Vestis Corporation

Welcome to the Vestas Corporation Fiscal Third Quarter 2024 Earnings Conference Call. At this time, all participants have been placed in 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 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. To enable others to hear your questions clearly, we ask that you pick up your handset for best quality. Lastly, if you should require operator assistance, please press star zero. I would now like to turn the conference over to Michael Aurelio, Senior Director, Investor Relations. Please go ahead, sir.

Thank you, Connie, and good morning, everyone. Welcome to the Vestas Corporation Fiscal Third Quarter 2024 Earnings Call. With me here today are our President and CEO, Kim Scott, and our CFO, Rick Dillon. As a reminder, a telephonic replay of this call will be available on the investor relations section of the Vestas.com website shortly after the completion of the call. Also, access to the materials discussed on today's call are available on the Vestas website under the investor relations section. Before we begin, I would like to remind you that this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about management's future expectations, beliefs, estimates, plans and prospects. Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in our periodic and current report files with the Securities and Exchange Commission. We do not undertake any duty to update them. With that, I would like to turn the call over to Kim.

Good morning. Thank you for joining our fiscal third quarter 2024 earnings call. I'd like to begin by thanking our 20,000 dedicated teammates for the hard work they do each day to support Vestas in serving our customers, shareholders, and the communities in which we operate. In my discussion today, I want to convey three key messages. Our business is stable, as evidenced by our third quarter results, retention metrics, and affirmation of guidance. We understand the importance of external communications, consistently delivering against our commitments, and establishing our credibility in the market. We are making progress on improving operations by way of new leadership in the delivery of organizational efficiencies. Catching on point number one, I'm pleased to report that our third quarter results are in line with expectations, and we are reaffirming our full year fiscal 24 guidance with EBITDA margin trending toward the higher end of our range. Adjusted EBITDA margin was 12.4%, a decline of 260 basis points versus the prior year, or 160 basis points excluding the impact of incremental public company costs. Notably, Q3 adjusted EBITDA of $87 million and adjusted EBITDA margin of 12.4% were both flat sequentially versus second quarter despite the approximate 1% sequential revenue decline. It's important to note that a portion of the upside in the third quarter was related to timing effects from pull forward of items that we originally expected to impact the fourth quarter. Revenue for the quarter was down 1.6% year over year. We remain focused on accelerating new business. We've seen approximately 700 basis points of growth from new wins in Q3 and 100 basis points of volume gains from route sales, which is cross-selling existing customers, additional products, and services. With the addition of new sales leadership and our new de-layered structure, we believe we can further accelerate our new business wins. Our customer retention rates have improved year-to-date and are in line with our plan for the year. In fiscal 24, we have seen a 210 basis point improvement in retention on a year-to-date basis versus fiscal 23. This is good validation that our decision to moderate pricing was the right decision to protect our recurring revenue base for the long term. As previously disclosed, our fiscal 23 retention rate includes the impact of two large national account losses, which impacted the full year and, in particular, the fourth quarter fiscal 23 rates. which presented a rollover volume loss headwind in fiscal 24. I'm pleased to share that we continue to have good performance with our national account renewals in fiscal 24 and have successfully renewed several of our largest customers year-to-date. Our objective in the year ahead is to continue to enhance our service levels in order to further improve retention rates over time. Moving on to point number two. We understand the importance of delivering consistent results and establishing our credibility in the market. To that end, we are fully mobilized to execute against our plans in the fourth quarter and deliver our full-year commitments. We want to end 2024 with strength, finalize our budget, and vet our plans with our team, which includes a great new chief operating officer and head of sales. While we will not discuss our expectations or provide guidance for fiscal 2025 today, we expect that our second half results will be the new base for our business from which we will grow. Moving on to my third point, I'm pleased to talk about two exciting new hires to Vestas. Some simplification to our organizational structure that's resulting in a net $4 million cost savings, as well as the appointment of two additional board members. Bill Seward will be joining as our Chief Operating Officer at the beginning of September. Bill most recently served as President of Supply Chain Solutions at UPS. Pete Rego has joined as Head of Field Sales. Pete brings significant sales leadership experience to Vestas, with most of his career spent as a sales leader within the industrial laundry industry, including 19 years at Centox. With Pete's addition to the organization, we are shifting our field sales team to report directly to sales leadership under Pete rather than up through field operations. Aligned with these leadership appointments, we have made a number of strategic changes to the organization that will enable us to accelerate growth and more rapidly deliver operational efficiencies. These include a sales center of excellence to improve close rates and increase revenue per deal, a dedicated team to oversee our national account growth strategy, which will be beneficial to optimize our route density and plant utilization, and collapsing our field operations structure to allow us to get even closer to our customers. This reorganization and de-layering will generate approximately $8 million in annualized growth cost out. This allows us to self-fund approximately $4 million of strategic investments in key leadership roles and realize approximately $4 million in net annualized savings. Lastly, we welcome two new members to our board, to our already strong and highly engaged board. Many of you in the investment community likely already know Keith Meister, the founder and chief investment officer of Corvex, Vestas' largest shareholder. Keith has a strong financial and investment expertise and brings a highly valuable set of skills and perspective to our boardroom. We are excited to welcome Keith to our board and have enjoyed a very constructive dialogue about Vestas' pathway to long-term value creation. Bill Goetz has also joined the Vestas Board of Directors. Bill brings strong sales and marketing expertise and a wealth of relevant industry experience to our board. Bill previously spent 22 years at Centos, in various executive leadership roles, including President and COO of Global Accounts and Strategic Markets and Chief Marketing Officer. Now I'd like to discuss the operational changes we've made to improve service. We are continuously working to enhance our customers' experience. As a reminder, our service levels have remained consistent over the past year. However, in some cases, we believe our customers expected enhanced service levels in order to accept higher levels of pricing. We are laser focused on improving our service levels above and beyond what we have historically delivered as we build a truly differentiated experience for our customers. We are fully mobilized to improve our operations to provide better service. We are launching new and improved procedures across our plants to address shortages, on-time delivery, and quicken the time to install for new wearers. In the third quarter, we introduced a new exciting customer delivery notification system so customers can receive real-time updates and documentation of product pickup and delivery. Lastly, we created a dedicated customer experience team to continuously enhance the customer experience. Before I turn the call over to Rick, I want to make a few last points. De-leveraging remains a priority. Subsequent to quarter end, we have entered into an accounts receivable securitization facility that will allow us to meaningfully lower our outstanding net debt. This transaction enables us to reduce by approximately $250 million the amount of net working capital our business requires us to hold on our balance sheet and allows us to utilize these proceeds to pay down approximately $250 million of debt. On a pro forma basis, third quarter net debt would have been $1.28 billion, and third quarter net leverage would have been 3.3 times had we closed on the facility and repaid $250 million of term loan debt prior to the end of the quarter. This is a great example of some of the latent assets that we can monetize to strengthen our balance sheet as a standalone entity. Rick will further discuss the AR facility and pro forma impact on the balance sheet. To conclude, I want to emphasize that we are pleased that our third quarter results are in line with our commitments. Our retention metrics have improved year to date, and we are reiterating our guide with EBITDA margins trending toward the high end. We are mobilized and tracking to deliver against our fourth quarter and full year commitments and taking a measured approach to our external communications. And as such, we won't be discussing FY25 until November. And we have made great progress in terms of reorganizing and streamlining our organization, adding key hires, continuously adding perspectives to our board, and improving our service level. And lastly, I want to reiterate that we expect that our second half results will be the new base for our business from which we will grow. With that, I'd like to turn the call over to Rick.

Thanks, Kim, and good morning, everyone. I will start with more details on the third quarter results and then close with our guidance and expectations for the fourth quarter. So let's start with the third quarter revenue bridge on slide 10. Revenue of $698 million decreased by 1.6% year-over-year. The impact of volume growth and pricing was offset by lost business in the quarter. Volume growth from recurring revenue, including new customers, and expanding our existing customer penetration through cross-selling provided approximately 800 basis points of growth in the quarter. Consistent with the second quarter, new customers contributed 700 basis points of growth, and route sales to existing customers contributed 100 basis points. We continue to win new business, and we are seeing an increase in the dollar contribution from gross new sales. Sales from new customers were up 17% year-over-year, despite sales headcount being down approximately 10% versus the third quarter of fiscal 23. Customer losses reduced third quarter revenue by approximately 900 basis points year-over-year, more than offsetting our volume growth. The lost business impact consists of 5% from known customer losses as we exited fiscal 23, and 4% from customer losses during this fiscal year. As Kim noted, we saw improvement in our year-to-date retention rate over fiscal 23, and we expect this will drive lower carryover losses in 25. This is an important point that I want to emphasize. The prior year retention rate was a bigger headwind in 2024 than we expect it will be in 2025. Said differently, we begin fiscal 2025 in less of a hold from lost business than 2024. Pricing contributed 60 basis points to top line growth. This reflects in-year regularly scheduled annual price increases and moderated off-cycle pricing, partially offset by the impact of the erosion of prior year June pricing actions as we progress through the fourth quarter of 2023 and the first quarter of 24. Direct sales were down $3 million in the third quarter year-over-year, driven almost entirely by the lost revenue from the large direct sale national account previously disclosed. Excluding direct sales, the uniform business was down 3.5% year-over-year, and workplace supplies was flat year-over-year. Moving on to slide 11, an adjusted EBITDA. Adjusted EBITDA was $87 million in the third quarter of fiscal 24, flat sequentially to the second quarter, and down approximately $20 million from the third quarter of fiscal 23. The operating leverage on new business and flow-through on pricing were more than offset by the impact of lost business in the quarter. The incremental margin on new sales volume was approximately 39%, which reflects incremental garment amortization costs and new customer wins and sales commissions on new sales. The approximately 58% decriminal margin on lost business was net of final exit billings during the quarter. Year to date, we have approximately $10 million in exit billings offsetting the impact of lost business. Incremental public company costs were approximately $7 million in the quarter and $14 million year to date. We now expect full-year incremental public company costs of approximately $18 million. Benefits from our network and logistics optimization efforts, as well as lower incentive compensation costs, were offset by the expected increase in labor costs year over year. The EBITDA margin was 12.4% for the quarter, consistent with the second quarter. However, margins declined 260 basis points year over year, including the absorption of 100 basis points of incremental public company costs. Returning to cash flow and the balance sheet on slide 12. We generated approximately $49 million in cash from operations in the third quarter and $176 million year-to-date, net of approximately $18 million in one-time cash and related costs. We continue our focus on inventory management through sales and operations planning and garment reuse initiatives, driving a $21 million reduction in inventory year-to-date as we focus on having the right inventories in our distribution centers and operating facilities to support growth. CapEx was approximately $21 million during the third quarter of 24, slightly ahead of last year's spending. Free cash flow in the third quarter was $28 million and $125 million year-to-date, with free cash flow conversion in excess of 100% of net income and 46% of year-to-date adjusted EBITDA. I want to reiterate that this free cash flow includes approximately $18 million in one-time spend-related costs and does not include the impact of the AR security taxation, which was subsequent to the quarter end. Turning to slide 13. We're committed to strengthening our balance sheet and deleveraging. We continue to channel available cash to voluntary loan principal reduction. Year to date, we have made payments of approximately $80 million, which includes $60 million in voluntary payments. We ended the third quarter with a net debt to EBITDA ratio of 3.98 times. We announced today we entered into a $250 million accounts receivable securitization facility and will use the proceeds from this facility to repay outstanding term loan debt. The facility matures in 2027 with an option for extension. The facility creates a liquidity event by giving us early access to cash from a portion of our outstanding accounts receivable while not interrupting our normal operating cash conversion cycle. This results in a reduction in working capital needed to support the business by unlocking this latent asset on our balance sheet. The proceeds will allow us to make meaningful, positive reductions in our outstanding net debt, improving our debt to equity and net debt to EBITDA leverage ratios. The cost of the facility is SOFR plus 100 basis points, which is currently 125 basis points lower than the interest on our existing term loans. The annualized cash savings from this transaction is also over $300 million. The nature of the transaction is such that there is no debt obligation on our balance sheet and it does not reduce the liquidity available under our existing credit facility. On a pro forma basis, Q3 net debt would have been $1.28 billion and Q3 net leverage would have been 3.3 times had we closed on the facility and repaid $250 million of term loan debt prior to the end of the quarter. I'm pleased to report that our current pro forma net debt total of $1.28 billion compares to our net debt of $1.6 billion to start the year, representing a debt pay down of more than $300 million since the start of the year. This significant debt pay down both highlights the strong operating cash flow that our business generates and the effective job our finance and operations teams have done in managing our balance sheet to generate cash during our first year as an independent public company. We remain confident in our ability to get to our targeted leverage of 1.5 to 2.5 times. I want to conclude by discussing our fiscal 2024 outlook and what to expect in the fourth quarter on slide 14. We are reaffirming revenue guidance for the year and now expect to be towards the higher end of our adjusted EBITDA margin guidance. We expect the underlying operating trends from Q3 to continue in Q4. As Tim noted, there were some one-time benefits to EBITDA in Q3 that won't repeat in Q4, some of which represents a pull forward of items we previously expected in Q4, including $4 million of direct sales from the known large national account we are exiting, $2 million from final exit billings offsetting reoccurring revenue losses in Q3, Taken together, these two represent approximately $6 million of revenue and $3 million in EBITDA that falls off as we move sequentially into Q4. Additionally, we expect a few million dollars of impact from price erosion sequentially from Q3 to Q4, with Q4 reflecting the settling of late Q2 pricing actions mid-third quarter and higher sales expense as we increase our investment in our sales team to support growth. These two items will represent approximately $4 million in sequential EBITDA impact as we move from Q3 into Q4. Collectively, we expect these items will drive approximately $7 million of sequential EBITDA step-down as we move from Q3 into Q4. These one-time items do not reflect the change in the health of the underlying business or where we see current trends. This concludes our prepared remarks for today, and Kim and I would like to thank everyone for joining us, and we will now open the line for questions. Operator?

Thank you. 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 question to provide optimal sound quality. Thank you. And our first question comes from Andy Whitman with Baird.

Great. Thanks, and good morning. Thanks for taking my question. I wanted to drill into, I guess, slide 10 in the revenue bridge, specifically around the customer losses here, because you kind of emphasized this, and I actually think it's a main point that I wanted to explore a little bit in more detail. The idea is that the hole for 25 from losses is not as big as it was in 24. And I guess one way of thinking about that, I want to confirm that I'm thinking about this correctly. If you had $37 million of revenue hit from known losses from basically the back half of 23, that'd be two quarters in 23, resulting in $37 million revenue impact. That would be about $18 million per quarter of revenue loss. That would compare to this year, where you say you've got $29 million of in-year losses over three quarters, or about $10 million of revenue loss per quarter. So basically, that difference from... $10 million per quarter. That difference between $18 million per quarter of revenue loss versus $10 million of revenue loss, is that one way of getting our arms around and thinking about the difference in the known customer losses?

Yes, I think that's a good way of thinking about it. I didn't completely redo your math, but thinking about it that way in terms of taking the known losses year-to-date that we've reported versus the in-year losses and then doing the math on what that differential is for 24 versus 25. That's exactly how I would think about it.

Okay. And I guess then, Kim, just as it relates to – it feels like the business is getting a little bit more stabilized after those customer losses. Pricing strategy has now been in effect. The new pricing strategy has been in effect. Your retention rates are stabilizing. Does it give you a little bit better visibility as to when organic growth – might be able to inflect positively. I was just wondering what your thought process is on timing, recognizing that some of these customer losses, even from last year, have to filter through next quarter, and I think probably into at least through fiscal first quarter of next year. But I was just wondering what your view is, if you think that organic growth can return in second quarter of next year or third quarter of next year. Is that kind of what you're thinking?

So I don't want to specifically point to the quarters at FY25, Andy, but I will tell you that you are thinking about this correctly in that there will still be some carryover losses that have to move from FY24 into the beginning of FY25, so we will need to last those, obviously. And you can look at our 800 basis points of growth that's coming from our sales team and from our route sales representatives. and recognize that we need to accelerate in order to more rapidly drive organic growth in the early quarters of 25. We need to accelerate. We would need to accelerate that run rate that's coming from that sales team because we still need to absorb some rollover losses coming into the first part of 25. I want to be careful not to talk to you specifically about 25, but what I also can tell you is that you are correct in your thinking that we definitely should see less of a headwind related to rollover losses coming into the new year now that we're seeing retention rates stabilize.

Got it. Okay, those are my key questions for today. I'm going to pass it on.

Thanks, Andy. Appreciate it.

and we'll take our next question from andrew steinerman from jp morgan hi um kim you know i heard you use the word uh moderation of of price um in your prepared remarks and then rick you used the word place erosion when talking about the implied fourth quarter guide compared to third quarter so i just want to understand are we talking about net realized price being positive, just lower than in the past? Or are we actually talking about realizing price negative, particularly when thinking about fourth quarter, which we're in now, versus the third quarter we just reported?

Sure. My comments, I'm referring to the impact of price in Q3 versus Q4. As we talked last call, we took moderated pricing actions late in Q2, and we noted that we would just moderate. As those pricing actions settled out in terms of realization in Q3, when you compare the impact in Q3 to Q4, it's a little bit less in Q4. We do have positive pricing, but we're just speaking to sequentially the decline in the impact.

Rick, when you say that, it sounds like you have positive realized pricing year over year, but it sounds like you're also realizing net realized pricing sequentially.

I'm saying in Q, sequentially, I'm realizing net pricing. I also have net pricing for the fourth quarter. I will call out that as we move through year over year, as we move through the fourth quarter relative to prior year, if you recall, we had significant off-cycle pricing in Q. for Q3-4 of last year, impacting primarily Q4, thus that year-over-year erosion that I spoke of relative to those actions. But we continue to take a price, and it is impacting our results. And to Kim's comments, the impact of pricing for the year will land at about between 1% and 2%, which is at a normalized rate for us.

Okay. Thank you.

And we'll take our next question from Shlomo Rosenbaum from Stiefel. Hi.

Thank you very much for taking my questions. Tim, can you talk a little bit about slide seven, the recurring revenue customer retention? Just trying to understand the context of it. It looks like it went down sequentially from 93.2 to 91.7, but it's up year over year by about 40 basis points. Can you just comment on the retention? Is the retention going down sequentially? Is this a seasonal type of metric to look at? How should we be thinking about what's going on in retention through the year?

Sure, I'll actually take that. When you look at our quarterly retention, there can be some volatility in the quarterly retention calculation. And that's why, and it's just based on the nature of the calculation and the discrete aspects of each quarter. And so that's why we look at this from a year-to-date perspective. And that 200, roughly in excess of 200 basis points improvement you see year-over-year, year-to-date, is what we're really focused on. And so we like that improved trend, and we're pleased with that. And so that quarterly number does have a little volatility. I would also note that Q4 of prior year, included the impact of a large national account and also is reflective of the very pricing you just talked about on the last question. He took significant pricing in Q3 and Q4, and you basically see some of the impacts we've been speaking to in Q4. We've moderated pricing, so we're not anticipating a pricing impact, but we're very pleased with where we are year-to-date.

Okay. And can you talk a little bit about that ARR securitization facility? Is it recourse to Vestas?

So the receivables are sold. They're sold to a bankruptcy remote entity and ultimately to a bank. The receivable and the rights to those receivables. And so as cash is collected, the purchaser enjoys that cash. What we like about the facility is as those receivables are paid off, we can replace them, and it gives us this permanent acceleration of our DSO and allows us to enjoy early the aspect of $250 million of receivables without impacting our ongoing operating cash flow.

There's no recourse on there to Vestas if something goes wrong with a big client or something like that, if the receivable becomes uncollectible. Does that go back to you? You guys have to go back and replace it? I'm just trying to figure out how that works.

There is no recourse.

Okay. Thank you.

And once again, if you do have a question, you may press star 1 on your telephone keypad at this time. And we'll take our next question from Stephanie Moore from Jefferies.

Great, thank you. Actually, I think for my first question, I'll just follow up on the prior question that was asked on retention. So I've understood that you can have some volatility quarter to quarter, but can you give us an idea where we think retention should end for fiscal 2024? Presumably, you've almost said about the year here, you should have probably a decent idea. And then what is the kind of targeted retention model we should think about as we start to lapse some of these losses and we're in what is, you know, presumably a more normalized environment? Thanks.

So what we've talked about before, actually, is that we came into the year expecting retention to be in this 92.5 zone. And year-to-date, that is where we're falling. Without getting into a forecast of what retention looks like in the fourth quarter, what we like about where we sit is we don't have the significant headwind from pricing. And as you see here today, we're not aware of any large national account that is at risk for the fourth quarter. Those are two meaningfully different headwinds to that Q4 retention count, and we're monitoring this and focused on that daily.

And then what would be a targeted normalized retention?

When we talked before, we talked about the last number that was out there was 93%. I will point out that that was actually a high point for retention for the business. And if you go back pre those years, retention for this business has been actually in the 91.5% range. We believe there's huge opportunity there, and we're really focused on how we do better than 92.5 to the discussion that Kim had on service excellence and what that does from not only an ability to take price, but also the impact on retention of the customers we have.

And, Stephanie, I'll just add to that. When we look at the future opportunity, we have market centers today, we have locations today that are performing well above the 95% mark. So we absolutely know that it is achievable to be much better than we are today, and that's really why we're putting this concerted focus around the customer experience and enhancing the experience for customers. So our internal benchmarks are, we believe, really something that is a great opportunity for Vestas in the years ahead. I wouldn't want to put a timeline on when we think we will achieve those higher levels, but we've proven to ourselves that we can do that because we have locations today that are performing at these levels. So we're really aiming to move that retention needle up significantly over time in the coming years. Right now we've been focused on stabilizing. We've taken some very decisive decisions to make sure that we move the needle in the right direction, and now we've got an entire team focused on elevating the experience for the customer so we can hit those watermarks.

Got it. No, that makes a lot of sense. And then just as a follow-up to that, I think as we think about organic growth going forward, and I understand not giving any color on 25, so I'm not specifically asking on that, but given kind of where retention is improving to, but as you said, it's an opportunity for further improvement going forward, given kind of the pricing environment, which I think across the board is really not super, super robust for all things we probably understand. So if you think about the levers you can pull, which are new business wins, it sounds like quarter-to-quarter new business wins remain pretty steady and pretty good, high single-digit range. It sounds like you've done a pretty good reorg of the sales organization. So can you talk a bit about the pipeline of new wins, the new win conversion level, and kind of the timing in which you think you can start to see some of the operational improvements drive, you know, an acceleration in the new business lens?

Yeah. So, you know, as we mentioned in our prepared remarks, we're seeing about 800 basis points of new growth. So 700 basis points coming from our frontline sales teams converting new logos to and about 100 basis points of growth coming from our route service representatives that are growing and penetrating and taking share of wallet with existing customers. So the first step to organic growth is making sure that rate outpaces lost business, and that's why we've been heavily focused on stabilizing lost business, and we continue to focus on that because the single best and easiest lever to pull for growth is just to hold on to more customers than you did before. And so our focus right now is let's protect our base, Let's make sure that we are putting a lot of energy around delivering an outstanding customer experience so that we can protect what we already have. And that's lever number one. Let's get that done and let's protect those great customers that are already in our house. The minute you do that, that 800 basis points can start to become a creative and positive growth opportunity. But on top of that, we've also put a tremendous amount of effort around restructuring our sales team, as you referenced, bringing in very strong proven industry leadership because we also do believe that our frontline sales team who is converting new logos can convert to at a better close rate and more revenue dollars per head. And I've talked a lot about that being an important metric for us, revenue dollars per head. And as Rick mentioned, we are actually seeing higher rate of sales from that team with lower headcount. So we know that they are becoming more productive. And what we're focused on right now is that year one and year two cohort of new teammates making sure when we bring those folks in, we're setting them up for rapid success so that they can immediately drive revenue dollars and continue to show productivity levels for that team. So I think there's opportunity with the lost business rate to continue to improve that. Just holding the line at the 800 basis points and improving the lost business rate would be a positive outcome, but we know that we can also drive up that 800 basis points with a more productive sales force and a more professionalized and capable sales force. So those are really, I think, the best levers. When it relates to the pipeline, we have also put a tremendous amount of energy around our national account pipeline. And, in fact, we appointed a new internal leader who is a proven leader who has been working in our clean room team to oversee our national accounts broadly for the organization. And she's already off to the races building a very robust national account pipeline and working on some very large deals to move those deals through the pipeline. So we also feel very positive about Erin's leadership and what we're going to see from national accounts. And I do just lastly want to remind everyone, you know, our strategy is centered around volume. And so winning those large national accounts and pushing large tranches of volume through our fixed assets creates tremendous operating leverage for us because we have that idle capacity that I've spoken about so many times. And so national account wins are incredibly important to us to push volume through the system. And so we also feel good about the progress we're seeing from that team.

Thank you.

Thanks, Stephanie.

And we'll take our next question from Manav Patnik from Barclays.

Hi, good morning. This is Ronan Kennedy. I'm from Manav. Thank you for taking my questions. Can I ask if you are seeing any of what one of your public comps described as a heightened new business, be it activity driven by dynamic of increased scrutiny by cost of customers, which is kind of a step change from more recent Industry dynamics, and is that being kind of coupled with your deliberate step back on pricing to address acknowledged service gaps? Is that driving instances of where you are renewing, you're having pricing and volume erosion during the renewal process? So that, you know, that dynamic or phenomenon and just commentary on the broader pricing pressure within the market.

So, Ronan, I wasn't able to hear the first part of your question. So I heard you say there's heightened competition, and your question was about, I think, more scrutiny from our customers around pricing. Is that the question?

Yeah. Yes, one of your public comps had referred to a more challenged environment, primarily from a national account bid activity standpoint, where there is increased scrutiny of pricing. Is that coupled with your deliberate moderation of pricing to improve acknowledged service gaps kind of? compounding pressure and resulting in instances of erosion of volume at price and renewal?

No, I would separate those two components. So we think about pricing with our national account customers very differently than we do with SMEs. So, as I'm sure you all know, national account customers are typically three- to five-year contracts, and they have very bespoke and surgical pricing by customer, as well as the price increase terms and conditions that are quite customized by customer. And so we are all at the macro level competing for those large pieces of national account volume, and those come up very episodically. Every three to five years you may have one of those large customers come up. When they do come up for renewal, it is very competitive, and we are all talking about pricing and rebates and incremental volume and ways that we can preserve the business or win the business from our competitor. That is a very different dynamic than our pricing decisions that we make related to SMEs. And it is a completely different process. So I would not commingle those two in any way, Ronan. I would think about them quite differently. But to answer the first question, yes, there is a lot of competitive activity when national account customers come up for renewal because, as I mentioned, they're large pieces of volume, so they're highly attractive in our model.

Got it. Thank you for the clarification and the insight there. And then can you just provide an update on the efforts around efficient operations? I think you previously highlighted optimization events and then also from a merchandise management, your reuse initiatives with the benefit to use fill rate and then your in-cash savings and annualized run rate benefits out of that.

Yeah, so we are very pleased. I'm glad you asked the question because we are very pleased with the progress that we're making around efficient operations. I've spoken a great deal about logistics optimization and building that muscle inside Vestas, and we are still continuing to see outstanding progress from that team. So I mentioned previously that we were measuring this as it relates to the number of optimization events we have. in terms of making sure we're accelerating progress. And we'll do about 46 of those events this year. And when we do that, we're seeing a reduction in fuel consumption. We're seeing consolidation of footprints, which results in headcount coming out of the system. It results in reducing shuttles and empty miles between wash facilities and cross docks or depots, as we call them. So we're seeing great progress on the logistics front, and we continue to accelerate there. That same team is also leading our use fill rate initiative. And so we are seeing also very good progress related to the reuse of existing garments that are already in our stock rooms, which allows us to avoid amortization costs. And it also allows us to preserve working capital by not having to build inventory. And you saw some really good results on our balance sheet related to $20 million in inventory cash benefit that we're seeing as a result of some of those efforts. So All in, we feel really good about the productivity initiative. I also mentioned the $4 million that we will see as a result of this restructure as well. We actually took out $8 million of costs, but we reinvested four of it. So we have a whole portfolio of costs out in productivity initiatives that are tracking really well.

Thank you. Appreciate it.

Thank you.

Once again, if you have a question, you may press star 1 on your telephone keypad at this time. And we'll go next to Tim Mulroney from William Blair.

Tim, good morning.

Hey, Tim. How are you? Good morning.

A long time no talk. I know. Good to hear your voice. Good to talk to you again. Likewise. So just a couple of questions. The first one's on, not surprisingly, retention. So, you know, based on the bridges that you provide in the slides, it looks like the headwinds from in-year customer losses was about three points in the first quarter. And then that increased a little bit to four points in the second quarter. So can you help me understand how that headwind can be getting larger as you move through the year, while at the same time your customer retention metrics are improving? I guess basically my question is how are your customer losses getting higher as you move through the year, but your customer retention is getting materially better? Can you help me bridge that gap?

Absolutely. Greg, do you want to take that? So when you think about the impact, I would separate that from the actual retention calculation. When you think about the end-year impact, As we progress through the year, you will see more impact from in-year losses, and you'll see less impact from carryover losses because we start to lap those. And the in-year losses, if it happens in the beginning of the year, It's a loss impact as we progress through the year. So you naturally see the impact of in-year losses grow as we progress, and we should see and will see the impact of known losses kind of taper. Okay.

So basically it accumulates through the year. I wasn't sure if the answer was related to pricing because retention doesn't have pricing, but it sounds like it's just an accumulative factor. Correct. Okay. Thank you. And just one more from me. I know service efficacy is a real focus area right now to help strengthen those retention rates. Curious how the general effort to improve on-time delivery has gone over the last few months with those telematics in place and efforts to improve on like loading processes and load shortages. Have you seen any material change in those key KPIs yet to improve service levels, or is it too early at this point?

Yeah, so we've done a lot of work around this. It's too early to start talking about step change and metrics yet because we've just been working diligently on implementing these big processes over the last quarter, but we're making great progress. We've already launched an on-time delivery notification for our customers in multiple pilot locations and we aim to have that in place across all of our systems by the end of the fiscal year. which is outstanding. So this is a real-time notification letting the customers know we've just bumped your dock, we've delivered your product, and hope you had a great service. And we're documenting and verifying that, much like many of the delivery companies that are delivering to your front doorstep at your home. So we think this is a kind of step-change introduction for the industry for us to be communicating real-time like this with our customers. So we feel very good that that will also drive accountability for our drivers and our teammates. because they know that we're going to be communicating with our customer on a real-time basis. And so that will help drive assurances around delivery. We also have developed a very robust SOP standard operating procedure related to you how to manage shortages if there's an inventory challenge in a facility or we're falling short for some reason on product we have found some best-in-class behaviors that are in fact at our Greenville South Carolina facility we spent a couple of days I myself spent a couple of days on the ground with them in Greenville mapping out their process of how they manage shortages and we've actually taken that best practice, put it into a standard operating procedure, and we'll be standardizing that across our whole network so that everyone is responding with urgency and in the same way to address any type of product shortage that we might have. Lastly, and most importantly, though, we've moved the leadership of this responsibility under our logistics leader, who you just heard me mention is having really great success with the initiatives he's driving on optimization, And he's now taken ownership for all of what we call tactical inventory, so ensuring all the plants have enough buffer stock and that we're ordering on time and we're delivering on time and that that product is available for customers. And he's bringing a whole other level of sophistication and metrics and data-based execution to this area of shortages and on-time delivery. So early days on the metrics, but we feel outstanding about the progress we've made since we spoke with you last quarter in terms of mobilizing around these opportunities.

Got it. That's a lot of good detail on the operational front.

Thank you. Thanks.

And we'll go next to George Tong from Goldman Sachs.

Hi, thanks. Good morning. You gave some examples of steps you're taking to improve customer service quality, and you touched on some now, including addressing shortages and ensuring on-time delivery. Can you talk about how long it would take to spread these practices across the organization to your satisfaction and your playbook for doing so?

Yeah, so we are very mobilized. We have the playbook in place around both assurances around on-time delivery, and we intend to have that delivery communication launched across our entire network to our entire customer base by the end of the fiscal year. So that will be happening across our network. We will continue to improve that over time, adding new levels of communication to the customer doors. So this is something that we will never stop working on. Phase one is communicating the delivery, but we believe we can add all kinds of additional touch points and communications to the customers through that process. Did you have a great experience? Do you need anything else? Can you give us a five-star Google rating to drive up, you know, enhanced SEO and other metrics? So there's a lot of opportunity to build on this, but we anticipate by the end of the fiscal year it will be launched across our entire system. We have successfully piloted it in multiple locations already. The standard operating procedure for shortages is being tested now as well and should be implemented very soon. But I will also tell you some of this is cultural change that takes time. As you train people on the standard operating procedure, then holding people accountable to comply to that procedure and making sure that we are doing what we said every day in every location across 20,000 teammates. So it will take time. for this to be institutionalized and to become part of our culture and our DNA of always putting the customer first and serving with excellence. So I don't want to put a timetable on it because we're never going to stop working on this. This is just going to become part of who we are and part of our culture.

Got it. That's helpful. And you moderated price increases this quarter to preserve retention rates. which worked, can you provide your latest pricing outlook for the next couple of quarters and when you believe pricing growth can accelerate as your service quality improves?

So without guiding to pricing going forward in 25, as I said earlier, we moderated pricing and we expect full-year pricing to land in between 1% and 2% in terms of in-year impact of pricing. As we talked last call, we expect to continue to do our normalized annual pricing activities, and we are doing very surgical, specific, customer-driven incremental pricing. We did that in the back half of this year, and we expect some of that to continue into 2025. Got it.

That's helpful. Thank you.

And we'll take our next question from Oliver Davis, Redburn Atlantic. Hi, Beth.

Hi, Oliver. Yeah, so you've seen a nice acceleration in the level of cross-selling this year. So can you just talk about how you see that kind of acceleration continuing into next year? And then secondly, can you just comment on the turnover of sales employees and how well staffed you think you are there?

Yeah, so I'll start with our route service representatives. We are very pleased with the work they're doing to cross-sell. We shared that we've seen 100 basis points of growth from that team. And while that may not seem high, when you look at the incremental margin that you get from cashing share of wallet and bolting on the existing products and services to customers that we're already visiting, it's a very attractive revenue, so we're very pleased. We have also seen our route service representatives in some instances hit the watermarks that we modeled. And so our strategic plan, you know, we had high aspirations for this team to grab massive share of wallet from existing customers. You might recall that we had shared we were only 30% to 40% penetrated with those existing customers. And we are seeing some of our RSRs hit those watermarks. for capturing very high levels of wallet and share with customers and so we feel very good that we can continue to accelerate sales with that team. and those are very attractive sales. A lot of the products that we're cross-selling have very low to no amortization, so they're very attractive immediately. So we're really excited about this initiative. We'll continue to drive it, and I'm very proud of our 5,000 or so teammates who have been making that happen. As it relates to new logos and new sales, I think you asked about the frontline productivity of those teammates, and we are also seeing those teammates sell at higher rates. We mentioned that we're up 17% on new business wins versus prior year rates, and that is on a lower headcount. So we're definitely seeing productivity up with that team as well.

Thanks.

Thank you.

This concludes the Q&A portion of today's call. I would now like to turn the floor over to Kim Scott, President and CEO, for closing remarks.

Well, in closing, I would just like to thank all of you for joining our call today. You know, I want to reiterate that Vestas is a great business with tremendous value creation opportunity before us. And our team is energized and we're committed to continuing to deliver on our commitments to the market. So thank you for joining us today.

Thank you. This concludes today's Vestas Corporation Fiscal Third Quarter 2024 Earnings Conference call. Please disconnect your line at this time.