Q1 2024 Vestis Corp Earnings Call

Yeah.

[music].

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Welcome to the fastest corporation fiscal first quarter 2024 earnings conference call.

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I would now like to turn the call over to Bryan Johnson, Chief Accounting Officer. Please go ahead.

Thank you Angela and good morning, everyone.

We appreciate your participation investors Corporation's fiscal first quarter 2024 earnings call.

With me here today are president and CEO, Kevin 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 fastest dotcom website. Shortly after the completion of the call.

Also access to the materials discussed on today's call are available on the fastest website under the Investor Relations section.

Yeah.

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 figure attic 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.

Thank you, Brian and good morning, everyone and thank you for joining our fiscal first quarter 'twenty 'twenty four earnings call before I discuss our results I'd like to thank our 20000 dedicated teammates for their outstanding work and unwavering commitment to our success as we complete our first quarter as a standalone publicly traded company.

Every day, our teammates are focused on taking great care of our customers and each other we continue to bring our purpose to life here investor delivering uniforms and workplace supplies that empower people to do good work and good things for others, while at work you.

You may have also seen our filing yesterday that Chris <unk>, who was our chief operating officer for a short time has resigned from the company for personal reasons. We appreciate Christmas contributions to Baptist and we wish him all the best.

Now turning to our results.

In the first quarter, we delivered disciplined high quality revenue growth of 2.5% and an adjusted EBITA margin of 13, 7%, which is up 60 basis points from Q1, 'twenty 23 and includes the absorption of incremental public company costs in the period with.

Earnings per share of 22 cents in the quarter last year's first quarter revenue included the benefit of a $13 million temporary energy fee that did not repeat in the quarter. Excluding the impact of this temporary energy fee and impacts from foreign exchange rates revenue growth was four 5% with a balanced <unk>.

<unk> from both volume and pricing on an underlying basis.

This demonstrates that our high quality growth strategy is effective and accelerating our ability to grow well above historical norms.

As Rick will cover in more detail, we continue to remain disciplined and focused on delivering growth that improves our revenue mix and generate operating leverage across our system. We are pleased to see the positive results of our strategy manifest as we deliver growth and margin expansion in tandem while also absorbing.

New public company costs that entered our system in the quarter. Our results also support our capital allocation strategy with deleveraging as a priority.

As we move through the balance of the year, we expect acceleration in our growth rates that will followed similar patterns from prior years and Additionally, we will lap the temporary energy for you beginning in Q3, we.

We are also seeing opportunity for additional pricing actions in the back half of the year.

As a result, I remain confident in our ability to deliver our full year guidance of four to four 5% revenue growth and adjusted EBITDA margin of 14, 3%, which as a reminder, equates to approximately 50 to 60 basis points of margin expansion offset by the impact of new public company costs and stuff.

Period.

Yeah.

During the first quarter, we continued to advance that's just this strategic plan, which we shared with you during our September 20th twenty-three analyst day, we are generating great momentum as we execute against our strategic priorities, which include high quality growth.

It shouldn't operations disciplined capital allocation and a performance driven culture.

Turning to high quality growth, we continue to prioritize the highest margin growth opportunities both within our existing customer base and as we target new customers and sell lots of vertical.

You can see the positive impact of our strategy in the quarter as we continued to intentionally shift our mix towards higher penetration with existing customers on existing routes largely through our route service Representatives cross selling workplace supplies to our current customers.

Works, a workplace supplies growth was approximately 4% in the quarter supported by an approximate 25% increase and route sales activity versus this period last year.

Our mix shift also includes a purposeful moderation of our lower margin direct sales business and when excluding the impact of this strategic decision our uniforms business grew approximately 1% this quarter.

This mix shift related to direct sales also delivered approximately three basis points of margin improvement across our consolidated results.

In parallel we continue to execute against our efficient operations initiatives, we are delivering a step change improvement in the way, we operate optimizing our network, reducing empty miles and lowering fuel consumption across our system.

In the first quarter, we have already completed another 13 route and network optimization events with many more planned for the balance of the year and beyond this demonstrates great momentum when compared to the 26 events, we completed last year.

Year to date, we've successfully deployed new telematics technology across 89% of our fleet and fully deployed new routing and scheduling technology and processes across North America.

All are part of our strategy to establish the capability to continuously optimize our network and our routes.

We've also accelerated our work on reducing amortization costs through the reuse of existing garments in our system.

In the first quarter, we saw improvements in our used fill rate across 103 of our target facilities.

These efforts will serve us well in the coming years as existing amortization rolls off and we accelerate the reuse of existing garments across our stock rooms overtime.

Uh huh.

We remain committed to delivering profitable growth that leverages existing capacity across our network, therefore, requiring modest capital investment of approximately 3% across the five year period.

We also remain focused on strengthening our balance sheet position as Rick will discuss we are currently in the market on the refinancing of our two year term loan.

And overall, we seek to operate in a target leverage range of one five to 2.5 and maintain a flexible financial position that will continue to allow us to invest in high return opportunities in the future.

So in summary, this is a fantastic business and we see tremendous opportunity for continued value creation, we are delivering against our plans and our commitments and we remain confident in our full year outlook, we are making substantial progress against our strategic initiatives and we continue to build and an amazing and inspiring culture here at fastest support.

By our incredible highly engage teammates who quite frankly are enjoying the thrill that comes with winning I'm delighted with our progress and excited about what lies ahead for us.

Now I'll turn things over to Rick to cover the financials in more detail before we take your questions Greg.

Thanks, Kim and good morning, everyone before I jump into the first quarter results I'd like to remind you that prior year reporting is on a carve out basis and does not fully reflect the additional costs associated with operating as a standalone public company.

So turning to the first quarter results revenue of $718 million increased two 5% year over year, excluding the impact of the temporary energy fee and foreign exchange revenue grew four 5%.

Revenue from workplace supply is up 4% in uniforms is up 2% compared to the prior year with a balanced contribution from volume and price on an underlying basis. As a reminder, uniforms includes our direct sale business, which is down approximately 4% year over year as we continue to optimize the business as part of our <unk>.

High quality growth strategy.

Kim noted excluding direct sales our uniform business grew 1% in the quarter.

From a segment perspective U S sales grew 2% and Canada sales were up 3%.

The mix of growth between uniforms and workplace supplies within the segments was consistent with our consolidated results.

Turning to profitability first.

First quarter 2024, adjusted EBITDA was $98 million, an increase of 7% year over year.

The U S segment increased 13%, while Canada declined 5%.

The favorable impact of operating leverage from revenue growth with existing customers 7 million and carryover benefits from workplace optimization actions, taking in the back half of fiscal 'twenty, three and lower energy costs more than offset the impact of increased labor costs increased bad debt expense and $3 million of incremental.

Public company costs.

Lower energy costs were driven by reduced fuel consumption from our route optimization efforts and favorable rates, primarily on natural gas utilized in our plants, which were in line with expectations.

The increased bad debt expense year over year is because of the prior year's first quarter profitability included the favorable impact of a bad debt reserve reduction to rightsize. The reserve for improved collections that did not repeat in the current year.

Okay.

As a reminder, we continue to expect incremental public company costs of $15 million to $18 million for the year inclusive of TSA payloads to aramark as we build out our corporate structure and IP infrastructure.

Profitability of our Canada segment was negatively impacted by increased merchandise amortization costs as we made strategic investments to improve product quality for our customers and higher than expected fleet maintenance costs.

Overall, adjusted EBITDA margin expanded 60 basis points year over year to 13, 7%.

Interest expense on our outstanding term loans was approximately $29 million in the quarter and our effective tax rate was 27% inline with expectations.

All combined to deliver an adjusted EPS up 22 cents per share for the first quarter of 2024.

Moving on to liquidity, we generated $51 5 million in cash from operations in the first quarter, an increase of $43 5 million prior year operating cash reflects an inventory build in early 2023 to support growth and a $16 million payment.

Deferred payroll taxes under the cares Act.

Capex was $17 million during the first quarter of 'twenty four up slightly from last year and in line with our expectations free cash flow in the first quarter was $34 6 million with cash conversion in excess of 100% of net income.

We ended the first quarter with $48 9 million in cash on hand, and our net to debt.

Net debt to EBITDA ratio of 385 times, we recently launched a process to refinance our two year $800 million term loan with a seven year term loan B and we expect to close the transaction in the coming weeks. The term loan will mature in 2031, and our existing five year term loan mature.

Shares in 2020.

Once the financing is complete our new capital structure will continue to provide us the flexibility we need to execute our strategy and support our capital allocation priorities, including achieving our optimal net leverage range of one five to two five times by fiscal 2026.

Before we turn to your questions I'd like to take a moment to discuss the full year outlook.

As Ken mentioned earlier, we remain confident in our ability to deliver our full year guidance of four to four 5% revenue growth and an adjusted EBITDA margin of approximately 14, 3%.

As we look forward to the balance of the year, we expect to see revenue growth patterns that are consistent with prior years. So if we look at the quarterly growth rates in fiscal 2023, adjusting for the impact of the energy fee in the first half growth accelerates as we move through the year.

We lap the temporary energy fee at the close of the second quarter with a $13 million impact in Q2.

Our initiatives to drive disciplined high quality profitable growth are gaining momentum and we look forward to sharing more as we progress throughout the year.

That concludes our prepared remarks and operator, please open the lines for questions.

The floor is now open for questions. At this time, if you have a question or comment. Please press star one on your telephone keypad.

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Our first question comes from Seth Weber with Wells Fargo Securities. Please go ahead.

Oh, Hey, guys. Good morning, Thanks for taking the question.

I guess, maybe Kim in your prepared remarks, you mentioned something about.

An opportunity to get more pricing as we're going through the year I was wondering if you could expand on that a little bit.

Certainly in good morning. Thank you for your question and say, we do see the opportunity to take some incremental pricing in the back half of the year, we've been very thoughtful and I would say somewhat moderated about pricing in the first quarter. As you all know we've been very diligent about passing through inflation.

Larry caused over the last year to year, and a half and our business and so we've been managing that and monitoring it very closely just to see customer attrition and modeling and understanding how customers are responding. So we have some carryover pricing that's still coming into our business from FY2023 actions and aside from that we took very much.

Iterate at normal levels of pricing in Q1 related to kind of our typical annual price increase process, but we have been surgically analyzing opportunities to take price more strategically and I'll give you. Some examples around what I mean by that what I mean by that is looking at customer cohort and identify.

<unk> groups of customers that may be underpriced on specific products. As an example, say we segmented our customers and we identified customers who may have certain products or services that are below the average as it relates to price. So we will be taking price around certain specific kind of product lines with those customers we've identified customers.

Or is he may receive more than one stop in a week, but there are only being charged for one stop and it's very appropriate that there would be incremental charges for multi day service. So we've identified that cohort of customers and we'll be taking price to charge those customers. Accordingly for multi day service and then we'll also take some more general pricing, but in a very surgical way.

With a lot of analysis around which customers will be impacted and what the current relationship and in state and condition of the relationship is with that customer. So we definitely see the opportunity we will be doing that in the back half of the year, particularly towards the end of the second quarter quite frankly, and then youll see some of that roll through in the third and fourth quarter.

Super Super helpful. Thank you and then maybe Rick.

If I could ask a follow up.

Just to call out on in Canada, the higher investments for new merchandise and kind of.

<unk> fleet maintenance costs do you expect that to continue through the year or is that.

More of a first half event or just how should we think I guess the maintenance costs in particular, how we should be thinking about that.

Yeah, So I'll kind of take that to start with and then break you can jump in if needed. So there are really kind of two drivers in Canada. As you heard from US. So you have a driver around some higher amortization costs related to some new product that we injected into the system really for customer satisfaction. Some of it was for new business because you can see those growth rate.

In Canada, but we also made a purposeful decision to you inject some new products and to existing customers and really kind of self funding quality. If you want to think about it that way in the name of customer satisfaction. So those products carry amortization SaaS, so you'll see them with us for a while until we lap the amortization of whatever those particular <unk>.

<unk> was was based on their life cycle, and then as it relates to fleet maintenance, we've actually done a great deal of evaluation related to the Canadian fleet and we found that historically before my time and before we brought in new logistics leadership, the Canadian fleet wasn't really.

A part of the central procurement strategy as it relates to allocating new fleets in new assets too.

The field and so we found an opportunity to start upgrading the age of the fleet in Canada and before that opportunity with identified they were driving more than normal maintenance cost and so that's what caused us to ask the question Hey, what's happening with maintenance costs in Canada, and as we evaluated that we did.

Covered that the Canadian fleet with significantly older than the U S fleet.

So we recognized an opportunity to inject some more asset and it's really not about injecting more capex in our total system. It's just about redirecting some of the fleet that we would have put into the U S into Canada. So theyre slated now to get about 102, new assets in their market are in the fiscal year and over time that will help improve that.

Age of the fleet and it'll start lowering that maintenance cost. So it's hard to tell you exactly when you're going to see that cost dissipate a 100%, but we certainly know that we're taking the right actions by upgrading the age of the fleet and you'll begin to see that maintenance costs roll off over time.

Appreciate the color. Thank you guys take care of you bet. Thanks Seth.

The next question comes from Shlomo Rosenbaum with Stifel. Please go ahead.

Hi, Thank you very much for taking my questions I thought I would just start with what progress Youre seeing in terms of the cross sell it's a major focus for the company.

And.

Are you seeing that kind of progressing strengthening as the quarter goes on and maybe just take the opportunity to discuss the overall selling environment and maybe I'll follow up after that.

Yeah, certainly Shlomo good morning, and thank you for joining us and for your questions. So to begin with on cross sell which to remind everyone is is really on leveraging our outstanding Route service Representatives, who are servicing our customer on a weekly basis to also cross sell existing products and services to them.

They're not using today and if you guys will recall, we called out in the analyst day that about our.

Our customers are only using about 30% to 40% that'd be available products and services. So it is a key component of our strategy to cross sell the base and to gain share of wallet with existing customers to increase revenue per stop we are very pleased with the way that our route surface Representatives have embraced this is a new part of our DNA.

A part of our go forward strategies that we are seeing momentum build in fact, you might have heard me call out that when you compare.

<unk> that had selling activity on them in Q1 of this year versus Q1 of last year, we're seeing roughly a 25% increase in selling activity. So we know that we have earlier in the year than we did last year more activity around route sales. We're in the middle as an example, right now the route sales contest, which is where we get a.

Medic lift in revenue per per stock with our route service Representatives and we are definitely seeing momentum build around that as we launched the concept, which is a normal part of our cycle and we expect it to do that and say we felt very good you know it'll be a while before you actually see the number of products and services per customer.

Dramatically. So we're not going to try to share that metric every quarter, because it would be rather static, but probably on an annual to 18 month basis, we'll take a look at the total number of products and services use per customer and use that as a proxy for success as well, but we feel really good about the progress around route cells and customers are quite engaged around.

And adding additional products and services and secondarily did.

The second point of your question around the general selling environment. We're also seeing really good progress with our frontline account executives driving revenue per head and were working very hard to continue to grow new business, particularly in those target micro verticals that we spoke about and said we've got about build.

And go to market strategies for those eight micro verticals are they're all in different stages of their lifecycle as you can imagine but auto was the example that I gave in analyst day, we're seeing very good very.

Very good progress penetrating that sector, we're seeing leads up in that sector, we're seeing close rate up in that sector and as an example, we see a.

A 1% improvement in the revenue contribution from automobile dealers now that we have focused on that vertical just to give you. An example, and so overall we feel good about our progress we do anticipate a ramp up as we move through the year very similar to the patterns that you saw last year in our business as you see growth accelerate and then also keeping in mind that will lap.

That temporary energy fee at the end of the second quarter.

Okay. Thank you just maybe Rick maybe you can just talk a little bit the.

Growth is supposed to accelerate through the year and maybe you could give us a little bit of a bridge. There's a couple of moving parts over here you have.

The beginning of the year I believe there was a rationalization of the direct sales kind of one off in the Skus are you had a strategic exit of a client that's supposed to go on and then you have kind of pricing that's supposed to kick. In later is it can you kind of readjust and how we should think about the cadence of growth through the year and how these different items will impact the revenue for the next three quarters.

Sure.

So in.

In the prior on our prior call we talked about our direct sale customer that we were parting ways with and that was $13 million in the back half of the year.

And so we kind of quantify that and you should expect to see that and that's in our direct sales. So that will impact on a reported basis, you'll see that in uniforms as we look at how we progress through the year. We've got another quarter here in Q2 that has energy free press.

Pressure and so the growth rate year over year, well that'll be a headwind for that growth.

What we wanted to make sure everyone understood because we're not we don't guide the quarters, but the.

The progression will be very similar to what you saw in prior years, and then particularly 2023.

So we are reporting $2 five here.

And then we've got another quarter with $13 million hedges when here in Q.

Two and then that's what you should continue to see growth rates to advance and then in Q3 and Q4, although you will see a $13 million direct sale headwind, we still expect to see accelerated growth.

And in those quarters because of that we said in our year end call. We knew that was out there in our guidance had already factored that in.

Okay. Thank you.

Yeah.

The next question comes from Andy Wittmann with Baird. Please go ahead.

Oh great.

Thanks for taking my question.

You had a comment in your prepared remarks about optimization events.

And I just was hoping that you could talk about what those are I think you mentioned there were 13 of them just trying to understand the significance.

Of what one optimization event could be.

And and how we should think about these types of things.

Unfolding throughout the course of the year and what they can mean.

Two the profit margin profile.

Absolutely good morning, Andy So when we are referencing the optimization events related to logistics and routing and scheduling I'd take you back to our strategy. When we spoke a great deal about optimizing our routes in building our logistics muscle and we spoke about the very intensive study that we.

Did with China Olympics around all of our flows between our plants and our customer location and the opportunity to optimize that flows and you may remember in analyst day, We gave some case studies around some specific markets and going in and rerouting customers to the proper plant location, but also looking at our cross docks and death.

And where those are located and identifying opportunities to drive less miles to serve our customers essentially and if you just kind of summarize it that's really what we're doing is we're reducing empty miles across the system either through mapping customers to the right locations, making sure drivers make all right turns on the routes and that they're being efficient with how they drive.

Or also just looking at cross docks and shuttles that we're doing to drive wasted miles to serve customers through cross docks versus directly from plants and say when we talk about these events these could be markets or groupings of routes and really large markets, where we're going in and actually running optimization.

Replanting routes and putting customers in the right plants on the right route.

And resetting that process and say when we say that we've already done 13 picture you know last year, we did a total of 26 and so what we're trying to emphasize here is that in the first quarter, we've already done half as many as we did last year and so we're building momentum around that and when we first started we had to build that muscle and teach the org.

<unk> how to do this I spoke a little bit about ensuring that we got the change management right that we were engaging with customers that we were doing the handoff in the change effectively and creating no disruption for our teammates or for our customers. So we were kind of going slow in the beginning not slow but in a moderated way to make sure. We did this thoughtfully now we're starting to ramp this.

Staying up and we're gaining more traction we modeled doing kind of a right sizing over the five year period, but at the same time. We're also institutionalizing. These tools. So when I talk about adding the telematics across all of our fleet. So we can ensure that we're running routes in compliance with how we'd like to do that and I'll say when we talk about dispatched.

<unk> are being implemented as a routing and scheduling tool now it's a dynamic tool you know every time, we win a new customer where properly adding it to the right route through the lens of logistics and so I would think about it is there is a great. One time resetting that's taking place that drops out dollars in terms of reduced fuel and lowering empty miles.

And then there's I'll say, there's this building this muscle that makes us smarter and better every time, we add a customer and run a route in perpetuity. So that's what we're speaking about Andy when we talk about these events.

That's really good color. Thank you I guess a follow up question I wanted to ask just kind of about the macro that you're seeing out there.

If you could just talk maybe about the level of benefit that you might getting from added wears or at your existing accounts or the.

I guess the amount of wins that youre getting from from customers that have not been a user of our rental program in the past.

So we are seeing conversion of non programmers. So when we talk about our account executives out selling.

We really enjoy that particular prospect and sell a lot of our focus while we're out selling new business and prospecting potential new customers are around down programmers and say we are seeing good growth with our account executives with new business new customers around on programmers certainly and that is a key focus for us quite frankly.

As far as trends around AD wearers quite frankly, it varies by end market. You know, we're quite diversified as you know in a lot of different end markets and so we are seeing some like I'll get health care as an example, where we're seeing good growth in health care are there are others, where restaurants as an example, where we're actually seeing more closures and more customers that are.

Clothing business are going out of business. So it really varies by vertical Andy.

We're kind of managing that tactically by end market.

Thank you.

Thank you.

The next question comes from Stephanie more with Jefferies.

Hi, good morning, Thank you.

Hey, Stephanie good morning.

I wanted to maybe touch more a little bit more so on the margin expansion opportunity I think you know very nice progress in the quarter you called out an improvement in fill rates that youre seeing and just your inventory reuse program getting traction could you talk a little bit about.

Maybe frame it from an earnings perspective, where you are in this inventory reuse program. If you can provide any kind of specific kpis that maybe benefit youre seeing at the facility level from some of the early initiatives that you've you've made any update there would be great. Thank you.

Yeah, we're very pleased with the progress we're making around the reuse of merchandise and you know we think about this is a very long term strategic initiatives.

So as you all know as we launch new customers, we inject new product into the system and the amortization clock starts ticking. So every time, we issue a new product we start the clock on amortization and that amortization stays with us for a period, depending on what the product is and what the timeline is that's been set and so this initiative around improving.

They use that existing garments that are already either amrita amortizing in our system, but not being used currently or perhaps they've rolled off and there's no amortization tied to them, we essentially already paid for them and they are sitting in our stock range. So we have launched a series of initiatives across our stock range around teaching our teammates.

You better reuse these existing assets that are either partially amortize or fully amortized we are saying.

A tremendous response from our field team and we are already I would say starting to see a step change kind of embracing the idea of pulling these fast moving skus to the front of your stock room and injecting those to customers rather than injecting new So you would have heard me mentioned in my script that we saw across more than 100 facilities we're already.

Seeing a really strong improvement around big used fill rate. It takes time for that to actually flow through the financials. Because you still have the other products in the system being amortized. So you should think about this in about a year, we will be coming back and talking with you about the improvements that we're seeing around not only amortized.

Asian, but also inventory and the management of cash related to inventory because this is a play as it relates to cash management and also a play relating to pushing down opex costs by kind of pushing down that amortization curve by injecting reuse garments just as a reminder, on Antelope and analyst day, we talked a little bit of a rule of thumb a percentage point of <unk>.

<unk> are you still right you asked for a metric we're really using a metric called us fill rate. So for every issue that we do to a customer on how many are used garments versus new garment.

And you you get about $1.4 million in savings for every percentage point that you improve and I'll tell you we have a lot of percentage points of improvement opportunity. So more to come on this one but I would not think about this in the year I would think about this very strategically. This is a long game and it's gonna be extremely beneficial once we see some of that old.

Roll off and then we start to continue to inject these new to offset the need for new garment.

Great no that's necessary.

Paul and then maybe just a follow up to the first question in the Q&A on the pricing side.

Maybe it was kind of I think my understanding that the guidance. That's first didn't really account for you know a ton of pricing. This year for I think obvious for obvious reasons, just given what we're seeing in inflation and really the opportunity that you have on your on your side now it sounds like you do have some opportunistic areas.

Areas to take price, which I think you explained it was very clear and exciting. So is does this more so give us more should we think about it is driving incremental comfort in achieving the guidance for the year could drive potential upside how should we think about maybe that's changed on the pricing front.

Yeah, I would think about it as additional comfort to give you confidence such the same confidence we have that we're going to ramp up the growth rates in the back half of the year and deliver against that you know the 4% to 4.5% say and certainly you know we're going to be opportunistic and take price whenever we can but we do expect to also see R V.

Volumes ramping around our route sales average when we look at our route drivers and around our AE cell, we have initiatives in place to to continue to ramp.

But yes, you should think about pricing as a providing a level of comfort.

We have that lever as well and we're being very thoughtful about how to use that lever.

The surgical pricing wasn't R. R.

And so if you remember we talked at analyst day, the disciplined pricing that can lead with but that there were opportunities for surgical pricing. That's what I thought were really just capitalizing on that we knew it was out there and we're giving you the flavor of the timing. So that you can help understand the progression of revenue.

Okay No. That's that's clear thank you guys.

Thank you Stephanie.

The next question.

<unk> comes from Andrew Steinman with J P. Morgan.

Hi, Kim I thought maybe we could spend a little bit more time on chris's, leaving cielo for really kind of a brief since there was great spending time with him in September.

You've labeled as a you know leaving for personal reasons. So I just wanted to make sure. When we say personal reasons that means it's a totally unrelated to vest as you know management business et cetera.

And then also are you going to hire somebody in that CLO position now that Chris has left.

Yeah. Thank you Andrew and thanks for joining us today, So I do I will briefly address just chris's departure. So Chris has made the decision to leave the organization as we said for personal reasons.

And just so everyone understands Christmas timeline, he was with us for a very brief time, so Chris join on September 11th a couple of days beforehand less day analyst day was on the 13th so I want to reassure everyone that chris's departure.

It does not impact our strategy or our ability to deliver against our strategy and this plan has been in motion for a very long time for the two and a half or two two plus years that I've been here and so we feel really confident that we will continue down the path that we are down that path as well in motion before his arrival. He has made the decision to depart.

As it relates to back filling I'm actually very excited that the team is back reporting to me. So they were essentially reporting to me before we created this C O O role and for now they're all going to continue to report back into me, they're aware of that and they are excited about that and I'll remind you guys. You know I am an operator I've been a C. L O I Love Love.

Getting down into this business and helping make this business better so I'm actually quite excited so we're going to take our time and be very thoughtful our organizational design will evolve whether that's a another C O O or that the two in a box at a field leader and a salesperson will figure all of that out in due course right now I'm pleased to have the team back with me.

We have great momentum and we're going to continue down the path that we're on that we felt we feel very good with no concerns regarding chris's departure.

Thanks Kim.

You bet. Thank you.

The next question comes from Manav Patnaik with Barclays. Please go ahead.

Hi, Good morning. This is roni Kennedy off them at all thank you for taking my question I was hoping that you could please comment on retention with the trends and the drivers whether it's service quality, the predictive analytics and digital tools.

And Conversely, what reasons for attrition would be outside of the deliberate exits it takes to physically within uniform direct sales and then also any further color on drivers of new business beyond the non programmers.

Typically as to how and why I guess this is waning.

Sure.

I think I didn't catch your name Yeah, we didn't catch your name I'm, sorry, who is this.

Sorry, it's Ronan Kennedy on for them and Oh, Okay. Okay, Yeah, sorry, I couldn't hear you. Good morning, So we'll start with retention. So just to take you back.

We have been talking about retention and using to stay at greater than 90%, which is what we filed in the form 10, and we continue to maintain retention above that level. So I'll start there that we have no real surprises as it relates to retention.

We're where we expect it to be for the most part.

Did talk about some attrition as it relates to direct sale into the strategic decision to kind of throttled down so youll recall in our full year earnings for FY2023 I shared with you a large direct sale customer that will be rolling off partially in the back half of the year and partially in FY 'twenty five so we do expect to see that in our numbers.

We also have you know from time to time, a large national account that may choose to go elsewhere to self serve so you're always going to see some of that those are larger events. They happened as a part of an RFP process, but generally speaking when you look at the rest of retention and you look at raising codes to answer your question around why would you see customers leave.

Are saying small to medium enterprise customers with an uptick in business closures and so just important to note as we look at reason codes. We are monitoring that very closely and it's also when you try to drill it down a little bit further you can see a trend as an example in Canada, there's a trend with restaurants. So when you look at what is happening.

Around business closures, particularly with small to medium enterprise, we're going pretty deep and granular to understand what are those patterns and trends around why customers leave we're seeing a slight uptick in customers going out of business and those small to medium enterprise verticals, particularly around restaurants. As an example, so we're managing that and monitoring that very closely Conversely, though we.

A lot of opportunity to to self serve and help ourselves as it relates to retention. So we're actually quite focused on a series of initiatives everything from improving the customer experience with a digital portal that we've talked about.

Actually changing incentives for our field team around customer retention as an example, so we have a whole series of initiatives designed to put the customer first to drive customer satisfaction and to help ourselves and quite frankly in this model. The single best way to grow is to retain the customers you already have.

So we're very focused on doing that but also at the same time understanding why customers might leave so we've got a lot of work going on around this tower and we just brought on a new chief commercial officer, Stephen Mohan, who has been here I think less than 60 days now and he is already all over digging in and understanding these causal factors in putting programs.

Round them. So we feel good about our future our long term future as it relates to retention.

That's very helpful. Thank you and then can I just ask for your comments on trends.

With regards to your input costs, obviously, you've touched on in the energy and related surcharge or lack thereof.

For the first half, but also what youre seeing from a material inflation standpoint labor dynamics.

Especially in consideration of the higher unionization et cetera.

Sure so from a I'll start with labor from a labor perspective.

We're seeing.

The little over 5%, which is what we expected coming into the year and so as we've talked before the union contracts that give us pretty good visibility to what that rate might look like and we are kind of on plan relative.

Relative to labor and that is manifesting itself, even on our retention of our existing work.

Workforce, that's improving year over year, which is giving us some operating efficiencies as well there.

From a input cost perspective, we haven't seen.

<unk> energy for a second we're not seeing significant movement in our input costs that will drive any type of variance in the current year I mean, we continue to monitor that monitor our suppliers.

And have a good forward view of inventory requirements and costing and I met in our Mexico facility also gives us.

A lot of.

Opportunity to head off a supply chain disruptions as well as.

Unnecessary from our perspective cost increase.

So.

Feel good about the material cost from an energy perspective, we talked about the fuel service charge, but we also as we said last time are seeing in the front half some favorable energy costs driven primarily by rate.

And are we expected to see that you'll probably continue to see it in Q2, we believe it'll flatten out as we get here in the back half of the year. So no change in our expectations on energy.

Thank you very much appreciate it.

Thanks.

The next question comes from George Tong with Goldman Sachs.

Alright, thanks, good morning.

Good morning.

Hello.

In the uniforms business, you mentioned growth was 1% excluding the moderation from direct sales can you discuss some of the factors youre seeing that may be causing uniforms growth to come a bit below some of what your competitors are seeing where growth is checking somewhere north of 5%.

Yeah. So a couple a couple of things I would say first and then I'll directly answer. Your question is also keep in mind that uniforms is not always apples to apples across us and our competitors that just making sure that youre dissecting, what's inside those uniform categories for us It is just uniforms.

And so it will start there the a T. S impact is very clear and known I think you guys are pretty well aware that we're purposely throttling that down and being very mindful.

And we were getting good growth rates and uniforms in historical periods. Prior to this strategy from a b S. Quite frankly, sometimes we used it to prop up the growth rate just to be honest with you. It's not that there's anything wrong with doing that but it's not a margin accretive strategy. So we are purposely said, hey time outlets tone. This thing down our direct sales team members are doing a great job.

The right stuff to the right customers. So we're very pleased and proud of them for doing that so when you normalize for that purposeful decision to throttle down you do get a 1% growth rate. So thank you for pointing that out I think that's really important it's also important.

To note that we've got a couple of things that are happening I mentioned, the we are growing in this space. Obviously I mentioned, the eight micro verticals and they were going to market very surgically and targeting very specific verticals with their propensity for cross sell.

That is very moderated growth so not all verticals are equal we're not targeting everything aggressively we're being very smart about which which leads we're pursuing and which customer types. We're pursuing so that also has an impact on the growth rate because we're not just growing for growth's sake, we're growing in a very targeted way. So that we can get margin expansion and the propensity for cross.

So I did mention that we do see an uptick in business closures as it relates to our SME. So that also has an effect on the number as it relates to the impact of retention on the uniforms number and were very transparent about that we're very aware of it and we're managing that very closely and then we also have a national account loss, but we haven't talked about it.

A lot because it wasn't a strategic loss. It was an unfortunate loss from our clean room business last year and it was a aloft that continues to flow through in the first two quarters of this year, which also affects that uniforms number and again, we haven't talked about it a lot because it's a regrettable loss. It wasn't part of our strategy, but it's just part of the nature of doing business that we also have George that.

<unk> our growth rate in the uniform sector in the period, and we will see that law still impacting us in the second quarter of the year.

So just keep that in mind as you're looking at the business because we you know while we regret losses like that the underlying health of the business is tracking exactly like we want it to track with AE cells are targeting to micro verticals and getting the RSR cross sells on the workplace supplies. So we feel very good about the underlying health of the business. Despite some of those factors that are moving.

The uniforms growth rate.

That's very helpful color. Thank you for that.

And then you mentioned progress with driving new business growth in your new micro verticals can you share. Some additional details on your micro vertical strategy traction with growth two examples to provide beyond auto dealerships and perhaps how much new business is coming from your micro verticals.

Yeah, so they're all in different life cycles. So you know auto dealers. The one that I've chosen to share publicly we're not going to talk about the other seven specifically because we don't want to give away all the hard work, we did on our growth strategy to others.

We think it's competitively sensitive, but I can tell you that we are methodically tracking our go to market progress in each of these eight micro verticals and the way that we have approached this is they were all in different stages of lives that some are easier to ramp and faster to move because were already aggressively in the vertical we already have the capability to sell.

And anybody can sell it right. So if you're selling to an auto dealer it doesn't take a specialized salesperson any of our account teammates can be equipped with training and collateral and go in and sell through an auto dealer. So that's a vertical that is moving very quickly because we said, let's go we're already doing that very well out on the west coast, which I think I shared that example, with you guys in analyst day.

So that's an example of a targeted micro vertical that we're already penetrating and I use that example, a moment ago. When someone asked the question earlier, but we're measuring things in each of these micro verticals in their metrics like sales activity. So how much sales activity, meaning how many leads did we have with these customers and how many calls that we do with these customers.

Last year versus now that we're in the vertical we're tracking that metric auto dealers. As an example sales activity is up 19% then we're looking at okay. The sales activity is up are we actually winning any more business. So then we're also measuring total one opportunities before we aggressively focused on this vertical and now as an example auto dealers is at 2%.

Our one opportunities how many new business opportunities are we winning is that 2%. Then we're also looking at how much weekly revenue are we getting from this vertical and are we seeing improvements in the vertical and auto dealers in Q1, we have a 47% increase in weekly revenue. So again another great.

Piece of data that tells us that we are gaining traction in this micro vertical. So these are the kinds of things that we're measuring by vertical.

The lifecycle is different depending on the vertical there are some that are more complex than the go to market strategy and the build out is taking longer and we'll eventually see the same results in that vertical as we do in auto dealers as an example, and over time when our mix really shifts you'll probably see us evolve the actual end markets that we talk about and will be segment our revenue.

But this is very early days, you're not going to see a shift in the mix yet for us to kind of change the end markets that we're talking about but over time you will learn about these other micro verticals. These more specific targets and we'll talk about them, but for now we'll stick with auto dealers just as the example, so I hope that was helpful. George.

Yes, it's very helpful. Thank you.

The next question comes from Michael O'brien with Wolfe Research. Please go ahead.

Hi, Good morning, guys. Thanks for taking my question two quick ones here regarding contract renewal are you guys seeing any disruptions regarding the separation with sometimes when you see these new spin COSE come out youll see some issues going on with contract renewals with existing clients and.

And then the second question is regarding the margin expansion opportunities is traded cost reductions for factored into your 2024 guidance. Thank you.

Michael Good morning. Thank you for your question, we'll start with contract renewals, we have had I would say a seamless transition as it relates to our customer agreements and our relationship with our customers as we've spun out so the agreements are transferable they directly over to that test and say, we have not had to go out to customers and <unk>.

Paper or renew contracts as part of the spin so the spin activity itself did not trigger the need to reengage the customer around the contract we've been very clear with customers and we use talking points at the beginning when we spun out that hey, your contracts just eventually going to say that they saw that instead of Aramark uniform services and we have had no friction.

And as it relates to that at all and customers have continued their current relationship with us with no drama if I can use that price. So no concerns there at all and we feel very good about that is as it relates to stranded costs. We actually have done an amazing job pre span of making sure that we right size. This business and you guys might renew.

That we talked about stripping out about $28 million of back office and build costs are pre spin so that we could prepare for the ingestion of pubco costs. So we feel really good that we're running a tight operation that we're not sitting on waste other than and I won't call. This waste. It's just unnecessary cost of spinning there is duplication.

Cost in our system as it relates to paying Aramark for TSA for certain services, while we're ramping up in particular, our team to be prepared to stand alone and support us as it relates to infrastructure and cyber security. So theres. Some duplication of costs that will take place kind of in the first year and we've been pretty transparent about that as well.

But otherwise we were operating quite independently from Aramark. Our business models are completely different we're running on a separate system separate teammates separate functional structure. So we felt like we're in a really great place and we're operating quite efficiently.

Okay, great. Thanks for the color.

Thank you.

We have time for one more question, which comes from Scott Schneeberger with Oppenheimer. Please go ahead.

Thanks, Good morning.

For each line Rick Real quick just curious you mentioned the DSO tick up but you mentioned you kind of spoke at all away Oh. It was a tough year over year on a comp from a one time event fire just just curious because we've heard over the course of the call. Some are small businesses using Canada.

If you could just clarify that it was uniquely the comparison and nothing else is amiss there that we might see in upcoming quarters and then just one separate one I'll ask.

You mentioned incentive that you use when used with the field on the cross sell I am curious how fluid have you been in the in the use of those incentives is.

Is that something new is that something that's been ongoing and are there any new initiatives with regard to these are these field enhancements sales enhancing that youre that youre initiating thanks for take them both.

Sure. So from a DSO perspective, so my comments spoke to the bad debt expense a year over year and the majority of what we're seeing.

In terms of a negative comp is we true it up the bad debt reserve that was on our books last year.

And that was the result of carrying higher reserves coming out of Covid to acknowledge the exposure and we finally chewed up the last portion of that in the 2023.

First quarter.

And so youre seeing last year, we had some strong favorability in bad debts, because we are effectively reversed our reserve this.

This year to your comment on DSO, we're not seeing a meaningful movement year over year and DSO, that's driving negative activity and so that's why we really called out but this is although as Kim noted we do see.

Some of the Smes.

Out of business year over year, the big driver for us kind of relative to bad debt is that reserve reversal that actually is a headwind.

And we're still delivering margin expansion, despite not having that in the current year.

Yeah, and I would just add to that we have a very concerted team focus on bad debt down to the market center level. So our teams in coordination with our accounting team and our collections team work very diligently around identifying customers are concerned we have a weekly process, where teammates between market centers and collect.

<unk> or on the phone and working through which customers do we need to be engaging with so I felt like we have a very good handle on managing DSO and bad debt and we are in a much better place than we were a couple of years ago. I think we've really matured as an organization to collaboratively drive down debt bad debt with our customers and to Rick's point, you're really looking at.

Kind of a one time step change that took place last year I'm very proud of our team that where that is really it is a headwind for us and we're overcoming that and still driving margin expansion in the quarter among the pepco cost and many other things that are entering our system. So I think it really demonstrates to the market. The underlying performance here is a very very strong.

As it relates to your question around incentives or frontline sell teammates, particularly our valve services Representatives, who are doing such a great job selling we.

We are very pleased with the incentives that we have in place for them and what we've been doing now is helping them understand what this means to them financially and so I had mentioned before that we have always had provisions inside our collective bargaining agreement that allows us to pay our teammates Commission our frontline rsr's.

Commission for selling what we haven't done well in the past and we're doing well now is actually calculating for them what that means though on your route you have a certain number of customers that have the ability to buy more products and services and here's what it means to us financially to you personally as you cross sell these customers and get the condition and also.

Make your route more valuable. So we have worked very diligently now to start putting that information in front of our frontline teammates. So that we can motivate and inspire them to sell more so that they can provide more and better for their families. So we think that we're getting making a real connection now between what the opportunity is for the company and what the opportunity is.

We do have also self contest, which are a ton of fun and very important to this process as well because they inspire and excite and engage our teammates across the field around competing against one another to sell and there are all kinds of things from prizes in dollars to just plain old bragging rights that allow people to get also excited about winning.

And building that muscle around selling the other thing that I had mentioned on incentives, which is not related to sales and it might've been what triggered your question is we actually changed our field incentives this year around retention. So as we're getting our teammates focused on you know the single best way to grow which is keep the customers you already have we actually modified.

Some of our management team out in the field, our frontline management team incentives are achieving their bonus incentives to include retention metrics and we think that is very important to make sure that we're very focused on the customer experience. So that's where we stand as it relates to incentives Scott hope that was helpful.

It was thank you both.

Thank you.

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

Thank you I would like to thank everyone for joining today to learn more about that this or to hear more about how we're progressing against our strategy I could not be more pleased with our outstanding teammates and the great work that they are doing to advance this strategy and we feel so strongly that the value creation opportunity here is simply tremendous so hopefully you enjoyed it.

Turning more about our progress today, and we look forward to talking with you again after the second quarter. So thanks for joining.

Thank you. This concludes today's fastest corporation fiscal first quarter 2024 earnings Conference call. Please disconnect. Your line at this time and have a wonderful day.

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