Vestis Corporation Q2 FY2026 earnings call

• Transformation Progress & Operational Improvement

  • Delivered the first year-over-year adjusted EBITDA growth in over two years and the first operating leverage improvement since the company spun off from Aramark, a key inflection point for the business transformation.
  • Year-over-year operational improvements: on-time delivery up 270 basis points, plant productivity up 11%, customer complaints down 4%, and a 2-cent reduction in cost per pound that drove the 2-cent improvement in operating leverage per pound.
  • Cost of service declined $4 million year-over-year driven by lower merchandise and delivery costs plus improved plant productivity; adjusted SG&A declined $13.5 million (12% year-over-year) from organizational streamlining efforts.

• Commercial Excellence Initiatives

  • Deployed new data-driven decision support tools to enable profitability-focused customer-level decisions for strategic pricing and product mix optimization, and strengthened customer segmentation, pricing frameworks, and approval processes across all sales channels.
  • Achieved flat year-over-year revenue per pound for the first time since the spin, narrowing the prior year-over-year decline; management reports that the intentional exit of unprofitable low-margin business is already improving overall revenue quality.
  • Enforced pricing floors, set product mix targets, and is exiting business that fails to meet return thresholds, with a goal of prioritizing value over volume to deliver sustained operating leverage growth.

• Balance Sheet & Asset Optimization

  • Sold two inactive non-operating facilities for $6.5 million in net proceeds, all used to repay debt; 11 additional non-operating properties with an estimated total value of $15 million are currently being marketed for sale, with future proceeds also earmarked for debt reduction.
  • Repaid $34 million of debt during the quarter, ending Q2 with net debt of $1.25 billion and total available liquidity of $344 million ($294 million in undrawn revolver capacity plus $50 million in cash), with no debt maturities until 2028.
  • Generated $74 million in year-to-date free cash flow, a $92 million improvement over the first half of 2025 driven by stronger working capital management, tighter inventory controls, and improved collections.

• Culture & Organizational Alignment

  • Management is building a unified, performance-driven culture focused on accountability and disciplined daily execution, with ongoing investment in employee development to support long-term value creation.

Vestas reports consolidated results for the fiscal second quarter 2026, with no separate breakdown into distinct product segments provided in the call. Overall consolidated Q2 2026 revenue was $659 million, a 0.9% year-over-year decline (down $6 million). Revenue per pound held flat year-over-year and sequentially at $1.37 per pound, as intentional exit of low-margin volume (6 million pounds lost at an average of $1 per pound) offset volume declines. Consolidated adjusted EBITDA was $74.5 million (11.3% margin), up from $62.6 million (9.4% margin) year-over-year on a covenant-adjusted basis, a 19% increase. Net income improved to $2.6 million from a net loss of $27.8 million year-over-year. Operating cash flow was $58.3 million, with reported free cash flow of $45.6 million and adjusted free cash flow (excluding transformation expenditures) of $57 million. Year-to-date through Q2, transformation initiatives have delivered $15 million of annualized cost reduction, on track for full-year targets. By product line, uniforms saw a $10.5 million revenue decline, while workplace supplies (including linen) grew by $4.7 million year-over-year, reflecting a pre-transformation shift to lower-margin products that management is actively reversing.

• Full-year 2026 adjusted EBITDA guidance was raised to a range of $295 million to $325 million, from the prior range of $285 million to $315 million, with an increased midpoint of $310 million. Management expects sequential adjusted EBITDA growth of approximately 5% in Q3 2026 and 5% to 10% in Q4 2026.
• Expected in-year transformation cost benefits were raised to $50 million, a $10 million increase from the prior estimate of $40 million, translating to at least $75 million in annualized full-year benefits entering fiscal 2027.
• Full-year 2026 free cash flow guidance was significantly raised to a range of $120 million to $150 million, up from the prior range of $50 million to $60 million, driven by stronger-than-expected first half performance. This guidance assumes $60 million to $70 million in cash capital expenditures and $30 million to $35 million in cash paid for transformation-related expenses.
• Full-year 2026 revenue guidance is maintained at flat to down 2% compared to normalized fiscal 2025 revenue (excluding the 53rd week impact from 2025). Management expects a return to top-line growth starting in Q4 2026.
• The full-year 2026 effective tax rate is expected to be between 35% and 40%, with the Q3 2026 standalone rate expected in the low to mid 40% range. No formal 2027 guidance has been released, and management expects 2027 EBITDA to build on the sequential exit rate from fiscal 2026.

• The ongoing industry consolidation merger process is subject to extended regulatory review, potential required remedies to approve the transaction, and integration risk if the merger closes, which could create market disruption that requires active management.
• The company is still in the early innings of its business transformation, with full benefits of commercial and operational initiatives not yet fully realized, and execution risk remains as the company works to exit low-margin business and shift to a higher-value product mix.
• External cost pressures from rising energy prices and labor wages are partially offsetting internal operational cost improvement initiatives.
• Achieving long-term top-line growth depends on the successful implementation of multiple concurrent growth initiatives, including new sales optimization, national account expansion, and the new market development representative program, with uncertain timing of full results.

Q: 10 months into the transformation, how does management view the current business, and can Q4 2026's implied ~$90 million EBITDA be used as a run-rate for 2027 EBITDA? / A: Management notes the core business is fundamentally strong, a scalable route-based service with strong customer demand, and has made significant progress restoring operational and commercial discipline that eroded after the spin. New data-driven decision tools and a focus on the right profitable revenue have put the business on a stronger trajectory, with significant upside remaining as execution continues. Management confirmed that 2027 EBITDA will build on the Q4 2026 exit rate, but no formal 2027 guidance is ready to release yet. Management also noted that industry consolidation has already generated inbound interest from customers and employees seeking an alternative to the merging firms, and Vestas is well positioned to compete regardless of the merger's outcome. (478 characters)

Q: What is driving the much stronger than expected free cash flow, and when will the company return to top-line growth? / A: The $92 million year-over-year improvement in year-to-date free cash flow is driven by operational excellence initiatives: tighter inventory management from centralized procurement delivered ~$40 million, tighter control of rental merchandise inventory reduced new inventory purchases for ~$14 million, and improved collections added additional gains. Most working capital benefits are one-time, not recurring, and EBITDA growth will be the main driver of free cash flow in the back half of the year. Management confirmed that after intentional churn of unprofitable low-margin volume, the company expects to return to positive top-line growth in Q4 2026. (459 characters)

Q: Is the decline in uniform volume driven by weak demand, or intentional mix shifts, and what is the timeline for full implementation of commercial discipline initiatives? / A: The uniform volume decline is almost entirely from intentional actions to exit low-margin business as management shifts the mix back to higher-margin uniforms from lower-margin linen workplace supplies. Current trends show linen growth slowing to 4% year-over-year (down from 7% in Q1) while uniform growth is up 5% year-over-year, and the company is not exiting linen entirely, only unprofitable linen in wrong locations. Management estimates commercial initiatives are only in the third or fourth inning, with new product profitability tools just rolled out, and full benefits will continue to flow through over the next several quarters as the company prioritizes profitability over near-term revenue. (501 characters)

Q: What drove the 2-cent year-over-year improvement in cost per pound, and is the 1% volume decline a sign of macro weakness? / A: Roughly half of the cost improvement came from higher plant productivity, but the majority of the overall adjusted operating expense improvement came from the 12% year-over-year reduction in adjusted SG&A. Delivery cost optimization is next on the agenda, with management intentionally holding off on large network changes to wait for clarity on industry consolidation, with low-hanging delivery savings already captured. The 1% volume decline is almost entirely from intentional exit of low-margin volume, not macro weakness; the majority of customers impacted by price adjustments to reach profitability targets have accepted the increases and stayed, so the volume impact is smaller than originally expected and reflects positive progress on revenue quality. (487 characters)