Vestis Aktie

Welcome to the Vestis Corporation Fiscal Third Quarter 2026 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 Adam Bowen, Interim Chief Financial Officer. Also with us on the call today is Bill Seward, Chief Operating Officer. Jim and Adam will provide prepared remarks, and then we will open the line to questions.

Before I turn the call over to Jim, I would 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, and good morning, everyone. We appreciate you joining us. Our third quarter results highlight consistent execution of our transformation plan. For the second quarter in a row, we grew adjusted EBITDA year-over-year and improved operating leverage, and we did it by running the same disciplined playbook across the business. Third quarter adjusted EBITDA was approximately $81 million, an increase of roughly $15 million or 23% year-over-year on a covenant adjusted basis.

Adjusted EBITDA margin expanded to 12.2% from 9.8% a year ago. We again reduced our operating expenses, holding cost per pound flat year-over-year as we continue to exit low-quality volume. And for the first time as a public company, we grew revenue per pound year-over-year, up $0.04 or approximately 3%, driving a $0.04 improvement in operating leverage per pound year-over-year. With that context, let me walk you through the progress we've made against each of our 3 strategic priorities.

Beginning with operational excellence, our key metrics are improving consistently, and those gains are holding. Compared with the fiscal third quarter of 2025, plant productivity increased by 9%, on-time delivery improved by 80 basis points and customer complaints declined by 74 basis points. These results come from executing the same disciplined practices well, consistently and with the customer at the center of everything we do. When we run our operations consistently, service improves and cost comes out of the business. Those are the leading indicators of durable financial performance.

We also made meaningful progress in exiting low-quality revenue volume, reducing our linen concentration by 6% on a year-over-year basis. We are encouraged by the progress, and we know there is meaningful room to keep raising the quality of service and revenue and our revenue per pound. Importantly, these productivity gains are beginning to flow through to lower plant operating costs and a lower cost of services. Together, our operational excellence and effective cost management reduced our cost of services on both a year-over-year and sequential basis.

We also enhanced operational excellence by streamlining key corporate support functions through an outsourced service agreement with a leading third-party provider. This should make us more flexible as an organization and enhance how we support our markets and customers, improving the overall quality of our service. It reflects a new way of operating at Vestis, one designed to lower our cost structure while giving us greater capacity to innovate in how we run the business.

We should begin to see the benefits of this arrangement in our fiscal fourth quarter results and more significantly as we enter fiscal 2027 and beyond. As we close out fiscal 2026, we expect to sustain this operational discipline and build on the initiatives we launched in the third quarter. Beyond plant and network execution, we are creating a more efficient and nimble operational structure, one built to better support and anticipate our customers' needs, sharpen our strategic execution and drive future profitable growth.

Turning to commercial excellence. Pricing execution was the biggest driver of our year-over-year revenue performance this quarter, and it sits at the center of the commercial discipline we have built. Our progress starts with pricing. We continue to sharpen strategic pricing at the customer level, supported by data-driven tools designed to make our pricing and product mix decisions more profitable while we remain customer-centric.

We also further strengthened customer segmentation, pricing frameworks and approval discipline across national accounts, new field sales and direct sales. Together, these actions should ensure that the revenue we take on supports operating leverage and adjusted EBITDA. That work is now evident in our results. After several quarters of narrowing declines, revenue per pound reached flat in the second quarter and turned positive in the third, rising $0.04 or approximately 3% year-over-year. This is the first year-over-year increase in revenue per pound since Vestis became a public company, and it was driven primarily by disciplined pricing execution, reinforced by improved customer segmentation and product mix.

We continue to put value ahead of volume. Pounds processed declined by 4.5% year-over-year as we intentionally exited unprofitable business, improving the quality of our revenue over the same period. At the same time, we are working to restore the commercial rigor that had eroded after the spin. That means enforcing pricing discipline, setting product mix targets on new sales, onboarding volume that is accretive to our network and exiting business that does not meet our return thresholds.

The principle is straightforward: create durable value through disciplined decisions about what we sell, how we price it and how we serve our customers. As these practices become standard across each market center, we expect operating leverage to keep improving through higher value mix, more consistent pricing execution and deeper penetration of our existing customer base, supported by the ongoing expansion of our market development representative program while we continue to manage our costs on behalf of our customers and our shareholders.

Our top line is still developing, but it is increasingly driven by pricing execution and better customer segmentation rather than solely focused on volume. Turning to asset and network optimization. The progress we've made so far this year comes from applying one consistent set of operating and commercial disciplines across the entire business to drive operating leverage. The same playbook deployed in every market. Running that playbook everywhere has proven the model works, and we have seen this proof of our financial results so far this year, specifically in operational and commercial excellence. What we have not yet achieved is uniformity across our network.

The gap between our strongest and our lowest performing markets is meaningful. Many of our markets already operate at industry-leading margins, profitability and service levels, while our lowest performers continue to weigh on the overall results. Closing that gap is our single largest opportunity. The next phase of the transformation moves from applying the playbook broadly to executing it consistently but with consideration for the unique markets in which we serve, holding each market center to a more customized playbook, resulting in a higher standard designed to harmonize and optimize our assets and network. That is the work that will define our path as we exit fiscal 2026 into fiscal 2027, and it's work we've already begun.

During the third quarter, we continued to assess and segment how our network is positioned across key markets, using our available capacity to identify growth and optimization opportunities to further strengthen operating leverage while improving route efficiency and lowering delivery costs. As we optimize the network and position Vestis for growth, we will continue to evaluate asset sales where valuations present an attractive opportunity to unlock value, strengthen the balance sheet and better align our footprint with higher growth markets.

In parallel, we are evaluating our market positioning and network configuration so that we are ready to act on shifts in competitive dynamics. We are working to optimize routes while remaining particularly focused on the opportunities created by consolidation in our industry and on remaining a reliable, high-quality service partner that new and existing customers choose. As we work through the remainder of the year, I'm pleased with how we are executing our transformation.

We're on track to deliver on all of our commitments for the year. And today, we are again increasing our full year guidance for free cash flow, which Adam will discuss in more detail. A foundational part of our transformation is our culture and in particular, the accountability we are building at every level of the organization.

We are aligning our teams around clear performance standards and our compensation around performance-based incentives to reward results, using them to drive stronger strategic execution and focus across the entire organization.

On that point, our year-to-date fiscal 2026 results, along with our guidance for the fourth quarter, include accrued expenses for our management incentive bonus or MIB program. Creating a rewards-based culture was important to me as we set out our fiscal 2026 business plan and has remained paramount as we stepped through each quarter this year. While we have historically had an MIB program, fiscal 2026 is the first fiscal year in which a management incentive bonus has been accrued for at this level since Vestis became a public company.

Payments are subject to the final fiscal '26 results and certification by our Compensation Committee later this year. But these accrued expenses, while in the normal course for any business, have not been normal course at Vestis until now. Bonuses must be earned every year, but establishing them in our run rate is an important step towards building a rewards-based culture. Together with surveying our teams, investing in their development and building our Vestis, this is how we ensure that every teammate is proud to be here, equipped to perform and rewarded for delivering.

In closing, I am proud of what our team delivered this quarter. With a stronger culture as a foundation, we are running Vestis as a penny-driven business, one where small deliberate improvements across mix, Pricing, operations and cost structure applied consistently in every market center can compound into sustainable operating leverage and long-term shareholder value one cent at a time. With that, I will turn it over to Adam to walk through the financials.

Thank you, Jim, and good morning, everyone. Revenue for the third quarter was approximately $662 million, down about $12 million or 1.8% year-over-year. This includes a neutral foreign currency impact from our Canadian business. The decline was primarily driven by a 4.5% reduction in volume, measured as pounds processed, partially offset by improvements in strategic pricing, net of a $10 million decrease in onetime loss in ruin revenue. When excluding the impact of the lower onetime loss in ruin revenue from last year, total revenue was down approximately $2 million or 0.3%, a sequential improvement from our fiscal second quarter 2026.

Revenue per pound in the third quarter was $1.42, an improvement of $0.04 year-over-year and $0.05 sequentially. The year-over-year increase in revenue per pound was driven by favorable changes in product mix, improved strategic pricing and the intentional exit of lower margin volume. Volume declined by approximately 22 million pounds year-over-year, but the volume we lost was lower quality, carrying an average revenue per pound of approximately $0.55. As a result, the decrease in volumes was accretive to our overall revenue quality. As we discussed throughout this fiscal year, prior to launching our transformation, our product mix shifted towards lower-margin workplace supplies, particularly linen.

In the third quarter, measured on a pounds processed basis, linen concentration decreased by 6% year-over-year, improving from a 7% increase in the first quarter and a 4% increase in the second quarter, reflecting the early impact of our initiatives to drive a higher value product mix.

Cost of services decreased by approximately $15 million year-over-year, driven by lower merchandise, plant and delivery costs. This improvement reflects the increase in plant productivity that Jim mentioned earlier, supported by continued progress and execution of our operational excellence initiatives. SG&A declined approximately $7 million year-over-year or approximately 6%, reflecting our continued focus on streamlining the organization and managing our total operating expenses.

Net income increased by $11.7 million to $11 million compared to a net loss of $0.7 million in the prior year. Adjusted EBITDA for the quarter was $80.9 million with an adjusted EBITDA margin of 12.2% versus $64 million or 9.5% in the prior year. Excluding a $1.8 million adjustment for pre-spin-related inventory last year, adjusted EBITDA was $65.8 million in the fiscal third quarter of 2025 with an adjusted EBITDA margin of 9.8% on a comparable or covenant adjusted basis, reflecting an increase of approximately $15 million or 23% year-over-year, driven by our improvement in revenue per pound and operating leverage. When we look at our per pound metrics, the reduction in cost of service and SG&A drove a $27 million or 4.5% reduction in our adjusted operating expenses, which are those expenses that directly impact adjusted EBITDA.

Taken in conjunction with our volume decline from the exit of lower quality revenue, cost per pound remained flat at $1.24 year-over-year. However, as previously discussed, our revenue per pound grew for the first time in Vestis public company history by $0.04 or 3%, driving an increase in operating leverage per pound by the same amount, $0.04 per pound.

Notably, this marks the return to operating leverage per pound levels not seen at Vestis since the third quarter of fiscal 2024, directly contributing to our growth in net income and adjusted EBITDA. On a year-to-date basis, our transformation initiatives are contributing roughly $30 million of in-year cost savings towards our estimate of approximately $50 million. As a reminder, in-year transformation benefits are calculated by taking the accumulated year-to-date differences between our quarterly adjusted EBITDA for each quarter in fiscal 2026 and our fiscal fourth quarter 2025 adjusted EBITDA of approximately $65 million when measured on a 13-week basis.

We realized approximately $5 million in transformation benefits in the fiscal first quarter of 2026, approximately $10 million in the fiscal second quarter and approximately $15 million in the fiscal third quarter just completed, with the remaining $20 million expected in our fiscal fourth quarter, in line with our implied range for adjusted EBITDA. As Jim discussed, during the third quarter, Vestis entered an agreement with a leading third-party provider to streamline our corporate support functions, primarily concentrated in back-office activities within finance as well as certain information technology and customer service support functions. This arrangement should create a more efficient and agile corporate support organization that will better serve our markets and customers and is expected to generate approximately $10 million in annualized cost savings beginning in fiscal 2027, with some benefits realized as early as the fourth fiscal quarter of 2026.

The cost benefits from this arrangement are already embedded in our guidance for the year and in our stated expectations for both the in-year and annualized benefits from our strategic business transformation.

Turning to cash flow and the balance sheet. We generated $65 million in operating cash flow and $47 million of free cash flow in the quarter. On a year-over-year basis, operating cash flow improved $42 million, driven in large part by an $11 million improvement in net income, combined with a $4.3 million improvement in merchandise and service and further supported by strong balance sheet management year-over-year, including a neutral impact from operating working capital during the quarter.

Our strong cash flow results reflect the disciplined progress of our teams in working capital and balance sheet management, including several operational excellence initiatives focused on stronger collections, centralized purchasing and tighter inventory control. Third quarter adjusted free cash flow was $56 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 $8.5 million, consisting of $7.2 million of third-party costs and $1.4 million of severance.

On the balance sheet, at the end of the quarter, net debt was $1.2 billion, and our principal bank debt outstanding was $1.1 billion. During the third quarter of fiscal 2026, we used cash generated from operations to repay $30 million of term loan debt. During the quarter, we invested $23 million in new capital assets, which included $18 million in cash investments and $5 million in new finance leases for our delivery fleet. Year-to-date, we've invested $62 million in new capital assets, including $40 million in cash investments and $22 million in new finance leases for our delivery fleet.

Throughout fiscal 2026, we've invested in capital assets that should provide clear financial returns to Vestis and our shareholders, in line with our growth mindset. Year-to-date, we've installed 30 new industrial washers and dryers across our plant network and are on pace to end the year with approximately 60 of these new assets installed, a significant increase from prior years. Additionally, we've invested in new information technology assets and programs to bring Vestis into the modern age. Taken together, these actions show that we can fund our transformation and position the business for growth without a step-up in overall capital intensity.

Our current capital investment strategy is holistic, yet targeted on the growth needs of our business. We ended the quarter with a strong liquidity position with no debt maturities until 2028 and approximately $352 million of available liquidity. This includes $294 million of undrawn revolver capacity and approximately $58 million of cash on hand.

Our capital allocation strategy continues to prioritize maintaining a strong balance sheet while allocating capital towards 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. We continue to actively market 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, and we expect several to close in the remaining months of fiscal 2026.

Turning to our outlook. Today, we are raising our full year fiscal 2026 guidance for free cash flow. Reflecting the strong execution of our teams around disciplined working capital and balance sheet management, we now expect free cash flow in the range of $160 million to $170 million compared to a range of $120 million to $150 million previously. Our updated midpoint is $165 million in free cash flow for the year, $30 million or 22% higher than our prior midpoint. And this assumes $60 million to $70 million of cash capital expenditures as well as $35 million to $40 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 adjusted EBITDA in the range of $310 million to $315 million for fiscal 2026 with a midpoint of $312.5 million, an increase of $2.5 million from our prior outlook. Based on our full year guidance and results year-to-date, adjusted EBITDA for the fiscal fourth quarter is implied to be in the range of $84 million to $89 million.

Additionally, we now expect our effective tax rate to be approximately 25% on a full year basis with a Q4 stand-alone rate at approximately 30%. With that, operator, please open the line for questions.

[Operator Instructions] Our first question today comes from Stephanie Moore with Jefferies.

Maybe just to start, I would love if it would be possible for you to provide some color on how you're thinking about top line revenue as you're closing out fiscal '26 and also beginning to look forward into fiscal '27, probably a good place to start.

I'll start. It may end up that Bill has a couple of comments as well when I'm done because I'm going to actually -- I like the question because I think a lot of answers can come together to kind of support this, Stephanie. First, I would say that the revenue per pound discussions we just had -- as we move into Q4, I would say I classify it as we're encouraged by what we're starting to see. And if we continue on the trends we have, we're going to see growth in the fourth quarter, okay? That's statement number one. As we move through this and get closer to the business, some things become apparent. First that I consider us having 6 growth drivers in the business, that being direct sales, nationals, field, clean room, Canada and kind of everything else. 5 of the 6 of them are growing. The one that's not is field and it needs to be corrected.

We've made a recent move in bringing Steve in from the outside. He's been in the business 3 months. He's been in the business before and has held various CEO leadership roles, and I am confident in what I've seen in the first 3 months as he puts the strategy together to not just deal with the field issue that we have, but also to really bring some new views of how to grow this business in the other segments of Vestis. I think lastly, the other thing I'd bring into this because I'm not going to give guidance for '27 yet on growth, but I will tell you, we plan to grow in '27. How will be a function of the next couple of months of work. I think the other thing that's kind of new in the script today and the remarks was this concept of uniformity in the network and/or top to bottom, too much variability.

Super enthused at the work that's been done now to kind of quantify it in quadrants. And our first 2 quadrants are as good as you could imagine and exceed most any margin number you can think about. The problem with some of these things in networks is averages of averages don't really tell how good you can be. So we segmented it. We're going to focus really on quadrants 3 and -- they will be our #1 priority next year. We've talked a lot about capital to grow maintenance versus growth capital. Those 2 quadrants, we will plan to invest about 70% of our plant investments, which is relatively modest, quite frankly, especially the free cash flow we're moving out with now.

The -- our goal is to move them up each up 1 quadrant, 4 turns into 3, 3 turns into 2, and so it goes. And then at that point, the kind of growth becomes a natural byproduct because it's not just the margins in the business that they're kind of holding us back, but they're the issue for growth as well because if they're not performing at the service levels, it's hard to bring on new customers and retain customers. And so we've seen it. It's real. It's there.

And we're going to attack it, not just the way it's been looked at historically, but maybe some of the learnings from the past about asking our really, really good leaders to move to these quadrants to help us move them forward in a quicker way than just normal course of business because these networks are really about human capital, and we'll put the financial capital in, making sure it's matched to the right leadership. So look, I'm encouraged by it, especially revenue per pound. I know everybody wants us to grow volume. We will grow volume in '27. How we do that, as I said, we'll update that at the end of Q4 as we talk about '27, okay?

Appreciate all the color there, Jim. And maybe just a follow-up, maybe can you see into the third or fourth quadrant here? What are the issues? How can it be fixed? How long do you think it can be fixed? And then probably most importantly, for those listening on the call here, what's the margin gap or the ultimate impact to the bottom line?

I'm -- that's packed. So it is -- the margin gap top to bottom is large. That's about all I'm going to say right now. But the great thing about it is that the top couple of quadrants and the way we've done it, Stephanie, is if we got roughly 120 to 125 market centers, we could have been close to 30. The top 2 quadrants, I can tell you, exceed anybody's margin view of what this company can produce even on an average basis. The 2 of them do, they're there. And if you think about that, then you know the business model works. It's correct. It runs properly. It produces outputs that, let's just say, people don't believe Vestis can produce.

We do. We do it already in well over half of the market centers. The other ones struggle. And so it's up to us now in near term. This to me is the #1 priority for next year for us as we move through transformation to move these quadrants up. put the right capital in, the right leadership and the right discipline in it. And we're actually building up very unique market center playbooks that leverage where each one is. And it's a long story about it. But the whole thing is still based upon service. That doesn't change. I'll ask Bill to add a couple of points to that in a second. But it is about getting those to where they look like they're, let's say, big brothers and sisters in the other network.

And then this thing will -- I think will end up surprising people how good this can be as we move forward. But that's -- I don't want to quantify it yet because there's a couple of nuances. -- on how we want to deal with a couple of market handles, the market dynamics that are going on in this industry right now. So we have to play that together. But it is material, and it is -- as big as transformation was to 2026 for us, this is that big in 2027 to get this right. Bill, do you want to add anything?

Yes, I'll add a couple of things. Thanks. First of all, as Jim mentioned, that top quadrant is also -- I know your question originally started with growth, Stephanie, is growing. And we've got some really good stuff. And the margin gap you alluded to, that same gap exists between the top and the bottom across cost metrics, across service metrics, in some cases, and other metrics that are really important to us. So we've launched an intense focus on that quadrant 4 that bottom 30 market centers that is just kind of kicking off in full steam right now, leveraging some of the momentum we brought in through the year on some of the cost and service and quality metrics. And we're really excited about the fact that these places do need some love. They do need some capital. And Jim mentioned a minute ago that between 2026 -- and if you think forward into 2027 in quadrant 4, we're looking to earmark about 42% of our CapEx in the plant to those market centers. And we've shown in 2026 that when we invest in those market centers with leadership, we invest in them with some CapEx that the market centers do respond, and we do get better outcomes for our customers and for our shareholders.

I'd say the last thing that's important is that I don't think Vestis has ever properly put a bottom-up business plan together. It's happening now for '27. It will be very unique to each market center. We will -- in some market centers, we're ready to really move growth out, we will move different resources and investments into them in '27 to do that. The other ones will stabilize them. At times, you don't really want more if you can't handle what you have. So you manage that as a priority. So it's going to be very unique. But again, we'll talk more about, Stephanie, when we roll out 2027 with a lot more flavor of the real question about the margin gaps so that you can have a better feel for it because it should roll up to produce our targets and financials for 2027. So thanks for that.

And last one for me. Could you maybe help us understand what a normalized free cash flow conversion can look like here?

Yes. Stephanie, it's Adam. I can take that. Thanks for the question. So year-to-date through Q3, we're converting at about 54% -- but you know is very much in line with what the company has said historically about free cash flow converting at around 50%. So that's where we're going to hold as we come through the end of the year. Our full year guidance at the midpoint for our new free cash flow midpoint of $165 million over the $312.5 million for adjusted EBITDA has us converting at roughly 53% as we go into FY '27. And that's really where I think is a good place for us to exit. And as we go into '27 and give you more guidance for next year, you'll hear more for us on what we think the future could look like.

Our next question comes from Tim Mulrooney with William Blair.

Jim, I was going to ask you about your plans to drive volume growth, but it sounds like you're planning to give the investment community an update next quarter on that. Is that correct?

Yes, I am. Absolutely. All right. So I'm going to hold off on that, and I'm just going to ask some different questions. Just building off of Stephanie's last question there, Adam, on free cash flow, what was the primary reason behind the updated free cash flow guidance? What drove you to push that higher?

Yes, it's a great question. And as we exited FY '25 last year, we came out with about 2% conversion on free cash flow last year, about $6 million on the whole entire year. So as we started this year, looking at the work that we knew we needed to do around working capital and balance sheet management and just converting adjusted EBITDA to free cash flow, we knew we had some things to go out and do as a part of our transformation.

And full credit goes to the team all across Vestis under Jim's leadership, really driving good working capital management. We've been neutral on working capital for the last 2 quarters. We had a little bit of benefit from working capital in the first quarter. The team is driving really great collections. Our DSOs are at the lowest that they've been since the company went public. So it's really a holistic cross-functional effort to drive free cash flow conversion, and it's exceeding our expectations, especially compared to where we were coming into the year from FY '25.

So as we look at these last 2 quarters of delivering north of $40 million in free cash flow coming into Q4, just gives us a lot of comfort to say, hey, Q4 is going to be another -- Q4 is going to be another quarter where we get that mid-40s range that we've been putting up the last 2 quarters. So really excited about the work the team has done, really encouraged about the future around free cash flow conversion. We're normalizing back to where the company has discussed this metric so far. And again, I'll give full credit to everyone across the company. It's been a team effort.

Yes. Yes, it was good. It was good to see that. And I looked at the working capital metrics there. It looks like some things are moving in the right direction there as well. So that was...

Not to cut you off, it's really exciting this quarter because a big part of our free cash flow is net income. We had $11 million of net income in the third quarter, and we've turned net income positive for the year, which is really exciting, so to see some of that free cash flow coming from net income and positive earnings per share is just great.

Yes. That makes it easier. Okay. That's really helpful. Just the last one for me. The EBITDA run rate that's kind of being implied here for the fourth quarter -- is it fair? Or is it a good way for us to think about that as a sustainable run rate as you are entering into fiscal 2027? Or are there some seasonal factors here in the fourth quarter that would prevent us from thinking about it that way?

I think it's a stable place for you to begin thinking about how we're going to build up FY '27. Obviously, there's going to be growth in '27. We're targeting enhancements and efficiencies. We're going to come into '27 with a cost-neutral mindset. That's how we build our plan. But I think it's a great way for you to begin thinking about how we would build that. And of course, there's some minor seasonal fluctuations throughout the year. You certainly saw that in FY '26. We've seen that before. But we're able to manage through that, to be perfectly honest with you. So I wouldn't expect there to be too much fluctuation in that run rate as we enter the year, and it will improve.

Our next question will come from Andy Wittmann with Baird.

I guess just the -- you got the annual revenue guidance, you got 3 months in the bag. And when I do some math on it, it looks like your fourth quarter revenue guidance is up at least 2%, 3 percentage points more than that to kind of the top end here. So like I guess I'm just kind of curious as to what's that comprised of. Is this just -- you've been running off the volume and the volume comps? Is there -- I know, Jim, you talked a lot about your market development reps trying to get fair pricing. How much of a factor is that?

Is the macro contributing or hurting you in terms of adds stops in terms of number of wearers that your existing customers I'd love to hear you just talk a little bit about the components behind that and how they drive your fourth quarter improvement, which obviously gives you that good top line momentum or better -- much better top line momentum into '27, please.

I'm going to have Adam start on the 2% number because we have a little bit different number. Let us clean that up, and I can give you a couple of thoughts on the rest, okay?

Yes. So Tim, the way I think about Q4 revenue is let's just compare -- establish what our baseline is to make sure we're all on the same page. Q4 2025, if you go look at our printed materials, you'll see a $712 million number there. You have to normalize that number for 14 weeks because we had an extra week in Q4 of fiscal '25. So that $712 million becomes really around $660 million that we're going to use as a comparative. So just start there. As you've seen throughout the year this year, we've done a really great job, credit to the team for stabilizing the revenue run rate around that $660 million to $663 million range all throughout the year. And that's a great accomplishment coming out of down 3% in prior year.

So I would think about Q4 as we're moving in to exit the year as being generally around the same place for where we are in Q3, which would still be year-over-year growth versus Q4 last year. But I think that's going to get you more in the down 1.5% range, if I just do the comparatives there. So I just wanted to kind of lay that out. If you have any questions on that, I can take them, and then I know Jim wants to add some things.

So Andy, on some of the buildup, I think one of the things that we went through in the discussion today, which I'd like to point your eyes to is this concept of the revenue per pound leaving the network versus the cost per pound to just level set the magnitude of why the focus has been what it's been in 2026. And that is that we went -- essentially had looked at the commercial side of the business and recognize that we have been going on prior to starting this transformation with all revenue, any revenue is good revenue, it's all accretive, and it's not the way it works.

Now we are almost 4 quarters into it and the 4.5% of volume that left us in the quarter had a revenue of $0.55 a pound. The business has a cost per pound of $1.24 -- if you just let that settle for a minute and you say to yourself, what's more important right now, getting the right volume in the network or how much of it, I think you can see pretty much in those 2 gaps of why we're doing what we're doing. And this is a couple of quarters on. As far as when does that stop, I think that just is dependent upon each customer's decision on how they look at things. But our job all along in some of these -- many of these instances, it's almost non-regrettable is what we call it, but that's not our long-term strategy, to be clear.

We are going to grow volume. I'll give you a couple of touch points right now on why I'm pretty enthused about what's getting ready to come. I talked about Steve, his background, he's putting his strategy work to it. We got a new leader out in the field, Karla. Karla Perez comes to us with background as well in this industry. She's off and running as well.

We've talked about MDRs a bit. The MDRs are -- the target is to -- and we'll give you exact numbers when we get in '22, but we're planning to about triple to go 4x X on the MDRs that we have. But where we sit right now as we exit -- as we come out of Q3 and into Q4 is the average weekly revenue being produced by the MDRs are what we used to get out of a new sales rep, twice, okay? So that -- you'll see more about that as we go forward. I would say in your ads over stocks, the ads over stops are somewhat neutral to a little bit -- it's not helping us -- we're not getting a lot of lift. A lot of that though is also tied into some of those customers that were the $0.55 per pound customers who have made certain choices that's going to have some more stops coming out of them. That's just the way the business runs. But to me, as we move through this, direct sales is turning for us right now. The MDRs are already going for us. National accounts continue to be very good.

Canada is growing way above -- well, not way above, above what we thought, I'll put it to you that way. And as I've talked about, it's just the field, and we can fix the field. The field -- a lot of that will be the MDRs fixing that, and a lot of that will be the quadrant 3 and 4 market centers, joining us and the rest of the company where we need to be, and I'll close with this, is that for the first time ever, we're going to have a leadership conference in the first month that we start the business that everyone wants that aligned on what their exact role is to grow this business. And it will come naturally because of the alignment of these in a route-based business. That's how it works. So it's not one thing that you win with, it's 4 or 5. And so it will come, and we do Q4 and we'll show that in '27, how it's going to come, when it's going to come and why it's going to come, okay?

It's really exciting -- you can look at our filings and see Canada revenue increasing year-over-year by about 70 bps already in Q3. We are already starting to see some of the fruit.

It's a really good answer. I just -- maybe just one other thing just to drill in because I really feel like your MDR, your market development reps comments, Jim, are important, particularly as you said you're getting a pretty great productivity out of them and you want to invest there. Can you just refresh mine for the benefit of everyone's kind of view as to what their focus really is? I remember you saying when we met this past summer that there was going to be a big focus on getting fair price there, but it also sounds like you're tasking them with trying to get some deeper penetration of existing customers. Are those still the 2 primary are doing for you?

Let me say it to you. First, let me segment the business. They are really targeting this nonnational space it's about half of the revenue that they're after when you put circles around them. And it's much more of a patch-based growth strategy because the industry allows -- if you're performing as you should be, allows a rational API once a year that's signed in the contract, and we should be able to go out and get that. And that's somewhere between 3%, 4% and 5% typically in the industry. And Vestis' history has been we don't get it and we get less than 0. And the MDRs are out changing that pattern, and they are showing us it works right now and are not in full force.

We only have about 30% of them in the model right now. But Steve and Karla and team are running down the road to close that and get them in full flight as we move into 2027. That's not to say we won't go after new rooftops with the rest of them. We're going to do that. But we will do that when it's and they're already there. So we're not abandoning anything. We're just splitting it as we started here in Q3. And yes, at the same time that they're going in to negotiate and ensure that we secure renewing contracts with the right APIs in them, they're going to try and sell additional value to the customer, be it through various channels. It could be ad stops, could be direct sales coming in. It could be other issues that they're going to go out there and get that.

And we capture that if it is a lift as new revenues. And that goes into the calculation of what the investment can be in the returns. And by the way, the average is 2%. We've had weeks that's been higher than 2% in the last couple of months. So it's very encouraging, quite frankly. It's what we kind of thought it would be. And by the way, the way that they'll then be incent and earn returns on this for us is the way the entire patch of land grows, not just each individual account, and that means you have to retain customers at the same time. Therefore, our churn has to continue to go down.

And therefore, they also have a very, very loud voice in customer satisfaction that will add more into next year about some real digital changes we're making in this business that perhaps the industry hasn't seen yet to make sure that, a, we prevent defects; and b, if we have them, we use those to our advantage in the customer relationship versus the past. So you'll hear a lot more about the MDRs, and we'll actually quantify it when we come out in 2027.

Our next question comes from Manav Patnaik with Barclays.

This is Ronan Kennedy on for Manav. You delivered a 3Q EBITDA beat and expect the full remaining $20 million of the FY '26 transformation benefit in 4Q, yet I think the $10 million prior guidance high upside was removed. Can I just -- apologies if I missed this, just precisely confirm the puts and takes to that? And then second part to an EBITDA question is the implied 4Q of roughly $84 million to $89 million is an appropriate starting point for '27. How should we think about the largest drivers of improvement from that level? Is it field recovery, the quadrant improvement, pricing, volume, network optimization or something else, please?

Yes. Ronan, I'll start out. I know Jim will want to jump in here on your last part about the levers -- let's just talk about the adjusted EBITDA guidance. It's actually an increase in the midpoint. We were guiding you $295 million to $325 million for the year as we came out of Q2. That was a midpoint of $310 million. Remember, last call, we were giving you the sequential 5% increases and then 5% to 10% for Q4. I would say we're dead in overperforming a bit in Q3, and we're dead in that range for Q4, and we feel comfortable raising that midpoint to $312.5 million. Even though we brought the top end down, we're just tightening the range as we see the business perform through the end of the year to give you a really tight guide for where we expect Q4 to be.

And what's driving that between Q3 and Q4, your question on the transformation benefits. I outlined how to think about calculating that and how we think about it in the script. But essentially, it's each quarter's adjusted EBITDA in FY '26 compared to the Q4 '25 exit rate of about $65 million. And so it was $70 million in Q1, that $65 million is $5 million.

You do the math in Q2, you do the math in Q3 to $81 million, less than $65 million, that's how you get to $15 million. And as you go into Q4, you can do the math there, and that's where you get the additional $20 million. So we're at a run rate coming into Q4 of about $81 million. We're only about $5 million away from the new midpoint, $86.5 million for Q4. That's how we get to $20 million. $15 million of it is already in the bag. And the drivers there is our outsourcing project that we launched in Q4. Many thanks to the team, a very heavy lift there. We signed a new contract with a leading third-party provider to outsource most of our back-office functions in finance, customer service, call center as well as some areas of information technology. And that's going to give us the benefit in Q4 with that kind of steady revenue state that I mentioned on a prior question when Andy asked about it a moment ago. So that's kind of the buildup for Q4 as we exit into FY '27.

We're going to give you more detail and color on how we build up the FY '27 guidance when we get later in the year. But hopefully, that answers your questions. And if I didn't get everything, let me know and we can go back over something.

Let me add one point to it that we put in the script is that we are -- this concept of a bonus program, if you think about what we talked about, and I'll even size it for you, when we finish this year, it should come in somewhere between $15 million and $20 million of what was not in last year's EBITDA that is now in our EBITDA.

And you can do the math on what that looks like. And so how this thing builds up for '27, I'd rather hold right now because we're still finalizing the quadrant work on that's going to come, the MDRs, the new sales, a couple of other things Steve and Karla and team are working on. So I don't want to quantify it yet because I think it's super important to quantify it as we move out of transformation and into more of a project initiative world that we'll be able to bring updates to, number one, how it's built and then number two, how we're performing this year. So I hold on that, but I don't want you to undersell the fact that $15 million, $20 million has been banked for us that we don't have to bank again in the same way when it comes to year-over-year margin degradation. And that's a good story for us and it's good for our people, too.

That's extremely helpful. If I may shift gears, I think you've indicated decisions around certain market centers and network optimization are being evaluated alongside broader industry dynamics, including potential industry consolidation. Could you just provide your current assessment of current industry dynamics, any changes there? And then any potential impacts of industry consolidation in terms of how that potentially shape your thinking around investing in retaining, consolidating or exiting certain specific markets?

Well, I would -- at least the way I think about it, I'd bifurcate it just a bit. Number one is that the market centers in the new Vestis going forward that are in -- that are not performing as they need to. This is -- these things, once you put the capital in and the right leadership in, number one, I tend in the past to see them work. And by the way, you can pretty much see that somewhere between 6 months and 8 months. And I've seen the impact in this network they're going to have in a very positive way.

Next statement is in certain situations, that market dynamic currently today may be allowing a node in the network to not return shareholder value, you might consider exiting that market center and doing it in different ways. So that's one way you have to look at it.

We all know there's a merger going on, a potential merger in second request right now, how that plays out, where it plays out, how that impacts Vestis or not and how the FTC is thinking about the various scenarios that can unfold would also guide us into what we might do longer term. And that's not to say, by the way, that Bill and team and the engineers aren't continuing to optimize routes, lower the cost as it is, but we've got to make sure each one, as you think about it, essentially is a small business in and of itself. And if it's not shareholder accretive for us to put capital allocate it to it and return it to shareholders, then we have another obligation to deal with it, right? And we'll do that. But it's not very quick, but we're starting -- it's already started now.

We're building it up, and we're going to have really good conversations with about that. Of course, I'm not going to tell you what and where they are. But I will tell you that the really, really strong ones exceed my expectations about what this business can actually do, and I'll leave it at that on that point.

[Operator Instructions] We'll go next to George Song with Goldman Sachs.

You continue to exit low-quality volumes in the quarter. Can you discuss how much of the business you still see as low quality? And how much additional exits you expect to make over the near to medium term?

George, it's Adam. I'll start there, and I know Jim will want to jump in and talk to you about kind of the future and how we're thinking about that. Just from my perspective, I think it's underappreciated the level of effort that the team has put in this year to really exit some of this unprofitable volume to do it at the degree that we've done it to take out $0.55 revenue per pound and target it in that way and still maintain a very stable top line throughout the year as a Herculean effort. So full credit goes to them. I think we're kind of lapping the exit of the majority of the bad linen volume that we saw came into the business last year. But as you know, urging your network of unprofitable volume is a continuous journey. that we're always going to be on. But I think as we enter into Q4, you can really start to see that we've taken out a significant amount of that volume and kudos to the team for the effort there.

I'll give you, I guess, one more point, George, is that lease-up last numbers I remember looking at late last week was it's about 75% of that volume we kept and about 25% exited us. And as to where it goes, it just depends as each individual customer assesses how they go forward and the choices that they have. But I would also -- it would be fair to say that I do consider in the past, Vestis was the low price in the market and not by a little, but by margins that don't make sense at $0.55 a pound when your business is $1.24 to run it. So I hope they all stay with us and give the chance to grow back and support their companies. That will be their choice. We had to make the choice to stop the degradation of that and we just couldn't put it away at the right rates. And then each year, by the way, that will change, and we'll modify what we do, how we do it, where we do it based upon where the cost curves are going to go, not where they've been. And so all those kind of factor into what happens in the future, George.

That's helpful.

The RPP growth is driven by certainly, as you talked about, the exited volume, but there are substantial amounts of customers that are paying more, and that's also driving the RPP growth on a year-over-year basis.

Got it. That's helpful. And then you discussed initiatives to sharpen your pricing strategy. Can you estimate how much pricing is increasing on a like-for-like basis once you exclude the benefit of exits from low-quality volumes? And what your target is for pricing increases on a like-for-like basis?

The way I'm not -- the reason I'm not going to answer that right now is simply because that's going very nicely in everywhere but the field. And the field is where we have to go forward here. And so -- and most of that activity within the field accounts.

You mean non-national field, right?

No-national, if you call it that, is that -- so George, I think that ultimately, that section of the business, which is material in this business, needed to take step 1 this year and we'll move into step 2. A lot of that depends on the quadrant that you're in. So if you look to quadrant 1 and quadrant 2 and halfway in quadrant 3, the answer to that question is going to be very good and fine and adjustable. The MDRs will manage it and grow it. The ones that aren't providing the right service, they are not taking care of the quality of the product at the right rate and then put a bad dispatch on the street that we're going to fix they would have less chance to get that.

And so averages average get you where they are right now. So I think it's more about -- again, and we would -- we'll tell you that, George, when we build up '27 because we're going to segment the initiatives where you can better understand the power of each lever, not just one outcome number and we question whether or not we can get it. We would rather give you one level down, convert so you can manage your models the right way, and we can manage our business the right way, and we'll get a little tired of that as we end Q4 into '27.

And we'll take a follow-up from Stephanie Moore with Jefferies.

Look, I think, Jim, you gave a lot of color this morning, and appreciate you wanting to build a bottoms-up plan for 2027. But maybe it would be helpful if you just kind of tell me what maybe offsides in my thinking here. I mean if we were to just annualize the updated 4Q EBITDA performance, you called out the $25 million in cost cuts for '27. Obviously, you have a lot of work to do, you talked through the quadrants. But again, if we kind of annualize that math for 4Q, make some assumptions there, I mean, is that a pretty good run rate as we start to think about go-forward levels? I mean, again, maybe just tell me what I could be missing in that math. And then at the same point, if we look at the margin profile, it looks like you're going to be at about 14% for the fourth quarter. Again, where can that be over the next couple of years, too? So just wanting to put a bow on everything that was said today.

Stephanie, let me jump in at that. I'm give you kind of some color here to think about Q3 and as we enter into '27. I know Jim will want to add as well. So if you just take the midpoint of our guidance for Q4, which is $86.5 million, and you put that over roughly the same revenue that we had in Q3, if you just kind of hold that flat, we're going to get an exit EBITDA margin of around 13%. So it's a bit lighter than what you mentioned, that 14%. I just wanted to call that out to make sure you get that level in your models.

And the way you can think about the wrap just for today is 86.5% exiting times 4 is going to get you roughly $350 million. It's about $346 million. And I don't wants you to add that $25 million, I'm going to tell you why. Embedded in Q4 '26 is $20 million of transformation benefits, right? So if you annualize that 20x 4, that gets you roughly $80 million. That's where the $75 million annualized is coming from as we exit Q4. And there's going to be improvement. There's going to be enhancements in '27, and we're going to talk about top line and all of that in more detail. But I think you kind of stick there in that general range for now and then give you an update in a few months, it would be appreciated.

And let me say this. So I respect exactly what you said, and I agree with what Adam said. There is a piece, though, that a lot of this depends what we're going to invest back in the business in 2 that the best thing we can do is work on our balance sheet and reinvest in this business and make sure the shareholders are dogged on happy when we're done. So that -- and we're not done with the work yet, Stephanie, we've got to finish that off in the next couple of months here inside these quadrants, taking Steve's strategy, taking the market dynamics and laying them over the network to be able to say, do we go up, stay the same or go up based upon what Adam just walked you through, based upon what we need to keep versus distributing the bottom line, but knowing that every time we keep a $1, we're going to get more than $1 back.

So we'll just give us a little bit more time, a couple more months, and we think we'll have something nice to share with everybody at that time.

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

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.

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

Welcome to the Vestis Corporation Fiscal Second Quarter 2026 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 Adam Bowen, Interim Chief Financial Officer. Also with us on the call today is Bill Seward, Chief Operating Officer. Jim and Adam 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 a 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, 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.

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 Instructions]

Our first question is coming from Stephanie Moore with Jefferies.

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.

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.

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.

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.

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.

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.

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.

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.

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

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?

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.

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.

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?

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...

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

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.

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.

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, 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.

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?

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.

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

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?

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.

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.

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?

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?

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.

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.

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.

Welcome to the Vestis Corporation Fiscal First Quarter 2026 Earnings Conference Call. [Operator Instructions]

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

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 Adam Bowen, Interim Chief Financial Officer. Also with us on the call today is Bill Seward, Chief Operating Officer. Jim and Adam will provide prepared remarks, and then we will open the line for 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'd like to turn the call over to Jim.

Thank you, Stefan, and good morning, everyone. Thanks for joining us. We started fiscal 2026 with disciplined execution and a clear focus on our business transformation framework. I want to walk you through what we've accomplished in the first quarter across our three pillars: operational excellence, commercial excellence and network and asset optimization.

Before that, I want to briefly touch on the financial performance for the quarter. Adjusted EBITDA was $70 million, improving sequentially from fiscal Q4 2025, which represented a low point in our profitability. This improvement is exactly what we set out to achieve with our transformation, reflecting early tangible progress from actions to bend the cost curve and drive better utilization of our people and our network.

Now turning to the first pillar of our business transformation, operational excellence. In a route-based asset-intensive business like ours, operational excellence starts with the basics, consistent service and a network that runs reliably every day. When we execute well in our plants, we improve productivity, enhance service quality and unlock operating leverage across our network.

In the first quarter, we made progress in the leading indicators that matter most to our customers. On-time delivery improved by 300 basis points versus the first quarter of 2025. Plant productivity improved 7% and customer complaints declined 12% year-over-year, and our average weekly lost business in Q1 declined 15% from the fourth quarter. These are not just statistics. They are leading indicators of operational efficiency and profitability. We expect the benefits to show up in the customer retention, lower cost per pound and stronger operating leverage. This is the kind of progress that builds momentum because when the network runs better, we can serve customers more reliably and create capacity for the right growth.

Going forward, operating leverage is going to be our primary scorecard for value creation. In the first quarter, we saw a $0.02 improvement in cost per pound over fiscal Q1 2025, which translates to roughly $10 million in adjusted EBITDA at our current volume and mix levels. We expect to see continued improvement in this trend throughout the year. And let me be clear, this is not a 1-quarter effort. This is about building repeatable processes and a culture of accountability that produces better performance quarter after quarter.

Given our operational priorities, I've asked Bill Seward, our Chief Operating Officer, to join us today, and he's prepared to provide additional context on our operational execution and key priorities in response to your questions after the conclusion of our prepared remarks.

Moving on to the second pillar, which is commercial excellence. In the first quarter, we advanced the decision support tools we need to execute our strategy and improve revenue quality. This work lays the foundation for stronger commercial engagement, a more favorable product mix, a strategic pricing model and better customer penetration.

We've also begun strengthening local customer engagement, including the introduction of market development representatives to help deepen relationships and expand penetration over time. This approach brings more discipline to how we grow and how we create value, helping our team make informed decisions on mix, pricing and how we serve customers, shifting the organization to growing value for Vestis.

The third pillar is network and asset optimization. During the first quarter, we undertook market studies and analyzed where we see the best opportunities to grow profitably and serve customers reliably over time. In addition, we are actively marketing several non-core properties for sale as part of optimizing our asset footprint, and we intend to use those proceeds from any non-core property sales to repay debt.

Stepping back, the key takeaway from the first quarter is that we're improving operating consistency while building the analytical foundation required to make better commercial and network decisions. That is how we expect to unlock the operating leverage that's embedded in this business. We've also taken steps to connect deeper with the decision-makers driving actions across our business. For the first time since going public, we've assembled a comprehensive training program delivered in person here in our corporate office to educate our key leaders on operating leverage.

As we look to the second quarter, we are beginning to advance pricing and product mix strategies, building directly on the operational progress already underway. We'll continue to manage the business through the lens of cost per pound because that's where the operating leverage will show up most clearly with every penny of improvement in cost per pound being worth approximately $5 million of adjusted EBITDA on our current total volume and mix levels.

And while we're encouraged, I'll emphasize this, we are still early in the transformation. We're laying the foundation now so we can drive more consistent value creation over time.

To wrap up, I'm pleased with the progress we've made in the first quarter. Going forward, we're managing Vestis as a pennies business. The compounding effect of small disciplined decisions on mix, pricing, delivery, plant and SG&A is how we build sustainable, profitable growth and shareholder value. When we get that right, it allows us to not only improve financial performance, but to grow the business and create jobs in a way that is durable and supported by the economics. That's the standard, and that's the focus of our entire team.

With that, I'll turn it over to Adam to walk through the financials.

Thank you, Jim, and good morning, everyone. Revenue for the first quarter was $663.4 million, a decline of $20.4 million or 3% versus the first quarter of fiscal 2025. Rental revenue declined $17.9 million and direct sales declined $2.7 million, offset by a $0.2 million benefit from the positive [indiscernible] processed through our market centers. However, the product mix of [Technical Difficulty]. To measure volume, we calculate the weight and pounds of uniforms and workplace supplies processed by our plants at a category and subcategory level. Approximately 95% of our total revenue is related to products that are reflected in the volume of pounds processed.

Looking closer at our volume, we processed 2% less in uniforms on a pound basis, but increased our linen volume by 7% in the first quarter of 2026 when compared to the prior year. For Vestis, Linen is a subcategory of workplace supplies, and we saw meaningful shifts in other workplace supply subcategories towards more linen adjacent products such as towels and aprons, which are significantly more costly for us to process than a uniform. While our revenue dollar mix has only shifted 1% to workplace supplies from uniforms year-over-year, our volume product mix has shifted more dramatically, representing a lowering of revenue quality and a limiting of top line operating leverage despite stable overall throughput.

The shift in our product mix has negatively impacted revenue per pound by $0.04 or 3%, which equates to roughly $20 million or the total amount of our year-over-year decline in revenue. Quite simply, Vestis has not experienced a diminishment in sales volumes, but the pounds we processed in the first quarter of 2026 carried lower revenue quality and thus lower revenue per pound than the prior year, which when combined with other commercial practices that were in place prior to the beginning of our strategic business transformation has negatively impacted total revenue.

Improving our revenue quality and revenue per pound is directly in line with the commercial excellence priorities Jim discussed earlier. Our revenue focus is to drive a more favorable product mix, supported by stronger decision support tools and a more strategic approach to pricing and customer penetration over time. As we continue to execute these initiatives throughout the year, we expect the year-over-year quarterly changes in revenue to narrow in line with our full year revenue guidance.

Our cost of service was down $3 million year-over-year on a combination of lower merchandise and delivery costs. Even though plant costs were up year-over-year related to shifts in product volume mix that I discussed previously, we saw a 3.7% improvement in our average weekly plant cost in December when compared to November, a financial improvement tied to the plant productivity gains Jim mentioned in his remarks.

SG&A was down approximately $0.9 million over the same period on a reported or gross basis. However, in the first quarter of 2026, SG&A expenses were impacted by approximately $7.8 million in third-party support costs and $5.5 million in severance related to our strategic business transformation. When adjusted for these items, SG&A was down approximately $14 million or 12% year-over-year as we have taken aggressive action to improve our total operating expenses.

Our cost per pound improved by $0.02 compared to the prior year, with costs measured as those operating expenses directly impacting adjusted EBITDA. At our current volume and product mix levels, $0.02 per pound equates to roughly $10 million in adjusted EBITDA, the amount of cost offset we saw against our revenue decline of $20 million year-over-year. First quarter adjusted EBITDA was $70.4 million, representing an adjusted EBITDA margin of 10.6% compared to $81.2 million or 11.9% in the prior year.

First quarter adjusted EBITDA margin is higher by 150 basis points than our fiscal fourth quarter 2025, driven by a lower cost per pound of approximately $0.01 on consistent overall volume and revenue per pound when comparing the 2 quarters. Our first quarter stand-alone effective tax rate was 25.3%. We expect our full year 2026 effective tax rate to be in the range of 25% to 30%.

Now moving on to cash flow and our balance sheet. During the quarter, we generated $38 million in operating cash flow and $28 million in free cash flow, including a $12.7 million benefit from working capital improvements, largely driven by more disciplined steps taken within our procurement and supply chain functions, positively impacting our inventory. As a reminder, our fiscal 2026 free cash flow guidance was neutral to the impact of working capital.

When excluding working capital improvements, our first quarter 2026 free cash flow would have been $15.6 million, in line with our full year guidance of $50 million to $60 million, spread evenly throughout the year. Our first quarter capital investments were $9.4 million, below our baseline target of $15 million per quarter due to longer lead times for industrial laundry equipment investments we are making in our plants, which we expect will come in future quarters throughout fiscal 2026.

Our strong operating cash flow of $38 million in the first quarter of fiscal 2026 represents a $33.9 million increase in operating cash flow year-over-year and a $39 million increase in free cash flow over the same period. Improvements in working capital management are attributable to $27 million in cash flow improvements year-over-year.

Looking at how our strategic business transformation impacted free cash flow. During the first quarter of 2026, we spent $9 million in cash for third-party expenses and $5.6 million in cash for severance. Excluding those transformation-related cash expenditures, adjusted free cash flow was $43 million, which reflects the strong cash generative capabilities of our business.

On the balance sheet, at the end of the first quarter, net debt was $1.29 billion, and our principal bank debt outstanding was $1.16 billion, including $19 million on our revolving credit facility, which declined $7 million from the fourth quarter of fiscal 2025. Our liquidity position is strong with no debt maturities until 2028 and $317 million of available liquidity, including $275 million of undrawn revolver capacity and $42 million of cash on hand.

Our capital allocation strategy is to maintain a strong balance sheet and allocate capital towards high-return opportunities with a firm focus on delevering. Our prudent balance sheet management and working capital actions are providing a stronger foundation from which to support our business. As Jim discussed, we are actively marketing several non-core properties for sale, all in various stages of the real estate disposition process. We intend to use the proceeds from any non-core property sales to repay debt, and we anticipate delevering actions taking place in the fiscal second quarter, our current operating quarter.

Today, we are reaffirming our outlook for fiscal 2026. We continue to expect that revenue for the year will be between flat to down 2% as compared to fiscal 2025 revenue on a 52-week basis. We also continue to expect that adjusted EBITDA for the full year 2026 will be in a range of $285 million to $315 million, with 5% successive quarterly improvements beginning with the second quarter.

Additionally, we continue to 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. As it relates to our free cash flow guidance for the year, we continue to expect working capital to be generally flat on a full year basis.

With that, operator, please open the line for questions.

[Operator Instructions]

Our first question is coming from Manav Patnaik with Barclays.

This is Ronan Kennedy on for Manav. For the revenue per pound decline of 2.8%, I think it was due to an element of mix and legacy commercial practices. Can I confirm how we should expect that to trend for the year? And then I understand there may be a lot, but what would be the most important drivers from a pricing mix action or the commercial initiatives to improve that? And when should we think about how that could potentially inflect and show in results?

Yes. Ronan, it's Adam. Thanks for your question. With respect to the remainder of the year, you can expect us on a full year basis to be flat to down 2% comparing to FY '25. We're reaffirming that guidance this morning. So we generally expect to see kind of consistent trends in revenue per pound throughout the year as we work towards the midpoint of that guidance.

And some of the most important levers, which I'll let Jim talk to in more detail here, is going to be focusing on shifting that mix, strategic pricing and a couple of other initiatives that he'll dial in more detail.

Thanks, Adam. So look, the plan is to improve revenue per pound throughout this year. A lot of that's going to be timing based. We've already started in the first quarter. We'll continue each quarter to add to that to turn the revenue per pound up which supports the plan. I would also though tell you really quickly, I wouldn't do revenue per pound in isolation. I would do it in concert with cost per pound. It's super important because that's going to reset the basis of what good revenue per pound looks like in this business. So we'll continue to adapt going forward.

Appreciate it. And then on the sequential EBITDA growth assumptions, I believe it was guided to 5% sequential adjusted EBITDA growth for each remaining quarter. And I know you touched on some of these key metrics. How should we expect those to play out sequentially? And what are, again, the most important operational and commercial assumptions underpinning that sequential progression? And any upside or downside risk to that, please?

Yes. Ronan, I can talk a little bit to how that's going to flow off through the year as far as our guidance goes on adjusted EBITDA. Remember, for FY '26, we're guiding to $285 million to $315 million in adjusted EBITDA on a full year basis. So if you plan that out sequentially across the quarters, looking at that 5% sequential improvement, you'll be able to see kind of the differences that are coming through in adjusted EBITDA through Q2, Q3, Q4 successively.

And if you work back to that cost per pound calculation that Jim mentioned, you'll be able to get there. Of course, you use Q4 '25 exit rate as your benchmark when you do those differences to be able to get the incremental uplift that we're going to see throughout the year. And just to be clear, from Q4 to Q1, that's about $5 million. And remember, it was $40 million in-year benefit from our transformation, and we saw $5 million of that in Q1 from an improvement in $0.01 per pound between the 2 quarters.

Our next question comes from Stephanie Moore with Jefferies.

Maybe to start, could you comment on what you're seeing from a general macro standpoint or customer demand standpoint? Any slowing or maybe reduction in overall demand that can be pointed to just more of a macro standpoint, that would be helpful.

Stephanie, it's Adam. I can comment a little bit there. We're still concentrated in the same key verticals that we've been concentrated in year-over-year. So we've seen no shifting in our macro vertical concentration. We're seeing really no waning in demand. And as I mentioned in our remarks, our volume is consistent on a pound basis year-over-year. So we're putting the same amount of work through the network that we put through last year on a per pound basis. The difference is that mix shifting, which is a part of our commercial excellence aspect of our transformation.

I would add, Stephanie, it's Jim, that I think that as we start out this transformation, the concept of the macro is really secondary in our business right now. It's getting the foundation of this right so we can grow as we need to grow for all the stakeholders. That will outweigh anything macro in this business in the near term. But that's how I kind of think about it.

Absolutely. No, and I think well understood. And that's a good segue into just my follow-up question there. So maybe, Jim, as you think about your time in the last -- I guess it's not a year, but I would just say, 9 months roughly. As you look at just the transformation underway, how would you calibrate your progress thus far? Are you ahead of schedule, in line with schedule? And as we think about the next, let's just say, 12 months, where do you think we should see the biggest change from an operations standpoint?

So a couple -- let me bifurcate it because second half, I'm going to get to Bill Seward to talk a little bit about the operations as well. So depending on what sport you think about, if I'm in baseball, I would say we're in the first inning right now. That's where we are. And we can -- this is a continual move quarter over quarter-over-quarter, and it will be a blend of cost per pound improvement and revenue per pound improvement. There's multiple layers behind it of opportunity in this business, which is why in the opening comments we made, it's embedded in this business. The value is there. We just have to unlock it going forward we plan to do.

So it will be both of those levers. That's why we're going to bring operating leverage in the business so we can keep score on that. And I'll have Bill talk for a second about one of the service metrics and the operations and put in on plant production kind of where we are.

Yes. Thanks, Jim. I think the way I think about your question is that the service comes along with the cost and the revenue per piece as well. So what we're seeing is sequentially month-over-month since we've kind of leaned into the transformation that we are getting better outcomes on cost and really importantly, for our customers and for our shareholders, our service levels are tracking with that. So I agree with Jim, early innings for sure.

Our next question comes from Tim Mulrooney with William Blair.

Dig into some cost KPIs here. So I wanted to ask about that plant productivity metrics, which showed a 7% increase. It looks like you measure it in terms of pounds processed, but pounds processed per watt, per hour, per day. Can you just help me understand that say again?

Sorry to interrupt you, per operating hour. And the idea there is that we've had some tools and some technology in place in the past that was kind of underutilized, I would say. We are leaning in on it with really good visibility, daily visibility to what our productivity levels are. And as I mentioned a moment ago, also daily visibility to what our service levels are to make sure that we don't just get the cost, but we maintain service and improve outcomes for our customers at the same time.

Got it. So that 7% improvement in plant productivity, is that direction we see in cost per pound? Can you connect those ideas for me? And can you also talk a little bit about the things that you're doing that drove those efficiency gains, like -- and I guess where you think you are along this journey to get that wash alley efficiency up to stuff?

So this is Jim. Let me put a couple of things together for you. And I like the line of questioning, too, because that's kind of where we're going with the whole thing is that the first question you asked was, is it related to the $0.02? And the answer to that is no. No, not in the first quarter, but we also made the point that December is where it started to move forward. And so that's where it started to move and more impactful going forward. And so even in the second quarter, it's picked up pace so far. It will show up in the cost per pound going forward. There's no question about that.

I think the other piece is that coming from a long-time UPS background that we had an army of engineers behind us doing time measurement and working on all these things. Vestis already had some really good technology, in my opinion, in it to actually take each building in the network and define what good looks like, what 100% effective of a building should be. They just hadn't quite pulled it together yet to move it into this transformation mode and convert it to cost per pound. And that's what's going on.

And so you will get that in each step of the way, we'll continue to optimize the buildings, and that opens up more capacity and it opens up more ability to grow based upon the way they can flow those pounds through the network.

And let me add one thing there to what Jim mentioned. The way we're doing cost per pound, if you look in our materials, you'll see that it's those costs directly impacting adjusted EBITDA, which is essentially operating expenses adjusted for the add-backs for adjusted EBITDA. So if you take a look at that calculation, you'll be able to see kind of what's driving that cost per pound savings.

[Operator Instructions]

We will move next going to George Tong with Goldman Sachs.

This is Anna on for George. Just wondering if -- sorry, if I missed a quick confirmation. How much of that $75 million has been realized in the first quarter? And how should we think about the cadence of cost saving realizations over the remainder of the year? And what are some puts and takes there? And I have a follow-up on if you are seeing any increase in traction in the [indiscernible] Market? And how is that growth in white space trending compared to last year?

Anna, it's Adam. I'll answer the first part of your question, and then I might get you to repeat your follow-up just to make sure we're giving you the right answer. So on the cadence of how -- your point about the $75 million. Now keep in mind, the $75 million is a full year number that's going to be realized after our transformation in FY '26. So in FY '26, it's $40 million in year, and that $40 million becomes $75 million on a full year basis moving forward.

So the way you get to the $40 million is essentially by taking kind of where we landed in Q1 compared to Q4. That's about a $5 million increment. That's $0.01 per pound that I mentioned earlier. That gives you $35 million of additional savings to get to $40 million that's going to run off between Q2 and Q4. And the way you calculate the way that's going to phase in, you take the Q2 5% uplift from Q1 and subtract it from our exit rate of $65 million from Q4, that's going to get you roughly $9 million. And then you'll have $13 million in Q3 and approximately about the same kind of in Q4 is how that's going to run off.

And just so we're clear, that's going to largely be focused, as we talked about earlier on the call and in the Q&A on cost per pound savings.

Perfect. That's super helpful. I guess my second part of the question is more about if there is any increase in traction in penetrating into the unblended market, like programmers market? And how is that growth in the white space trending for you guys?

Yes, Anna, that's a great question. Thank you. We're still roughly on our new business side, 60-40 with 40% of them being nonprogrammers, 60% of them being programmers and haven't seen a dramatic shift there.

But I would add to Adam's responses, it's Jim, that we mentioned in the prepared remarks that we're introducing market development representatives into our growth model. And very clearly, they'll have more feet closer to the front line where the customers are, and they will be focused on continuing to grow both sides of that growth equation, both nonprogrammers and those that are already in the industry.

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

Thank you, Nikki, 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.

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

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 3 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, [indiscernible] 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 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 [indiscernible] 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 [indiscernible] and $30 million of cash on hand. 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 3 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 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 [ record 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] Our first question is coming from Manav Patnaik with 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 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.

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

Yes, your assessment, given the restructuring and the changes within the organization of the [indiscernible].

6 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 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 do you be ready to talk about something beyond '26 and the kind of run rate into 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 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.

Our next question comes from [ Tim Mulrooney ] with William Blair.

Its [ Luke McCann ] 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 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 versus how do we look what's difference in our plans probably a fairly 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. [indiscernible], 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 [indiscernible]? 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 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 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 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.

Our next question comes from Andrew Steinerman with JPMorgan.

Kelly, I [indiscernible] 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 [indiscernible] million [indiscernible] restructuring onetime charges that we discussed. And then we add CapEx and there for roughly $60 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 [ not ] 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. You ask 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 frequent is it sort of back-end or front-end loaded? And then the last question was, okay, after we have a good sense for 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 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.

Our next question comes from Andy Wittmann with 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, talk about 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.

[Audio Gap]

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. Hope that helps.

The new tools [indiscernible] 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 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, 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 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 the assessment of what goes into kind of flat, same customer in terms of what is [indiscernible] company's control? Just your evaluation of that, I think, would be 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 [indiscernible] in 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 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.

Our next question comes from George Tong with 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 of those 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 [ best this ].

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 [indiscernible] 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] Our next question comes from Shlomo Rosenbaum with Stifel.

Could you maybe comment on the general 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 this has 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 it usually in -- there has been historically the plants in the [ RSS ] plant [indiscernible] to the place that we really want them. And as far as the rest of the turnover, we [indiscernible] move. But that's like the state of the business is kind of how I think as we move forward and move everything up from here.

Our last question comes from Stephanie Moore with Jefferies.

This is Harold Antor on for Stephanie Moore. So I guess just on the pricing front, the prior management team also had initiatives on strategic pricing. It seems that 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 this. [indiscernible] 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 to the [ number ] of 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 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 [indiscernible].

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 changing, some of the investments that you've been making to make this product mix?

And then, I guess, in terms of the sales of clients, receptiveness from clients on this product mix? And I guess, actually in the quarter as 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 [indiscernible] marketing reform services. It was a uniform focused organization. It was built for, the assets were built for, 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 2 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 [ Bartels ] 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 be much more mindful of where end markets are retargeting 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 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 [email protected]. 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.