Vestis Corp (VSTS) 2025 Q4 法說會逐字稿

Welcome to the Vestis Corporation fiscal fourth quarter and full year 2025 earnings conference call. (Operator Instructions)

I would now like to turn the call over to Stefan Neely with Vallum Advisors.

Thank you, operator, and thank you all for joining us on the call this morning. Leading the call with me today is Jim Barber, President and Chief Executive Officer; and Kelly Janzen, Executive Vice President and Chief Financial Officer. Jim and Kelly will provide prepared remarks, and then we will open the line to questions.

Before I turn the call over to Jim, I want to remind everyone that today's discussion contains forward-looking statements about future business and financial expectations. The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for such Forward-looking Statements. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the Securities and Exchange Commission.

Except as required by law, we undertake no obligation to update our forward-looking statements. Further, this call will include the discussion of certain non-GAAP financial measures. Reconciliation of these measures to the closest GAAP financial measure is included in our quarterly earnings press release and corresponding supplemental materials, which are available at ir.vestis.com.

With that, I would like to turn the call over to Jim.

Thank you, Stefan. Good morning, everyone, and thank you for joining us. We have spent the past several months looking at every aspect of our business, how we operate, how we serve customers and how we create long-term value. That work culminated in a comprehensive multiyear business transformation plan, which we recently began executing. It's a plan that I feel confident will position Vestis to unlock operating leverage and deliver consistent profitable growth over the long term.

But before we dive into the specifics of our plan, I want to share some insights related to certain challenges I've identified since arriving to the company. First, over the past several years, Vestis prioritized revenue growth without sufficient focus on revenue quality. Much of the new revenue recently brought into the business did not meet the financial thresholds required for sustainable, profitable growth.

Second, we lost focus on customer service in certain areas of our business. This led to attrition of some of our higher-quality revenue accounts. Tactically, this showed up as a pricing approach that alienated certain customers, coupled with under investment in key processes and infrastructure expected to deliver consistent high-level service.

As some customers moved away, we were behind in implementing a coordinated strategy to address their concerns necessary to better manage nutrition. Third, while we were winning new customers, we lost discipline in managing our product mix, over-indexing on low-margin workplace supplies at the expense of our core uniform business where we generate our strongest long-term margins.

This lack of discipline has negatively impacted our operating leverage. The transformation plan we have developed addresses each of these issues head on. It focuses on implementing scalable processes, restoring customer centricity and recommitting the best practices to run the business more effectively. It was put together with the help from leading third-party advisers and will be executed in phases, which we expect to substantially complete by the end of fiscal 2027.

It is built around three strategic pillars: commercial excellence, operational excellence, and asset and network optimization. Let me walk through each of these and the related actions we are taking. Our first pillar is commercial excellence and at the center of this is the customer. In 2026, we are focused on deepening relationships and delivering value in a way that is high quality and profitable, both of which will improve retention. To do that, we are taking several key steps.

First, we are rolling out new tools that give us better visibility into customer segmentation and product profitability. These tools are critical to all aspects of our strategic execution. We are also making a new strategic approach to our pricing strategy. We are committed to ensuring that our pricing accurately reflects the value we deliver and our cost of service while remaining transparent, fair and competitive.

In addition, we are deploying market development representatives across our business to grow volume with our existing customers and better support their needs. Finally, we're also introducing a new tool to measure and improve satisfaction that will capture customer feedback at the point of delivery, allowing us to address concerns real time. We will be launching this in the coming weeks.

Our second pillar is operational excellence, and the priority for 2026 is improving plant performance and overall organizational efficiency. This pillar is fundamental to driving improved operating leverage and includes initiatives such as standardizing processes to improve safety and service quality, tightening cost controls and investing in technology to increase visibility and accountability.

We are also taking a series of steps to streamline our organization. That means ensuring our sales and administrative functions are sized appropriately and positioned to support the business with agility. In the fourth quarter, we made targeted reductions in our field sales team, while our cost structure was misaligned with revenue and growth opportunities and more recently, we made further reductions in various areas across the business where we believe we will operate more efficiently.

These were difficult decisions but necessary to support our future business objectives. I want to emphasize that the steps we're taking to streamline our organization will not impact our ability to deliver high-quality service. They are solely focused on simplifying our structure so we can operate more efficiently while continuing to serve our customers with excellence.

Finally, our third pillar is asset and network optimization, where we are focused on optimizing our asset base and redesigning our service delivery network. This is not a new priority, but in 2026, we are accelerating that work through comprehensive initiatives to evaluate route efficiency and consolidate underutilized locations. We're also continuing to invest in our facilities, upgrading equipment and infrastructure to improve service quality and reduce downtime.

These are relatively modest investments with strong returns. Foundational to all of this is a strong culture. We are prioritizing training, succession planning and employee engagement to improve turnover and foster a high-performance, customer-centric culture that wins.

I am incredibly optimistic about launching this plan. Not only does it include significant enhancements to how we operate, but it's also one that supports meaningful financial improvement. Inclusive of the planned initiatives, our 2026 full year adjusted EBITDA guidance midpoint is $300 million. $40 million higher than the Q4 2025 normalized exit run rate of $260 million.

We have already made progress, but I want to emphasize that this is a multiyear journey. The actions we are taking in 2026 are foundational designed to position Vestis for sustainable organic growth in 2027 and beyond. In a moment, Kelly will walk through our fourth quarter financial performance, along with our fiscal 2026 guidance in more detail. But before I turn it over, I would like to take this opportunity to thank the entire Vestis team for welcoming me into the organization and for their hard work, determination and commitment over the last year. My optimism for the future is strong, and I look forward to continuing to collaborate with this team as we move to the next chapter.

Now I'll turn it over to Kelly.

Thank you, Jim, and good morning, everyone. I will now go through the 2025 fiscal fourth quarter financial results and then discuss our outlook for fiscal 2026. As a reminder, the fourth quarter of 2025 benefited from an additional operating week when compared to the fourth quarter of 2024. Reported revenue for the quarter was $712 million, or approximately $660 million when normalized to exclude a $52 million benefit from the additional operating week.

On a normalized basis, revenue was down $24 million or 3.5% year-over-year compared to the fourth quarter of fiscal 2024. The decline in revenue was due to an $18 million decrease in rental revenue, $5 million in lower direct sales revenue and $1 million negative foreign currency impact. Within rental revenue, growth from new business or conversion contributed approximately $43 million or 6.5% of revenue year-over-year for Q4 on a normalized basis.

The normalized revenue impact in the fourth quarter from churn, our lost business was approximately $60 million when compared with the same quarter in the prior year. On a rolling 12-month basis, our business retention as measured in revenue dollars was 91.8% at the end of Q4, essentially flat when compared to what we reported in the third quarter. In addition, year-over-year revenue from our existing business was also flat.

In our direct sales business, revenue decreased $5 million or 13.6% year-over-year on a normalized basis from lower overall sales volume. Reported cost of services in the quarter was $533 million, and gross margin was 25.1%, down 366 basis points when compared to the fourth quarter of last year.

On a normalized basis, cost of services was $495 million, excluding $38 million in costs related to the additional operating week this quarter. The decrease in our gross margin is primarily due to the impact of lower revenue and reflects an $8 million increase in plant costs related to the increase in processing throughput compared to the prior year period. Reported SG&A for the fourth quarter was $126 million, a decrease of approximately $6 million year-over-year.

The reduction in SG&A includes a net increase of $7 million related to the additional operating week in the fourth quarter. The remaining $13 million decrease is made up of a $3 million decrease in selling expense due primarily to workforce reductions taken in our field sales team during the fourth quarter and $10 million in lower overall administrative costs.

For the full year 2025, the effective tax rate was 9.2%, and we recorded a benefit of $4 million for the fiscal year. Looking ahead to 2026, we would expect a full year effective tax rate to be in the range of 25% to 30%. Fourth quarter adjusted EBITDA was $65 million, representing an adjusted margin of 9.1%. The fiscal fourth quarter adjusted EBITDA includes a $3.6 million environmental reserve that had been a contingent liability for many years before we became a stand-alone public company, the amount of which was only recently estimable.

Thus, excluding this expense, Reported adjusted EBITDA would have been $68 million for the fourth quarter and when normalized for the extra week, we operationally generated $65 million in adjusted EBITDA with an adjusted margin of 9.8%. This compares to 11.8% in the fourth quarter of last year and 9.5% in the third quarter of 2025. Now moving on to cash flow and working capital.

During the quarter, we generated $31 million on operating cash flow and $16 million in free cash flow, reflecting a positive improvement over our fiscal third quarter. Net cash provided from working capital was $22 million, and includes an increase of approximately $8 million, resulting from our efforts to reduce our inventory levels and improve working capital efficiency.

Consistent with our expectations, we spent approximately $15 million on capital expenditures during the period. The majority of which was related to market center facility improvement. Looking at our balance sheet. At the end of the fiscal quarter, net debt was $1.34 billion and our principal bank debt outstanding was $1.17 billion. Our liquidity position is strong with no debt maturities until 2028 and $298 million of available liquidity, including $268 million of undrawn revolver capacity and $30 million of cash on hand.

Our guiding principles for capital allocation are to maintain a strong balance sheet and allocate capital toward high return opportunities with a focus on delevering. Our prudent balance sheet management and working capital actions aim to provide a flexible foundation from which to support our business. As Jim mentioned, we launched a multiyear business transformation and restructuring plan during the first quarter of 2026. The plan is centered around three strategic priorities: commercial excellence; operational excellence; and asset to network optimization and is designed to make the company more customer-focused, agile and efficient while positioning it for long-term profitable growth.

The plan is expected to generate run rate operating cost savings of at least $75 million by the end of 2026 and to also enhance revenue. We expect the plan to be substantially completed by the end of 2027, and for costs related to the execution of the plan to be in a range of approximately $25 million to $30 million.

Now moving on to our outlook for 2026. Our expectation in fiscal 2026 is for revenue to be between flat and down 2% as compared to normalized fiscal 2025 revenue. And adjusted EBITDA to be in the range of $285 million to $315 million. Additionally, we expect fiscal 2026 free cash flow to be in the range of $50 million to $60 million, assuming capital expenditures are generally consistent with 2025.

The 2026 outlook reflects the fourth quarter 2025 exit rate annualized for both revenue and adjusted EBITDA along with the improvements we expect to generate through our plan. Regarding revenue, we plan to offset annual churn and stabilize revenue by implementing strategic pricing that is well executed along with driving higher penetration with existing customers through investing in market development representative. In addition, we are implementing various cost initiatives, which we expect to provide an incremental lift to adjusted EBITDA of roughly $40 million related to our Q4 exit rate.

We expect the first quarter of adjusted EBITDA to be approximately 7% to 10% better than the normalized $65 million generated in Q4, and that the remaining quarter of 2026 will show sequential improvement each quarter of approximately 5%. As of today, our average weekly revenue run rate for Q1 of 2026 is approximately $51 million, which is slightly above the Q4 2025 average.

As we look ahead, our near-term focus is on increasing both profitability and cash flow to lay the foundation for stronger, more durable financial performance going forward. The variety of initiatives we are executing related to our business transformation plan represents a critical step toward improving operating leverage, supporting the balance sheet and unlocking the full potential of our platform to deliver lasting value for all stakeholders.

Now I will turn it over to Jim for closing remarks before we take your questions.

Thanks, Kelly. And before we go to Q&A, I'd like to close with a few salient points that I want to leave you with on why I'm confident in our 2026 plan and the improvement we expect to deliver. First, the majority of our improved profitability next year will come from actions squarely within our control, specifically removing excess costs from our operations.

Success here is about disciplined operating standards and strong leadership, and we've already taken steps to ensure both. Because of this, I'm confident that the fourth quarter of 2025 represents the low point for profitability. From here, we expect steady, measurable progress through 2026 as we execute our plan.

Second, Customer churn has been one of our biggest challenges and now represents one of our largest opportunities. It tells us that the balance between service quality and price has not been right. We have already begun implementing some measures to address churn starting in Q1 and improving retention will be a key driver of long-term revenue stability and growth.

Third, we see tremendous value in creating efficiencies across our operating network. In 2026, we're deploying tools that enable market centers to operate more effectively in alignment with our enterprise priorities. Fourth, our new segmentation and profitability tools will give us more visibility into day-to-day performance and unlock opportunities to create value for all stakeholders.

Finally, our business model is solid. What hasn't been solid are the processes and technology underpinning it. That's why we're investing in market centers of the future, which will modernize our operations and open new avenues for growth in the years ahead. Our near-term strategic road map is clear. We are focused on disciplined execution prioritizing customer service quality and driving operational rigor.

These are the levers that will position Vestis for sustainable, profitable growth. And importantly, we are already taking quick action to execute our plan. And that gives me confidence that 2026 will mark the beginning of a stronger, more resilient investors, built to deliver long-term value for our customers, employees and shareholders.

Now I'd like to turn the call back to the operator for your questions.

(Operator Instructions) Manav Patnaik, Barclays.

This is Ronan Kennedy on for Manav. Jim, I think you alluded to culture being foundational to the strategic multiyear transformation. Culture is something -- I think the prior management team also emphasized a performance-driven culture and the strategy they articulated. Where are you in terms of culture, the additional transformation needed there? And do you have the right team and the right people to execute this strategic transformation?

It's a good question to start with, I think. I think it really gets at a number of things that we are embedded in 2026 that are key because in the culture -- context of culture, the way I see this transformation is that in the past, I don't know that everyone saw the power of what a really, really good running network can do for customers and shareholders and our employees and growth and everything about it.

And so one of the decisions we had to make here on the transformation is what do we do first, second, third and fourth. And very clearly, we'll go through this. And as we talk more this morning and beyond, of the $75 million of savings in the transformation, about 3/4 of that comes directly from just unoptimized plant operations that are the engine of this network that need to perform at a very high level to serve our customers.

And so we're starting there. Since I arrived, we've worked obviously with the third-party adviser, Alex. They had some tools we did not have. This firm -- the firm was not founded with a bunch of engineers that are built to kind of define what 100% looks like in a plant. We triangulated a number of inputs to that.

We know what that is, and that backs up our plant operations. It's all in our control. And as I said, that's 3/4 of it. So that culture, in my mind, really wraps around operational excellence and rigor. And in my mind, it wasn't where it needed to be. And therefore, that's where we must start to get a good foundation to build on top of that. So if that answers your question, I'm not sure, I think about.

And sorry, with regards to having the right team in place? And then if I may, I have a follow-up question, please.

Did you ask if I had the right team in place?

Yes, your assessment, given the restructuring and the changes within the organization is the right.

Well, absolutely. Look, I think that there's a lot of really great people in this business and every business, quite frankly. I think it comes down to giving them the vision and the strategies that we all should align to so that they are successful. They can earn their reward for coming to work at Vestis every day. I'm very confident we've launched that in 2026 and will happen actually after this call this week and more rigor to that.

So I think they're here. I just think it's more about making sure that the foundations of the business are right. So the decisions we make are right, and they work for all the stakeholders. And that's 80% of this, I think, comes down to the right leadership and vision.

And then may I ask, I think both of you and Kelly spoke to establishing a foundational position for durable and sustainable organic growth for 2017 and beyond. Are you helping with how we should think about the financial framework beyond what we've guided for '26 for the mid to long term, primarily from an organic growth and a margin profile standpoint?

Yes. Sure answer. But I think the answer you probably want to hear is the timing of that. In other words, when are we going to when do you be ready to talk about something beyond '26 and the kind of run rate into '27. We'll know more of that as we execute through these first couple of quarters in '26.

But there's going to be a lot more coming in '27 and beyond that is not here yet. We just feel like this is the year to get the foundation right. It is moving in the right direction, have the stakeholders believe if we tell them something we're going to perform to it, and that's where we are in the early innings of the game, and '27 and beyond will come in short order.

Tim Mulrooney, William Blair.

Its Luke McFadden on for Tim. So you called out improving logistics through network rationalization in your slides. I was curious if we should take that to mean you're consolidating some capacity in certain regions. And if so, can you provide any additional details around how much capacity you plan to take out of the business to streamline operations?

So when we talk about that. I think we should kind of drop back and think about it probably to be fair to ask how the previous leadership look at it versus how do we look what's the difference in our plan is probably a fair way to say about that.

From my perspective and why we started with what we did with our focus on the plants and 75% of this coming out of optimization of them is that, I don't think from my background, it's really proved out to be positive if you take 2 underperforming assets and put them together in one, it works out very well.

They don't really create the value they should. What you first should do is optimize what you have, look at to the future of what that does to your cost of the leverage part of the business, figure out what you're going to keep, what you're going to optimize and maybe what's not right for your network and then make the decisions.

And there's a lot of inputs into that. That's not an easy piece of work. And I think you have to be very careful with that. And so we're kind of putting that second. There's a little of that in the 2026 plan, not the majority of it.

The majority comes out of optimizing the inside of the plant. But that will come longer term. And there's tremendous value in this organization, both in the plants and on the road for us to optimize, but we need to get a little bit of prework done before we take those steps and roll them out to make the commitments that we're going to deliver.

That's really helpful. And maybe more of a modeling question here as a follow up. I know the EBITDA guide for next year came in higher than we were expecting. But there's some transformational costs you're planning here, obviously, in the business. Can you help quantify for us even nonrecurring expenses that are currently embedded in your adjusted EBITDA guidance for fiscal 2026? And how much of that $25 million to $30 million related to the restructuring plan is expected to following this year?

Yes. So just to start out with the $25 million to $30 million is not included in the adjusted EBITDA given that it's added back as a restructuring. So that would all be kind of outside of that guidance. And so there foremost of the nonrecurring are not incorporated into that. So the way we got to the adjusted EBITDA number was kind of what we laid out a little bit more into the prepared remarks as well.

So we are coming off of the fourth quarter, normalized for taking out the extra week, adding back the $3.6 million adjustment that I mentioned. That was really not nonoperational related to the quarter, and we'll get back to the $65 million of a normalized adjusted EBITDA.

And then we're just taking that run rate and getting to about a [$2.60] million number if you just take it time for. And then you add in the $40 million of in-year savings -- that $75 million annualized really translates into $40 million of a year, and that's kind of how we start getting to our midpoint around the $300 million.

And then there's always puts and takes that we put that range around it. But that's kind of how we're getting there. And we're -- and that is assuming that revenue is relatively stable. It does take into consideration the midpoint of our revenue guidance as well, which is predicated on ensuring that we have -- that we execute the initiatives related to pricing, with strategic pricing. This is more targeted pricing around areas where we think we're either below market, both in the new price for our new products or relative to pricing of the existing contracts.

It's also looking at improving penetration around our existing customers, of which we think we have a lot of opportunity to do. We have a lot of opportunity to really spend more time with those customers and really see what their needs are and help them and we're going to implement market development rep teams to help do that.

And so -- and then we have other areas of commercial -- just general commercial execution. So when you kind of think about all of that, that kind of is what helps build together the process of how we came back to the EBITDA revenue that we feel good about -- I mean, sorry, the EBITDA range that we feel good about.

Andrew Steinerman, JPMorgan.

Kelly, I would like to understand more details about the guided fiscal '26 free cash flow, the $50 million to $60 million. Could you go over like what are the embedded assumptions around CapEx or working capital adjustment or any other context that you might think helpful? And how is the phasing of this free cash flow are going to be throughout the year in '26? And lastly, related to that, might there be a need to raise capital to make the capital investments you're planning?

Yes. So a number of things there, right? So first, to kind of walk you through how we got to the guidance. Starting with our midpoint of $300 million of EBITDA, we have interest annually, given our debt of around $95 million. So that's not -- so that's kind of embedded in there.

We also have an estimate of a cash taxes of around $50 million, and we have the $25 million to (inaudible) restructuring onetime charges that we discussed. And then we add CapEx and there for roughly $60 million to $65 million depending on how things shake out, but generally in line with what we did this past year, and that gets you to the high end of our guidance range and maybe it's slightly above. And then we're going to have -- we have a number of liabilities on our books that have been existing for a long time.

We've experienced over the last year that some of those pay out depending on reserves for various things. And it's holding working capital, like operating working capital relatively flat. But there could be a potential to have to use a little bit of working capital as we continue to transform our business. So that's kind of how I got to the range, and in the most simple way I could kind of explain that. I think as well -- I'm sorry, you asked me additional questions, I'm going to have you to repeat the remaining questions, so I can make sure I answer that clearly.

Sure, Kelly. The second point was how might that free cash flow phase throughout the year? Is it sort of back-end or front-end loaded? And then the last question was, okay, after we have a good sense of all that, might there be a need to raise capital to make all these kind of transformational and capital investments you're planning. So the phasing -- when you think about the items, interest, taxes and even the third party support, and I think that's going to be relatively even throughout the year.

And then CapEx as well should be relatively even and similar to what we've done this last year. So the only thing that could be a little lumpy is potentially some of the restructuring charges depending on how we execute certain actions. But broadly, I don't think that would materially change the answer related to cash coming in relatively even through the year.

Okay. And then -- yes and then finally -- I'm sorry. As far as we raising capital. We don't need -- I think we talked about that we only need modest investments. I mean I think the CapEx is really all about allocating it in the right spot.

So it's not that we need -- certainly, there will be plenty of opportunities to use more CapEx on bigger things. But in this kind of short term or in this foundational year, where we really need to -- what we really need to do is CapEx, to make sure that we're putting it in the right spot.

So it's looking across our network, making sure that every spot is being allocated in the right way. And then we did our first review around that as we put our budget together for this year. We actually came back to -- it's not that we need a lot more dollars, it's that we just need them probably I look at it in a different way.

Andy Wittmann, Baird.

So on the topic of Asset optimization, it looks like some locations have already been closed. You look at the number of locations here and you talked about kind of looking at your capacity here. Jim, I was just hoping you could take us through some of the steps that you're taking to assure that the change management process as you move drivers and routes, depots closed, other things like that. What you're doing to make sure that your customer doesn't feel any of the impacts from these changes that are clearly probably the right things to do for the business, but might be tough on the network and the customer experience.

So I just thought you could address that and talk about some of the steps that you're taking to ensure that. And then also, I thought the mention of new tools that you have to ensure quality growth that's obviously a really important focus. And so I was hoping that you could elaborate on that a little bit more as well.

Love to. So two things. One, let's start with the network. I'll reinforce one of the points I kind of made in the script in a little bit a few seconds ago, is that our plants, they're like the hubs at UPS. They're the heartbeat of the network.

The whole network can only really perform as well as they're performing and customers feel that. Customers know that. The delivery network is set on that. The key before you consolidate anything in network businesses is to get the plants, get the heart beats running properly so that when you do go to combine the delivery networks, they have a chance to succeed.

And that has not been the case yet. So we have -- they have taken before I got here and even a few since we gotten here, we have taken some isolated moves where we're very logical because of the capacity or the business that was running through Note A versus Note B, where it was, competitive environment, all the other things. And we've done some of that. We slowed it down a little bit after I got here.

So that I could give, we could all get the plant to the place where we felt they were operating somewhere in the 93%, 94% effective to their ability to perform and use the capacity they add. And then the second part of the long-winded question gets to your tools, which is a lot of your decisions on what you're going to keep, what you're going to combine, what you're going to optimize, has to do with your commercial processes. And we've opened up with the fact that in the past, the rigor of the commercial processes in this business was not where it needed to be.

So therefore, we are going to use the time as we optimize our plants to then put in place new commercial processes to guide our decisions on what we keep, what we optimize or what we may end up putting out to market in a different way. But all of it to be quite frank is, it's really about starting to grow the business the right way where you're creating leverage when you grow and you're able to invest back into the network and then the decisions become much easier than if you're going the other way. And so that's the key to why we started what we've done in '26. We start with the engine, start with the heartbeat of the move and then more and more and more as we go into next year and the following. We'll unveil the final network decisions, both organic and/or inorganic kind of how we want to play this for our customers and shareholders. I hope that helps.

The new tools, by the way, i apologize, let me give you one more. The new tools -- kind of a missing piece for me in my background, and Kelly has someone heard as well or a lot is, you really need good product profitability tools and customer profitability tools to make sure that the decisions you're making are framed around that. Because the worst thing you can do is making a commitment to a customer to do something and let them down and have to go back and clean things up, which we're having to do a little bit right now.

But you do that prudently, it will work out, in my opinion. So those tools will be in play for us in the second quarter of this year, probably towards the latter half, end of February, first of March. We leveraged what we had built over decades at UPS. We brought in some help from the outside. We use the internals of the really good inside people that know the systems to build them, and we're ready to start to launch those in the second quarter, and they will help guide our decisions going forward.

Great. That's helpful. I wanted to follow up with one other topic here. I heard you mention in your prepared remarks that your same customer revenue was about flat year-over-year. I think I heard that correctly. Correct me, please, if I'm wrong on that.

And then I was just wondering, Jim, if you could just a comment on that specifically, considering the macro, there's a lot of fears from investors about the labor market softening. How much of this is -- do you view flat as a good outcome with a tough labor market backdrop? Do you feel like that's a good outcome considering all the challenges the company is kind of dealing with overall right now. And -- but I'm just kind of curious as to your assessment of what goes into kind of flat same customer in terms of what is out there macro-wise and inside the company's control, just your evaluation of that, I think it would be a helpful perspective to have here.

Yes. So you're kind of hitting on one of the things I spend a lot of time on. Just because of my background, and it goes like this is that, from a Vestis perspective, we've got about $2.7 billion to $2.8 billion of revenue in our book of business right now. It goes back to some of the changes that we've made since taking a look at the options, and that is that my opinion is very strong opinion, is that the organization was way over-indexed on bringing on new business with new sales resources with relationships we don't know, and that's fine.

It's just the amount of that. And the issue is what we bring on in that, does it create operating leverage because what happened is, as you overindex that investment, you miss the potential to grow the business of the base in a different way. And that's what we've started to move into right now with these market development representatives that Kelly referenced as well is that 80% of my background of any business we had in the network, 80% of our revenue growth came from the customers you already owned.

Because in a rational environment, you'll get the rational price increases that the customers understand, based upon your service quality and then you'll actually have a really good chance to penetrate that book of business. And that is not the way the plans were built in the past, and that's what we're building towards them. And in addition, we need to enhance our product sets a bit inside of Vestis. And we need to lean into some of these businesses like direct sales, like clean room, like national accounts, that all, if managed differently, we'll tend to grow our book of business internally versus externally.

So that's kind of a short story to how we're moving here when it comes to growing the revenue base. And certainly flat to down 2% is not where we're going to end up, it's where we start. And we plan to prove as we go step by step, but a lot of that growth can come from the revenue base we already own, and you'll see that in our results as we move forward.

George Tong, Goldman Sachs.

You talked about taking a new approach to your pricing strategy to better reflect value of services provided and the cost of service. Taking that into account, how do you think that will ultimately affect your effective pricing strategy? So in other words, what are you targeting for pricing increases going forward?

It's good question. I think that my view of that at a very macro level, very macro is that you start with your network and your cost to run your network in a relatively optimized way because that's some of the issue here is, if you're running a suboptimal network that your cost of services or cost per pound is not scaling right, it's not fair oftentimes to try and pass that on to a customer. Your job is to optimize it first, look to see how long that takes, and then you build into your long-term pricing strategy, how much your increases you think are prudent.

And that's where -- that's a piece of where we're going right now. The flip side, though, is if you find through your analysis that you have a pretty big piece of your network that has negative direct margin contribution because of previous decisions that were made, you can't let that go on forever. You've got to start to work that up at the same time. So it's both tactical and strategic at the same time, is in my mind, guide where we're going to go with some of the tools we've talked about, that will guide us.

And so I'm confident we'll do that right. And that all has to be underpinned by great service because that's what really allows you to get a fair deal with a fair customer, get deals with inflation and the kind of normal things of the business that we haven't shown we can do in the past to Vestis.

Got it. That's helpful. You also mentioned taking targeted reductions to the field sales team. At this point, would you say your reductions are largely complete? Or are they still in the early innings of happening? And over time, do you expect your field sales team to grow at a certain targeted rate to support your overall sales growth targets?

Yes. So our job is to grow jobs and investors not reduce them, okay? Let's be clear with that. That's what we're here to do. The targeted reductions we took were simply because, as I mentioned a couple of times we have a bigger opportunity in the revenue base we already have than what we were loading into the investment on that side of the new business.

So it's not either/or, it's both, and it will be both. But we felt like trimming it right now to allow us to invest in market development reps to prove and to evaluate 2 swim lanes at once on how we grow into the future will help us keep investing.

So the size of it really depends on how well we execute to be quite frank, and our ability to bring in business in both sides of those swim lanes that we can create operating leverage in our network on behalf of our shareholders. And then the investments will begin to materialize differently in the future. And we'll assess that every year that we go just based on the market competition, all the other issues or products that we're going to roll out, all of that comes into play.

So I'm really, really comfortable that the decisions we took to get here are correct. And now we just have to execute in the first innings of '26 to prove how the growth will come in the future.

(Operator Instructions) Shlomo Rosenbaum, Stifel.

Could you maybe comment on the general employee engagement levels across the organization, maybe what it was when you joined, what actions you're taking on this front? And then any comments on employee turnover trends.

Well, look, I'm not going to roll out empirical numbers on it right now. I would tell you this that given what the employees at Vestis have been through the last couple of years, with everything from the performance to coming out being a brand-new public company to moving forward to not having the best couple of years in life and then going through a transformation, I would understand that their feeling right now is not at their highest level, that's number one.

Number two is that part of transformation is to recognize that and convince them that this is a new day at Vestis, which we plan to do. We're going to talk to the majority of them this Thursday and Friday. And then back that up with the right commitments going forward to prove that we can start to turn the business.

So I don't sometimes the state you're in dictates how you have to look at things and I realize that just been a tough time for them. But that's our job is to help convince them that their decision to stay with Vestis is the right one. And so I would leave that employee engagement thing going forward. The turnover in the business typically, when you ask that question, I think the ones that really matter are usually in the -- have been historically the plants in the RSSs plant, both of them are coming down, but they're not to the place that we really want them.

And as far as the rest of the turnover, because of the obviously, transformation and so on and so forth. Those numbers will give you a little move. But that's the state of the business that's kind of how I think as we come into this call and we move forward and move everything up from here.

Stephanie Moore, Jefferies.

This is Harold Antor on for Stephanie Moore. So I guess just on the pricing front, the prior management team also had some initiatives on strategic pricing. It seems as though you guys also have an initially on strategic pricing. So I just want to know -- I just want to hear you guys talk to how you plan to implement the pricing where you reduce any some of the negative effects of the company has outpaced historically?

So I guess there's a couple of key differences. That comes from my mind, this continued concept of operating. And that is a company like Vestis as a network that should be built to attract a certain type of product at a certain price point to create value for our stakeholders. The previous leadership did not follow that thesis. There was more of all revenues, good revenue and kind of I guess, some continued increases that customers didn't really think we're rational to keep the revenue lines up and drove some churn to the business that we're having to manage through right now.

The difference is that we are aligning the ability of our cost to serve to the pricing decisions that we know create value and that sits on top of service that's improved materially in the last 3 quarters in this business as we pull the plants together to know that you can price appropriately in a competitive world and win customers where you do create value when they enter your business, that's a key difference. And you've got profit tools to help manage and measure that.

We feel like that's the way to grow the business. As I mentioned also, I think, a lot more focus on growth due to the $2.7 billion we already have in our book of business, makes that a lot easier as well. So that's the key difference as I see them as we move into '26. They'll be more sophisticated as we go down the line and we get a really, really robust pricing tools that are probably AI-driven down in '27 and beyond. But right now, there's some basics that we can help ourselves if we perform those as I'm describing them right now.

Yes. Very helpful. And then just on the product mix, I mean, you guys have been making some changes on the product mix. So just any thoughts there on, I guess, how much of this product mix has already been changed, maybe some of the investments that you've been making to make this product mix?

And then, I guess, in terms of the sales with clients or receptiveness from clients on this product mix and I guess, exiting the quarter or the first few weeks of the quarter. Any commentary would be helpful.

On the product mix, I think it's -- before we recognize right away is if you look at kind of Vestis as it spun out, came out a few years ago, most of the kind of legacy Vestis network for Aramark uniform service. It was a uniform focused organization. It was built for, the assets were built for it. They invested in it, the technology was there.

And as it spun out in its quest for revenue growth, it moved away from that. And quite frankly, we became a very focused organization in the last few years looking at things like workplace supply, women and other issues that didn't carry the same set of economics and didn't carry the same cost to serve it either. So kind of over-indexed on the mix to a set of products that wasn't balanced. We have changed that in 2026. And we are moving back to a focus on very focused piece of product mix and ensuring that our sales force sells into that the right way is compensated the right way, and we return to a business that's more balanced in product mix.

That's what I would say is the big difference. And I would say, and then Kelly can add whatever she would also like to add to that. With the first two months of this quarter look on plan as to where we think they should be. Do you want to add anything?

Yes. I'll just kind of back that up with the discussion. Over the last year, we lost about 8% of our Uniform business. And that trend has been going on for actually the last couple of years. And so with the increase in workplace supply, specifically, as Jim mentioned, Linens and [Barteels] and aprons, which is effectively reflective of the increase in business that we've added related to hospitality and food and beverage.

So I think our goals going forward are really to just be much more mindful of where end markets are we targeting, where we talked about the tools and the profitability tools, it's all around what are the right market prices to go out in the first place with versus trying to have to come back around to existing customers and renegotiate better to get the price right upfront.

And then also give the team's target with mix target mixes to be able to and reward appropriately as you mentioned, so that we can ensure that we're moving the needle in the right direction and that we reduced this 8% to something much lower for the next year.

This concludes the Q&A portion of today's call. I will now turn the floor back to Stefan Neely for closing remarks.

Thank you, everyone, for joining us today. We appreciate your time and your interest in Vestis. If you have any questions, please don't hesitate to contact us at ir@vestis.com. We look forward to speaking with you again next quarter. Have a great day.

Thank you. This concludes today's Vestis Corporation fiscal fourth quarter and full year 2025 earnings conference call. Please disconnect your line at this time, and have a wonderful day.