Vestis Corporation (NYSE:VSTS) Q2 2024 Earnings Call Transcript

Vestis Corporation (NYSE:VSTS) Q2 2024 Earnings Call Transcript May 4, 2024

Vestis Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to the Vestis Corporation Fiscal Second Quarter 2024 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. [Operator Instructions] I would now like to turn the call over to 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.

A credit services employee wearing a uniform with a badge, holding a single-pay loan folder to demonstrate the company’s services.

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.

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Q&A Session

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 two 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 eight micro verticals but we have been slow to gain traction with our sales force.