On Tuesday, Vestis (NYSE:VSTS) discussed second-quarter financial results during its earnings call. The full transcript is provided below.
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The full earnings call is available at https://event.on24.com/wcc/r/5309442/92660FDF65681ED8E8A211A8907C5F8C
Summary
Vestis Corp reported a second quarter adjusted EBITDA of approximately $75 million, a 19% year-over-year increase, marking the first growth in over two years.
The company executed well on its Business Transformation Plan, improving operational metrics such as on-time delivery and plant productivity, while reducing cost per pound by 2 cents.
Revenue for the quarter was $659 million, down 0.9% year-over-year, but strategic pricing and product mix improvements helped maintain revenue per pound at $1.37.
Vestis Corp sold two inactive properties for $6.5 million to repay debt and is marketing additional properties to optimize its network and strengthen its balance sheet.
The company raised its full-year fiscal 2026 guidance for adjusted EBITDA to a range of $295 million to $325 million and expects free cash flow between $120 million and $150 million.
Full Transcript
OPERATOR
Welcome to the Vestis Corp fiscal second quarter 2026 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. If you would like to ask a question at that time, please press star one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star two. To enable others to hear your questions clearly, we ask that you pick up your handset for best sound quality.
Lastly, if you should require operator assistance, please press 0. I would now like to turn the call over to Stefan Neely with 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 Dolan, Interim Chief Financial Officer. Also with us on the call today is Bill Seward, Chief Operating Officer. Jim and Adam will provide prepared remarks and then we will open the line to questions. Before I turn the call over to Jim, I want to remind everyone that today’s discussion contains forward-looking statements about future business and financial expectations.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for such forward-looking statements. Actual results may differ significantly from those projected in today’s forward-looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to update our forward-looking statements.
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.
Jim Barber, President and CEO
Thank you, Stefan, and good morning everyone. Thanks for joining us. I’m very proud of the progress our team delivered in the second quarter. Our results reflect continued momentum and disciplined execution against our business transformation plan. Importantly, the quarter marked a meaningful inflection point for Vestis, delivering our first year-over-year adjusted EBITDA growth in more than two years and our first improvement in operating leverage since becoming a public company.
This performance demonstrates the impact of an enterprise-wide focus on execution and on managing every dollar of the business down to the penny as we work to compound value over time. Second quarter adjusted EBITDA was approximately $75 million, an increase of nearly $12 million or 19% year over year on a covenant-adjusted basis. That improvement was driven by a 2 cent improvement in operating leverage comprised of a 2 cent reduction in cost per pound.
Guided by the initiatives laid out in our Business Transformation Plan, we are continuing to strengthen the foundation for sustained profitability and value creation. Our progress this quarter reflects the power of a more unified performance-driven culture. A culture we are evolving upon, a shared vision and values which promote long-term value creation upon a bedrock of customer service. Our teams across the organization are aligned around promoting disciplined operating practices and making daily decisions that improve operating leverage while enhancing the customer experience.
During the quarter, we made measurable progress across all three pillars of our transformation framework. Starting with operational excellence, we built on the progress achieved in the first quarter, delivering tangible improvements across the metrics that matter most when compared to the fiscal second quarter of 2025. On-time delivery improved by 270 basis points, plant productivity increased by 11%, and customer complaints have declined by 4%. This continued momentum reflects our commitment to customer service and our intense focus on consistent disciplined operating practices.
When we execute well operationally, the customer experience improves and our costs come down. These are the leading indicators that drive durable improvements in financial performance. But we have more work to do to improve our service as we are just getting started. We also sharpened our enterprise-wide focus on cost per pound with clear accountability across the organization. By measuring success consistently on a per-pound basis and reinforcing ownership and accountability to investors, we delivered a 2 cent year-over-year reduction in cost per pound.
Combined with our progress in commercial execution, this was a key contributor to the operating leverage improvement and adjusted EBITDA growth we achieved in the quarter. Looking ahead, we expect to carry this momentum through the second half of the year. In addition to plant and network execution, we’re expanding our focus to include delivery costs and additional SG&A reduction opportunities. We are actively streamlining processes and organizational workflows to unlock further efficiency driving continued improvement in cost per pound and adjusted EBITDA as the year progresses.
Turning to commercial excellence, we continue to advance several key initiatives to strengthen decision support and improve revenue quality. During the quarter, we made progress that enabled improved profitability-focused decision-making at the customer level, particularly in strategic pricing and product mix. We also continue to strengthen customer segmentation, pricing frameworks, and approval processes across national accounts, new field sales, and direct sales.
These actions are designed to ensure that the revenue we bring into the business supports operating leverage and adjusted EBITDA expansion. We are beginning to see the impact of this work. The year-over-year decline in revenue per pound has narrowed over the past several quarters, reaching flat in the second quarter, a first time since Vestis became a public company. This progress reinforces our confidence that the commercial initiatives underway are gaining traction.
At the same time, we are reestablishing commercial rigor and discipline that had eroded following the spin. That includes enforcing pricing floors, setting product mix targets for new sales, onboarding volumes that are accretive to our network, and exiting business that does not meet our return thresholds. The goal is straightforward: create durable value by being more disciplined about what we sell, how we price, and how we serve our customers. As we scale these practices, we expect continued improvements in operating leverage through higher value mix, more consistent pricing execution, and deeper penetration in our existing customer base, including through the continued expansion of our Market Development Representative program. While we continue to prioritize value over volume, the early progress in improving revenue quality delivered a half percent improvement year over year in growth during the month of March. Looking ahead, we expect this momentum to continue driving future improvements in revenue per pound and supporting a return to top-line growth as we approach the end of fiscal 2026.
Turning to network and asset optimization, during the quarter we sold two inactive non-operating facilities generating $6.5 million net proceeds that we used to repay debt. We continue to actively market several additional non-operational properties that Adam will discuss in more detail as we further optimize our network and position Vestis for future growth. We will continue to evaluate asset sales where market values present an attractive opportunity to unlock value, strengthen the balance sheet, and better align our footprint with high-growth markets.
In parallel, we are evaluating our market positioning and network configuration to ensure we are well-positioned to capitalize on shifts in competitive dynamics. We are particularly focused on identifying opportunities created by market consolidation and ensuring Vestis remains a reliable, high-quality service partner of choice for both new and existing customers. As we move through the remainder of the year, I am pleased with the progress we’ve made in executing while there is still work ahead.
Our performance to date gives us confidence in both the plan and our ability to deliver. Reflecting the execution achieved in the first half of the year, we are increasing our outlook for both adjusted EBITDA and free cash flow, which Adam will discuss in closing. I am very, very proud of the progress our team made in the second quarter and I remain encouraged by the momentum building across the business. A key part of our transformation is the work we’re doing to strengthen our culture, surveying our teams, investing in their development, and building our Vestis.
Together, we’re building a Vestis where every teammate is proud to work and empowered to perform with a culture grounded in alignment, accountability, and strategic execution. With a stronger culture as our foundation, we are managing Vestis as a penny-driven business, one where the compounding of small intentional improvements across mix, pricing, operations, and cost structure will grow into sustainable operating leverage and long-term shareholder value $0.01 at a time.
With that, I’ll turn over to Adam to walk through the financials. Thank you, Jim, and good morning, everyone. Revenue for the second quarter was approximately $659 million, down about $6 million or 0.9% year over year. This includes a $2.7 million favorable foreign currency impact from our Canadian business. The decline was primarily driven by a 1.2% reduction in volume measured as pounds processed, partially offset by improvements in strategic pricing and product mix. Revenue per pound in the second quarter was $1.37 per pound, flat both year over year and sequentially.
Volume declined by approximately 6 million pounds year over year, but the volume we lost was lower quality, carrying an average revenue per pound of approximately $1 per pound. As a result, the decrease in volumes was accretive to our overall revenue quality and reflects continued progress in strategic pricing, product mix, and the intentional exit of lower margin volume. As we discussed on our first quarter call prior to launching our transformation, our product mix shifted toward lower margin workplace supplies, particularly linen.
In the second quarter, measured on a pounds process basis, linen concentration increased by 4% year over year, improving from a 7% increase in the first quarter and down 2% sequentially, reflecting the early impact of our initiatives to drive a higher value product mix. Cost of service decreased by approximately $4 million on a year over year basis, driven by lower merchandise and delivery costs in combination with improvements in plant productivity that Jim mentioned earlier, reflecting continued progress and execution of our operational excellence initiatives.
SG&A declined approximately $36 million year over year on a reported basis. However, the prior year included a $15 million bad debt expense adjustment and $8 million of non-recurring severance related to executive transition costs. Adjusting for these items, SG&A declined approximately $13.5 million or 12% year over year, reflecting our continued progress on streamlining the organization and managing our operating expenses. Taken together, the reduction in operating costs drove a 2 cent year over year improvement in cost per pound, with revenue per pound flat.
Operating leverage per pound also improved by 2 cents. Notably, this marks the first year over year increase of operating leverage since the spin, directly contributing to growth in net income and adjusted EBITDA. Net income increased by $30.4 million to $2.6 million compared to a net loss of $27.8 million in the prior year. Adjusted EBITDA for the quarter was $74.5 million with an adjusted EBITDA margin of 11.3% versus $47.6 million or 7.2% in the prior year.
Excluding the $15 million bad debt adjustment last year, adjusted EBITDA was $62.6 million in the prior year with an adjusted EBITDA margin of 9.4% on a comparable or covenant adjusted basis, reflecting an increase of approximately $12 million going 19% year over year driven by our improvements in operating leverage. On a year to date basis, our transformation initiatives are contributing approximately $15 million of end year cost reduction benefits towards our initial estimate of $40 million.
As expected, turning to cash flow in the balance sheet, we generated $58.3 million in operating cash flow and $45.6 million of free cash flow in the quarter. This was driven by approximately $12 million of improvement in operating working capital including accounts receivable, inventory, and accounts payable, along with roughly $11 million of improvement in rental, merchandise, and service year over year. Our strong cash flow results reflect our disciplined progress in working capital and balance sheet management including several operational excellence initiatives focused on stronger collections, centralized purchasing, and tighter inventory control. Second quarter adjusted free cash flow was $57 million. As a reminder, adjusted free cash flow excludes transformation related cash expenditures such as third party costs and severance payments made during the transformation period. During the quarter, those expenditures totaled approximately $11 million, consisting of $7.2 million of third party costs and $3.9 million of severance on the balance sheet. At the end of the second quarter, net debt was $1.25 billion and our principal bank debt outstanding was $1.13 billion.
During the second quarter of fiscal 2026, we used cash generated from operations and proceeds from non-operating asset sales to repay $34 million of debt including $19 million of borrowings on our revolver and $15 million of term loan debt. During the quarter, we invested $24.7 million in new capital assets which included $12.7 million in cash investments and $12 million in new finance leases for our delivery fleet. Year to date, we’ve invested $39.5 million in new capital assets including $22.1 million in cash investments and $17.4 million in new finance leases for our delivery fleet.
We ended the quarter with a strong liquidity position with no debt maturities until 2028 and approximately $344 million of available liquidity. This includes $294 million of undrawn revolver capacity and approximately $50 million of cash on hand. Our capital allocation strategy continues to prioritize maintaining a strong balance sheet while allocating capital toward high return opportunities. With a clear focus on delevering through disciplined balance sheet management and improved working capital execution, we are creating greater financial flexibility and strengthening the foundation to support the business over the long term.
As discussed last quarter, we remain active in monetizing non-operating assets while evaluating our network for further optimization. During the second quarter, we completed the sale of 2 inactive properties for approximately $6.5 million in proceeds which were used to repay debt. We are actively marketing an additional 11 properties with an estimated value of approximately $15 million, all in various stages of the disposition process and more are under evaluation.
As with prior dispositions, proceeds will be used to reduce debt. Turning to our outlook today, we are raising our full year fiscal 2026 guidance for adjusted EBITDA and free cash flow. Reflecting the strong execution against our transformation plan, we now expect adjusted EBITDA in the range of $295 million to $325 million with sequential growth of about 5% in the third quarter and 5 to 10% in the fourth quarter toward an increased midpoint of $310 million.
Our updated adjusted EBITDA outlook for the full year is compared to our previous range of $285 million to $315 million, with a prior midpoint of $300 million. We now expect end year benefits from our transformation to be approximately $50 million, a $10 million increase over our prior estimate of $40 million in year, which translates to at least $75 million on a full year basis as we enter into fiscal 2027. Moving to our updated guidance for free cash flow.
Through the first six months of fiscal 2026, we generated approximately $74 million of free cash flow, an improvement of $92 million compared to the first half of fiscal 2025. This improvement was driven by the hard work of our teams executing against our transformation priorities, contributing roughly $50 million from stronger working capital and balance sheet management along with approximately $14 million from improved management of rental merchandise and service both on a comparable year to date basis.
The remainder of our improvements are resulting from stronger collections practices. Overall, our free cash flow performance exceeds our initial expectations for fiscal 2026. Given our first half performance and continued momentum, we now expect free cash flow in the range of $120 million to $150 million compared to a range of $50 million to $60 million previously. This assumes $60 million to $70 million of cash capital expenditures and $30 million to $35 million in cash paid for transformation related expenses.
As with our prior guidance, we continue to expect fiscal 2026 revenue to be flat to down 2% compared to our normalized fiscal 2025 revenue, excluding the impact of our 53rd week last year. We also expect our full year effective tax rate to be between 35 and 40% on a full year basis with our Q3 standalone rate in the low to mid 40% range. With that, operator, please open the line to questions.
OPERATOR
Absolutely. The floor is now open for questions. At this time, if you have a question or comment, please press star 1 on your telephone keypad. If at any point your question is answered, you may remove yourself from the queue by pressing star 2. Again, we ask that you pick up your handset when posing your questions to provide optimal sound quality. Thank you. Our first question is coming from Stephanie Moore with Jefferies. Your line is open.
Stephanie Moore (Equity Analyst at Jefferies)
Great. Good morning. Hi, Jim. Hi, everybody. Thank you. I think a two-part question for me, Jim. How are you thinking about the business now versus when you started about 10 months ago? And then second, building on this, given the progress you’ve made thus far and the implied 4Q EBITDA outlook of about $90 million, can we be run rating 4Q as indicative of total 2027 EBITDA? Any view there would be helpful, thanks.
Jim Barber, President and CEO
Okay, I’m going to do it, I guess. Thanks for the question, by the way. In the end, I’m going to let Adam take the kind of forward-looking on the EBITDA. I think the first two I’d like to say a couple of things about. First of all, you’re right. I joined Vestis Corp about a year ago, and I would say at that time I was excited to come on board, and I can tell you I’m more excited now than I’m 10 months into this job. And really, it comes down to a couple of things I’d like to just chat about for a second, and that is first, this is a very good business.
Fundamentally, it’s a route-based business that customers want us to serve them. It’s scalable, it is something that this business will perform, and it’s managed and led well, and I think to where we see this now. And I look back over the last year or so and all the way to the spin, largely the transformation benefits we’re making so far are really getting back to the really good input to the business that were there in the past, and they just kind of lost their way a bit from my perspective.
And in fact, if I think about that in a couple of pieces, first and foremost, I think that any business you have to lead with is being an operator-led business. And if your decisions aren’t really processed through the lens of how it affects the operator and the customer, you can get off track. And some of that happened. I think there was a zeal for all revenue can be good revenue. And that does not work in these businesses. It has to be the right revenue in the place you want to win.
And moving back to that, I really believe that you have to understand your cost to serve in this business because at that point, it becomes much easier to make accretive decisions. We’ve got brand new decision support tools that have been made over the last 10 months in this business. The finance function, with some outside support, has really done well there. That’s going to help frame our move in the second half of this year. And then really, as we move forward, it’s about having the right people in this business.
Vestis Corp has the right people. The issue just for us is to keep investing in them, investing in the network, taking care of customers, making sure they have what they need to be successful in driving this business forward. So in the last 10 months, 11 months, that’s clearly what I see so far with a whole lot of upside potential because we’re just kind of getting started. I’ll talk for a second about the merger because I think I get that question about three times a day.
And first, I’m going to say I’m not going to get near the regulatory process with respect to the FTC. We’ll let that go. Secondly, I have been involved in these in my 40-year career, so I’m pretty doggone familiar with them. I won’t recite them chapter and verse, but I’m pretty comfortable with the options that might avail themselves to us in this pretty concentrated market. And I think about those in both short and kind of medium-term dimensions.
In the short term, I think we’re a viable competitor here in a scale competitive Cintas and universe. And what that really means to me is that there’ll be a certain set of customers and even employees who really think Vestis Corp might be a better home for them as this merger goes down the path that just naturally happens. I’m not trying to throw gasoline or anything here. That just happens in these processes. And largely that has to do with culture from my perspective.
And I can already tell you that we’re getting inbound calls on both already, and that’s something we’ll manage. Our job is to be ready when the calls come the right way. Secondly, if it does have an extended regulatory process going forward and it might have some remedies involved to get this deal across the line, I think we are a great place to be a credible participant to keep the competitive nature of this industry there. And so that’s the second point for us near term.
And then if it does close, having done this a couple of times, look, I see why people want to merge because it is natural, there’s value to be unlocked, there’s no question about that. But these are really, really tough jobs, jobs to do, and they take more time than you think. And there will be disruption, and we will be ready to manage that long term or kind of longer term as that goes forward. I think I also get the question, can we compete if this merger goes down?
And the answer is yes, we are in the early days and weeks of looking through this lens with different optionality of what might happen in this consolidation as to what our strategy should look like. We owe that to the board. That hasn’t been put forth yet, not since I’ve come for sure. And we are just in the early days. As I said, our job is to figure out how and where we’re going to play and when. And it doesn’t mean necessarily do it the same old way.
Our job is to innovate. Our job is to take cost curves to different places and give customers a different choice that they haven’t had in the past. And we will do that. We’ll work with the board to get that across the line. And as we move into 27, we’ll avail that to everyone around the industry who has knowledge of that. So I’ll let Adam take the kind of third piece, Stephanie, on how we look at kind of going forward if we exit out the 90s and Q4s going forward.
Adam Dolan (Interim Chief Financial Officer)
Hey Stephanie, it’s Adam. Good morning. Thanks for the question on adjusted EBITDA. So the way to think about the revised guidance is we’re coming out of Q2 at 74.5% step up in Q3, and then we’ve got an approximately 5 to 10% step up in Q4. So in terms of how we exit the year, that’ll really be determined over the next couple of quarters. But the way that you can think about how we would start FY27 is where we’re going to be exiting FY26 out of Q4.
And we’ll have more firm guidance for you on 27 as we get closer to the beginning of that fiscal year later this year.
Jim Barber, President and CEO
I’m going to add a point because we’re not ready, Stephanie, to put numbers to it yet. But clearly what happens in these processes as you scale them up and continue sequentially forward, there will be a natural wrap because it’s scaling the way that you’re seeing it scale. And so there will be, as I say, wind at our back as we enter 27. We’ve got to finalize some work here to see how high that might be able to go and make sure that we deliver that for the shareholders and their own stakeholders.
No, thanks.
Stephanie Moore (Equity Analyst at Jefferies)
Got it. No, I really appreciate it. If you don’t mind, if I could squeeze one more in here. It’s very strong free cash flow performance for the quarter and outlook for the year. So if you could talk about that free cash flow, what’s driving the strength, how much of that is recurring. And then I will say a question that we get quite often is when to expect a return to top line growth. So any color there would also be helpful. I’ll pass it on. Thank you, guys.
Adam Dolan (Interim Chief Financial Officer)
Hey, Stephanie, it’s Adam again. Let me take your free cash flow question and I’m going to pass to Jim on your question for top line growth. So let me just go back to last year, FY25 a bit and talk about where we were year to date in the same time period we are this year. So year to date, last year through second fiscal quarter 25, we had a negative free cash flow of about 18 million. This year we have free cash flow of 74 million year to date. That’s on a fiscal year to date basis.
So that’s a $92 million swing. So what’s happening there? There’s a lot of transformation initiatives focused on operational excellence that are driving stronger working capital management. And you’re seeing it particularly in our inventory. And that credit goes to our teams. Under Jim and Bill’s leadership, tightening procurement strategies, more centralized purchasing and ensuring we only have inventory on hand to meet our immediate needs. That’s about $40 million of the year over year improvement.
Then you get down into merchandise, inventory, rental merchandise and service. That’s tighter management on injections into our rental merchandise pool. That’s serving our recurring customers. And great work by the team there on managing to use existing inventory to serve customers instead of bringing new inventory onto the balance sheet and inventory. That saves us on the cash flow side. It also saves us on the merchandise amortization side on the income statement.
And the third piece of that is tighter management on the balance sheet. That’s giving us about 12 million in the non-operating working capital and the non-rental merchandising service. So that’s the bulk of what’s driving it. And all of that’s coming from operational excellence initiatives. And the last pillar that I’ll mention to you is really good management on collections. It’s strong VSO and good management.
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