Welcome to the Vestis Corporation Fiscal Second Quarter 2026 earnings conference call. I would now like to turn the call over to Stephen Nee with Investor Relations.
Thank you, operator, and thank you all for joining us on the call this morning. Leading the call with me today is Jim Barber, President and Chief Executive Officer, and Adam Bowen, Interim Chief Financial Officer. Also with us on the call today is Bill Seward, Chief Operating Officer. Jim and Adam will provide prepared remarks, and then we will open the line to questions. Before I turn the call over to Jim, I want to remind everyone that today's discussion contains forward-looking statements about future business and financial expectations. The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for such forward-looking statements. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the Securities Exchange Commission.
Except as required by law, we undertake no obligation to update our forward-looking statements. Further, this call will include the discussion of certain non-GAAP financial measures. Reconciliation of these measures to the closest GAAP financial measure is included in our quarterly earnings press release and corresponding supplemental materials, which are available at ir.vestis.com. With that, I would like to turn the call over to Jim.
Thank you, Stefan. Good morning, everyone. Thanks for joining us. I am very proud of the progress our team delivered in the second quarter. Our results reflect continued momentum and disciplined execution against our business transformation plan. Importantly, the quarter marked a meaningful inflection point for Vestis, delivering our first year-over-year adjusted EBITDA growth in more than 2 years and our first improvement in operating leverage since becoming a public company. This performance demonstrates the impact of an enterprise-wide focus on execution and on managing every dollar of the business down to the penny as we work to compound value over time. Second quarter adjusted EBITDA was approximately $75 million, an increase of nearly $12 million or 19% year-over-year on a covenant-adjusted basis. That improvement was driven by a $0.02 improvement in operating leverage, comprised of a $0.02 reduction in cost per pound.
Guided by the initiatives laid out in our business transformation plan, we are continuing to strengthen the foundation for sustained profitability and value creation. Our progress this quarter reflects the power of a more unified, performance-driven culture, a culture we are evolving upon a shared vision and values which promote long-term value creation upon a bedrock of customer service. Our teams across the organization are aligned around promoting disciplined operating practices and making daily decisions that improve operating leverage while enhancing the customer experience. During the quarter, we made measurable progress across all three pillars of our transformation framework. Starting with the operational excellence, we built on the progress achieved in the first quarter, delivering tangible improvements across the metrics that matter most. When compared to the fiscal second quarter of 2025, on-time delivery improved by 270 basis points.
Plant productivity increased by 11%, and customer complaints have declined by 4%. This continued momentum reflects our commitment to customer service and our intense focus on consistent, disciplined operating practices. When we execute well operationally, the customer experience improves, and our costs come down. These are the leading indicators that drive durable improvement in financial performance, but we have more work to do to improve our service as we are just getting started. We also sharpened our enterprise-wide focus on cost per pound with clear accountability across the organization. By measuring success consistently on a per-pound basis and reinforcing ownership and accountability through Vestis, we delivered a $0.02 year-over-year reduction in cost per pound. Combined with our progress in commercial execution, this was a key contributor to the operating leverage improvement and adjusted EBITDA growth we achieved in the quarter.
Looking ahead, we expect to carry this momentum through the second half of the year. In addition to plant and network execution, we're expanding our focus to include delivery costs and additional SG&A reduction opportunities. We are actively streamlining processes and organizational workflows to unlock further efficiency, driving continued improvement in cost per pound and adjusted EBITDA as the year progresses. Turning to commercial excellence. We continue to advance several key initiatives to strengthen decision support and improve revenue quality. During the quarter, we made progress deploying data-driven decision tools that enable improved profitability-focused decision-making at the customer level, particularly in strategic pricing and product mix. We also continue to strengthen customer segmentation, pricing frameworks, and approval process across national accounts, newfield sales, and direct sales. These actions are designed to ensure that the revenue we bring into the business supports operating leverage and adjusted EBITDA expansion.
We are beginning to see the impact of this work. The year-over-year decline in revenue per pound has narrowed over the past several quarters, reaching flat in the second quarter, a first time since Vestis became a public company. This progress reinforces our confidence that the commercial initiatives underway are gaining traction. At the same time, we are reestablishing commercial rigor and discipline that had eroded following the spin. That includes enforcing pricing floors, setting product mix targets for new sales, onboarding volume that are accretive to our network, and exiting business that does not meet our return thresholds. The goal is straightforward: create durable value by being more disciplined about what we sell, how we price, and how we serve our customers.
As we scale these practices, we expect continued improvements in operating leverage through higher value mix, more consistent pricing execution, and deeper penetration within our existing customer base, including through the continued expansion of our market development representative program. While we continue to prioritize value over volume, the early progress in improving revenue quality delivered a half percent improvement year-over-year in growth during the month of March. Looking ahead, we expect this momentum to continue, driving future improvements in revenue per pound and supporting a return to top-line growth as we approach the end of fiscal 2026. Turning to network and asset optimization. During the quarter, we sold 2 inactive non-operating facilities, generating $ six and a half million net proceeds that we used to repay debt. We continue to actively market several additional non-operational properties that Adam will discuss in more detail.
As we further optimize our network and position Vestis for future growth, we will continue to evaluate asset sales where market values present an attractive opportunity to unlock value, strengthen the balance sheet, and better align our footprint with high-growth markets. In parallel, we are evaluating our market positioning and network configuration to ensure we are well-positioned to capitalize on shifts in competitive dynamics. We are particularly focused on identifying opportunities created by market consolidation and ensuring Vestis remains a reliable, high-quality service partner of choice for both new and existing customers. As we move through the remainder of the year, I am pleased with the progress we've made in executing our business transformation. While there is still work ahead, our performance to date gives us confidence in both the plan and our ability to deliver.
Reflecting the execution achieved in the first half of the year, we are increasing our outlook for both adjusted EBITDA and free cash flow, which Adam will discuss. In closing, I am very, very proud of the progress our team made in the second quarter, and I remain encouraged by the momentum building across the business. A key part of our transformation is the work we're doing to strengthen our culture, surveying our teams, investing in their development, and building our Vestis together. We're building a Vestis where every teammate is proud to work and empowered to perform with a culture grounded in alignment, accountability, and strategic execution.
With a stronger culture as our foundation, we are managing Vestis as a penny-driven business, one where the compounding of small intentional improvements across mix, pricing, operations, and cost structure will grow into sustainable operating leverage and long-term shareholder value $0.01 at a time. With that, I'll turn it over to Adam to walk through the financials.
Thank you, Jim, and good morning, everyone. Revenue for the second quarter was approximately $659 million, down about $6 million or 0.9% year-over-year. This includes a $2.7 million favorable foreign currency impact from our Canadian business. The decline was primarily driven by a 1.2% reduction in volume, measured as pounds processed, partially offset by improvements in strategic pricing and product mix. Revenue per pound in the second quarter was $1.37 per pound, flat both year-over-year and sequentially. Volume declined by approximately 6 million pounds year-over-year, but the volume we lost was lower quality, carrying an average revenue per pound of approximately $1 per pound.
As a result, the decrease in volumes was accretive to our overall revenue quality and reflects continued progress in strategic pricing, product mix, and the intentional exit of the lower margin volume. As we discussed on our first quarter call, prior to launching our transformation, our product mix shifted towards lower margin workplace supplies, particularly linen. In the second quarter, measured on a pounds processed basis, linen concentration increased by 4% year-over-year, improving from a 7% increase in the first quarter and down 2% sequentially, reflecting the early impact of our initiatives to drive a higher value product mix. Cost of service decreased by approximately $4 million on a year-over-year basis, driven by lower merchandise and delivery costs in combination with improvements in plant productivity that Jim mentioned earlier, reflecting continued progress and execution of our Operational Excellence Initiatives.
SG&A declined approximately $36 million year-over-year on a reported basis. However, the prior year included a $15 million bad debt expense adjustment and $8 million of non-recurring severance related to executive transition costs. Adjusting for these items, SG&A declined approximately $13.5 million or 12% year-over-year, reflecting our continued progress on streamlining the organization and managing our operating expenses. Taken together, the reduction in operating costs drove a $0.02 year-over-year improvement in cost per pound. With revenue per pound flat, operating leverage per pound also improved by $0.02. Notably, this marks the first year-over-year increase of operating leverage since the spin, directly contributing to growth in net income and adjusted EBITDA. Net income increased by $30.4 million to $2.6 million compared to a net loss of $27.8 million in the prior year.
Adjusted EBITDA for the quarter was $74.5 million, with an adjusted EBITDA margin of 11.3% versus $47.6 million or 7.2% in the prior year. Excluding the $15 million bad debt adjustment last year, adjusted EBITDA was $62.6 million in the prior year with an adjusted EBITDA margin of 9.4% on a comparable or covenant-adjusted basis, reflecting an increase of approximately $12 million or 19% year-over-year, driven by our improvements in operating leverage. On a year-to-date basis, our transformation initiatives are contributing approximately $15 million of in-year cost reduction benefits towards our initial estimate of $40 million, as expected. Turning to cash flow and the balance sheet. We generated $58.3 million in operating cash flow and $45.6 million of free cash flow in the quarter.
This was driven by approximately $12 million of improvement in operating working capital, including accounts receivable, inventory, and accounts payable, along with roughly $11 million of improvement in rental merchandise and service year-over-year. Our strong cash flow results reflect our disciplined progress in working capital and balance sheet management, including several operational excellence initiatives focused on stronger collections, centralized purchasing, and tighter inventory control. Second quarter adjusted free cash flow was $57 million. As a reminder, adjusted free cash flow excludes transformation-related cash expenditures such as third-party costs and severance payments made during the transformation period. During the quarter, those expenditures totaled approximately $11 million, consisting of $7.2 million of third-party costs and $3.9 million of severance.
On the balance sheet, at the end of the second quarter, net debt was $1.25 billion, and our principal bank debt outstanding was $1.13 billion. During the second quarter of fiscal 2026, we used cash generated from operations and proceeds from non-operating asset sales to repay $34 million of debt, including $19 million of borrowings on our revolver and $15 million of term loan debt. During the quarter, we invested $24.7 million in new capital assets, which included $12.7 million in cash investments and $12 million in new finance leases for our delivery fleet. Year to date, we've invested thirty-nine and a half million in new capital assets, including $22.1 million in cash investments and $17.4 million in new finance leases for our delivery fleet.
We ended the quarter with a strong liquidity position with no debt maturities until 2028 and approximately $344 million of available liquidity. This includes $294 million of undrawn revolver capacity and approximately $50 million of cash on hand. Our capital allocation strategy continues to prioritize maintaining a strong balance sheet while allocating capital toward high return opportunities with a clear focus on delevering. Through disciplined balance sheet management and improved working capital execution, we are creating greater financial flexibility and strengthening the foundation to support the business over the long term. As discussed last quarter, we remain active in monetizing non-operating assets while evaluating our network for further optimization. During the second quarter, we completed the sale of two inactive properties for approximately six and a half million in proceeds, which were used to repay debt.
We are actively marketing an additional 11 properties with an estimated value of approximately $15 million, all in various stages of the disposition process, and more are under evaluation. As with prior dispositions, proceeds will be used to reduce debt. Turning to our outlook. Today, we are raising our full year fiscal 2026 guidance for adjusted EBITDA and free cash flow. Reflecting the strong execution against our transformation plan, we now expect adjusted EBITDA in the range of $295 million-$325 million, with sequential growth of about 5% in the third quarter and 5%-10% in the fourth quarter toward an increased midpoint of $310 million.
Our updated adjusted EBITDA outlook for the full year is compared to our previous range of $285 million-$315 million with a prior midpoint of $300 million. We now expect in-year benefits from our transformation to be approximately $50 million.
A $10 million dollar increase over our prior estimate of $40 million in year, which translates to at least $75 million on a full year basis as we enter into fiscal 2027. Moving to our updated guidance for free cash flow. Through the first six months of fiscal 2026, we generated approximately $74 million of free cash flow, an improvement of $92 million compared to the first half of fiscal 2025. This improvement was driven by the hard work of our teams executing against our transformation priorities, contributing roughly $50 million from stronger working capital and balance sheet management, along with approximately $14 million from improved management of rental merchandise and service, both on a comparable year-to-date basis. The remainder of our improvements are resulting from stronger collections practices. Overall, our free cash flow performance exceeds our initial expectations for fiscal 2026.
Given our first half performance and continued momentum, we now expect free cash flow in the range of $120 million-$150 million, compared to a range of $50 million-$60 million previously. This assumes $60 million-$70 million of cash capital expenditures and $30 million-$35 million in cash paid for transformation-related expenses. As with our prior guidance, we continue to expect fiscal 2026 revenue to be flat to down 2% compared to our normalized fiscal 2025 revenue, excluding the impact of our 53rd week last year. We also expect our full year effective tax rate to be between 35% and 40% on a full year basis, with our Q3 standalone rate in the low to mid 40% range. With that, operator, please open the line to questions.
Absolutely. The floor is now open for questions. At this time, if you have a question or comment, please press star one on your telephone keypad. If at any point your question is answered, you may remove yourself from the queue by pressing star two. Again, we ask that you pick up your handset when posing your questions to provide optimal sound quality. Thank you. Our first question is coming from Stephanie Moore with Jefferies. Your line is open.
Great. Good morning. Hi, Jim. Hi, everybody. Thank you. I think a two-part question for me. You know, Jim, how are you thinking about the business now versus when you started about 10 months ago? Second, building on this, you know, given the progress you've made thus far and, you know, the implied 4Q EBITDA outlook of about $90 million, should we be run rating 4Q as indicative of total 2027 EBITDA? Any view there would be helpful. Thanks.
Okay. I'm gonna do, I guess, thanks for the question, Violet. In the end, I'm gonna let Adam take the kind of forward looking on the EBITDA. I think the first two I'd like to say a couple of things about. First of all, you're right, I joined Vestis about a year ago. I would say at that time I was excited to come on board, and I can tell you I'm more excited now to be, you know, 10 months into this job. Really it comes down to a couple of things I'd like to just chat about for a second. That is first is this is a very good business fundamentally. It's a route-based business that customers want us to serve them. It's scalable.
you know, it is something that this business will perform, and it's managed and led well. I think to where we see this now, and I look back over the last year or so and all the way to the spins, largely the transformation benefits we're making so far, are really getting back to the really good inputs to the business that were there in the past, and they just kind of lost their way a bit from my perspective. In fact, you know, if I think about that in a couple of pieces, first and foremost, I think that in these businesses you have to lead with this being an operator-led business. If your decisions aren't really processed through the lens of how it affects the operator and the customer, you can get off track.
Some of that happened. I think there was a zeal for all revenue can be good revenue, and that does not work in these businesses. It has to be the right revenue in the place you want to win. We're moving back to that. I really believe that you have to understand your cost to serve in this business because at that point it becomes much easier to make accretive decisions. We've got brand-new decision support tools that have been made over the last 10 months in this business. The finance function with some outside support has really done well there. That's gonna help frame where we move in the second half of this year. Really, as we move forward, it's about having the right people in this business. Vestis has the right people.
The issue just for us is to keep investing in them, investing in the network, taking care of customers, making sure they have what they need to be successful in driving this business forward. In the last 10 months, 11 months, that's clearly what I see so far with a whole lot of upside potential, because we're just kind of getting started. I'll talk for a second about the merger because I think I get that question about three times a day. First I want to say I'm not going to get near the regulatory process with respect to the FTC. We'll let that go. Secondly, I have been involved in these in my 40-year career, so I'm pretty doggone familiar with them.
I won't recite them chapter and verse, but I'm pretty comfortable with the options that might avail themselves to us in this pretty concentrated market. I think about those in both in short and kinda medium-term dimensions. In the short term, I think we're a viable competitor here and a scale competitor to Synthes and UniFirst. What that really means to me is that there'll be a certain set of customers and even employees who really think Vestis might be a better home for them as this merger goes down the path. That just naturally happens. I'm not trying to, you know, throw gasoline on anything here. That just happens in these processes, and largely that has to do with culture from my perspective.
I can already tell you that we're getting inbound calls on both already, and that's something we'll manage. Our job is to be ready when the calls come the right way. Secondly, you know, if it does have an extended regulatory process, going forward and it might have some remedies involved to get this deal across the line, I think we are a great place, to be a credible participant to keep the competitive nature of this industry there. That's a second point for us near term. If it does close, having done this a couple of times, look, I see why people wanna merge because it is natural and there's value to be unlocked. There's no question about that.
These are really, really tough jobs to do, and they take more time than you think, and there will be disruption. We will be ready to manage that long term or kind of longer term as that goes forward. I think I also get the question, can we compete if this merger goes down? The answer is yes. We are in the early days and weeks of looking through this lens with different optionality of what might happen in this consolidation as to what our strategy should look like. We owe that to the board. That hasn't been put forth yet, not since I've come for sure, and we are, you know, just in the early days.
As I said, our job is to figure out how and where we're gonna play and when, and that doesn't mean necessarily do it the same old way. Our job is to innovate. Our job is to take cost curves to different places and give customers a different choice that they haven't had in the past, and we will do that. We'll work with the board to get that across the line, and as we move into 2027, we'll avail that to everyone around the industry who has knowledge of that. I'll let Adam take the kinda third piece, Stephanie, on how we look at kinda going forward if we exit out the nineties and Q4 and so on and so forth.
Hey, Stephanie. It's Adam. Good morning. Thanks for the question on adjusted EBITDA. The way to think about the revised guidance is we're coming out of Q2 at 74.5. 5% step-up in Q3, and then we've got an approximately 5%-10% step-up in Q4. In terms of how we exit the year, that'll really be determined over the next couple of quarters, but the way that you can think about how we would start FY 2027 is where we're gonna be exiting FY 2026 out of Q4. We'll have more firm guidance for you on 2027 as we get closer to the beginning of that fiscal year later this year.
I would add, I'd add a point 'cause we're not ready, Stephanie, to put numbers to it yet, but clearly what happens in these processes, as you scale them up and you continue sequentially forward, there will be a natural wrap in 2027 because it's scaling the way that you're seeing it scale. There will be, as I say, a wind at our back as we enter 2027. We've just gotta finalize some work here to see how high that might be able to go and make sure that we deliver that for the shareholders and everyone, the stakeholder. Thanks.
Got it. No, I really appreciate it. If you don't mind, if I could squeeze one more in here. It's a very strong free cash flow performance for the quarter and outlook for the year. If you could talk about, you know, of that free cash flow, what's driving the strength? You know, how much of that is recurring? I will say a question that we get quite often is when to expect a return to top-line growth. Any color there would also be helpful, and I'll pass it on. Thank you, guys.
Yep. Hey, Stephanie. It's Adam again. Let me take your free cash flow question, and then I'm gonna pass to Jim on your question for top-line growth. Let me just go back to last year, FY 2025 a bit, and talk about where we were year to date in the same time period we are this year. Year to date last year through second fiscal quarter 2025, we had a negative free cash flow of about $18 million. This year we have free cash flow of $74 million year to date. That's on a fiscal year to date basis. That's a $92 million swing, so what's happening there? There's a lot of transformation initiatives focused on operational excellence that are driving stronger working capital management, and you're seeing it particularly in our inventory.
That credit goes to our teams under Jim and Bill's leadership, tightening procurement strategies, more centralized purchasing, and ensuring we only have inventory on hand for, to meet our immediate needs. That's about $40 million of the year-over-year improvement. You get down into merchandise rental merchandise and service. That's tighter management on injections into our rental merchandise pool that's serving our recurring customers, and great work by the team there on managing to use existing inventory to serve customers instead of bringing new inventory onto the balance sheet in service. That saves on the cash flow side. It also saves us on the merchandise amortization side on the income statement. The third piece of that is tighter management on the balance sheet. That's giving us about $12 million in the non-operating working capital and the non-rental merchandising service.
That's the bulk of what's driving it and all of that coming from operational excellence initiatives. The last pillar that I'll mention to you is really good management on collections. It's strong DSO and good management of income statement conversion to free cash flow. Those are really hard-fought initiatives by our team. We did not have visibility to, you know, full execution of that at the beginning of the year, so we came out of FY 2025 when on a full year basis we had $6 million in free cash flow and our initial guidance was $50 million-$60 million, which was a 10 times multiple off where we were for the whole year in FY 2025. How we've gotten from there to here in the first six months is a lot of hard work by our teams.
Now I don't expect operating working capital benefits to continue to manifest to this degree as we move throughout the year. The way to think about modeling to our updated midpoint of $135 million, which is between the 120 and the 150 we had bid you on this morning, is to look at our FY 2026 Q2 that we just finished. We exited with 45.6 in free cash flow. There's a couple of one-time things in there that you should peel out. About $12 million in benefit from merchandise and service inventory. That's a large one-time benefit from those management initiatives that I mentioned a moment ago. There's about $7 million in benefit from the balance sheet. That's coming from lower commissions paid to our sales team. It's coming from pre-base being paid to us.
Those are one-time items that are not gonna repeat. To also think about stepping up EBITDA sequentially into Q3 and then into Q4 on those increments we gave you on the EBITDA guidance, and adjust for higher CapEx. 'Cause year-to-date, we're only about $22 million in cash for CapEx, and we're gonna step that up to our range to meet our range of between $60 million and $70 million on the full year. Also think about stepping down the cash paid for transformation, because we paid $11 million in Q2, and we're gonna step that down to about $5 million each quarter in Q3 and Q4. If you take those views throughout the rest of the year, that'll help you get to the midpoint of 135. I'll give it to Jim now for your question on the sequential revenue.
I do get this question a lot as well. Before I just tell you what I really think about it, I would say that there's a lot going on beneath the surface on the revenue line in this business, and a lot of that has to do with us getting right some of the revenues in the business at the wrong place, dealing with what I call non-regrettable churn or customers leaving the business because the direct margins are that bad out of whack. There's some of that that's continuing through the business, but that is fine for us to manage. We can do that and create value on the bottom line. As you say, and everybody said, is that's not the long-term strategy.
With all that said, I believe based on everything I can see right now, we're gonna return to growth in the fourth quarter of this year. That's what I believe. I'd rather not put a number on it at this point, but I do believe that all the actions that we've taken to date as they run through and move forward, and all the other growth pieces of it, from new field sales to national account sales to direct sales to all of those channels which are being optimized, I believe we're gonna grow in Q4. I'll leave it at that for this call, and we can update that following the next call.
Thank you. Adam, sorry, did you say what free cash flow conversion would be going forward? You gave a lot of really helpful numbers there, but I may have missed that one.
Yeah, no problem. I don't think I shared that. Year-to-date, we're at about 51% on free cash flow. That's a historical aligns with the historical number that the company has shared previously. As we go throughout the remainder of the year, I would really think about it, Stephanie, in terms of those midpoints. 135 in free cash flow conversion on $310 million in adjusted EBITDA. That's 44% thereabout for the remainder of the year. Let us get through the balance of the year when I've got a little bit more CapEx. I wanna swing in the back half. I've got some EBITDA increases coming, and we'll give you an update when we give you fiscal 2027 guidance at the end of the year.
Thanks, everyone. Really appreciate the time.
Thanks.
We'll take our next question from Manav Patnaik with Barclays. Your line is open.
Hi, good morning. This is Ronan Kennedy on for Manav. Thank you for taking our questions. I was taking a look at the 10-Q, and I think the $5.8 million revenue decline was $10.5 million decline in uniforms offset by a $4.7 million increase in workplace supplies. If I'm not mistaken, it said this is resulting from sales product mix shift prior to commencement of the plan. Is there an element of this being driven by underlying demand pressure? Do you expect uniforms to re-accelerate as execution improves? How should we think broadly about revenue mix if there would be a deliberate shift as a result of these strategic initiatives around commercial discipline, exiting low return uniform accounts, et cetera? If you could just provide some color on that, please.
Yeah. Hey, Manav. It's Adam Alfstorff, and then I'll give it over to Jim for more of the strategic forward-looking things. You're absolutely correct on your assessment of the sales product mix shift that's happened prior to the commencement of our transformation. It was really a shift into more workplace supply, the lower profitable products there. It's particularly in linen concentration, which has a food and beverage focus to it. As you heard in our prepared remarks, we exited about 6 million pounds year-over-year at about $1 of revenue per pound compared to our consolidated reported revenue per pound of $1.37. That gives you an idea of kind of the low-calorie nature of that particular volume, and that's in a heavy linen concentration.
As we said in Q1, year-over-year, our linen volume had increased 7%. When we look at our fiscal second quarter, the one we just concluded, linen concentration is up on a per pound basis only 4%. That's a nice improvement. We're lapping some installations that happened in Q1 of fiscal 2025 that was focused more on that food and beverage segment and that restaurant linen space. Sequentially, from Q1 '2026 into Q2 '2026, we're down about 2% as we exit that lower profitable volume out of the business. Your assessment of that is correct. Our focus inside of this business now is to shift back more towards uniforms and higher profitable mix. That's through our strategic pricing and our commercial excellence initiative. I'm gonna shift that over to Jim now and let him chat with you a bit about the strategy.
Yeah. I would just say, look, most recently, since the data I looked at as of yesterday shows that our focus on returning to garment growth and swapping it out looks exactly like what we want to do, which is reducing our growth in linen by 7% year-over-year, and we're increasing 5% year-over-year in garments. We're swapping one for the other, and that's, we're gonna continue that. Workplace supplies offsets and everything in the middle. That's a piece of what you're seeing happening now that will also impact revenue per pound going forward and then the other downstream effects of that. That does not mean we're getting out of the linen business.
It means where you can process it properly with the right investment in the right strategic areas, we're gonna process linen in a competitive way, and our shareholders should be happy. There was just too much linen in the wrong places for us that we needed to clean up, and we're doing that as we speak.
That's very helpful. Thank you. If I may, follow up on all of that. I think you spoke about reestablishing the commercial rigor through pricing floors, the mix targets, which we've touched on, and then exiting that lower return business. How much of this is already implemented versus still ahead? How should we think about when that fully flows through to revenue quality? Then also, is there a way to think about the near-term trade-off between protecting revenue versus improving profitability and any potential impacts on volumes there?
Well, I'll start with the second answer. As I said, that's why we're not through that yet. Which is why I deferred to growth in the fourth quarter. We're moving through it because we started two quarters ago to move down this path. We are, you know, our churn, if you look at it in the way we're looking at it right now, customers leaving the business, regrettable and non-regrettable, our churn that we regret to have is better than last year, we're also swallowing some of the other stuff leaving. As Adam said in his script, if you look at the revenue per pound on what's leaving, it is that very low-calorie revenue that we can't really make economic profit on. That's going on.
When you keep moving forward and you look at this thing, you know, the, the growth side of this, we are, I would say, if I had to put it in a, in a baseball game, we're probably in the third or fourth inning of how it's benefiting the business today versus what it will look like tomorrow. We just rolled out our first view of product profitability that's never been here before, and it is very insightful for us. It takes us into different places and processes and floors and pricing that is moving into the second half, that will bear fruit in the second half, and it'll keep going, you know, as we move forward. That's kind of where I think we are in the whole process and excited to go forward the right way.
Always keeping in mind this, is that in the unique place we are, in my opinion, inside of Vestis, our real job at the same time to grow the business is understand where the cost per pound is going to go, not where it is today. At that point, you open up the market to bring in different business that's more accretive than just pricing in a historic way. Those are the tools. We're almost there with them. You'll start to feel that more going forward, and we'll know that growth top and bottom line will come together at that point. Thanks.
Thank you both for all that. Greatly appreciate it.
Yeah.
We'll take our next question from Tim Mulrooney with William Blair. Your line is open.
Jim, Adam, good morning. Spent a lot of time here talking about revenue. Let's switch to the cost side for a moment, if you don't mind. Your cost per pound, you know, improved $0.02 in the quarter. How much of that was from improvements in, you know, production versus delivery? It sounds like you're, you know, making progress in both areas, but not sure, you know, which one drove the improvement in the quarter.
Hey, Tim, it's Adam. Thanks for the question. If you look at our adjusted operating expenses year-over-year, and we've got that broken out throughout our materials. In our supplementary materials, you'll find that on page seven. 6.2, these are the costs that directly impact adjusted EBITDA. $6.3 million in fiscal second quarter 2025 and $585 million this last quarter, fiscal second quarter 2026. That's about an $18 million delta year-over-year. There's a lot of puts and takes happening in that, but let me give you some of the big drivers. We have that plant productivity improvement that Jim mentioned in his script. That's driving, you know, about $9 million of improvement inside of our plant costs, inside of cost of service.
There's some other costs that are offsetting that, you're looking externally at the income statement. You're seeing about a $4 million year-over-year improvement in cost of service. That includes that $9 million that I mentioned for plant offset with some increases for things like energy that are happening in the market and labor costs that are happening for, you know, higher merits that we have to pay folks year-over-year. The bulk of what's driving that improvement in adjusted operating expenses is really SG&A improvement. It's a $13.5 million improvement year-over-year. That's from reduced headcount and optimization throughout our operating structure. That's about 12% on just at net SG&A year-over-year. We are seeing really great improvements inside of our cost of service and plant facilities for some initiatives on the operational excellence side.
I would add, and Bill won't say anything, I would say that we are not avoiding the driver side of this. It's just secondarily to come. We will speed that up in the second half. Then we are kind of purposely looking at this market consolidation to think about what happens and how we might react to situations that avail themselves to us because ultimately, your long-term network, including the dispatch of that, is going to be set by the growth model. So we're chipping away at it, taking some of the low-hanging fruit. We'll continue to do that. Long term, though, with the nodes, we're gonna blend that into our 2027 strategy, and we'll talk to you about that when that's kind of finalized, okay?
Yeah. Hey, Bill, I just want to add one thing there is we're making some big moves in the bigger ticket areas like labor and those expenses. There's a lot of smaller moves, attention to detail kind of things, whether it be truck idling or hangar reclamation and all these other places that are also adding up to meaningful savings. Most importantly, and the comment I want to make is that none of that is being done without a focus on improved service levels. We may talk about those later. We talked a little bit in the script about some of the improving service metrics. We are gonna get cost and service at the same time.
Okay. Yeah, no, that's all really helpful. If I'm hearing you correctly, it sounds like maybe you're purposefully being careful about not going too fast on that side to see what happens in the marketplace over the next 6 to 12 months. fully understood, and makes sense. Thank you, guys. On the macro, I, you know, I saw that pounds processed, you know, they were down 1% in the quarter. I think it was flat last quarter. you know, you're de-emphasizing linen, so I don't really know how to read the volume down 1%. You know, am I concerned about the macro here? Is this more just the transformation story, the de-emphasizing some of these things?
Can you talk a little bit about, you know, what you're seeing on that side of things? Maybe the net wear metrics, any change in customer behavior and spending patterns and categories that you'd consider to be more discretionary? Any color there. Thank you.
Yeah. Hey, Tim. I'll start. It's Adam, and then I'll pass on to Jim and Bill to add some additional color. The volume decline is a result of intentional actions being taken by the team to exit that lower profitable volume, particularly around linen-concentrated customers and customers where we're just not meeting certain profitability targets. We've included some detail inside of our earnings deck this time that gives you the history of pounds going all the way back to when we spun out from Aramark. Our volume in fiscal second quarter 2026 is not too different from where it was in the first quarter of 2024. It's about 2 million pounds different on a quarter-versus-quarter basis.
our revenue is so drastically different, and that's because we've, over this time, drawn down that lower profitable volume. It's smart for the team to target it, and they're doing a great job just getting started on that, on the commercial excellence side of things.
I would just add one point, is that, definitely the majority, the number's moving, so I don't want to quote a number right now. The majority of the customers, when we go to them and have discussion about previous price positioning, accept the rate increase. They accept it. There's lots of reasons that could happen. Obviously, our job is not to run them out. It's to get them to a place where we're both satisfied with the service we're providing, and the majority of them are staying. The drop in the pounds exposure-wise was much bigger than that.
the way that the team did it with the customers was it was done the right way, explained all, you know, we went through everything with the whole team to understand, look, we just can't. There's certain things that you can't do economically based upon some things that might have been put in the market in the past. To that end, we're very comfortable with the customers that are staying with us. The ones that are leaving, we take the cost out with it, but our job is to see if we can't keep them at the right rate. I would add that to Adam's comments.
Okay. Great. Thank you.
Yeah.
Once again, if you do have a question, you may press star one on your telephone keypad at this time. We'll move next to George Tong with Goldman Sachs. Your line is open.
Hi. Thanks. Good morning. You've emphasized a more data-driven approach to pricing and improving revenue quality, which is helping us stabilize revenue per pound even as volumes decline. How are you thinking about the trade-off between pricing and retaining volumes, and what level of volume pressure are you willing to accept to achieve your pricing targets?
I think I just walked through that a second ago. I would say in addition to that, I'd add a couple of points. Number one, our floor rates in our systems based upon our new tools had told us they weren't quite where they needed to be. We're adjusting those. In any situation where you're applying price, George, you have to keep your eye on the win rates. Very clearly, what we've seen since I've been here involved in the process with Bill and the other sales leaders and Pete and the rest of the team and Aaron, is that our win rates are not dropping.
This is about growing a smart way and going forward, and that's what I believe will show in the fourth quarter of this business, is that as we move through this, there's some unregrettable work we had to get done, and we're moving through that as gracefully as we can. Some of the adjustments in pounds are coming, but, you know, the net net of all the activities should be the revenue growth in this business. You know, there's a big piece of that. I mentioned on the call the rollout of MDRs in this business. One of the largest areas of growth opportunity is quite frankly a reasonable rate increase from the $2.6 billion of revenue I already have in this business.
This business had not looked at it through that lens, and the MDRs are positioned exactly to help us get that as is defined in some of our most targeted segments. It's not all the same. It's a collage of growth efforts. It's not one single thing. You have to bring them all together and know that some of the parts is gonna grow at acceptable rate, both top and bottom line. I think you're gonna see that very clearly as we move into Q4.
I would add, I think we got started in some places a little earlier than others, and in those places we're seeing some pretty favorable results. We've got signs of growth in national accounts, and that's coming from disciplined approach to grow in new business and considerably better outcomes on all of our renewals. There's really good momentum in a couple of places, and I think we'll have the whole company here on track, as Jim said, coming to Q4.
Got it. That's helpful. Can you quantify how sales productivity is trending exiting the quarter, and what level of improvement is required to return the business to positive organic growth?
Again, I'm gonna go right back to what I said a minute ago. It's not just new sales growth. In fact, that's the smallest part of it, if you wanna know that, quite frankly. We purposely took a look at that the third day I got here and assessed the economic value of what we were doing. It took us to we were over-indexed on that vertical, so we've made some adjustments with that. We still believe in new sales. The answer to your second part of the question is their productivity is up 50% in year-over-year in the quarter. They were selling too small. It is up 50%, and it's about 85% of what we agreed we would get done this year, and we moved to that in the second half of the year.
That is working, and the job is to really blend new sales from the outside, of which still about 40% is non-programmed for us. You're gonna get that swim lane going. You're gonna get the national accounts going, as Bill talked about. You're gonna get the field sales going with the MDRs, and all of those will come together to grow the business. I would say to you that I believe that the largest of that may come from the MDRs when we're done. That's new to the business, and all of that's growth. It's just a different way to look at growth, largely through a lens of penetration from my background. You'll see that, and we'll call that out as we continue to grow and move into the fourth quarter for you.
All right?
Got it. Thanks very much.
Yep.
Thank you. This does conclude the Q&A portion of today's call. I would now like to turn the floor back to Stephen Nee for closing remarks.
Thank you, operator, and thank you everyone for joining us today. We appreciate your time and your interest in Vestis. If you have any questions, please don't hesitate to contact us at ir@vestis.com. We look forward to speaking with you again next quarter. Have a great day.
Thank you. This concludes today's Vestis Corporation Fiscal Second Quarter 2026 earnings conference call. Please disconnect your line at this time and have a wonderful day.