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 have been placed on a listen-only mode and the floor will be opened for your questions following the presentation. [Operator Instructions]. I would now like to 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. 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 IR section of the vestis.com. Access to the replay and materials related to today's discussion are also available on the Investor Relations website. Before we begin, I would like to remind you that this call may contain forward-looking statements. And as such -- as within 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, 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 that 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%. And 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…

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. And I will come back to that when we look at the actual estimates of public cost 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 reflects 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 US up approximately 9% and Canada down 13%. The operating leverage from sales volume pricing actions and…

[Operator Instructions] 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 base strategy, growth strategy. So our aim here is we grow the business in FY '24 and beyond really is to drive 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 take pricing appropriately as we offsetted things like inflation and we also take value-based pricing, as Rick referenced earlier as he was giving his discussion around the future for '24. But we will also continue to protect and grow customers. But as you noted, we will also exit strategically at times customers. So we'll see some erosion in the base at times as we exit some of these lower-margin customers while also growing new customers in our micro verticals. So it will be a balance, quite frankly, of cross-selling new business in the micro verticals and modest pricing. Rick, anything that you would add to that?

No. In the weighting will lean towards the impact of cross-selling. So you see that same overweight of workplaces lives versus uniforms. Yes.

Got it. No, that's helpful. And then just as a follow-up to that question, as we think about your you execute 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 kind of continue to be outshadowed 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 also driven by some of these decisions that we're making to strategically exit our direct sale business, which will have an impact on the Uniforms number. So just keep that in mind. We are definitely still growing our uniforms business. We're targeting those micro verticals as well as other verticals and our sales team is actually our sales team that is driving new business is actually quite productive and performing very well. We are just purposely at times exiting some business and also overshadowing that with the workplace supplies. So I would expect you should see a muted uniforms growth rate again in FY '24, but that is a very purposeful decision to grow very strategically under high-quality verticals and exiting some underperforming business.

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 kind of have better context around the magnitude of that have been?

Yes. Sure, I'd be happy to, and Andy. It's great to hear from you. So thanks for joining us today. 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. So about half of that will hit the FY '24 year, and about half of that will hit in FY '25. So about $13 million in this year and $13 million in the year to come. And 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 bps 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, right? Do you expect that you'll be giving an EPS measure in your guidance as well, like an adjusted EPS measure or measure. Do you expect that we're just going to work on GAAP for now and go that way?

Yes. We absolutely will. And I'll let Rick provide some more color here in a moment, but we actually discussed that as we were preparing for our first earnings and we 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, in the future, be discussing and sharing information related to EPS. Rick, anything that 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. And so you'd be reporting an EPS on a pro forma number. So it's got to be very not indicative as I said about 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.

Okay. That makes a lot of sense. And presumably, that adjusted EPS is on the same -- includes the same adjustments as the EBITDA. I'm guessing. And then I guess yes. Okay. And then -- so then just to follow up on that here, just related to the free cash flow conversion here when you say greater than 100% of net income. In this context, however, 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 kind of 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 that today that you're working on?

Thanks, Andy, appreciate that question. So cross-selling the base is a very attractive margin accretive activity. So 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 plans assets tied to those customer locations. So 1 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 and get that flow through revenue. And 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. And that does take the entire organization coming together. So service managers, frontline teammates managers out in market centers as well as sell teammates supporting them and marketing with collateral. So that is a full-on team effort that everyone is mobilized around. The other really very large initiative that requires the whole company to move in the same direction as our building a center of logistics excellence. So this notion of rerouting customers and conducting flow optimization across these market centers requires a tremendous amount of collaboration between facilities as we are rerouting customers working very diligently to ensure that is a seamless and invisible process for the customer. So 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. So if I had to really choose key areas of focus for us. I would say it is cross-selling workplace supplies to existing customers and leveraging those fixed assets and 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. So obviously, 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 from training our frontline teammates and our territory managers with playbooks around how to do a great job taking care of the customer to also providing our route drivers, our frontline teammates with tools to let them know when there's an opportunity to improve with the customer and then also to 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 really, really great feedback from our customers around these initiatives. And so we feel very, very good about the establishment of a service excellence culture across the company. We also continue to deliver retention rates that are above 90% as we stated in our Form 10. So we continue to emphasize that greatly.

And add stops and net new?

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

Have Add stop held up?

We don't actually use a metric of Ad stop. And I think it's also important to note on your question around Net New that we actually aren't communicating and we're shifting away from that Net New metrics that we were using at Aramark as well. Because 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, and it does not reflect the growth in the base, which is our key focus area. So you're going to see us shift away from the conversation around that new and talking about that metric. And you're going to hear us 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 like really humming along. You think you're like 50% there because it's a significant change from the way that the company had operated for literally decades. And maybe you could talk about where you are now and how long do you think it would take to really be kind of firing on all cylinders?

So I think we still have work to do. I'm pleased with the way the team has embraced everyone sells culture and mindset that we're working to create Shlomo. But I think your question is a really important question that we are constantly focused on here because it is a massive cultural shift to move a company to a mindset of growth. And that is the opportunity that we found when we came here. I joined a couple of years ago, it was very clear that, that obsession with growth was not present in this organization. So I think that we've made great strives 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. But I would tell you that I think that 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 mega 2% or so. And you also know we're shedding some unprofitable business at the same time. So that growth rate healthier than it appears. So I'm pleased with where we are, but I think we can do so much better. And so we continue to bring tools and resources and really encourage and arm the team with the right, the tools that they need to get out there and grow the business. I'd say I don't want to gauge it at 50%, but I'd say we are maybe halfway there, maybe, honestly. And that excites me, so I don't say that as a criticism. I'd say that is we're doing a great job. I'm pleased with the progress, and there's so much more yet to come. But our teammates are responding well. They're excited. They're proud to be a part of growing this business. I think they're recognizing now the latent potential that is untapped that hasn't been unleashed here, and people are pretty fired up about bringing that to life. So more to come on the culture front.

Great. And then maybe this 1 is for Rick. Can you talk a little bit more about the sequential margin improvement? Obviously, there's a pretty good cadence over here. And can you talk about what changed from like June to September? And -- is this going to be like 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's a few other ones that we should be looking towards for the next several quarters and over the year?

So from a quarterly progression Q3 to Q4, there were quite a few kind of moving pieces driving that activity. And so you have -- in our fourth quarter, you have all types of things around benefits, around customer closeouts around contest that kind of drives that Q4 increase in profitability. And it's a normal cadence. If you go back and look the last 2, 3 years, we see that normal Q1, Q2, Q3, Q4 glide path. And so we expect to see that going forward in terms of your question about how you should be thinking about it. We, of course, are guiding the quarters. We did include in the earnings release, the quarterly history, so you can go and take a look at that. But the movement from Q3 to Q4 reflects also be having a full quarter of our cost-out actions reflected in our results as well.

[Operator Instructions]. And our next question will come from Oliver Davies with Redburn Atlantic.

Just 1 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 some more detail. But 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. And so the CBA negotiations, the collective bargaining agreement negotiations are very predictable for us and we have history as a guide to determine where we think those negotiations will land and what that will equate to in terms of increased wages. So we anticipate about 5% wage inflation across the 5-year period. 5% on an annualized basis across the 5-year period as we look at our strategic plan, and that's actually fairly predictable for us and that has played through over the last couple of years. So 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 here just in a bit, but we're seeing muted energy costs and generally a very predictable supply chain forecasting activity because we're purchasing inventory in advance and then we're issuing it over a period as we grow new business and amortizing that over a couple of years. So we have pretty good forecasting capabilities as it relates to all of our key cost drivers in the business. And we're not seeing anything surprising or unusual as we move through kind of building out the FY '24 plan. Rick, anything that you would want to add there?

On the energy costs, as I noted, we did see moderation that's moderation relative to 2022, which was kind of at some of the peak highs. So when you looked at our energy for 2023, we obviously saw high energy costs in the first half. We saw those costs year-over-year kind of moderate in the back half. the view forward is a bit choppy. And so in our guidance, we've assumed we stay elevated. So kind of at that on average for 2023 and our position to take whatever actions we need to should we see another spike. So we haven't forecasted we continue to get better. which you saw us talking about, you see it actually in the Q4 results. But we kind of took that average cost and assumed. We hold that line during the year. As you -- and we monitor 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. I guess 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?

So from a demand perspective, we've been very focused on cross-selling existing customers in products and services that they're currently self-serving. So there -- 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 are seeing some closures of business. We're seeing sale of businesses taking place in that business changing hands. And that feels pretty stable. So nothing erratic to report there as it relates to kind of customer behavior we're pretty well diversified, as you guys know, across many different end markets. So we feel pretty comfortable that we're insulated around any kind of 1 particular segment or industry that might be declining. And if we continue to harvest share of wallet with existing customers. There's plenty of space here regardless of what might be happening from a macro environment perspective. You guys will recall, I'm sure in Analyst Day, we sized this market out at a $48 billion market across all of the products and services that we offer. So there's a lot of room to to find places to grow as we're looking at various trends across the end sector. So we feel pretty good about that from a macro perspective. We feel good about having 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 that be energy or labor or other of supply chain costs related to our formats. We think we've got a good view of that. So we see a pretty path forward for us through FY '24 with a good understanding of the things that might be headwinds that are facing us. We think we've got great plans to offset any of those headwinds through good operational efficiency actions that we're taking. And also, we've demonstrated our ability to price as appropriate as we may see those inflationary impacts emerge. Rick, anything that you would add there?

I think I would just say we haven't assumed in the plan broadly a market downturn. We're certainly not the looming recession. And so all the things that Kim described, is kind of how we would respond to we're not recession proof, but we do like our mix in that environment of workplace supply, we're less employee-centric still actually more margin accretive. So we feel good about where we're positioned, but we take all the necessary actions, as Kim described, to preserve profitability should that occur.

Yes. I mean, we'll be agile and monitor closely what's happening in various end markets and adjust our kind of targeted sales activity to move and flow where the demand exists.

That's very helpful. And then if I may, as a follow-up. Can you just reconfirm with regards to the progression for the targeted margin expansion after '28. How we should think about that kind of sequentially year-to-year and the key contributors, if it's initially, it will be leveraging that sales growth until you start to see more benefits from the field and the workforce optimization or the operating efficiencies, et cetera.

Yes. So as we've talked about before, we didn't build this thing as a hockey stick. So there's no massive kind of betting on the comp in the back 2 years and assuming that we're going to generate 500 bps of margin in 2 years. This is a slow and steady wins the rate base hit game for us. In FY '24, which is really the first year of our 5-year plan that we've articulated to the market, as I mentioned earlier, we are ingesting our public company costs, and we're ingesting that very effectively and we plan for that. So we're really 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 pubco costs. But what you'll also see is there's some really good strong underlying performance taking place here with 50 to 60 basis points of margin expansion happening to the underlying business, and we're using that to offset the ingestion of those patco costs. But if you look at what's happening, you can definitely see margin coming through, and you can see operating leverage emerging in the business. As we are taking advantage of cross-selling the customer base and leveraging fixed assets. And so we are getting flow through on that revenue. That revenue is creating margin expansion. And we're also working very steadily around our flow optimization and driving efficiency through these logistics initiatives that we've talked about. All of these things are in motion. So there's not new initiatives that need to gain traction or that will start taking place 3 years from now to help deliver that plan. All of the initiatives required to get to that FY '28 margin are moving down. So we are optimizing flows. We are cross-selling the customer. And it just gets stronger and stronger as we add revenue every stop. We just continue to leverage those fixed assets and get the flow through. So you should think about this as a very slow and steady wins the race base hit game. You're going to continue to see us just turning away at these initiatives and the margin is going to continue to flow and operating leverage will continue to open. So you'll see, again, it's muted in '24 purposely because we're ingesting the patco costs but the underlying performance is there, and you'll see that just continue to move through '28.

Our last question will come from Scott Schneeberger with Oppenheimer. Q – Unidentified Analyst: It's Dan for Scott. Just a quick 1 on the trends you've been seeing in to medium-sized enterprises versus national accounts. If you can please discuss recent trends there and how you see that develop into next year?

Thanks for your questions, Scott. It is good to hear from you. So we are very focused on both groupings of customers. As we've talked about earlier, they dose add great value. So our national account customers can really form the backbone of your supply chain and create density. So we've got a team out there hunting and harvesting national account customers. And those customers, as you know, stay more than 20 years with us. So they're very valuable customers and the lifetime value is great. But we also know that small to medium enterprise customers are very margin accretive and there's great propensity to cross-sell the base once you bring those customers into your house. And so we continue to focus very heavily on the experience in creating an outstanding customer experience with those SME customers. So that we can not only retain them, but we can cross-sell the base. We are analyzing recent costs when we're losing customers in that segment in the small to medium enterprise segment. We typically get that data through our inbound call center, and we're able to tie recent coach to that. I would say trends in the SME space about 1/4 of those inbound calls when we're losing customers on the SME side of the business are tied to business closures or they're tied to business sales. So I find that to be an interesting trend that we're observing and continuing to monitor as we're seeing transition taking place with SME businesses. But some of that is related to selling the business, not closing the business. And so we're able to rent those customers and retain them, but it's an interesting trend that we're keeping an eye on. Otherwise, I would say the trend is great that SME customers are very open to outsourcing additional workplace supplies. And so we are seeing a tremendous response as we're out cross-selling the existing customer base, we are seeing a tremendous response for outsourcing related to these workplace supplies and services that we're very actively focused on. So there's a real willingness to give that up and allow others to do that so that our customers can take care of their core business and focus on what matters most to them.

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.

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