Vestis Corporation

Welcome to the Vestas Corporation Fiscal Fourth Quarter and Full Year 2024 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 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 sound quality. Lastly, if you should require operator assistance, please press star zero. I would now like to turn the call over to Michael Aurelio, Vice President, Investor Relations.

Thank you, Ashley, and good morning, everyone. Welcome to the Vestas Corporation Fiscal Fourth Quarter and Full Year 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 reports filed 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.

Thank you, Michael. Good morning, everyone. Thank you for joining our fiscal fourth quarter 2024 earnings call. Vestas recently celebrated its first year anniversary as a standalone public company. And I want to begin by recognizing our teammates and the collective effort behind that milestone. Over the past year, our team has been hard at work building a strong foundation that will allow Vestas to capitalize on the tremendous opportunity ahead. To each of our 20,000 dedicated teammates, thank you for your continued commitment and support of our customers and shareholders. We delivered solid fourth quarter financial results that were in line with our expectations for revenue and ahead of our expectations for adjusted EBITDA. Fourth quarter revenue was $684 million, and on a full year basis, Fiscal 2024 revenue was 2.8 billion. We are very pleased with our fourth quarter adjusted EBITDA performance, which allowed us to deliver 353 million in EBITDA for the full year, representing a margin of 12.6 versus our guidance of 12 to 12.4%. Q4 adjusted EBITDA was 81 million versus our implied Q4 guide of 76 million. As a reminder, Our 2024 results include the impact of incremental public company costs, which impacted fourth quarter and full year 2024 margin by 75 basis points and 65 basis points, respectively. We continue to generate strong free cash flow in line with our conversion target. That has supported our strategic priority to delever, and we ended the year with a 3.6 times net leverage ratio. I want to focus my discussion today on simple but important themes. We are building commercial momentum. We continue to drive efficiencies across our operations, and we remain highly focused on elevating our customers' experience. A lot is working well at Vestas, which we will talk about today, but we still have more room to go. And that's what excites me regarding the opportunities ahead. We are committed to achieving best-in-class performance related to retention, sales, and margins, and I'm encouraged by what we're beginning to see. As I move through my prepared remarks, I will also touch on some cost initiatives that give us great confidence in our ability to deliver against our commitments in fiscal 2025 and set us up for continued profitable growth as we move into fiscal 2026 and beyond. I'll begin with the commercial progress we are seeing, including our national account wins and pipeline, success with the small to medium enterprise customer base, and achievements in route sales with existing customers. I'm pleased with the development of our sales capabilities, and we expect an acceleration in new business wins in FY25, with incremental volume outpacing lost business beginning in the second quarter. Over the past year, we have been focused on growth with national accounts, a segment of the market that was not a growth priority for the company in the past. These accounts add route density, make our routes more efficient, and leverage our excess plant capacity. And they can carry an incremental margin above our corporate average margin. I'm really proud of major recent wins in this segment, including a large multi-year deal with a leading national food services company spanning multiple product categories across both uniforms and workplace supplies. We see potential for this account to become one of our largest customers over the next several years. We also won a large expansion award as part of a recent renewal with an existing top 10 customer in the restaurant industry. As a longtime partner, this customer valued our service and saw the benefit of further consolidating its business with a trusted national service provider. This lane expansion is expected to more than double our revenue with the customer when fully ramped. The current state of our national account pipeline is the strongest I've seen during my tenure at Vestas, with a record high for both new logos and risk-weighted revenue in the pipeline. Turning to our small to medium enterprise customer base, I'm also pleased with the early results we've seen in the field sales under our new leadership and structure. Beginning in early September, our new head of field sales began making significant changes to our sales training and processes, including implementing more tactical selling strategies for targeting competitor business and converting non-programmers. Since then, we have seen a greater than 10% year-over-year increase in per-seller productivity. In one specific region, we saw seller productivity hit a level that we believe represents best in class for our industry, and a level that is multiples higher than our company-wide level in fiscal 2024. These recent data points demonstrate what is possible from our sales team. As sales headcount has attrited over the past year, we have purposefully delayed the replenishment of the team. Now, with a strong leader in place, we are institutionalizing a world-class sales process strengthening our field sales leadership and are ready to expand the size of our team. We will be introducing these teammates into a better structure with stronger leadership and sound sales processes that will set them up for success and reduce teammate turnover going forward. In addition to new customer acquisition, we also continue to deliver strong results from route sales. Our route sales increased approximately 50% in fiscal 2024 and added more than 100 basis points of in-year revenue growth at high margin flow through. We have sustained this momentum into 2025 with route sales continuing to grow more than 50% on a year-to-day basis and in line with our objectives for 2025. Now I would like to discuss the initiatives we are driving related to efficient operations. As I've discussed in the past, we have excess capacity in our facilities. which means if we continue to deliver on the commercial improvements I outlined, we could see significant operating leverage. We also have line of sight to a number of initiatives that will further drive costs out of the business in fiscal 2025, which I will discuss momentarily. Let me start with our excess capacity. We are well positioned to accelerate volume growth without the need for a step up in CapEx. we believe we have approximately 35% underutilized wash capacity in our current plant footprint. This gives us the highly attractive opportunity to grow volumes and drop operating leverage without the need to spend meaningful capex for additional equipment or new plants. We continue to deliver strong advancements with our network optimization and merchandise reuse initiative. We expect to realize meaningful cost savings from these areas in fiscal 2025, which will come from a combination of physical 2024 carryover benefits as well as additional in-year actions. Finally, we are executing against a portfolio of cost takeout initiatives throughout FY25 that will enhance our cost structure as we move through the year. These include further improving our field operations cost profile and rationalizing our back office G&A. We have already executed against many of these efficiency opportunities in the first quarter, underpinning our confidence and our ability to deliver our commitments this year. Now I want to discuss an area of our strategy where we are moving in the right direction, but still have opportunity to continue to improve the customer experience. We remain laser focused on delivering a best in class customer experience that will support retaining and growing with our existing customers. Importantly, our physical 2024 retention rate improved by 150 basis points year over year to 91.9%, which will position us better entering 2025 versus 2024. We are pleased with the year over year improvement and the fiscal 2024 rate. As we've mentioned in the past, there can be some seasonality in this metric, and we believe it is most useful to evaluate retention on a full year basis. That said, we are also pleased that our fourth quarter retention improved more than 400 basis points year over year, and what has historically been our lowest quarter of the year from a seasonality perspective. As a reminder, our retention in the fourth quarter of fiscal 2023 included the impact of national account losses and customer response to significant fiscal 2023 pricing actions. We are keenly focused on continued improvement in service measures, responding quickly to our customers' needs and always putting the customer first. We believe we can further improve our retention rate in fiscal 2025, and we feel good about where the year has started with a retention rate of 93.7% in October. To further illustrate the changes we have been implementing, I want to highlight two new operational initiatives that are currently underway. These include a new on-time delivery notification and measurement system that will allow us to better measure and manage our delivery performance, as well as a new standard operating procedure for our plants to control product shortages. We have observed an almost 50% reduction in shortage-related service requests at the pilot locations and are preparing for a network-wide rollout in the near future. I'm excited about the way our organization has rallied around this powerful cultural shift as we embrace a customer-first mindset underpinned by robust improvements in our operating procedures. Now I'd like to end by discussing our outlook and guidance for fiscal 2025. We expect fiscal 2025 revenue of $2.8 to $2.83 billion and adjusted EBITDA of $345 to $360 million. This represents revenue growth of approximately 0% to 1% and a margin of 12.3% to 12.7%. It's important to note that our guidance excludes the benefit of one-time customer exit billings and revenue from the large direct sale customer that we exited in fiscal 2024 as part of our profit improvement strategy for that line of business. Rick will discuss this in more detail in his prepared remarks. Adjusted for these impacts, we expect to deliver core revenue growth of 1% to 2% and adjusted EBITDA margin expansion of 40 basis points, which we believe is a better view of the current trajectory of the business and our underlying performance. This core growth will be driven by positive contribution from both net volume growth and pricing. Specifically, we continue to build momentum with new sales and have now lapped headwinds from outsized 2023 carryover lost business. Additionally, we continue to realize net price increases with our customers, and we expect pricing to be a positive year-over-year contributor to growth in fiscal 25. Furthermore, and what's most exciting, is that as we deliver our fiscal 25 plan, we also lap tough comps in the first half of the year and thus expect to begin to deliver revenue growth of 3 to 4 percent and EBITDA growth approaching or exceeding 10 percent in the back half of the year. This instills great confidence that we will enter 2026 with momentum. To conclude, I'll come back to the three initial themes I shared at the beginning of my discussion. A lot is working well at Vestas. We are building commercial momentum and we are seeing continued success with our efficient operations initiative. In addition to our logistics optimization, we are executing against a portfolio of cost initiatives that will support the delivery of our results as we move through FY25. Through the course of FY25, we will continue to identify opportunities to make our operations more efficient, allowing us to further improve our cost structure. And lastly, we are building a customer-centric culture with a keen recognition of the importance of delivering an outstanding customer experience in order to grow the lifetime value of our customer base. We remain focused on executing against our strategy, and I'm excited about the opportunity ahead for Vestas. Lastly, in response to preliminary proposals received for potential acquisitions of Vestas, we have retained Centerview Partners and Weill Gottschall. I want to emphasize that our management and board are focused on maximizing shareholder value. As a public company, we will always do what is in the best interest of shareholders. Given the confidentiality and sensitivity around this topic, we will not answer questions regarding this during our call. Thank you in advance for your understanding. With that, I'd like to turn the call over to Rick.

Thanks, Kim, and good morning, everyone. So let's start with fourth quarter revenue bridge on slide eight. Revenue of $684 million decreased by 4% year over year. The impact of volume growth was more than 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 700 basis points of growth in the quarter. New customers contributed approximately 600 basis points of growth, and existing customers' growth contributed 100 basis points, with route sales up 18% year over year. Net customer losses reduced fourth quarter revenues by approximately 900 basis points. The lost business impact consists of $5 million from known customer losses as we exit 2023, and $60 million from customer losses during the fiscal year. As Kim noted, we improved four-quarter retention by over 400 basis points year-over-year and full-year retention by 150 basis points, ending the year at 91.9%. As a result of this improvement, retention will be less of a headwind in fiscal 25 than we have seen in fiscal 24. 60 basis points of in-year pricing actions was more than offset by the negative impact from the rollback of significant prior year pricing actions as we progressed through the fourth quarter of 2023 and the front half of 2024. Direct sales drove a 60 basis point decline in the fourth quarter year over year, driven almost entirely by the lost revenue from the large direct sale national account previously disclosed. Excluding the impact of the direct sale business, our uniform business was down 6% year-over-year and workplace supplies down 3% year-over-year. Moving on to slide nine, an adjusted EBITDA. Adjusted EBITDA was $81 million in the fourth quarter of fiscal 24, down approximately $32 million from the fourth quarter of 23. The operating leverage on new business was more than offset by the impact of lost business and the rollback of pricing gains that favorably impacted the fourth quarter of 23. The incremental margin on new sales volume was approximately 34%, which reflects incremental amortization costs and sales commissions on new customer wins. The approximately 57% decremental margin on lost business was net of final exit billings during the quarter. Equivalent of Pubco costs were approximately $5 million in the quarter and $18 million for the full year. We expect these costs to be down approximately $5 million in fiscal 25 as we exit the transition service agreement with Aramark and are fully operational on a standalone basis. Benefits from lower incentive compensation costs, our network and logistics optimization efforts, and lower energy costs were offset by expected increase in labor year over year, pricing erosion, as we discussed earlier, and the impact of Pubco costs. The EBITDA margin was 11.8% for the quarter versus 15.8% in the fourth quarter of 23. The decline in margin is attributable primarily to lower net volume erosion of price year over year and incremental public company costs. Turning to cash flow slides on slide 10. We generated approximately $63 million in cash from operations in the fourth quarter and $239 million for the fiscal year, net of approximately $23 million in one-time cash spin-related costs. This excludes the benefit from our accounts receivable securitization in the quarter and the proceeds from the sale of the joint venture, which was completed subsequent to the fiscal year end. We continue our focus on inventory management through sales and operations planning and garment reuse initiatives, driving a $10 million reduction in inventory during the year as we focus on having the right inventories in our distribution centers and operating facilities to support growth. Net capital expenditures were approximately $23 million during the fourth quarter of 2024 and $74 million for the year, $7 million ahead of last year's spending. Free cash flow in the quarter was $40 million and $165 million for the fiscal year. Our free cash flow conversion was in excess of 100% of net income and 47% of adjusted EBITDA for the full year fiscal 2024. I want to reiterate that this free cash flow includes approximately $22 million in one-time spend costs and does not include the impact of the AR securitization facility completed in the fourth quarter. Turning to slide 11. We are committed to strengthening our balance sheet through deleveraging. We continue to channel available cash to voluntary loan principal reduction. We have made principal payments of approximately $105 million, which include $85 million in voluntary payments in fiscal 24. I am pleased to report that our net debt total of $1,278,000,000 compares to our net debt of $1,633,000,000 to start the year, representing a debt pay down of more than $350 million since the start of the year. As previously reported, we completed the sale of a Japanese joint venture in October, subsequent to the quarter end. The $35 million of after-tax proceeds were also used to repay long-term debt. These are significant debt reductions and highlights the strong operating cash flow our business generates and the effective job our teams have done managing cash and our balance sheet. We ended the quarter with a net debt to EBITDA ratio of 3.6 times and remain confident in our ability to get to our targeted leverage level of 1.5 to 2.5 times. I'll conclude by providing a few details on our fiscal 2025 outlook on slide 12. Again, we expect revenue of $2.8 to $2.83 billion and adjusted EBITDA of $345 to $360 million. This results in a revenue growth from approximately 0 to 1% and an EBITDA margin of 12.3 to 12.7%. As Kim noted, our revenue guide reflects the absence of $13 million in one-time exit cost billings in fiscal 24 and $15 million associated with strategic exit of a large direct sale customer in 2024. Excluding these items, core revenue growth is expected to be one to two percentage points, reflecting our national account and field sales growth trajectory, as well as continued improvement in our route sales and positive net pricing in fiscal 25. From an EBITDA perspective, these two items represent approximately 18 million, and thus on a similar core view, we expect the underlying business to grow mid-single digits in 2025. As you think about the phasing of our guidance for the next year, it is important to note that both of these items, along with fiscal 23 carryover pricing, primarily impacted the front half of 2024, and the back half of fiscal 24 is more indicative of the starting point for our business heading into fiscal 25. As a result, we anticipate Q1 of fiscal 25 revenue and EBITDA will look similar to the fourth quarter of 24 with incremental improvement throughout the year as we continue to implement our strategic initiatives and cost structure enhancements. In closing, we're excited about the momentum of our business. We are confident in our ability to deliver against our 2025 commitments and our trajectory heading into 2026. This concludes our prepared remarks today. Kim and I want to thank everyone for joining us, and we will now open the line for questions.

Operator?

Thank you. Thank you, and 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 has been 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. Our first question is coming from Andy Whitman with Baird. Please go ahead.

Great. Thank you for taking my questions, and thank you for all the detail on your initiatives inside the company during the quarter. That's all very helpful context. Kim, I just thought I'd have you elaborate a little bit more on kind of the status of of your pricing conversations. It sounded like through some of your commentary here that the price comps maybe for the first half of this year are a little tougher, but underline that. And with the new base for the second half, it gets a little bit better. Can you just maybe just put a little bit more meat on that bone and talk about kind of the discussions you're having and what gives you the confidence that the pricing environment is firming up after 24, which is kind of a transition year?

Yeah, thanks, Andy. It's good to hear from you this morning. So as we said in our prepared remarks, pricing will be a positive contributor for our business in FY25. So you're right, we've got some headwinds and some comps we've got to deal with in the first half of the year. But as we move into the back half of the year, we will see pricing coming through the business. We also have done a great deal of work around our culture and our customer first focus to and our delivery metrics and our shortages. And so the things that I talked about around the service enhancements are really starting to take root inside the organization. Also, our new chief operating officer, Bill Subert, has really done an outstanding job out the gate instilling this customer service and customer first mindset. All of that is giving our team more confidence. to hold price, to take price, and to be really confident about the service that we provide and the value of the service that we provide. So we are starting to see momentum in the organization around standing behind price and being confident in taking that price. And you'll start to see that flowing in the back half.

Okay, great. And then I just thought I would... ask for just an update on the overall rollout of your network densification strategies. Obviously, you've been doing this for some time, and it's always incremental. You're doing kind of market by market at a time. How far along are you on this? How much did you do in the quarter? And how much more is planned for 25? Anything around that topic I think would be helpful for all of us. Thank you.

Yeah, I'm really very pleased with the progress that we've made in logistics optimization. You know, we started down this path several years ago, and so this program is quite mature for us. It's become the way we work now. So we are constantly optimizing and ensuring that our routes are as efficient as possible while we're still marching down the path of addressing footprint optimization, so locations that are not where they belong or additional depots and crosstalks in our network that are driving empty miles and wasted miles. So we continue down that path, and in fact, we're accelerating. So each year, we're doing more events. We have a dedicated team that's on the ground doing that by location. We will enjoy carryover benefits from logistics cost out from activities that we did in 24, while also accelerating and generating more of those in 25. So this program continues, and really, this program will never end. So we'll get through our first assessment and our first optimization model across the next zero to five years as we've been in this journey now about two years. We've got about three years to go on the first wave, but there are more rounds of this to go, Andy, and this will continuously be optimized as we grow our network and we add volume. We will keep doing this type of activity. So we'll see good dollars flowing through and good cost out coming in 25 from the rollover as well as the new events, and you'll see it again in 26.

That's super helpful. I just had one final question and I'm guessing this one's probably more for Rick. And the question is just really just to help people get their expectations set for their models through the year, having to do with the $28 million of items that were kind of beneficial last year that were kind of one-time or exit charges or things of that nature. Where do those fall in terms of a quarterly cadence? I just want to make sure that we all kind of look at the revenue and the margins that happen from those on a year-over-year basis and try to get those right. So any context you could give on that I think would be helpful for us to kind of level set expectations.

Sure, and that really speaks to the front half, back half nature of our guidance. There's roughly about $13 million of exit costs. If you think about those, they happen primarily in the front half of the year, almost split evenly across the first two quarters, and a similar discussion around the exit of a large facility national direct sale account, really front half weighted with similar quarterly growth in the front half. Both of those work their way out of the system here in the front half, and we return to not lapping that headwind when we get to the back half of the year.

Okay. Super helpful. Thanks, guys. Have a good day.

Thanks, Andy. Thank you. We will take our next question from Shlomo Rosenbaum with CIFL. Please go ahead.

Hi, good morning. Thank you for taking my questions. Kim, I wanted to follow up on your comment about the Salesforce attrition that you kind of let happen, you know, as you're trying to work through getting a new sales leader and you're looking to kind of, you know, add to your Salesforce experience. Can you talk about, like, you know, how many people you're looking to add or percentage-wise what you're looking to add? And then how long does it take from when you start, you bring someone on board until when they're really hit their stride? And you could expect them to deliver, you know, the type of revenue growth that you would expect from a seasoned salesperson. And after that, I have another question.

Okay, great. Well, good morning, Shlomo. Thank you for joining the call and for your question. Sure. So let me maybe just step back for a second and talk about how we think about our sales ramp, because there's really several levers inside that. We have an existing group of teammates who are here today. And as I mentioned in my prepared remarks, we are seeing great productivity improvements with those teammates. We're really proud of the work that they're doing under our new sales leadership. and we're seeing their revenue per head go up dramatically, and we're very pleased about that. We're also setting those teammates up for success so that we retain them and they stay with the company and we lower turnover. The third lever is adding new teammates. And so what we're doing is closely monitoring the productivity levels that we're getting from existing teammates, and we will turn the dial for adding new teammates as we see the need to replenish the teams. We purposely did let teammates attrit starting in the second quarter, as I mentioned in our earnings call in the second quarter. We allowed those teammates to attrit, and we did not throw dollars at headcount to put bodies in place without the right processes and the right leadership. Now we have that leadership. and we will add heads as needed to replenish the team while we monitor the productivity per head. And so we're going to turn all three of those dials, what's happening with turnover, what's happening with revenue per teammate, and then what is happening with new sales ads. And so as we move through the year, we'll turn those dials appropriately. So it wouldn't be appropriate for me to give you a number because that number could change depending on how fast our current teammates improve their level of performance. We will need less new teammates. To answer your question about how fast they ramp, our new leader has a very militant program of training sales teammates. And so we essentially, depending on their level of sales experience, when they come into the organization can be between four and eight weeks approximately. So it really depends on their background and their experience, whether they go through the full eight-week onboarding and ramping protocol or they go through a four-week program. So it depends on their skill and their level of experience in the industry as well as in selling in other environments. So it varies, but we have a very disciplined, robust process in place for how we recruit those teammates, the profile of those teammates, the set of experiences that teammate brings to the table, and then the onboarding and training and integration into Vestas that they go through. So I feel really, really good about our ability to continue to ramp our sales team. And we already have very strong evidence with early days with Pete, our new leader in place, demonstrating what is possible. I mentioned in my prepared remarks, we have seen an entire region hit levels that we believe are the watermark for the industry. And we were very far from that watermark, if you guys will recall, in prior discussions that we've had about sales productivity. And so I'm very excited about the strong green shoots that we're seeing coming from that team.

Okay, thank you. And then can you just give us a little bit more detail in progress that you're seeing in some of the things that were challenged? You listed three things, you know, before last quarter or two, new winds not ramping as expected, you had service quality issues, and then you deliberately moderated pricing. We talked a little bit about pricing here, but Are you seeing improvements in new wins and kind of ramping more the way that you'd expect? And can you quantify any improvements there in kind of the service quality issues?

Yeah, so we absolutely are seeing progress and new wins. And I mentioned some very exciting national account wins, including that large food services provider that we brought into our portfolio. And we truly believe that that is an opportunity for that customer to become the largest customer that we have at Vestas. So that is very exciting. We also are seeing great what I call lane expansion, so including adding additional locations to an existing set of customers. And we've seen great progress there. I highlighted an example of that around one of our top ten customers in the restaurant industry who is now adding additional services with us, adding additional locations with us. And they are growing, which means we are also growing with them. So I'm really excited about the focus that we're seeing on the national account pipeline, as well as the frontline field sellers that we spoke about just a moment ago. So we are definitely seeing momentum. We also have an extensive and robust national account pipeline that is very thorough, rigorous, detailed, and being harvested by our national account team. You might recall that I mentioned on our last call that we have put new leadership over national accounts as well. A very proven leader inside our organization is now leading that team, and she's doing an outstanding job. So I'm very pleased with what we're seeing as it relates to frontline field sellers as well as harvesting a national account pipeline. From a service perspective, I also touched on some key areas that we are hyper-focused on. Starting with culture, we are having a revolution inside this business around obsessing over our customer, taking great care of our customer, putting our customer first in all we do. And we have brought in new leadership to also support that cause in Bill Seward, our new chief operating officer. So there is an across this organization around putting our customer first like I've never seen during my time here. So I'm incredibly excited about what's happening with putting our customer first, but we're also underpinning that with sound processes and discipline. We created a customer experience team as part of our restructure that we spoke about in the fourth quarter of last year when we moved to 10 regions. We also created a customer experience team. We have great leadership over that team. We have dedicated resources to that team, and they are mapping out our operating procedures related to all of our touches with customers, improving those procedures, and then retraining our teammates on those procedures. Our new COO who is coming to us from a very disciplined background and set of experiences across the course of his career is also militantly ensuring that our teammates follow those procedures. They have the tools and resources and training, but they're also held accountable to make sure that we follow those procedures and put our customers first. I mentioned the on-time delivery metric, which is outstanding, but it also includes an on-time notification to our customer, a digital notification to our customer that we delivered on the promise, that we have bumped their docks, we have dropped their product, we have taken their sold product, and we did what we said we're going to do when we said we were going to do it. Our customers are now getting that automated notification from us, which I think is going to drive transformation in the industry related to how we touch customers and communicate and interface with customers in this industry. So I'm delighted about that. And then lastly, we called out shortages, making sure every piece of product got on the truck and delivered to the customer as needed. And we also have now been testing a new procedure for our facilities to follow. In our pilot locations, we've seen a 50% improvement in reducing shortages just in the pilot locations. So that will be rolled out over the course of the year as well. So all in, I can tell you that great things are happening here at Vestas for our customers, and we've got leadership and processes to underpin that. So I feel really good about where we are. On your last question around pricing, we've already touched on that. We're absolutely seeing pricing momentum in the business. We do have tough comps to lap in the first half of the year, so you will see pricing emerging in the third and fourth quarter of the year and contributing on a positive basis for the balance of the year. Okay? Thank you. Thanks, Wilma. I appreciate your question.

Thank you. We'll take our next question from Stephanie Moore with Jefferies. Please go ahead.

This is Harold Lanto on for Stephanie Moore. So I guess, you know, good progress you made on the leverage profile. I guess when looking at 2025, how much do you plan to deliver in 2025, I guess, and achieve your target? And I guess if you could talk about any progress you've been seeing from the ARC organization.

Sure. I would say in 2025, we expect to continue, as we've said this year, really devote any quote-unquote excess cash towards delevering. And we did that over the past year in addition to driving delevering from really focusing on managing our balance sheet. So from the AR securitization, there was about $233 million of operating cash benefit from doing that initial draw from the facility. And as we've talked about, we also have sold a Japanese joint venture. We did that subsequent quarter. That gives us an additional $35 million to channel towards that. And this past year, we did some asset sales that also provided cash for us against debt. So we expect to continue to leverage our balance sheet. There are more opportunities there. And as I've noted, we're excited that we continue to meet our cash conversion targets and using that cash to continue down the path of de-levering, while also maintaining our 3% CapEx investments.

Yeah, I guess just on the retention side of things, I guess what's the implied retention you guys are assuming in fiscal year 25 to achieve your revenue growth targets?

So we're not giving a retention target for the year, but what I can tell you is we continue to improve related to retention. So we are very pleased with the progress that we made in FY24 versus FY23. We are entering FY25 on solid footing as it relates to mitigating rollover losses. If you'll recall, we had to face rollover losses from FY23 into FY24, and we had to absorb those losses throughout the course of the year. We're very pleased that we're entering in a much stronger position as we come into FY25. We improved our rate in 24, as I mentioned in my prepared remarks, and we expect that we will continue to improve throughout FY25. Also, I mentioned our October performance, which is 93.7% retention. We're very pleased to see that progress as we move through the first quarter.

Thank you.

Thank you.

Thank you. We will take our next question from Manav Patnaik with Barclays. Please go ahead.

Hi, good morning. This is Ronan Kennedy. I'm from Manav. Thank you for taking my question. Could I just ask for some further insight with regards to the cost initiatives, perhaps some further context and or quantification. I know you said that there is an expectation to realize meaningful cost savings of 24 benefits. I think you referenced some actions being taken in the current quarter, et cetera, around improving field services, G&A, et cetera. Can you expand upon that in terms of quantification, timeline for realization, run rate, that type of thing?

Yeah, thanks for raising your question. It's good to hear from you this morning. So, absolutely. And I think it's really important, and we want to make sure that everyone understands this. We are absolutely taking appropriate action to ensure that we have the right cost structure inside this business. And, of course, we're always going to be diligent about doing that. One of the key components of our strategy is efficient operations. So we've been constantly looking at and evaluating and finding ways to take costs out of our system, and we've been very diligent about doing that. We do have some carryover that will come from 24 into 25, but also I want to provide assurances to all of you that we have a very strong foundation in place to deliver our FY25 commitments. And we are confident about that related to all of the things that we've talked about around sales and improving the customer experience. But we have also taken significant action to lower our call space and to take costs out of the business. We have taken those actions, many of those actions already. So prior to this call, we have taken action to reduce the number of headcount across our business. That has resulted in eliminating positions. We have significantly taken down the headcount across particular teams, including our finance team, most recently. And then we have also done a great deal of work around discretionary spending and making sure that we have very tight controls around spending across the company. and we are accelerating our logistics initiatives in 25 beyond what we had originally planned in our original strategic plan. So there is a great deal of good things happening across the organization to lower our cost base, and we have high confidence in the contributions those will make to our 25 numbers.

That's very helpful. Thank you. And then may I confirm on the CapEx 3% of revenues? I think you've Reference, again, being underutilized, I think, to the score of 35%. How should we think about what the CapEx and the investments are being made and the areas of focus there for investment?

As we said when we launched, that we would channel first two years of of capex around some maintenance items, but then also leave enough flexibility to drive operating efficiencies within our plant. So that could be automation of particular equipment in the plant. It could be investing in the further use of our existing ABS system. But those investments are project specific, delivering specific returns. And so as Kim noted, we are at 35% capacity. We do have 35% capacity within our existing facilities. And so that CapEx is not needed to build new buildings, but we are still investing on equipment and processes within our facilities.

Thank you. And then could you just comment as to where you think you are in terms of whether the, you know, it's the famous sports analogy, what ending with regards to automation of equipment in the plant, use of ABS, et cetera, broader technology?

Yeah, I'll take that. So, you know, just in general, I would say a couple of things. For those of you who have been following us for a while, you would know that we moved our entire network onto ABS, which is essentially a work order system, and we standardized that across all of our locations, including Canada. So we're all operating on one platform across all locations, which gives us a great ability to do things quickly inside the company if we want to make changes, if we want to adjust the way that we operate. Excuse me, that allows us to do that. So we feel really good about the operating platform. We have a great IT stack, so we already feel great about the systems that we have in place, and we're very pleased about that. Where we're leveraging technology is really for our customers. You might recall that we launched a world-class portal that our customers are using to do quite a bit of self-serve and management of their accounts, and we continue to evolve that portal. and we continue to add new features. I also spoke about our on-time delivery notification, which allows our frontline teammates that are serving our customers to also notify them automatically and electronically when we've provided that service so that they have that information at their fingertips. And so we're really merging the technology stack that we have to create new initiatives for our customers that are creating a positive experience. As it relates to our plants, we're just getting started, to be honest with you. I think there's tremendous opportunity to continue to optimize the layouts in our plants, the flow of product through our plants. We have good technology that allows us to look at labor productivity and to understand our teammates' productivity in the facilities. But there is great opportunity to create better lean layouts and footprints in those facilities, and that's not even a part of our current short-term plan. So more opportunity to come there in the future.

That's very helpful. Thank you very much. Appreciate it.

Thank you. Appreciate your questions.

Thank you. We will take our next question from Tim Mulrooney with William Blair. Please go ahead.

Hi, good morning. This is Luke McFadden on for Tim Mulrooney. Thanks for taking our questions today. Maybe just to start here, one on guidance. I'm curious for your 2025 outlook, what the assumptions are as it relates to underlying performance in your uniforms and workplace supplies categories, and should we expect performance in those service offerings to vary at all across our U.S. and Canada reporting segments?

So you're referring to the mix, Luke, the mix of workplace supplies versus uniforms?

That's correct, yeah, and just kind of expectations for performance there as we move through 2025 here. Sure.

We expect, in terms of overall mix, we expect the mix you're seeing to sustain itself as we continue to execute the strategy on cross-selling. When you talk about some of the national account pipelines, And even our field sales, you will start to see uniform winds pick up, and therefore you'll see some growth in the uniforms and workplace supplies. But we do expect workplace supplies to continue to outpace uniforms.

Excellent. Really helpful. Thanks. And then maybe just switching gears here, obviously, you guys have seen some really nice improvement on the customer retention front. I noticed a comment in the slide deck around improving frontline employee retention as well. Maybe you could just speak to that a bit, perhaps how employee churn has historically trended and maybe what you've been doing differently now to support better retention on that frontline.

Yeah, I appreciate you noticing that. We're really proud of the work that we've done to take great care of our frontline teammates. We have made significant strides really over the last three years, but in particular, we had step change last year as it related to employee turnover. These are our outstanding teammates that serve us in our plants and serve our customers in our plants on the frontline, as well as our route service representatives that are out delivering and taking great care of our customers every day. So we need to be taking great care of them. So I'm really pleased with the way that our leaders have embraced our frontline teammate. We have started driving engagement processes. We're seeing very good performance related to employee engagement. And we've done a lot of things to make sure that our teammates know how valued and how important they are. And I can tell you in this business model, the best thing that we have and the most important asset that we have to take care of our customers and our shareholders is to take care of our teammates. They do the hard work every day. And so we are really putting a focus on embracing them and engaging them and making sure that they feel valued inside the company. We're also improving training and processes, though. I talked about some of the training and some of the things that we're doing around standard operating procedures. And people thrive when they know how to be great at their job and when they feel empowered to do their job and that they have the skills and resources to do their job. So all of the work that we're doing around standard operating procedures is and training is also helping engage them, which is causing the turnover to go down as well. We've also instilled new leadership in our field under our new COO, and we also moved to 10 regions, as I mentioned, with our regional vice presidents now having smaller spans of control. All of that is allowing us to better engage and touch our teammates and make sure that they are thriving inside this organization. So we're really thrilled with the progress there. Thank you for pointing that out.

Great. Thanks so much.

Thank you.

Thank you. We'll take our next question from Oliver Davis with Redburn Atlantic. Please go ahead.

Yeah. Hi, Kim. Hi, Rick. Two questions for me. Can you give us an indication of the gap between the sales force productivity in the region that you described best in class versus kind of the average across the company? And then the second one, you mentioned some momentum on the national account side. So can you discuss the reasons you're having better success here and if there have been any changes to your pricing strategy? Thanks.

Yeah, for sure. So we'll start with the frontline sales productivity that we spoke about. It is significantly higher, multiples higher than what we have seen historically. So I will just let you know it's a dramatic step change, what we're seeing. And in fact, one of the regions, the region that is hitting that watermark is also a new field sales leader underneath Pete so Pete has brought in some additional resources and leadership as well and so we are really seeing a transformation happen here across this frontline sales team and so I will just tell you it is significant and meaningful so once we're able to you know institutionalize this as we are working to do and we will see all of these levels stabilize and start to rise which is great. And your question related to what's happening with national accounts, you know, I mentioned in my prepared remarks this was not a focus for the organization pre-spend. And when I arrived here, I was really kind of surprised to find that there was not a strong understanding of how important volume is for Vestas. And so when you understand that you have 35% idle plant capacity and that pushing volume through that system is going to create massive operating leverage, you quickly grow to value the volume that you get from national account customers. And I will tell you at first blush, if you look at it very tactically, you might assume that it's not as profitable perhaps as SME business. and when you understand the attribute of density and the contribution that national accounts make you get significant value from that volume that is those are very valuable accounts because our team did not understand that there really was no focus or pipeline on new business for national accounts they were actually not out hunting national accounts we've driven that education and that understanding across the organization now regarding how valuable these large pieces of volume are for our company And we've put new leadership and we've renewed that team around hunting and winning national account customers. So we have developed a strong pipeline and we are marching through that pipeline, fostering those relationships and closing those deals. I mentioned two great wins. In particular, one of those was a new win, a new logo around national accounts that we believe will be potentially our largest customer over time. So great, great progress there around engaging the organization to hunt and win national accounts.

Great. Thanks, Kim.

Thank you.

Thank you. We'll take our next question from George Tong with Goldman Sachs. Please go ahead.

Hi, thanks. Good morning. You mentioned pricing will be a positive contributor to revenue growth in fiscal 2025. Can you elaborate on how much pricing you're embedding into your guide and when you might expect pricing increases to begin exceeding input cost increases given your service quality initiatives?

So we won't give exactly how much pricing is in the guide, but as we talked about, it definitely flips positive as we lap the impact of carryover pricing. And so it's a positive contributor to our guide in 2025. It's important to note, as we have continued to note, that it We continue to take price. You saw in-year pricing in Q3 and Q4. We will continue those actions very disciplined and not as moderated because we talked about moderating our pricing in the back half of 24. And so pricing becomes a positive contributor for the year. We do have front half carryover, 2023 carryover that will create a headwind. but expect positive net pricing for the year.

Right. And the second half of the question around when you might expect pricing increases to begin to overtake input cost increases.

I'm sorry, George. Can you say that again? I couldn't quite hear what you said.

Yeah. When you expect pricing increases to begin to overtake input cost increases, so things like wage inflation, fuel inflation, when you would expect those pricing increases to exceed your input cost increases.

Yeah. So without specifically talking about when those lines cross or when pricing fully absorbs inflation, I think that's your question. We are just continuing to focus on earning the right to take price, which we feel very confident we have done through our service initiatives and the work that we have done to put our customer first. And so we will continue to evolve pricing over time. We will continue to take pricing as appropriate with our customers. And we feel confident that we have a really solid plan in place to absorb inflation, to take price as appropriate, and also to drive costs out of the system as appropriate. I spoke a moment ago about the significant cost takeout actions that we've already implemented this year to set us up for success, and we will always continue to do that as well. So I think it's a healthy balance between price increases and also self-help and taking costs out of your system appropriately to make sure that you underpin your commitments and drive the numbers that you need to drive, and that's what we're set up to do this year. So it's a healthy balance of cost takeout that's already been executed as well as pricing actions that will occur throughout the year.

Got it. That's helpful. And then with respect to customer service, Approximately what proportion of your branches is hitting your desired goals? And how long do you think it'll take for the rest of your operations to achieve sufficient service quality?

Yeah, so we have pockets of outstanding performance. So there are opportunities always to improve, and we will do that in every location. But I will tell you, we're seeing the level of performance rise across the system with particular focus on those locations that are underperforming versus the norm. Our goal is to raise the entire bar for the whole organization. We're seeing that happen on on-time delivery already. I mentioned the measurement system that we put in place. well as the notification to customers just by driving that level of accountability just by everyone knowing that we have an expectation and we're going to tell our customer how we performed is already raising the level of performance so we do have some aggressive goals for our team and we're starting to see them move in that direction So pockets of outstanding performance, pockets of opportunity, and across the system, the whole system is rising and the level of play is getting stronger. So I would just say we're going to continuously improve across the board, and we're doing that.

Thanks very much.

Thank you, George. Appreciate your questions.

We do have time for one more question. We'll take our final question from Andrew Steinerman with J.P. Morgan. Please go ahead.

Hi, Kim. I actually have two questions. The first one, I still don't fully understand when looking at your fiscal 25, you're looking for enhanced client retention, positive realized pricing, improved new sales and cross-selling. But when you talk about core revenue, excluding the one-timers, you're just looking for 1% to 2% growth in fiscal 25. And let me just give you my second question. My second question, you caught my ear when you talked about kind of tactical selling strategies for both targeting competitive business and converting non-programmers. I was just hoping you could elaborate on this comment a little bit more, particularly about the competitive environment.

Yeah, absolutely. So we'll start with the price and I'll let Rick come behind me with some numbers as well. But it's important, Andrew, to remember that we have some pricing headwinds in the first half of the year. So some comps that we're battling where we had some pricing that rolled over from 23 into the first quarter. and beyond of 24. so we're lapping those headwinds and that's part of the reason that you're seeing if you look at the macro level excluding those one-timers you're seeing a lower growth rate but when you carve that out on an underlying basis you are starting to see good growth emerge inside this business and you particularly get to see that as we move into the back half because we lamp flap those comps rick anything you would add to that

Sure. Just based on the disclosures that we've given, we've got 37 million net carryover pricing in 2024. And if you split that, the back half was negative due to price erosion. The front half was positive. And so it's that front half positive that we have to lap. And again, just looking at our disclosures, that's about $57 million in the front half and a negative $20 in the back half to get you to the $37 million. We're talking about the $57 million, but we do have in-year pricing, and we will continue to have in-year pricing, and it will be a positive sequential year-over-year pricing impact. And so You'll see that come through the numbers in the back half, but it's that $57 million and that $37 million that we've got to kind of lap here in terms of, and that's what you're seeing in our year-over-year growth. But sequential, we're very pleased with what you're going to see from a pricing perspective next year.

And then, Andrew, in relation to your question around our tactical selling strategies and the great work we're doing to train our team and institutionalize those processes, we are being very, very thoughtful about how we're competing in the marketplace with really strong go-to-market and value proposition strategies for customers that are already rental customers and being served by one of our competitors. versus customers that are non-programmers and we're selling the value of our rental program. So we've really bifurcated our focus, which is really allowing us to perform incredibly well with both of those audiences. And so we are competing and winning new business from our competitors. and we are also selling the value proposition to non-programmers and converting those as well. We're seeing a really healthy balance of competitive wins as well as conversions of non-programmers. So we really like the state of play, and we like how we're performing and competing out there in the marketplace, and we're really excited about some of these wins that we've been bringing home of late. So more to come there, but great progress.

Appreciate it. Thank you.

Thank you, Andrew. Appreciate you.

Thank you. And this will conclude today's Vestas Corporation's fiscal fourth quarter and full year 2024 earnings conference call. Please disconnect your line at this time and have a wonderful day.