Kim Scott: 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.
Andrew Steinerman: Thanks, Kim.
Kim Scott: You bet. Thank you.
Operator: The next question comes from Manav Patnaik with Barclays. Please go ahead.
Ronan Kennedy: 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?
Rick Dillon: Sure. I mean, I think we didn’t catch your name.
Kim Scott: Yeah. We didn’t catch your name. I’m sorry. Who is this?
Ronan Kennedy: Sorry, it’s Ronan Kennedy on for Manav.
Kim Scott: Okay. Okay. Yeah. Sorry, I couldn’t hear you. Good morning. So we’ll start with retention. So just to take you back, we have been talking about retention and using the stat greater than 90%, which is what we filed in the Form-10, and we continue to maintain retention above that level. So I’ll start there, that we have no real surprises, as it relates to retention and where we expected to be for the most part. We did talk about some attrition, as it relates to direct sale and some strategic decision to kind of throttle down. So you’ll recall in our full year earnings for FY 2023, I shared with you a large direct sale customer that will be rolling off partially in the back half of the year and partially in FY 2025. So we do expect to see that in our numbers.
We also have, from time to time, a large national account that may choose to go elsewhere or to self-serve. So you’re always going to see some of that. Those are larger events. They happen, as a part of an RFP process. But generally speaking, when you look at the rest of retention, and you look at recent codes to answer your question around why would you see customers leave, we are seeing small to medium enterprise customers with an uptick in business closures. And so just important to note, as we look at recent codes, we are monitoring that very closely. And it’s also when you try to drill it down a little bit further, you can see a trend. As an example, in Canada, there’s a trend with restaurants. So when you look at what is happening around business closures, particularly with small to medium enterprise, we’re going pretty deep and granular to understand what are those patterns and trends around why customers leave.
We’re seeing a slight uptick in customers going out of business in those small to medium enterprise verticals, particularly around restaurants, as an example. So we’re managing that and monitoring that very closely. Conversely, though, we have a lot of opportunity to self-serve and help ourselves, as it relates to retention. So we’re actually quite focused on a series of initiatives, everything from improving the customer experience with the digital portal that we’ve talked about to actually changing incentives for our field team around customer retention, as an example. So we have a whole series of initiatives designed to put the customer first, to drive customer satisfaction and to help ourselves. And quite frankly, in this model, the single best way to grow is retain the customers you already have.
So we are very focused on doing that, but also at the same time understanding why customers might leave. So we’ve got a lot of work going on around this tower. And we just brought on a new Chief Commercial Officer, Stephen Mohan, who has been here, I think, less than 60 days now, and he is already all over digging in and understanding these [indiscernible] factors and putting programs around them. So we feel good about our future, our long-term future, as it relates to retention.
Ronan Kennedy: 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?
Rick Dillon: 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.
Ronan Kennedy: Thank you very much. Appreciate it.
Kim Scott: Thanks.
Operator: The next question comes from George Tong with Goldman Sachs.
George Tong: Hi, thanks. Good morning, In the Uniforms business…
Kim Scott: Hi, George, good morning.
George Tong: 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%?
Kim Scott: 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 a very targeted way, so that we can get margin expansion and the propensity for cross-sell. I did mention that we do see an uptick in business closures, as it relates to our SMEs. So that also has an effect on the number, as it relates to the impact of retention on the Uniforms number, and we’re very transparent about that, we’re very aware of it, we’re managing that very closely. And then, we also have a national account loss, but we haven’t talked about it a lot because it wasn’t a strategic loss.
It was an unfortunate loss from our Clean Room business last year, and it was a loss that continues to flow through in the first two quarters of this year, which also affects that Uniforms number. And again, we haven’t talked about it a lot because it’s a regrettable loss. It wasn’t part of our strategy, but it’s just part of the nature of doing business. So we also had, towards that, impacting our growth rate in the Uniform sector in the period, and we will see that loss still impacting us in the second quarter of the year. So just keep that in mind, as you’re looking at the business because we — while we regret losses like that, the underlying health of the business is tracking exactly like we want it to track with AE sales up, targeting the micro verticals and getting our [indiscernible] on the workplace supplies.
So we feel very good about the underlying health of the business despite some of those factors that are muting the Uniforms growth rate.
George Tong: 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?
Kim Scott: 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.
