Earnings Call Transcript - VSTS Q3 2024

Operator, Operator

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

Michael Aurelio, Senior Director, Investor Relations

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

Kimberly T. Scott, President and CEO

Good morning. Thank you for joining our fiscal third quarter 2024 earnings call. I'd like to begin by thanking our 20,000 dedicated teammates for the hard work they do each day to support Vestis in serving our customers, shareholders, and the communities in which we operate. In my discussion today, I want to convey three key messages: our business is stable as evidenced by our third quarter results, retention metrics, and affirmation of guidance. We understand the importance of external communications, consistently delivering against our commitments, and establishing our credibility in the market. We are making progress on improving operations by way of new leadership in the delivery of organizational efficiencies. Touching on point number one. I'm pleased to report that our third quarter results are in line with expectations, and we are reaffirming our full-year fiscal 2024 guidance with EBITDA margin trending towards the higher end of our range. Adjusted EBITDA margin was 12.4%, a decline of 260 basis points versus the prior year or 160 basis points excluding the impact of incremental public company costs. Notably, Q3 adjusted EBITDA of $87 million and adjusted EBITDA margin of 12.4% were both flat sequentially versus 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. Revenue for the quarter was down 1.6% year-over-year. We remain focused on accelerating new business. We've seen approximately 700 basis points of growth from new wins in Q3 and 100 basis points of volume gains from route sales, which is cross-selling existing customers additional products and services. With the addition of new sales leadership and our new delayered structure, we believe we can further accelerate our new business wins. Our customer retention rates have improved year-to-date and are in line with our plan for the year. In fiscal 2024, we have seen a 210 basis point improvement in retention on a year-to-date basis versus fiscal 2023. 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 2023 retention rate includes the impact of two large national account losses which impacted the full year and, in particular, the fourth quarter fiscal 2023 rates, which presented a rollover volume loss headwind in fiscal 2024. I'm pleased to share that we continue to have good performance with our national account renewals in fiscal 2024 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 levels 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. 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 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. Moving on to my third point. I'm pleased to talk about two exciting new hires to 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 as our Chief Operating Officer at the beginning of September. Bill most recently served as President of Supply Chain Solutions at UPS. Pete Rego has joined as Head of Field Sales. 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 Cintas. 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 sales 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 efficiencies. These include a sales center of excellence to improve growth 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 field operations structure to allow us to get even closer to our customers. This reorganization and delayering will generate approximately $8 million in annualized gross cost savings. 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 welcomed 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. Keith has a strong financial and investment expertise and brings a highly valuable set of skills and perspectives to our Board room. 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 Goetz has also joined the Vestis Board of Directors. Bill brings strong sales and marketing expertise and a wealth of relevant industry experience to our Board. Bill previously spent 22 years at Cintas 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 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. 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. Deleveraging remains a priority. Subsequent to the quarter end, we have 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. This is a great example of some of the latent assets that we can monetize to strengthen our balance sheet as a stand-alone entity. Rick will further discuss the AR facility and 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. 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 FY 2025 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.

Ricky T. Dillon, CFO

Thanks, Kim, and good morning everyone. I will start with more details on the third quarter results and then close with our guidance and expectations for the fourth quarter. So let's start with the third quarter revenue bridge on Slide 10. Revenue of $698 million decreased by 1.6% year-over-year. The impact of volume growth and pricing was offset by lost business in the quarter. Volume growth from recurring revenue, including new customers and expanding our existing customer penetration through cross-selling, provided approximately 800 basis points of growth in the quarter. Consistent with the second quarter, new customers contributed 700 basis points of growth, and route sales to existing customers contributed 100 basis points. We continue to win new business, and we are seeing an increase in the dollar contribution from gross new sales. Sales from new customers were up 17% year-over-year despite sales headcount being down approximately 10% versus the third quarter of fiscal 2023. Customer losses reduced third quarter revenue by approximately 900 basis points year-over-year, more than offsetting our volume growth. The lost business impact consists of 5% from known customer losses as we exited fiscal 2023 and 4% from customer losses during this fiscal year. As Kim noted, we saw improvement in our year-to-date retention rate over fiscal 2023, and we expect this will drive lower carryover losses in 2025. This is an important point that I want to emphasize that prior year retention rate was a bigger headwind in 2024 than we expect it will be in 2025. Said differently, we begin fiscal 2025 in less of a hole from lost business than 2024. Pricing contributed 60 basis points to top line growth. This reflects end-year regularly scheduled annual price increases and moderated off-cycle pricing, partially offset by the impact of the erosion of prior year June pricing actions as we progressed 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 uniform business was down 3.5% year-over-year, and workplace supplies were flat year-over-year. Moving on to Slide 11 and adjusted EBITDA. Adjusted EBITDA was $87 million in the third quarter of fiscal 2024, flat sequentially to the second quarter, and down approximately $20 million from the third quarter of fiscal 2023. The operating leverage on new business and flow-through on pricing were 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. 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 lost 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. 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. So 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 spend-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 inventories in our distribution centers and operating facilities to support growth. 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 adjusted EBITDA. I want to reiterate that this free cash flow includes approximately $18 million in one-time spin-related costs and does not include the impact of the AR securitization, which was subsequent to the quarter end. 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, 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 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. The facility creates a liquidity event by giving us early access to cash from a portion of our outstanding accounts receivable without 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 ratios. 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. 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. 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 as an independent public company. We remain confident in our ability to get to our targeted leverage of 1.5 times to 2.5 times. 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 pull-forward 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. Taken together, these two represent approximately $6 million of 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 expenses 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. 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, Operator

Thank you. Our first question comes from Andy Wittmann with Baird.

Andrew Wittmann, Analyst

Great, thanks, and good morning. I appreciate you taking my question. I'd like to focus on Slide 10 and the revenue bridge, particularly regarding customer losses, as you've highlighted this. I believe it's important to discuss this in more detail. The expectation is that the revenue impact from customer losses in 2025 will be less significant than what we saw in 2024. To clarify my understanding, if there was a $37 million revenue hit from known losses in the latter half of 2023, that would translate to about $18 million in revenue loss per quarter over two quarters. In contrast, this year you've mentioned $29 million in losses over three quarters, equating to around $10 million in revenue loss per quarter. So if I understand correctly, we’re looking at a difference between $18 million per quarter and $10 million per quarter in revenue loss. Is that a good way to conceptualize the difference in known customer losses?

Ricky T. Dillon, CFO

I think that's a good way to approach it. While I won't redo the calculations, considering the known losses we've reported this year against the in-year losses and then calculating the difference for 2024 versus 2025 is exactly how I would frame it.

Andrew Wittmann, Analyst

Okay. Kim, it seems that the business is becoming more stable after those customer losses. With the new pricing strategy in place and improving retention rates, do you have a clearer perspective on when we might see organic growth start to trend positively? I am curious about your thoughts on the timing, given that some of last year's customer losses will carry into the next quarter and possibly through at least the first fiscal quarter of next year. Do you believe organic growth could return by the second or third quarter of next year? Is that the direction you're considering?

Kimberly T. Scott, President and CEO

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

Andrew Wittmann, Analyst

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

Kimberly T. Scott, President and CEO

Thanks Andy, appreciate it.

Operator, Operator

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

Andrew Steinerman, Analyst

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

Ricky T. Dillon, CFO

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

Andrew Steinerman, Analyst

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?

Ricky T. Dillon, CFO

I'm indicating that sequentially, I am seeing net pricing. I also have net pricing for the fourth quarter. I want to point out that as we compare year-over-year, moving through the fourth quarter relative to the previous year, we had significant off-cycle pricing in the third and fourth quarters of last year, which primarily affected Q4. Therefore, the year-over-year decline I mentioned relates to those actions. However, we continue to implement price increases, which are impacting our results. As for the comments made by Kim, the overall impact of pricing for the year will be around 1% to 2%, which aligns with our typical rate.

Andrew Steinerman, Analyst

Okay, thank you.

Operator, Operator

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

Shlomo Rosenbaum, Analyst

Hi, thank you for taking my questions. Kim, can you discuss the recurring revenue customer retention on Slide 7? I’m trying to understand its context. It seems to have decreased sequentially from 93.2% to 91.7%, but there is a year-over-year increase of about 40 basis points. Can you comment on the retention? Is the sequential decline a seasonal metric, and how should we interpret retention trends throughout the year?

Ricky T. Dillon, CFO

Sure, I'll address that. Our quarterly retention can show some fluctuations due to the nature of its calculation and the specific circumstances of each quarter. That's why we focus on the year-to-date perspective. The improvement of over 200 basis points year-over-year is our main focus, and we're encouraged by that trend. While the quarterly number may have some volatility, it's important to note that the fourth quarter of last year saw effects from a significant national account and reflects the pricing changes you've mentioned. In the third and fourth quarters, we implemented considerable price adjustments, and we're observing some of the impacts from that in the fourth quarter. We have moderated pricing, so we do not expect any pricing impacts going forward, and we're pleased with our performance year-to-date.

Shlomo Rosenbaum, Analyst

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

Ricky T. Dillon, CFO

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

Shlomo Rosenbaum, Analyst

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

Ricky T. Dillon, CFO

There is no recourse.

Operator, Operator

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

Stephanie Moore, Analyst

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

Ricky T. Dillon, CFO

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

Stephanie Moore, Analyst

And then what would be a targeted normalized retention?

Ricky T. Dillon, CFO

When we previously discussed, we mentioned that the last reported retention rate was 93%. It is important to note that this figure represented a peak for our business. Historically, before those years, retention rates were around 91.5%. We see a significant opportunity to improve, and our aim is to exceed 92.5%. The conversation that Kim had about service excellence is crucial, as it influences not only our pricing capabilities but also the retention of our current customers.

Kimberly T. Scott, President and CEO

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

Stephanie Moore, Analyst

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

Kimberly T. Scott, President and CEO

Yes. So as we mentioned in our prepared remarks, we're seeing about 800 basis points of new growth, so 700 basis points coming from our frontline sales team converting new logos and about 100 basis points of growth coming from our route service representatives that are growing and penetrating and taking share of wallet with existing customers. So the first step to organic growth is making sure that rate outpaces lost business. And that's why we've been heavily focused on stabilizing lost business, and we continue to focus on that because the single best and easiest lever to pull for growth is just to hold on to more customers than you did before. And so our focus right now is let's protect our base. Let's make sure that we are putting a lot of energy around delivering an outstanding customer experience so that we can protect what we already have, and that's lever number one. Let's get that done and let's protect those great customers that are already in our house. The minute you do that, that 800 basis points can start to become accretive and positive growth. But on top of that, we've also put a tremendous amount of effort around restructuring our sales team, as you referenced, bringing in very strong proven industry leadership because we also do believe that our frontline sales team who is converting new logos can convert at a better close rate and more revenue dollars per head. I've emphasized the importance of revenue dollars per head as a key metric for us. As Rick pointed out, our team is achieving higher sales rates with fewer employees, indicating increased productivity. Our current focus is on the first and second-year new hires, ensuring they are set up for success to drive revenue and maintain productivity. We see potential for improvement in the lost business rate; maintaining it at 800 basis points while enhancing it would be a positive outcome. We believe we can boost that figure further with a more effective and professional sales team. Regarding the pipeline, we are dedicating significant resources to our national account pipeline. We have appointed a new internal leader from our cleanroom team to manage national accounts across the organization. She has already begun establishing a strong national account pipeline and is working on securing large deals. We are confident in her leadership and the national account progress. Lastly, our strategy focuses on volume. Securing large national accounts helps us maximize our fixed asset capacity, which is vital since we have significant idle capacity. Winning these national accounts is crucial for driving volume, and we are optimistic about the advances we are making with that team.

Oliver Davies, Analyst

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

Kimberly T. Scott, President and CEO

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

Operator, Operator

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.

Kimberly T. Scott, President and CEO

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.

Operator, 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.