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Date

May 12, 2026 at 8:30 a.m. ET

Call participants

  • Chief Executive Officer — James Barber
  • Chief Financial Officer — Adam Bowen
  • President and Chief Operating Officer — Bill Seward
  • Vice President, Investor Relations — Stefan Neely

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Takeaways

  • Revenue -- $659 million, representing a decrease of $6 million or 0.9%, including a $2.7 million favorable foreign currency impact from the Canadian business.
  • Adjusted EBITDA -- $74.5 million, up 19% or approximately $12 million with a margin of 11.3% versus 7.2% in the prior year on a comparable basis.
  • Net income -- Increased by $30.4 million year over year to $2.6 million, compared to a net loss of $27.8 million previously.
  • Free cash flow -- $45.6 million for the quarter and $74 million year-to-date, an improvement of $92 million versus the same period last year.
  • SG&A -- Declined by $13.5 million or 12% year over year after adjustments for prior-year bad debt and severance expenses.
  • Plant productivity -- Improved by 11% year over year, supporting cost reduction and efficiency initiatives.
  • Cost per pound -- Improved by $0.02 year over year, reflecting a $0.02 reduction in cost of service per pound and direct operating leverage improvement.
  • Revenue per pound -- Remained flat at $1.37 both year over year and sequentially, with volume lost primarily in lower-margin segments.
  • Volume -- Decreased by 1.2% year over year, or approximately 6 million pounds, largely attributed to intentional exits from low-margin business.
  • Linen concentration -- Increased 4% year over year (down from a 7% increase in Q1) and declined 2% sequentially, showing early results from product mix changes.
  • Dispositions -- Generated $6.5 million from the sale of two inactive properties, with 11 more properties marketed at an estimated value of $15 million.
  • Debt repayment -- $34 million repaid during the quarter, including $19 million on the revolver and $15 million on term loan debt, using operating cash and asset sale proceeds.
  • Liquidity -- $344 million in available liquidity at quarter-end: $294 million in undrawn revolver capacity and $50 million in cash on hand, with no debt maturities until 2028.
  • Transformation cost savings -- $15 million in year-to-date cost reduction benefits, with full year in-year benefits now expected at $50 million (up $10 million from prior estimate).
  • Full-year guidance (adjusted EBITDA and FCF) -- Adjusted EBITDA upgraded to a $295 million-$325 million range, with a midpoint of $310 million; free cash flow now expected between $120 million and $150 million, both revised upward from previous guidance.
  • Cash capital expenditures -- $24.7 million invested in new assets during the quarter ($12.7 million in cash and $12 million in finance leases); full-year capex expected between $60 million and $70 million.
  • Operational metrics -- On-time delivery improved by 270 basis points, while customer complaints declined 4% year over year.
  • Sales productivity -- Increased by 50% year over year in the quarter, reaching about 85% of the company’s targeted improvement for the year.
  • Revenue quality initiatives -- Commercial focus led to revenue per pound decline narrowing to flat and a shift towards higher-margin products, as reflected by more rigorous pricing discipline and mix management.

Summary

Management announced upgraded full-year guidance, citing successful execution of transformation initiatives that delivered the first year over year adjusted EBITDA growth since becoming a public company. Leadership reported the inflection to operating leverage improvement, reflecting a company-wide focus on disciplined cost control, pricing, and accretive revenue mix, with both net income and free cash flow sharply higher from the preceding year. The commercial transformation drove a stabilization of revenue per pound and an initial return to revenue growth in March, with further revenue mix improvements expected as the transition from linen concentration to more profitable uniform products accelerates. Strategic asset dispositions and enhanced working capital management enabled debt reduction and materially increased available liquidity, positioning Vestis (VSTS +29.03%) for continued financial flexibility and deleveraging.

  • CEO Barber stated, “I believe based on everything I can see right now, we're going to return to growth in the fourth quarter of this year,” indicating management’s expectation for topline expansion after the execution of margin-focused initiatives.
  • Guided sequential adjusted EBITDA growth of 5% in Q3 and 5%-10% in Q4, with management indicating Q4 adjusted EBITDA run rates as a baseline for fiscal 2027 projections.
  • CFO Bowen clarified, “year-to-date, we're at about 51% on free cash flow,” and forecasted roughly 44% free cash flow conversion for the remainder of the year at the updated $310 million adjusted EBITDA midpoint.
  • Product mix shift is underway, with the business “reducing our growth in linen by 7% year over year, and we're increasing 5% year over year in garments,” according to CEO Barber, marking a pivot toward higher-margin garment segments.
  • CFO Bowen detailed that about $40 million of year over year free cash flow increase was attributed to inventory and procurement changes, $14 million from improvements in rental merchandise/service management, and the remainder from collections and balance sheet management actions.

Industry glossary

  • Linen concentration: The proportion of total product volume comprising linens and workplace textile supplies, typically representing lower-margin business in rental operations.
  • MDR (Market Development Representative): Sales role focused on driving penetration and upsell activity within existing accounts, supporting revenue quality and mix objectives in uniform and facility services sectors.

Full Conference Call Transcript

James Barber: Thank you, Stefan, and good morning, everyone. Thanks for joining us. I'm very proud of the progress our team delivered in the second quarter. Our results reflect continued momentum and disciplined execution against our business transformation plan. Importantly, the quarter marked a meaningful inflection point for Vestis, delivering our first year-over-year adjusted EBITDA growth in more than 2 years and our first improvement in operating leverage since becoming a public company. This performance demonstrates the impact of an enterprise-wide focus on execution and on managing every dollar of the business down to the penny as we work to compound value over time.

Second quarter adjusted EBITDA was approximately $75 million, an increase of nearly $12 million or 19% year-over-year on a covenant adjusted basis. That improvement was driven by a $0.02 improvement in operating leverage comprised of a $0.02 reduction in cost per pound. Guided by the initiatives laid out in our business transformation plan, we are continuing to strengthen the foundation for sustained profitability and value creation. Our progress this quarter reflects the power of a more unified performance-driven culture, a culture we are evolving upon a shared vision and values, which promote long-term value creation upon a bedrock of customer service.

Our teams across the organization are aligned around promoting disciplined operating practices and making daily decisions that improve operating leverage while enhancing the customer experience. During the quarter, we made measurable progress across all 3 pillars of our transformation framework. Starting with the operational excellence, we built on the progress achieved in the first quarter, delivering tangible improvements across the metrics that matter most. When compared to the fiscal second quarter of 2025, on-time delivery improved by 270 basis points, plant productivity increased by 11% and customer complaints have declined by 4%. This continued momentum reflects our commitment to customer service and our intense focus on consistent, disciplined operating practices.

When we execute well operationally, the customer experience improves and our costs come down. These are the leading indicators that drive durable improvement in financial performance, but we have more work to do to improve our service as we are just getting started. We also sharpened our enterprise-wide focus on cost per pound with clear accountability across the organization. By measuring success consistently on a per pound basis and reinforcing ownership and accountability through Vestis, we delivered a $0.02 year-over-year reduction in cost per pound. Combined with our progress in commercial execution, this was a key contributor to the operating leverage improvement and adjusted EBITDA growth we achieved in the quarter.

Looking ahead, we expect to carry this momentum through the second half of the year. In addition to plant and network execution, we're expanding our focus to include delivery costs and additional SG&A reduction opportunities. We are actively streamlining processes and organizational workflows to unlock further efficiency, driving continued improvement in cost per pound and adjusted EBITDA as the year progresses. Turning to commercial excellence. We continue to advance several key initiatives to strengthen decision support and improve revenue quality. During the quarter, we made progress that enable improved profitability-focused decision-making at the customer level, particularly in strategic pricing and product mix.

We also continue to strengthen customer segmentation, pricing frameworks and approval process across national accounts, new field sales and direct sales. These actions are designed to ensure that the revenue we bring into the business supports operating leverage and adjusted EBITDA expansion. We are beginning to see the impact of this work. The year-over-year decline in revenue per pound has narrowed over the past several quarters, reaching flat in the second quarter, a first time since Vestis became a public company. This progress reinforces our confidence that the commercial initiatives underway are gaining traction. At the same time, we are reestablishing commercial rigor and discipline that had eroded following the spin.

That includes enforcing pricing floors, setting product mix targets for new sales, onboarding volumes that are accretive to our network and exiting business that does not meet our return thresholds. The goal is straightforward: create durable value by being more disciplined about what we sell, how we price and how we serve our customers. As we scale these practices, we expect continued improvements in operating leverage through higher value mix, more consistent pricing execution and deeper penetration with our existing customer base, including through the continued expansion of our market development representative program. While we continue to prioritize value over volume, the early progress in improving revenue quality delivered a 0.5% improvement year-over-year in growth during the month of March.

Looking ahead, we expect this momentum to continue, driving future improvements in revenue per pound and supporting a return to top line growth as we approach the end of fiscal 2026. Turning to Network & Asset Optimization. During the quarter, we sold 2 inactive nonoperating facilities, generating $6.5 million in net proceeds that we used to repay debt. We continue to actively market several additional nonoperational properties that Adam will discuss in more detail. As we further optimize our network and position Vestis for future growth, we will continue to evaluate asset sales where market values present an attractive opportunity to unlock value, strengthen the balance sheet and better align our footprint with high-growth markets.

In parallel, we are evaluating our market positioning and network configuration to ensure we are well positioned to capitalize on shifts in competitive dynamics. We are particularly focused on identifying opportunities created by market consolidation and ensuring Vestis remains a reliable, high-quality service partner of choice for both new and existing customers. As we move through the remainder of the year, I am pleased with the progress we've made in executing while there is still work ahead, our performance to date gives us confidence in both the plan and our ability to deliver.

Reflecting the execution achieved in the first half of the year, we are increasing our outlook for both adjusted EBITDA and free cash flow, which Adam will discuss. In closing, I am very, very proud of the progress our team made in the second quarter, and I remain encouraged by the momentum building across the business. A key part of our transformation is the work we're doing to strengthen our culture, surveying our teams, investing in their development and building our Vestis together. We're building a Vestis where every teammate is proud to work and empowered to perform with a culture grounded in alignment, accountability and strategic execution.

With a stronger culture in our foundation, we are managing Vestis as a pennies-driven business, one where the compounding of small intentional improvements across mix, pricing, operations and cost structure will grow into sustainable operating leverage and long-term shareholder value $0.01 at a time. With that, I'll turn it over to Adam to walk through the financials.

Adam Bowen: Thank you, Jim, and good morning, everyone. Revenue for the second quarter was approximately $659 million, down about $6 million or 0.9% year-over-year. This includes a $2.7 million favorable foreign currency impact from our Canadian business. The decline was primarily driven by a 1.2% reduction in volume, measured as pounds processed, partially offset by improvements in strategic pricing and product mix. Revenue per pound in the second quarter was $1.37 per pound, flat both year-over-year and sequentially. Volume declined by approximately 6 million pounds year-over-year, but the volume we lost was lower quality, carrying an average revenue per pound of approximately $1 per pound.

As a result, the decrease in volumes was accretive to our overall revenue quality and reflects continued progress in strategic pricing, product mix and the intentional exit of lower-margin volume. As we discussed on our first quarter call, prior to launching our transformation, our product mix shifted towards lower-margin workplace supplies, particularly linen. In the second quarter, measured on a pounds processed basis, linen concentration increased by 4% year-over-year, improving from a 7% increase in the first quarter and down 2% sequentially, reflecting the early impact of our initiatives to drive a higher value product mix.

Cost of service decreased by approximately $4 million on a year-over-year basis, driven by lower merchandise and delivery costs in combination with improvements in plant productivity that Jim mentioned earlier, reflecting continued progress and execution of our operational excellence initiatives. SG&A declined approximately $36 million year-over-year on a reported basis. However, the prior year included a $15 million bad debt expense adjustment and $8 million of nonrecurring severance related to executive transition costs. Adjusting for these items, SG&A declined approximately $13.5 million or 12% year-over-year, reflecting our continued progress on streamlining the organization and managing our operating expenses. Taken together, the reduction in operating costs drove a $0.02 year-over-year improvement in cost per pound.

With revenue per pound flat, operating leverage per pound also improved by $0.02. Notably, this marks the first year-over-year increase in operating leverage since the spin, directly contributing to growth in net income and adjusted EBITDA. Net income increased by $30.4 million to $2.6 million compared to a net loss of $27.8 million in the prior year. Adjusted EBITDA for the quarter was $74.5 million with an adjusted EBITDA margin of 11.3% versus $47.6 million or 7.2% in the prior year.

Excluding the $15 million bad debt adjustment last year, adjusted EBITDA was $62.6 million in the prior year, with an adjusted EBITDA margin of 9.4% on a comparable or covenant adjusted basis, reflecting an increase of approximately $12 million or 19% year-over-year, driven by our improvements in operating leverage. On a year-to-date basis, our transformation initiatives are contributing approximately $15 million of in-year cost reduction benefits towards our initial estimate of $40 million as expected. Turning to cash flow and the balance sheet. We generated $58.3 million in operating cash flow and $45.6 million of free cash flow in the quarter.

This was driven by approximately $12 million of improvement in operating working capital, including accounts receivable, inventory and accounts payable, along with roughly $11 million of improvement in rental merchandise and service year-over-year. Our strong cash flow results reflect our disciplined progress in working capital and balance sheet management, including several operational excellence initiatives focused on stronger collections, centralized purchasing and tighter inventory control. Second quarter adjusted free cash flow was $57 million. As a reminder, adjusted free cash flow excludes transformation-related cash expenditures, such as third-party costs and severance payments made during the transformation period. During the quarter, those expenditures totaled approximately $11 million, consisting of $7.2 million of third-party costs and $3.9 million of severance.

On the balance sheet, at the end of the second quarter, net debt was $1.25 billion, and our principal bank debt outstanding was $1.13 billion. During the second quarter of fiscal 2026, we used cash generated from operations and proceeds from nonoperating asset sales to repay $34 million of debt, including $19 million of borrowings on our revolver and $15 million of term loan debt. During the quarter, we invested $24.7 million in new capital assets, which included $12.7 million in cash investments and $12 million in new finance leases for our delivery fleet. Year-to-date, we've invested $39.5 million in new capital assets, including $22.1 million in cash investments and $17.4 million in new finance leases for our delivery fleet.

We ended the quarter with a strong liquidity position with no debt maturities until 2028 and approximately $344 million of available liquidity. This includes $294 million of undrawn revolver capacity and approximately $50 million of cash on hand. Our capital allocation strategy continues to prioritize maintaining a strong balance sheet while allocating capital toward high-return opportunities with a clear focus on delevering. Through disciplined balance sheet management and improved working capital execution, we are creating greater financial flexibility and strengthening the foundation to support the business over the long term. As discussed last quarter, we remain active in monetizing nonoperating assets while evaluating our network for further optimization.

During the second quarter, we completed the sale of 2 inactive properties for approximately $6.5 million in proceeds, which were used to repay debt. We are actively marketing an additional 11 properties with an estimated value of approximately $15 million, all in various stages of the disposition process and more are under evaluation. As with prior dispositions, proceeds will be used to reduce debt. Turning to our outlook. Today, we are raising our full year fiscal 2026 guidance for adjusted EBITDA and free cash flow.

Reflecting the strong execution against our transformation plan, we now expect adjusted EBITDA in the range of $295 million to $325 million, with sequential growth of about 5% in the third quarter and 5% to 10% in the fourth quarter toward an increased midpoint of $310 million. Our updated adjusted EBITDA outlook for the full year as compared to our previous range of $285 million to $315 million with a prior midpoint of $300 million. We now expect in-year benefits from our transformation to be approximately $50 million, a $10 million increase over our prior estimate of $40 million in year, which translates to at least $75 million on a full year basis as we enter into fiscal 2027.

Moving to our updated guidance for free cash flow. Through the first 6 months of fiscal 2026, we generated approximately $74 million of free cash flow, an improvement of $92 million compared to the first half of fiscal 2025. This improvement was driven by the hard work of our teams executing against our transformation priorities, contributing roughly $50 million from stronger working capital and balance sheet management, along with approximately $14 million from improved management of rental merchandise and service, both on a comparable year-to-date basis. The remainder of our improvements are resulting from stronger collections practices. Overall, our free cash flow performance exceeds our initial expectations for fiscal 2026.

Given our first half performance and continued momentum, we now expect free cash flow in the range of $120 million to $150 million compared to a range of $50 million to $60 million previously. This assumes $60 million to $70 million of cash capital expenditures and $30 million to $35 million in cash paid for transformation-related expenses. As with our prior guidance, we continue to expect fiscal 2026 revenue to be flat to down 2% compared to our normalized fiscal 2025 revenue, excluding the impact of our 53rd week last year.

We also expect our full year effective tax rate to be between 35% and 40% on a full year basis with our Q3 stand-alone rate in the low to mid-40% range. With that, operator, please open the line to questions.

Operator: [Operator Instructions] Our first question is coming from Stephanie Moore with Jefferies.

Stephanie Benjamin Moore: I think a 2-part question for me. Jim, how are you thinking about the business now versus when you started about 10 months ago? And then second, building on this, given the progress you've made thus far and the implied 4Q EBITDA outlook of about $90 million, should we be run rating 4Q as indicative of total 2027 EBITDA? Any view there would be helpful.

James Barber: Okay. I'm going to do -- I guess -- thanks for the question, by the way. In the end, I'm going to let Adam take the kind of forward-looking on the EBITDA. I think the first 2, I'd like to say a couple of things about. First of all, you're right, I joined Vestis about a year ago. And I would say at that time, I was excited to come on board. And I can tell you, I'm more excited now than 10 months into this job. And really, it comes down to a couple of things I'd like to just chat about for a second. And that is first is this is a very good business fundamentally.

It's a route-based business. The customers want us to serve them. It's scalable. It is something that this business will perform and it's managed and led well. And I think where we see this now, and I look back over the last year or so and all the way to the spin, largely, the transformation benefits we're making so far are really getting back to the really good inputs to the business that were there in the past, and they just kind of lost their way a bit from my perspective.

And in fact, if I think about that in a couple of pieces, first and foremost, I think that these businesses, you have to lead with this being an operator-led business. And if your decisions aren't really processed through the lens of how it affects the operator and the customer, you can get off track. And some of that happened. I think there was a zeal for all revenue can be good revenue, and that does not work in these businesses. It has to be the right revenue in the place you want to win and moving back to that.

I really believe that you have to understand your cost to serve in this business because at that point, it becomes much easier to make accretive decisions. We've got brand-new decision support tools that have been made over the last 10 months in this business. The finance function with some outside support has really done well there. So that's going to help frame where we're moving in the second half of this year. And then really, as we move forward, it's about having the right people in this business. Vestis has the right people.

The issue just for us is to keep investing in them, investing in the network, taking care of customers, making sure they have what they need to be successful in driving this business forward. And so in the last 10 months, 11 months, that's clearly what I see so far with a whole lot of upside potential because we're just kind of getting started. I'll talk for a second about the merger because I think I get that question about 3 times a day. And first, I want to say I'm not going to get near the regulatory process with respect to the FTC. We'll let that go.

Secondly, I have been involved in these in my 40-year career, so I'm pretty doggone familiar with them. I won't recite them chapter and verse, but I'm pretty comfortable with the options that might avail themselves to us in this pretty concentrated market. And I think about those in both short and kind of medium-term dimensions in the short term. I think we're a viable competitor here and a scale competitor to Cintas and UniFirst. And what that really means to me is that there'll be a certain set of customers and even employees who really think Vestis might be a better home for them, as this merger goes down the path. That just naturally happens.

I'm not trying to throw gasoline on anything. That just happens in these processes. And largely, that has to do with culture from my perspective. And I can already tell you that we're getting inbound calls on both already, and that's something we'll manage. Our job is to be ready when the calls come the right way. Secondly, if it does have an extended regulatory process going forward and it might have some remedies involved to get this deal across the line, I think we are in a great place to be a credible participant to keep the competitive nature of this industry there. And so that's the second point for us near term.

And then if it does close, -- having done this a couple of times, look, I see why people want to merge because it is natural, there's value to be unlocked. There's no question about that. But these are really, really tough jobs to do. And they take more time than you think, and there will be disruption. And we will be ready to manage that long term or kind of longer term as that goes forward. I think I also get the question, can we compete if this merger goes down? And the answer is yes. We are in the early days and weeks of looking through this lens with different optionality of what might happen in this consolidation.

As to what our strategy should look like. We owe that to the Board. It hasn't been put forth yet, not since I've come for sure. And we are just in the early days, as I said, our job is to figure out how and where we're going to play and win, and it doesn't mean necessarily do it the same way. Our job is to innovate. Our job is to take cost curves to different places and give customers a different choice that they haven't had in the past. And we will do that. We'll work with the Board to get that across the line.

And as we move into '27, we'll avail that to everyone around the industry who has knowledge of that. So I'll let Adam take the kind of third piece, Stephanie, on how we look at kind of going forward if we exit out the 90s in Q4 and so forth.

Adam Bowen: Stephanie, it's Adam. Thanks for the question on adjusted EBITDA. So the way to think about the revised guidance is we're coming out of Q2 at 74.5 million, 5% step-up in Q3, and then we've guided approximately 5% to 10% step-up in Q4. So in terms of how we exit the year, that will really be determined over the next couple of quarters. But the way that you can think about how we would start FY '27 is where we're going to be exiting FY '26 out of Q4. And we'll have more firm guidance for you on '27 as we get closer to the beginning of that fiscal year later this year.

James Barber: I'd add a point because -- and we're not ready, Stephanie, to put numbers to it yet. But clearly, what happens in these processes as you scale them up and continue sequentially forward, there will be a natural ramp because it's scaling the way that you're seeing at scale. And so there will be, as I say, a wind at our back as we enter '27. We've got to finalize some work here to see how high that might be able to go and make sure that we deliver that to the shareholders and the stakeholder.

Stephanie Benjamin Moore: Got it. No, I really appreciate it. And if you don't mind, if I could squeeze one more in here. You have very strong free cash flow performance for the quarter and outlook for the year. So if you could talk about of that free cash flow, what's driving the strength? How much of that is reoccurring? And then I will say a question that we get quite often is when to expect a return to top line growth. So any color there would also be helpful, and I'll pass it on.

Adam Bowen: Yes. Stephanie, it's Adam again. Let me take your free cash flow question, and then I'm going to pass to Jim on your question for top line growth. So let me just go back to last year, FY '25 a bit and talk about where we were year-to-date in the same time period we are this year. So year-to-date last year through second fiscal quarter '25, we had a negative free cash flow of about $18 million. This year, we have free cash flow of $74 million year-to-date. That's on a fiscal year-to-date basis. So that's a $92 million swing. So what's happening there?

There's a lot of transformation initiatives focused on operational excellence that are driving stronger working capital management. And you're seeing it particularly in our inventory. And that credit goes to our teams under Jim and Bill's leadership, tightening procurement strategy, more centralized purchasing and ensuring we only have inventory on hand to meet our immediate needs. That's about $40 million of the year-over-year improvement. Then you get down into merchandise -- rental merchandise and service. That's tighter management on injections into our rental merchandise pool that's serving our recurring customers and great work by the team there on managing to use existing inventory to serve customers instead of bringing new inventory onto the balance sheet in service.

That saves on the cash flow side. It also saves on the merchandise amortization side on the income -- and the third piece of that is tighter management on the balance sheet. That's giving us about $12 million in the nonoperating working capital and the non-rental merchandise and service. So that's the bulk of what's driving it. And all of that's coming from operational excellence initiatives. And the last pillar that I'll mention to you is really good management on collections. Its strong DSO and good management of income statement conversion to free cash flow. Those are really hard fat initiatives by our team. We did not have visibility to full execution of that at the beginning of the year.

So we came out of FY '25 when on a full year basis, we had $6 million in free cash flow. And our initial guidance was $50 million to $60 million, which was a 10x multiple of where we were for the whole year in FY '25. So how we've gotten from there to here in the first 6 months is a lot of hard work by our teams. Now I don't expect operating working capital benefits to continue to manifest to this degree as we move throughout the year.

So the way to think about modeling to our updated midpoint of $135 million, which is between the $120 million and the $150 million we updated you on this morning is to look at our FY '26 Q2 that we just finished. We exited with $45.6 million in free cash flow. There's a couple of onetime things in there that you should peel out. About $12 million in benefit from merchandise onetime benefit from those management initiatives that I mentioned a moment ago. There's about $7 million in benefit from the balance sheet. That's coming from lower commissions paid to our sales team. It's coming from pre-base being paid to us.

Those are onetime items that are not going to repeat. And to also think about stepping up EBITDA sequentially into Q3 and then into Q4 on those increments we gave you on the EBITDA guidance and adjust for higher CapEx because year-to-date, we're only about $22 million in cash for CapEx, and we're going to step that up to our range to meet our range of between $60 million and $70 million on the full year. And also think about stepping down the cash paid for transformation because we paid $11 million in Q2, and we're going to step that down to about $5 million each quarter in Q3 and Q4.

So if you take those views throughout the rest of the year, that will help you get to the midpoint of 135. I'll give it to Jim now for your question on the sequential revenue.

James Barber: So I do get this question a lot as well. Before I just say what I really think about it, I would say that there's a lot going on beneath the surface on the revenue line in this business. And a lot of that has to do with us getting right some of the revenues in the business at the wrong place, dealing with what I call non-regrettable churn or customers leaving the business because of direct margins with that out of whack. And so there's some of that, that's continuing through the business, but that is fine for us to manage. We can do that and create value on the bottom line.

As you say, everybody said, that's not the long-term strategy. With all that said, I believe based on everything I can see right now, we're going to return to growth in the fourth quarter of this year. That's what I believe. And so I'd rather not put a number on it at this point, but I do believe that all the actions we've taken to date as they run through and move forward and all the other growth pieces of it from new field sales to national account sales to direct sales to all of those channels, which are being optimized, I believe we're going to grow in Q4.

And I'll leave it at that for this call, and we can update that following the next call.

Stephanie Benjamin Moore: And Adam, sorry, did you say what free cash flow conversion would be going forward? You gave a lot of really helpful numbers there, but I may have missed that one. Yes. No problem. I don't think I shared that. So year-to-date, we're at about 51% on free cash flow. That's a historical -- aligns with the historical number that the company has shared previously. As we go throughout the remainder of the year, I would really think about it, Stephanie, in terms of those midpoints. So $135 million in free cash flow conversion on $310 million in adjusted EBITDA. That's 44% thereabout for the remainder of the year.

Let us get through the balance of the year when I've got a little bit more CapEx on this come in the back half, I've got the EBITDA increases coming, and we'll give you an update when we give you fiscal '27 guidance at the end of the year.

Operator: We'll take our next question from Manav Patnaik with Barclays.

Ronan Kennedy: This is Ronan Kennedy on for Manav. We've taken a look at the 10-Q, and I think the $5.8 million revenue decline was $10.5 million decline in uniforms offset by a $4.7 million increase in workplace supplies. If I'm not mistaken, you said this is resulting from sales product mix shift prior to commencement of the plan. Is there an element of this being driven by underlying demand pressure? And do you expect uniforms to reaccelerate as execution improves? And then how should we think broadly about revenue mix if there will be a deliberate shift as a result of these strategic initiatives around commercial discipline, exiting low return uniform accounts, et cetera?

If you could just provide some color on that, please?

Adam Bowen: Yes. Manav, it's Adam. I'll start, and then I'll give it over to Jim for more of a strategic forward-looking thing. And you're absolutely correct on your assessment of the sales product mix shift that's happened prior to the commencement of our transformation. And it was really a shift into more workplace supply, the lower profitable products there. It's particularly in linen concentration, which has a food and beverage focus to it. As you heard in our prepared remarks, we exited about 6 million pounds year-over-year at about $1 of revenue per pound compared to our consolidated reported revenue per pound of $1.37. And that gives you an idea of kind of the low-calorie nature of that particular volume.

And that's in a heavy linen concentration. As we said in Q1, year-over-year, our linen volume has increased 7% -- when we look at our fiscal second quarter, the one we just completed, linen concentration is up on a per pound basis only 4%. That's a nice improvement. We're lapping some installations that happened in Q1 of fiscal 2025 that was focused more on that food and beverage segment and that restaurant linen space. And sequentially, from Q1 '26 into Q2 '26, we're down about 2% as we exit that lower profitable volume out of the business. So your assessment of that is correct.

Our focus inside of Vestis now is to shift back more towards uniforms and higher profitable mix. That's through our strategic pricing and our commercial excellence initiative. And I'm going to shift that over to Jim now and let him chat with you a bit about the strategy.

James Barber: Yes. I would just say, look, most recently, since the data I looked at as of yesterday shows that our focus on returning to garment growth and just swapping it out looks exactly like what we want to do, which is we're reducing our growth in linen by 7% year-over-year, and we're increasing 5% year-over-year in garments. And we're swapping one for the other. And that's -- we're going to continue that. Workplace supplies offset some everything in the middle. But that's a piece of what you're seeing happening now that will also impact revenue per pound going forward and then the other downstream effects of that. And that does not mean we're getting out of the linen business.

It means where you can process it properly with the right investment in the right strategic areas, we're going to process linen in a competitive way and our shareholders should be happy. But there's just too much linen in the wrong places for us that we needed to clean up, and we're doing that as we speak.

Ronan Kennedy: That's very helpful. And if I may, a follow-up on all of that. I think you spoke about reestablishing the commercial rigor through pricing floors, the mix targets, which we touched on and then exiting that lower return business. How much of this is already implemented versus still ahead? And how should we think about when that fully flows through to revenue quality? And then also, is there a way to think about the near-term trade-off between protecting revenue versus improving profitability and any potential impact on volumes there?

James Barber: I'll start with the second half. As I said, that's why we're not through that yet, which is why I deferred to growth in the fourth quarter, but we're moving through it because we started 2 quarters ago to move down this path. So we are -- our churn, if you look at it in the way we're looking at it right now, customers leaving the business regrettable and nonregrettable. Our churn that we regret to have is better than last year, but we're also swallowing some of the other stuff leaving.

But as Adam said in his script, if you look at the revenue per pound when what's leaving, it is that very low-calorie revenue that we can't really make economic profit on. So that's going on. When you keep moving forward and you look at this thing, the growth side of this, we are, I would say, if I had to putting in a baseball game, we're probably in the third or fourth inning of how it's benefiting the business today versus what it will look like tomorrow. We just rolled out our first view of product profitability that's never been here before, and it is very insightful for us.

It takes us into different places in processes and floors and pricing that is moving into the second half that will bear fruit in the second half, and it will keep going as we move forward. So that's kind of where I think we are in the whole process for the right way. And always keeping in mind this is that in the unique place we are, in my opinion, inside of Vestis, our real job at the same time to grow the business is understand where the cost per pound is going to go, not where it is today.

At that point, you open up the market to bring a different business that's more accretive than just pricing in a historic way. And so those are the tools we're almost there with them. You'll start to feel that more going forward, and we'll know that both top and bottom line will come together at that point. So...

Operator: We'll take our next question from Tim Mulrooney with William Blair.

Timothy Mulrooney: Jim, I spent a lot of time here talking about revenue. Let's switch to the cost side for a moment, if you don't mind. Your cost per pound improved $0.02 in the quarter. How much of that was from improvements in production versus delivery? It sounds like you're making progress in both areas, but not sure which one drove the improvement in the quarter.

Adam Bowen: Tim, it's Adam. Thanks for the question. So if you look at our adjusted operating expenses year-over-year, and we've got that broken out throughout our materials and our supplementary materials, you'll find that on Page 7. 602 -- these are the costs that directly impact adjusted EBITDA. $603 million in fiscal second quarter '25 and $585 million this last quarter, fiscal second quarter '26. So that's about an $18 million delta year-over-year. There's a lot of puts and takes happening in that, but let me give you some of the big drivers.

We have that plant productivity improvement that Jim mentioned in his script, that's driving about $9 million of improvement inside of our plant costs inside of cost of service. Now there's some other costs that are offsetting that. So you're looking externally at the income statement, you're seeing about a $4 million year-over-year improvement in cost of service. that includes that $9 million that I mentioned for plant offset with some increases for things like energy that are happening in the market and labor costs that are happening for higher merits that we have to pay folks year-over-year. But the bulk of what's driving that improvement in adjusted operating expenses is really SG&A improvement. That's a $13.5 million improvement year-over-year.

That's from reduced headcount and optimization throughout our operating structure. That's about 12% on just net SG&A year-over-year, but we are seeing really great improvements inside of our cost of service and plant facilities for some initiatives on the operational excellence side.

James Barber: I would add, and Bill wants to say anything, I would say that we are not avoiding the driver side of this. It's just secondarily to come. We will speed that up in the second half. And then we are kind of purposely looking at this market consolidation to think about what happens and how we might react the situations that avail themselves to us because ultimately, your long-term network, including the dispatch of that is going to be set by your growth model. And so we are -- we're chipping away at it, taking some of the low-hanging fruit. We'll continue to do that.

Long, long term, though, with the nodes, we're going to blend that into our 2027 strategy, and we'll talk to you about that when that's kind of finalized, okay?

Bill Seward: Bill, I just want to add one thing there is we're making some big moves in the bigger ticket areas like labor and those expenses. There's a lot of smaller moves, attention to detail kind of things, whether it be truck idling or hangar reclamation and all these other places that are also adding up the meaningful savings. But most importantly, and the comment I want to make is that none of that is being done without a focus on improved service levels. So we may talk about those later. We talked a little bit in the script about some of the improving service metrics. We are going to get cost and service at the same time.

Timothy Mulrooney: Okay. Yes. That's all really helpful. And if I'm hearing you correctly, it sounds like maybe you're purposely being careful about not going too fast on that side to see what happens in the marketplace over the next 6 to 12 months. So I fully understood and makes sense. On the macro, so I saw that pounds processed, they were down 1% in the quarter. I think it was flat last quarter. But you're deemphasizing linen. So I don't really know how to read the volume down 1%. Am I concerned about the macro here? Is this more just a transformation story to deemphasizing some of these things?

Could you talk a little bit about what you're seeing on that side of things, maybe the net wear metrics, any change in customer behavior and spending patterns and categories that you'd consider to be more discretionary? Any color there?

Adam Bowen: Yes. Tim, I'll start. It's Adam, and then I'll pass on to Jim and Bill to add some additional color. So it's a result -- the volume decline is a result of intentional actions being taken by the team to exit that lower profitable volume, particularly around linen concentrated customers and customers where we're just not meeting certain profitability targets. And if you look generally at -- we've included some detail inside of our earnings deck this time that gives you the history of pounds going all the way back to when we spun out from Aramark. And our volume in fiscal second quarter '26 is not too different from where it was in the first quarter of '24.

It's about 2 million pounds different on a quarter versus quarter basis. But our revenue is so drastically different. And that's because we've, over this time, brought in that more profitable volume. So it's smart for the team to target it, and they're doing a great job just getting started on that on the commercial excellence side of things.

James Barber: I would just add one point is that definitely the majority, the number is moving. So I don't want to quote a number right now, but the majority of the customers, when we go to them and have a discussion about previous price positioning, accept the rate increase. They accept it. And there's lots of reasons that could happen. But obviously, our job is not to run them out. to get them to a place where we're both satisfied with the service we're providing. And so the drop in the pounds exposure-wise was much bigger than that.

But the way that the team did it with the customers was it was done the right way, explained all -- we went through everything with the whole team to understand, look, we just can't -- there are certain things that you can't do economically based upon some things that might have been put in the market in the past. And so to that end, we're very comfortable with the customers that are staying with us and the ones that are leaving, we take the cost out with it, but our job is to see if we can't keep them at the right rate. So I would add that to Adam's comments.

Operator: [Operator Instructions] We'll move next to George Tong with Goldman Sachs.

Keen Fai Tong: You've emphasized a more data-driven approach to pricing and improving revenue quality, which is helping us stabilize revenue per pound even as volumes decline. How are you thinking about the trade-off between pricing and retaining volumes? And what level of volume pressure are you willing to accept to achieve your pricing targets?

James Barber: So I think I just walked through that a second ago. But I would say, in addition to that, I'd add a couple of points. Number one, our floor rates in our systems based upon our new tools had told us they weren't quite where they needed to be. So we're adjusting those. And in any situation where you're applying price, George, you have to keep your eye on the win rates. And very clearly, what we've seen since I've been here involved in the process with Bill and the other sales leaders and Pete and the rest of the team and Aaron is that our win rates are not dropping.

This is about growing in a smart way and going forward. And that's what I believe will show in the fourth quarter of this business is that as we move through this, there's some unregrettable work we had to get done, and we're moving through that as gracefully as we can. And we -- some readjustment of the piles are coming. But the net-net of all the activity should be the revenue growth in this business. And there's a big piece of that.

I mentioned on the call, the rollout of MDRs in this business. one of the largest areas of growth opportunity is, quite frankly, a reasonable rate increase in the $2.6 billion of revenue I already have in this business. And this business had not looked at it through that lens, and the MDRs are positioned exactly to help us get that as it is defined in some of our most targeted segments, and it's not all the same. And so it's a collage of growth efforts. It's not one single thing. And so you have to bring them all together and know that sum of the parts is going to grow at acceptable rate, both top and bottom line.

And I think you're going to see that very clearly as we move into Q4.

Bill Seward: And I would add, I think we got started in some places a little earlier than others. And in those places, we're seeing some pretty favorable results. We've got signs of growth in national accounts, and that's coming from disciplined approach to go win new business and considerably better outcomes on all of our renewals. So there's really good momentum in a couple of places, and I think we'll have the whole company here on track, as Jim said, coming Q4.

Keen Fai Tong: Got it. That's helpful. And then can you quantify how sales productivity is trending exiting the quarter? And what level of improvement is required to return the business to positive organic growth?

James Barber: Again, I'm going to go right back to what I said a minute ago. It's not just new sales growth. In fact, that's the smallest part of it, if you want to know that, quite frankly. Now we purposely took a look at that the third day I got here and assessed the economic value of what we were doing. And it took us to -- we are over-indexed on that vertical. So we've made some adjustments with that. We still believe in new sales. The answer to your second part of the question is the productivity is up 50% year-over-year in the quarter. They were selling too small.

It is up 50% and it is about 85% of what we agreed we would get done this year, and we moved to that in the second half of the year. And so that is working. And the job is to really blend new sales from the outside, of which still about 40% is nonprogrammers for us. You're going to get that swim lane going. You're going to get the national accounts going, as Bill talked about. You're going to get the field sales going with the MDRs and all of those will come together to grow the business.

And I would say to you that I believe that the largest of that may come from the MDR and we're done. And so -- and that's new to the business. And so all of that growth. It's just a different way to look at growth largely through a lens of penetration to my background. But you'll see that and we'll call that out as we continue to grow and move into the fourth quarter for you, right?

Operator: This does conclude the Q&A portion of today's call. I would now like to turn the floor back to Stefan Neely for closing remarks.

Stefan Neely: Thank you, operator, and 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 [email protected]. We look forward to speaking with you again next quarter. Have a great day.

Operator: Thank you. This concludes today's Vestis Corporation Fiscal Second Quarter 2026 Earnings Conference Call. Please disconnect your line at this time, and have a wonderful day.