Welcome to the Vestis Corporation Fiscal Third Quarter 2024 Earnings Conference Call. At this time all participants have been placed in a listen-only mode. And the floor will be open for your questions following the presentation. [Operator Instructions]. I would now like to turn the conference over to Michael Aurelio, Senior Director, Investor Relations. Please go ahead, sir.

Thank you, Connie, and good morning everyone. Welcome to the Vestis Corporation fiscal third quarter 2024 earnings call. With me here today are our President and CEO, Kim Scott; and our CFO, Rick Dillon. As a reminder, a telephonic replay of this call will be available on the Investor Relations section of the vestis.com website shortly after the completion of the call. Also, access to the materials discussed on today's call are available on the Vestis website under the Investor Relations section. Before we begin, I would like to remind you that this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about management's future expectations, beliefs, estimates, plans, and prospects. Such statements are subject to a variety of risks, uncertainties, and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in our periodic and current reports filed with the Securities and Exchange Commission. We do not undertake any duty to update them. With that, I would like to turn the call over to Kim.

Good morning. Thank you for joining our fiscal third quarter 2024 earnings call. I'd like to begin by thanking our 20,000 dedicated teammates for the hard work they do each day to support Vestis in serving our customers, shareholders, and the communities in which we operate. In my discussion today, I want to convey three key messages: our business is stable as evidenced by our third quarter results, retention metrics, and affirmation of guidance. We understand the importance of external communications, consistently delivering against our commitments, and establishing our credibility in the market. We are making progress on improving operations by way of new leadership in the delivery of organizational efficiencies. Touching on point number one. I'm pleased to report that our third quarter results are in line with expectations, and we are reaffirming our full year fiscal 2024 guidance with EBITDA margin trending towards the higher end of our range. Adjusted EBITDA margin was 12.4%, a decline of 260 basis points versus the prior year or 160 basis points excluding the impact of incremental public company costs. Notably, Q3 adjusted EBITDA of $87 million and adjusted EBITDA margin of 12.4% were both flat sequentially versus second quarter despite the approximate 1% sequential revenue decline. It's important to note that a portion of the upside in the third quarter was related to timing effects from pull-forward of items that we originally expected to impact the fourth quarter. Revenue for the quarter was down 1.6% year-over-year. We remain focused on accelerating new business. We've seen approximately 700 basis points of growth from new wins in Q3 and 100 basis points of volume gains from route sales, which is cross-selling existing customers additional products and services. With the addition of new sales leadership and our new delayered structure, we believe we can…

Thanks, Kim and good morning, everyone. I will start with more details on the third quarter results and then close with our guidance and expectations for the fourth quarter. So let's start with the third quarter revenue bridge on Slide 10. Revenue of $698 million decreased by 1.6% year-over-year. The impact of volume growth and pricing was offset by lost business in the quarter. Volume growth from recurring revenue, including new customers and expanding our existing customer penetration through cross-selling, provided approximately 800 basis points of growth in the quarter. Consistent with the second quarter, new customers contributed 700 basis points of growth, and route sales to existing customers contributed 100 basis points. We continue to win new business, and we are seeing an increase in the dollar contribution from gross new sales. Sales from new customers were up 17% year-over-year despite sales headcount being down approximately 10% versus the third quarter of fiscal 2023. Customer losses reduced third quarter revenue by approximately 900 basis points year-over-year, more than offsetting our volume growth. The lost business impact consists of 5% from known customer losses as we exited fiscal 2023 and 4% from customer losses during this fiscal year. As Kim noted, we saw improvement in our year-to-date retention rate over fiscal 2023, and we expect this will drive lower carryover losses in 2025. This is an important point that I want to emphasize that prior year retention rate was a bigger headwind in 2024 than we expect it will be in 2025. Said differently, we begin fiscal 2025 in less of a hole from lost business than 2024. Pricing contributed 60 basis points to top line growth. This reflects end-year regularly scheduled annual price increases and moderated off-cycle pricing, partially offset by the impact of the erosion of prior year…

Thank you. [Operator Instructions]. And our first question comes from Andy Wittmann with Baird.

Great, thanks, and good morning. Thanks for taking my question. I wanted to drill into, I guess, Slide 10 and the revenue bridge, specifically around the customer losses here because you kind of emphasized this, and I actually think it's the main point that I wanted to explore a little bit in more detail. And so the idea is that the hole for 2025 from losses is not as big as it was in 2024. And I guess one way of thinking about that, I want to confirm that I'm thinking about this correctly. If you had $37 million of revenue hit from known losses from basically the back half of 2023, that would be two quarters in 2023 resulting in $37 million revenue impact, that would be about $18 million per quarter of revenue loss. That would compare to this year where you say you've got $29 million of in-year losses over three quarters or about $10 million of revenue loss per quarter. So basically, that difference from -- or three quarters, yes, $10 million per quarter. That difference between $18 million per quarter of revenue loss versus $10 million of revenue loss is that one way of getting our arms around and thinking about the difference in the known customer losses?

Yes. I think that's a good way of thinking about it without -- I didn't -- could redo your math, but thinking about it that way in terms of taking the known losses year-to-date that we've reported versus the in-year losses and then doing the math on what that differential is for 2024 versus 2025, that's exactly how I would think about it.

Okay. And I guess then, Kim, just as it relates to -- it feels like the business is getting a little bit more stabilized after those customer losses. Pricing strategy has now been in effect. The new pricing strategy has been in effect, your retention rates are stabilizing, does it give you a little bit better visibility as to when organic growth might be able to inflect positively, I was just wondering what your thought process is on timing, recognizing that some of these customer losses even from last year have to filter to next quarter and I think probably into at least through fiscal first quarter of next year but I was just wondering what your view is if you think that organic growth can return in second quarter of next year or third quarter next year, is that kind of what you're thinking?

So I don't want to specifically point to the quarters at FY 2025, Andy. But I will tell you that you are thinking about this correctly and that there will still be some carryover losses that have to move from FY 2024 into the beginning of FY 2025 so we will need to lap those, obviously. And you can look at our 800 basis points of growth that's coming from our sales team and from our sales representatives and recognize that we need to accelerate in order to more rapidly drive organic growth in the early quarters of 2025, we need to accelerate, we would need to accelerate that run rate that's coming from that sales team because we still need to absorb some rollover losses coming into the first part of 2025. I want to be careful not to talk to you specifically about 2025. But what I also can tell you is that you are correct in your thinking that we definitely should see less of a headwind related to rollover losses coming into the New Year now that we're seeing retention rates stabilize.

Got it, okay, those are my key questions today. I am willing to pass it on.

Thanks Andy, appreciate it.

And we'll take our next question from Andrew Steinerman from J.P. Morgan.

Hi. Kim, I heard you used the word moderation of price in your prepared remarks. And then, Rick, you used the word price erosion when talking about the implied fourth quarter guide compared to third quarter. So I just want to understand, are we talking about net realized price being positive, just lower than in the past or are we actually talking about realizing price negative, particularly when thinking about fourth quarter, which we're in now versus the third quarter we just reported?

Sure. My comments, I'm referring to the impact of price in Q3 versus Q4. As we talked last call, we took moderated pricing actions late in Q2 and we noted that we would just moderate. As those pricing actions settled out in terms of realization in Q3, when you compare the impact in Q3 to Q4, gets a little bit less in Q4. We do have positive pricing but we're just speaking to sequentially the decline and the impact.

Rick, when you say that, it sounds like you have positive realized pricing year-over-year, but it sounds like you're also realizing net realized pricing sequentially?

I'm saying in -- sequentially, I'm realizing net pricing. I also have net pricing for the fourth quarter. I will call out that as we move through year-over-year, as we move through the fourth quarter relative to prior year, if you recall we had significant off-cycle pricing in Q4 -- Q3, Q4 of last year impacting primarily Q4. Thus, that year-over-year erosion that I spoke of relative to those actions. But we continue to take price and it is impacting our results. And to Kim's comments, the impact of pricing for the year will land at about between 1% and 2%, which is in a normalized rate for us.

Okay, thank you.

And we'll take our next question from Shlomo Rosenbaum from Stifel.

Hi, thank you for taking my questions. Kim, can you talk a little bit on Slide 7 the recurring revenue customer retention. Just trying to understand the context of it. It looks like it went down sequentially from 93.2% to 91.7%, but it's up year-over-year by about 40 basis points. Is there -- can you just comment on the retention, is the retention going down sequentially, is this a seasonal type of metric to look at, how should we be thinking about what's going on in retention through the year?

Sure, I'll actually take that. When you look at our quarterly retention, there can be some volatility in the quarterly retention calculation. And that's why -- and it's just based on the nature of the calculation and the discrete aspects of each quarter. And so that's why we look at this from a year-to-date perspective. And that 200 -- roughly in excess of 200 basis points improvement you see year-over-year -- year-to-date is what we're really focused on. And so we like that improved trend and we're pleased with that. And so that quarterly number does have a little volatility. I would also note that Q4 of prior year included the impact of a large national account and also is reflective of the very pricing you just talked about on the last question. You took significant pricing in Q3 and Q4, and you basically see some of the impacts we've been speaking to in Q4. We've moderated pricing so we're not anticipating a pricing impact, but we're very pleased with where we are year-to-date.

Okay. And can you talk a little bit about that AR securitization facility, is it recoursed to Vestis?

So the receivables are sold. They're sold to a bankruptcy remote entity and often into a bank. The receivable and the rights to those receivables. And so as cash is collected, the purchaser enjoys that cash. What we like about the facility is as those receivables are paid off, we can replace them, and it gives us this permanent acceleration of our DSO and allows us to enjoy early the aspect of $250 million of receivables without impacting our ongoing operating cash flow.

There's no recourse on there to Vestis if something goes wrong with a big client or something like that if the receivable becomes uncollectible, right, does that go back to you, you guys have to go back and replace it? I'm just trying to figure out how that works.

There is no recourse.

Okay, thank you.

[Operator Instructions]. And we'll take our next question from Stephanie Moore from Jefferies.

Great, thank you. Actually, I think for my first question, I'll just follow-up on the prior question that was asked on retention. So understood that you can have some volatility quarter-to-quarter. But can you give us an idea of where we think retention should end for fiscal 2024, presumably, you've almost said about the year where you should have probably a decent idea and then what is the kind of targeted retention level we should think about as we start to lap some of these losses that were in what is presumably a more normalized environment? Thanks.

So we've talked about before actually is that we came into the year expecting retention to be in this 92.5% zone. And year-to-date, that is where we're falling. Without getting into a forecast of what retention looks like in the fourth quarter, what we like about where we sit is we don't have the significant headwind from pricing. And as we sit here today, we're not aware of any large national account that is at risk for the fourth quarter. Those are two meaningfully different headwinds to that Q4 retention count, and we're monitoring this and focused on that daily.

And then what would be a targeted normalized retention?

When we talked before, we talked about the last number that was out there was 93%. I will point out that, that was actually a high point for retention for the business. And if you go back pre -- those years, retention for this business has been actually in the 91.5% range. We believe there's huge opportunity there and we're really focused on how we do better than 92.5%. So the discussion that Kim had on service excellence and what that does from not only our ability to take price but also the impact on retention of the customers we have.

And Stephanie, I'll just add to that. When we look at the future opportunity, we have market centers today. We have locations today that are performing well above the 95% mark. So we absolutely know that it is achievable to be much better than we are today, and that's really why we're putting this concerted focus around the customer experience and enhancing the experience for customers. So our internal benchmarks are, we believe, really something that is a great opportunity for Vestis in the years ahead. I wouldn't want to put a time line on when we think we will achieve those higher levels. But we've proven to ourselves that we can do that because we have locations today that are performing at these levels. So we're really aiming to move that retention needle up significantly over time in the coming years. Right now, we've been focused on stabilizing. We've taken some very decisive decisions to make sure that we move the needle in the right direction. And now we've got an entire team focused on elevating the experience for the customer so we can hit those watermarks.

Got it. No, that makes a lot of sense. And then just as a follow-up to that, I think as we think about organic growth going forward, I understand you're not giving any color on 2025 so I'm not specifically asking on that. But given kind of where retention is improving too, but as you said, is an opportunity for further improvement going forward. Given kind of the pricing environment, which I think across the board is really not super, super robust for all things we probably understand. So as you think about the levers you can pull, which are new business wins, it sounds like quarter-to-quarter, new business wins remain pretty steady at a pretty good high single-digit range. It sounds like you've done a pretty good re-org of the sales organization. So can you talk a bit about the pipeline of new wins, the new win conversion level, and kind of the timing in which you think you can start to see some of the operational improvements drive an acceleration in new business wins?

Yes. So as we mentioned in our prepared remarks, we're seeing about 800 basis points of new growth, so 700 basis points coming from our frontline sales team converting new logos and about 100 basis points of growth coming from our route service representatives that are growing and penetrating and taking share of wallet with existing customers. So the first step to organic growth is making sure that rate outpaces lost business. And that's why we've been heavily focused on stabilizing lost business, and we continue to focus on that because the single best and easiest lever to pull for growth is just to hold on to more customers than you did before. And so our focus right now is let's protect our base. Let's make sure that we are putting a lot of energy around delivering an outstanding customer experience so that we can protect what we already have, and that's lever number one. Let's get that done and let's protect those great customers that are already in our house. The minute you do that, that 800 basis points can start to become accretive and positive growth. But on top of that, we've also put a tremendous amount of effort around restructuring our sales team, as you referenced, bringing in very strong proven industry leadership because we also do believe that our frontline sales team who is converting new logos can convert at a better close rate and more revenue dollars per head. And I've talked a lot about that being an important metric for us, revenue dollars per head. And as Rick mentioned, we are actually seeing higher rate of sales from that team with lower headcount. So we know that they are becoming more productive. And what we're focused on right now is that year one and…

Thank you.

And we'll take our next question from Manav Patnaik from Barclays.

Hi, good morning. This is Ronan Kennedy on for Manav. Thank you for taking my questions. Can I ask if you are seeing any one of your public comps described as heightened new business bid activity driven by dynamic of increased scrutiny by cost of customers, which is kind of a step change from more recent industry dynamics and is that being kind of coupled with your deliberate step back on pricing to address acknowledged service gaps, is that driving instances of where you are renewing, you're having pricing and volume erosion during the renewal process, so that dynamic and phenomenon and just commentary on the broader pricing pressure within the market?

So Ronan, can you -- I wasn't able to hear the first part of your question. So I heard you say there's heightened competition and your question was about, I think, more scrutiny from our customers around pricing. Is that the question?

Yes, one of your public comps had referred to a more challenged environment from -- primarily from a national account bid activity standpoint where there is increased scrutiny of pricing. Is that coupled with your deliberate moderation of pricing to improve acknowledged service gaps kind of compounding pressure and resulting in instances of erosion of volume and pricing renewals?

So no, I would separate those two components. So we think about pricing with our national account customers very differently than we do with SMEs. So as I'm sure you all know, national account customers are typically three to five-year contracts, and they have very bespoken surgical pricing by customer as well as the price increase terms and conditions that are quite customized by customer. And so we are all at the macro level competing for those large pieces of national account volume and those come up very episodically. Every three to five years, you may have one of those large customers come up. When they do come up for renewal, it is very competitive and we are all talking about pricing and rebates and incremental volume and ways that we can preserve the business or win the business from our competitor. That is a very different dynamic than our pricing decisions that we make related to SMEs, and it is a completely different process. So I would not co-mingle those two in any way, Ronan. I would think about them quite differently. But to answer the first question, yes, there is a lot of competitive activity when national account customers come up for renewal because as I mentioned, they are large pieces of volumes and they're highly attractive in our model.

Got it, thank you for the clarification and the insight there. And then can you just provide an update on the efforts around efficient operations, I think you had previously highlighted optimization events and then also from the merchandise management, your reuse initiatives would be benefit to fill rate and then your in cash savings and annualized run rate benefits out of that?

Yes. So we are very pleased. I'm glad you asked the question because we are very pleased with the progress that we're making around efficient operations. I've spoken a great deal about logistics, optimization, and building that muscle inside Vestis and we are still continuing to see outstanding progress from that team. So I mentioned previously that we were measuring this as it relates to the number of optimization events we have in terms of making sure we're accelerating progress. And we'll do about 46 of those events this year. And when we do that, we're seeing a reduction in fuel consumption. We're seeing consolidation of footprint, which results in headcount coming out of the system. It results in reducing shuttles and empty miles between wash facilities and cross-docks or depots as we call them. So we are seeing great progress on the logistics front and we continue to accelerate there. That same team is also leading our used fill rate initiative. And so we are seeing also very good progress related to the reuse of existing garments that are already in our stock rooms, which allows us to avoid amortization costs and it also allows us to preserve working capital by not having to build inventory. And you saw some really good results on our balance sheet related to $20 million in inventory cash benefit that we're seeing as a result of some of those efforts. So all in, we feel really good about the productivity initiatives. I also mentioned the $4 million that we will see as a result of this restructure as well. We actually took out $8 million of cost but we reinvested $4 million of it. So we have a whole portfolio of cost-out and productivity initiatives that are tracking really well.

Thank you, appreciate it.

Thank you.

[Operator Instructions]. And we'll go next to Tim Mulrooney from William Blair.

Team, good morning.

Hi, Tim. How are you? Good morning.

Long time no talk. It is good to talk to you again. So just a couple of questions. The first one is on, not surprisingly, retention. So based on the bridges that you've provided in the slides, it looks like the headwind from in-year customer losses was about 3 points in the first quarter, and then that increased a little bit to 4 points in the second quarter. So can you help me understand how that headwind can be getting larger as you move through that -- through the year, while at the same time, your customer retention metrics are improving, I guess, basically, my question is, how are your customer losses getting higher as you move through the year but your customer retention is getting materially better, can you help me bridge that gap?

Rick, you want to take that?

So when you think about the impact, I would separate that from the actual retention calculation. When you think about the in-year impact, as you progress through the year you will see more impact from in-year losses, and you'll see less impact from carryover losses because we start to lap those. And the in-year losses, it happens in the beginning of the year. It's a loss impact as we progress through the year. So you naturally see the impact of in-year losses grow as we progress, and we should see and will see the impact of known losses kind of taper.

Okay, so basically it accumulates through the year. I wasn't sure if the answer was related to pricing because retention doesn't have pricing. But it sounds like it's just a cumulative factor?

Correct.

Okay, thank you. And just one more from me. I know service efficacy is a real focus area right now to help strengthen those retention rates. Curious how the general effort to improve on-time delivery has gone over the last few months with those telematics in place and efforts to improve on like loading processes and load shortages. Have you seen any material change in those key KPIs yet to improve service levels or is it too early at this point?

Yes. So we've done a lot of work around this. It's too early to start talking about step change in metrics yet because we've just been working diligently on implementing these new processes over the last quarter, but we're making great progress. We've already launched an on-time delivery notification for our customers in multiple pilot locations, and we aim to have that in place across all of our system by this [ph] fiscal year, which is outstanding. So this is a real-time notification, letting the customers know we just bumped your dock, we delivered your product and hope you had a great service. And we're documenting and verifying that much like many of the delivery companies that are delivering to your front door step at your home. So we think this is a kind of step change introduction for the industry for us to be communicating real-time like this with our customers. So we feel very good that, that will also drive accountability for our drivers and our teammates because they know that we're going to be communicating with our customers on a real-time basis. And so that will help drive assurances around delivery. We also have developed a very robust SOP, standard operating procedure related to how to manage shortages, if there is an inventory challenge in a facility or we're falling short for some reason on product. We have found some best-in-class behaviors at our -- in fact, at our Greenville, South Carolina facility. We spent a couple of days, myself, spent a couple of days on the ground with them in Greenville mapping out their process of how they manage shortages. And we've actually taken that best practice, put it into the standard operating procedure. And we'll be standardizing that across our whole network so that everyone is responding with urgency and in the same way to address any type of product shortage that we might have. Lastly and most importantly though, we've moved the leadership of this responsibility under our logistics leader, who you just heard me mentioned is having really great success with the initiatives he's driving on optimization, and he's now taken ownership for all of what we call tactical inventory. So ensuring all the plants have enough buffer stock and that we're ordering on time and we're delivering on time and that product is available for customers. And he's bringing a whole another level of sophistication and metrics and data-based execution to this area of shortages and on-time delivery. So early days on the metrics but we feel outstanding about the progress we've made since we spoke with you last quarter in terms of mobilizing around these opportunities.

Got it. That’s a lot of good detail on the operational front. Thank you.

And we'll go next to George Tong from Goldman Sachs.

Hi, thanks, good morning. You gave some examples of steps you're taking to improve customer service quality, and you touched on some now, including addressing shortages and ensuring on-time delivery. Can you talk about how long it would take to spread these practices across the organization to your satisfaction and your playbook for doing so?

Yes. So we are very mobilized. We have the playbook in place around both assurances around on-time delivery, and we intend to have that delivery communication launched across our entire network through our entire customer base by the end of the fiscal year. So that will be happening across our network. We will continue to improve that over time, adding new levels of communication to the customer, George. So this is something that we will never stop working on. Phase 1 is communicating the delivery, but we believe we can add all kinds of additional touch points in communications to the customers through that process. Did you have a great experience, do you need anything else, can you give us a 5-star Google rating to drive up enhanced SEO and other metrics? So there's a lot of opportunity to build on this, but we anticipate by the end of the fiscal year, it will be launched across our entire system. We have successfully piloted it in multiple locations already. The standard operating procedure for shortages is being tested now as well and should be implemented very soon. But I will also tell you some of this is cultural change that takes time. As you train people on a standard operating procedure, then holding people accountable to comply to that procedure and making sure that we are doing what we said every day in every location across 20,000 teammates. So it will take time for this to be institutionalized and to become part of our culture and our DNA of always putting the customer first and serving with excellence. So I don't want to put a timetable on it because we're never going to stop working on this. This is just going to become part of who we are and part of our culture.

Got it, that's helpful. And you moderated price increases this quarter to preserve retention rates, which worked. Can you provide your latest pricing outlook for the next couple of quarters and when do you believe pricing growth can accelerate as your service quality improves?

So without guiding to pricing going forward in 2025, as I said earlier, we moderated pricing and we expect full year pricing to land in between 1% and 2% in terms of in-year impact of pricing. As we talked last call, we expect to continue to do our normalized annual pricing activities, and we are doing very surgical, specific customer-driven incremental pricing. We did that in the back half of this year, and we expect some of that to continue into 2025.

Got it, that’s helpful. Thank you.

And we'll take our next question from Oliver Davies, Redburn Atlantic.

Hi there. So you've seen a nice deceleration in the level of cross-selling this year. So can you just talk about how you see that kind of acceleration continuing into next year? And then secondly, can you just comment on the turnover of sales employees and how well-staffed do you think you are there?

Yes. So I'll start with our route service representatives. We are very pleased with the work they're doing to cross-sell. We shared that we've seen 100 basis points of growth from that team. And while that may not seem high, when you look at the incremental margin that you get from capturing share of wallet and bolting on the existing products and services to customers that we're already visiting it's a very attractive revenue. So we're very pleased. We have also seen our route service representatives, in some instances, hit the watermarks that we modeled. And so our strategic plan, we had high aspirations for this team to grab massive share of wallet from existing customers. You might recall that we had shared we were only 30% to 40% penetrated with those existing customers, and we are seeing some of our RSRs hit those watermarks for capturing very high levels of wallet and share with customers. And so we feel very good that we can continue to accelerate sales with that team and those are very attractive sells. A lot of the products that we're cross-selling have very low to no amortization so they're very attractive immediately. So we're really excited about this initiative. We'll continue to drive it and I'm very proud of our 5,000 or so teammates who have been making that happen. As it relates to new logos and new sales, I think you asked about the frontline productivity of those teammates, and we are also seeing those teammates sell at higher rates. We mentioned that we're up 17% on new business wins versus prior year -- versus prior year rates, and that is on a lower headcount. So we're definitely seeing productivity up with that team as well.

Thanks.

Thank you.

This concludes the Q&A portion of today's call. I would now like to turn the floor over to Kim Scott, President and CEO, for closing remarks.

Well, in closing, I would just like to thank all of you for joining our call today. I want to reiterate that Vestis is a great business with tremendous value creation opportunity before us. And our team is energized and we're committed to continuing to deliver on our commitments to the market. So thank you for joining us today.

Thank you. This concludes today's Vestis Corporation fiscal third quarter 2024 earnings conference call. Please disconnect your line at this time, and have a wonderful day.