VSTS - NYSE

Welcome to the Vestis Corporation Fiscal First Quarter 2025 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions]. I would now like to turn the call over to Michael Aurelio, Vice President, Investor Relations.

Thank you, Madison and good morning, everyone. Welcome to the Vestis corporation fiscal first quarter 2025 earnings call. With me here today are our President and CEO, Kim Scott; and our CFO, Rick Dillon. As a reminder, a telephonic replay of this call will be available on the Investor Relations section of the vestis.com website shortly after the completion of the call. Also, access to the materials discussed on today's call are available on the Vestis website under the Investor Relations section. Before we begin, I would like to remind you that, this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about management's future expectations, beliefs, estimates, plans and prospects. Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in our periodic and current reports filed with the Securities and Exchange Commission. We do not undertake any duty to update them. With that, I would like to turn the call over to Kim.

Thank you, Michael. Good morning, everyone. Thank you for joining our fiscal first quarter 2025 earnings call. As always, I want to start by thanking our 20,000 dedicated teammates for their hard work, as we continue to execute against the tremendous opportunity ahead for Vestis. Our Q1 results came in as we expected. Last quarter, we communicated Q1 revenue and EBITDA would look similar to the fourth quarter of FY '24. We delivered results in line with this commentary with Q1 revenue of $684 million flat sequentially from fourth quarter 2024 and adjusted EBITDA of $81.2 million, up approximately 1% sequentially from fourth quarter 2024. We also note our Q1 revenue was impacted by unfavorable movement in the Canadian dollar exchange rate, which had a negative impact relative to last year and the assumption in our guidance. Compared to the first quarter of fiscal 2024 revenue was down 4.7% or 4.5% on a constant-currency basis. As we previously discussed, our 2025 results exclude the benefit of one-time customer exit billings and revenue from the large direct sales customer that we exited in FY '24 as part of our profit improvement plan for this line of business. Adjusted for these items, which we believe represents a more accurate reflection of the underlying performance of our business, first quarter revenue declined 2.8% on a normalized constant-currency basis and what we expect will be both the toughest comp and the low point for our quarterly revenue in fiscal 2025. From a profitability perspective, Q1 adjusted EBITDA was $81.2 million. Our Q1 EBITDA margin was 11.9%, down 180 basis points year-over-year and up 10 basis points sequentially versus the fourth quarter. Q1 cash flow was impacted by normal seasonality as well as timing that shifted some cash collection into the second quarter which Rick will discuss in more detail. On an underlying basis, we expect the business to remain highly cash-generative and see no change in our outlook for the full year, given this was a Q1 timing dynamic. We were pleased to continue to improve our balance sheet during the quarter with our gross and net debt declining to $1.29 billion and $1.27 billion respectively, and Q1 net debt-to-EBITDA of 3.8 times. Now that I've summarized our results, I want to look ahead to the rest of the year. I'm excited by all aspects of our business, but especially by a particular milestone we expect to hit in Q2. Toward the end of the second quarter we knew volume growth will exceed loss business driven by profitability national account awareness, new frontline sales headcount growth and solid retention metrics. Further, we started Further, we started taking price in Q1 which held well and will continue through the year. In addition to core volume growth and price, we have cost savings benefits throughout the year. And to that end, we are reaffirming our full year FY '25 guidance for revenue and EBITDA. We expect our business will grow sales at a rate of 3% to 4% with EBITDA growth approaching or exceeding 10% in the second half of the year. For FY '25 revenues, there are four main drivers that will support our sequential ramp. The first driver is strong new volume wins across SME field sales and national accounts. On field sales, we're seeing the positive effects from organizational changes made last year, with year-over-year productivity improving 20% this quarter. We believe there's more room to go, as we saw some of our regions achieve a 40% increase. On national accounts, we are accelerating new business installations and continue to convert our pipeline into new WIM. These customers drive route density and leverage our excess client capacity in our network, which in turn drivers operating leverage in our business. Some significant wins from these quarter include a new line of expansion with a large restaurant customer, where Vestis will more than triple its recurring revenue. This customer will ramp in Q2 and throughout We also won a number of new customers in healthcare and industrial verticals. Out pipeline with national accounts is the strongest it's been for Vestis. The second driver in our sequential acceleration is growth with existing customers. During Q1 our revenue from route sales to existing customers increased by more than 50% year-over-year. The third driver is our hiring pipeline for frontline sales teammates. After intentionally slowing our frontline sales hiring in 2024, we have once again resumed hiring in 2025. January marks the first month since pausing in 2024 that we've had a positive net change in sales headcount. These new hires will drive sales in 2025 and beyond, as we introduce these teammates into a more professionalized selling environment. The fifth driver is our retention metric. In the first quarter our customer retention rate was 92.9%, up 30 basis points year-over-year and up 280 basis points versus the fourth quarter. As we've mentioned in the past, we feel it is most useful to evaluate retention on a full year basis, which we believe is most indicative of our underlying performance. Going forward, we will continue to report customer retention on an annual basis with quarterly disclosure focused on the in-period revenue impact from lost business. To recap, I believe in our sequential revenue guidance because of the new customers we're winning across SMEs and national accounts, our ramp in sales force hiring, our growth with existing customers and our Q1 retention metrics. For FY '25 EBITDA, in addition to the net volume improvement, there are three main drivers that support our sequential ramp. The first driver is meaningful cost savings from operating more efficiently. We are pulling several levers, including driving merchandise reuse programs and logistics optimization initiatives. The second driver is optimizing our workforce to further drive cost performance and structural profitability of our business. During Q1 we took further action to rationalize build operations and back office G&A where appropriate, with the majority of P&L benefits to come in future quarters. The final driver of our EBITDA ramp is our in select in year pricing. We have improved our market segmentation, and we observed pricing in Q1 stuck better than in other quarters. We expect to continue to realize net positive price increases with our existing customer base in FY '25. So, to recap, a lot is working well at Vestis. Churn is in line with our expectations, build sales productivity is ramping nicely, our sales hiring pipeline is robust, we're winning with national accounts, and we have pricing and cost savings through the rest of the year. We're excited by our business' fundamentals and the sequential ramp we expect through the year. Before I turn the call over to Rick to discuss the financials, I'd like to provide some additional color on our outlook. For the full year, we continue to expect the underlying business to deliver 1% to 2% core revenue growth and 40 basis points of core adjusted EBITDA margin expansion, normalized for the fiscal '24 customer exit billings and direct sales impact that I previously discussed. We continue to expect this core performance to be driven by positive contributions from both net volume and pricing for the full year fiscal 2025. As we deliver on our plan, we expect to see sequential improvement in both revenue and EBITDA through the balance of the year with our strongest performance in the fourth quarter. On a year-over-year basis, we continue to anticipate 3% to 4% top-line growth and EBITDA growth approaching or exceeding 10% in the second half of the year. Finally, I want to discuss two personnel changes that we announced this morning. First, our Chief Legal Officer and General Counsel, Tim Donovan, will be retiring next month. I'm pleased to announce that, Busch Bouchard will soon be appointed as Vestis's Chief Legal Officer, General Counsel and Corporate Secretary. Bush brings over 30 years of public company legal experience and was most recently Chief Legal Officer at Team Inc. which is a global industrial services company. We're excited to welcome Butch to the team, and we thank Tim and wish him all the best in his retirement. Additionally, we announced that our Chief Financial Officer, Rick Dillon, will be leaving the company as part of the transition of the CFO role. I want to sincerely thank Rick for his significant contributions to Vestis. His leadership in preparing for Vestis' separation as a standalone public company and building out our public company finance capabilities will have a lasting positive impact on our company. We remain grateful for his service to the company and we wish him continued success. I'm also excited to announce that Kelly Janssen will be joining Vestis as our new CFO. Kelly has over 25 years of financial leadership experience, and since October, she has been supporting us as a finance consultant. Previously, Kelly worked in the industrial distribution space as the CFO of BlueLinx from 2020 to 2023. Kelly brings a tremendous skill set, particularly in financial and business process optimization. And under her proven leadership, we believe, we will be able to significantly advance our finance organization in support of future value creation. Lastly, regarding our comments last quarter about potential interest in Vestis, we continue to have strategic advisors retained and are focused on our operations and delivering on our 2025 financial outlook. We will not be commenting further. With that, I'd like to turn the call over to Rick. Rick?

Thanks, Kim, and good morning, everyone. So, let's start with the first quarter revenue bridge on Slide 9. Revenue of $684 million was up 10 basis points sequentially versus the fourth quarter on a constant-currency basis and in line with expectations, with favorable customer retention having a positive impact on our sequential results. Excluding the one-time exit billings and the large direct sale customer loss from the prior year, revenues were down 2.8% year-over-year. The impact of rental growth was offset by lower pricing year-over-year and the impact of lost business. Volume growth from recurring revenue, including new customers and expanding our services with existing customers, provided approximately 730 basis points of growth in the quarter. New customer growth contributing approximately 600 basis points and existing customer growth contributed 140 basis points with revenue from route sales up over 50% year-over-year. The gap between new customer growth and lost business is closing with the impact of lost business exceeding the contribution from volume growth by only $8 million in this quarter. Our first quarter net volume performance represents a 39% improvement from the prior year and a 43% sequential improvement, marking the first sequential improvement since fiscal 2023. Our first quarter retention also improved by 40 basis points year-over-year and 280 basis points sequentially. Improved retention during fiscal '24 and in the first quarter of 2025 resulted in a 16% reduction in the overall impact of lost business. As expected, 40 basis points of in-year pricing actions was more than offset by the negative impact from the rollback of prior year pricing actions. We expect to see positive pricing in the back half of the year, as we lap difficult comps in the first two quarters. Direct sales drove an approximately 120 basis points decline in the first quarter year-over-year, driven primarily by the lost revenue from the large direct sale national account previously disclosed. FX was a 20-basis point headwind during the quarter with the Canadian exchange rate lower than the prior year and the rate assumed in our guidance. Moving on to Slide 11 and adjusted EBITDA. Adjusted EBITDA was approximately $81.2 million in the first quarter of fiscal '25, in line with our expectations for sequential performance relative to Q4 and resulting in a decrease of approximately $17 million from the first quarter of fiscal '24. The operating leverage on new business was more than offset by the impact of lost business and the rollback of prior year pricing actions. Cost reduction initiatives, continued network optimization efforts and lower energy costs were partially offset by the impact of prior year onetime exit billings, expected labor increases and increased freight costs associated with positioning inventory in our network for new business install. On a sequential basis, EBITDA margins increased 10 basis points to 11.9% in the first quarter of 2025. EBITDA margins were 13.7% in the first quarter of '24. Turning to cash flow on Slide 11. We generated approximately $4 million in cash from operations in the first quarter compared to $52 million in the first quarter of last year. This excludes the cash from the sale of the Japan joint venture completed during the quarter. Q1 is seasonally our lowest cash-generating quarter due to certain annual payments including things like insurance premiums and incentive compensation. The decrease year-over-year reflects lower EBITDA between years and a $6 million investment in inventory to support growth. In addition, there was approximately $20 million of cash collections on trade and other receivables that shifted into January due to the timing of the holidays and our quarter end date. We continue to focus on inventory management through sales and operations planning and garment reuse initiatives. The increase during the quarter is to position the right inventory in our facilities to support growth as we prepare for several large installs. Net capital expenditures were approximately $15 million during the first quarter, essentially flat with Q1 of 2024. The negative free cash flow in the quarter was driven by the receivable timing previously mentioned. In January, we recovered the $20 million collections deficit from the last week of December. This was simply a timing shift. We continue to expect our cash conversion rate to be on average approximately 50% on an annual basis. On an underlying basis, we expect the business to remain highly cash generative and see no change in our outlook for the full year. We utilized proceeds from the sale of the Japan GP to make voluntary principal payments of approximately $20 million during the quarter, reducing our net debt to $1.274 billion. We ended the quarter with a net debt-to-EBITDA ratio of 3.8 times. Given the expected increase in LTM EBITDA and cash generation, we expect this to be the high point of our leverage ratio, as we progress through the year. We remain confident in our ability to meet our targeted leverage level of 1.5 times to 2.5 times by the end of fiscal '26. I will conclude by providing a few more details on our fiscal 2025 outlook on Slide 14. We remain on track to deliver our guidance for the year. We continue to expect revenue of $2.8 billion to $2.83 billion and adjusted EBITDA of $345 million to $360 million. This would result in revenue growth from approximately 0% to 1% and an EBITDA margin of 12.3% to 12.7% As a reminder, our Q1 included a 20-basis point headwind related to Canadian dollar exchange rates versus prior year and the rate assumed in our guidance. We expect this to continue to be a headwind, as we progress through the year. We believe our growth and cost initiatives support sequential improvement in our results, as we progress through the year, including Q2, which is typically our lowest growth quarter. We expect to return to year-over-year growth in the back half of the year. Kim talked about the many drivers of this sequential growth, including field sales productivity improvements, national account wins, new hires and selective price increases. We remain excited about momentum in our business and the trajectory of the business heading into 2026. Lastly, as Kim mentioned, I will be leaving Vestis on February 14th. It gives me great pride to see the green shoots and underlying momentum in our business. I am glad to be leaving the company in a strong position, delivering against its financial commitments with a long runway to capitalize on value-creation opportunities ahead. I am especially proud of the finance team and their contributions and accomplishments over the last three years. I've had the chance to work with Kelly for the last few months and I'm confident I'll leave them in good hands. So, I want to say publicly thank you, Kim, and the rest of my Vestis teammates and I wish you and the company continued success. That concludes our prepared remarks for today. We thank everyone for joining us and we will now open the line for questions.

[Operator Instructions]. Our first question is coming from Andy Wittmann with Baird. Please go ahead. Andy Wittmann, your line is open.

Sorry about that. Thanks for taking my questions. I had a question on pricing. I guess I wanted to start there. I saw that, in year pricing contribution to the first quarter results was up 0.4%, pretty similar to the 0.6% of last quarter, but down kind of just a smidge. Kim, you mentioned in your script that, you're expecting to kind of get more pricing and it was well received. Is the pricing ramp, that you're expecting here in fiscal '25 kind of more back-end loaded or maybe you could give some detail about the cadence and a little bit more color on what you're seeing, on the pricing absorption there?

Yes. Sure. Thank you for your question, Andy. It's great to hear from you this morning. I would start by saying, you're right in my message around the fact that, we are demonstrating the ability to stick price and maintain higher levels of pricing. We expect that, that will continue, not accelerate, but continue through the balance of the year. We will lap negative pricing comps that are happening in the first and second quarter of the year and the back half of the year. We'll net positive pricing overall for the full year. The way we're doing that is, really through the ability to hold on to that price better with our existing customers. You'll recall that, we spoke a lot about improving our service performance, earning the right to take price, and we feel really confident that, we've gained a great deal of traction in terms of improving the customer experience. And so, that is earning us the right to take and hold that price. We've also spent time with our frontline teammates training them and helping them, have those conversations with customers and understand how to discuss and explain pricing tactics. So, we feel really good about the ability to generate net positive pricing in the full year, and you should expect that, that will be generally in line with our normal annual price increasing levels.

Okay. That's helpful. Thank you for that context. Just for my follow-up, I guess, I want to kind of ask on the cost side of the ledger here as well. I mean, just looking at the P&L, like the SG&A line and other things, it looks like there have been some pretty significant cost reductions. I guess, two-part question. One is, can you talk a little bit about what areas that address specifically for efficiency here in the last three months? And you did mention that you're not quite done, with some of your efficiency actions. I was wondering, kind of what you still see, in the future as the areas that can be addressed.

Yes. Certainly. So, we are really generating tremendous momentum in many cost takeout areas as well as productivity areas of our business. So, we continue down the path of our logistics optimization strategy. We continue to accelerate that work. We've gotten significant footing around optimizing our network, and we continue to conduct those activities across our facilities. We're generating savings and productivity from being more efficient from a logistics perspective. We continue to improve the use of existing garments. So, our merchandise reuse initiative related to improving our reuse initiative related to improving our used fill rate metric drives also cash benefits as well as cost out in the period. And then, we did take some specific action around optimizing our workforce out in the field as well as in our back-office G&A. And we did not enjoy a full quarter of those activities in the first quarter. So, we will see full quarters of those benefits flow through in the second, third and fourth quarter. And then the final area is around plant operations and working to become more efficient in our plants related to labor efficiencies and productivity with our frontline workforce. Andy, we've got a really full portfolio of productivity and cost-out initiative and we continue to fill that pipeline and we continue to optimize, and we will always see that. But in particular, you're going to see a full, second, third, and fourth quarter of this cost takeout initiative that we did in the first quarter, only seeing a partial contribution in Q1.

And we will take our next question from Andrew Steinerman with JPMorgan. Please go ahead.

Hi, Kim. Could you comment on the direction of the NPS scores? I remember the last time you commented on them with this group, you said they were at 12 months high. That was a couple of quarters ago. Could you just remind us, how often these scores are measured at a company level? And then, give us some qualitative comment. Has there been a reduction of service issues and how that was achieved?

Yes, great question. So, we really look at NPS at the most macro level on an annual basis. So, we'll come back to that and talk about that annually. But we look every day at leading indicators around service-related requests. As a customer calls in with a service need of some sort, we call those SRs and we manage service requests on a very tactical and daily basis. And those service requests have very specific reason codes attached to them, and those reason codes help us to generate credo bars and understand, what are the key drivers of customer service requests. You might recall in the past, I spoke about those and I specifically called out on-time delivery and shortages as being key opportunities to improve the customer experience and to reduce those service requests. I'm really proud to say that, we are reducing those service request related to those key -- bars and those key areas around on time delivery and around shortages. Overall, we are seeing continued improvement in the customer experience, and we can see that, daily in the reduction of service requests related to these key focus areas. And also, I will add some more color around that, Andrew, as we're seeing great success cross-selling our existing customers' multiple products and services, and that is also a great indicator that our customers are having a good experience because they're choosing to buy more from Vestis.

Thank you. And we will take our next question from Shlomo Rosenbaum with Stifel. Please go ahead.

Hi. Thank you very much. Kim, could you dig in a little bit more to some of the efficiency efforts? I can talk about 15 logistics ops and amortization events and merchandise reuse up to 10% to record high that's in the slide deck. How much do those two items move the needle? In other words, with those things happening in the quarter, did that add $5 million of EBITDA? I'm just trying to figure out how material the items are that you've already done and how should we think about that going forward?

Yes. We will always continue to focus on this portfolio of productivity initiatives and cost-out initiatives. So, I also think you should think of it as a never-ending program. So, every year, I'll be challenging my team to identify these opportunities and to execute against them. We were very explicit about the logistics optimization opportunity. As we were preparing to spin the company out, you might recall, we did a pretty significant network optimization study and we found a tremendous opportunity to consolidate, in some cases, depots into existing market centers. We found opportunities to optimize customer routes and to serve them more efficiently. And so, we are very explicitly moving down that path, and we've been doing that for several years now. So, you'll continue to see cost-out from that program over the next probably three years, and then we'll continue to optimize that network as we grow. That is a gift that keeps giving as we move through the quarters. The cost takeout program was very explicit. And while I'm not going to give specifics around the actual contribution of that cost takeout, it was significant in the year. And I believe, there is more opportunity to continue to optimize our workforce and to optimize the way that our teams operate. The next level of that is really going to be though through automation and through really eliminating work and digitizing work. So more to do there, before we hit the next leg of the back-office G&A cost out. And then, as it relates to used fill rate, we did get the full year numbers last year. So, I think it's important just to note that, as we continue to reuse existing garments, we will continue to lower amortization. So, you'll be able to see that in our financials, as we report amortization numbers. So, I would just point you to that and encourage you to continue to watch that amortization cost line as a function of revenue, and you'll be able to see, what we're driving there related to use fill rate.

Okay. And then can you just talk a little bit, about what's going to drive the revenue growth? How much should we expect to be able to come over time from pricing? What will it take to get like the volumes to really materially go up from here? Are you, thinking about hiring much more aggressively now? I know you talked about net hiring is up. Is this going to be more of a selective or do you feel a program or do you feel like with the leadership you have in sales now, you're at a point, where it makes sense to really implement a much more aggressive hiring program?

So, I'll start with the broad macro question around price and volume and how they contribute to our strategy to create value. So, we will take pricing at normal pricing levels, as we did historically pre-COVID, and we feel very confident that, we've achieved the ability to do that, and we saw good pricing stick in Q1 per normal pricing level. So, I think of pricing as a normal activity that we'll do on an annual basis, and it is not the key to our strategy. And then, I'll point you to the key to our strategy, which is to drive volume through our system. So, volume is incredibly important. I was very pleased to share on the call this morning that, we expect new volume wins to outweigh losses as we kind of exit the second quarter. So, we're very pleased that we expect to see that shift and we'll start to see positive volume growth in the system. The reason the is so important to us and powerful for us is because we are setting on roughly 35% idle plan capacity. So, we are going to generate significant operating leverage as this volume puts positive and we push volume through the system. So, it is definitely about generating incremental volume and driving that volume. How are we doing that, I think, is the second part of your question, and we're doing that really through three legs of the stool. First, I would think about national account volume. We've talked a great deal about accelerating our pipeline, the health of our pipeline, some of these key customer wins that we've been highlighting for you. And we feel extremely confident about the power of our national account pipeline and our ability to convert that to new wins and then to install that business. We are seeing great results there, and we're very, very pleased with the work the national account team is doing. The second leg of the tool is SME sales through our frontline field team, and we talked a lot about that over the past year. That team has been revamped. That team has been professionalized under our new sales leadership, and they are starting to drive higher levels of revenue per head or productivity per head. We are now at the point, where we would like to add more teammates to that team, putting them into a professionalized selling environment where they're going to be highly productive. So, we do aim to grow the sales team. I spoke about the fact that we've seen a positive add of sales headcount now in January and we're going to continue to add that headcount. But when you think about what should the size of the team be, it really depends on three knobs. It depends on what type of turnover you're seeing. It depends on what type of productivity you're seeing and then how fast are you hiring them and how productive are they. So, we're going to just keep dialing those knobs and turn in those knobs until we get the right formula, but we are going to add teammates to that team. And then the third leg of the tool is retention, and we're very pleased to see the fruits of our labor around improving the customer experience. We're seeing positive improvement in customer retention rates, and that will also contribute to our volume strategy.

Thank you. And our next question is coming from Stephanie Moore with Jefferies. Please go ahead.

Hello. This is Harold on for Stephanie Moore. So, I guess just on the retention front, I know you saw an improvement in the quarter. Could you talk about the factors that's contributing to that improvement? And then how should we think about the retention improvement throughout the rest of the year? I guess, what are your underwriting attention for the fiscal year?

I think I got your question there, Harold. So, your question is, what are we doing to drive retention improvements in the system and what do we expect for the balance of the year? Is that your question?

Yes.

So, I'll point you back to all of the efforts that we really undertook really in shifting the team to focus very aggressively on enhancing the customer experience. And so, we have been hyper focused as a team on really driving a delightful experience for our customers from on-time performance to rolling out standard operating procedures to improve shortages and to make sure our customers get everything they want the first time that it's delivered and really shifting our team's focus around delighting the customer. We are definitely seeing that, that body of work is making a difference, and we are seeing improvements in service requests and our customers responding very positively to the work that we are doing to take great care of them. So, I would point to that, as the key reason around why our customers are staying. I would also point you to the fact that, we've been very thoughtful in our pricing strategies and about how we take price and how we approach that pricing activity with the customer. So, we feel that, we've taken a very balanced approach to pricing and appropriate approach as well as driving an enhanced customer experience and both of those factors are contributing to improved customer retention. Through the balance of the year, we continue to expect good performance related to retention. We saw improvement in Q1 and we expect that, we will hold that improvement, and we will always be focused on retaining as many customers as we can. So, we won't be satisfied with our performance for the year, but we do expect to see improved retention this year, and we will continue to drive that number up in the coming years.

Thank you. And our next question is coming from Manav Patnaik with Barclays. Please go ahead.

Hi. Good morning. This Ronan Kennedy on for Manav. Thank you for taking my questions. Could I just please ask how you would characterize the macro in the demand environment in conversations with customers? And then, if there's any particular regions or key strategic sub-verticals of particular strength or weakness? And then, one more element to the question, please. Any implications or impacts of that you're seeing already or potentially of new policy from the new presidential administration such as the 25% tariffs in Mexico? If I'm not mistaken, I think you have manufacturing facilities there?

Okay, Ronan. I'm going to try to take that. I think that's four questions, but I'm with you. Let me start with the first one. It's good to hear from you. The first one I believe is around demand and are we seeing any shift in the macroeconomic environment. I would just point everyone back to this $48 billion market that we estimate we are participating in. There is plenty of opportunity for growth and we are not seeing a shortage of leads or the ability to go out and hunt and find opportunities for new business. I feel very confident that, there's lots of market share out there for us and we're attacking that. I spoke a moment ago about our very strong national account pipeline and the fact that, we're generating great new wins off of that pipeline and we're seeing our sales people sell more. So, we feel really good about that. I would also point you to the diversification of our end market and that we operate in many verticals as you guys all know. So even if a particular industry is negatively impacted, for some reason, we have lots of end markets and verticals to hunt in. So, we feel really confident that, we're well insulated from some type of particular downturn in one particular industry. So, feeling good about sub-verticals, I think that was the second part of your question. Are we seeing any particular weakness in any particular vertical or end market? I would say not at this time. We are very diligent about measuring the performance with existing customers, understanding what's happening with teammates and wearers that are using our products with those customers, and we're not seeing any significant shifts there. As it relates to your question around tariffs and policy and are we seeing any impacts that the new administration affecting us, at this time, there is no specific effect on our business, but we are closely monitoring all of the actions that administration is taking. We are keenly aware of the conversations that are taking place around tariffs. We've been working to de-risk our supply chain and have been very mindful of this well before the election. I feel really confident that we are in a good place as it relates to that.

I appreciate you covering all aspects of that multifaceted question. For the CapEx, the guidance of 3% of revenues, could you confirm what the priority areas of investment are?

Yes, I can do that. And Rick, feel free to jump in here as well if needed. But essentially, our CapEx is supporting a couple of key areas. We have general maintenance CapEx, always, of course; and we have CapEx related to kind of keep the light one, if you want to think about it that way. Then we have some CapEx that goes towards our optimization efforts. So as our logistics team is working on plant consolidation, we may need to buy a linen press and move it into a facility as an example. We might need to replace a roof on a building. So, these are very basic general maintenance-type activities for the most part that consume our 3%.

And our next question is coming from Sam [indiscernible] with William Blair. Please go ahead.

Just a few short ones here. I was hoping you could comment just a bit more on the health of the international account pipeline. And just maybe any industries or markets where seeing that particular strength occurring and possibly where specifically you're trying to target for the remainder of the year?

Yes. Sam, it's great to hear from you and thank you for your question. I feel incredibly energized to be quite frank, around our national account pipeline and the leadership of that team is doing an incredible job. I would put it in a few buckets the way that you should think about it. One of those buckets is existing national account customers and further penetrating them. So, you would have heard the example that I used about the restaurant customer and continuing to gain new business with that customer and tripling our revenue with them in due course. That is a target area for us. So, we have built out existing customer share of wallet opportunities, so you should think about that as one leg of the stool. Also, we are very focused on large customers that have the opportunity to be a preferred account customer, meaning they have multiple locations we can establish national account pricing with them, and then we can go and target their local branches. So, think about that as a large bucket of customers. Those could also be GPO customers and other types. We mentioned a store food services company last quarter, that would be a great example of a large parent company that has multiple child locations that we can go after and target. And then we are also seeing really strong performance in health care, not only in our industrial rental business but also in our Cleanroom business.

Got it. A couple of color. Last one for us. Maybe just provide an update as it relates to your merchandise for use initiatives. And maybe just speak to the progress there as it relates to operating efficiency.

Yes. I'm really proud of the team. So, this is a multi-unit location effort. So, think about more than 115 locations who have a stock room and we're trying to teach those teammates how to reuse existing garments, garments that we have already purchased and already started amortizing or maybe already fully amortized in our system. So, the entire notion of the program of merchandise reuses don't buy new stuff and inject it into the system and start amortizing again, use the products that you already have. And so, this has been a groundswell of an effort with an army down on the ground in each of our market centers, working with our great stock gain managers to help them understand and prioritize reuse of existing garments. So, we continue to focus on fast-moving SKUs we continue to make sure we're also selling fast-moving SKUs that are in our system so that we can reuse those products, and we will have a bulk of those in the stock rooms over time. So, it's about prioritizing what we sell upfront and then ensuring that we reuse those like SKUs that are in our stock room as much as we possibly can. So, we just keep driving that number up as we improve performance in each stock room. And as each of our stock ran managers becomes more skilled in this area, we continue to see that number move up. And we think there is more room to go. But again, I'll point you back to amortization and also to cash because it improves our need to put inventory on the floor and to invest capital and inventory. So, you're going to see benefits over time based on cash flow related to inventory and on amortization costs.

[Operator Instructions]. Our next question is coming from George Tong with Goldman Sachs.

You talked about making progress with on-time deliveries and shortages. Can you elaborate on your progress with these and other initiatives to improve customer service quality?

Yes. George, thank you for your question. I'll start with on-time delivery because we're incredibly excited about the way that we're interfacing with our customers related to on-time delivery. So, around the third, fourth quarter of last year of FY '24, we actually launched an automated notification to our customers real time, letting them know that we have bumper docs, we had delivered their product, and we were now leaving their facility. And so, our customers have responded incredibly well to this because it holds us accountable. It provides great transparency to the customer that we did what we said we were going to do and we delivered on the promise. And so, we're actually providing these real-time notifications. The other thing that it does, George, is that holds our own team accountable because now we're going to notify the customer real time when we bump and leave their docs. And so, we have to be on time, and we have to deliver that promise because we're measuring it and we're holding ourselves accountable in front of our customers. So, we are seeing a great response both from our customers and from our front-line RSRs who are delivering those products and services, and we feel really, really positive about the work we're doing there. Our national account team is also seeing a great benefit in this feature. And as they're outselling customers, we're really proud to highlight this is something that we offer that we think is really a gain future for our business. Secondly, on shortages, we have been working really hard around helping our teams learn better operating procedures around how to load trucks. And so, we have rolled out a very robust standard operating procedure in the locations that have been using that standard operating procedure for an extended period of time. We are actually seeing a step change in improvement related to shortages. We're also seeing an improvement related to shortages for those who have mastered the on-time delivery and the notification. So those two things are working really well hand in hand. So, we feel really good about where we are related to the customer experience.

Got it. That's helpful. And then earlier, you noted that sales force headcount this hiring has resumed this year. Can you discuss how quickly you plan to increase sales force headcount? And what strategies you have to increase sales headcount retention?

Yes. We've done a great deal of work around several areas that we believe are supporting our frontline field sales team. I will start with our new leader, Pete Rigo, who came in at the end, I think, around third quarter of last year. He has done an exceptional job of really institutionalizing the playbook around how we sell, how we onboard teammates, how we train those teammates, even how we recruit those teammates and what types of teammates we recruit to ensure that they're going to be successful in the selling environment here. And so, we feel outstanding that we are now onboarding teammates through what I would call somewhat of a sales food camp we're literally bringing them here into the teammate support center here at the corporate headquarters where I sit, and we're training those teammates, one by one individually and in groups as they come into our team. We've also enhanced our recruiting procedures. So, we have a talent acquisition team that has been very focused on making sure that we recruit the right type of teammate that's going to be successful in our environment. So, we've changed the profile of who we are recruiting, what type of background and skills they have, then we're training them better as they onboard, and we're seeing great signs of not only improving turnover but improving that teammates productivity earlier in their life cycle with Vestis. So, we are now ramping up our hiring practices. As I mentioned, we added more sales teammates in January, and we will continue to build that sales team over the coming year.