Welcome to the Vestis Corporation Fiscal First Quarter 2024 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions following the presentation. I would now like to turn the call over to Bryan Johnson, Chief Accounting Officer. Please go ahead.

Thank you, Angela, and good morning, everyone. We appreciate your participation in Vestis Corporation's fiscal first 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 website under the Investor Relations section. Before we begin, I would like to remind you that this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about management's future expectations, beliefs, estimates, plans and prospects. Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in our periodic and current reports filed with the Securities and Exchange Commission. We do not undertake any duty to update them. With that, I would like to turn the call over to Kim.

Thank you, Bryan. Good morning, everyone, and thank you for joining our fiscal first quarter 2024 earnings call. Before I discuss our results, I'd like to thank our 20,000 dedicated teammates for their outstanding work and unwavering commitment to our success as we complete our first quarter as a stand-alone, publicly traded company. Every day, our teammates are focused on taking great care of our customers and each other. We continue to bring our purpose to life here at Vestis, delivering uniforms and workplace supplies that empower people to do good work and good things for others while at work. You may have also seen our filing yesterday that Chris Synek, who was our Chief Operating Officer for a short time, has resigned from the Company for personal reasons. We appreciate Chris' contributions to Vestis and we wish him all the best. Now, turning to our results. In the first quarter, we delivered disciplined, high-quality revenue growth of 2.5% and an adjusted EBITDA margin of 13.7%, which is up 60 basis points from Q1 2023 and includes the absorption of incremental public company costs in the period with earnings per share of $0.22 in the quarter. Last year's first quarter revenue included the benefit of a $13 million temporary energy fee that did not repeat in the quarter. Excluding the impact of this temporary energy fee and impact from foreign exchange rates, revenue growth was 4.5% with a balanced contribution from both volume and pricing on an underlying basis. This demonstrates that our high-quality growth strategy is effective and accelerating our ability to grow well above historical norms. As Rick will cover in more detail, we continue to remain disciplined and focused on delivering growth that improves our revenue mix and generates operating leverage across our system. We are pleased to see the positive results of our strategy manifest as we deliver growth and margin expansion in tandem while also absorbing new public company costs that entered our system in the quarter. Our results also support our capital allocation strategy, with deleveraging as a priority. As we move through the balance of the year, we expect acceleration in our growth rates that will follow similar patterns from prior years and additionally, we will lap the temporary energy fee beginning in Q3. We are also seeing opportunity for additional pricing actions in the back half of the year. As a result, I remain confident in our ability to deliver our full year guidance of 4% to 4.5% revenue growth and adjusted EBITDA margin of 14.3%, which, as a reminder, equates to approximately 50 basis points to 60 basis points of margin expansion offset by the impact of new public company costs in the period. During the first quarter, we continued to advance Vestis' strategic plan which we shared with you during our September 2023 Analyst Day. We are generating great momentum as we execute against our strategic priorities, which include high-quality growth, efficient operations, disciplined capital allocation and a performance-driven culture. Turning to high-quality growth. We continue to prioritize the highest margin growth opportunities, both within our existing customer base and as we target new customers in select verticals. You can see the positive impact of our strategy in the quarter as we continued to intentionally shift our mix towards higher penetration with existing customers on existing routes, largely through our route service representatives cross-selling workplace supplies to our current customers. Workplace supplies growth was approximately 4% in the quarter, supported by an approximate 25% increase in route sales activity versus this period last year. Our mix shift also includes a purposeful moderation of our lower margin direct sales business and when excluding the impact of this strategic decision, our uniforms business grew approximately 1% this quarter. This mix shift related to direct sales also delivered approximately 3 basis points of margin improvement across our consolidated results. In parallel, we continue to execute against our efficient operations initiatives. We are delivering a step change improvement in the way we operate, optimizing our network, reducing empty miles and lowering fuel consumption across our system. In the first quarter, we have already completed another 13 route and network optimization events with many more planned for the balance of the year and beyond. This demonstrates great momentum when compared to the 26 events we completed last year. Year-to-date, we've successfully deployed new telematics technology across 89% of our fleet and fully deployed new routing and scheduling technology and processes across North America, all a part of our strategy to establish the capability to continuously optimize our network and our routes. We've also accelerated our work on reducing amortization costs through the reuse of existing garments in our system. In the first quarter, we saw improvements in our used fill rate across 103 of our target facilities. These efforts will serve us well in the coming years as existing amortization rolls off and we accelerate the reuse of existing garments across our stockrooms over time. We remain committed to delivering profitable growth that leverages existing capacity across our network, therefore, requiring modest capital investment of approximately 3% across the five-year period. We also remain focused on strengthening our balance sheet position. As Rick will discuss, we are currently in the market on the refinancing of our two-year term loan. And overall, we seek to operate in a target leverage range of 1.5 times to 2.5 times and maintain a flexible financial position that will continue to allow us to invest in high-return opportunities in the future. So, in summary, this is a fantastic business and we see tremendous opportunity for continued value creation. We are delivering against our plan and our commitments and we remain confident in our full year outlook. We are making substantial progress against our strategic initiatives and we continue to build an amazing and inspiring culture here at Vestis, supported by our incredible, highly engaged teammates who, quite frankly, are enjoying the thrill that comes with winning. I'm delighted with our progress and excited about what lies ahead for us. I'll now turn things over to Rick to cover the financials in more detail before we take your questions.

Thanks, Kim, and good morning, everyone. Before I jump into the first quarter results, I'd like to remind you that prior year reporting is on a carve out basis and does not fully reflect the additional costs associated with operating as a stand-alone public company. So, turning to the first quarter results, revenue of $718 million increased 2.5% year-over-year. Excluding the impact of the temporary energy fee and foreign exchange, revenue grew 4.5%. Revenue from workplace supplies is up 4% and uniforms is up 0.2% compared to the prior year with a balanced contribution from volume and price on an underlying basis. As a reminder, uniforms include our direct sale business which is down approximately 4% year-over-year as we continue to optimize the business as part of our high-quality growth strategy. As Kim noted, excluding direct sales, our uniform business grew 1% in the quarter. From a segment perspective, U.S. sales grew 2% and Canada sales were up 3%. The mix of growth between uniforms and workplace supplies within the segments was consistent with our consolidated results. Turning to profitability. First quarter 2024 adjusted EBITDA was $98 million, an increase of 7% year-over-year. The U.S. segment increased 13% while Canada declined 5%. The favorable impact of operating leverage from revenue growth with existing customers, $7 million in carryover benefits from workplace optimization actions taken in the back half of fiscal 2023 and lower energy costs more than offset the impact of increased labor costs, increased bad debt expense and $3 million of incremental public company costs. Lower energy costs were driven by reduced fuel consumption from our route optimization efforts and favorable rates, primarily on natural gas utilizing our plants, which were in line with expectations. The increased bad debt expense year-over-year is because the prior year's first quarter profitability included the favorable impact of a bad debt reserve reduction to right-size the reserve or improve collections that did not repeat in the current year. As a reminder, we continue to expect incremental public company costs of $15 million to $18 million for the year inclusive of TFA payments to Aramark as we build out our corporate structure and IP infrastructure. Profitability of our Canada segment was negatively impacted by increased merchandise amortization costs as we made strategic investments to improve product quality for our customers and higher-than-expected fleet maintenance costs. Overall adjusted EBITDA margin expanded 60 basis points year-over-year to 13.7%. Interest expense on our outstanding term loans was approximately $29 million in the quarter and our effective tax rate was 27% in line with expectations, all combined to deliver an adjusted EPS of $0.22 per share for the first quarter of 2024. Moving on to liquidity. We generated $51.5 million in cash from operations in the first quarter, an increase of $43.5 million. Prior year operating cash reflects an inventory build in early 2023 to support growth and a $16 million payment of deferred payroll taxes under the CARES Act. Capex was $17 million during the first quarter of 2024, up slightly from last year and in line with our expectations. Free cash flow in the first quarter was $34.6 million with cash conversion in excess of 100% of net income. We ended the first quarter with $48.9 million in cash on hand and a net debt-to-EBITDA ratio of 3.85 times. We recently launched a process to refinance our two-year $800 million term loan with a seven-year term loan B, and we expect to close the transaction in the coming weeks. The term loan will mature in 2031 and our existing five-year term loan matures in 2028. Once the financing is complete, our new capital structure will continue to provide us the flexibility we need to execute our strategy and support our capital allocation priorities, including achieving our optimal net leverage range of 1.5 times to 2.5 times by fiscal 2026. Before we turn to your questions, I'd like to take a moment to discuss the full year outlook. As Kim mentioned earlier, we remain confident in our ability to deliver our full year guidance of 4% to 4.5% revenue growth and an adjusted EBITDA margin of approximately 14.3%. As we look forward to the balance of the year, we expect to see revenue growth patterns that are consistent with prior years. So if we look at the quarterly growth rates in fiscal 2023, adjusting for the impact of the energy fee in the first half, growth accelerates as we move through the year. We lap the temporary energy fee at the close of the second quarter with a $13 million impact in Q2. Our initiatives to drive disciplined, high-quality, profitable growth are gaining momentum, and we look forward to sharing more as we progress throughout the year. That concludes our prepared remarks, and operator, please open the lines for questions.

The floor is now open for questions. Thank you. Our first question comes from Seth Weber with Wells Fargo Securities. Please go ahead.

Oh, hey, guys. Good morning. Thanks for taking my question. I guess, maybe Kim, in your prepared remarks, you mentioned something about an opportunity to get more pricing as we're going through the year. I was wondering if you could expand on that a little bit.

Yeah, certainly, and good morning, Seth. Thank you for your question. So we do see the opportunity to take some incremental pricing in the back half of the year. We've been very thoughtful, and I would say somewhat moderate about pricing in the first quarter. You all know we've been very diligent about passing through inflationary costs over the last year to year and a half in our business. And so, we’ve been managing that, monitoring it very closely just to see customer attrition and modeling and understanding how customers are responding. So we have some carryover pricing that's still coming into our business from FY 2023 actions. And aside from that, we took very moderate normal levels of pricing in Q1 related to our typical annual price increase process, but we have been surgically analyzing opportunities to take price more strategically, and I'll give you some examples around what I mean by that. What I mean by that is, looking at customer cohorts and identifying groups of customers that may be underpriced on specific products, for example. So we segmented our customers. We identified customers who may have certain products or services that are below the average as it relates to price. So we will be taking price around certain specific kind of product lines with those customers. We've identified customers who may receive more than one stop in a week, but they're only being charged for one stop. And it's very appropriate that there would be incremental charges for multi-day service. So we've identified that cohort of customers and we'll be taking price to charge those customers accordingly for multi-day service. And then we'll also take some more general pricing, but in a very surgical way, with a lot of analysis around which customers will be impacted and what the current relationship and state of the relationship is with that customer. So we definitely see the opportunity. We will be doing that in the back half of the year, particularly towards the end of the second quarter, quite frankly. And then you'll see some of that roll through in the third and fourth.

Super helpful. Thank you. And then, Rick, if I could ask a follow-up. Regarding Canada, the increased investments in new merchandise and elevated fleet maintenance costs, do you expect that to continue throughout the year, or is it more of a first half occurrence? Specifically, how should we consider the maintenance costs?

Yeah. So I'll kind of take that to start with, and then, Rick, you can jump in if needed. So there are really kind of two drivers in Canada, as you heard from us. You have a driver around some higher amortization costs related to some new product that we injected into the system really for customer satisfaction. Some of it was for new business because you can see those growth rates in Canada. But we also made a purposeful decision to inject some new products into existing customers, really kind of self-funding quality, if you want to think about it that way, in the name of customer satisfaction. So those products carry amortization steps. So you'll see them with us for a while until we lap the amortization of whatever those particular products were based on their lifecycle. And then as it relates to fleet maintenance, we've actually done a great deal of evaluation related to the Canadian fleet. And we found that historically, before my time and before we brought in new logistics leadership, the Canadian fleet wasn't really a part of the central procurement strategy as it relates to allocating new fleets and new assets to the field. And so, we found an opportunity to start upgrading the age of the fleet in Canada. And before that opportunity was identified, they were driving more than normal maintenance costs. And so, that's what caused us to ask the question, 'Hey, what's happening with maintenance costs in Canada?' And as we evaluated that, we discovered that the Canadian fleet was significantly older than the U.S. fleet. So we recognized an opportunity to inject some more assets. And it's really not about injecting more capex in our total system. It's just about redirecting some of the fleet that we would have put into the U.S. into Canada. So they're slated now to get about 102 new assets in their market in the fiscal year. And over time, that will help improve the age of the fleet and it'll start lowering that maintenance cost. So it's hard to tell you exactly when you're going to see that cost dissipate 100%. But we certainly know that we're taking the right actions by upgrading the age of the fleet. And you'll begin to see that maintenance cost roll off over time.

Appreciate the color. Thank you guys. Take care.

You bet. Thanks, Seth.

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

Hi. Thank you very much for taking my questions. I thought I would just start with what progress you're seeing in terms of the cross-sell? It's a major focus for the Company. And are you seeing that progressing, strengthening as the quarter goes on? And maybe just take the opportunity to discuss the overall selling environment and maybe I'll follow up after that.

Yeah, certainly, Shlomo, good morning and thank you for joining us and for your question. So, to begin with on cross-sell, which, to remind everyone, is really leveraging our outstanding route service representatives who are servicing our customer on a weekly basis to also cross-sell existing products and services to them that they're not using today. And if you guys will recall, we called out in the Analyst Day that about our customers are only using about 30% to 40% of the available products and services. So it is a key component of our strategy to cross-sell the base and to gain share of wallet with existing customers, increase revenue per stop. We are very pleased with the way that our route service representatives have embraced this as a new part of our DNA and a part of our go-forward strategy. So we are seeing momentum build. In fact, you might have heard me call out that when you compare routes that had selling activity on them in Q1 of this year versus Q1 of last year, we're seeing roughly a 25% increase in selling activity. So we know that we have, earlier in the year than we did last year, more activity around route sales. We're in the middle, as an example right now of a route sales contest, which is where we get a dramatic lift in revenue per stop with our route service representatives. And we are definitely seeing momentum build around that as we launch the contest, which is a normal part of our cycle and we expected to do. So we feel very good. It'll be a while before you actually see the number of products and services per customer moved dramatically. So we're not going to try to share that metric every quarter because it would be rather static. But probably on an annual to 18-month basis, we'll relook at the total number of products and services used per customer and use that as a proxy for success as well. But we feel really good about the progress around route sales, and customers are quite engaged around adding additional products and services. Secondarily, to the second point of your question, around the general selling environment, we're also seeing really good progress with our front line account executives driving revenue up per head. And we're working very hard to continue to grow new business, particularly in those target micro verticals that we spoke about. And so, we've thought about building go-to-market strategies for those eight micro verticals. They're all in different stages of their lifecycle, as you can imagine. But auto was the example that I gave in Analyst Day. We're seeing very good progress penetrating that sector. We're seeing leads up in that sector, we're seeing close rates up in that sector. And as an example, we see a 1% improvement in the revenue contribution from automobile dealers now. But we have focused on that vertical, just to give you an example. So overall, we feel good about our progress. We do anticipate a ramp up as we move through the year, very similar to the patterns that you saw last year in our business as you see growth accelerate. And then also keeping in mind that we'll lap that temporary energy fee at the end of the second quarter.

Okay, thank you. Just maybe, Rick, maybe you can just talk a little bit. The growth is supposed to accelerate through the year. Maybe you could give us a little bit of a bridge. There's a couple of moving parts over here you have. In the beginning of the year, I believe there's a rationalization of the direct sales kind of one-off in the SKUs you had, a strategic exit of a client that's supposed to go on, and then you have kind of pricing that's supposed to kick in later. Can you kind of bridge us and how we should think about the cadence of growth through the year and how these different items will impact the revenues for the next three quarters?

We previously discussed a direct sale customer we are no longer working with, which accounted for $13 million in the latter half of the year. This situation will be reflected in our direct sales, particularly affecting our uniforms segment. As we move through the year, we anticipate another quarter in Q2 with energy cost pressures, which will impact our year-over-year growth rate. While we do not provide specific guidance for each quarter, we expect the progression to be similar to what we experienced in prior years, especially in 2023. We are currently reporting a growth rate of 2.5%, and there's another $13 million headwind in Q2. However, we still anticipate growth rates to improve in Q3 and Q4, as we were aware of this situation during our year-end call and have already accounted for it in our guidance.

Okay, thank you.

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

Thanks for taking my question. You mentioned optimization events in your prepared remarks, and I would like you to explain what those are. I believe you said there are 13 of them. I'm trying to understand the significance of an individual optimization event and how we should consider these developments throughout the year and their impact on profit margins.

Absolutely. Good morning, Andy. So, when we are referencing the optimization events related to logistics and routing and scheduling, I take you back to our strategy. When we spoke a great deal about optimizing our routes and building our logistics muscle, and we spoke about the very intensive study that we did with Chainalytics around all of our flows between our plants and our customer locations, and the opportunity to optimize those flows. And you may remember, in Analyst Day, we gave some case studies around some specific markets, and going in and rerouting customers to the proper plant location, but also looking at our cross-docks and depots and where those are located, and identifying opportunities to drive less miles to serve our customers essentially. And if you just kind of summarize it, that's really what we're doing is, we're reducing empty miles across the system, either through mapping customers to the right locations, making sure drivers make all right turns on the routes, and that they're being efficient with how they drive, or also just looking at cross-docks and shuttles that we're doing to drive wasted miles to serve customers through cross-docks versus directly from plants. And so, when we talk about these events, these could be markets or groupings of routes in really large markets where we're going in and actually running optimization, re-planning routes, and putting customers in the right plants on the right routes, and resetting that process. And so, when we say that we've already done 13, picture last year we did a total of 26. And so, what we're trying to emphasize here is that, in the first quarter, we've already done half as many as did last year. And so, we're building momentum around that and when we first started, we had to build the muscle and teach the organization how to do this. I spoke a little bit about ensuring that we got the change management right, that we were engaging with customers, that we were doing the handoff and the change effectively, and creating no disruption for our teammates or for our customers. So we were kind of going slow in the beginning. Not slow, but in a moderated way to make sure we did this thoughtfully. Now we're starting to ramp this thing up and we're gaining more traction. We modeled doing kind of a right-sizing over the five-year period, but at the same time, we're also institutionalizing these tools. So when I talk about adding the telematics across all of our fleet so we can ensure that we're running routes in compliance with how we’d like to do that. And also when we talk about dispatch track being implemented as our routing and scheduling tool, now, it's a dynamic tool. Every time we win a new customer, we're properly adding it to the right route through the lens of logistics. And so, I would think about it as there's a great one-time resetting that's taking place, that drops out dollars in terms of reduced fuel and lowering empty miles. And then there's also this building of this muscle that makes us smarter and better every time we add a customer and run a route in perpetuity. So that's what we're speaking about, Andy, when we talk about these events.

That's really good color. Thank you. I guess, my follow-up question I wanted to ask just kind of about the macro that you're seeing out there. If you could just talk maybe about the level of a benefit that you might getting from added wares or at your existing accounts, or the, I guess, the amount of wins that you're getting from customers that have not been a user of a rental program in the past?

So we are seeing conversion of non-programmers. So when we talk about our account executives outselling, we really enjoy that particular prospect. And so, a lot of our focus while we're out selling new business and prospecting potential new customers are around non-programmers. And so, we are seeing good growth with our account executives, with new business, new customers around non-programmers, certainly. And that is a key focus for us, quite frankly. As far as trends around added wares, quite frankly, it varies by end market. We're quite diversified, as you know, in a lot of different end markets. And so, we are seeing some, like, I'll give healthcare as an example, where we're seeing good growth in healthcare. There are others where restaurants, as an example, where we're actually seeing more closures and more customers that are closing business or going out of business. So it really varies by vertical, Andy. And we're kind of managing that tactically by end market.

Thank you.

You bet. Thank you.

The next question comes from Stephanie Moore with Jefferies.

Hi, good morning. Thank you.

Hi, Stephanie. Good morning.

I wanted to discuss the margin expansion opportunity a bit more. I believe there has been significant progress this quarter. You mentioned an improvement in fill rates and the traction of your inventory reuse program. Can you provide some perspective on where you stand in this inventory reuse program? Any specific key performance indicators or benefits you're seeing at the facility level from your early initiatives would be appreciated. Thank you.

We're very satisfied with the advancements we've made in reusing merchandise, considering this a long-term strategic goal. As we onboard new customers, we introduce new products into our system, which starts the amortization process. Each time a new product is released, we set the clock on amortization, which lasts for a certain duration based on the product and the defined MR timeline. Our efforts focus on enhancing the use of existing garments that are either in our system but underutilized or have rolled off without any associated amortization. Essentially, we've already paid for these items, and they are currently in our stockroom. We've initiated several programs aimed at educating our team on how to more effectively reuse these existing assets, whether they are partially or fully amortized. The response from our field team has been outstanding, and we are beginning to see a notable shift towards prioritizing fast-moving SKUs from our stockroom for customers instead of relying solely on new products. I've mentioned in my script that we have noticed significant improvement in used fill rates across more than 100 facilities. However, it will take time for this to reflect in our financial results, as we still have other products in the system under amortization. You can expect to hear from us in about a year regarding the improvements we've made not only in amortization but also in inventory management and cash flow related to it. This initiative also aims to manage cash better and reduce operating expenses by alleviating the amortization burden through the use of reused garments. Just as a reminder, during Analyst Day, we mentioned a rule of thumb: improving our used fill rate by one percentage point can save around $1.4 million. There's significant opportunity for improvement in this area. While we anticipate progress, I urge you to view this initiative strategically as a longer-term play, which will yield significant benefits once some of the old MR rolls off and we can continue to integrate these reused items to offset the need for new garments.

Great. That's very insightful. Following up on the first question in the Q&A regarding pricing, I'd like to clarify that the initial guidance did not fully consider significant pricing adjustments this year due to current inflation and the opportunities on your side. It appears that you now have some chances to increase prices, which is clear and exciting. Does this enhance our confidence in meeting this year's guidance? Could it lead to potential upside? How should we view this change in pricing?

I see this as extra reassurance to instill confidence, similar to the confidence we have in our ability to increase growth rates in the latter half of the year and meet the 4% to 4.5% target. We plan to seize pricing opportunities whenever possible, but we also anticipate our volumes will increase concerning our route sales average and our AE sales. We have strategies in place to support this growth. Therefore, you should view pricing as a source of reassurance; however, we are being deliberate about how we utilize that option.

Yeah. And the surgical pricing was in our guidance. And so, if you remember, we talked at Analyst Day the disciplined pricing that Kim led with, but that there were opportunities for surgical pricing. And so, we're really just capitalizing on that. We knew it was out there. And we're giving you the flavor of the timing, so that you can help understand the progression of revenue.

Okay. That's clear. Thank you, guys.

Thank you, Stephanie.

The next question comes from Andrew Steinerman with JPMorgan.

Hi. Kim, I thought maybe we could spend a little more time on Chris' leaving. He was COO for really kind of a brief stint. It was great spending time with him in September. You've labeled it as a leaving for personal reasons. So I just wanted to make sure, when we say personal reasons, that means it's totally unrelated to Vestis Management business, etc? And then also, are you going to hire somebody in that COO position now that Chris has left?

Thank you, Andrew, and thanks for joining us today. I want to briefly address Chris' departure. He has decided to leave the organization for personal reasons. To clarify Chris' timeline, he was with us for a very short period. He joined on September 11th, just a couple of days before Analyst Day on the 13th. I want to assure everyone that Chris' departure does not affect our strategy or our ability to execute it. This plan has been underway for more than two years during my time here, and we are confident in continuing our current direction, which was already established prior to his joining. We wish him well and thank him for his contributions during his brief time here. I have no concerns about our business performance or our strategy. Regarding backfilling, I am actually very pleased that the team is now reporting to me again. They were previously under my reporting before the COO role was created, and they are excited about this change. As an operator with COO experience, I enjoy working closely with the business to improve it. We will take our time to thoughtfully consider our organizational design moving forward, whether that includes appointing another COO or adopting a different structure. For now, I am happy to have the team back with me, and we have great momentum as we continue our path. We feel good with no concerns about Chris' departure.

Thanks, Kim.

You bet. Thank you.

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

Hi, good morning. This is Ronan Kennedy on for Manav. Thank you for taking my questions. I was hoping that you could please comment on retention, the trends and the drivers, whether it's service quality, the predictive analytics, the digital tools. And conversely, what reasons for attrition would be outside of the delivery exits, say specifically within Uniform direct sales? And then also, any further color on drivers of new business beyond non-programmers specifically as to how and why Vestis is running?

Sure. I'm sorry. I think we didn't catch your name.

Sorry, it's Ronan Kennedy on for Manav.

Okay. Okay. Yeah. Sorry, I couldn't hear you. Good morning. So we'll start with retention. So just to take you back, we have been talking about retention and using the stat greater than 90%, which is what we filed in the Form-10, and we continue to maintain retention above that level. So I'll start there, that we have no real surprises, as it relates to retention and where we expected to be for the most part. We did talk about some attrition, as it relates to direct sale and some strategic decision to kind of throttle down. So you'll recall in our full year earnings for FY 2023, I shared with you a large direct sale customer that will be rolling off partially in the back half of the year and partially in FY 2025. So we do expect to see that in our numbers. We also have, from time to time, a large national account that may choose to go elsewhere or to self-serve. So you're always going to see some of that. Those are larger events. They happen, as a part of an RFP process. But generally speaking, when you look at the rest of retention, and you look at recent codes to answer your question around why would you see customers leave, we are seeing small to medium enterprise customers with an uptick in business closures. And so just important to note, as we look at recent codes, we are monitoring that very closely. And it's also when you try to drill it down a little bit further, you can see a trend. As an example, in Canada, there's a trend with restaurants. So when you look at what is happening around business closures, particularly with small to medium enterprise, we're going pretty deep and granular to understand what are those patterns and trends around why customers leave. We're seeing a slight uptick in customers going out of business in those small to medium enterprise verticals, particularly around restaurants, as an example. So we're managing that and monitoring that very closely. Conversely, though, we have a lot of opportunity to self-serve and help ourselves, as it relates to retention. So we're actually quite focused on a series of initiatives, everything from improving the customer experience with the digital portal that we've talked about to actually changing incentives for our field team around customer retention, as an example. So we have a whole series of initiatives designed to put the customer first, to drive customer satisfaction and to help ourselves. And quite frankly, in this model, the single best way to grow is retain the customers you already have. So we are very focused on doing that, but also at the same time understanding why customers might leave. So we've got a lot of work going on around this tower. And we just brought on a new Chief Commercial Officer, Stephen Mohan, who has been here, I think, less than 60 days now, and he is already all over digging in and understanding these factors and putting programs around them. So we feel good about our future, our long-term future, as it relates to retention.

That's very helpful. Thank you. And then can I just ask for your comment on trends with input costs. Obviously, you've touched on the energy and the related surcharge or lack thereof for the first half, but also what you're seeing from a material inflation standpoint, labor dynamics especially in consideration of the higher unionization, etc?

Sure. Starting with labor, we are seeing a little over 5%, which aligns with our expectations for the year. The union contracts provide us with good visibility on this rate, and we are on track with our labor plans. This is also reflected in the improvement of our existing workforce retention year-over-year, leading to better operating efficiencies. Regarding input costs, we are not experiencing significant fluctuations that would affect our current financial outlook. We are actively monitoring our suppliers and have a clear view of inventory needs and costs. Our facility in Mexico also helps us mitigate supply chain disruptions and unnecessary cost increases, so we are optimistic about our material costs. As for energy, we have previously mentioned the fuel surcharge, and we are seeing favorable energy costs in the first half due to rate adjustments, which we anticipated. This trend is likely to continue into Q2, but we expect it to stabilize in the latter half of the year. Therefore, our expectations regarding energy remain unchanged.

Thank you very much. Appreciate it.

Thanks.

The next question comes from George Tong with Goldman Sachs.

Hi, thanks. Good morning. In the Uniforms business...

Hi, George, good morning.

Hello. In the Uniforms business, you mentioned growth was 1%, excluding the moderation from direct sales. Can you discuss some of the factors you're seeing that may be causing Uniforms growth to come a bit below some of what your competitors are seeing, where growth is tracking somewhere north of 5%?

There are a few points I want to address before answering your question. It's important to recognize that Uniforms is not directly comparable across all our competitors, so it's crucial to analyze the specifics within the Uniforms category. For us, it strictly pertains to Uniforms. The impact from ADS is significant, and it's worth noting that we intentionally scaled back our efforts there and are being cautious. We had been experiencing growth rates in Uniforms historically before implementing this ADS strategy. To be frank, sometimes we relied on it, not that there were any issues, but it isn't a strategy that enhances our margins. Therefore, we've consciously decided to pull back. Our ADS direct sales team is excelling at selling the appropriate products to the right customers, and we are very proud of their performance. When we adjust for our intentional decision to scale back, we see a growth rate of 1%, which is a valuable point to highlight. Additionally, we are achieving growth in this space and are strategically targeting specific verticals with a propensity for cross-selling. This growth is measured, as not all verticals are prioritized equally. We are being selective about which leads and customer types to pursue, which influences the growth rate, as our aim isn’t simply growth for its own sake, but rather a targeted approach that allows for margin expansion and cross-selling potential. I've also mentioned we are experiencing an increase in business closures among our SMEs, which affects our retention and the Uniforms numbers. We are conscious of this and managing it closely. Furthermore, we faced a loss of a national account that we haven't discussed much because it wasn't a strategic loss, but rather an unfortunate outcome from our Clean Room business last year. This loss continues to impact our results in the first two quarters of this year, affecting the Uniforms figures. While we regret such losses, they are part of business dynamics. As we look at the growth rate in the Uniforms sector, this loss also plays a role. However, despite these challenges, the overall health of the business is tracking positively, with sales growth in AE, a focus on micro verticals, and an emphasis on workplace supplies. We remain optimistic about the underlying health of the business, even with these factors curbing Uniforms growth.

That's very helpful color. Thank you for that. And then you mentioned progress with driving new business growth in your eight new micro verticals. Can you share some additional details on your micro vertical strategy, traction with growth, new examples to provide beyond auto dealerships and perhaps how much new business is coming from your micro verticals?

Yeah. So they're all in different life cycles. So auto dealer is the one that I've chosen to share publicly. We're not going to talk about the other seven specifically because we don't want to give away all the hard work we did on our growth strategy to others, and we think it's competitively sensitive. But I can tell you that we are methodically tracking our go-to-market progress in each of these eight micro verticals. And the way that we have approached this is they were all in different stages of life. So some are easier to ramp and faster to move because we're already aggressively in the vertical, we already have the capability to sell and anybody can sell it, right? So if you're selling to an auto dealer, it doesn't take a specialized salesperson. Any of our account teammates can be equipped with training and collateral and go in and sell to an auto dealer. So that's a vertical that's moving very quickly because we said let's go. We're already doing that very well out of the West Coast, which I think I shared that example with you guys in Analyst Day. So that's an example of a targeted micro vertical that we're already penetrating. And I used that example a moment ago when someone asked the question earlier. But we're measuring things in each of these micro verticals, and there are metrics like sales activity. So how much sales activity, meaning how many leads did we have with these customers, and how many calls did we do with these customers, last year versus now that we're in the vertical. We're tracking that metric. Auto dealers, as an example, sales activity is up 19%. Then we're looking at, okay, the sales activity is up, are we actually winning any more business? So then we're also measuring total won opportunities before we aggressively focused on this vertical. And now, as examples, auto dealers is up 2%. So our won opportunities, how many new business opportunities are we winning is up 2%. Then we're also looking at how much weekly revenue are we getting from this vertical, and are we seeing improvements in the vertical. In auto dealers in Q1, we have a 47% increase in weekly revenue. So again, another great piece of data that tells us that we are gaining traction in this micro vertical. So these are the kinds of things that we're measuring by vertical. And the lifecycle is different depending on the vertical. There are some that are more complex than the go-to-market strategy and the build-out is taking longer. And we'll eventually see the same results in that vertical as we do in auto dealers, as an example. And over time, when our mix really shifts, you'll probably see us evolve the actual end market that we talk about and we'll be segmenting our revenue, but this is very early days. You're not going to see enough shift in the mix yet for us to kind of change the end markets that we're talking about. But over time, you will learn about these other micro verticals, these more specific targets, and we'll talk about them. But for now, we'll stick with auto dealers just as the example. So I hope that was helpful, George.

Yeah. It's very helpful. Thank you.

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

Hi, good morning, guys. Thanks for taking my questions. Two quick ones here. Regarding contract renewal, are you guys seeing any disruptions regarding the separation? Sometimes when you see these new spin-cos come out, you see some issues going on with contract renewals with their existing clients? And then the second question is regarding the margin expansion opportunities, is stranded cost reductions factored into your 2024 guidance? Thank you.

Michael, good morning. Thank you for your question. We'll begin with contract renewals. We've experienced a seamless transition concerning our customer agreements and relationships as we’ve separated. The agreements are transferable and directly moved over to Vestis, so we haven't needed to approach customers for new contracts during the spin. The spin didn’t necessitate reengaging customers about the contracts. We communicated clearly with customers about how their contracts would now reflect Vestis instead of Aramark Uniform Services. There has been no friction in this transition; customers have maintained their existing relationships with us without any issues. We feel quite positive about this situation. Regarding stranded costs, we've done an excellent job preparing for the spin by right-sizing the business. We previously discussed eliminating around $28 million in back office and billed costs to prepare for the integration of public company expenses. We’re confident we're running a lean operation without unnecessary costs, aside from what’s needed for the transition. There are some costs associated with ongoing services from Aramark or TSA while we build up our IT team to support our own infrastructure and cybersecurity. Some cost duplication will occur in the first year, and we’ve been open about that. However, we’re operating independently from Aramark, with different business models, systems, teams, and functional structures. Overall, we feel we are in a really strong position and operating quite efficiently.

Okay. Great. Thank you for the color.

Thank you.

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

Thanks. Good morning. One for each. Rick, real quick. Just curious, you mentioned the DSO tick up, but you mentioned you kind of spoke it all the way as it would be a tough year-over-year comp from the one-time event prior. Just curious because we've heard over the course of the call, some small business issues in Canada, just if you could just clarify that it was uniquely the comparison and nothing else is a miss there that we might see in upcoming quarters. And then just one separate one, I'll ask. Kim, you mentioned incentives that you use with the field on the cross-sell. I'm curious, how fluid have you been in the use of those incentives? Is that something new? Is that something that's been ongoing? And are there any new initiatives with regard to these field enhancement, sales enhancements that you're initiating? Thanks for taking both.

From a DSO perspective, my comment addressed the year-over-year bad debt expense. The main factor contributing to the negative comparison is the adjustment we made to the bad debt reserve from the previous year. This adjustment was due to the higher reserves we maintained after COVID to cover potential risks, and we fully adjusted the last part of that reserve in the first quarter of 2023. Last year, we benefited from a reduction in bad debts because we reversed a reserve. This year, in regards to DSO, we are not observing any significant year-over-year change that would lead to negative results. Therefore, we highlighted that, while there are some SMEs going out of business, the primary factor affecting bad debt for us is that reserve reversal, which is currently a challenge. Nonetheless, we are still achieving margin expansion despite not having that working in our favor this year.

I would just like to add that we have a strong team effort focused on managing bad debt at the market center level. Our teams work closely with our accounting and collections departments to identify customers of concern. We have a weekly process where market center teams and collections communicate to determine which customers need engagement. I believe we have a good handle on managing Days Sales Outstanding (DSO) and bad debt, and we're in a much better position than we were a couple of years ago. We've matured as an organization in our efforts to collaboratively reduce bad debt with our customers. To Rick's point, there was a significant change last year that we're addressing. I'm proud of our team for overcoming this challenge and still achieving margin expansion this quarter, despite the costs and various factors impacting our business. This demonstrates the strength of our underlying performance. Regarding incentives for our frontline sales teams, especially out-service representatives who are excelling in sales, we are pleased with the incentives currently in place. We are assisting them in understanding the financial implications of these incentives. Historically, we have had provisions in our agreements that enable us to pay commissions to our frontline representatives for sales. What we are doing now is effectively calculating and communicating this to them. Each representative has customers who can purchase more products, and we’re showing them the personal financial benefits of cross-selling these customers, thereby increasing the value of their routes. We are diligently providing this information to inspire and motivate our frontline teammates, enhancing their ability to support their families. We are creating a connection between the company’s opportunities and those of our frontline teams without changing the incentives in the agreement. We also hold sales contests that are engaging and enjoyable, encouraging our teammates to compete in sales. These contests come with various rewards, from cash prizes to bragging rights, which help build excitement around selling. Additionally, we have made changes to our retention-related field incentives this year. We are focusing our teammates on the best way to grow our business, which is to retain existing customers. As such, we have adjusted some management incentives in the field to tie bonuses to retention metrics, emphasizing the importance of customer experience. This summarizes our current stance on incentives. I hope this information is helpful.

It was. Thank you, both.

You bet. Thank you.

Thank you.

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

Thank you. I would like to thank everyone for joining today to learn more about Vestis or to hear more about how we're progressing against our strategy. I could not be more pleased with our outstanding teammates and the great work that they are doing to advance this strategy. And we feel so strongly that the value creation opportunity here is simply tremendous. So hopefully, you enjoyed learning more about our progress today, and we look forward to talking with you again after the second quarter. So thanks for joining.

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