Operator: Hello, and welcome to the Vestis Corporation Fiscal Second Quarter 2024 Earnings Conference Call. [Operator Instructions]

I would now like to turn the call over to Bryan Johnson, Chief Accounting Officer. Please begin.

Bryan Johnson: Thank you, and good morning, everyone. We appreciate your participation in Vestis Corporation's Fiscal Second 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 Scott: Thank you, Bryan. Good morning, everyone, and thank you for joining our fiscal second quarter 2024 earnings call. Before I discuss our results, I'd like to thank our 20,000 dedicated teammates for the hard work they do each day to contribute to making a positive difference for Vestis' customers, shareholders and the communities we serve. We continue to bring our brand purpose to life here at Vestis following our spin-off in October, by delivering uniforms and workplace supplies that empower people to do good work and good things for others while at work. The underlying health of Vestis is strong, and we continue to position the company well for long-term success.

With the spin and transition to a stand-alone public company now behind us, we are able to fully apply our resources against advancing our strategic plan and driving growth across the business. Operating trends are improving with strong free cash flow, demonstrating cost performance, improvement in managing working capital and the resiliency of our model in support of strengthening our balance sheet over time.

Now turning to our results. In the second quarter, we delivered lower-than-expected revenue growth of 0.9% or 2.8% on an underlying basis when normalized for last year's temporary energy fee. An adjusted EBITDA margin of 12.4%, which is 90 basis points lower than the second quarter last year and includes the absorption of incremental public company costs. Lower than planned revenue growth impacted our performance in the quarter and will also impact our performance in the back half of the year. While we delivered 8% growth in new business wins and customer penetration through route sales, we did not accelerate our ramp to the levels required to offset rollover losses from FY '23. Our top line growth was also impacted by a deliberate decision to moderate pricing while we enhance our service processes in order to continue to strengthen customer retention.

To ramp new business sales further going forward, we are focused on improving the capabilities of our frontline sales teammates while also strengthening our national account pipeline and go-to-market strategies. We also made the recent and deliberate decision to moderate pricing actions in the second quarter and the back half of the fiscal year in order to realize improved retention while we enhance our service processes. While this is negatively impacting our revenue and EBITDA in the second half of the year, we strongly believe that it is the right decision for the long-term health and growth of the business. As a result of these short-term challenges related to sales productivity and deliberate moderated pricing actions, we are updating our full year outlook for FY '24.

We now expect revenue growth between negative 1% to flat year-over-year and adjusted EBITDA margin between 12% and 12.4%. While we are not satisfied with our performance and this outlook for the full year, we remain confident in our long-term strategy and the value creation opportunity ahead for Vestis. We are delivering results against many of our key strategic initiatives while taking swift and assertive action to enhance our sales productivity and service efficacy to accelerate growth. We are also keenly focused on managing and reducing costs across the company. Later in our discussion, I'll provide a scorecard against several key strategic initiatives.

Now I'd like to discuss our response. We are taking decisive and immediate actions to address our short-term challenges in the year. We are mobilized to improve sales productivity related to new business wins and focus on building a high-performing sales team. I have spent significant time over the past few months assessing our sales team, structure and talent as well as our processes from teammate training and onboarding to collateral and go-to-market strategies for our various product lines. We've identified enhancing selling skills and capabilities as well as improving teammate tenure as our highest priorities to support our frontline sales teammates in improving their close rates and deal sizes. In support of this, we have launched improved recruiting, onboarding and retention programs as well as enablement tools such as improved collateral and sample kits. We are also strengthening our national account pipeline.

I have spent a great deal of time with our national account sales leaders and our customers. It's a privilege to support so many great companies and brands. Not only do we have opportunity to win new national accounts but we have opportunity to grow share of wallet with existing customers. Our national account team is energized by the support and focus they are receiving from leadership to grow national accounts as this has not been a priority for past leadership. We are taking actions to enhance our service in order to deliver a higher level of customer satisfaction, loyalty and retention. This effort will also allow us to revisit pricing as we see customers respond positively to these process improvements.

We are conducting assessments all the way to our route service representatives in the field to identify, improve and retrain on specific procedures that can enhance our customers' experience and garner loyalty. We will also be creating a new leadership role on our team that will be accountable for service across the company. While we work through these improvements, we have deliberately moderated planned price increases we had scheduled for the second quarter and in the second half of the year in order to reduce customer churn, with a focus on improving customer lifetime value while we enhance our service processes.

We will continue to strategically and surgically price in a thoughtful way with focus on lifetime customer value. We believe service gaps have driven price sensitivity as fully satisfied customers typically don't leave because they've received a price increase. But the price increase can be a catalyst for cancellations or quits. We are mobilized around this opportunity and see upward trends in customer retention year-to-date, which I'll discuss on the next slide.

We are also taking swift action related to variable labor, accelerating the delivery of operational efficiencies in areas such as logistics and evaluating our organizational structure. We will be making changes to our structure to better organize our team for success. And in parallel, we are also evaluating the structure through the lens of flattening and simplifying the organization, so that we are more agile and able to institutionalize improvements in our business more quickly while also lowering costs.

We are addressing these short-term challenges and expect to return to the acceleration of growth and market expansion we have outlined in our strategic plan. We will also continue advancing our strategic initiatives while these opportunities are being addressed.

Now turning to customer retention. As discussed previously, we have highly engaged and dedicated teammates that are focused on creating a great experience for our customers. Their commitment has not wavered while we have identified the need to improve service processes.

We have been working to overcome and offset a large amount of rollover losses from FY '23 that are impacting our volume in FY '24. These losses from FY '23 include 2 large national account customers that represent approximately 60 basis points of revenue growth headwind in the full year of FY '24. Our customer retention performance trend for recurring revenue is trending upward this year and returning to historical norms. Fiscal year-to-date, our customer satisfaction score has improved to a 12-month high.

I'm pleased to say that national account renewals are performing well this year with several of our largest customers renewed year-to-date. However, these renewals have also revealed the need to enhance our service and in a few instances, have resulted in pricing and volume erosion during the renewal process. Based on reason codes cited by our customers when they cancel service with us, we know that more than 70% of cancellations are due to causes that are within our control. This presents a great opportunity to drive incremental value as we continue to improve retention, and it validates our focus on improving service in order to improve customer retention. We are focused on enhancing our service processes in order to continue this upward trend as we see opportunity to continue to improve customer retention and drive value over the long term through these efforts.

Now moving to sales. Starting with our new business wins with new customers. While we have delivered 700 basis points of revenue growth from new business wins in FY '24 year-to-date, we have not ramped to the sales levels planned for the year and needed to overcome the rollover losses from FY '23. We continue to strengthen our national account pipeline, which, over time, will bring large incremental volumes to our network and will leverage our fixed assets and idle capacity. We are also mobilized around our 8 micro verticals but we have been slow to gain traction with our sales force. We remain confident in these verticals and are supporting our teams in accelerating growth in these sectors.

As discussed previously, we are implementing improvements in our recruiting, onboarding and training programs for sales teammates, while also providing enablement tools such as improved collateral and sample kits to improve sales productivity. Our strategy to cross-sell additional products and services to existing customers in order to drive customer penetration comes with an attractive revenue flow-through and is progressing well and ahead of plan. Our route sales representatives or RSRs are doing a great job. Sales per RSR are up approximately 100% versus prior year, and we've seen a 20% increase in the number of routes with sales activity year-to-date.

We've instituted a twice daily process to manage and measure route sales, and I'm very pleased with the results we are seeing here. We've also seen demonstrated performance from teammates at the levels required to achieve the long-term growth rates in our strategic plan. Our focus is now centered around supporting all of our RSRs in achieving and maintaining these levels of performance.

Now let's shift to our strategic plan. We remain confident in our strategic plan, and we will continue to advance it. On Slide 7, this scorecard depicts our rating of how we are doing against several key initiatives. We talked a lot about sales today, and we are undoubtedly focused on accelerating revenue growth through addressing sales productivity. Customer retention is one of the single most important levers in our recurring revenue model and critical to our strategy to strengthen the base, capture share of wallet through cross-selling, to leverage idle capacity and fixed assets and enhance customer lifetime value.

We are hyper-focused on improving retention in support of our strategy as we already see the great progress we are making to cross-sell and gain penetration with our satisfied and loyal customers. Retention is moving back in the right direction. But even when at historical norms, we believe that it's still lower than our peers. This presents a great opportunity for Vestis to create shareholder value as we enhance our service processes and ultimately increase retention and customer penetration. While we are working to enhance our service processes, we will be strategic about how and when we price so that we are building the company for the long term.

Now turning to efficient operations. I'm very pleased with our progress related to logistics initiatives. Our team is performing extremely well in this area. We are building momentum and have already completed 22 optimization events in the first half of the year versus a total of 23 for the full year in FY '23. As a result, we are seeing improvements in logistics efficiencies in areas such as fuel consumption. We intend to introduce a metric in FY '25 that will serve as a barometer for progress against this initiative. We are also ahead of plan related to our merchandise reuse initiative. Year-to-date, we've seen a 20% improvement in used fill rate and are on track to deliver an approximate $10 million in cash savings and an approximate $4 million run rate cost benefit in FY '24.

We also remain focused on capital allocation with delevering as a priority. Rick will talk more about capital allocation in a moment, but I did want to mention the great progress we are making institutionalizing a sales and operations planning process that will further help us to improve inventory management. Our supply chain team is doing a great job here, delivering $34 million in cash generation improvements year-to-date as a result.

Now I'd like to introduce Rick who will take us through the financials. Rick?

Ricky Dillon: Thanks, Kim, and good morning, everyone. I'll start with more details on the second quarter results and then walk through drivers of the changes in our full year 2024 guidance and what it means for the back half of the year.

So let's start with the second quarter revenue bridge on Slide 9. Revenue of $705 million increased by 0.9% year-over-year. The impact of volume growth and pricing was offset by lost business in the quarter. Volume growth, including new customers and expanding our existing customer penetration through cross-selling, provided approximately 8% of growth in the quarter, with the contribution from new sales up 7% year-over-year. Customer losses reduced second quarter revenues by 9% year-over-year, more than offsetting our new business growth. The impact of losses consist of 6% from the known customer losses as we exited fiscal 2023 and 3% from customer losses during this fiscal year. As Kim noted and in line with our expectations, we have seen a meaningful improvement in our retention rate year-to-date, and that will drive lower carryover losses in 2025.

We are adding new business, but we are not ramping at the pace we expected heading into the year. Sequentially, compared to the first quarter, new business revenue is up 3%. Pricing contributed 4% to the top line growth, 3% from prior year pricing actions and 1% from current year pricing. As we noted earlier, while we continue to take annual pricing increase, the current year pricing impact was less than planned given our decision to moderate off-cycle pricing actions. Excluding the impact of the temporary energy fee, revenue grew 2.8% year-over-year. The fee was discontinued in the second quarter of last year, so this is the last quarter of comparable headwinds associated with the fee. Our direct sales business is down approximately $2 million or 5% year-over-year as we continue to optimize that business. Excluding the direct sales, our Uniforms business was flat year-over-year and Workplace Supplies were up 2%.

Moving on to Slide 10 and the adjusted EBITDA. Adjusted EBITDA was $87 million in the second quarter of fiscal 2024, down approximately $6 million or 6% from the second quarter of fiscal 2023. The operating leverage on new business and flow-through on pricing was offset by the impact of lost business in the quarter. The incremental margin on new sales volume was approximately 33%, reflecting the increase in garment amortization on new customer wins and sales commissions on new sales. The approximately 60% decremental margin on lost business was net of final exit billings during the quarter. The elimination of the $13 million temporary energy fee this year had a negative impact on margin that was offset by approximately $6 million in energy cost savings year-over-year. The fee was favorable for us in the second quarter of last year due to the timing of implementing the fee versus the spike in energy fees. Energy cost savings this quarter were again driven by favorable rates for natural gas consumed in our plants and reduced fuel consumption from our route optimization efforts. Incremental public company costs were $4 million in the quarter and $7 million year-to-date.

We continue to expect full year incremental public company costs of $15 million to $18 million. Productivity gains in the quarter, including permanent structural reductions implemented last year and the continued benefits from our network optimization efforts were offset by the expected increase in labor costs year-over-year. Overall, adjusted EBITDA margins were down 90 basis points year-over-year. Excluding the net impact of the temporary energy fee and incremental public company costs, margins expanded 80 basis points year-over-year.

Turning to liquidity on Slide 11. We generated approximately $76 million in cash from operations in the second quarter, an increase of approximately 25% or $15 million. Our focus on inventory management, with new sales and operation planning initiatives drove a $34 million reduction in inventory year-to-date. CapEx was approximately $13 million during the second quarter of 2020, down from approximately $18 million last year. Last year's results included $10 million in proceeds from the sale of a real estate property. Free cash flow in the second quarter was $63 million with cash conversion in excess of 100% of net income and 50% of EBITDA year-to-date. As previously announced, we completed the refinancing of our 2-year term loan with a 7-year term loan that matures in 2031.

We will continue to channel available cash to voluntary loan principal reductions. Year-to-date, we have made principal payments of approximately $65 million, which includes $45 million in voluntary principal payments in Q2, and we expect to continue to make meaningful voluntary payments in the back half of the year. We ended the second quarter with a net debt-to-EBITDA ratio of 3.82x. We remain confident in our ability to get to our targeted leverage level of 1.5 to 2.5x by the end of fiscal 2026, despite the challenges with the calculated leverage for the back half of the year using our revised EBITDA margin guidance. We believe we will exit the year with a net debt-to-EBITDA leverage of approximately 4x. As a reminder, our leverage covenant levels are 5.25x through March of 2025 and reducing to 4.5x on thereafter.

Before I turn the call back over to Kim, I want to revisit the key drivers of our revised guidance on Slide 12. We now expect revenue to be down 1% to flat and adjusted EBITDA margin to be between 12% and 12.4%. From a revenue perspective, it's important to note that lost business is not a factor in the lowering of our revenue guide. Again, while we are absorbing losses from the prior year, current year retention is improving in line with our expectations. Pricing accounts for 250 basis points of the guidance reduction, reflecting the decision to moderate pricing in the second quarter and the back half of the year. Volume accounts for 225 basis points which represents the impact of lower-than-expected sales productivity in the year, while cross-selling has been strong, new customer wins have not met our expectations. We are expecting sales productivity in the back half of the year to be consistent with the first half of fiscal 2024.

The 190 to 230 basis points decline in margin guidance is driven by the loss of leverage on lower pricing and volume in the year, partially offset by 45 months from cost performance actions as Kim previously discussed. From a quarterly progression perspective, we expect revenues to decline sequentially from the second quarter to the third quarter. The decline is attributable to the progression of carryover losses as we move past final exit billings included in Q1 and Q2, offset by a sequential improvement in route sales. We will see direct sales decline approximately $4 million from the second quarter, which includes the impact of the lost direct sale national customer we previously disclosed.

We expect Q4 revenue to be slightly higher than Q3 as the impact of net carryover losses moderate in the quarter. We expect the EBITDA margin in Q3 to decline sequentially with the loss of sales leverage. In addition, we expect incremental public company costs between $6 million to $8 million for the quarter as we near the exit of the TSA and in keeping with our estimate of $15 million to $18 million for the year. And lastly, we expect Q4 margins will benefit from a lower level of incremental public company costs.

With that, I'll now turn the call back over to Kim for final remarks.

Kimberly Scott: Thanks, Rick. Before we open it up for questions, I also want to provide a quick update on our Chief Operating Officer search. We have engaged an external recruiting firm to support us with our search and are very pleased with the quality of candidates we have been presented and interviewed thus far. We are making progress with the search but also taking our time to ensure adequate due diligence to vet candidates and to ensure we find the right skill set and leadership style to support the advancement of our strategy and financial goals while also helping us solidify our desired performance-driven culture. Once the COO is in place, I will continue to work closely with the new leader and our commercial and operations teams to ensure no interruption in our performance as the new leader onboards and integrates into Vestis.

In closing, while today we shared that we are mobilized to address some short-term challenges that have resulted in an updated outlook for the year that is lower than expectations, we remain committed to our strategy and resolute in the opportunity to create value here at Vestis. We are building on our customer-first culture, by improving our service efficacy in order to strengthen customer loyalty and improve retention rates with our first priority aimed at protecting and growing the lifetime value of our customer base over the long term.

Our cross-sell logistics and operational initiatives are driving results. These teams are operating at a high level of performance, and we will go faster where we can to accelerate value creation in these areas. We will continue to pursue our strategy, and we remain confident in our pathway to value creation. I want to thank you all again for joining us today, and we will now open the line for questions. Operator?

Operator: [Operator Instructions] Our next question comes from Shlomo Rosenbaum with Stifel.

Shlomo Rosenbaum: Kim, could you explain to us what the service gaps are just from a practical perspective that are resulting in the decision to moderate the pricing? It sounds like it -- this is a change that happened inter quarter, something's like -- something was discovered that you didn't necessarily see beforehand and significant enough that you feel that you need to make a change in the plans of pricing. Can you just give us some idea of what these service gaps are, how widespread they are? And how long do you think it's going to take to fix them?

Kimberly Scott: Shlomo, thank you for your question. I appreciate you joining us today. So as we have been evaluating the lost business and really digging in to understand the root causes of that lost business, it's led us back to service efficacy. So as we look at the causes for customer quits and the feedback that we're receiving from them, we're finding very specific areas we can action around. So we're looking at on-time delivery, making sure that the load arrives to the customer at the time and on the day that it is expected. We're implementing telematics. We've rolled out telematics across our fleet now, so that we can put processes in place to measure that delivery and ensure that, that delivery happens. So we expect that, that will continue to improve in the coming months, and we should see benefits from that in FY '25 as the telematics have now been installed in the trucks, and now we're building reporting and capability to use the insights from that data. We also see opportunities around things like shortages, that are making sure that we have a process to verify that the truck has been loaded accurately and that all of the product that needs to go to our customer is, in fact, being delivered to our customer. So those are opportunities around the perfect truck and loading processes, and we've got folks out in the field now working through programs to address those things.

So we feel very confident that we've isolated these challenges and opportunities, and we have very clear, deliberate actions around specific things like on-time delivery and stopping shortages and delivering full loads to customers. The great news is that our culture is in a great place as it relates to wanting to do a great job for the customer and our teammates are serving our customers really well as it relates to the relationship and the experience. But we just need to -- we get tighter and do a better job on being on time, being complete, being fully loaded and putting metrics around that, so that we can ensure that we're delivering consistently the expectations that our customers have for us.

Shlomo Rosenbaum: Can I just squeeze in one more? Just what does it mean, you're not executing as expected on new wins? Does that mean that you're not getting the volume of new wins? They're not starting up in the way you expected? I'm just trying to understand what that means in terms of the volume?

Kimberly Scott: Yes, absolutely. So it is volume related, and it really comes back to the way that we're measuring our sales performance is revenue dollars per sales teammates. And so we had expectations that the revenue dollars per sale teammate would continue to ramp and increase throughout the year. We are not seeing that ramp to the degree that we needed and expected. And so this is really about improving the close rate and also improving the amount of revenue per deal closed.

Operator: Our next question comes from Andrew Steinerman with JPMorgan.

Andrew Steinerman: I wanted to ask about the price elasticity of [ investors -- this ] client base. As you articulated, your plan had been just a couple of months ago for a targeted in-year price increase and then you pivoted to a price decrease. I surely caught that you're saying the clients are claiming it's about service. My question is, might it also be about price and I'm talking about price versus other uniform services providers?

Ricky Dillon: Thanks, Andrew. I would take this one. And I would say, as Kim discussed, our service efficacy and price sensitivity go hand-in-hand. And as we've spent the time analyzing the reason for quits and the magnitude of the carryover losses, we made the determination that we would deliberately moderate the pricing to focus on retention and customer efficacy. So when you -- so from the back half of your question of is this about price sensitivity or price elasticity or is it about service, we view those as tied closely together. And as Kim described, if we improve the customer efficacy we have much more -- less sensitivity to pricing, and we can get back to a more normal pricing environment.

I would add that we do continue to take our normalized annual pricing, some of that's surgical, more specific that as we've described earlier, value-added activity and specific product categories, et cetera. We will get back to that as we work on customer efficacy.

Operator: Our next question comes from Andy Wittmann with Baird.

Andrew J. Wittmann: I guess I wanted to understand a little bit more about the revenue outlook here. I understand the comments that you made here about the sales not ramping as much as you previously forecasted. But some of these 23 lost customers that were significant in nature are actually a tailwind to your second half growth. Obviously, you still have the direct sale headwind. I guess, are you factoring in more risk from some of these national accounts that you had to reprice lower as a factor into that second half? Or are there known losses that are coming that haven't been disinstalled yet? Maybe you could just talk about some of the moving pieces to get you to that flat to down revenue outlook, I guess, in a little bit more detail.

Ricky Dillon: When you think about first half to back half, we do have -- as we exit customers, we do have that final billing. And most of that is behind us and it impacts the Q1 and Q2, as I noted. When you move forward to the back half, you get the full impact of those losses, including the full impact of the couple of national account losses that we described. So that's part of the increased back half impact of lost business. I would say we are not expecting losses or incremental losses to impact our back half guidance. And so as we've said, our retention is in line with expectations. And that improvement we showed at about 93% from a recurring revenue retention is really driving our confidence that this is not about lost business, and we're kind of meeting the lost business numbers that we kind of entered the year expecting.

We did talk about the large direct sale national account, and that's excluded from our retention calculations. And so that does also impact kind of the front half, back half revenue along with the step down from a seasonality perspective in the front half, back half. And so while we certainly are focused on lost business, we think our efforts are driving the improved retention in here and the known losses coming into 2023, we get the full impact of those losses. As you can see from the retention chart that we've included as well, a lot of those losses came or the losses accelerated in Q4.

So unfortunately, we will live with them through the end of the year as well as moving past the exit costs in the back half of the year.

Andrew J. Wittmann: Kim, just as it relates to the service quality, you mentioned things like the perfect load and you're not there today. How much are operational things like this or how much can they be attributed to things like doing very complicated reroutings of those trucks and loading them differently today than maybe they've been done in the past? Or have these service shortfalls been there the whole time, and you're just starting to realize them more as you've rolled up your sleeves? I guess I'd just like to understand kind of the source and the genesis of some of the service issues that you're talking about today.

Kimberly Scott: Yes, absolutely, Andy. And thank you for your questions and for being with us today. So I can definitely confirm to you that these service opportunities are not related to the logistics optimization and the rerouting of customers. These challenges have been in our business for quite some time, and I've dug in quite deeply into these root causes of quits to really understand how do you get to the root of this and improve customer retention. And so you've got to go really deep and far to get to the right answer. And so as I've explored this and listen to customer feedback, it's just really clear that we are not tight on our processes as it relates to disciplined loading of trucks, delivering on time, delivering full loads. And so this is -- the good news here is these are processes that can absolutely be improved. And people can be trained on these processes and do a great job, and our teammates want to do a great job, so they'll be happy to follow new processes and have better procedures. But it is something that I believe Andy has persisted in this business for some time and has not been realized or addressed. And so I think this is a great opportunity for us to step back and rethink these processes and really enhance the customer experience.

Operator: [Operator Instructions] We'll take our next question from Stephanie Moore with Jefferies.

Stephanie Benjamin Moore: So maybe, Kim, given such a change in tone here in the last 90 days since you reported 1Q, I think including in the short period of time an erosion in national account business and now a reversal in pricing capabilities. How do we get comfortable that you have her arms around the operations and can meet this revised guidance for the year?

Kimberly Scott: So Stephanie, we feel very confident in the strategy. We remain incredibly committed and we know that the value creation opportunity for Vestis this year. So this is about improving some service processes to make sure that our service experience with our customers is outstanding because improving revenue -- or excuse me, improving retention is the heartbeat of this model. So our strategy is built on keeping loyal customers and then enhancing the lifetime value by cross-selling them. So we feel it's really imperative that we continue to enhance our processes and improve the retention experience. As we drive up that experience and it continues to improve and more customers continue to be loyal, it just fully supports our cross-sell initiatives and our desire to penetrate those customers and cross-sell other products and services. So we feel incredibly confident that we are on the right path and that making these corrections around service efficacy is just going to further strengthen our plan.

As it relates to sales, there is without a doubt an opportunity to have a more high-performing sales team. We have great people who absolutely want to do a great job for the company and drive sales, but we need to support them with better enablement tools. We need to have more sophisticated processes around how we go to market. We are doing things like improving sales collateral, working on onboarding, recruiting the right profile of teammate who will thrive in this environment, but also training them and getting them the right tools and resources to sell effectively. So these are very known and understood opportunities, and we're incredibly mobilized around them. But I do want to reiterate, Stephanie, we believe in this plan. We believe in the value creation opportunity, and we have no doubt that there's going to be great value generated here over the long term.

Stephanie Benjamin Moore: Got it. And then just as a follow-up. I mean, clearly, it does sound like a lot of changes are being implemented, and you kind of noted just that we should start to see the benefits in fiscal 2025. So does that mean in your minds, we should be able to return to revenue growth in 2025, maybe in line with the targets you provided at your Analyst Day? And then how will pricing be part of that so -- since it looks like you're probably going to be a pretty decent comp on the pricing front as we look to 2025?

Kimberly Scott: Yes. So as it relates to growth, we absolutely intend to return to positive growth in FY '25. We'll talk more about what those growth rates will look like when we guide for the year. But we absolutely are accountable to and expect to return growth in FY '25. So you can count on that happening for sure, and we'll talk about those rates as we exit '24 and we guide for '25. So without a doubt. And then as it relates to pricing, we believe very strongly that we could take more price right now if we wanted to. But we believe strongly that it is important to improve service efficacy and to make sure that we are not taking price in the short term only to jeopardize customer retention rate in the long term. So we will return to the ability to take more pricing, and we still feel strongly that inflationary environments, we can pass that price through as appropriate and that price will stick. So we will definitely continue to address pricing. We feel that we will improve our ability to take more price as we improve our service processes and our customer experience.

And so we also will take price though, and we are taking price this year, and I want to be really clear about that. We have annual price increases and we have off-cycle price increases. We continue to take our normal annual price increases but our subjective discretionary off-cycle price increases are the price increases that we're moderating. We will also still be surgical and take price in certain areas as it relates to multiple stops in a week or a customer that is largely underpriced versus the average in the market. So there will still be pricing taking place. We're not shutting off pricing. We are just moderating pricing as it relates to the discretionary off-cycle pricing.

Operator: Our next question comes from Oliver Davies with Redburn Atlantic.

Oliver Davies: So just 2 for me. I guess, firstly, volume growth in the quarter, I think it was about 50 basis points lower than Q1. So can you kind of just talk through the cadence through the months and into the latest quarter? And then secondly, probably one for Rick. Can you talk about the level of sort of underlying costs and labor inflation and how you see that playing out through the rest of the year?

Ricky Dillon: Sure. So from a volumes perspective, when you look at Q1 to Q2, as I mentioned earlier, there is a step-up in absorption of lost business in Q2 from Q1, and that's just moving past some exit billings. And then also, we do have a meaningful step down in the direct sale business. Direct sales are down 17% from Q1, and that's attributable to kind of the seasonality of that business. And so the combination of the -- moving to absorbing the full impact of those rollover losses, the direct sales seasonality. And then finally, as I mentioned, we did see greater erosion of pricing in the front half, and that's consistent with our discussion around back half pricing and customer sensitivity. You normally see some pricing erosion given the magnitude of our back half pricing. That was a little bit more, and we made the decision to throttle back that Q2 pricing that we talked about on last call. So I think Q1 to Q2, those are the big drivers from a top line perspective. And I'm sorry, the second part of your question -- oh, cost.

Oliver Davies: Just on cost inflation, yes.

Ricky Dillon: Sure. So we -- labor is coming in higher than expected. I'm sorry, I take that back. Labor is coming in as expected. And so higher than prior year, we're still trending toward approximately 5% year-over-year hourly or frontline labor increase, and we have locked in our approximately 3% for salaries. So that is up, but in line with expectations. I mentioned earlier that we had some favorability in energy in the quarter, and that is -- has been driven by natural gas. We're seeing the rest of the energy rates kind of flatten out here as we look to the back half. And so the front half favorability will come down but still be a little bit favorable in the back half. And that's in line with our expectations for energy for the year. From an other cost perspective, we aren't seeing any significant impacts inflationary-wise for us for the remainder of the year.

Operator: Our next question comes from Manav Patnaik with Barclays.

Manav Patnaik: I just want to take a little bit of a step back. Like some of the reasons you're calling out for the shortfall and what you're doing and what you changing, I mean they sound -- they make sense in terms of what you're doing. But I'm just curious, like can -- you were at the company for almost 2 years, while under Aramark. You guys presumably did all this work going through IR Day and your confidence the last 2 quarters was pretty solid as well. So I'm just trying to understand on the margin, like what changed in the last 90 days or 60 days or whatever it is that caused this big of a revision?

Kimberly Scott: Yes, absolutely. Well, let me start, Manav. Thank you for your question. We remain highly confident in the strategy. So the confidence that you heard about this opportunity at Analyst Day and prior earnings discussions has not wavered. So we are completely confident in this strategy and our pathway to value creation. What we have done is really started to analyze -- to create long-term health in this business, the best thing we can do is ensure that we have great retention rates. And so the whole strategy hinges on cross-selling the base and making sure that we improve lifetime value with our customers. And so we've spent a lot of time over the last few months very aggressively digging into reason codes related to the customer experience. And so as we have done that, we have found that there is an opportunity to better serve the customer with improved processes. Many of our customers are still having a great experience because we're cross-selling them, and we're having great success gaining some more penetration.

So it's important to note that these are isolated reason codes, very specific delivery matters related to own time delivery, shortages on loads, and we are isolating that by market center and making sure that we are addressing procedural gaps and improving procedures by location where we have shortcomings related to service. And so as we evaluated that over the last few months, we made a strategic decision to take a pause, to get our services in order to make sure that they are excellent, and then we will return to pricing levels as appropriate. So it was a very deliberate decision to make sure that we improve our service efficacy and that we're building customer loyalty for the long term. So that's really what's changed as it relates to pricing.

The second thing that has changed is we had continued to expect our sales teammates on the front line to ramp to higher levels. And those sales teammates, while they are selling, and we talked about the 700 basis points of new business wins that we're seeing, they needed to sell at a higher rate to offset those rollover losses from '23 that rolled into '24. we are not seeing them ramp to the degree that we need to offset those losses and deliver the original growth rates that we had in the guide for the year. We can absolutely improve here, and we will do that, and I talked about many of the things that we're doing. But those things all have an impact on the EBITDA in the second half of the year, particularly the pricing that drops through at a very high flow-through will not be dropping through at that rate. And so that has an impact on EBITDA in the second half. Rick, anything you would add there?

Ricky Dillon: I would just note, as we think about what changed, we saw the impact -- well, we knew the impact coming in of the lower retention rate. And as we progress through Q1 and Q2, we see the favorable impact of higher retention rates, so lower losses in year. And our decision, as Kim described, looking at customer efficacy, seeing the correlation between higher pricing and lost business, it was a decision we made to -- intentionally to throttle as a result of that. So I just want to keep aligning that correlation between customer efficacy and the deliberate pricing decision. And what's changed is that pricing and the significance on the top line, and the margin as a result of not seeing the ramp in sales.

Operator: Our next question comes from George Tong with Goldman Sachs.

Keen Fai Tong: I just wanted to dive into the visibility of the business. The revenue guide that you issued just a quarter ago was brought down quite a significant amount. And so I just wanted to understand how much visibility is there, especially as it relates to your ability to win new business? Specific to new business, what changed over the past quarter that you didn't foresee previously?

Kimberly Scott: So there are a couple of things. And George, it's good to hear from you. There's a couple of things related to new business that we are focused on right now. And the first one, as I mentioned, is that we did expect a continued acceleration in revenue generated per sales teammate, and we're not seeing that ramp occur to the degree that we had expected and planned. So that's the kind of the first thing that has changed, is that ramp was supposed to continue to happen. You all might recall, I talked a lot about measuring revenue dollars per sales head count previously, and we've been monitoring that on a regular basis. So we have visibility to that, and we have been expecting that to continue to move upward and ramp to the degree needed to deliver the numbers in the back half and that ramp is not happening. I talked about the need to improve the sales tools and enablement, recruiting and training and all the things that we need to do to help our sales teammates be more successful. We're doing many of those things and we will continue to do those things to make sure that we get that rate up. But that is one of the key things that has happened as it relates to the sales ramp.

As it relates to our decision to moderate pricing, we also have great visibility that I've dug into quite deeply around why are customers choosing to leave Vestis. Many are choosing to stay and we're grateful for those loyal customers, but we've done a diagnostic around those that are leaving. And for those customers who are choosing to go elsewhere, we are finding that there is a very actionable set of root causes here around service experiences related to our procedures, not our teammates. Our teammates are doing an awesome job, but related to how we are delivering the load on time and incomplete loads. So those are the things that we'll be addressing in order to return to a higher level of pricing over time.

Operator: Our next question comes from Michael O'Brien with Wolfe Research.

Michael O'Brien: One quick one here. So you mentioned that the shortfall, the service shortfalls are incremental. They're not related to the route optimization efforts that you guys put in place and talked about in the Analyst Day. My question is, were these shortfalls falls long standing? Or are they related to the spin that you're a new company now and there's an issue there? And if they are long standing, why haven't you guys caught this before the separation.

Kimberly Scott: So they're not related to the spin, so I'll be clear about that. I mean, I guess you could always say that there is a transition period where things may be changing, but not for us as it relates to service. This is really about adherence to our service processes. And we've had service processes and procedures in place for a really long time. What we're seeing is that we need to better follow those, but also provide the teammates with better tools. And so as I come into this business and evaluate how we're measuring service efficacy, I found it very odd that we did not have telematics in our fleet. That's a very normal thing that you would have in a B2B route-based business. But we were not using telematics to make sure that we are delivering to customers on time and also that we are following routing efficiencies. So we've put that telematics in our trucks, and we expect very quickly that we'll begin to use those insights and that data from telematics to shore this up and to make sure that we're delivering on time and that we're where we should be, when we should be. So a lot of these things have been in the company as an underlying opportunity for some time, but we've been addressing some of them as well.

So the telematics is a great example of that. But I can also tell you that I have gone incredibly deep into this business over the last 6 months since we have spun out and particularly over the last few months since our COO left the company, and I have gone very deeply into evaluating these root causes at the grassroots level down to our market center. And I'm just finding great opportunity to continue to improve. So I think this is about going really deep into the bowels of the business and understanding what levers we can pull to make Vestis even better, and that's what we're doing.

Operator: We have time for one more question today. Our final question comes from Scott Schneeberger with Oppenheimer.

Scott Schneeberger: I Appreciate it. I guess I'll make it a quick one for you, Rick. Working capital management, very strong. It sounds like inventory management as well, you're trending very nicely year-to-date above your -- what you had said at Investor Day as far as free cash flow conversion to EBITDA. How is that going to look in the second half of the year? And it sounds like you're anticipating using your strong cash position for debt reduction. Are there any other considerations for use of that cash?

Ricky Dillon: Thanks. Yes, we do expect free cash flow to remain strong for the year, consistent with what we talked about. We believe this model and our efforts will allow us to continue to generate cash the way we have in the front half despite the EBITDA reduction. We will continue to focus on working capital that's driving improved receivables collections and days sales outstanding and continuing our sales and ops planning efforts and used fill rate from a rental product perspective. And so reducing that investment in merchandise inventory. Kim talked about the $10 million gain there and the fact that we're well ahead of our planned rate. So we feel really good about the opportunities we have in the back half to continue to scale and drive incremental free cash flow. When you look at what are going to be the uses of that cash, we still expect to spend 3% of revenue on CapEx as we discussed. So we're not changing that. We'll continue to invest in the business as we talked about before, and we do expect to continue to make voluntary debt payments in the back half, leveraging our free cash flow strength as well as we also obviously committed -- it's been committed to paying the quarterly dividend.

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 Scott: Thank you. I'd like to thank everyone for joining the call today. And I want to close by reiterating that we remain fully committed to our strategy, and we are confident in the long-term value creation opportunity here at Vestis. So thank you for joining.

Operator: Thank you. This concludes today's Vestis Corporation Fiscal Second Quarter 2024 Earnings Conference Call. Please disconnect your lines at this time, and have a wonderful day.