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. [Operator Instructions] I would now like to turn the call over to Bryan Johnson, Chief Accounting Officer. Please go ahead. Bryan Johnson 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 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. Kim Scott 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…

The floor is now open for questions. [Operator Instructions] 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 moderated about pricing in the first quarter. You all know we've been very diligent about passing through inflationary cost 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 moderated normal levels of pricing in Q1 related to kind of 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, as an 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 and condition 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 kind of 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 maybe, Rick, if I could ask a follow-up. Just to call out in Canada the higher investments for new merchandise and kind of elevated fleet maintenance costs, do you expect that to continue through the year or is that more of a first half event or just how should we be -- I guess, the maintenance costs in particular, how we should be thinking about that?

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. So 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 was 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 kind of 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…

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 revenue for the next three quarters?

Sure. So on a prior call, we talked about a direct sale customer that we were parting ways with, and that was $13 million in the back half of the year. And so, we kind of quantified that and you should expect to see that. And that's in our direct sales. So that will impact -- on a reported basis, you'll see that in uniforms. As we look at how we progress through the year, we've got another quarter here in Q2 that has energy free pressure. And so, the growth rate year-over-year, will -- that will be a headwind for that growth. What we wanted to make sure everyone understood, because we don't guide the quarters, but the progression will be very similar to what you saw in prior years and then particularly 2023. And so, we're reporting 2.5 here. And then we've got another quarter with a $13 million headwind here in Q2, and then -- but you'll continue to see growth rate advance. And then in Q3 and Q4, although you will see $13 million direct sale headwind, we still expect to see accelerated growth in those quarters, because, as we said at our year-end call, we knew that was out there, and our guidance has already factored that in.

Okay, thank you.

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

Great. Thanks for taking my question. I -- you had a comment in your prepared remarks about optimization events, and I just was hoping that you could talk about what those are. I think you mentioned there were 13 of them. Just trying to understand the significance of what one optimization event could be and how we should think about these types of things unfolding throughout the course of the year and what they can mean to the profit margin profile?

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…

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 [indiscernible], 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. 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 maybe touch more -- a little bit more so on the margin expansion opportunity. I think very nice progress in the quarter. You called out an improvement in fill rates that you're seeing and just your inventory reuse program getting traction. Can you talk a little bit about -- maybe frame it from an inning perspective, where you are in this inventory reuse program. If you can provide any kind of specific KPIs of the -- maybe benefit you're seeing at the facility level from some of the early initiatives that you've made? Any update there would be great? Thank you.

Yeah. We're very pleased with the progress we're making around the reuse of merchandise, and we think about this as a very long-term strategic initiative. So as you all know, as we launch new customers, we inject new products in the system, and the amortization clock starts ticking. So every time we issue a new product, we start the clock on amortization and that amortization stays with us for a period depending on what the product is and what the MR timeline is that's been set. And so, this initiative around improving the use of existing garments that are already either advertising in our system, but not being used currently or perhaps they've rolled off and there's no amortization tied to them. We essentially already paid for them and they're sitting in our stockroom. So we have launched a series of initiatives across our stockroom around teaching our teammates how to better reuse these existing assets that are either partially amortized or fully amortized. We are seeing a tremendous response from our field team, and we are already, I would say, starting to see a step change kind of embracing the idea of pulling these fast-moving SKUs to the front of your stockroom and injecting those to customers rather than injecting new. So you would have heard me mention in my script that we saw -- across more than 100 facilities we're already seeing a really strong improvement around the used fill rate. It takes time for that to actually flow through the financials because you still have the other products in the system being amortized. So you should think about this in about a year. We will be coming back and talking with you about the improvements that we're seeing around not only amortization, but also inventory and the management of cash related to inventory because this is a play, as it relates to cash management, and also a play relating to pushing down OpEx costs by kind of pushing down that amortization curve by injecting reuse garments. Just as a reminder, on Analyst -- in Analyst Day, we talked a little bit a rule of thumb, a percentage point of moving our used fill right, UFR metric, we're really using a metric called used fill rate. So for every issue that we do to a customer on how many are used garments versus new garments. And you get about $1.4 million in savings for every percentage point that you improve. And I'll tell you, we have a lot of percentage points of improvement opportunity. So more to come on this one, but I would not think about this in the year. I would think about this very strategically. This is a long game, and it's going to be extremely beneficial once we see some of that old MR roll off, and then we start to continue to inject these new to offset the need for new garments.

Great. No, that's very insightful. And then maybe just a follow-up to the first question, in the Q&A, on the pricing side. Maybe it was kind of -- I think my understanding that the guidance at first didn't really account for a ton of pricing this year for, I think, obvious -- for obvious reasons, just given what we're seeing inflation and really the opportunity that you have on your side. Now it sounds like you do have some opportunistic areas to take price, which I think you explained is very clear and exciting. So does this more so give us more -- so we think about it is driving incremental comfort in achieving the guidance for the year? Could it drive potential upside? How should we think about maybe this change on the pricing front?

Yeah. I would think about it as additional comfort to give you confidence, the same confidence we have that we're going to ramp up the growth rates in the back half of the year and deliver against the 4% to 4.5%. So -- and certainly, we're going to be opportunistic and take price whenever we can. But we do expect to also see our volumes ramping around our route sales average when we look at our route drivers and around our AE sales. We have initiatives in place to continue to ramp. But yes, you should think about pricing as a -- providing a level of comfort, but we have that lever as well, and we're being very thoughtful about how to use that lever.

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?

Yeah. Thank you, Andrew, and thanks for joining us today. So I do -- I will briefly address just Chris' departure. So Chris has made the decision to leave the organization, as we said, for personal reasons. And just so everyone understands Chris' timeline, he was with us for a very brief time. So Chris joined on September 11th, a couple of days before Analyst Day. Analyst Day was on the 13th. So I want to reassure everyone that Chris' departure does not impact our strategy or our ability to deliver against our strategy. This plan has been in motion for a very long time for the 2.5 years or 2-plus years that I've been here. So we feel really confident that we will continue down the path that we are down. That path was well in motion before his arrival. He's made the decision to depart, and we wish him all the best and thank him for the few months that he was here and for the time that he contributed. But Andrew, I can assure you that I have no concerns about our business, our business performance and how we're tracking against our strategy. As it relates to backfilling, I'm actually very excited that the team is back reporting to me. So they were essentially reporting to me before we created the COO role. And for now, they're all going to continue to report back into me. They're aware of that, and they're excited about that. I'll remind you guys, I am an operator. I've been a COO. I love getting down into this business and helping make this business better. So I'm actually quite excited. So we're going to take our time and be very thoughtful. Our organizational design will evolve, whether that's another COO or that's two-in-a-box with a field leader and a sole person, we'll figure all of that out in due course. Right now, I'm pleased to have the team back with me. We have great momentum, and we're going to continue down the path that we're on. So we feel very good with no concerns regarding 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 mean, I think we didn't catch your name.

Yeah. We didn't catch your name. I'm sorry. Who is this?

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…

That's very helpful. Thank you. And then can I just ask for your comment on trends with [indiscernible] 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. So from a -- start with labor. From a labor prospective, we're seeing a little over 5%, which is what we expected coming into the year. And so, as we've talked before, the union contracts give us pretty good visibility to what that rate might look like, and we are kind of on plan relative to labor. And that is manifesting itself even on our retention of our existing workforce that's improving year-over-year, which is giving us some operating efficiencies, as well there. From an input cost perspective, we are seeing -- parking energy for a second. We're not seeing significant movement in our input costs that will drive any type of variance in the current year. We continue to monitor that, monitor our suppliers and have a good forward view of inventory requirements and costing. And our Mexico facility also gives us a lot of opportunity to head off supply chain, both disruptions, as well as unnecessary from our perspective, cost increases. And so, we feel good about the material costs. From an energy perspective, we talked about the fuel surcharge, but we also, as we said last time, are seeing in the front half some favorable energy costs driven primarily by rates, and our -- we expected to see that. You'll probably continue to see it in Q2. We believe it will flatten out, as we get here in the back half of the year. So no change in our expectations on energy.

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%?

Yeah. So a couple of things, I would say first, and then I'll directly answer your question is also, keep in mind that Uniforms is not always apples-to-apples across our competitors, so just making sure that you're dissecting what's inside the Uniforms category, for us it is just Uniforms. And so, we'll start there. The ADS impact is very clear, and I think you guys are pretty well aware that we're purposely throttling that down and being very mindful. And we were getting growth rates in Uniforms since historical periods prior to this strategy from ADS, quite frankly. Sometimes we use it to [indiscernible]the growth rate, just to be honest with you, not that there's anything [indiscernible] doing that, but it's not a margin accretive strategy. So we have purposely said, hey, time out, let's tone this thing down. Our ADS direct sales team members are doing a great job selling the right stuff to the right customers. So we're very pleased and proud of them for doing that. So when you normalize for that purposeful decision to throttle down, you do get a 1% growth rate, so thank you for pointing that out. I think that's really important. It's also important to note that we've got a couple of things that are happening. I mentioned the -- we are growing in this space. Obviously, I mentioned the eight micro verticals, and they were going to market very surgically and targeting very specific verticals with propensity for cross-sell. That is very moderated growth. So not all verticals are equal. We're not targeting everything aggressively. We're being very smart about, which leads we're pursuing and which customer types we're pursuing. So that also has an impact on the growth rate because we're not just growing for growth's sake. We're growing in…

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…

Yeah. It's very helpful. Thank you.

The next question comes from Michael O'Brien with Wolfe Research. Please go ahead. Michael O’Brien: 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 for -- factored into your 2024 guidance? Thank you.

Michael, good morning. Thank you for your question. We'll start with contract renewals. We have had, I would say, a seamless transition, as it relates to our customer agreements and our relationship with our customers, as we've spun out. So the agreements are transferable. They directly move over to Vestis. And so, we have not had to go out to customers and repaper or renew contracts, as part of the spin. So the spin activity itself did not trigger the need to reengage the customer around the contract. We've been very clear with customers, and we used talking points at the beginning when we spun out the -- how your contracts just eventually going to save Vestis on it instead of Aramark Uniform Services. And we have had no friction, as it relates to that at all and customers have continued in their current relationship with us with no drama, if I can use that phrase. So no concerns there at all. We feel very good about that. As it relates to stranded costs, we actually have done an amazing job pre-spin of making sure that we rightsize this business, and you guys might remember that we talked about stripping out about $28 million of back office and billed cost pre-spin, so that we could prepare for the ingestion of pubco cost. So we feel really good that we're running a tight operation that we're not sitting on waste other than -- and I won't call this waste, it's just the necessary cost of spinning. There is duplication of cost in our system, as it relates to paying Aramark or TSA for certain services, while we are ramping up, in particular, our IT team to be prepared to standalone and support us, as it relates to IT infrastructure and cybersecurity. So there's some duplication of costs that will take place kind of in the first year, and we've been pretty transparent about that as well. But otherwise, we were operating quite independently from Aramark. Our business models are completely different. We're running on separate systems, separate teammates, separate functional structure. So we feel like we're in a really great place, and we're 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.

Sure. So from a DSO perspective, so my comment spoke to the bad debt expense year-over-year and the majority of what we're seeing in terms of a negative comp is we trued up the bad debt reserve that was on our book last year, and that was a result of carrying higher reserves coming out of COVID to acknowledge the exposure, and we finally trued up the last portion of that in the 2023 first quarter. And so, you're seeing -- last year we had some strong favorability in bad debts because we effectively reversed a reserve. This year, to your comment on DSO, we're not seeing a meaningful movement year-over-year in DSO that's driving negative activity. And so that's why we really called out that this is -- although as Kim noted, we do see some of the SMEs going out of business, year-over-year, the big driver for us relative to bad debt is that reserve reversal that actually is a headwind, and we're still delivering margin expansion despite not having that in the current year.

Yeah. And I would just add to that, we have a very concerted team focus on bad debt down to the market center level. So our teams in coordination with our accounting team and our collections team work very diligently around identifying customers of concern. We had a weekly process, where teammates between market centers and collections are on the phone, working through, which customers do we need to be engaging with. So I don't like we have a very good handle on managing DSO and bad debt, and we are in a much better place than we were a couple of years ago. I think we've really matured as an organization to collaboratively drive down bad debt with our customers. And to Rick's point, you're really looking at kind of a one-time step change that took place last year. I'm very proud of our team that we're -- that is really -- it is a headwind for us, and we're overcoming that and still driving margin expansion in the quarter, among the pubco cost and many other things that are entering our system. So I think it really demonstrates to the market the underlying performance here is very, very strong. As it relates to your question around incentives for frontline sales teammates particularly our out-service representatives, who are doing such a great job selling. We are very pleased with the incentives that we have in place for them. And what we've been doing now is helping them understand what this means to them financially. And so, I've mentioned before that we have always had provisions inside our collective bargaining agreements that allows us to pay our teammates commission, our frontline RSRs commission for selling. What we haven't done well in the past, and we're doing well now is actually…

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.