Q3 2024 Vestis Corp Earnings Call

Unknown Executive: Investor relations, please go ahead, sir.

Yeah.

Unknown Executive: 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.

Connie: of Relations. Please go ahead, sir.

Thank you Conor and good morning, everyone. Welcome to divest This corporation fiscal third quarter 2024 earnings call.

Speaker Change: With me here today are our president and CEO, Kevin Scott and our CFO Rick Dillon.

Unknown Executive: 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 is available on the Vestis website under the Investor Relations section.

Speaker Change: 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.

Unknown Executive: 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.

Speaker Change: 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. Thank you. Thank you. Thank you.

Speaker Change: 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.

Kim: 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.

Kim Scott: 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 result, retention metrics, and affirmation of guidance. We understand the importance of external communication, consistently delivering against our commitments, and establishing our credibility in the market.

Unknown Executive: Thank you, Connie. And good morning, everyone.

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.

Unknown Executive: 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 is available on the Vestis Corporation website under the Investor Relations section.

Unknown Executive: 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.

Kim: 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.

Kim: We understand the importance of external communication, consistently delivering against our commitments, and establishing our credibility in the market.

Kim Scott: We are making progress on improving operations by way of new leadership in the delivery of organizational efficiencies. Petching on point number one, I'm pleased to report that our third quarter results are in line with expectation, and we are reaffirming our full year fiscal 24 guidance, with EBITDA margin trending toward the higher ends 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 revenues decline.

Kim: We are making progress on improving operations by way of new leadership in the delivery of organizational efficiencies.

Kim Scott: 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.

Kim: 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 24 guidance with EBITDA margin trending toward the higher end of our range.

Kim: 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.

Kim: 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 revenues decline.

Kim Scott: 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 self-leadership and our new delayer structure, we believe we can further accelerate our new business wins.

Kim: 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.

Kim: 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.

Kim: With the addition of new self-leadership and our new D-layered structure, we believe we can further accelerate our new business win.

Kim Scott: Our customer retention rates have improved year to date and are in line with our plan for the year. In fiscal 24, we have seen a 210 basis point improvement in retention on a year-to-date basis versus fiscal 23. This is good validation that our decision to moderate pricing with the right decision to protect our recurring revenue based for the long term. As previously disclosed, our fiscal 23 retention rate includes the impact of two large national account laws, which impacted the full year and, in particular, the fourth quarter fiscal 23 rates, which presented a roll over volume loss headwind in fiscal 24.

Kim: Our customer retention rates have improved year-to-date and are in line with our plan for the year. In fiscal 24, we have seen a 210 basis point improvement in retention on a year-to-date basis versus fiscal 23.

Kim: This is good validation that our decision to moderate pricing was the right decision to protect our recurring revenue base for the long term.

Kim: As previously disclosed, our fiscal 23 retention rate includes the impact of two large national account losses, which impacted the full year and, in particular, the fourth quarter fiscal 23 rates, which presented a rollover volume loss headwind in fiscal 24.

Kim Scott: I'm pleased to share that we continue to have good performance with our national account renewals in fiscal 24 and have successfully renewed several of our largest customers year to date. Our objective in the year ahead is to continue to enhance our service level in order to further improve retention rate over time. Moving on to point number two, we understand the importance of delivering consistent results and establishing our credibility in the market. To that end, we are fully mobilized to execute against our plans in the fourth quarter and deliver our full year commitment. We want to end 2024 with strength, finalize our budget, and then our plans with our team, which includes a great new Chief Operating Officer and Head of Cell.

Kim Scott: Our business is stable, as evidenced by our third-quarter results, retention metrics, and affirmation of guidance. We understand the importance of external communication, consistently delivering on our commitments, and establishing our credibility in the market. We are making progress on improving operations by way of new leadership and organizational efficiency. 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 24 guidance with EBITDA margin trending toward the higher end of our range.

Kim Scott: 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 the 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 the pull forward of items that we originally expected to impact the fourth quarter. However, revenue for the quarter was down 1.6% year over year.

Kim Scott: 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 D-layered structure, we believe we can further accelerate our new business win. Our customer retention rates have improved year-to-date and are in line with our plan for the year.

Kim: We want to end 2024 with strength, finalize our budget, and vet our plans with our team, which includes a great new chief operating officer and head of sales.

Kim Scott: While we will not discuss our expectations or provide guidance for fiscal 2025 today, we expect that our second half results will be the new base for our business from which we will grow.

Kim Scott: In fiscal 24, we have seen a 210 basis point improvement in retention on a year-to-date basis versus fiscal 23. This is good validation that our decision to moderate pricing was the right decision to protect our recurring revenue base for the long term. As previously disclosed, our fiscal 23 retention rate includes the impact of two large national account losses which impacted the full year and, in particular, the fourth quarter fiscal 23 rates, which presented a rollover volume loss headwind in fiscal 24.

Kim Scott: I'm pleased to share that we continue to have good performance with our national account renewals in fiscal 24 and have successfully renewed several of our largest customers year to date. Our objective in the year ahead is to continue to enhance our service level in order to further improve retention rates over time. Moving on to point number two, we understand the importance of delivering consistent results and establishing our credibility in the market.

Kim Scott: Moving on to my third point, I am pleased to talk about two exciting new hires to bestive some simplification to our organizational structure that's resulting in a net $4 million cost saving, as well as the appointment of two additional board members. Bill Stewart will be joining as our Chief Operating Officer at the beginning of September. Bill must recently served as President of Supply Chain Solutions at UPS. Pete Riego has joined as head of Build Cells. Pete brings significant cell leadership experience to justice with most of his career spent as a cell leader within the industrial laundry industry, including 19 years at Centop.

Kim Scott: To that end, we are fully mobilized to execute against our plans in the fourth quarter and deliver on our full year commitments. We want to end 2024 with strength, finalize our budget, and vet our plans with our team, which includes a great new chief operating officer and head of sales. While we will not discuss our expectations or provide guidance for Fiscal 2025 today, we expect that our second half results will be the new base for our business from which we will grow.

Kim Scott: Moving on to my third point, I'm pleased to talk about two exciting new hires at Vestis, some simplification to our organizational structure that's resulting in a net $4 million cost savings, as well as the appointment of two additional board members. Bill Seward will be joining us as our Chief Operating Officer at the beginning of September. Bill most recently served as President of Supply Chain Solutions at UPS. Pete Rigo has joined as head of field sales.

Speaker Change: Bill Seward will be joining as our Chief Operating Officer at the beginning of September . Bill most recently served as President of Supply Chain Solutions at UPS.

Kim Scott: Pete brings significant sales leadership experience to Vestis, with most of his career spent as a sales leader within the industrial laundry industry, including 19 years at Centot. With Pete's addition to the organization, we are shifting our field sales team to report directly to sales leadership under Pete, rather than up through field operations. Aligned with these leadership appointments, we have made a number of strategic changes to the organization that will enable us to accelerate growth and more rapidly deliver operational efficiency.

Kim Scott: With Pete's addition to the organization, we are shifting our build cell team to report directly to cell leadership under Pete rather than up through build operation. Aligned with these leadership appointments, we have made a number of strategic changes to the organization that will enable us to accelerate growth and more rapidly deliver operational efficiencies. These include a cell center of excellence to improve close rates and increase revenue per deal, a dedicated team to oversee our national account growth strategy, which will be beneficial to optimize our route density and plant utilization, and collapsing our build operation structure to allow us to get even closer to our customers.

Kim Scott: These include a sales center of excellence to improve close rates and increase revenue per deal; a dedicated team to oversee our national account growth strategy, which will be beneficial to optimize our route density and plant utilization, and reducing our field operations structure to allow us to get even closer to our customers. This reorganization and delayering will generate approximately $8 million in annualized growth costs.

Kim Scott: This reorganization and delaying will generate approximately $8 million in annualized growth cost out. This allows us to self-fund approximately $4 million of strategic investment in key leadership roles and realize approximately $4 million in net annualized savings.

Kim Scott: This allows us to self-fund approximately $4 million of strategic investments in key leadership roles and realize approximately $4 million in net annualized savings. Lastly, we welcome two new members to our board. Many of you in the investment community likely already know Keith Meister, the founder and chief investment officer of Corvex, Vestis' largest shareholder.

Kim Scott: Lastly, we welcome two new members to our board, to our already strong and highly engaged board. Many of you in the investment community likely already know Keith Meister, the founder and chief investment officer of Corvex; Vestus is largest shareholder. Pete has a strong financial and investment expertise and brings a highly valuable set of skills and perspective to our board group. We are excited to welcome Keith to our board and have enjoyed a very constructive dialogue about Vestus's pathway to long-term value creation. Bill Gates has also joined the Vestis Board of Directors. Bill brings strong cells and marketing expertise and a wealth of relevant industry experience to our board.

Speaker Change: Lastly, we welcome two new members to our board, to our already strong and highly engaged board. Many of you in the investment community likely already know Keith Meister, the founder and chief investment officer of Corvex, Vestis' largest shareholder.

Kim Scott: Keith has strong financial and investment expertise and brings a highly valuable set of skills and perspectives to our boardroom. We are excited to welcome Keith to our board and have enjoyed a very constructive dialogue about Vestis' pathway to long-term value creation. Bill Getz has also joined the Vestis Board of Directors.

Speaker Change: Keith has a strong financial and investment expertise and brings a highly valuable set of skills and perspectives to our boardroom. We are excited to welcome Keith to our board and have enjoyed a very constructive dialogue about Vestas' pathway to long-term value creation.

Kim Scott: Bill brings strong sales and marketing expertise and a wealth of relevant industry experience to our board. Bill previously spent 22 years at CentOS in various executive leadership roles, including President and COO of Global Accounts and Strategic Markets and Chief Marketing Officer. Now I'd like to discuss the operational changes we've made to improve service. We are continuously working to enhance our customers' experience. As a reminder, our service levels have remained consistent over the past year. However, in some cases, we believe our customers expected enhanced service levels in order to accept higher levels of prices.

Kim Scott: Bill previously spent 22 years at CENTOP in various executive leadership roles, including President and COO of global accounts and strategic markets, and Chief Marketing Officer.

Kim Scott: Now, I'd like to discuss the operational changes we've made to improve service. We are continuously working to enhance our customer's experience. As a reminder, our service levels have remained consistent over the past year. However, in some cases, we believe our customers expected enhanced service levels in order to accept higher levels of pricing. We are laser focused on improving our service levels above and beyond what we have historically delivered as we build a truly differentiated experience for our customers. We are fully mobilized to improve our operations to provide better service. We are launching new and improved procedures across our plants to address shortages, on-time delivery, and quicken the time to install for new wearers.

Speaker Change: As a reminder, our service levels have remained consistent over the past year. However, in some cases, we believe our customers expected enhanced service levels in order to accept higher levels of pricing.

Kim Scott: We are laser focused on improving our service levels above and beyond what we have historically delivered as we build a truly differentiated experience for our customers. We are fully mobilized to improve our operations to provide better service. We are launching new and improved procedures across our plants to address shortages on time delivery and quicken the time to install for new wearers. In the third quarter, we introduced a new exciting customer delivery notification system so customers can receive real-time updates and documentation of product pickup and delivery. Lastly, we created a dedicated customer experience team to continuously enhance the customer experience. Before I turn the call over to Rick, I want to make a few last points.

Speaker Change: We are fully mobilized to improve our operations to provide better service. We are launching new and improved procedures across our plants to address shortages, on-time delivery, and quicken the time to install for new wearers.

Kim Scott: In the third quarter, we introduced a new, exciting customer delivery notification system so customers can receive real-time updates and documentation of product, pickup, and delivery. Lastly, we created a dedicated customer experience team to continuously enhance the customer experience.

Kim Scott: Before I turn the call over to Rick, I want to make a few last points. De-leveraging remains a priority. That's the quest to quarter ends. We have entered into an account receivable securitization facility that will allow us to meaningfully lower our outstanding net depth. This transaction enables us to reduce by approximately $250 million. The amount of networking capital our business requires us to hold on our balance sheet and allows us to utilize these proceeds to pay down approximately $250 million of depth. On a pro forma basis, third quarter net debt would have been $1.28 billion, and third quarter net leverage would have been 3.3 times had we closed on the facility and repaid $250 million a term loan debt prior to the end of the quarter.

Kim Scott: Deleveraging remains a priority. Subsequent to quarter end, we entered into an accounts receivable securitization facility that will allow us to meaningfully lower our outstanding net debt. This transaction enables us to reduce by approximately $250 million the amount of net working capital our business requires us to hold on our balance sheet and allows us to utilize these proceeds to pay down approximately $250 million of debt. On a pro forma basis, third quarter net debt would have been $1.28 billion, and third quarter net leverage would have been 3.3 times had we closed on the facility and repaid $250 million of term loan debt prior to the end of the quarter.

Speaker Change: Before I turn the call over to Rick, I want to make a few last points.

Rick Dillon: The leveraging remains a priority.

Rick Dillon: Subsequent to quarter ends, we have entered into an accounts receivable securitization facility that will allow us to meaningfully lower our outstanding net debt.

Rick Dillon: This transaction enables us to reduce, by approximately $250 million, the amount of net working capital our business requires us to hold on our balance sheet, and allows us to utilize these proceeds to pay down approximately $250 million of debt.

Rick Dillon: On a pro forma basis, third quarter net debt would have been $1.28 billion and third quarter net leverage would have been 3.3 times had we closed on the facility and repaid $250 million of term loan debt prior to the end of the quarter.

Rick Dillon: This is a great example of some of the latent assets that we can monetize to strengthen our balance sheet as it stands alone entity. Rick will further discuss the AR facility and pro forma impact on the balance sheet.

Kim Scott: This is a great example of some of the latent assets that we can monetize to strengthen our balance sheet as a standalone entity. Rick will further discuss the AR facility and its pro forma impact on the balance sheet. To conclude, I want to emphasize that we are pleased that our third-quarter results are in line with our commitments. Our retention metrics have improved year-to-date, and we are reiterating our guidance with EBITDA margins trending toward the high end.

Rick Dillon: This is a great example of some of the latent assets that we can monetize to strengthen our balance sheet as a standalone entity. Rick will further discuss the AR facility and pro forma impacts on the balance sheet.

Kim Scott: To conclude, I want to emphasize that we are pleased that our third quarter results are in line with our commitments. Our retention metrics have improved here today, and we are reiterating our guide with even our margin trending toward the high end. We are mobilized and tracking to deliver against our fourth quarter and full year commitments and taking a measured approach to our external communications, and as such, we won't be discussing FY25 until November. And we have made great progress in terms of reorganizing and streamlining our organization, adding key hires, continuously adding perspectives to our board, and improving our service levels.

Rick Dillon: To conclude, I want to emphasize that we are pleased that our third quarter results are in line with our commitments. Our retention metrics have improved year to date, and we are reiterating our guide with EBITDA margins trending toward the high end.

Kim Scott: We are mobilized and tracking to deliver against our fourth quarter and full year commitments and taking a measured approach to our external communications. And as such, we won't be discussing FY25 until November. And we have made great progress in terms of reorganizing and streamlining our organization, adding key hires, continuously adding perspective to our board, and improving our service levels. And lastly, I want to reiterate that we expect that our second half results will be the new base for our business from which we will grow. With that, I'd like to turn the call over to Rick.

Rick Dillon: We are mobilized and tracking to deliver against our fourth quarter and full year commitments and taking a measured approach to our external communications. And as such, we won't be discussing FY25 until November .

Kim Scott: And lastly, I want to reiterate that we expect that our second half results will be the new base for our business from which we will grow.

Rick Dillon: And lastly, I want to reiterate that we expect that our second half results will be the new base for our business from which we will grow. With that, I'd like to turn the call over to Rick.

Rick Dillon: With that, I'd like to turn the call over to Rick. 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 loss business in the quarter. Volume growth from recurring revenue, including new customers and expanding our existing customer penetration through cost selling, provided approximately 800 basis points of growth in the quarter.

Rick Dillon: Thanks, Kim. And good morning, everyone.

Rick Dillon: 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.

Rick Dillon: 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.

Rick Dillon: 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 cost selling, provided approximately 800 basis points of growth in the quarter. Consisting 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're 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 2020.

Rick Dillon: Volume growth from recurring revenue, including new customers, and expanding our existing customer penetration through cost selling, provided approximately 800 basis points of growth in the quarter.

Rick Dillon: Consistent with the second quarter, new customers contributed 700 basis points of growth and contributed 100 basis points. We continue to win new business, and we're seeing an increase in the dollar contribution from gross new sales. Sales from new customers were of 17% year-over-year, despite sales headcounting down approximately 10% versus the third quarter of fiscal 23. Customer losses reduced third quarter revenue by approximately 900 basis points year-over-year, more than offsetting our volume growth. The loss business impact consists of 5% from known customer losses that we exited fiscal 23, and 4% from customer losses during this fiscal year.

Rick Dillon: We continue to win new business, and we're 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 23.

Rick Dillon: Customer losses reduced third quarter revenue by approximately 900 basis points year over year, more than offsetting our volume growth. The loss business impact consists of 5% from known customer losses as we exited fiscal 23, and 4% from customer losses during this fiscal year. As Kim noted, we saw improvement in our year-to-date retention rate over fiscal 23, and we expect this will drive lower carryover losses in 25. This is an important point, and I want to emphasize the prior year retention rate was a bigger headwind in 2024 than we expect it will be in 2025.

Rick Dillon: 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 23, and 4% from customer losses during this fiscal year.

Rick Dillon: As Kim noted, we saw improvement in our year-to-date retention rate over fiscal 23, and we expect this will drive more carry-over losses in 25. This is an important point, and I want to emphasize the prior year retention rate with a bigger head win in 2024, then we expect it will be in 2025. So, differently, we begin fiscal 2025 and less of the whole from loss business than 2024. Pricing contributed 60 basis points to half-line growth. This reflects in-year regularly scheduled annual price increases and moderated off-cycle pricing. Partially offset by the impact of the erosion of prior year gym pricing actions and to progress through the fourth quarter of 2023 and the first quarter of 24.

Rick Dillon: Said differently, we begin fiscal 2025 in less of a hole from lost business than in 2024. Additionally, pricing contributed 60 basis points to top-line growth. This reflects in-year regularly scheduled annual price increases and moderated off-cycle prices, partially offset by the impact of the erosion of prior year June pricing actions as we progress through the fourth quarter of 2023 and the first quarter of 2024. Direct sales were down $3 million in the third quarter year over year, driven almost entirely by the lost revenue from the large direct sale national account previously disclosed. Excluding direct sales, the uniformed business was down 3.5% year over year, and workplace supplies were flat year over year.

Rick Dillon: Partially offset by the impact of the erosion of prior year June pricing actions as we progress through the fourth quarter of 2023 and the first quarter of 2024.

Rick Dillon: Direct sales were down 3 million in the third quarter year-over-year, driven almost entirely by the loss revenue from the large direct sale national account previously disclosed. Excluding direct sales, the uniform business was down 3.5% year-over-year, and workplace supplies was flat year-over-year.

Rick Dillon: Direct sales were down $3 million in the third quarter year-over-year, driven almost entirely by the lost revenue from the large direct sale national account previously disclosed. Excluding direct sales, the uniformed business was down 3.5% year-over-year, and workplace supplies was flat year-over-year.

Rick Dillon: Moving on to slide 11 and adjusted EBITDA. Adjusted EBITDA was 87 million in the third quarter of fiscal 24, flat sequentially to the second quarter, and down approximately 20 million from the third quarter of fiscal 23. The operating leverage on new business and flow through on pricing were more than offset by the impact of loss business in the quarter. The incremental margin on new sales volume was approximately 39%, which reflects incremental garment amortization costs and new customer wins and sales commissions on new sales. The approximately 58% decriminal margin on loss business was net a final act of drilling during the quarter.

Rick Dillon: Moving on to slide 11 and adjusted EBITDA. Adjusted EBITDA was $87 million in the third quarter of Fiscal 24, flat sequentially to the second quarter, and down approximately $20 million from the third quarter of Fiscal 24. The operating leverage on new business and flow-through on pricing was more than offset by the impact of lost business in the quarter. The incremental margin on new sales volume was approximately 39%, which reflects incremental garment amortization costs and new customer wins and sales commissions on new sales.

Rick Dillon: Adjusted EBITDA was $87 million in the third quarter of Fiscal 24, flat sequentially to the second quarter, and down approximately $20 million from the third quarter of Fiscal 23.

Rick Dillon: The operating leverage on new business and flow-through on pricing were more than offset by the impact of lost business in the quarter.

Rick Dillon: The approximately 58% decremental margin on lost business was net of final exit billings during the quarter. Year to date, we have approximately 10 million in exit billings offsetting the impact of loss. Incremental public company costs were approximately $7 million in the quarter and $14 million year to date. We now expect full year incremental public company costs of approximately $18 million. Benefits from our network and logistics optimization efforts, as well as lower incentive compensation costs, were offset by the expected increase in labor costs year over year.

Rick Dillon: Year-to-date, we have approximately 10 million in exit drilling, offsetting the impact of loss business. Incremental public company costs were approximately $7 million in the quarter and $14 million year-to-date. We now expect full-year incremental public company costs of approximately $18 million. Benefits from our network and logistics optimization efforts, as well as lower incentive compensation costs, were offset by the expected increase in labor costs year-over-year. DeMargin was 12.4% for the quarter, consistent with the second quarter. However, Margin's decline 260 basis points year over year, including the absorption of 100 basis points of incremental public company costs.

Rick Dillon: Benefits from our network and logistics optimization efforts, as well as lower incentive compensation costs, were offset by the expected increase in labor costs year over year.

Rick Dillon: The EBITDA margin was 12.4% for the quarter, consistent with the second quarter; however, margins declined 260 basis points year-over-year, including the absorption of 100 basis points of incremental public company cost. We're turning to cash flow and the balance sheet on slide 12. We generated approximately $49 million in cash from operations in the third quarter and $176 million year-to-date, net of approximately $18 million in one-time cash and related costs. We continue our focus on inventory management through sales and operations planning and garment reuse initiatives driving a $21 million reduction in inventory year-to-date as we focus on having the right inventory in our distribution centers and operating facilities to support growth.

Rick Dillon: The EBITDA margin was 12.4% for the quarter consistent with the second quarter, however margins declined 260 basis points year-over-year including the absorption of 100 basis points of incremental public company costs.

Rick Dillon: We're turning to cash flow and the balance sheet on slide 12. We generated approximately 49 million in cash from operations in the third quarter, and 176 million year-to-date, net of approximately 18 million in one time cash been related costs. We continue our focus on inventory management through sales and operations planning and garment reuse initiatives, driving 21 million dollar reduction in inventory year-to-date as we focus on having the right inventories in our distribution centers and operating facilities to support growth. CapEx with approximately 21 million during the third quarter of 24, slightly ahead of last year's spending.

Rick Dillon: We're turning to cash flow and the balance sheet on slide 12.

Rick Dillon: We generated approximately $49 million in cash from operations in the third quarter and $176 million year-to-date, net of approximately $18 million in one-time cash and related costs.

Rick Dillon: We continue our focus on inventory management through sales and operations planning and garment reuse initiatives, driving a $21 million reduction in inventory year-to-date, as we focus on having the right inventories in our distribution centers and operating facilities to support growth.

Rick Dillon: CapEx was approximately $21 million during the third quarter of 2024, slightly ahead of last year's spending. Free cash flow in the third quarter was $28 million and $125 million year-to-date, with free cash flow conversion in excess of 100% of net income and 46% of year-to-date adjustments. I want to reiterate that this free cash flow includes approximately $18 million in one-time stimulated costs and does not include the impact of the armed security invasion which was subsequent to the quarter end. Turning to slide 13.

Rick Dillon: CapEx was approximately $21 million during the third quarter of 2024, slightly ahead of last year's spending.

Rick Dillon: Free cash flow in the third quarter was 28 million and 125 million year-to-date, with free cash flow conversion in excess of 100% of net income and 46% of year-to-date adjusted EBITDA. I want to reiterate that this free cash flow includes approximately 18 million in one-time spend related costs and does not include the impact of the AR security station, which was subsequent to the quarter end.

Rick Dillon: Free cash flow in the third quarter was $28 million and $125 million year-to-date, with free cash flow conversion in excess of 100% of net income and 46% of year-to-date adjusted EBITDA.

Rick Dillon: Turning to slide 13, we're committed to strengthening our balance sheet and deleveraging. We continue to channel available cash to voluntary loan principal reduction. Year-to-date, we have made payments of approximately 80 million dollars, which includes 60 million in voluntary payments. We ended the third quarter with a net debt to EBITDA ratio of 3.98 times. We announced today we entered into a 250 million dollar accounts receivable deterioration facility, and we'll use the proceeds from this facility to repay outstanding term loan debt. The facility matures in 2027 with an option for extension. The facility creates a liquidity event by giving us early access to cash from a portion of our house and the account receivable, while not interrupting our normal operating cash conversion cycle.

Rick Dillon: We're committed to strengthening our balance sheet and delivering. We continue to channel available cash to voluntary loan principal reduction. Year to date, we have made payments of approximately $80 million, which includes $60 million in voluntary payments. We ended the third quarter with a net debt to EBITDA ratio of 3.98 times. We announced today that we entered into a $250 million accounts receivable securitization facility and will use the proceeds from this facility to repay outstanding term loan debt.

Speaker Change: Turning to slide 13.

Speaker Change: We are committed to strengthening our balance sheet and deleveraging. We continue to channel available cash to voluntary loan principal reduction. Year-to-date, we have made payments of approximately $80 million, which includes $60 million in voluntary payments.

Speaker Change: We ended the third quarter with a net debt to EBITDA ratio of 3.98 times.

Speaker Change: We announce today we entered into a $250 million accounts receivable securitization facility and will use the proceeds from this facility to repay outstanding term loan debt. The facility matures in 2027 with an option for extension.

Rick Dillon: The facility matures in 2027 with an option for extension. The facility creates a liquidity event by giving us early access to cash from a portion of our outstanding accounts receivable. Receivable while not interrupting our normal operating cash conversion cycle. This results in a reduction in working capital needed to support the business by unlocking this latent asset on our balance sheet. The proceeds will allow us to make meaningful, positive reductions in our outstanding net debt, improving our debt to equity and net debt to EBITDA leverage ratio. The cost of the facility is SOFR plus 100 basis points, which is currently 125 basis points lower than the interest on our existing term loans.

Speaker Change: The facility creates a liquidity event by giving us early access to cash from a portion of our outstanding accounts receivable.

Speaker Change: Receivable, while not interrupting our normal operating cash conversion cycle. This results in a reduction in working capital needed to support the business by unlocking this latent asset on our balance sheet.

Rick Dillon: This results in a reduction in working capital needed to support the business by unlocking this latent asset on our balance sheet. The proceeds will allow us to make meaningful positive reductions in our outstanding net debt, improving our debt to equity and net debt to EBITDA leverages. The cost of the facility is so far plus 100 basis points, which is currently 125 basis points lower than the interest on our existing term loans. The annualized cash savings from this transaction is also over 300 million. The nature of the transaction is such that there is no debt obligation on our balance sheet, and it does not reduce the liquidity available under our existing credit facility.

Speaker Change: The cost of the facility is SOFR plus 100 basis points, which is currently 125 basis points lower than the interest on our existing term loans. The annualized cash savings from this transaction is also over $300 million.

Rick Dillon: The annualized cash savings from this transaction are also over $300 million. The nature of this transaction is such that there is no debt obligation on our balance sheet, and it does not reduce the liquidity available under our existing credit facility. On a pro forma basis, Q3 net debt would have been $1.28 billion, and Q3 net leverage would have been 3.3 times had we closed on the facility and repaid $250 million of term loan debt prior to the end of the quarter.

Rick Dillon: On a pro forma basis, Q3 net debt would have been 1.28 billion and Q3 net leverage would have been 3.3 times, and we close on the facility and repaid to our here 50 million of term loan debt prior to the end of the quarter. I'm pleased to report that our current pro forma net debt total of 1.28 billion compares to our net debt of 1.6 billion to start the year, representing a debt pay down of more than 300 million since the start of the year. This significant debt pay down both highlights the strong operating cash flow that our business generates and the effective job our finance and operations teams have done in managing our balance sheet to generate cash during our first year and when independent public comes.

Speaker Change: On a pro forma basis, Q3 net debt would have been $1.28 billion and Q3 net leverage would have been 3.3 times had we closed on the facility and repaid $250 million of term loan debt prior to the end of the quarter.

Rick Dillon: I'm pleased to report that our current pro forma net debt total of $1.28 billion compares to our net debt of $1.6 billion at the start of the year, representing a debt paydown of more than $300 million since the start of the year. This significant debt paydown both highlights the strong operating cash flow that our business generates and the effective job our finance and operations teams have done in managing our balance sheet to generate cash during our first year as an independent public company. We remain confident in our ability to get to our targeted leverage of 1.5 to 2.5 times.

Speaker Change: I'm pleased to report that our current pro forma net debt total of $1.28 billion compares to our net debt of $1.6 billion to start the year, representing a debt pay down of more than $300 million since the start of the year.

Speaker Change: This significant debt pay down both highlights the strong operating cash flow that our business generates and the effective job our finance and operations teams have done in managing our balance sheet to generate cash during our first year as an independent public company.

Rick Dillon: Tony, we remain confident in our ability to get to our targeted leverage of 1.5 to 2.5 times.

Speaker Change: We remain confident in our ability to get to our targeted leverage of 1.5 to 2.5 times.

Rick Dillon: I want to conclude by discussing our fiscal 2024 outlook and what to expect in the fourth quarter on slide 14. We are reaffirming revenue guidance for the year and now expect to be towards the higher end of our adjusted EBITDA margin guidance. We expect the underlying operating trends from Q3 to continue in Q4. As Kim noted, there were some one-time benefits to EBITDA in Q3 that won't repeat in Q4, some of which represents a pool board of items we previously expected in Q4, including 4 million of direct sales from the known large national account we are exiting, 2 million from final exit billings, offsetting reoccurring revenue losses in Q3.

Rick Dillon: I want to conclude by discussing our fiscal 2024 outlook and what to expect in the fourth quarter on slide 14. We are reaffirming revenue guidance for the year and now expect it to be towards the higher end of our adjusted EBITDA margin guidance. We expect the underlying operating trends from Q3 to continue in Q4. As Kim noted, there were some one-time benefits to EBITDA in Q3 that won't repeat in Q4, some of which represents a pull-forward of items we previously expected in Q4, including $4 million of direct sales from a known large national account we are exiting.

Speaker Change: I want to conclude by discussing our fiscal 2024 outlook and what to expect in the fourth quarter on slide 14.

Speaker Change: As Kim noted, there were some one-time benefits to EBITDA in Q3 that won't repeat in Q4, some of which represents a pull-forward of items we previously expected in Q4, including $4 million of direct sales from the known large national account we are exiting,

Rick Dillon: 2 million from final exit billings offsetting recurring revenue losses in Q3. Taken together, these two represent approximately $6 million in revenue and $3 million in EBITDA that falls off as we move sequentially into Q4. Additionally, we expect a few million dollars of impact from price erosion sequentially from Q3 to Q4, with Q4 reflecting the settling of late Q2 pricing actions, mid third quarter, and higher sales expense as we increase our investment in our sales team to support growth.

Speaker Change: Two million from final exit billings offsetting reoccurring revenue losses in Q3. Taken together, these two represent approximately six million in revenue and three million in EBITDA that falls off as we move sequentially into Q4.

Rick Dillon: Taken together, these two represent approximately 6 million of revenue and 3 million in EBITDA that fall off as we move sequentially into Q4. Additionally, we expect a few million dollars of impact from price to roles in sequentially from Q3 to Q4, with Q4 reflecting the settling of late Q2 pricing actions, mid-dirt quarter, and higher sales expenses that we increase our investment in our sales team to support growth. These two items will represent approximately 4 million in sequentially EBITDA impact as we move from Q3 into Q4. Collectively, we expect these items will drive approximately 7 million of sequentially EBITDA step down as we move from Q3 into Q4.

Speaker Change: Additionally, we expect a few million dollars impact from price erosion sequentially from Q3 to Q4.

Speaker Change: with Q4 reflecting the settling of late Q2 pricing actions.

Speaker Change: mid third quarter and higher sales expense as we increase our investment in our sales team to support growth. These two items will represent approximately $4 million in sequential EBITDA impact as we move from Q3 into Q4.

Rick Dillon: These two items will represent approximately 4 million in sequential EBITDA impact as we move from Q3 into Q4. Collectively, we expect these items will drive approximately 7 million of sequential EBITDA step down as we move from Q3 into Q4. These one-time items do not reflect the change in the health of the underlying business or where we see current trends. This concludes our prepared remarks for today, and Kim and I would like to thank everyone for joining us, and we will now open the line for questions. Operator?

Speaker Change: Collectively, we expect these items will drive approximately 7 million of sequential EBITDA step-down as we move from Q3 into Q4. These one-time items do not reflect the change in the health of the underlying business or where we see current trends.

Rick Dillon: These one-time items do not reflect the change in the health of the underlying business or where we see current trends.

Unknown Executive: This concludes our prepare of remarks for today, and Kim and I would like to thank everyone for joining us, and we will now open the line for questions.

Speaker Change: This concludes our prepared remarks for today and Kim and I would like to thank everyone for joining us and we will now open the line for questions.

Unknown Executive: Operator. Thank you.

Operator: Thank you. The floor is now open for questions. At this time, if you have a question or comment, please press star 1 on your telephone keypad. If at any point your question is answered, you may remove yourself from the queue by pressing star 2. Again, we ask that you pick up your handset when asking your question to provide optimal sound quality. Thank you. And our first question comes from Andy Wittman with Baird.

Unknown Executive: 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. If at any point your question is answered, you may remove yourself from the queue by pressing star two. Again, we ask that you pick up your handset when posing your question to provide optimal sound quality. Thank you.

Speaker Change: Operator.

Speaker Change: Thank you. The floor is now open for questions. At this time, if you have a question or comment, please press star 1 on your telephone keypad. If at any point your question is answered, you may remove yourself from the queue by pressing star 2.

Speaker Change: Again, we ask that you pick up your handset when posing your question to provide optimal sound quality. Thank you.

Andy Whitman: And our first question comes from Andy Whitman with Baird. Great. Thanks and good morning. Thanks for taking my question.

Speaker Change: And our first question comes from Andy Wittman with Baird.

Andy Wittman: Great, thanks, and good morning. Thanks for taking my question. I wanted to drill into, I guess, slide 10 in the revenue bridge and specifically around the customer losses here, because you kind of emphasize this, and I actually think it's a main point that I wanted to explore a little bit in more detail. And so the idea is that the hole for 25 from losses is not as big as it was in 24, and I guess one way of thinking about that, I wanted to confirm that I'm thinking about this correctly.

Speaker Change: Great. Thanks, and good morning. Thanks for taking my question. I wanted to drill into

Andy Whitman: I wanted to drill into a slide 10 in the revenue bridge specifically around the customer losses here because you kind of emphasize 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 whole for 25 from losses is not as big as it was in 2004. And I guess one way of thinking about that, I wanted to confirm that I'm thinking about this correctly. If you had $37 million of revenue hits from known losses from basically the back half of 23, I'd be two quarters and 23 resulting in $37 million revenue impact, I'd be about $18 million per quarter of revenue loss.

Andy Whitman: I guess slide 10 in the Revenue Bridge, specifically around the customer losses here, because you kind of emphasize this, and I actually think it's a main point that I wanted to explore a little bit in more detail.

Speaker Change: The idea is that the hole for 25 from losses is not as big as it was in 24, 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 23,

Andy Wittman: If you had $37 million of revenue hit from known losses from basically the back half of 23, that'd be two quarters in 23, resulting in $37 million of revenue impact. That'd be about $18 million per quarter of revenue lost. 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 lost per quarter. So basically, that difference between our three quarters is, yeah, $10 million per quarter.

Speaker Change: I'd be two quarters and 23 resulting in 37 million dollar revenue impact.

Speaker Change: That would be about $18 million per quarter of revenue lost. That would compare to this year where you say you've got $29 million.

Kim Scott: 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 our three quarters is yet $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 completely redo your mask, 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 24 versus 25.

Speaker Change: of in your losses over three quarters or about $10 million of revenue loss per quarter. So basically, that difference from

Andy Wittman: That difference between $18 million per quarter of revenue loss versus $10 million of revenue loss is 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.

Speaker Change: are three quarters since you have 10 million dollars per quarter that difference between 18 million dollars per quarter of revenue loss versus 10 million dollars of of revenue loss is that one way of getting our arms around and thinking about the difference in the known customer losses

Rick Dillon: Without I didn't completely redo your math, but 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 24 versus 25. That's exactly how I would think. 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.

Speaker Change: Yes, I think that's a good way of thinking about it without, I didn't completely 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

Kim Scott: That's exactly how I would think about it. Okay.

Speaker Change: for 24 versus 25. That's exactly how I would think about it.

Kim Scott: 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. Price of 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?

Speaker Change: Okay, and I guess then, Kim, just as it relates to...

Speaker Change: It feels like the business is getting a little bit more stabilized after those customer losses.

Rick Dillon: The new pricing strategy has now been in effect. Your retention rates are stabilizing. Does that give you a little bit better visibility as to when organic growth might be able to inflect positively? I'm just wondering what your thought process is on timing, recognizing that some of these customer losses even from last year have to filter through next quarter and, I think, probably into at least the fiscal first quarter of next year. But I'll just ask what your view is if you think that organic growth can return in the second quarter of next year or third quarter of next year. Is that kind of what you're thinking?

Speaker Change: Pricing strategy has now been in effect.

Speaker Change: The New Pricing Strategy has been in effect. Your retention rates

Speaker Change: are stabilizing. Does it give you a little bit better visibility as to when organic growth

Kim Scott: I was just wondering what your thought process is. I'm timing recognizing that some of these customer losses, even from last year, have to filter to next quarter. I think probably into at least through fiscal first quarter of next year, but I was just reading 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 FY25, and I will tell you that you are thinking about this correctly in that there will still be some carryover losses that have to move from FY24 into the beginning of FY25.

Speaker Change: 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 through next quarter, I think probably into at least through fiscal first quarter of next year. But I'll just bring what your view is.

Speaker Change: If you think that organic growth can return in second quarter of next year or third quarter of next year, is that kind of what you're thinking?

Kim Scott: So I don't want to specifically point to the quarters in FY25, Andy, but I will tell you that you are thinking about this correctly in that there will still be some carryover losses that have to move from FY24 into the beginning of FY25. So we will need to lap those, obviously.

Speaker Change: So I don't want to specifically point to the quarters at FY25, Andy, but I will tell you that you are thinking about this correctly in that there will still be some carryover losses that have to move from FY24 into the beginning of FY25, so we will need to lasso, obviously. And you can look at our, you know, 800 basis points of growth that's coming from our sales team and from our sales representatives.

Kim Scott: So we will need to last those, obviously. And you can look at our 800 basis points that grow that's coming from our self team and from our self representative and recognize that we need to accelerate in order to more rapidly drive organic growth in the early quarters of 25. We need to accelerate; we would need to accelerate that run rate that's coming from that self team because we still need to absorb some rollover losses coming into the first part of 25. I want to be careful not to talk to you specifically about 25, 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.

Speaker Change: And recognize that we need to accelerate in order to more rapidly drive organic growth in the early quarters of 25. 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 25. I want to be careful not to talk to you specifically about 25, 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.

Kim Scott: 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 FY25. 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 FY25.

Kim Scott: I want to be careful not to talk to you specifically about FY25, but what I 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.

Unknown Executive: Now that we're seeing retention rates table on. Got it.

Andy Wittman: Got it. Okay, those are my key questions for today. I'm going to pass them on. Thanks, Andy.

Andy Whitman: Okay, those are my key questions today. I'm going to pass it on. Thanks, Andy. You appreciate it.

Speaker Change: Got it. Okay, those are my key questions for today. I'm going to pass it on.

Kim Scott: Thanks, Andy. I appreciate it.

Andrew Steinerman: And we'll take our next question from Andrew Steinerman from JP Morgan. Hi. Can you, I heard you use the word moderation of price. I mean, you prepared remarks, and then Rick 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 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 or price in Q3 versus Q4.

Andy Whitman: Thanks, Andy. Appreciate it.

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

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

Kim Scott: Hi Kim, you know, I heard you use 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 the 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 a price negative, particularly when thinking about the fourth quarter, which we're in now versus the third quarter we just reported? Sure.

Andrew Steinerman: Hi. Kim, you know, I heard you use 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?

Rick Dillon: 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, it's a little bit less in Q4. We do have positive pricing, but we're just speaking about the sequential decline in the impact.

Speaker Change: Sure. My comments, I'm referring to the impact of price in Q3 versus Q4. As we talked last call, we took

Rick Dillon: 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 real realization and Q3. When you compare the impact in Q3 to Q4, it's a little bit less than Q4. We do have positive pricing, but we're just speaking to sequentially the decline.

Speaker Change: Moderated pricing actions late in Q2.

Speaker Change: 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, it's a little bit less in Q4. We do have positive pricing, but we're just speaking to sequentially the decline in the impact.

Rick Dillon: William Pat. Rick, when you say that, it sounds like you have positive realized pricing year-over-year, but it sounds like you also realizing net realized pricing sequentially. I'm saying in the Q 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 Q-4, Q-3, 4 last year. In fact, in the primary Q-4, thus that year-over-year erosion that I spoke of relative to those actions. But we continue to take advice, and it is impacting our results. At the Kim's comments, the impact of pricing for the year will land at about between one and two percent, which is in a normalized rate for us.

Rick Dillon: 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 Q, 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 the prior year, if you recall, we had significant off-cycle pricing in Q3.

Speaker Change: 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.

Rick Dillon: I'm saying in the queue, sequentially, I'm realizing that

Rick Dillon: 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 Q2.

Rick Dillon: Well, I just wanted to provide just a couple of things. But we continue to take advice, and it is impacting our results. And to Kim's comments, the impact of pricing for the year will land at about between one and 2%, which isn't a normalized rate for us.

Rick Dillon: for Q3-4 of last year, impacting primarily Q4, thus that year-over-year erosion that I spoke of relative to those actions.

Kim: So we continue to take a 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 percent, which isn't a normalized rate for us.

Unknown Executive: Okay, thank you.

Kim: Okay, thank you.

Shalom O. Rosenbaum: And we'll take our next question from Shalom O. Rosenbaum from Steeple. Hi, thank you very much for taking my questions. Kim, can you talk a little bit about slide seven, the recurred revenue customer attention, 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, you know, 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 retention through the year?

Rick Dillon: And we'll take our next question from Shlomo Rosenbaum from Stiefel. Hi, thank you.

Kim: And we'll take our next question from Shlomo Rosenbaum from Stiefel.

Shlomo Rosenbaum: Hi, thank you very much for taking my questions. Kim, can you talk a little bit about slide seven, the recurrent revenue customer retention? I'm 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, you know? Can you just comment on retention? Is retention going down sequentially? Is this a seasonal type of metric to look at? How should we be thinking about what's going on retention through the year? Sure, I'll actually take that.

Shlomo Rosenbaum: Hi, thank you very much for taking my questions.

Shlomo Rosenbaum: Kim, can you talk a little bit on slide seven, the recurrent revenue, customer retention?

Shlomo Rosenbaum: I'm just trying to understand the context of it. It looks like...

Speaker Change: It went down sequentially from 93.2 to 91.7.

Speaker Change: But it's up year over year by about 40 basis points. Is there, you know, 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 retention through the year?

Kim Scott: Sure, I'll actually take that. When you look at our quarterly retention, there can be some volatility in the quarter we 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 is roughly an except 200 basis points improvement you see year-over-year is here-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.

Rick Dillon: 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 footprint, and we're pleased with that.

Speaker Change: 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.

Speaker Change: And so that's why we look at this from a year-to-date perspective.

Speaker Change: 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.

Rick Dillon: And so that quarterly number does have a little volatility. I would also note that Q4 of the previous year included the impact of a large national account, and it also reflected the very pricing we just talked about in the last question. We took significant pricing in Q3 and Q4, and you basically see some of the impacts we've been speaking about 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.

Speaker Change: And we're pleased with that. And so that quarterly numbers does have a little volatility. I would also note that Q4 of prior year.

Kim Scott: I would also note that Q4 of prior year included the impact of a large national account. And also it reflected the very pricing you just talked about on the last question. He took significant pricing in Q3 and Q4, and you basically see some of the impact we've been seeking 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.

Speaker Change: Included the impact of a large national account and also is reflective of the very pricing you just talked about on the last question.

Speaker Change: We 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 yet to date.

Shalom O. Rosenbaum: Okay. And can you talk a little bit about that AR securitization facility? Is it recourse to this? So the receivables are sold. They're sold to a bankrupt zero-mode entity and ultimately to a bank. They're 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 receivables without impacting our ongoing operating cash.

Shlomo Rosenbaum: Okay, and can you talk a little bit about that AR securitization facility? Is that recourse to Vestis? So the receivables are sold. They're sold to a bankruptcy or liquidation company and ultimately to 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 the benefits of $250 million of receivables early without impacting our ongoing operating cash flow.

Speaker Change: Okay, and can you talk a little bit about that AR securitization facility, is it recourse to Vestis?

Speaker Change: So the receivables are sold. They're sold to a bankruptcy remote entity and ultimately to a bank.

Speaker Change: , and the rights to those receivables. So as cash is collected, the purchaser enjoys that cash. What we like about the facility is

Speaker Change: And those receivables are paid off.

Speaker Change: 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.

Rick Dillon: One, there's no recourse on there to Vestis if something goes wrong with the big client or something like that if the receivable becomes uncollectable, 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.

Shlomo Rosenbaum: There's no recourse to Vestis if something goes wrong with the 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 report. Okay, thank you.

Speaker Change: There's no recourse on there to Vestis if something goes wrong with the 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.

Speaker Change: There is no recourse.

Speaker Change: Okay, thank you.

Rick Dillon: And once again, if you do have a question, you may press star one on your telephone keypad at this time. And we'll take our next question from Stephanie Moore from Jefferies.

Stephanie Moore: Once again, if you do have a question, you may press star one on your telephone keypad at this time. And we'll take our next question from Stephanie Moore from Jeffries. 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. So, can you give us an idea where we think retention should end for fiscal 2024, consuming links almost out of the year here, you should have probably a decent idea. And then what is the kind of targeted retention model we should think about as we start to lack some of these losses that before and what is, you know, presumably a more normalized environment.

Speaker Change: And once again, if you do have a question, you may press star 1 on your telephone keypad at this time.

Speaker Change: And we'll take our next question from Stephanie Moore from Jefferies.

Stephanie Moore: Great, thank you. Actually, I think for my first question, I'll just follow up on the prior question that was asked about retention. So I understand 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, we're almost done with the year here, so you should probably have a decent idea. And then what is the kind of targeted retention model we should think about as we start to experience some of these losses and we're in what is, you know, presumably a more normalized environment? Thanks.

Stephanie Moore: 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 where we think retention should end for fiscal 2024? Presumably, you've almost said what the year here you should have.

Stephanie Moore: Probably a decent idea. And then what is the kind of targeted retention model we should think about as we start to lap some of these losses and we're in what is, you know, presumably a more normalized environment? Thanks.

Kim Scott: Thanks. So, what we've said this talked about before actually is that, you know, we came into the year expecting retention to be in this 92.5 zone, and you today, that is where we're falling. When I'm 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 say for today, we're not aware of any large national account that is at risk for the fourth quarter. Those are two meaningful, we different headwinds to that queue for retention count.

Rick Dillon: So what we've talked about before, actually, is that, you know, 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 a significant headwind from pricing. And, as we say 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.

Speaker Change: So are we.

Speaker Change: We talked about before actually is that, you know, we came into the year expecting retention to be in this 92 point.

Speaker Change: 5-Zone, and year-to-date, that is where we're falling.

Speaker Change: 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.

Kim Scott: And we're monitoring this and focused on that daily. And then what would be targeted normalized retention? Yeah, when we talked before, we talked about the last number that was out there with 93%. I will point out that that was actually a high point for retention for the business. And if you go back three 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 to the discussion that Jim had on service excellence and what that does from not only the ability to take price, but also the impact on retention of the customers we have.

Speaker Change: And then what would be a targeted normalized retention?

Speaker Change: When we talked before, we talked about the last number that was out there.

Speaker Change: With 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.

Kim Scott: And Stephanie, I'll just add to that 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 conservative focus around the customer experience and enhancing the experience, customer. So our internal benchmarks are, we believe, really something that is a great opportunity for best in the year in the head. I wouldn't want to put a timeline on when we think we will achieve those higher levels, but we prevent ourselves that we can do that because we have locations today that are performing at these levels.

Speaker Change: 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 timeline 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.

Kim Scott: 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 water marks.

Speaker Change: Kimberly Scott, Felise Kissell, Unknown Executive

Stephanie Moore: Gaudet, that makes a lot of sense, and then I'm just going to follow up to that. I think as we think about organic growth going forward, I understand not giving any color. I'm 25 months, just basically asking him that, but given kind of where retention is improving too, but as you said, as 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, you probably understand. So if you think about the levers you can pull, which are new business lens, it sounds like quarter to quarter new business lens, we're being pretty steady and pretty good high-level digit range.

Speaker Change: 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, and I understand not giving any color on 25, so I'm not specifically asking on that, but given kind of where retention is improving to, 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,

Speaker Change: So, if you think about, you know, the levers you can pull, sure, new business wins.

Kim Scott: It sounds like you've done a pretty good reorg of the failed organization. So can you talk a bit about the pipeline of new wins, the new conversion level and kind of the timing in which you think you can start to see some of the operational improvements drive, you know, an accelerate. 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 self-team converting new logos, and about 100 basis points of growth coming from our route service representatives that are growing and penetrating and taking a share wallet with existing customers.

Speaker Change: It sounds like you've done a pretty good reorg 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

Speaker Change: Operational improvements drive, you know, an acceleration and a new business lens.

Speaker Change: Yeah, so as you know, 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.

Speaker Change: And about 100 basic points of growth coming from our Routes 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.

Kim Scott: 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.

Kim Scott: The minute you do that, that 800 basis points can start to become a creative and positive growth. But on top of that, we've also put a tremendous amount of effort around restructuring our self-team, as you reference, bringing in very strong proven industry leadership, because we also do believe that our frontline self-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 a higher rate of fails from that team with lower headcounts.

Speaker Change: 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.

Kim Scott: So we know that they are becoming more productive. And what we're focused on right now is that you're one and you're two cohort of new teammates, making sure when we bring those folks in, we're setting them up for rapid success so that they can immediately drop revenue dollars and continue to show productivity levels for that team. So I think there's opportunity with the loss business rate to continue to improve that, just holding the line at 800 basis points and improving the loss business rate would be a positive outcome. But we know that we can also draw that 800 basis points with a more productive sales force and a more professionalized and capable sales force.

Rick Dillon: And what we're focused on right now is that year one and year two cohort of new teammates, making sure when we bring those folks in we're setting them up for rapid success so that they can immediately drive revenue dollars and continue to show productivity levels for that team. So I think there's opportunity with the lost business rate to continue to improve that. Just holding the line at the 800 basis points and improving the lost business rate would be a positive outcome, but we know that we can also drive up that 800 basis points with a more productive sales force and a more professionalized and capable sales force.

Kim Scott: So those are really the best levers when it relates to the pipeline. We have also put a tremendous amount of energy around our national account pipeline. And in fact, we appointed a new internal leader who has been working in our cream room team to oversee our national account broadly for the organization. And she's already off to the races building a very robust national account pipeline and working on some very large deals to make those deals through the pipeline. So we also feel very positive about air and leadership and what we're going to see from national account.

Rick Dillon: So those are really the, I think, the best levers when it relates to the pipeline.

Erin: We have also put a tremendous amount of energy around our national account pipeline, and in fact, we appointed a new internal leader who is a proven leader who has been working in our cream room team to oversee our national account broadly for the organization, and she's already off to the races building a very robust national account pipeline and working on some very large deals to move those deals through the pipeline, so we also feel very positive about Erin's leadership and what we're going to see from national accounts.

Kim Scott: And I do just lastly want to remind everyone, you know, our strategy is centered around volume. And so winning those large national accounts and pushing large charges of volume through our fixed assets creates tremendous operating leverage for us because we have that idle capacity that I've spoken about so many times. And so national account lands are incredibly important to us to push volume through the system. And we also feel good about the progress we're seeing from that.

Erin: And I do just lastly want to remind everyone, you know, our strategy is centered around volume.

Erin: And so winning those large national accounts and pushing large tranches of volume through our fixed assets.

Erin: creates tremendous operating leverage for us because we have that idle capacity that I've spoken about so many times and so national account wins are incredibly important to us to push volume through the system and so we also feel good about the progress we're seeing from that team.

Stephanie Moore: Thank you.

Manav Patnaik: Thank you, Stephanie.

Speaker Change: Thank you. Thanks, Stephanie.

Unknown Executive: And we'll take our next question from Manav Patnaik from Barclays. Hi, good morning.

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

Unknown Executive: This is Roman Kennedy. I'm from Manav. Thank you for taking my questions. Can I ask if you are seeing any of what one of your public companies described as a high new business data activity driven by dynamic of free scrutiny by cost as 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 your having pricing and value and erosion during the new process? So that dynamic of phenomenon is just commentary on the broader pricing pressure within the market.

Ronan Kennedy: Hi, good morning. This is Ronan Kennedy on Kriminal. Thank you for taking my question. Can I ask if you are seeing any of what one of your public comments described as a heightened new business data activity driven by dynamic of increased scrutiny by cost?

Ronan Kennedy: 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?

Ronan Kennedy: 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, you know, that dynamic is phenomenal. And just commentary on the broader pricing pressure within the market.

Kim Scott: So, Robert, can you? I wasn't able to hear the first part of your question. So I heard you say there are high ins competition and your question was about, I mean, more scrutiny from our customers around pricing. Is that the question? Yes, one of your public, public comps said, referred to a more challenged environment from primarily from a national account bit 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 at price and renewal?

Speaker Change: So Rhonda, 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,

Speaker Change: More scrutiny from our customers around pricing. Is that the question? Yes, one of your public comments referred to a, you know, a more challenged environment, primarily from a national account bid activity standpoint where there is increased scrutiny of pricing.

Speaker Change: 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 at price and renewal?

Kim Scott: So no, I would separate those to those two components that 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 bespoke and 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 ethically. Every three to five years, you may have one of those large customers come up.

Speaker Change: So no, I would separate those two, those two components. So we think about pricing with our national account customers very differently than we do with SMEs.

Speaker Change: As I'm sure you all know, national account customers are typically three to five year contracts.

Speaker Change: And they have very bespoke and 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.

Speaker Change: 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

Kim Scott: 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, there are large pieces of volume for the highly attractive in our model.

Speaker Change: 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 commingle 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, those are large pieces of volumes, so they're highly attractive in our model.

Unknown Executive: Thank you for the clarification in the insight there.

Kim Scott: And then can you just provide an update on the efforts around efficient operations? I think you previously highlighted optimization events and then also from the merchandise management, your reuse initiatives that benefit to you, to fill rate, and then you're in cash savings and annualized revenue benefits out of that. Yeah, so we are very pleased and 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 justice, and we are still continuing to see outstanding progress from that team.

Ronan Kennedy: Guys, 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 previously highlighted.

Speaker Change: Optimization Events, and then also from the Merchandise Management, your reuse initiatives with benefit to use, fill rate, and then your in-cash savings and annualized return rate benefits out of that.

Speaker Change: Yeah, 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 footprints, 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.

Kim Scott: 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 be 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 footprints, which results in headcount coming out of the system. It results in reducing shuttles and empty miles between wash facilities and crossocks, or depots as we call them. So we are seeing great progress on the logistics run, and we continue to accelerate there.

Kim Scott: That same team is also leading our use 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 room, which allows us to avoid amortization costs, and it also allows us to preserve working capital by not having to build inventory. And you sell 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 these efforts. So all and we sell really good about the productivity initiative. I also mentioned the $4 million that we will see as a result of this restructure as well.

Speaker Change: Great progress on the logistics front and we continue to accelerate there.

Speaker Change: That same team is also leading our youth spill 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.

Speaker Change: [inaudible]

Speaker Change: 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 four of it. So we have a whole portfolio of cost-cutting productivity initiatives that are tracking really well.

Kim Scott: We actually took out $8 million of cost, but we re-invested four of it. So we have a whole portfolio of cost-out and productivity initiatives that are tracking really well.

Speaker Change: Thank you. Appreciate it. Thank you.

Unknown Executive: Once again, if you have a question, you may press star one on your telephone keypad at this time.

Speaker Change: And once again, if you have a question, you may press star 1 on your telephone keypad at this time. And we'll go next to Tim Mulroney from William Blair.

Tim Moroni: And we'll go next to Tim Moroni from William Blair. Tim, good morning. Hey, Tim. How are you? Good morning. How long time no talk? It's a good question. Good luck to you again. Yeah. Likewise. So just a couple of questions. The first one's on, not surprisingly, retention. So based on the bridges that you provide in the slides, it looks like the headwind from in-year customer losses was about three points in the first quarter. And then that increased a little bit to four 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?

Tim Mulroney: Kim, good morning.

Tim Mulroney: Hey Kim, how are you? Good morning.

Tim Mulroney: A long time no talk, it's good to talk to you again.

Tim Mulroney: So just a couple of questions. The first one's on, not surprisingly, retention. So, you know, based on the bridges that you provide in the slides, it looks like the headwind

Speaker Change: from in-year customer losses was about three points in the first quarter, and then that increased a little bit to four points in the second quarter.

Speaker Change: 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?

Kim Scott: Well, 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? Completely. Great. You want to take that.

Stephanie Moore: 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?

Speaker Change: 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...

Speaker Change: Better. Can you help me bridge that gap?

Rick Dillon: So when you think about the impact, we'll separate that from the action of 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 carry-als or losses because we start to laugh 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 we'll see, the impact of known losses kind of paper.

Speaker Change: So when you think about the impact, let's separate that from the actual retention calculation.

Speaker Change: When you think about the end-year impact, as we progress through the year, you will see more impact from end-year losses, and you'll see less impact from carryover losses because we start to lap those, and the end-year losses

Speaker Change: 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.

Speaker Change: And we should see, and will see, the impact of known losses kind of paper.

Rick Dillon: 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.

Rick Dillon: Okay. So it basically accumulates through the year. I was unsure if the answer was related to pricing because retention doesn't have price, but it sounds like it's just the accumulative factor. Correct. Okay.

Speaker Change: 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 an accumulative factor.

Unknown Executive: Thank you.

Kim Scott: And just one more from me, you know, I know service efficacy is a real focus area right now to help strengthen those retention rates. Terriers have 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 an interior change in those key KPIs yet to improve service levels? Or is it too early at this point? Yeah. So we've done a lot of work around this. It's too early to start talking about, you know, step change in metrics yet because we've just been working diligently on implementing these big processes over the last quarter. But we're making great progress.

Speaker Change: Correct.

Speaker Change: Okay, thank you. And just one more from me on, you know, I know service.

Speaker Change: 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-time delivery.

Speaker Change: 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?

Speaker Change: Yeah, so we've done a lot of work around this. It's too early to start talking about, you know, step change and 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 systems by the end of the fiscal year, which is outstanding. This is a real-time notification, letting the customers know we've just bumped your dock, we've delivered your product, and hope you had a great service. And we're, you know, documenting and verifying that, much like many of the delivery companies that are delivering to your front doorstep at your home. So we think this is a kind of step-change introduction for the industry for us to be communicating real-time.

Kim Scott: 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 fiscal year, which is outstanding. So this is a real-time notification, letting the customers know we've just bumped your dock. We delivered your products and hope you had a great service, and we're, you know, documenting and verifying that much like many of the delivery companies that are delivering to your front doorstep 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.

Kim Scott: 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 customer on a real-time basis. So that will help drive assurances around delivery. We also have developed a very robust SOP (standard operating procedure) related to you, how to manage shortages. If there's an inventory challenge in a facility or we're following shore for some reason on products, we have found some best-in-class behaviors that are, in fact, that are Greenville Top Carolina facility. We spent a couple of days on myself, spent a couple of days on the ground with them in Greenville, mapping out their process of how they manage shortages.

Speaker Change: like

Speaker Change: SOP, Standard Operating Procedure, related to how to manage shortages if there's an inventory challenge in a facility or we're falling short for some reason on product.

Speaker Change: We have found some best-in-class behaviors that are, 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 a 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.

Kim Scott: And we've actually taken that process, put it into a 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 mention 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 that product is available for customers. And he's bringing a whole other level of sophistication and metrics and data-based execution to this area of shortages and on-time delivery.

Speaker Change: Lastly, and most importantly, though, we've moved the leadership of this responsibility under our logistics leader, who you just heard me mention 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 that product is available for customers. And he's bringing a whole other 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.

Kim Scott: 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. Keith. Got it. That's a lot of good detail on the operational front. Thank you. Thanks.

Stephanie Moore: Got it. That's a lot of good detail on the operational front. Thank you.

Speaker Change: Got it. That's a lot of good detail on the operational front. Thank you.

George Tong: Then 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 personal service quality. Are you touched on some now, including addressing shortages and ensuring on-time delivery?

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

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

Kim Scott: Hello, 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?

George Tong: Hi, thanks. Good morning.

Speaker Change: He gave some examples.

Speaker Change: Hello. 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?

Kim Scott: 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? Yeah, so we are very mobilized. We have the playbook in place around those assures around on-time delivery, and we intend to have that delivery communication launched across our entire network to 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.

Kim Scott: Yeah, so we are very mobilized. We have the playbook in place around those assurances around on-time delivery, and we intend to have that delivery communication launched across our entire network to 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 door. So this is something that we will never stop working on. Phase one is communication about delivery, but we believe we can add all kinds of additional touch points and communications to the customers through that process. Did you have a great experience? Do you need anything else?

Speaker Change: Yeah, so we are very mobilized. We have the playbook in place around those assurances around on-time delivery, and we intend to have that delivery communication launched across our entire network to our entire customer base.

Speaker Change: 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 one is the communicating the delivery, but we believe we can add all kinds of additional touch points and communications to the customers through that process. Did you have a great experience?

Kim Scott: Can you give us a five-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.

Kim Scott: Say, one is communicating the delivery, but we believe we can add all kinds of additional touch points and communications to the customer through that process. Did you have a great experience? Do you need anything else? Can you give us a fast start Google rating to drive up, you know, 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'll be launched across our entire system. And then 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.

Speaker Change: Do you need anything else? Can you give us a five-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'll be launched across our entire system. We have successfully piloted it in multiple locations already.

Speaker Change: 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 the 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.

George Tong: 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 a cultural change that takes time. As you train people on the standard operating procedure, then hold people accountable to comply with that procedure and make 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.

Kim Scott: But I will also tell you some of this is cultural change that takes time as you train people on the standard operating procedures and holding people accountable to complicit that procedure and making sure that we are doing what we said every day and 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.

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

Kim Scott: That is helpful. And you motivated pricing increases this quarter to preserve retention rates, which worked.

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

Rick Dillon: Can you provide your latest pricing outlook for the next couple of quarters and when you believe pricing growth can accelerate as your service quality improves? So, without guiding to pricing going forward in 25, as I said earlier, we moderated pricing and we expect full year pricing to land in between one and two percent in terms of in your impact of pricing. As we talk last call, we expect to continue to do our normalize 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 25.

Speaker Change: So, um, without...

Speaker Change: Guiding to pricing going forward in 25. 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

Speaker Change: 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.

Unknown Executive: Thank you.

George Tong: Got it. That's all, folks. Thank you.

Kim Scott: Well, in closing, I would just like to thank all of you for joining our call today. You know, I want to reiterate that Vestis is a great business with a 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.

Oliver Davis: And we'll take our next question from Oliver Davis, Redburn Atlantic. Yeah, so you're seeing a nice acceleration in the level of cross-selling this year. So can you just talk about how you see that kind of folks' acceleration continuing, you know, into next year?

Speaker Change: Got it. That's all folks.

Speaker Change: And we'll take our next question from Oliver Davis, Redburn Atlantic.

Oliver Davis: Hi, Dan.

Unknown Speaker: You've seen a nice acceleration in the level of cross-selling this year. Can you talk about how you see that acceleration continuing into next year? Secondly, can you comment on the turnover of sales employees and how well-staffed you think you are there?

Kim Scott: And then secondly, can you just comment on the turnover of sales employees and how well staffed you think you all are? Yeah, so I'll start with our well service representatives. We are very pleased with the work they're doing to cross-sell. We shared it. We've seen a hundred 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 transferring share of wallet and bolting on the existing products and services to customers that we're already visiting, it's very attractive revenues that we're very pleased.

Speaker Change: Yeah, 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 shared 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 representative, in some instances hit the watermarks that we modeled. And so our strategic plan, you know, 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

Kim Scott: We have also seen our well service representatives, in some instances, hit the watermarks that we modeled. And so our strategic plan, you know, 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, we are seeing some of our RSRs hit those watermarks for capturing very high levels of wallet and share with customers. So we feel very good that we can continue to accelerate sales with that team. And those are very attractive sales.

Speaker Change: and some of our RSRs, TIPIs, watermarks.

Speaker Change: 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 sales. 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 rates. And that is on a lower headcount. So we're definitely seeing productivity up with that team as well.

Kim Scott: 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.

Kim Scott: And I'm very proud of our 5,000 or so teammates who have been making that happen.

Kim Scott: As it relates to new logos and new spells, I think you asked about the frontline productivity of those teammates. And we are also seeing those teammates sell at our rates. We mentioned that we're up 17% on new business wins versus our year rate. And that is on a lower head count. So we're definitely seeing productivity up with that team as well. Thanks.

Unknown Executive: Thank you.

Speaker Change: Thanks.

Kim Scott: This concludes the Q&A portion of today's call.

Speaker Change: Thank you.

Kim Scott: 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 this 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 markets. So thank you for joining us today. Thank you.

Speaker Change: 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 a closing remark.

Operator: 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.

Kim Scott: 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.

Unknown Executive: This concludes today's Vestus Corporation fiscal 3rd quarter 2024 earnings conference call.

Speaker Change: 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.

Unknown Executive: Please disconnect your line at this time and have a wonderful day.