Cintas Corp

NASDAQ:CTAS

Earnings Call Transcript 2022-Q1

[Operator]

Good day, everyone, and welcome to the Cintas First Quarter FY '21 Earnings Release Conference Call. Today's call is being recorded.

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

[Paul Adler, Vice President and Treasurer, Investor Relations]

Thanks, Shelly. Thank you for joining us. With me is Todd Schneider, President and Chief Executive Officer; and Mike Hansen, Executive Vice President and Chief Financial Officer. We will discuss our first quarter results for fiscal 2022. After our commentary, we'll open the call to questions for 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 SEC.

I'll now turn the call over to Todd.

[Todd Schneider, President and Chief Executive Officer]

Thank you, Paul. We are pleased with our start to fiscal 2022. First quarter total revenue grew 8.6% and diluted earnings per share or EPS grew 11.9%. Every business, whether goods-producing or services-providing, has a need for image, safety, friendliness or compliance. Every business has a need Cintas can fulfill to help get them Ready for the Workday. Our financial results are indicative of our strong value proposition and vast total addressable market.

Uniform Rental and Facility Services operating segment revenue was $1.51 billion, compared to $1.39 billion last year. Organic revenue growth was 8.2%. We expected solid growth over the year prior period in which the economy was in a weakened state. But we also made solid progress on a sequential basis. And in total, revenue grew stronger than anticipated. We continue to make measured investments to support our growth.

The labor market remains challenging. U.S. still hasn't recovered 5.3 million pre-pandemic jobs. This represents an opportunity for us. Most of our customers are open. However, most are not operating at the same capacity and employment levels as pre-COVID. We are seeing inflationary signs, including higher cost of freight, energy, wages and supplies. We continue to take actions to minimize the impacts. These include reviewing and challenging our processes and procedures, produce efficiencies and reduce costs and thoughtfully implementing increases to the pricing of certain products and services in response to higher operational costs.

Our First Aid and Safety Services operating segment revenue for first quarter was $199.1 million compared to $204.5 million last year. First quarter revenue was up against a very difficult comparison. In last year's first quarter, in response to the COVID-19 pandemic, personal protective equipment or PPE sales were surging, propelling the business to grow organic revenue over 17%. At that time, PPE comprised an outsized percentage of First Aid and Safety Services revenue mix. As discussed on previous earnings calls, the amount of PPE has declined as COVID case counts have fallen from peak levels. However, PPE remains a larger percentage of the revenue mix that was pre-COVID.

Over the same period of time, the recurring First Aid cabinet service business revenue has increased. We welcome this shift in mix because First Aid Cabinet Service business is historically higher profit margin business and more consistent.

Our Fire Protection Services and Uniform Direct Sale businesses are reported in the All Other segment. All other revenue was $189.7 million compared to $147.7 million last year. The Fire business organic revenue growth rate was 17.8%, and the Uniform Direct Sale business growth rate was 68%. Both businesses benefited in part from increased activity in a period of reduced COVID case counts.

Regarding our balance sheet and cash flow, our financial position remains strong. Recently, on September 15, we paid shareholders $98.8 million in quarterly dividends. The amount per share of common stock paid of $0.95 represents a 26.7% increase of the company's previous quarterly dividend. We continue to allocate capital to improve shareholder return.

I'm proud of the execution of our employees, whom we call partners. They continue to navigate an unsettled environment by focusing on our customers. The COVID-19 pandemic continues, of course, fueled recently by the surge of the Delta variant. We remain well positioned headed into the fall and winter months to provide potentially life-saving items such as face masks and gloves, provide hygienically-clean garments such as health care scrubs and isolation gowns and conduct services, including hand sanitizer dispensing and sanitizing spray services.

Now before turning the call over to Mike, I want to highlight a recent announcement of our ambition to achieve net-zero greenhouse gas emissions by 2050. Cintas was founded on a sustainable business model. Our corporate culture is based on doing what's right and challenging ourselves to improve. We view our ambition to achieve this objective as a natural extension. Also, as part of our steadfast commitment to corporate responsibility, we will soon issue a more robust environmental, social and governance report. We are committed to protecting the environment, enhancing humanity and maintaining accountability.

I will now turn the call over to Mike.

[Mike Hansen]

Thanks, Todd, and good morning. Our fiscal 2022 first quarter revenue was $1.9 billion compared to $1.75 billion in last year's first quarter. The organic revenue growth rate adjusted for acquisitions, divestitures and foreign currency exchange rate fluctuations was 8.6%. Gross margin for the first quarter of fiscal '22 was $902.8 million compared to $826.2 million in last year's first quarter. Gross margin as a percentage of revenue increased 30 basis points to 47.6% for the first quarter of fiscal '22 compared to 47.3% in the first quarter of fiscal '21. Gross margin percentage by business was 48.3% for Uniform Rental and Facility Services; 44.8% for First Aid and Safety Services; 46.1% for Fire Protection Services; and 41.5% for Uniform Direct Sale.

Selling and administrative expenses of $508.7 million increased 6.7% compared to last year's first quarter. This increase reflects investments in our sales teams as well as slight incremental travel and meeting expenses, somewhat offset by the sale of assets within our Uniform Direct Sale business.

Operating income of $394.1 million increased 12.7%. Operating margin increased 80 basis points to 20.8% in the first quarter of fiscal '22 compared to 20% in the first quarter of fiscal '21.

Our effective tax rate on continuing operations for the first quarter of fiscal '22 was 11% compared to 7.8% last year. The 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 first quarter of fiscal '22 was $331.2 million, an increase of 10.4%. Diluted EPS was $3.11, an increase of 11.9% from last year's first quarter.

We are increasing our fiscal '22 financial guidance. We are raising our annual revenue expectations from a range of $7.53 billion to $7.63 billion, to a range of $7.58 billion to $7.67 billion; and diluted EPS from a range of $10.35 to $10.75, to a range of $10.60 to $10.90.

Please note the following regarding our guidance: Fiscal '22 -- our fiscal '22 effective tax rate is expected to be approximately 19.5% compared to a rate of 13.7% for fiscal '21. The higher effective tax rate negatively impacts fiscal '22 diluted EPS guidance by about $0.77 and diluted EPS growth by about 760 basis points. Guidance does not include any future share buybacks or potential tax reform. Guidance assumes an uneven economic recovery caused by the surging COVID-19 Delta variant. However, guidance does not contemplate significant pandemic-related setbacks such as stay-at-home orders and other restrictions commonly referred to as lockdowns.

Finally, when modeling our fiscal '22 financial results by quarter, please note the following regarding last fiscal year's financial results: In last fiscal year second quarter, 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 second quarter operating margin by 100 basis points. The pretax gain and the related tax benefit impacted EPS by $0.25. And in last fiscal year's third quarter, we were able to help our customers respond to a spike in COVID-19 cases by providing them with large supplies of personal protective equipment. We provided more personal protective equipment in that quarter than in any other.

[Paul Adler, Vice President and Treasurer, Investor Relations]

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

[Operator]

[Operator Instructions]. We'll take our first question from Tim Mulrooney with William Blair.

[Tim Mulrooney, William Blair]

Can you talk about the primary factors that led you to raise revenue guidance this quarter? Was it primarily related to the better-than-expected result that you generated here in the first quarter? Or is it more related to your outlook for the remaining three quarters of this fiscal year?

[Todd Schneider, President and Chief Executive Officer]

Hey, Tim. It's Todd. Thanks for the question. Well, certainly, our performance in Q1 exceeded our expectations. But we like the momentum that we see in our business. We like the new business, that’s as a driver of growth for us. And we're providing more products and services to our customers. So, those who are open and hopefully will -- they'll be back to full strength here very shortly. But in general, yes, we like the momentum that we see in our businesses.

[Tim Mulrooney, William Blair]

Okay, thanks, Todd. I was wondering if you could also maybe talk about growth by vertical a little bit more this quarter. I know hospitality was showing a strong recovery last quarter. Did that vertical stall out a little bit as COVID cases ramped up here in August and September? And are there any other end markets that you call out here as being somewhat stronger or weaker than you had expected?

[Todd Schneider, President and Chief Executive Officer]

Well, great question, Tim. Certainly, the hospitality business is -- well, so far down, hospitality was, that it's coming back and it's coming back nicely. I wouldn't use the word stall it out by any stretch. Certainly, there is a bit of a tail to that. So orders aren't received and shipped in real time, meaning that they make those decisions about staffing. There's a process, they place the orders, we ship them, et cetera. So there's a little bit of a tail there.

But we still like what we see in the hospitality business. Certainly, they are anxious about business travel coming back, convention travel specifically, but the -- in general, the hospitality business is doing so much better. And -- but they're a little bit anxious, right, about how things will be impacted because of the variant, but also when will business travel come back.

As far as the other areas, healthcare continues to do well for us. We've talked about those offerings that we have, and they really resonate with those folks. So whether it's helping them clean their facilities, helping with isolation gowns, scrubs, et cetera, all that is very attractive for folks.

And I'd just like to take a moment to talk about what we compete with in those markets, in many cases, is disposables. And with the focus on ESG, that value proposition of providing an item that is essentially relaundered and recycled is very attractive, separate from the economics of it. It's very attractive for the healthcare institutions and many institutions to say, "Well, you can provide me a product that doesn't just go to landfill after a use." So again, that value proposition is very much resonating.

[Operator]

We'll take our next question from Andy Wittmann with R. W. Baird.

[Andy Wittmann, Robert W. Baird]

Great. I don't usually ask about the Direct Sales segment, but I'm going to this quarter. The segment margins in All Other came out very strong. We haven't seen them this strong in a while, obviously, plus 68%. It's a big number, but we all know that the compare was fairly easy. Todd, could you just talk a little bit about what drove the margin leverage? Was there an unusually large order that came back with somebody kind of redressing folks? Or maybe just a little bit of color what as to what drove the great profit margins in the All Other reportable segment?

[Todd Schneider, President and Chief Executive Officer]

Well, Andy, first off, thanks for your question. Our partners in that area of the business really appreciate you calling it out and citing that their performance is really, really good. You're right. The comps are -- were more than reasonable because of what happened to the hospitality business, in particular, last summer. But our revenue is coming back very nicely there, hence, the revenue growth. But -- and we're getting leverage over the organization staffing levels that we have in place. And Mike cited that we had a sale of an asset that occurred in that area.

So -- but in total, if you put it all together, we see -- you shouldn't anticipate that level of increase in the future. But nevertheless, we like the leverage we have there. And we think we're well positioned. Our organization is -- was, as you can imagine, right-sized as a result of what occurred last summer. And we think we're in a really good spot and to capture opportunities in the marketplace and gain leverage on our investment.

[Mike Hansen]

Well, the other half or part of that All Other segment is the Fire business, which also had a great first quarter. And so we're very pleased with that business and the momentum in that business as well. We saw some nice sequential improvement in the gross margin of the Fire business. And at organic growth of 17.8%, we're thrilled with the performance that we've seen.

[Andy Wittmann, Robert W. Baird]

Yes. Okay. And then I guess, just for my follow-up question, I wanted to just get a little bit more specific on the labor market, both as it relates to your own business, your ability to hire and compensate people as well as the impact on your customers. I don't know if there's a way for you guys to talk to us about the level of staffing at your -- you're always selling new business, but the historical customers that you've had through this whole time, what does the headcount look like for those customers? Are they still -- can you quantify how far down they are? I mean we talked about the 5 million jobs that are still missing. How many of those were former Cintas wearers?

[Todd Schneider, President and Chief Executive Officer]

Yes, Andy, first of all, you can't open up a newspaper without hearing about wages and pressure in the market on labor. So we are certainly not immune from that nor are our customers. And so we are battling it every single day and staffing at levels that we feel very good about in our business.

And as far as our customers, I mean it's really difficult to say -- to put a number on it. It varies so much based upon geographies and industries, because the restaurant business is certainly -- they're nowhere near back to where I think they -- hopefully, will be someday and certainly not back to where they were pre-COVID, as an example, warehousing and distribution is back very, very nicely and probably at or above pre-COVID levels.

In total, we're certainly down from pre-pandemic levels. And I think we're representative of the 5-point-something million jobs that we have less in the U.S. versus pre-COVID. So we're anxious for our customers to get back to previous levels. And when we think about labor and we think about those functions, we always focus more about how it impacts our customers, we'll figure things out and how to manage it.

[Paul Adler, Vice President and Treasurer, Investor Relations]

On not only 5.3 million jobs lost, right, versus pre-pandemic, but still 10 million, 11 million job openings that haven't been filled, which is great opportunity for us as you know.

[Todd Schneider, President and Chief Executive Officer]

Yes. The latest number I saw from the Bureau of Labor Statistics that they reported out earlier this month was 10.9 million job openings. So I don't know how many of those would be people that would wear a Cintas uniform and utilize items out of our first aid cabinets, et cetera. But we'd like to see those all be filled.

[Operator]

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

[Manav Patnaik, Barclays]

I just had one question for you guys. And I was just hoping, you talked about wage and labor a bit, but can you just talk about the moving pieces on the cost side? We've heard a lot about driver shortages and fuel costs and supply chain. I was just hoping you guys could just give us a quick state of what's happening with you guys?

[Todd Schneider, President and Chief Executive Officer]

So Manav, I'll start, and then Mike can assist with this. Certainly, energy costs are increasing. We're seeing that, whether it's at the pump, natural gas to run our facilities. But we've worked really hard on efficiencies in routing and in our production facilities to maximize efficiencies there to mitigate all of that. And we're -- I think we're doing a very good job there. Wages, we talked a little bit about. But we have discussed in previous earnings calls that we've been addressing this wage issue with particular focus on our frontline partners over the past couple of years. So we weren't flat footed when it came into this wage subject. We're continuing to address it. We've got to be very competitive in the marketplace to attract the right partners on our team, and we're doing that. And we're going to be able to continue to navigate that successfully. And then as you can imagine, we've been very diligent about managing discretionary spend. There is some travel that is back, but certainly not near the levels that they were pre-COVID.

Mike, anything else?

[Mike Hansen]

No, I think that hits the cost side, but Manav also keep in mind, we talked a little bit about this in July. But we have begun to increase prices here in the first quarter. It's a strategic local customer-by-customer view but early indications suggest a positive reception from our customer base. And certainly, that's important as we look at things, like energy being up 40 basis points year-over-year.

We're not immune to some inflationary pressures, but we are -- as Todd said, we're managing them very, very diligently. We're looking for automation opportunities, efficiency opportunities. And if we need to, we can strategically increase prices and we've started to do that here in this first quarter after taking a few years off.

[Manav Patnaik, Barclays]

Got it. And actually, maybe if I can squeeze in one more. Just hoping you could give us an update on the M&A pipeline perhaps in the non-uniform businesses? Like are there opportunities that you guys are actively seeking?

[Todd Schneider, President and Chief Executive Officer]

Great question, Manav. We're active and acquisitive in every business we're in. We'll say that activity has ramped up here in the back half of the year, probably anticipation of tax changes, et cetera. But nevertheless, some. So we like the activity. We've -- we have -- we are in a great financial position. We love our balance sheet and right after investing in our existing facilities to help grow those organizations, our #2 use of capital is for M&A. And so we're very acquisitive and looking very active, and looking forward to closing on more deals in the near future.

[Operator]

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

[Hamzah Mazari, Jefferies]

I just wanted to follow up on pricing. You had mentioned you hadn't taken pricing for a while, I think, maybe 2 years or 18 months or whatever. And I think you just referenced you're beginning to take price now. What kind of price is baked into your guidance? And how are the customer conversations? I assume customers see inflation headlines all over the place. So -- and given you have an increased pricing for a while, could you maybe talk about order of magnitude? Are you doing a pricing catch-up? Or how should we think about pricing strategy?

[Todd Schneider, President and Chief Executive Officer]

Hamzah, I wouldn't think of it as a catch-up. And we had not raised price in 2 years. But these are -- Mike mentioned, these are strategic decisions. Their pricing is a local subject. It really gets down to what type of what industry is that business in, what even geography are they in, and what condition of their -- is their business and to be able to handle it, so that we're able to be fair with our customers as we look out. Meaning, that there are certain organizations that are -- their business is doing a whole lot better than others. And we're conscious of that. But as far as the conversations, again, that would depend upon the particular business. But it does make the conversation easier when inflation is so much in the headlines. So that certainly gives us a little benefit. But these conversations are -- they're never easy, right? Because from our customer standpoint, it's a tough subject. And -- but we're focused on the long-term value of those customer relationships, and we handle them appropriately.

[Hamzah Mazari, Jefferies]

Got it. And just my follow-up question would just be around -- just the -- I know it's been a while since the SAP implementation was completed but then COVID hit, and we were sort of caught up in that, and it's still kind of going on. But maybe you could just give some examples on how the SAP system is maybe benefiting you now as organic growth comes back? Maybe if you want to talk about it qualitatively or quantitatively, however, either on the cost side or revenue side? Any examples would kind of be helpful.

[Todd Schneider, President and Chief Executive Officer]

Yes, Hamzah. So a few items on SAP that where we're benefiting from. Certainly, one view of the customer is significant for us. And that helps us with cross-sell. And we know when we do that, when we are able to provide more products and services, the customer sees more value. And when they see more value, it's a better retention tool for us. So that's been significant for us and has been and will continue to be moving forward.

We get some other -- certainly advantaged from a data analytics standpoint, the cash cycle, those types of subjects. But some other items that I think you might be able to see out in the marketplace is routing efficiencies are a real opportunity for us. We are focused on that from a dollar efficiency from our ambition on the 2050 net zero emissions. And we see we can advance that subject, advance all much further than we have in the past by bringing technology to that. So that will be exciting.

The other item is with SAP, it allows for us to have an online experience for our customers that they haven't had in the past. And what we realized is that our customers want -- they don't all want to communicate with us the way that they did when I started with the company 32 years ago, meaning they don't want to just have to call during working hours. They want to do business when they want to do business, whether that's to pay a bill, whether that's to communicate a request, to order something, those types of items are all -- we want to make it easier to do business with us. And on our online presence, and we call it My Cintas, allows for our customers to do just that. So providing more value to them, more conduits for them to communicate with us, instead of having to do it in the old traditional nine-to-five type model. So those are significant for us.

Another operational item would be our ability to speed up the process from when we see an order from a customer -- receive an order from a customer to when we can get it out to them. Having that transparency throughout our supply chain, is an absolute advantage where we can anticipate better. And even once we receive the order, get it out the door faster than what we were historically. And so that efficiency shows up to the customer in speed to market and then able to get them products and faster than we had in the past. So we want to leverage that system. And I think we've done that quite nicely to date, but there will be more coming.

[Operator]

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

[George Tong, Goldman Sachs]

Revenue growth in the quarter was stronger than you expected on a sequential basis. Can you elaborate on the sources of upside, specifically? And where you see the most promising trends over the next year?

[Todd Schneider, President and Chief Executive Officer]

George, I'll start, but I'd say two significant drivers of growth for us have been new business. It's still quite robust. Our value proposition is resonating very much. And many companies are still struggling with staffing as we cited earlier, 10.9 million job openings. And when you're struggling with staffing and you can find a company like Cintas, you can outsource certain functions too, it makes it very attractive. So they look at it and say, wow, you can take care of these items and maybe they were a do-it-yourself in the past, so that resonates with them. So that's been quite nice.

Most of -- and moving on to another driver, most of our customers were, I'd say, are open and probably were open going into the first quarter. But we are providing more products and services to them. We are, again, anxious for them to get back to their pre-employment levels and we think that will be even better. But new business and then I'd say, again, adds within our current customers are two significant drivers for us that we think will continue to help us throughout the year.

[George Tong, Goldman Sachs]

Got it. That's helpful color. And then I wanted to dive into pricing increases, which you touched on earlier. To what extent do you think that pricing combined with efficiencies can fully offset the input cost increases that you're seeing? And could there be a timing lag as to when those pricing increases will take effect and the real-time nature of the input cost increases that you're seeing now?

[Mike Hansen]

Yes, George, certainly, timing, it is difficult to match up the timing exactly to when costs increase match up the timing exactly to when costs increase and when we see changes in the supply chain, for example. But we're doing our best to manage. And the -- as I mentioned a little bit ago, when we have those conversations today, the message resonates that look, there are increases in cost and these price increases, when we do make them, they are reasonable and they make sense to our customers. That's been our experience so far.

The really nice thing about our -- if you think about our cost structure as well, Todd hit on this a little bit, that our labor, we've been working on that for a while. And so we may not be -- while not immune, we may not be as affected as some of our peers and others. And so that's important for us. The other part is that many of our material costs are amortized. So when we see spikes in supply chains in various areas, whether it is labor throughout the world or cotton or other things, we're amortizing costs and it tends to be a bit of a natural hedge for us.

And so it does slow down the impact and it requires the impact to be greater for a much longer period of time before it really starts to hit us. And in those cases, we can get ahead of the inflationary pressures a little bit with our pricing strategy. So generally speaking, we feel like we're -- while it's not perfect matching of expense and benefit, we do a pretty good job and we get a little bit of benefit from just the way our business works.

[Operator]

We'll take our next question from Ashish Sabadra with RBC.

[Ashish Sabadra, RBC Capital]

Mike, I just wanted to drill down further on the cross-sell opportunities that you mentioned. I was wondering if you could provide any color on where you are in penetrating, let's say, hygiene products, safety as well as first aid and fire services within your existing customer base? And how can you accelerate that cross-sell either through organic or through M&A? Any color on those fronts?

[Todd Schneider, President and Chief Executive Officer]

Ashish, thanks for the comments and the question. We have our sales and service organization well positioned to offer the various products and services. Again, they have tools that allow them to understand where those opportunities exist. They're certainly not perfect, but they are allowing them to get pointed in the right direction to help provide that value to the customers.

And as I mentioned, the more value -- excuse me, more products and services we provide the customer, we know the stickier that, that relationship will be just like most relationships, right? If it's just one product, it's probably more at risk than having two and so on and so forth. So it's very much a point of focus. When you think about our relationships, every single customer virtually needs, our fire surface, right, because of the legal requirements around that subject. But we see very nice overlap with those who would -- who are uniform customers who would need some direct sale their uniform rental. And we also see overlap with those who are uniform rental customers who would need first aid and safety products, training, CPR, all the various items that we provide.

So it's -- our big issue has been in the past that our customers weren't aware of everything we provided. And that's a nice problem to have, but nevertheless, it's still very much a problem for us. And we're trying to change that position in the marketplace that our customers realize that not just through our sales and service organization but also through our mass media spend, which you may have seen this past weekend where we had a significant position on -- in golf's Ryder Cup, where we're trying to get the message out about all the products and services we provide. And not a complete one-stop shop for a business, but we sure do get them a long ways on that path. Mike, anything else on this?

[Mike Hansen]

Well, the only thing I would add is the really good news is we're in the early innings of penetration. And so when you think about the rental customers and the opportunity to continue to penetrate with even rental items, such as our restroom products and our things that we've talked about recently in the last year, like isolation gowns and hand sanitizers, we're in the very early innings. And when you couple that with the first day of safety and fire opportunities again, less than 20% penetration. And so we've got a lot of work to do and a so we've got a lot of work to do and a exciting thing is much opportunity remains.

[Ashish Sabadra, RBC Capital]

That's very helpful color. That's great. And maybe just a quick clarifying question. I was just wondering at a very high level, can you provide what are the key categories of spend and the percentage of expenses from labor versus fuel versus amortization of equipment? Any color would be helpful.

[Mike Hansen]

Sure. Let me start with energy. So energy, and that would include fuel for our trucks and the running of our laundry operations, in the quarter was 2.1%. That is up 40 basis points from a year ago, flat with our fourth quarter. So it's a -- while it is up some, it's still a relatively insignificant part of our overall cost structure.

When you think, Ashish, about our cost structure, though, you can -- I'm going to use cost of rentals. You can think about it in 3 buckets, the cost of the materials, the cost of running the laundries and then the cost of the service component. And while they're not exactly the same, you can think about them as 1/3 each. And each of those buckets are a little bit different. I mentioned the materials, many of which we amortize over certain periods of time. So we get a little bit of smoothing of those costs. And then we also have some that are direct sale type like the restroom products that we expensed immediately.

The major component of that would be those rental items that we're amortizing. When you think about the laundries, then you're -- then we're into the depreciation of the buildings and certainly, the equipment that's in our wash alleys, but also the labor component within that as well. And then the service component, you've got our drivers, our trucks and the amortization of the trucks and the gas to run those. When you put it all together, certainly, labor is a large part of our cost structure. The materials, the products that we sell are certainly a large part of our structure. And we manage each one of those quite tightly and look for improvement opportunities.

[Operator]

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

[Jeffrey Goldstein, Morgan Stanley]

This is actually Jeff on for Toni. I know this question was asked earlier related to revenue guidance, but I wanted to ask it slightly different as it relates to EPS. The EPS guide is up by about 2% for the full year, but it seems like a lot of that is maybe flowing through the buybacks and a better-than-expected tax rate. So is that fair? And is that to say from an operating standpoint, maybe you're a little bit more optimistic on the revenue side, but maybe some cost headwinds keep you a little conservative here? Just some more color on that would be helpful.

[Mike Hansen]

Sure, Jeff. I don't think that's a fair reflection of our guidance. You think about our guidance of $10.60 to $10.90 that's a 3.5% to 6.4% increase in annual EPS. But you referred to a lower tax rate, our tax rate is going to -- based on our guide today is going to go up 5.8% compared to '21. Now that's quite a significant impact. And if you think about the 760 basis points that I referred to in my opening remarks, that takes EPS growth from about 11% to 14%.

Now certainly, the buyback that we had done in the fourth quarter and the first quarter did create some benefit, but that still gets to a pretax earnings growth in the range of double-digits. And so it's a pretty good year. And then if you kind of move further up, we talked in July about our guidance of implying operating improvement of -- at the low end, 0 basis points to 70 at the high end, we're still right around in that neighborhood in terms of the guidance that we provided today. And keep in mind, that's on the heels of a 310 basis point improvement in operating margin in the previous fiscal year. So to kind of margin in the previous fiscal year. So to kind of taxes, I think, is not a great reflection of really what's going on.

The guidance on the EPS side is nice, healthy margin improvement, pretax increases of right around double digits and then a higher tax rate that pulls that EPS down. Hopefully, that gives you a little bit more color on that EPS guidance.

[Jeffrey Goldstein, Morgan Stanley]

No, understood. That was helpful. And then I want to ask about First Aid margins, which were pretty strong in the quarter. Are you able to quantify at all how much PPE is still constraining margins there, just given it's greater than normal mix? And then I guess based on that, how should we think about near-term upside as that rolls off? Like is that really going to kick up in the next few quarters as that roll off? Just kind of overall, if you could talk about the path back to pre-COVID margins in that line of business.

[Mike Hansen]

Sure. We certainly -- PPE has been a major factor in that business. And Jeff, you're correct in pointing that out. And it was a -- it was really important for our customers over the course of the last year, and we invested quite a bit in inventory to be able to serve the customers, even if it was at a bit of a lower gross margin for us. But we've seen some nice sequential improvement there. Our 44.8% is still lower than our pre-pandemic of, call it, 48-ish percent. And so we're -- we still believe we can get back to those kinds of levels.

Now the PPE that we've had over the course of the last year tends to drop off a little bit more quickly than the First Aid comes back because, as Todd and Paul have referenced, we still have a lot of job openings, quite a bit fewer people in the workplace today than pre-pandemic. And so as those people come back and as those job openings get filled, that creates more hands in our first aid cabinets. And that creates some nice momentum.

One of the nice things that we really have seen coming out of the last few quarters is our customers and our new customers, so prospects turning into customers, are really seeing the value of keeping their employees safe and healthy, and our First Aid business really allows us to provide that value to them. And so our new business has been really strong in this first aid cabinet space. But it's coming back. And while we like the momentum, we're not there yet. And we do expect to see sequential improvement. And I'll maybe step that back a bit. We expect to see improvement in the year every quarter can be a little bit bumpy here and there. But generally speaking, we continue to look for improved gross margin in that business.

[Operator]

We'll take our next question from Gary Bisbee with Bank of America Securities.

[Gary Bisbee, Bank of America Securities]

If I could go back to labor for a minute, I think a lot of your comments have been about cost and working on wages. But are you fully staffed both from a service and a sales perspective? And if you had seen any elevated turnover relative to history or had any increased difficulty hiring to support the rebound in growth you're seeing?

[Todd Schneider, President and Chief Executive Officer]

Gary, a very good question. I guess the way I'd describe it is, we're having to run at higher RPMs to get the output that we want. So it's harder. There's no doubt about it. Attracting, retaining and developing the talent is core to what we do as a company, and we're working that much harder now to get to the levels that we want to be at.

So are we staffed at the levels we want to be at? Yes. Yes, we like our staffing position. Turnover is still very manageable. And I think it speaks to many, many things. Certainly, the total compensation that we provide, the attractive benefits, but it really speaks to the culture and the investment that we put in to people, because for so many partners that have grown up in the company and have and have advanced in the company, and that's part of our culture. So we've always had to be really good at painting a picture for people about this is where you start, but we will invest and develop you. And we're having to work harder at it, but it's still resonating with folks. And so that's where we are now.

[Gary Bisbee, Bank of America Securities]

Okay. Great. And then on -- you've talked about the PP&E and some of the pandemic-driven sales in first aid and safety. But I think you also had some of that in uniforms handling that stuff through the facilities business. Is -- and I'm not going to ask you when it's going to go away because who knows, but is there a meaningful chunk of revenue there that probably churns off in the future? And what I'm really trying to think through is how that could impact the rate of growth over the next several quarters or whatever in the core uniforms business. Is it elevated? Or is that just not a big deal in the grand scheme of that business?

[Todd Schneider, President and Chief Executive Officer]

Yes, Gary, what Mike spoke of, it was a significant portion of our First Aid and Safety business. There was certainly some revenue that went through our rental business sold on route, that was for PPE, but nowhere near the amount as a percentage that would go through our First Aid business. So is there some there today? There's a little bit, but it's not significant whatsoever.

So -- and as far as when we look out about demand, we're still in a good spot if the demand is there for those types of products and services. We're managing that inventory. And there is still demand. We still hope as a country and as North America, as a world that, that is -- that will be diminishing over the course of the balance of our fiscal year. So our guide takes all that into account. And we're focused on building the core of our business. And -- but if our customers need those types of products and services, we're there for them, and we will help them with this.

[Mike Hansen]

Gary, I might just add, as you're thinking about -- I believe you referred to the next several quarters, as I said in my opening remarks, we talked last third quarter about $45 million that we did not expect to repeat in our fourth quarter. And so that's going to be -- as you think about the growth of quarter-to-quarter, definitely keep that in mind as a third quarter growth impact.

Now again, as it relates to this PPE, look, the safety and cleanliness themes that we've sold under for years is really resonating. And we certainly believe that those areas will be larger moving forward than pre-COVID and that certainly is exciting for us.

[Operator]

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

[Scott Schneeberger, Oppenheimer]

I want to hone in a little bit on the offsetting efficiencies of the environment in the automation. Just anecdotally, if you could speak to a few things you're doing. I know in Hamzah's question, you talked about SAP and automation of payments and customer facing. Just curious if you could elaborate maybe a little bit on what you're doing in this environment, maybe at facilities or otherwise and some of the longer-term goals of other automation?

[Todd Schneider, President and Chief Executive Officer]

Good morning, Scott. There’s a couple of obvious ones for us. I mentioned routing. That is obviously a significant one that we think is going to pay dividends for us. Scott Farmer always spoke about, we don't generate any revenue when the wheels are turning on our trucks, right? We generate revenue when the wheels stop. And we see an opportunity to improve that efficiency and that we're investing in technology there to do so, and we're excited about the impact that will have not only on our cost structure, but also on our emissions as we move forward.

In the production facilities, we are managing very tightly our wash alley and making sure that we have much better efficiencies there, meaning we're tracking very closely the number of loads that go through our facilities versus the quantity that went through pre-COVID on the same playing field, meaning same amount of volume that's going through. And we put some technology in place to help us with that instead of just doing it through elbow grease. And as a result, we're seeing some real benefits there. And again, that will help us in our cost structure, but also in our emissions. And so we're focused on making sure that we're managing that very tightly and we're seeing some benefits there.

[Mike Hansen]

Yes, I'm not -- one other one I might talk about, I don't know that Todd mentioned the stock rooms in our laundry facilities and the ability to get those automated, and that creates visibility and it creates the opportunity to share. And when we are more efficient in our stockrooms, so let me be clear, our stockrooms are within our -- within all of our rental facilities, they are garment that have been in service already. And so when we are efficient, that means we are reusing garments that are already amortizing in our cost structure. And so that's -- that creates revenue generation out of garments that are either already in our cost structure or maybe have been amortized fully.

And so we get some real nice incremental margins when we can more efficiently use those or put back those garments into service. SAP has allowed us to get visibility and to be able to improve the use of those garments within our stockroom. So that's another example, Scott, of something that's really benefiting us.

[Scott Schneeberger, Oppenheimer]

Excellent. Sounds good, guys. I appreciate that. And then just as a follow-up, I wanted to touch on -- it sounds like you're very active in M&A, that came up, I think, particularly before calendar year-end, maybe with some consideration for tax implications. But you've done over $1 billion worth of stock buybacks in the fourth and the first quarter here, back to back, and that's just kind of looking back, that's as big, if any, year going back for a while.

So I'm just kind of curious how -- the thought process there, if -- it sounds like you're getting closer on some M&A, but it's not really a lot of allocation of capital is going into repurchase. Is that something we should expect to continue?

[Todd Schneider, President and Chief Executive Officer]

Scott, we are -- as I mentioned, we're active, and it takes two to dance, and we're seeing more folks at the dance as -- anecdotally, my guess is because of tax reform. And as a result, we think more deals will come through.

Now, that being said, we are in a great position on our balance sheet. And we are ready, willing and able to activate that balance sheet as appropriate that is best for the long-term value for our organization. And just as a reminder, the #1 priority for our capital is, has been and will continue to be the investment into our current business to help grow the sales and profits of our organization, whether that's through additional products and services, additional facilities, training, staffing levels, all those is our #1 priority. And then after that, #2 is M&A, and we're steadfast in that commitment, and we'll allocate appropriately. And then thereafter, then we'll return it to the shareholders as available in the form of stock buyback and dividends. And I think we've got a really good track record of managing those priorities appropriately and intelligently for the long-term value.

[Operator]

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

[Paul Adler, Vice President and Treasurer, Investor Relations]

Thank you for joining us this morning. We will issue our second quarter of fiscal '22 financial results in the latter half of December. We look forward to speaking with you again at that time. Thank you.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.