Operator: 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.
Stefan Neely: 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.
James Barber: 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.
Adam Bowen: 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: [Operator Instructions] Our first question today comes from Stephanie Moore with Jefferies.
Stephanie Benjamin Moore: 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.
James Barber: 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?
Stephanie Benjamin Moore: 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?
James Barber: 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?
Bill Seward: 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.
James Barber: 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.
Stephanie Benjamin Moore: And last one for me. Could you maybe help us understand what a normalized free cash flow conversion can look like here?
Adam Bowen: 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.
Operator: Our next question comes from Tim Mulrooney with William Blair.
Timothy Mulrooney: 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?
James Barber: 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?
Adam Bowen: 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.
Timothy Mulrooney: 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...
Adam Bowen: 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.
Timothy Mulrooney: 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?
Adam Bowen: 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.
Operator: Our next question will come from Andy Wittmann with Baird.
Andrew J. Wittmann: 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.
James Barber: 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?
Adam Bowen: 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.
James Barber: 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?
Adam Bowen: 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.
Andrew J. Wittmann: 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?
James Barber: 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.
Operator: Our next question comes from Manav Patnaik with Barclays.
Manav Patnaik: 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?
Adam Bowen: 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.
James Barber: 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.
Manav Patnaik: 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?
James Barber: 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: [Operator Instructions] We'll go next to George Song with Goldman Sachs.
Keen Fai Tong: 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?
Adam Bowen: 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.
James Barber: 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.
Keen Fai Tong: That's helpful.
James Barber: 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.
Keen Fai Tong: 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?
James Barber: 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.
Keen Fai Tong: You mean non-national field, right?
James Barber: 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.
Operator: And we'll take a follow-up from Stephanie Moore with Jefferies.
Stephanie Benjamin Moore: 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.
Adam Bowen: 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.
James Barber: 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.
Operator: This concludes the Q&A portion of today's call. I will now turn the call back to Stefan Neely" for closing remarks.
Stefan Neely: Thank you, operator, and thank you, everyone, for joining us today. We appreciate your time and your interest in Vestis. If you have any questions, please don't hesitate to contact us at ir@vestis.com. We look forward to speaking with you again next quarter. Have a great day. Thank you. This concludes today's Vestis Corporation Fiscal Third Quarter 2026 Earnings Conference Call. Please disconnect your line at this time, and have a wonderful day.
