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Welcome to the Vestis Corporation Fiscal Third Quarter 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 wanted 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. Before I begin, I would like to thank Phillip, the Board and the leadership team for helping to facilitate a smooth transition for me into the CEO role here at Vestis. Now that I'm 2 months into the role, my belief is that this company has tremendous potential and a team capable of achieving great things. I was attracted to this opportunity because I spent much of my career leading businesses with similar route-based asset-intensive models. Businesses such as this succeed when they execute well at the local level driven by strong customer relationships that are built upon reliability, excellent service quality and the ability to control daily operating costs. These outcomes are produced by frontline teams of loyal and capable people supported by robust, repeatable processes and technology that enhances execution. Since starting in June, I spent a great deal of my time getting to know the business through engaging with our teams, visiting with customers and diving deep into the operational and strategic levers that drive performance. And what is clear to me is that while Vestis has faced its share of challenges, it is a company with a fundamentally sound foundation. What I believe this business needs now is a sharp focus on commercial processes, operational discipline and a clear strategy to unlock operating leverage. To do this, we will focus on the key inputs that drive operating leverage. These are value-based pricing, favorable product mix and efficient cost of service. Foundational to this is our ability as an organization to efficiently utilize our assets, both our people and infrastructure, to serve our customers. First is pricing. Pricing is one of the most important levers for driving improved operating leverage. This focus does not just pertain to setting prices, but also ensuring that they reflect the value we deliver and the cost of our service. The right pricing requires a rigorous data-driven approach, and we're building out a value-based pricing model designed to optimize product profitability. Price integrity, however, can only be successful when it is supported by service quality. And to that end, we are committed to raising our service standards to support long-term customer relationships and improve customer retention. The strength of our customer relationships is built at the local level with our RSRs, and we are investing in the tools, systems and processes to support and empower them and other frontline team members to succeed in providing customers the best possible experience. The second key driver is product mix. We are looking to evolve our sales approach to prioritize profitability over volume. In order to do this, we need to be more selective, managing the mix of the products we sell more deliberately in order to maximize capacity utilization with a focus on margin-accretive growth. We are shifting our mindset from how much we grow to how well we grow. And the third driver is optimizing cost of service. Our teams have already made meaningful progress over the last few quarters in identifying and implementing a variety of different cost actions. However, there is still more work to be done. We are evaluating ways to increase our variable to fixed cost ratio, enhance plant reliability and optimize capacity utilization. And none of this can be accomplished if we don't have a strong customer-centric culture. That culture is firmly grounded in our people's determination to serve customers supported by proper training, infrastructure and processes. All of this should be underpinned by constructive management, employee and union working relationships. For the remainder of this fiscal year, I'm focused on stabilizing performance and quickly launching initiatives that we expect to result in near-term financial improvement. In addition, the team and I are taking a hard look at every aspect of the business to build a road map for success in 2026 and beyond. As part of that road map, we are also laying the groundwork for investing in modernizing our technology infrastructure to better support execution and long-term priorities. Smart, scalable systems are fundamental to improving the customer experience, unlocking efficiencies and enabling data-driven decision-making. In a moment, Kelly will walk through our third quarter financial performance in detail. But before she does that, I would also like to provide some brief context. While our results were in line with expectations, we continue to see ongoing revenue pressure as churn outpaces conversion. I believe that our improvement initiatives will soon yield positive results. However, our expectation is that the near-term performance will be similar to what we saw over this last quarter. I want to assure you that I'm committed to seeing Vestis improve in 2026 and look forward to sharing more details, including financial and operational goals during our fourth quarter call. Yes, there are challenges that we need to address, but there are also opportunities, and I believe we are focused on the right levers to create meaningful, sustainable improvement. With that, I'll turn it over to Kelly.

Thank you, Jim, and good morning, everyone. Revenue during the quarter was $674 million, down $24 million or 3.5% year-over- year compared to the third quarter of 2024. The decline in revenue was due to an $18 million decrease in rental revenue and $6 million of lower direct sales. Within rental revenue, growth from new business or conversion contributed approximately $45 million or 6.7% of revenue year-over- year for the third quarter. We continue to see increases in sales from both our field and national account sales organizations, which collectively installed 20% more recurring revenue year-over-year. The revenue impact in the third quarter from churn or lost business was approximately $60 million when compared with the same quarter in the prior year. On a rolling 12-month basis, our business retention as measured in revenue dollars was 91.9% at the end of Q3, a slight decrease when compared to what we reported last quarter. Year-over-year, revenue from existing business decreased $3 million due to declines in both price and volume. Upon further analysis of the changes that have occurred in our rental business over the last year, we've observed that the volume, when measured as the throughput we see in our facilities, has indeed gone up in line with our increased commercial efforts. However, the difference in pricing between contracts that we've recently obtained and those that we've off-boarded has been unfavorable. This, along with a shift to lower-priced products, is the primary reason for our net decline in rental revenue. In our direct sales business, revenue decreased $6 million or 14% year-over-year, which primarily reflects the previously discussed loss of a large national account in 2024. When excluding the loss of this account, direct sales decreased approximately $1 million compared to the third quarter of last year. Cost of services in the quarter was $492 million and gross margin was 27%, down approximately 200 basis points when compared to the third quarter of last year. Our gross margin for the quarter was negatively impacted by churn, which, as I previously discussed, carried higher pricing relative to recent new account installations. These headwinds were offset, to some extent, by a reduction in our delivery costs. As Jim mentioned, we have recently implemented a series of improvement initiatives, some of which are pricing, to help mitigate the impact of the decremental margin on churn and are also actively evaluating several other strategies, including the implementation of a comprehensive value-based pricing model across all markets. SG&A for the third quarter was $122 million, a decrease of approximately $8 million year-over-year. The reduction in SG&A reflects a $6 million decline in stock-based compensation, along with a $4 million decrease in separation-related costs and a $3 million reduction in other administrative costs. Offsetting this overall decrease was an increase of almost $4 million in selling expense related to our field sales team. In the third quarter, the tax rate was 9.7%, and we recorded an immaterial tax benefit during the period. Third quarter reported adjusted EBITDA was $64 million, representing an adjusted margin of 9.5%. This compares to 12.4% in the third quarter of last year and 9.4% in the second quarter of 2025 when excluding the nonrecurring $15 million bad debt adjustment during the same period. Now moving on to cash flow and working capital. During the quarter, we generated $23 million of operating cash flow and $8 million of free cash flow, reflecting a positive improvement over last quarter. Net cash provided from working capital was $5 million and includes an increase of approximately $13 million resulting from our efforts to reduce our inventory levels and improve working capital efficiency. During the quarter, we also paid $9.6 million of federal cash tax payments that we had been allowed to defer from the first half of 2025 due to certain natural disaster relief provisions. Consistent with our expectations, we spent approximately $15 million on capital expenditures in the period. And for the year, we still expect total capital investment to be around $60 million, the majority of which is related to Market Center facility improvements. Looking at our balance sheet. At the end of the third quarter, total debt was $1.32 billion, and our principal bank debt outstanding was $1.17 billion. Our liquidity position is strong with no debt maturities until 2027 and $290 million of available liquidity, including $266 million of undrawn revolver capacity and $24 million of cash on hand. As of the end of the third quarter, our net leverage ratio as calculated under our credit agreement was 4.50x. As a reminder, under our amended credit agreement, the net leverage ratio cannot exceed 5.25x for any fiscal quarter ending prior to July 3, 2026. Our guiding principles for capital allocation are to maintain a strong balance sheet and allocate capital toward high-return opportunities with a focus on delevering. Our prudent balance sheet management and working capital actions aim to provide a flexible foundation from which to support our business. As Jim mentioned, our results were in line with expectations. However, we continue to see ongoing pressure from customer losses and lower penetration, partially offset by new business wins and cost actions. We believe several of our fourth quarter initiatives will be fruitful as we remain focused on driving sustainable improvement in our operating leverage. However, I expect our near-term financial performance to continue to reflect trends similar to what we saw in Q3. Our goal is to finalize our operating plan for 2026 over the balance of the remaining fiscal year, and we look forward to providing details of our expectations for the coming year during the next call. Now I would like to turn the call back to the operator for your questions.

[Operator Instructions] And our first question will come from Manav Patnaik with Barclays.

Can you hear me?

We can hear you.

Yes. Apologies. Sorry, Ronan Kennedy on for Manav. Jim, may I ask, you alluded to spending a great deal of time with the business, engaging teams, visiting customers, diving deep into operational strategic levers. Could we just have a recap, an initial assessment of the strengths and weaknesses? I know you highlighted the opportunity, but also foundationally, the culture and potential work to be done there.

Sure. I appreciate that. I guess, first, I would say that I think it's important to know why I came here. I think that having spent about 40 years of my career in these network-based businesses that have heavy assets in them, I saw Vestis as the same thing before I came across. And so my background in understanding how to create this operating leverage in these businesses was why I came, a big piece of it. And I think Vestis could have used some of what I learned over my career to help them as they move forward. So that's first why I came. So the second comment after about 8 weeks would be the networks are very, very similar, the 2 of them. Both of them should be designed the same way to get at this leverage point. Both of them should be found on great service to our customers. The core of that is going to be around making sure your plants are reliable, that they're invested in properly because they're the engine. Also to that end, I do think that the human capital and the employees in this business make a difference. I think we've got some opportunity in our areas of turnover in this business and plants that make it as not as optimal as they could be. In the very end, I think we've got the foundation already after about 8 weeks to understand that in 2026, we're going to create different value going up in this business that you've seen after the last couple of quarters. So I think the alignment is great, quite frankly, and I think there's so many similarities. The acronyms are different, I can tell you that. But at the end of the day, it's the same type of business taking care of customers. So that's after 8 weeks of a view of this.

Got it. Appreciate that. And then may I confirm, it sounds like there's going to be a shift from, I think, volume or the amount of growth to the profitability. It sounds like changes to capital allocation and investment levels. Can you just give cognizance that we'll get the financial and operational update on strategy on the fourth quarter call, it sounds like, but what are the kind of the main things we can think about for changes coming for now?

Yes. I guess I would start with the fact that my past has looked through the lens of a penetration of the customer base that you already have. And in this business, that's about $2.8 billion of revenue. And looking back, it really hasn't grown the way, in my opinion, it should be, and there's lots of factors to that. We can talk about those later going forward. But at the end of the day, we've got to be able to create the value for our customers that allow that penetration growth to happen, and that should then be supplemented by conversion and a betterment of churn, and you're going to get growth in 3 different ways. Second comment is, there's no question, I think that we're going to create some new tools around here. Kelly mentioned in some of her comments opening the value-based pricing model. We need that. We've already got teams in play building the cost models beneath it. In 8 weeks, I'm confident that's going to come very quickly for us to be able to price differently because, quite frankly, in these networks, the key is to match the type of volume you want to your network and your customers that creates operating leverage. And so I think in 8 weeks, again, the similarities for me keep coming forward between my past and Vestis now, and we're going to stick to those, and we'll keep investing in those. And I think you'll hear a lot of those specifically underpinning not how and why we're going to get better in 2026, but by initiatives that we talk about here on this call today.

And we'll go next to Tim Mulrooney with William Blair.

This is Luke McFadden on for Tim Mulrooney. Maybe one just kind of thinking more at a macro level non-program payrolls for July came in a bit light and both the May and June readout were revised lower. I'm just curious to hear what you're seeing in terms of hiring behavior amongst your customer base and whether you would characterize net wearer levels as a headwind, tailwind or neutral to the quarter?

I would just kind of say neutral from my perspective. And I think our job in any of these networks is to deal with headwinds or tailwinds properly and just focus on modeling, getting better and creating the leverage we're talking about here. But I would say neutral at this point. Obviously, I'd take tailwinds, but neutral is fine for now.

Understood. And then maybe looking at free cash flow, it looks like working capital was a big source of cash in the fiscal fourth quarter of last year and was also a source in the fiscal fourth quarter of 2023. Are you expecting a similar dynamic here in the fourth quarter of this year?

What I can tell you is that I think we had a great quarter as it related to working capital management and obviously contributed to positive cash flow in the third quarter. And we're going to continue to manage our working capital very tightly and our cash in general. So I certainly expect us to have cash as a focus going forward.

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

This is Anna Wu on for George Tong. I wanted to start with a high-level question. Wondering if you could share some thoughts around the overall health and the competitive landscape of the uniform rental industry in the near term? And additionally, can you provide some color around the sales environment in each of your end markets? And I have a follow-up after this.

Could you repeat the second part of the question for me, please? I missed it.

Yes. Just can you provide some color around the sales environment in each of your end markets?

Sure. Let me take the first half. Look, the health of this segment, in my opinion, is one that I think continues to be one that is just fine. And what I mean by that is, if I look at the last month or the last quarter we just finished, what I saw was that almost 45% of our growth came from non-program in this business. And that is a stat I'm not used to having in my background, which means that the total addressable market continues to grow. And I think that's a great positive step forward. I think ultimately, the products and the industry itself, secondarily, I don't see as one that mega trends are after. I think that the other, I think, very positive I found in this industry already is this concept of the network itself. And inside of our organization, Vestis, it's essentially not 1 network, it's 120 closed-loop networks. And what that means is that we can experiment differently. We can put projects and initiatives in flight in parallel versus kind of a serial nature to it. We've already begun that and that you start to get into these businesses that the general managers have really great breadth of perspective to grow in this business profitably. We're just going to help them tune the lens a little bit better to make sure that the work that they're putting into their individual networks create value for our shareholders. The second half, again, was something about the sales side. What specifically is your question?

So just each of your end markets, verticals like hospitality or restaurants, how do you think about or can you provide some colors around the selling environment there?

Yes. It hasn't shifted quarter-over-quarter. You're still into hospitality, into health care, into retail. Same ones going forward. Again, I still like the nonprogrammer side of it because I'm not used to that. And that also can probably lead us to other growth avenues that I might not have seen in my background. So that's how I think about both of those.

Yes, super helpful. And just a quick follow-up. On the previous earnings calls, we learned that the company has retained strategic advisers for some potential transactions. Is that still an option on the table for you? And just wondering if there is any updates regarding the alternative options for the business at this stage?

I'll just look forward on it. I can tell you what we're doing. We've already had 3 sets of advisers, I think, can help us speed this up, coming in from the outside to help the core business, not any transactions or anything else. I mean we're focused on the tools we've already talked about in cost models and pricing tools that are coming into play right now. We've got some work in the technology area, I think, which can help us going forward, and we've got some opportunity from other outside looks. But all of those are going to be supplemental to what we're going to do as a leadership team and group ground here. But for the rest of it, I'm looking forward to optimizing this business, not quite the outside just yet.

This concludes the Q&A portion of today's call. I'd like to turn the call back to Jim Barber for closing remarks.

This is Kelly. Before we give it to Jim, I just wanted to mention that we put some revised materials out on our website. You can access those after the call at ir.vestis.com. Jim?

Thanks, Kelly. Let me just say this quickly to close is that I think that we're on the right track already after 8 weeks. I'm really anxious to come forward, and next time we talk, discuss the Q4 results. We've got a lot of activities going the right way there and then really excited to roll out a plan for 2026 that all of our stakeholders, I think, will stand behind and be supportive of, and we'll be proud to deliver on everybody's behalf. So I appreciate your time this morning. Thanks.