Vestis Corp Q4 FY2023 Earnings Call

Welcome to the Inaugural Earnings Call for Vestis Corporation's Fiscal Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are in listen-only mode and questions will be taken after the presentation. Now, I will turn the call over to Valerie Haertel, Vice President of Investor Relations.

Thank you, Chelsea, and good morning, everyone. We appreciate your participation in Vestis Corporation's fourth quarter and fiscal 2023 earnings call. Joining me today are our President and CEO, Kim Scott, and our CFO, Rick Dillon. A telephonic replay of this call will be available on the Investor Relations section of vestis.com. Access to the replay and materials related to today’s discussion can also be found on the Investor Relations website. Before we begin, I want to remind you that this call may contain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements involve management's future expectations, beliefs, estimates, plans, and prospects and are subject to various risks, uncertainties, and other factors that could cause actual results to differ materially. These risks and factors are detailed in our periodic and current reports filed with the Securities and Exchange Commission. We do not assume any obligation to update these statements. With that, I would like to turn the call over to Kim.

Thank you, Valerie. Good morning, and thank you for joining Vestis' first earnings call as a standalone public company. We completed our spin-off of Aramark on September 30, an achievement that was only made possible thanks to the hard work of our 20,000 dedicated teammates. I would like to thank the Vestis Nation for their unwavering commitment to our customers and to each other as we work together to deliver this tremendous outcome. Every day, our outstanding teammates bring our purpose to life inside the company, delivering uniforms and supplies that empower people to do good work and good things for others while at work. We are doing important work, work that makes a positive difference in the lives of so many. Turning now to our Vestis results, we delivered strong financial performance in 2023 with revenue growth of 5% and adjusted EBITDA margin of 14.3%, an increase of more than 40 basis points. As Rick will touch on in more detail in a moment, we delivered this growth and margin expansion as a result of strong performance against our strategic initiatives, which are focused on high-quality growth and efficient operations. We saw continued positive performance trends throughout the year, and we have entered 2024 with great momentum as our strategic plan gains traction and operating leverage begins to emerge. We are pleased to share our outlook for fiscal year 2024, a revenue growth rate of 4% to 4.5%, which is well above our historical norms of approximately 2%. We will deliver 50 to 60 basis points of EBITDA margin expansion, which will be offset by the introduction of $15 million to $18 million in public company costs in the period. As a result, we will maintain our FY '23 EBITDA margin at 14.3% while absorbing these go-forward public company costs. Throughout 2023, we continued to establish a strong foundation for profitable growth through the advancement of our strategic initiatives that we outlined at the Vestis Analyst Day back in September. As a reminder, our strategic imperatives include the delivery of high-quality growth, efficient operations, disciplined capital allocation, and a performance-driven culture. We are pleased with the progress we are making against these imperatives. Our top-line results reflect our strategy to grow with existing customers through cross-selling workplace supplies. We delivered 9% growth across workplace supplies in 2023. We are grateful to our frontline route service representatives for the work they are doing to support our growth and provide these value-added services and products to our customers, with sales activity taking place across 96% of our routes in 2023. This focus on capturing share of wallet with existing customers and driving up the revenue per stop at a customer location contributes to a higher flow-through on revenue, aiding in our delivery of margin expansion. We will continue to deliver top-line growth while also improving our revenue mix. To that end, we will exit a relationship with a large direct sale customer in FY '24 and through FY '25, improving our consolidated margin by approximately 3 basis points on a fully annualized basis. We will continue to focus our energy and our resources on high-quality growth, including our key micro-vertical targets we discussed in September at Analyst Day. We remain focused on optimizing our revenue mix to support density and operating leverage across our network. Our focus on efficient operations has contributed to our margin expansion and is establishing the foundation for a more disciplined and modernized operating environment that will serve us well in the years ahead. Our team has activated our plan to optimize our network, reduce empty miles, and lower fuel costs by simply serving the right customers from the single most efficient location. This will also allow us to leverage latent capacity at our existing locations. Taken together, we believe we have $30 million to $50 million of potential cost savings or redeployable capacity that will be unlocked across our system over the next five years. This is a tremendous opportunity to leverage the assets we already have in our system, and it gives us confidence that we can accelerate growth without a significant capital outlay. In FY '23, we successfully completed more than 20 last-mile optimization events across our network in support of this initiative. We also organized our team for success in FY '23 in support of our strategy, which has resulted in lowering operating costs across the company. This proactive initiative has prepared us well to absorb the incoming public company costs as we enter FY '24 as a standalone public company while maintaining our FY '23 adjusted EBITDA margin level of approximately 14.3%. We are also progressing our efforts to improve the rigor applied against merchandise management or inventory reuse as we call it, which will reduce the amortization costs on our garments over time. Before I turn the call over to Rick, I would be remiss if I didn't touch on the incredible culture we are building here at Vestis. I am so inspired to come to work every day surrounded by our exceptional teammates. They are highly engaged to deliver against our plan, committed to serving our customers with excellence in every interaction, and embracing change while growing and advancing themselves each day as we teach them new and better ways to do things across our business. I couldn't be more proud of this team and all that we are accomplishing together, blazing new trails that lead to growth and margin expansion while building the Vestis brand and uniting around our shared purpose as an organization. Looking ahead to 2024, we are well-positioned to deliver healthy revenue growth and margin expansion that on a normalized basis is already within the long-term target range that we provided at Analyst Day. We will continue to advance our strategic initiatives to drive high-quality growth and enhance our operational productivity. As Rick will share, we expect to deliver healthy and stable cash flows that will allow us to delever while continuing to invest in our business. I believe our opportunity ahead is significant and our pathway to value creation is clear. I will now turn things over to Rick before we take your questions.

Thanks, Kim, and good morning, everyone. Before we dive into fiscal 2023 results, just a quick reminder of the accounting basis for our reporting. Fiscal '22 and '23 results are prepared on a carve-out basis as Vestis did not operate as an independent company. These results are different than the segment results reported by Aramark, as they include certain allocations of Aramark corporate expenses, additional accounting adjustments, and previously eliminated revenue from services provided to Aramark. The allocated costs do not fully reflect the additional costs associated with providing these services as an independent company. I will come back to that when we look at the actual estimates of public costs in a moment. So with that level setting, let's move on to more details on fiscal 2023. Revenue for fiscal '23 was $2,800,000,000, up approximately 5% from fiscal '22. Workplace supplies were up approximately 9% year-over-year, while uniform revenue was essentially flat. Our results reflect our focus on expanding our relationships with existing customers and the strategic shift in our approach to new business. Both years include $26 million in revenue from a temporary energy fee that was implemented late in the second quarter of fiscal '22 and continued through the end of the second quarter of fiscal '23. Currency negatively impacted growth by 60 basis points in the year. From a segment perspective, U.S. sales were up 5.2% and Canadian sales were up 4.1%. The mix of growth between uniforms and workplace supplies was consistent with our consolidated growth across both segments. Moving on to adjusted EBITDA for the year. Adjusted EBITDA was $404 million in fiscal '23, an increase of approximately 8% compared to the prior year, with the U.S. up approximately 9% and Canada down 13%. The operating leverage from sales volume pricing actions and $15 million in structural cost reductions were partially offset by increases in cost of services and other SG&A expenses. Cost of services increased by 3%. Half of the increase is associated with higher merchandise amortization costs from increases in circulating inventory during fiscal 2022 to support demand recovery post-COVID. The other half is attributable to increased labor and energy costs year over year. While energy costs remained elevated throughout the year, we did see some moderation starting in the back half of the year. SG&A expenses include an incremental $12 million in structural costs associated with establishing the leadership team and corporate functions needed for a public company. From a segment perspective, U.S. profitability was driven by operating leverage on revenue growth, a favorable mix towards workplace supplies, as well as momentum in our operating efficiency initiatives. The decline in profitability in Canada is attributable to prior year wage of fees and a gain on a property sale that did not repeat in the current year. Additionally, investments in rental merchandise inventory to support COVID demand recovery more than offset the benefits from operating leverage on revenue growth, pricing actions, and the impact of operating efficiencies during the year. Overall adjusted EBITDA margins expanded by 42 basis points in fiscal 2023 to 14.3% after absorbing $12 million in incremental public company costs. So let's look closer at public company costs. As noted, our results include the $12 million in permanent structural costs, and we expect to incur an additional $15 million to $18 million in fiscal '24 while completing the build-out of our corporate structures and our IT infrastructure. That's inclusive of TSA costs. As we complete our separation activities during '24, we will utilize a transition services agreement with Aramark to provide monthly bridge support. The support will decline throughout the year as we stand up our own functions. There will, however, be some periods of overlapping costs, but we expect to be fully operational by the end of fiscal '24. So all in all, we expect to see public company costs and TSA payments in the range of $27 million to $30 million for 2024, while our permanent structural cost run rate will be about $20 million to $25 million starting as we enter 2025 post-TSA. Moving on to liquidity, we generated $257 million in cash from operations during fiscal '23, an increase of approximately $24 million. The increase is primarily attributable to higher rental merchandise ads in the prior year compared to the current year and lower year-over-year growth in receivables attributable to timing. The actual investment in in-service inventory or the cash impact was in fiscal 2022, and the increase in amortization impacted results in 2023. Additionally, we saw a use of cash for accounts payable during the year driven primarily by the timing of payables heading into the spin transaction. CapEx was $78 million for fiscal '23, up slightly from 2022 and just under 3% of our total revenues. Free cash flow was $190 million, up $27 million from the prior year. We entered into a $1.8 billion credit agreement on September 29 as part of the spin transaction. The facility includes a $300 million revolver and two term loans. On the last day of fiscal '23, just before the completion of the spin-off, we drew on the two term loans, totaling $1.5 billion, $800 million maturing in two years and $700 million maturing in five years. The revolving credit facility was undrawn during fiscal '23. We ended fiscal '23 with $36 million in cash on hand and a net debt to EBITDA leverage ratio of 3.95x. The maximum leverage under our credit facility is 5.25x, dropping to 4.5x in March of 2025. We continue to target an optimal leverage ratio of 1.5 to 2.5 by fiscal '26. We are mobilizing to refinance the two-year loan in the second quarter of fiscal '24. We believe our available cash, future cash generation from operations, existing credit facilities, and access to credit markets provide us ample liquidity and the flexibility needed to execute our strategy, reduce our leverage, and return capital to shareholders in the form of a sustained quarterly dividend, as announced earlier today. I'll close with a few more details on our 2024 guidance. As Kim noted, we expect revenues to grow between 4% and 4.5%, when normalized for the $26 million impact of the temporary energy fee in 2023. Our '24 guidance represents a 5% to 5.5% growth in revenue. Our adjusted EBITDA margin guidance has absorbed incremental $15 million to $18 million or 50 to 60 basis points of incremental public company costs in 2024. Depreciation and amortization expense is expected to be $130 million to $140 million. Interest expense is expected to be $115 million to $120 million. We expect CapEx will be approximately 3% of revenue, and our effective tax rate will be approximately 26 million. We estimate we will spend $25 million in fiscal '24 on one-time spin-related costs that are not included in our adjusted margin guidance. This includes approximately $15 million in costs associated with the rebranding of our fleet and signage on our facilities. We expect this process to be completed over the next two years with an incremental $10 million of expenses expected in fiscal '25. Finally, we expect free cash flow conversion to be greater than or equal to 100% of net income to support the pay down of debt and our quarterly dividend. So that concludes our prepared remarks. Operator, I will turn it back to you to open the lines for questions.

Our first question will come from Stephanie Moore with Jefferies.

Maybe just starting with the guidance for fiscal 2024. I appreciate the incremental color that you provided in terms of the lapping of the fuel surcharge. But could you kind of break out as you think about the components of that organic growth guidance and other revenue growth guidance in terms of what you would expect roughly from pricing, cross-sell, new business wins as well as I think you noted you were walking away from that customer in 2023. So those puts and takes would be helpful.

Thanks for your question, Stephanie. So we do expect a bend towards volume in FY '24. As we talked about at Analyst Day, this is not a pricing-based growth strategy. Our aim here is to grow the business in FY '24 and beyond by really driving volume in the base through cross-selling. So we expect healthy growth coming from cross-selling as part of our strategy around workplace supplies. We will also take pricing appropriately as we offset things like inflation and will also continue to protect and grow our existing customer base. But as you noted, we will strategically exit some of these lower-margin customers, so we'll see some erosion in the base at times as we exit. This will be a balance of cross-selling, new business in the micro-verticals, and modest pricing. Rick, anything that you would add to that?

No. In the weighting, we will lean towards the impact of cross-selling. So you see that same overweight of workplace supplies versus uniforms. Yes.

Got it. No, that's helpful. And then just as a follow-up to that question, as we think about your execution of your strategy that you outlined at the Analyst Day, particularly with some of those micro-verticals that you talked about, should we expect to see the Uniform business maybe accelerate a bit versus what we saw in fiscal 2023? Clearly, we're making really nice progress on the workplace supplies, but maybe uniform just a little bit lighter. Should we think about uniform kind of stepping up a bit going forward or continue to be overshadowed by the workplace supplies?

Yes. You should expect that you will continue to see momentum in workplace supplies and a more muted uniforms number, but that is driven by some of the decisions that we're making to strategically exit our direct sale business, which will have an impact on the uniforms number. Just keep that in mind. We are still growing our uniforms business. We're targeting those micro-verticals as well as other verticals and our sales team is driving new business and performing very well. We are just purposely at times exiting some business while also overshadowing that with the workplace supplies. So I would expect you to see a muted uniforms growth rate again in FY '24, but that is a purposeful decision to strategically grow under high-quality verticals while exiting some underperforming businesses.

Our next question will come from Andy Wittmann with Baird.

I guess maybe you can comment on the size of the direct sales customer here that's giving you the 3 basis points of margin just so we can have better context around the magnitude of that?

Yes. Sure, I'd be happy to, and Andy. It's great to hear from you. The customer that we're referring to is, on an annualized basis, about $26 million in revenue. So it's a significant-sized customer for us, and we will see that customer transition out. About half of that will hit FY '24, and about half will hit in FY '25. So about $13 million in this year and $13 million in the year to come. At the macro level, that will have about a 222 basis point impact on the uniform's growth rate on a fully annualized basis, about 92 basis points on our total consolidated Vestis revenue.

Got it. That's super helpful. I was just wondering, do you guys anticipate as you get into reporting your own results as opposed to the carve-out here? Do you expect that you'll be giving an EPS measure in your guidance as well, like an adjusted EPS measure? Or do you expect that we're just going to work on GAAP for now?

Yes. We absolutely will. And I'll let Rick provide some more color here in a moment, but we discussed that as we were preparing for our first earnings and made the decision, given that we had just spun out, not to report that in this particular full year result for FY '24 as we were still a part of Aramark. But we will be discussing and sharing information related to EPS in the future. Rick, anything you'd like to add there?

Yes. Fiscal '23. We will report it for '24. The '23 numbers, as Kim said, there were no shares outstanding. Therefore, reporting an EPS on a pro forma number would not be very indicative of the carve-out. On a go-forward basis, we have a share count; we'll know the dilution impact, and we'll start reporting the adjusted EPS for the quarter. To your point, Andy, you can, of course, get there with what we provided, but you will see us report that.

That makes a lot of sense. I assume that the adjusted EPS includes the same adjustments as the EBITDA. Just to follow up on that, when you refer to free cash flow conversion being greater than 100% of net income, do you mean this in terms of GAAP net income? Is that correct?

Correct.

Okay. Okay. So then, I guess, stepping back, my last question. There's a lot, Tim, that you're doing to move the margin profile in a lot of different ways. As you look here over the past 3 months or so, what are the kind of key initiatives where you're really focused on today that your employees are feeling in terms of how they're going to talk to their customers or changes that they're seeing in the routes or in the plant? What are the real things today that you're working on?

Thanks, Andy, appreciate that question. So cross-selling the base is a very attractive margin-accretive activity. We are hyper-focused on growing share of wallet with existing customers, and we've already incurred that fixed cost. We already have route drivers serving them and plan assets tied to those customer locations. One of the single most important areas of focus that our whole team is rallied around is cross-selling existing customers so that we can capture share of wallet and leverage fixed assets to get that flow-through revenue. I would say our team is fully mobilized. As I mentioned when I was speaking earlier, we had selling activity on 96% of our routes. I shared with you guys during Analyst Day that we were not leveraging our fantastic frontline teammates to sell our customers to cross-sell our customers when I joined the company a couple of years ago. So to be able to share now that we have 96% of our routes containing sales activity is tremendous momentum. That takes the entire organization coming together. So service managers, frontline teammates, managers out in market centers, as well as sales teammates supporting them and marketing with collateral. That is a full-on team effort that everyone is mobilized around. The other really large initiative that requires the whole company to move in the same direction is building a center of logistics excellence. This notion of rerouting customers and conducting flow optimization across these market centers requires a tremendous amount of collaboration between facilities. While rerouting customers, we are working diligently to ensure that this is a seamless and invisible process for the customer. It requires all hands on deck out in the field working together, not just to remap it from a logistics perspective using great technology and tools, but it is also a large change management undertaking that requires all of us to work together to get that done. If I had to highlight key areas of focus, I would say it is cross-selling workplace supplies to existing customers and leveraging those fixed assets while optimizing our network from a logistics perspective.

Our next question will come from Andrew Steinerman with JP Morgan.

Could you please comment on recent trends in Ad Stop, Net New, and Retention.

Ad Stop, Net New, and what was the last one?

Retention.

Got it. We continue to focus on creating an amazing customer experience, and we talked a lot about some of the things that we're doing to enhance that experience by training our frontline teammates and our territory managers with playbooks on how to take care of the customer. We are also providing our route drivers, our frontline teammates, with tools to let them know when there's an opportunity to improve with the customer, along with launching our customer portal, which we're getting great feedback on. So we feel really good about the momentum around protecting and growing our customer base. We are seeing great feedback from our customers around these initiatives, and we feel very good about the establishment of a service excellence culture across the company. We continue to deliver retention rates that are above 90%, as stated in our Form 10. So we continue to emphasize that greatly.

And add stops and net new?

We haven't given out those metrics specifically, but we continue to add new business. We're pleased with the progress that we're seeing from our frontline sales team, and we continue to see growth in our business. We're not really using the quite alert.

Have add stops held up?

We don't actually use a metric of add stop. I think it's important to note on your question around net new that we are shifting away from that net new metrics that we were using at Aramark. It doesn't reflect growth in our base, so that net new metric is a discrete metric around customers who are with you and then leave and are no longer customers. It does not reflect the growth in the base, which is our key focus area. You are going to see us shift away from that new conversation and talk more about macro-level growth that includes cross-selling and adding products and services to existing customers, and that's not reflected in that net new number.

Our next question comes from Shlomo Rosenbaum with Stifel.

You've been focused a lot on the efforts to improve the cross-sell, and you talked about 96% of the routes are selling now. Where do you think you are in terms of making the shift in the culture to a more sales-oriented culture and selling across the base? Do you think you're really humming along? Do you think you are about 50% there? It's a significant change from the way the company had operated for literally decades. Maybe you could talk about where you are now and how long do you think it would take to really be firing on all cylinders?

I think we still have work to do. I'm pleased with the way the team has embraced the everyone-sells culture and mindset that we're working to create, Shlomo. That is a massive cultural shift to move a company to a mindset of growth. We have made great strides as evidenced by 96% of our routes having sales activity and teammates beyond dedicated sales teammates helping to sell and grow our business, particularly harvesting the base and capturing share of wallet with existing customers. I would tell you that I think we have a long way to go, which is encouraging because we're seeing great results well above our historical norms. You can see that reflected in our guidance as we're projecting 4% to 4.5% growth when historically, this business was growing at a mere 2% or so. And you also know we're shedding some unprofitable business at the same time. I'm pleased with where we are, but I think we can do much better. We continue to bring tools and resources and really encourage and arm the team with the right tools that they need to grow the business. I don't want to gauge it at 50%, but I'd say we are maybe halfway there. That excites me, so I don't say that as a criticism; I'd say that as we're doing a great job. Our teammates are responding well; they're excited. They're proud to be a part of growing this business. I think they're recognizing the latent potential that is untapped and people are pretty fired up about bringing that to life. So more to come on the culture front.

Great. And then maybe this one is for Rick. Can you talk a little bit more about the sequential margin improvement? Obviously, there's a pretty good cadence over here. Can you talk about what changed from like June to September? Is this going to be a consistent grind forward? Obviously, I understand the TSA and the additional public company costs, but maybe you could talk about if there are some key items that drove that margin expansion? And then maybe if there are a few other ones that we should be looking towards for the next several quarters and throughout the year?

From a quarterly progression Q3 to Q4, there were quite a few types of moving pieces driving that activity. In our fourth quarter, we had many benefits around customer closeouts and contests that drove that Q4 increase in profitability. It's a normal cadence. If you go back and review the last 2-3 years, we see that normal Q1, Q2, Q3, Q4 glide path. We expect to see that moving forward. Regarding your question about how you should be thinking about it, we are guiding the quarters. We included the earnings release, the quarterly history so you can take a look at that. The movement from Q3 to Q4 reflects having a full quarter of our cost-out actions reflected in our results as well.

Our next question will come from Oliver Davies with Redburn Atlantic.

Just one for me. On margin, can you just talk about sort of the current cost inflation you're seeing, I guess, across labor, materials, and fleet and sort of how you see that evolving into 2024?

Sure. I'll start, and then I'll kick it over to Rick for more detail. From a labor perspective, and we talked a little bit about this in the past, we actually have pretty good predictability around labor because we have a unionized workforce. The collective bargaining agreement negotiations are predictable for us, and we have history as a guide to determine where we think those negotiations will land and what that would equate to in terms of increased wages. So we anticipate about 5% wage inflation across the 5-year period, 5% on an annualized basis. This has played through over the last couple of years. That’s what we're assuming in FY '24 as we put this guidance forward. We're seeing muted energy costs. I'll let Rick kind of touch on that in a bit, but we're generally seeing a very predictable supply chain forecasting activity since we're purchasing inventory in advance and then issuing it over a period of growth. So we have good forecasting capabilities for our key cost drivers, and we're not seeing anything surprising or unusual as we build out the FY '24 plan. Rick, anything you want to add there?

Regarding energy costs, as I noted, we did see moderation relative to 2022, which was at some peak highs. When you looked at energy for 2023, we saw high energy costs in the first half and moderation in the back half. The forward view is a bit choppy. In our guidance, we've assumed we stay elevated at an average for 2023. We are monitoring energy costs, and on any given week, the forward view is up or down depending on economic factors.

Our next question comes from Manav Patnaik with Barclays.

This is Ronan Kennedy on for Manav. As a follow-up to that, on the assumptions for wage and energy inflation, how would you characterize the macro environment and the demand backdrop now? Anything to call out demand-wise within your key verticals versus in terms of stronger or weaker demand? And then Rick just touched on the expectations for energy, et cetera. What are you assuming from a broader macro-outlook standpoint for '24?

From a demand perspective, we've focused on cross-selling existing customers in products and services that they're currently self-serving. For us, there's plenty of demand that can be created. We are seeing in our retention numbers as we look at customer trends; we observe some closures of business and sales of businesses taking place in that business changing hands, which feels pretty stable. Nothing erratic to report regarding customer behavior; we're well-diversified across many different end markets. We feel comfortable being insulated from any decline in a particular segment or industry. By continuing to harvest share of wallet with existing customers, there's plenty of space to grow regardless of the macro environment. You will recall in Analyst Day, we sized this market at $48 billion across all products and services that we offer. There's ample opportunities. We feel we have a solid understanding of the cost drivers in our business and what we think is happening from a macroeconomic perspective related to those drivers, whether energy, labor, or other supply chain costs. We see a good path forward for FY '24 with a good understanding of potential headwinds. We have great plans to offset those headwinds through your operational efficiency actions, and we've demonstrated our ability to price appropriately for inflationary impacts. Rick, anything you would add?

I would just say we haven't assumed in the plan broadly a market downturn. We are focusing on all the things Kim described. We believe we have a good mix in that environment of workplace supply, which is less employee-centric and margin accretive. We feel good about our positioning but we take necessary actions to preserve profitability should that occur.

Yes. We will be agile and monitor closely what's happening in various end markets and adjust our targeted sales activity accordingly to where the demand exists.

That's very helpful. As a follow-up, could you reconfirm regarding the progression for the targeted margin expansion after '28? How should we think about that kind of sequentially year-to-year and the key contributors, if it's initially leveraging sales growth until we start to see more benefits from field workforce optimization or operating efficiencies?

As we've talked about before, we didn't build this as a hockey stick. There won't be massive spikes in performance; this is a slow and steady wins the race plan for us. In FY '24, which is the first year of our five-year plan, we are effectively ingesting our public company costs. We're pleased to see that we are going to, at a minimum, hold the line on margins from FY '23 through FY '24 while absorbing those public costs. What you'll see is strong underlying performance with 50 to 60 basis points of margin expansion occurring in the underlying business, and we're using that to offset the ingestion of those public company costs. If you look at what's happening, you will definitely see margin come through and operating leverage emerging. We are taking advantage of cross-selling the customer base and leveraging fixed assets. The revenue is generating margin expansion. We are also steadily focusing on flow optimization and driving efficiencies through these logistics initiatives we've talked about. All these initiatives are currently in motion; we are optimizing flows and cross-selling customers. This growth is gradual and there are no new initiatives that need to gain traction three years from now to deliver the results we're talking about. So think of it as a slow and steady wins the race strategy. You'll continue to see us working on these initiatives and margins will continue to flow as operating leverage opens. You should see a muted performance in fiscal '24, but the underlying performance is strong and will show through by FY '28.

Our last question will come from Scott Schneeberger with Oppenheimer.

It's Dan for Scott. Just a quick one on the trends you've been seeing in medium-sized enterprises versus national accounts. If you can please discuss recent trends there and how you see that developing into next year?

Thanks for your question, Scott. It is good to hear from you. We focus on both groupings of customers because they add great value. Our national account customers can form the backbone of your supply chain and create density. We've got a team out there hunting and harvesting national account customers. Those customers, as you know, often stay with us for over 20 years. They're valuable customers with great lifetime value. Small to medium enterprises (SMEs) are very margin-accretive, and there's great potential for cross-selling once you bring those customers in-house. We focus on creating outstanding customer experiences with those SME customers, so we can retain them and cross-sell effectively. We analyze recent losses in that segment through our inbound call center, tying recent closures to that. Trends indicate that about 25% of these inbound calls relate to business closures or business sales. We can retain those customers, but we are keeping an eye on that trend. Otherwise, SMEs are very open to outsourcing additional workplace supplies. We are getting a tremendous response as we cross-sell existing customers; there's a willingness to give that up so they can focus on core business.

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

Thank you for joining our call today and for your interest in Vestis. We are pleased with our FY '23 performance and the great progress that we are making against our strategic plan. The opportunities for us are tremendous as we move forward, and our future remains bright. Thank you for joining us today.

Thank you. This concludes today's Vestis Corporation fiscal fourth quarter and full year 2023 earnings conference call. Please disconnect your lines at this time, and have a wonderful day.