Quarter 1
Q3 2026 Earnings Call — March 25, 2026
Analyst Tim Mulrooney (William Blair): Todd, Scott, Jim, Jared, good morning. Just two procedural ones. Scott, I just wanted to follow up on the guidance thing that you were mentioning at the end. How much of that three to four cents of EPS related to the universe transaction was incurred in the third quarter versus expected EPS in the fourth quarter? I didn't see a reconciliation table for the third quarter and just wanted to make sure everyone's aligned on their models. And I also noticed SG&A was a little bit higher in the third quarter than what folks were expecting. So I thought maybe there was a little bit of deal related expense there in the third quarter. I'm not sure.
Executive Scott (Title): Yeah, Tim, good morning. Good question. The estimate that we provided of that three to four cents is related to the fourth quarter and the fiscal year guide. Any costs that were incurred in Q3 were immaterial. You know, as far as the comment on SG&A being a little higher, just to remind everyone of that one-time gain last year, that represented about 60 BIPs. So when you take that into consideration, you know, SG&A was effectively flat year over year. And if you go back really over the last three fiscal years, Q3 is typically elevated due to the timing of certain expenses like the reset of payroll taxes. In fact, when you go back to last fiscal year and you back out the adjustment for the one-time gain, we were up 100 basis points sequentially last year and actually 70 basis points sequentially if you go back to fiscal year 24. So we feel really good where we are with SG&A expenses, and when you back out the one-time gain, it's flat year over year.
Analyst Tim Mulrooney (William Blair): Yeah, good point, Scott. I think maybe consensus didn't fully factor in everything because of the one-time gain last year. So that's a good reminder. Thank you. And then just as my follow-up, apologies if I missed it, but how much were energy costs as a percentage of revenue in the quarter, and what's your expectation for next quarter, given the increase we've seen in oil prices over the last few weeks? I think this is an important question for investors.
Executive Scott (Title): Yeah, Tim, good question. Energy for the quarter was 1.7 percent, which was flat year over year, and up 10 basis points over the previous quarter. You know, certainly the increase in gas prices will have an impact. But just, you know, I want to remind everyone that, you know, only 60% of our energy costs are related to fuel for our vehicles, which when you do the math on that, that equates to about 100 basis points. So if you just look at, you know, fuel's been, you know, continuing to increase. But if you assume a 30% increase in fuel costs, that would be sustained over an entire quarter, that would add 30 basis points of cost to our results. You know, so yes, it has an impact, but not something that we feel that we can't overcome. And we have contemplated this in our guide.
Analyst George Tong (Goldman Sachs): Hi, thanks. Good morning. Can you provide an update on higher-level customer purchasing behaviors in the current macro environment, if you're seeing any changes, any increases or reductions?
Executive Todd (Title): Good morning, George. This is Todd. I'll take that question. Scott and Jim have spoken about it. It is certainly a complex environment, but our customer base has been quite resilient. I think it ties back into our value proposition, continuing to resonate. You know, when you deal with these types of complex environments, it can create opportunity for you as well. And, you know, we help our customers run a better business. And by outsourcing items to us, that in most cases, they were solving that somehow, some way, in their own fashion and their own businesses. By outsourcing it to us, it allows it to free them up to focus on running their business and taking care of their guests or their patients or their customers, however you want to phrase it. But no real change in the customer base, pretty resilient, and I think our value proposition continues to resonate.
Analyst George Tong (Goldman Sachs): Got it. That's helpful. And then going back to an earlier point on fuel, you mentioned that fuel expectations are contemplated in your full year guide. Can you elaborate on what exactly you're assuming for the remaining quarters of the year in terms of how fuel will trend and how you plan to pass along any changes in fuel costs to customers in the form of pricing?
Executive Todd (Title): Yeah, thank you, George. As Todd mentioned, clearly this is a dynamic environment. And our guide includes our best estimate of the increase in energy costs. You know, as far as, you know, our approach to mitigating this, or I think you said pass it along. I'll let Todd answer that.
Executive Todd (Title): Yeah. So, you know, Georgia, it is certainly a dynamic environment. Hence the, you look at what oil prices were doing last night and then what they're doing this morning. So they're, they're, they're changing by the minute. That being said, we've got to contemplate it in an increased level of gas prices at the pump into our guidance. And as far as how we handle that, we do not have a fuel surcharge. That historically is not how we handle it. As Scott correctly pointed out, if you think about the fuel at the pump, it accounts for about 100 basis points of our total as a percent of sales. So it's not our largest cost. And we also take the approach that we think long-term about this, and we find other ways to extract out inefficiencies. We don't just look at it and say, well, this happened, so we've just got to pass it on. We want to be better than that, and we want to focus on being consistent for our customers and extracting out inefficiencies and other ways that we have in our business and still hitting our goals as a financial goals as a company while we're doing that.
Analyst Justin Hawk (RW Baird): Good morning. Thanks for taking the question. I guess I had one question just kind of on the CapEx expectations. You know, your CapEx as a percentage of revenue has historically been a lot lower than Unifirst has been. Obviously, you guys are much, much bigger, so that's part of it. But I guess just philosophically, you know, looking at their assets and the systems to kind of get to CentOS levels, you know, thinking about, you know, do you expect the CapEx to kind of trend a little bit higher as a percentage of revenue in the first couple of years of integration? Thank you.
Executive Todd (Title): Yeah, Justin, good question. And I would just say, you know, we just announced the agreement a couple weeks ago. We'll know a lot more as we close the deal. But, you know, when we, you know, close this merger, you know, we still expect, you know, not only will we continue to generate strong cash flow, Unifirst generates strong cash flow. We'll have a strong balance sheet. You know, we talked on our Unifirst call about, you know, at closing we would expect debt to EBITDA being at 1.5. So we're in a great position. And I don't see our capital allocation priorities really changing. Our first priority has always been reinvesting back into the business through CapEx, followed by strategic M&A. And then we'll continue to look at returning capital back to our shareholders in the form of dividends and buybacks. So more to come on what we would look at in the future with CapEx as a percent of revenue as we close the deal. But I would really not anticipate any material changes in our capital allocation priorities.
Executive Scott (Title): Justin, I'd just like to add to that that, you know, Universe CapEx was higher. They were certainly trying to catch up on the technology subject and other areas. And we obviously were in a really good position from a technology footprint. And we will continue to invest in there because we have to make sure that we're positioned to compete in the marketplace. That being said, one of the uniquenesses about Uniforce versus most companies that transact like this is they were not for sale. And as a result, they ran their business very much thinking in the long term. They invested for the long term. So we're not acquiring an asset that needs a significant amount of CapEx investment into facilities and to get it up to standard, they run a really good business. They think about how to run a business very similar to us. The cultures are very similar. They think long term, think about investing for the long term for their people and their customers. And as a result, we think that positions us incredibly well for the future.
Analyst Manav Patnaik (Barclays): Hi, this is Ronan Kennedy. I'm from Manav. Good morning, and thank you for taking our questions. You commented on retention at record levels, pricing at historic levels. Could you please provide some further color as to how we should think about what those levels are
as a reminder? And then the trends and drivers versus your expectations for new business and cross-sell, and then anything to call out from specifically strong organic drivers at a respective segment level, please?
Executive Jim (Title): Hey, Ronan, this is Jim.
Good morning. I'll take that question. I'll start with it. And if we start to think about our growth formula and what we're attempting to achieve every quarter. You know, we do like to target that mid to high single-digit total growth rate. As an organization, the major contributors to that growth, as you correctly pointed out, is our new business acquisition. And a reminder, you know, two-thirds of that new business acquisition comes with that no-programmer or do-it-yourself or space, and that continues to perform very well for us, and we really like the trend line there. Retention levels for us has stayed around that steady, that 95% rate, and we are really comfortable with where that is at this point. Pricing is at our historical levels, which we've considerably said is in that 2% to 3% range. And then the remainder of the growth, if you kind of put all those together, you know, you start with a negative five, you add in two percent for pricing and you want to get up to eight. The majority of that's new business. But then the remainder is that cross selling opportunity selling into the current customer base, which has been highly effective for us this year.
And we think that there's a long runway of opportunity within our current customer base. As we continue to provide great value, we think about it long term. We've made nice investments in the product line and the technology and try to make it easier to do business with us. And the customers in this type of an environment is complex, are looking for steady answers. And they know they can rely on us. So we've had a lot of success this past year. So I would say new business and cross-sell slightly continuing to improve and the others right where we're expecting them to be.
Analyst Manav Patnaik (Barclays): Thank you, Jim. I appreciate it. And then for my follow-up, kind of a follow-up to Tim and George's questions, but beyond gas prices, I guess focusing on the all-time high gross margins in each of the segments, can you just further unpack the drivers there? I know it's strategic investments cost initiatives and assess the sustainability of them. I know there may be a potential immediate impact if there is inflation, but also unpack the other components of your key cost buckets from a gross margin standpoint beyond gas, whether that's materials or the production expense, the labor, et cetera. So drivers of gross margins and sustainability in near term and longer term, given the dynamics.
Executive Jim (Title): Hey, Ron, and I'll start on that and see if anybody wants to add color and I'll start at the consolidated level and say that the gross margin at 51% for the quarter, obviously a great quarter for us. The team did an excellent job at execution for the quarter. And I think a little bit of that is a demonstration of our culture and the belief that nothing is ever as good as it can be and that there's always an opportunity to improve processes and work out inefficiencies. But if we look at and we think about the quarter in and of itself, first of all, there was no one-timers, nothing significant from a one-timer perspective that helped the quarter. The key drivers of that are our primary focus, which is revenue growth. And we like strong revenue growth to continue to create leverage. And that certainly contributed in all three of our route-based businesses. We are always looking for initiatives to remove inefficiencies and expenses out of the business. And you can see that across all of our businesses, certainly in our rental business is a big focus for them.
Maybe the other one to call out is revenue mix in both our first aid and fire protection businesses. That's important for us. And revenue mix can fluctuate a little bit quarter to quarter. So this was a good quarter for us on that revenue mix. And then, of course, timing of investments and what those investments look like. So all around a strong quarter of execution. So the team did a fantastic job, and those were the key inputs. But then just a quick reminder that it can fluctuate quarter to quarter. Running a business isn't linear, and that we're going to continue to make investments into business for short-term delivery of results, and then long-term to be able to set ourselves up for long-term continuous success.
Analyst Manav Patnaik (Barclays): Thank you very much. Appreciate it.
Analyst Josh Chan (UBS): Hi. Good morning, Todd, Jim, Scott, Jared. I guess in terms of your investments, how do you feel about, you know, your level of investments kind of exiting 2026 and into 2027? Just thinking about, you know, how well funded do you think your growth initiatives are at this point? Thank you.
Executive Todd (Title): Yeah, good morning, Josh. You know, one of the things about our culture here at Centos is we are constantly investing, right? And as a result, yeah, certain years you might see more than others. But we think we're in a really good spot from what we have been investing and what we will continue to do, invest. So I wouldn't say anything, no material change there. You should expect us to continue to invest because we look at the future and it looks incredibly bright. We look at the opportunity out there in the white space of converting over new programmers, and we want to go after that. We're competing in an environment where there's 16 to somewhere maybe up to 20 million businesses in the U.S. and Canada, and there's 180 million people that go to work every day in the U.S. and Canada. That opportunity is immense. So we're investing for the future because we think the future looks really bright and we have to position ourselves to be able to compete in those areas.
Analyst Josh Chan (UBS): Sure. That makes a lot of sense. Thanks for the call, Todd. And then I guess in terms of your comment about the good balance sheet position, does that imply that you can continue to perhaps repurchase stock as you desire and even through this process or how should we think about sort of the pace of buybacks? Thank you.
Executive Josh (Title): Josh, good morning. Thanks for the question. You know, as I mentioned, you know, we continue to generate strong cash flow, strong balance sheet, and, you know, certainly we're not going to be limited due to our capital allocation. However, you know, there are restrictions from the time that we signed the agreement with Unifirst through the expected Unifirst shareholder votes. You might also guess that we were, you know, limited during Q3 with share buybacks just to being in a quiet period as we negotiated the Unifirst agreement and completed confirmatory due diligence. But once those restrictions are lifted, we'll continue to be opportunistic with our buyback strategy.
Analyst Jasper Bibb (Truist Securities): Hey, morning, guys. Just wanted to ask what you're seeing in wearer levels at existing customers in uniforms.
Executive Todd (Title): Jasper, I'll start. As I mentioned, our customer base is quite resilient. You know, it's... So if anything, our growth from our current customers is slightly improved. Wear levels are... You know, we see the jobs reports, but our meaning that, you know, they're not as robust as what we would like, but nevertheless, our customers are still quite resilient and hanging on to their people. And we just see an amazing opportunity to sell other items, cross-sell other items into that customer base. But things are pretty steady.
Analyst Jasper Bibb (Truist Securities): Thanks, that makes sense. And then I know we just got Unifirst, but after that closes, I imagine you're going to be looking for more acquisitions outside the Uniform business. So just any thoughts on what might be next for you after that point, and maybe how you're thinking about the consolidation opportunity in the fire business would be interesting.
Executive Todd (Title): Sure, Jasper. You know, we're acquisitive in each of our route-based businesses. We'll certainly be busy in our rental business here shortly. But the strength of our balance sheet, the strength of our infrastructure and our other businesses allow us to be acquisitive in all those. So we will continue to go down that path. And, you know, those are tough to pace, tough to predict on deal flow, but it won't change how we think about it. That being said, in the fire business you asked specifically, you know, the mix of business really matters to us. So we try to think long-term about that. We prefer service business much more so than installation-type business. So it just has to be the right deal, but we have been very inquisitive in that business over the past months and years, and we'll continue with that approach.
Analyst Alex Hess (J.P. Morgan Securities): Hi, this is Alex Hess on for Andrew Steinerman. Good morning, everyone. I want to touch on a couple recent initiatives you have. First is the recently announced three-way contract with you guys, Ford and Carhartt. And the second being the launch of what I think is a new personalized apparel plus program on your website. Both of those seem to be targeting the trades and manufacturing a bit more. Just wanted to maybe start, is there something you're seeing in those goods providing industries that maybe you're leaning into those a little more for sales growth in your term?
Executive Todd (Title): Uh, Alex, uh, thank you for the question. Um, I'll start, um, you know, uh, our relationship, uh, with Carhartt and with Ford goes back many, many years. Um, and, uh, we have, uh, We have a great relationship with both organizations. And this is about providing products that people want to wear. And in the case of Ford, I know Jim Farley was passionate about providing the products that his people want to wear and would be proud to wear. And our relationship with Carhartt was an absolute natural. So we're excited about that. Certainly the trades are something that we think is growing in demand and is an incredible opportunity for us. Those are people that frankly, we don't have nearly as many people in the trades in our uniform programs as we should, and they're all wearing garments. They're in jobs that are perfectly positioned for us to tap into. So we're excited about that, and we see the future looks really bright in that area.
Executive Jim (Title): As far as Apparel Plus, Jim? Yeah, I'll add a little color there, Alex, and I appreciate the question. And Apparel Plus really goes back to the core of our company culture and values, which is a culture of innovation and continuing to be dynamic and move to where the opportunity is and where the opportunity will present themselves in the future. And so Apparel Plus is just another movement towards that. So we want to be able to outfit any job imaginable across North America. And we want to make sure that we have the right apparel in those industries for what people want to wear, what they choose to go to work in. And it's been very successful for us. Regarding specialty trades, I think Todd outlined the fact that that market is really growing. A large employment market, they resonate well with our value proposition, and there's a tremendous amount of opportunity.
In fact, I have an example of one that I brought here for a call today, and as we always speak about, two-thirds of our new customers come from the unserved market, and we always want to illustrate what does that look like? Why do customers continue to partner up with Cintas, and what do they see as the main driver of the value proposition? So I have a property maintenance example here. and this company was going ahead and they were buying uniforms for their employees, a combination of retail and e-commerce, with the primary objective that they wanted to look professional and they wanted to look good and cohesive in front of their customer base. But what they found out over time was that they weren't able to accomplish that objective, that as they bought year after year, the styles would change, they would be inconsistent on an annual basis. What employees determined was, Clean and what represented the company well varied depending on the individual employee. The management team was spending a bunch of time administering the program and ordering and size changes and any time things were worn out. So it took them a bunch of time.
And then, of course, budgeting was all over the place. Sometimes they had big spikes in budgets. Other times they had very little. Made it really hard for them to manage their P&L. When they were introduced to the fully managed rental program for Cintas, they saw all the things that they wanted out of the program. They were able to get higher quality uniforms that were very comfortable, that were branded with specifically the Carhartt name, things that their employees really wanted to wear. They got a nice consistent image across the board because all their employees were wearing exactly the same thing and they were in good and usable and presentable conditions because of our professional laundry service that was provided with them. They were able to get time back in their day because they were no longer in a uniform business. They were in a business of taking care of their customers, which they certainly appreciated, and it made budgeting a whole lot easier. So that's exactly why we want to continue to expand the product line to be able to show other industries the benefits here of a rental program and why we think that we have such a massive market opportunity.
Analyst Alex Hess (J.P. Morgan Securities): Got it. That's awesome, guys. And then maybe as a follow-up, obviously, you guys are in the midst of implementing SAP into the FHIR segment, and you guys have implemented SAP into a host of acquisitions over the years. Maybe you can just highlight one on FHIR, the progress and prospective benefits, but also just sort of learnings from running that ERP implementation successfully over the years and what you might be able to do with that going forward.
Executive Todd (Title): Yes, Alex, we are preparing to implement our SAP into our technology into the fire business. And we're excited about that. We think it's going to bring standardization with that, allows for a better customer experience, and with that, it also allows for a better employee partner experience. So we focus on these technologies to allow us to make it easier to do business with us and make it easier for our employee partners to do their jobs. So we think it'll do just exactly that. And that shows up in all kinds of different ways. Retention of customers, retention of our employee partners, productivity, those types of things. That being said, it takes time. And technology is certainly never easy to implement. But we have really good muscle memory there. And we're well prepared to roll that out. And once we close on our deal with universe, we're highly positioned to do the exact same thing. So, and I think we'll see the same experience. I think the team partners at Uniforce will be excited about it, make it easier to do their jobs, make it more valuable to the customers, make it easier for the customers to do business. And we think long-term about those subjects as you go through the challenges of integrating technology. But the long-term impact is powerful for our business.
Analyst Jason Haas (Wells Fargo): Good morning. This is Jun-Yi Ahn for Jason Haas. Thanks for taking our questions. Can you walk us through some of the key puts and takes to consider for 4Q organic revenue growth by segment? I believe you guys had some one-time benefits in 4Q last year in Uniform Direct and First Aid and Safety. Could you remind us how big those impacts were and any other factors to consider across the board? Thank you.
Executive Jim (Title): Thank you for the question. I'll start. And I appreciate you pointing it out because the comparative for Q4 on revenue growth is significant. It was our highest revenue growth quarter last year. The organic was at 9%. And we did have some one-time benefits, specifically in our first aid business that ran 18.5% organic growth. We certainly do not anticipate that again. And then in our uniform direct sale business as well. In first aid, we had an increase in the training business that helped us as it relates to AED training. So that was a spike that we, again, we don't think is going to occur at those levels. And the uniform direct sale business can be a little lumpy, but it had a really good quarter. So, yeah, hopefully that gives you a little bit of color around the tough comparative in Q4.
Executive Scott (Title): Todd, I might just add, like, first off, I'd just say, you know, we had an outstanding quarter this quarter. You know, Jim mentioned that we continue to execute at a high level. We feel that the guide for Q4 is not only a good guide, but it's also consistent with the guide that we gave at the end of the second quarter. I guess let me kind of walk through a little bit of math there that last quarter, the organic growth at the high end of the range was 8%. And if you look at the guide for this quarter, this quarter is also at 8%. And then if you even take it a step further and look at it another way, last quarter, we issued a guide for the second half of the year to grow organically 7.8%. In Q3, we just delivered a growth rate of 8.2% organically. And when you combine that with the Q4 implied of 7.6, you get an average of 7.9. So really effectively right in line with the guide that we gave last quarter.
Analyst Jason Haas (Wells Fargo): Great. That's really helpful. And as my follow-up, I understand that most of your new business comes from no programmers, but I want to see if you've seen any change in the competitive environment recently following your acquisition and also given changes in the macro and geopolitical environment.
Executive Jim (Title): Thank you for the question. It is the geopolitical environment is certainly having a dynamic impact on things. So but from a competitive set standpoint, no real change, keeping in mind, as you referenced, two-thirds of our new customers come from that no program market. So, you know, when you're competing with e-commerce and you're competing with retail and you're competing with other managed programs, you know, relative to all that, we also have traditional competitors. So no real change to that competitive set. It's incredibly competitive, and that's the way it always has been and will be. That being said, we are focused on delivering value to that set of prospects out there. There are so many businesses. We do business with a little over a million businesses, and there's, you know, whatever, 16 to 20 million businesses in the U.S. and Canada, the opportunity out there is immense. And we're focused on delivering our message and getting our team positioned to better serve that market and get the word out better to that market because so many of them don't realize what we can do for them and many of them also think that they're not a big enough business to have a program like we offer, which is incredibly contrary to how we make a living, which is servicing Main Street USA. And our average size customer is... you know, spends about $10,000 a year with us. So trying to get that message out to that prospect base is incredibly important to us.
Analyst Ashish Sabhadra (RBC): Hey, good morning, guys. This is Will Chee for Ashish Sabhadra. I appreciate you guys taking our questions. Based on the ask on route density and the incremental opportunities there around footprint, especially with UNF acquisition in mind, retention's still at highs. Will any retention dips result in kind of reorganization there? Or do you still see a lot of opportunity kind of increasing the sell-through on those routes and just further fleet optimization? Why don't I sta
Quarter 2
Q2 2026 Earnings Call — December 18, 2025
Tim Mulroney (William Blair): Scott, Jared, good morning. Only 10 minutes on the prepared remarks. That's what I'm thankful for this holiday season. Thank you for that. So just one question from me. There continues to be a lot of noise in the labor market data, but I think most would agree that we've seen a softening trend in terms of hiring activity over the last several months, at least on balance. And I'd be curious to hear if you've seen any material change in employment levels across your customer base, if what we are seeing in the broader payroll numbers are playing out in your world, or, you know, if the reported job losses are more in the white collar world where you're providing some services, but, you know, those folks don't typically wear uniforms. I know you've emphasized your ability to grow in all types of environments. But I'd be interested in your take on more of the underlying dynamics here, given the number of businesses that you service week to week. Thank you.
Todd (Executive): Well, thank you, Tim. We're reading the same things you are. We're watching jobs reports, as we always do. And as we spoke about in our preparer remarks,
as a reminder, we've shown the ability to grow in multiples of GDP and jobs growth for a long time now.
We certainly love it when our customers are adding employees and their businesses are really healthy. And that's how we love that. But we don't need it in order to grow our business the way we like to. That being said, to your point, I think you have to dig past the headlines on the jobs report. You know, first off, we've picked our verticals really well, very strategically. And the employment picture for them, if you look at it, it's positive. Healthcare, education, hospitality, state, local government, those are good. The services providing sector continues to show growth. And the goods producing sector isn't performing as well, but the specialty trades within them are doing well. And those are obvious uniform wearers and users of our services. So there are certainly many jobs that are under pressure, hence what you see in the headlines and the markets reports. But they are certainly, more generally, white-collar jobs, IT, financial, back office, that are really not end markets for us, as you pointed out, Tim. Really helpful. Thank you, Todd.
Manav Patnik (Barclays): Thank you. Good morning. I also just had one broader question, maybe just following up from that one. You know, I know you've obviously shown that you guys can outperform and execute in any kind of environment, but just maybe help us appreciate, like, what is your downturn playbook look like? Like, if unemployment does crack, how do you still, you know, keep up these kind of high single-digit growth levels? Like, which levels typically make up more? Is it all of them? Just any color there would be helpful.
Todd (Executive): Yeah, good question, Manav. You know, we certainly have a wide array of products and services that we provide, and we service a wide breadth of customers as well. So our target of mid to high single-digit organic growth is important to us, and we have so many different ways to grow that it gives us flexibility. Certainly new business is important to us. And when you think about a business that when they have less people, that can certainly impact us, but they also have still other needs that they need to address. And in many cases, they don't have enough people to address those, and they look to us to outsource for those items. So new business is important. We are still very early in the innings of cross-selling all of our various products and services into us. So trying to gain growth from our current customers is an important lever for us. So that's all valuable. M&A tends to get better during those periods of times as well. But we have many levers here, in addition to obviously the ones that I mentioned that I think give us real optionality. And certainly when we look at new programmers, that's a big opportunity for us.
Jim (Executive): Hey, Manav, this is Jim. Perhaps I can give just a little more color on how much opportunity really lies within our current customers. And as Todd mentioned, as prepared remarks, our objective is to first supply our customers with a great experience with us. And that starts at the foundational level. And then we are in the right now to be able to ask them for more opportunities and to steer more of their spend that they already have over to us. And just due to the nature of our service model, we're in their facilities so frequently that we get a really deep understanding of what their needs are and where the opportunities may come from. So I have an example here of a property management company that we service out on the West Coast. And we've been servicing that facility for a number of years for uniform rental for all the folks who work on the property. And during our routine visits, our team uncovered that they were doing bulk orders from an e-commerce solution for all their restroom supplies.
And when inquiring with the company, they realized that they were tying up cash flow, they were tying up really precious real estate space and storage space that they did not want to tie up and they were taking a lot of their labor and manpower to go ahead and inventory all of those goods. Our folks went in and introduced the concept of outsourcing that to us and utilizing the syntax hygiene program. They found out that now their spend is much steadier than it was in the past. It makes it much easier to budget. They're not tying up that space and maybe most importantly their team is not involved in taking their precious time away from what they focus on, going ahead and managing hygiene inventories. They let us handle that for them. So just a small example of activities that happen across a million plus customers every day. Thank you so much, appreciate it.
Andrew Steinerman (JP Morgan): Hi, I definitely heard the pluses and minuses about the customer's employee base by just doing quite get a compilation if ad stops are changed year-over-year. I surely heard the separate point that you continue to grow with same customers. So just a comment on ad stops year-over-year. And then my second question is, with the acquisitions that were completed in this second quarter, how much will that add to second half of the year revenues?
Todd (Executive): I'll take the first half. Andrew, so thank you for the question. You know, as we mentioned in Jim's example, we talked about all the various products and services we can provide for our customers, and it's broad and growing. So from that standpoint, growth from current customers, I would describe it as very stable, if anything, slightly positive. So, you know, we're in a good position. Our current customers see the value proposition that we can offer to them, and that actually helps with retention as well.
Scott (Executive): Yeah, thanks, Todd, and Hello, Andrew. We talked in the prepared remarks. The acquisition impact during the second quarter was about 70 bps. And if you think about the rest of the year and our guide, you know, we obviously assume no new acquisitions. You can assume that there's a normal tail when it comes to the acquisition volume. And generally for the second half of the year, you would assume about half of the second quarter impact. So call it, you know, 30 to 35 bps.
Josh Chan (UBS): Hi, good morning. Congrats on a really strong quarter. I guess my two questions, one, I think both Todd and Jim mentioned that retention rates are at record levels. Usually you see those in stronger economic times, so maybe could you talk about how you're able to achieve strong retention rates even in these types of climate? And then I guess my second question is, on the incremental margins, I think both Q1 and Q2 were within your longer-term range, but maybe towards the lower end. So any way to think about how that kind of transpires in the second half would be great. And thanks for taking my questions.
Todd (Executive): Thank you, Josh. I appreciate that. I'll take the first half regarding retention, and Jim will address the incrementals. You know, our retention rates are there at all-time levels. And we have been for several quarters now. And it speaks to a number of things. First off, the execution by our team is impressive. They're doing a great job making sure they're taking great care of our customers. That is easy to say, really hard to do. Starts with our supply chain team, our operations organization. They are doing a great job. And that all ties back into our culture. And we have spoken over and over again about the fact that our culture is our ultimate competitive advantage. And it's, you know, it shines even brighter in economic environments that are a little bit more uncertain than others. So, and it's showing up big time for our folks. We're also providing great value for our customers, and they're seeing it with not only the products but the services, the technology that we're utilizing, and the technology investments that we've made help accomplish two things at a 30,000-foot level. One is it makes it easier for our partners to our employee partners to service and take care of our customers to provide value for them. And the second one is it makes it easier for our customers to do business with us. So when you add those up, all that, you mix it in, it adds up to retention rates that we find very attractive.
Jim (Executive): Yeah. Yeah, Josh, I'll get to the second question regarding margins. So first of all, we ran a 27% incremental margin for the second quarter, which we really like. And that's right in our stated range of that 25% to 35%. That range is really important for us because that allows us to continue to invest in the future growth of the business while the NL expand margin along the way. So we really like that. That allows us to make the investments in technology, the necessary investments in capacity, bench strength, selling resources. All of those are really critically important to us. So that would be really right in the sweet spot of the range. Now, a couple things to keep in mind with regards to incrementals this year and how it plays out for the remainder of the year. First off, we're coming off of a comparison to last fiscal year, which is a really tough comp. Last fiscal year, we ran in the second quarter incrementals of 49.7. That's an outperform. That's not what we normally expect. So we're really pleased with the 27 this quarter, given that comparison. In fact, if you look at the whole first half of last year, we ran an incremental of 44.3%.
So really, really high in the beginning of last fiscal year, settling back into our range this fiscal year. A couple other things maybe to keep in mind is what the guide implies with regards to incrementals for this fiscal year. If you look at the whole year across the board, incrementals would imply somewhere between the 29 and 30 when you adjust for the $15 million asset sale from last fiscal year. So that's right in the heart of where we want to be, a perfect level of investments continuing to fuel future growth. And if you look at the back half of the year, that would imply incrementals of 30% to 33%, so moving back up towards the high side of that range. So we're really pleased with where we are. We like the outlook of the year, and we think that's a great spot for us to run the business.
Jasper Bibb (Truist Securities): Hey, morning, everyone. Wanted to get an update on your experience with sourcing costs and tariffs so far this year. I guess how have things trended relative to your expectations when you initially set out into the security here?
Todd (Executive): Good morning, Jasper. Thanks for the question. Yeah, with the tariffs, it is certainly a dynamic environment as it relates to that. But we continue to execute at a high level. You know, as I mentioned earlier, our culture, when times are challenging, you might have to run at higher RPMs, but we're executing at a high level. We're not immune from impacts of higher costs from tariffs. But our supply chain has always been a competitive advantage. And when you're in this type of environment, it's that much more of an advantage. Now, keeping in mind the ability to – they're flexible and adaptable. And part of how they have that optionality is because we source from all over the world. And we do have really good geographic diversity. And we've spoken in the past that 90-plus percent of our products, we have two or more options. So that optionality is incredibly important when it comes to an economic – excuse me, a sourcing environment and what we're dealing with. The guide does contemplate the current environment for tariffs. So it's coming in very similar to what we expected. You recognize that we do have the ability to – we amortize most of our goods. So as a result of that, it does give us time to pivot and adapt. But it's coming in about where we expected, but we're certainly staying on our toes because the sourcing environment is dynamic and the tariff environment is – there certainly could be changes coming as well.
Jasper (Truist Securities): Thanks for that. And then, you know, really healthy margin in the first aid business this quarter. Can you provide a bit more detail on what the underlying mix has looked like in that business this year? I know you were a bit heavier on the training side for the end of last year, so curious if that's flipped back to more recurring revenue.
Todd (Executive): Yeah, we're, you know, we love the first aid business. It is a great business for us. We're very pleased with that. And you've seen that they've had outsized performance for a period of time now. One of the things that the mantra that we have and the leadership of our organization there talks about there's nothing more important than the health and wellness of a business's employees and customers. We completely agree with that. You're seeing really good growth in that business. We see them as a low double-digit grower for the foreseeable future. So that's great. That being said, certainly the mix of business can have an impact on the margins in that. So we like the range we're in. But if we have a little bit of change and mix and there's a little change in margin within a range for us, we're okay with that. We're investing for the future, providing more value to our customers. And, you know, running a business isn't linear, so we're not focused on, you know, just a pure, hey, we've got to get another, you know, a certain amount of basis points, a lift in gross margin in that business. We think it's important that we are running a range that's really attractive so we can grow our operating margins. But mix of business really is impacted by that. So, Jim, anything else that you'd like to comment on that?
Jim (Executive): No, Todd, I think you hit all the main points of what really drives this business. The only other thing I might just say is the team did a fantastic job in the quarter of execution, and, you know, we're really pleased with the results and the way they stand.
Andrew Whitman (RW Baird): Great, thanks for taking my question. I just thought I would give you guys an opportunity, or I'd like to hear a little bit about the competitive environment. Obviously, over the last couple of years, you've had some competitors that have really gone on a volume-chasing spree. You guys have obviously executed very well amongst all this, but I was just wondering what you're seeing out there and how that's affecting your price realization.
Todd (Executive): Good morning, Andrew. Thanks for the question. Yeah, I mean, as you know, we operate in a very competitive environment, always have, always will, my entire career. It's always been like that. And we certainly do win some business from competitors, but that's, as you know, that's not where our focus is. Our focus is on signing new customers that – that weren't programmers when we walked in, and when we walk out, they are. And as a result of that, still over two-thirds of our new customers are coming from that sector. And the white space is incredibly large there, with us servicing a little over a million customers, but there's still 16-plus million businesses in the U.S. and Canada. So that's really attractive for us. I mentioned our retention rates are at all-time high. That's helping us as well. But that's really about the value proposition that we're providing for our customers, which starts with our culture and is executed through our employee partners. But it is a – we're pleased with how our folks are performing, competing in the marketplace, and really attacking that large TAM out there of that – no program market, which we think we're really excited about.
Andrew (RW Baird): Great. Thank you. Just for my follow-up, I thought I would just ask a little bit on the M&A side. Obviously, you know, last fiscal year was one of your bigger years that you had since for a while. A pretty big quarter here in terms of capital deployment towards M&A. Maybe, Todd, you could just talk about kind of the funnel here. Did you feel like, you know, thinking about, you know, the amount of capital deployment last year is, again, doable this year with the progress that you made this year so far?
Todd (Executive): Andrew, great question. First off, just capital allocation in general, we're very pleased with how we're going there. We just, you know, we invested over $100 million in CapEx for the quarter, $85 million in M&A. All three route-based businesses we were acquisitive in. And then on top of that, $182 million in dividends paid out and over $600 million in buybacks. So we really like that capital allocation strategy. We've shown to be good fiduciaries with that. And M&A is certainly a part of that. As I mentioned, we had a really good quarter. We had a great year last year. But as you know, it's hard to predict. M&A tends to be a little unpredictable and lumpy, whether it's because there's family-owned businesses that are waiting on the next generation, whether they want to move on or not. And we do love M&A of all shapes and sizes. We love tuck-ins. We like new geographies. And when we make M&A, we value so much of it, but the number one things that we get out of it are the people that are running the business and the customers. And we try to make sure that we can get synergies.
If it's a tuck-in, and if it's not a tuck-in, then we get extra capacity, and we also then have more customers that we can cross out. So, all that's attractive. You know, the pipe, we are always working on that pipe. Jim and I and our corporate development team are all in that game together. We have relationships that are going back decades, and we're ready and willing for M&A to be an important component of our strategy moving forward. Happy holiday, guys. Have a good day. Thanks a lot.
George Tong (Goldman Sachs): Hi, thanks. Good morning. You touched on some of this, but can you provide a high-level overview on what you're seeing with sales cycles and broader customer purchasing behaviors, and if you've noticed any meaningful changes from prior quarters?
Todd (Executive): Good morning, George. You know, nothing specific to call out. You know, we've certainly operated in easier environments. This economic environment is a little less certain than we like. But despite that uncertainty – The value proposition continues to resonate. As I mentioned earlier, especially in periods of uncertainty, it can do that. Outsourcing can save money, improving steady cash flow, and saving time that can be spent on running the business. That was referenced in Jim's example that we talked about earlier. I've already referred to retention rates being at very attractive levels. And our – and I also mentioned our growth from our current customers was steady. If anything, improved slightly. So, you know, we think we're in a good spot and we like where we are, where we're pointing.
George (Goldman Sachs): Got it. That's helpful. And then just to follow up, you took up your full year guide for revenue. Can you talk about how much of the increase reflects upside in the quarter versus what you were internally expecting compared to maybe a stronger outlook for the remainder of the year?
Todd (Executive): Yeah. First off, our guide for the year is really good. It looks right where we want it to be. If you look at the guide for the years, showing growth of 7.8% to 8.5%. Midpoint of 8.2. It's right where we want. I think it's also important to recognize that the comps do get tougher in the second half for growth. Last year's second half growth was about 90 basis points higher than the first half of last year. So, you know, we've booked a good performance, but we're going to be up against tougher comps in the second half on growth than we were in the first half. But we're pleased with where we are, and we're pleased with our guide. And we think that we will be able to get some leverage as we move forward on that guide, which will help fall to the bottom line, hence the EPS guide as well.
Jason Haas (Wells Fargo): Hey, good morning, and thanks for taking my questions. I just wanted to follow up to get some more detail on the timing of the tariff costs. It sounds like those have maybe started to flow through the P&L, but there's more impact to come. Is that, like, a fair understanding? And then how is the industry reacting? How are you reacting? Have you started to raise prices? Have your competitors begun raising prices? How should we think through that?
Todd (Executive): Good morning, Jason. Well, a few things. First off, as tariffs come through, I mentioned that we have optionality. So don't think of it as simple as, well, tariffs are a significant impact. We just haven't seen it yet. That's not the case because our culture is such that we don't just accept that. We've got to go find ways to improve. We've got to work at higher RPMs to find other additional suppliers to take costs out of our business as well. And we're doing all that. I mentioned we're not immune from it, but we're working really hard to mute that subject as very best we can. As far as pricing is concerned, we take a long-term approach on pricing. You know, we are at what I'll call historical type levels. But our philosophy is we care about the long-term value of a customer. So we're focused on, you know, growing our business via volume growth, not just pricing. We're going to go out and extract out the inefficiencies of our business that will allow us to grow our margins at attractive levels along with the revenue growth to help us get leverage.
But we don't simply just pass along those costs to our customers because we operate in a really competitive environment, and those customers have choices, so we've got to work really diligently to mute the cost impacts of tariffs and other costs that are going through so that and we're extracting out those inefficiencies and doing the very best we can to make sure that we're positioned for success to grow our margins.
Jason (Wells Fargo): That's very helpful. And then as a follow-up, can you just refresh us on the timing of the SAP fire implementation costs? Are you expecting a greater headwind to margins in FHIR in the second half of the year as that system gets turned on and starts recognizing the amortization?
Todd (Executive): Thank you, Jason. You know, these ERP implementations take time, and we are experiencing some additional costs now, for sure, but there is more cost to come in the future. We're working really hard on this implementation, we think it will be really valuable for our employee partners and our customers. So, you know, we're investing for the future in that business. You see that we're growing it really attractively. We're not only growing it attractively, but we are also – highly inquisitive in that business. So when you think about the fire business, think about it this way. We are also dealing with M&A that comes to us. And as I mentioned earlier, M&A, you can't predict it exactly. And in that business, some of our M&A allows us to be tuck-ins, but others are actually geographic expansion. And when we make M&A in that business and you get M&A expansion, it is – for a period of time, that doesn't run at the margin profile that we do. We've got to make sure that we get our operating protocols in place. And as you can see, M&A account for 340 basis points of total growth per fire in Q2. So that's a component of any margin profile pressure that we have in that business, a little bit of SAP, but we're investing for that in that business because we think the future is really, really bright, and we're quite optimistic about the coming years.
Scott (Executive): Jason, this is Scott. I just might add, you know, as Todd mentioned, the ERP implementations take some time. We've got some experience with that, and, you know, a rental business as well as first aid and safety. And we are expecting the fire rollout to carry on into next fiscal year. And I would just look at the impact for fiscal year 27 to be around that, you know, 100 basis points for the fire protection business.
Faiza Awi (Deutsche Bank): Yes, hi, thank you. So I wanted to ask about your technology. I think it's well understood that you guys are at the forefront of implementing the latest and greatest in terms of technology. So I just wanted to put an update on what are, if there's any recent initiatives you'd like to talk about and maybe the return on those types of investments, whether it's AI related or anything else you would want to highlight.
Todd (Executive): Yeah, good morning, Faiza. Yes, we are investing in technology, have been for many years, and will be probably in perpetuity. Just it's the nature of how business works now. And we are – we spoke about in the past, we're seeing benefits, whether it's in material cost or cost of goods, production, delivery costs, all those, you're seeing that. We talked about Smart Truck helping us from a technology standpoint. Garment utilization being on one system allows us to share garments and reduce our costs there. All that is important. Certainly, AI, we see obvious opportunity there. We're in the early stages, as many companies are, on the AI front. And I – you know, include that into our total technology investment. But we're optimistic about where that will impact us in the future, and we are organizing and investing appropriately to make sure we leverage those opportunities.
Stephanie Moore (Jefferies): Great. Good morning. Thank you, everybody. I think, you know, two areas of your strategy were very clear this morning and obviously have been clear for some time now. And first is obviously the erotic retention levels that you could continue to see as well as, you know, as you called out, your investments and key verticals and just the strength that you're seeing there despite the uncertain macro. So kind of given these two factors, you know, maybe talk about how your view on pricing can change because it would seem like the look retention is very strong. You're in, you're also in these verticals where you're, you know, seeing a lot of impact, but also, you know, continuing to build out your value with these customers. So IE, I would assume being much stickier. So maybe just talk about how this can inform your pricing strategy going forward. Thanks.
Todd (Executive): Yeah. Good morning, Stephanie. You know, our pricing strategy hasn't changed. And, you know, as I mentioned, we're running at historical levels. And I also mentioned we think long-term about these subjects. So our strategy around pricing thinking long-term has helped the retention rates. So, you know, we're focused on growing our margins, but we're not going to do that just through pricing. We have to go extract out inefficiencies because we operate in a very competitive market. And we have many competitors, whether it is what you might think of as a traditional competitor, but online, e-commerce, the big box retail, we compete with all these people. And as a result, we've got to be focused on providing great value. And that applies to our key verticals as well. Each of our verticals, we operate in a very competitive environment. And we're focused on providing the value, extracting out those inefficiencies, because we do not operate, never have and never will operate in an environment where we can just price up because it's an ultra-competitive environment. Thank you. Appreciate it.
Scott Schneeberger (Oppenheimer): Thanks very much. It was asked earlier a question on sales cycles, and you guys covered the spectrum of the answer pretty well. I'm curious just to ask that a little different way. What you're seeing behaviorally from large customers as opposed to small customers, are you seeing any softness or strength in one or the other? Just any indications on size category. Thanks.
Todd (Executive): Yeah, good question, Scott. You know, as you can imagine, we watch our customer base really closely. But we have such a wide breadth of customers and products and services. But it's a – that wide breadth of customers – whether it's geographic or by NAIC code, you name it, we service it. And so nothing to call out specific.