Release Date: August 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Third-quarter results are in line with expectations, reaffirming full-year fiscal '24 guidance with EBITDA margin trending toward the higher end of the range.
- Customer retention rates have improved year to date, with a 210-basis-point improvement compared to fiscal '23.
- New business wins contributed approximately 700 basis points of growth in Q3, with an additional 100 basis points from route sales.
- Operational efficiencies are being realized through new leadership and organizational restructuring, resulting in a net $4 million cost savings.
- The company has successfully implemented a $250 million accounts receivable securitization facility, significantly reducing net debt and improving leverage ratios.
Negative Points
- Revenue for the quarter was down 1.6% year over year, and adjusted EBITDA margin declined by 260 basis points versus the prior year.
- Incremental public company costs impacted adjusted EBITDA margin by 100 basis points.
- Customer losses reduced third-quarter revenue by approximately 900 basis points year over year.
- There were some onetime benefits to EBITDA in Q3 that will not repeat in Q4, leading to an expected sequential EBITDA stepdown.
- Pricing contributed only 60 basis points to top-line growth, reflecting moderated off-cycle pricing and the erosion of prior year pricing actions.
Q & A Highlights
Q: Can you explain the impact of customer losses on revenue and how it compares to previous years?
A: Rick Dillon, CFO: The impact of customer losses is cumulative throughout the year. In 2024, we saw $29 million of in-year losses over three quarters, compared to $37 million in the back half of 2023. This means the headwind from losses is less severe in 2025 compared to 2024.
Q: How does the current pricing strategy affect retention and future growth?
A: Kim Scott, CEO: We moderated pricing to stabilize retention rates, which has worked well. We expect pricing to contribute 1-2% to growth this year. Future pricing actions will be more surgical and customer-specific, aiming to balance retention and growth.
Q: What are the key initiatives to improve customer service and retention?
A: Kim Scott, CEO: We are implementing a new customer delivery notification system and standard operating procedures for managing shortages. These initiatives are expected to be fully operational by the end of the fiscal year, aiming to enhance customer experience and retention.
Q: Can you provide an update on the accounts receivable securitization facility?
A: Rick Dillon, CFO: The $250 million facility allows us to reduce net debt and improve liquidity. The receivables are sold to a bankruptcy-remote entity, and there is no recourse to Vestis. This will help us achieve our deleveraging goals.
Q: How is the sales team performing in terms of new business wins and cross-selling?
A: Kim Scott, CEO: Our sales team has achieved 800 basis points of growth, with 700 from new logos and 100 from cross-selling. We are also seeing higher productivity per sales head, and our national account pipeline is robust.
Q: What are the expected retention rates for fiscal 2024 and beyond?
A: Rick Dillon, CFO: We expect retention to be around 92.5% for fiscal 2024. Our long-term goal is to improve this rate significantly, leveraging our focus on customer experience and service excellence.
Q: How are you addressing operational efficiencies and cost savings?
A: Kim Scott, CEO: We are making significant progress in logistics optimization and inventory management, resulting in $20 million in inventory cash benefits. We also expect $4 million in net annualized savings from organizational restructuring.
Q: What is the outlook for organic growth and new business wins?
A: Kim Scott, CEO: We are focused on stabilizing customer retention and improving sales productivity. Our national account strategy is also expected to drive significant volume through our fixed assets, contributing to organic growth.
Q: How are you managing the balance between pricing and service quality?
A: Rick Dillon, CFO: We are taking a balanced approach to pricing, focusing on customer-specific actions while maintaining service quality. This strategy aims to support both retention and growth.
Q: What are the key metrics for evaluating the success of your service improvement initiatives?
A: Kim Scott, CEO: We are tracking on-time delivery, customer satisfaction, and inventory management as key metrics. Early results are promising, and we expect these initiatives to drive long-term improvements in customer experience and retention.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
