Vestis Corporation (VSTS) Earnings Call Transcript

Welcome to the Vestis Corporation Fiscal Third Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Stefan Neely with Vallum Advisors.

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 would want to remind everyone that today's discussion contains forward-looking statements about future business and financial expectations. The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for such forward-looking statements. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to update our forward-looking statements. 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, and good morning, everyone. We appreciate you joining us. Our third quarter results highlight consistent execution of our transformation plan. For the second quarter in a row, we grew adjusted EBITDA year-over-year and improved operating leverage, and we did it by running the same disciplined playbook across the business. Third quarter adjusted EBITDA was approximately $81 million, an increase of roughly $15 million or 23% year-over-year on a covenant adjusted basis. Adjusted EBITDA margin expanded to 12.2% from 9.8% a year ago. We again reduced our operating expenses, holding cost per pound flat year-over-year as we continue to exit low-quality volume. And for the first time as a public company, we grew revenue per pound year-over-year, up $0.04 or approximately 3%, driving a $0.04 improvement in operating leverage per pound year-over-year. With that context, let me walk you through the progress we've made against each of our 3 strategic priorities. Beginning with operational excellence, our key metrics are improving consistently, and those gains are holding. Compared with the fiscal third quarter of 2025, plant productivity increased by 9%, on-time delivery improved by 80 basis points and customer complaints declined by 74 basis points. These results come from executing the same disciplined practices well, consistently and with the customer at the center of everything we do. When we run our operations consistently, service improves and cost comes out of the business. Those are the leading indicators of durable financial performance. We also made meaningful progress in exiting low-quality revenue volume, reducing our linen concentration by 6% on a year-over-year basis. We are encouraged by the progress, and we know there is meaningful room to keep raising the quality of service and revenue and our revenue per pound. Importantly, these productivity gains are beginning to flow through to lower plant operating costs and a lower cost of services. Together, our operational excellence and effective cost management reduced our cost of services on both a year-over-year and sequential basis. We also enhanced operational excellence by streamlining key corporate support functions through an outsourced service agreement with a leading third-party provider. This should make us more flexible as an organization and enhance how we support our markets and customers, improving the overall quality of our service. It reflects a new way of operating at Vestis, one designed to lower our cost structure while giving us greater capacity to innovate in how we run the business. We should begin to see the benefits of this arrangement in our fiscal fourth quarter results and more significantly as we enter fiscal 2027 and beyond. As we close out fiscal 2026, we expect to sustain this operational discipline and build on the initiatives we launched in the third quarter. Beyond plant and network execution, we are creating a more efficient and nimble operational structure, one built to better support and anticipate our customers' needs, sharpen our strategic execution and drive future profitable growth. Turning to commercial excellence. Pricing execution was the biggest driver of our year-over-year revenue performance this quarter, and it sits at the center of the commercial discipline we have built. Our progress starts with pricing. We continue to sharpen strategic pricing at the customer level, supported by data-driven tools designed to make our pricing and product mix decisions more profitable while we remain customer-centric. We also further strengthened customer segmentation, pricing frameworks and approval discipline across national accounts, new field sales and direct sales. Together, these actions should ensure that the revenue we take on supports operating leverage and adjusted EBITDA. That work is now evident in our results. After several quarters of narrowing declines, revenue per pound reached flat in the second quarter and turned positive in the third, rising $0.04 or approximately 3% year-over-year. This is the first year-over-year increase in revenue per pound since Vestis became a public company, and it was driven primarily by disciplined pricing execution, reinforced by improved customer segmentation and product mix. We continue to put value ahead of volume. Pounds processed declined by 4.5% year-over-year as we intentionally exited unprofitable business, improving the quality of our revenue over the same period. At the same time, we are working to restore the commercial rigor that had eroded after the spin. That means enforcing pricing discipline, setting product mix targets on new sales, onboarding volume that is accretive to our network and exiting business that does not meet our return thresholds. The principle is straightforward: create durable value through disciplined decisions about what we sell, how we price it and how we serve our customers. As these practices become standard across each market center, we expect operating leverage to keep improving through higher value mix, more consistent pricing execution and deeper penetration of our existing customer base, supported by the ongoing expansion of our market development representative program while we continue to manage our costs on behalf of our customers and our shareholders. Our top line is still developing, but it is increasingly driven by pricing execution and better customer segmentation rather than solely focused on volume. Turning to asset and network optimization. The progress we've made so far this year comes from applying one consistent set of operating and commercial disciplines across the entire business to drive operating leverage. The same playbook deployed in every market. Running that playbook everywhere has proven the model works, and we have seen this proof of our financial results so far this year, specifically in operational and commercial excellence. What we have not yet achieved is uniformity across our network. The gap between our strongest and our lowest performing markets is meaningful. Many of our markets already operate at industry-leading margins, profitability and service levels, while our lowest performers continue to weigh on the overall results. Closing that gap is our single largest opportunity. The next phase of the transformation moves from applying the playbook broadly to executing it consistently but with consideration for the unique markets in which we serve, holding each market center to a more customized playbook, resulting in a higher standard designed to harmonize and optimize our assets and network. That is the work that will define our path as we exit fiscal 2026 into fiscal 2027, and it's work we've already begun. During the third quarter, we continued to assess and segment how our network is positioned across key markets, using our available capacity to identify growth and optimization opportunities to further strengthen operating leverage while improving route efficiency and lowering delivery costs. As we optimize the network and position Vestis for growth, we will continue to evaluate asset sales where valuations present an attractive opportunity to unlock value, strengthen the balance sheet and better align our footprint with higher growth markets. In parallel, we are evaluating our market positioning and network configuration so that we are ready to act on shifts in competitive dynamics. We are working to optimize routes while remaining particularly focused on the opportunities created by consolidation in our industry and on remaining a reliable, high-quality service partner that new and existing customers choose. As we work through the remainder of the year, I'm pleased with how we are executing our transformation. We're on track to deliver on all of our commitments for the year. And today, we are again increasing our full year guidance for free cash flow, which Adam will discuss in more detail. A foundational part of our transformation is our culture and in particular, the accountability we are building at every level of the organization. We are aligning our teams around clear performance standards and our compensation around performance-based incentives to reward results, using them to drive stronger strategic execution and focus across the entire organization. On that point, our year-to-date fiscal 2026 results, along with our guidance for the fourth quarter, include accrued expenses for our management incentive bonus or MIB program. Creating a rewards-based culture was important to me as we set out our fiscal 2026 business plan and has remained paramount as we stepped through each quarter this year. While we have historically had an MIB program, fiscal 2026 is the first fiscal year in which a management incentive bonus has been accrued for at this level since Vestis became a public company. Payments are subject to the final fiscal '26 results and certification by our Compensation Committee later this year. But these accrued expenses, while in the normal course for any business, have not been normal course at Vestis until now. Bonuses must be earned every year, but establishing them in our run rate is an important step towards building a rewards-based culture. Together with surveying our teams, investing in their development and building our Vestis, this is how we ensure that every teammate is proud to be here, equipped to perform and rewarded for delivering. In closing, I am proud of what our team delivered this quarter. With a stronger culture as a foundation, we are running Vestis as a penny-driven business, one where small deliberate improvements across mix, Pricing, operations and cost structure applied consistently in every market center can compound into sustainable operating leverage and long-term shareholder value one cent at a time. With that, I will turn it over to Adam to walk through the financials.

Thank you, Jim, and good morning, everyone. Revenue for the third quarter was approximately $662 million, down about $12 million or 1.8% year-over-year. This includes a neutral foreign currency impact from our Canadian business. The decline was primarily driven by a 4.5% reduction in volume, measured as pounds processed, partially offset by improvements in strategic pricing, net of a $10 million decrease in onetime loss in ruin revenue. When excluding the impact of the lower onetime loss in ruin revenue from last year, total revenue was down approximately $2 million or 0.3%, a sequential improvement from our fiscal second quarter 2026. Revenue per pound in the third quarter was $1.42, an improvement of $0.04 year-over-year and $0.05 sequentially. The year-over-year increase in revenue per pound was driven by favorable changes in product mix, improved strategic pricing and the intentional exit of lower margin volume. Volume declined by approximately 22 million pounds year-over-year, but the volume we lost was lower quality, carrying an average revenue per pound of approximately $0.55. As a result, the decrease in volumes was accretive to our overall revenue quality. As we discussed throughout this fiscal year, prior to launching our transformation, our product mix shifted towards lower-margin workplace supplies, particularly linen. In the third quarter, measured on a pounds processed basis, linen concentration decreased by 6% year-over-year, improving from a 7% increase in the first quarter and a 4% increase in the second quarter, reflecting the early impact of our initiatives to drive a higher value product mix. Cost of services decreased by approximately $15 million year-over-year, driven by lower merchandise, plant and delivery costs. This improvement reflects the increase in plant productivity that Jim mentioned earlier, supported by continued progress and execution of our operational excellence initiatives. SG&A declined approximately $7 million year-over-year or approximately 6%, reflecting our continued focus on streamlining the organization and managing our total operating expenses. Net income increased by $11.7 million to $11 million compared to a net loss of $0.7 million in the prior year. Adjusted EBITDA for the quarter was $80.9 million with an adjusted EBITDA margin of 12.2% versus $64 million or 9.5% in the prior year. Excluding a $1.8 million adjustment for pre-spin-related inventory last year, adjusted EBITDA was $65.8 million in the fiscal third quarter of 2025 with an adjusted EBITDA margin of 9.8% on a comparable or covenant adjusted basis, reflecting an increase of approximately $15 million or 23% year-over-year, driven by our improvement in revenue per pound and operating leverage. When we look at our per pound metrics, the reduction in cost of service and SG&A drove a $27 million or 4.5% reduction in our adjusted operating expenses, which are those expenses that directly impact adjusted EBITDA. Taken in conjunction with our volume decline from the exit of lower quality revenue, cost per pound remained flat at $1.24 year-over-year. However, as previously discussed, our revenue per pound grew for the first time in Vestis public company history by $0.04 or 3%, driving an increase in operating leverage per pound by the same amount, $0.04 per pound. Notably, this marks the return to operating leverage per pound levels not seen at Vestis since the third quarter of fiscal 2024, directly contributing to our growth in net income and adjusted EBITDA. On a year-to-date basis, our transformation initiatives are contributing roughly $30 million of in-year cost savings towards our estimate of approximately $50 million. As a reminder, in-year transformation benefits are calculated by taking the accumulated year-to-date differences between our quarterly adjusted EBITDA for each quarter in fiscal 2026 and our fiscal fourth quarter 2025 adjusted EBITDA of approximately $65 million when measured on a 13-week basis. We realized approximately $5 million in transformation benefits in the fiscal first quarter of 2026, approximately $10 million in the fiscal second quarter and approximately $15 million in the fiscal third quarter just completed, with the remaining $20 million expected in our fiscal fourth quarter, in line with our implied range for adjusted EBITDA. As Jim discussed, during the third quarter, Vestis entered an agreement with a leading third-party provider to streamline our corporate support functions, primarily concentrated in back-office activities within finance as well as certain information technology and customer service support functions. This arrangement should create a more efficient and agile corporate support organization that will better serve our markets and customers and is expected to generate approximately $10 million in annualized cost savings beginning in fiscal 2027, with some benefits realized as early as the fourth fiscal quarter of 2026. The cost benefits from this arrangement are already embedded in our guidance for the year and in our stated expectations for both the in-year and annualized benefits from our strategic business transformation. Turning to cash flow and the balance sheet. We generated $65 million in operating cash flow and $47 million of free cash flow in the quarter. On a year-over-year basis, operating cash flow improved $42 million, driven in large part by an $11 million improvement in net income, combined with a $4.3 million improvement in merchandise and service and further supported by strong balance sheet management year-over-year, including a neutral impact from operating working capital during the quarter. Our strong cash flow results reflect the disciplined progress of our teams in working capital and balance sheet management, including several operational excellence initiatives focused on stronger collections, centralized purchasing and tighter inventory control. Third quarter adjusted free cash flow was $56 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 $8.5 million, consisting of $7.2 million of third-party costs and $1.4 million of severance. On the balance sheet, at the end of the quarter, net debt was $1.2 billion, and our principal bank debt outstanding was $1.1 billion. During the third quarter of fiscal 2026, we used cash generated from operations to repay $30 million of term loan debt. During the quarter, we invested $23 million in new capital assets, which included $18 million in cash investments and $5 million in new finance leases for our delivery fleet. Year-to-date, we've invested $62 million in new capital assets, including $40 million in cash investments and $22 million in new finance leases for our delivery fleet. Throughout fiscal 2026, we've invested in capital assets that should provide clear financial returns to Vestis and our shareholders, in line with our growth mindset. Year-to-date, we've installed 30 new industrial washers and dryers across our plant network and are on pace to end the year with approximately 60 of these new assets installed, a significant increase from prior years. Additionally, we've invested in new information technology assets and programs to bring Vestis into the modern age. Taken together, these actions show that we can fund our transformation and position the business for growth without a step-up in overall capital intensity. Our current capital investment strategy is holistic, yet targeted on the growth needs of our business. We ended the quarter with a strong liquidity position with no debt maturities until 2028 and approximately $352 million of available liquidity. This includes $294 million of undrawn revolver capacity and approximately $58 million of cash on hand. Our capital allocation strategy continues to prioritize maintaining a strong balance sheet while allocating capital towards 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 nonoperating assets while evaluating our network for further optimization. We continue to actively market 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, and we expect several to close in the remaining months of fiscal 2026. Turning to our outlook. Today, we are raising our full year fiscal 2026 guidance for free cash flow. Reflecting the strong execution of our teams around disciplined working capital and balance sheet management, we now expect free cash flow in the range of $160 million to $170 million compared to a range of $120 million to $150 million previously. Our updated midpoint is $165 million in free cash flow for the year, $30 million or 22% higher than our prior midpoint. And this assumes $60 million to $70 million of cash capital expenditures as well as $35 million to $40 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 adjusted EBITDA in the range of $310 million to $315 million for fiscal 2026 with a midpoint of $312.5 million, an increase of $2.5 million from our prior outlook. Based on our full year guidance and results year-to-date, adjusted EBITDA for the fiscal fourth quarter is implied to be in the range of $84 million to $89 million. Additionally, we now expect our effective tax rate to be approximately 25% on a full year basis with a Q4 stand-alone rate at approximately 30%. With that, operator, please open the line for questions.

[Operator Instructions] Our first question today comes from Stephanie Moore with Jefferies.

Maybe just to start, I would love if it would be possible for you to provide some color on how you're thinking about top line revenue as you're closing out fiscal '26 and also beginning to look forward into fiscal '27, probably a good place to start.

I'll start. It may end up that Bill has a couple of comments as well when I'm done because I'm going to actually -- I like the question because I think a lot of answers can come together to kind of support this, Stephanie. First, I would say that the revenue per pound discussions we just had -- as we move into Q4, I would say I classify it as we're encouraged by what we're starting to see. And if we continue on the trends we have, we're going to see growth in the fourth quarter, okay? That's statement number one. As we move through this and get closer to the business, some things become apparent. First that I consider us having 6 growth drivers in the business, that being direct sales, nationals, field, clean room, Canada and kind of everything else. 5 of the 6 of them are growing. The one that's not is field and it needs to be corrected. We've made a recent move in bringing Steve in from the outside. He's been in the business 3 months. He's been in the business before and has held various CEO leadership roles, and I am confident in what I've seen in the first 3 months as he puts the strategy together to not just deal with the field issue that we have, but also to really bring some new views of how to grow this business in the other segments of Vestis. I think lastly, the other thing I'd bring into this because I'm not going to give guidance for '27 yet on growth, but I will tell you, we plan to grow in '27. How will be a function of the next couple of months of work. I think the other thing that's kind of new in the script today and the remarks was this concept of uniformity in the network and/or top to bottom, too much variability. Super enthused at the work that's been done now to kind of quantify it in quadrants. And our first 2 quadrants are as good as you could imagine and exceed most any margin number you can think about. The problem with some of these things in networks is averages of averages don't really tell how good you can be. So we segmented it. We're going to focus really on quadrants 3 and -- they will be our #1 priority next year. We've talked a lot about capital to grow maintenance versus growth capital. Those 2 quadrants, we will plan to invest about 70% of our plant investments, which is relatively modest, quite frankly, especially the free cash flow we're moving out with now. The -- our goal is to move them up each up 1 quadrant, 4 turns into 3, 3 turns into 2, and so it goes. And then at that point, the kind of growth becomes a natural byproduct because it's not just the margins in the business that they're kind of holding us back, but they're the issue for growth as well because if they're not performing at the service levels, it's hard to bring on new customers and retain customers. And so we've seen it. It's real. It's there. And we're going to attack it, not just the way it's been looked at historically, but maybe some of the learnings from the past about asking our really, really good leaders to move to these quadrants to help us move them forward in a quicker way than just normal course of business because these networks are really about human capital, and we'll put the financial capital in, making sure it's matched to the right leadership. So look, I'm encouraged by it, especially revenue per pound. I know everybody wants us to grow volume. We will grow volume in '27. How we do that, as I said, we'll update that at the end of Q4 as we talk about '27, okay?

Appreciate all the color there, Jim. And maybe just a follow-up, maybe can you see into the third or fourth quadrant here? What are the issues? How can it be fixed? How long do you think it can be fixed? And then probably most importantly, for those listening on the call here, what's the margin gap or the ultimate impact to the bottom line?

I'm -- that's packed. So it is -- the margin gap top to bottom is large. That's about all I'm going to say right now. But the great thing about it is that the top couple of quadrants and the way we've done it, Stephanie, is if we got roughly 120 to 125 market centers, we could have been close to 30. The top 2 quadrants, I can tell you, exceed anybody's margin view of what this company can produce even on an average basis. The 2 of them do, they're there. And if you think about that, then you know the business model works. It's correct. It runs properly. It produces outputs that, let's just say, people don't believe Vestis can produce. We do. We do it already in well over half of the market centers. The other ones struggle. And so it's up to us now in near term. This to me is the #1 priority for next year for us as we move through transformation to move these quadrants up. put the right capital in, the right leadership and the right discipline in it. And we're actually building up very unique market center playbooks that leverage where each one is. And it's a long story about it. But the whole thing is still based upon service. That doesn't change. I'll ask Bill to add a couple of points to that in a second. But it is about getting those to where they look like they're, let's say, big brothers and sisters in the other network. And then this thing will -- I think will end up surprising people how good this can be as we move forward. But that's -- I don't want to quantify it yet because there's a couple of nuances. -- on how we want to deal with a couple of market handles, the market dynamics that are going on in this industry right now. So we have to play that together. But it is material, and it is -- as big as transformation was to 2026 for us, this is that big in 2027 to get this right. Bill, do you want to add anything?

Yes, I'll add a couple of things. Thanks. First of all, as Jim mentioned, that top quadrant is also -- I know your question originally started with growth, Stephanie, is growing. And we've got some really good stuff. And the margin gap you alluded to, that same gap exists between the top and the bottom across cost metrics, across service metrics, in some cases, and other metrics that are really important to us. So we've launched an intense focus on that quadrant 4 that bottom 30 market centers that is just kind of kicking off in full steam right now, leveraging some of the momentum we brought in through the year on some of the cost and service and quality metrics. And we're really excited about the fact that these places do need some love. They do need some capital. And Jim mentioned a minute ago that between 2026 -- and if you think forward into 2027 in quadrant 4, we're looking to earmark about 42% of our CapEx in the plant to those market centers. And we've shown in 2026 that when we invest in those market centers with leadership, we invest in them with some CapEx that the market centers do respond, and we do get better outcomes for our customers and for our shareholders.

I'd say the last thing that's important is that I don't think Vestis has ever properly put a bottom-up business plan together. It's happening now for '27. It will be very unique to each market center. We will -- in some market centers, we're ready to really move growth out, we will move different resources and investments into them in '27 to do that. The other ones will stabilize them. At times, you don't really want more if you can't handle what you have. So you manage that as a priority. So it's going to be very unique. But again, we'll talk more about, Stephanie, when we roll out 2027 with a lot more flavor of the real question about the margin gaps so that you can have a better feel for it because it should roll up to produce our targets and financials for 2027. So thanks for that.

And last one for me. Could you maybe help us understand what a normalized free cash flow conversion can look like here?

Yes. Stephanie, it's Adam. I can take that. Thanks for the question. So year-to-date through Q3, we're converting at about 54% -- but you know is very much in line with what the company has said historically about free cash flow converting at around 50%. So that's where we're going to hold as we come through the end of the year. Our full year guidance at the midpoint for our new free cash flow midpoint of $165 million over the $312.5 million for adjusted EBITDA has us converting at roughly 53% as we go into FY '27. And that's really where I think is a good place for us to exit. And as we go into '27 and give you more guidance for next year, you'll hear more for us on what we think the future could look like.

Our next question comes from Tim Mulrooney with William Blair.

Jim, I was going to ask you about your plans to drive volume growth, but it sounds like you're planning to give the investment community an update next quarter on that. Is that correct?

Yes, I am. Absolutely. All right. So I'm going to hold off on that, and I'm just going to ask some different questions. Just building off of Stephanie's last question there, Adam, on free cash flow, what was the primary reason behind the updated free cash flow guidance? What drove you to push that higher?

Yes, it's a great question. And as we exited FY '25 last year, we came out with about 2% conversion on free cash flow last year, about $6 million on the whole entire year. So as we started this year, looking at the work that we knew we needed to do around working capital and balance sheet management and just converting adjusted EBITDA to free cash flow, we knew we had some things to go out and do as a part of our transformation. And full credit goes to the team all across Vestis under Jim's leadership, really driving good working capital management. We've been neutral on working capital for the last 2 quarters. We had a little bit of benefit from working capital in the first quarter. The team is driving really great collections. Our DSOs are at the lowest that they've been since the company went public. So it's really a holistic cross-functional effort to drive free cash flow conversion, and it's exceeding our expectations, especially compared to where we were coming into the year from FY '25. So as we look at these last 2 quarters of delivering north of $40 million in free cash flow coming into Q4, just gives us a lot of comfort to say, hey, Q4 is going to be another -- Q4 is going to be another quarter where we get that mid-40s range that we've been putting up the last 2 quarters. So really excited about the work the team has done, really encouraged about the future around free cash flow conversion. We're normalizing back to where the company has discussed this metric so far. And again, I'll give full credit to everyone across the company. It's been a team effort.

Yes. Yes, it was good. It was good to see that. And I looked at the working capital metrics there. It looks like some things are moving in the right direction there as well. So that was...

Not to cut you off, it's really exciting this quarter because a big part of our free cash flow is net income. We had $11 million of net income in the third quarter, and we've turned net income positive for the year, which is really exciting, so to see some of that free cash flow coming from net income and positive earnings per share is just great.

Yes. That makes it easier. Okay. That's really helpful. Just the last one for me. The EBITDA run rate that's kind of being implied here for the fourth quarter -- is it fair? Or is it a good way for us to think about that as a sustainable run rate as you are entering into fiscal 2027? Or are there some seasonal factors here in the fourth quarter that would prevent us from thinking about it that way?

I think it's a stable place for you to begin thinking about how we're going to build up FY '27. Obviously, there's going to be growth in '27. We're targeting enhancements and efficiencies. We're going to come into '27 with a cost-neutral mindset. That's how we build our plan. But I think it's a great way for you to begin thinking about how we would build that. And of course, there's some minor seasonal fluctuations throughout the year. You certainly saw that in FY '26. We've seen that before. But we're able to manage through that, to be perfectly honest with you. So I wouldn't expect there to be too much fluctuation in that run rate as we enter the year, and it will improve.

Our next question will come from Andy Wittmann with Baird.

I guess just the -- you got the annual revenue guidance, you got 3 months in the bag. And when I do some math on it, it looks like your fourth quarter revenue guidance is up at least 2%, 3 percentage points more than that to kind of the top end here. So like I guess I'm just kind of curious as to what's that comprised of. Is this just -- you've been running off the volume and the volume comps? Is there -- I know, Jim, you talked a lot about your market development reps trying to get fair pricing. How much of a factor is that? Is the macro contributing or hurting you in terms of adds stops in terms of number of wearers that your existing customers I'd love to hear you just talk a little bit about the components behind that and how they drive your fourth quarter improvement, which obviously gives you that good top line momentum or better -- much better top line momentum into '27, please.

I'm going to have Adam start on the 2% number because we have a little bit different number. Let us clean that up, and I can give you a couple of thoughts on the rest, okay?

Yes. So Tim, the way I think about Q4 revenue is let's just compare -- establish what our baseline is to make sure we're all on the same page. Q4 2025, if you go look at our printed materials, you'll see a $712 million number there. You have to normalize that number for 14 weeks because we had an extra week in Q4 of fiscal '25. So that $712 million becomes really around $660 million that we're going to use as a comparative. So just start there. As you've seen throughout the year this year, we've done a really great job, credit to the team for stabilizing the revenue run rate around that $660 million to $663 million range all throughout the year. And that's a great accomplishment coming out of down 3% in prior year. So I would think about Q4 as we're moving in to exit the year as being generally around the same place for where we are in Q3, which would still be year-over-year growth versus Q4 last year. But I think that's going to get you more in the down 1.5% range, if I just do the comparatives there. So I just wanted to kind of lay that out. If you have any questions on that, I can take them, and then I know Jim wants to add some things.

So Andy, on some of the buildup, I think one of the things that we went through in the discussion today, which I'd like to point your eyes to is this concept of the revenue per pound leaving the network versus the cost per pound to just level set the magnitude of why the focus has been what it's been in 2026. And that is that we went -- essentially had looked at the commercial side of the business and recognize that we have been going on prior to starting this transformation with all revenue, any revenue is good revenue, it's all accretive, and it's not the way it works. Now we are almost 4 quarters into it and the 4.5% of volume that left us in the quarter had a revenue of $0.55 a pound. The business has a cost per pound of $1.24 -- if you just let that settle for a minute and you say to yourself, what's more important right now, getting the right volume in the network or how much of it, I think you can see pretty much in those 2 gaps of why we're doing what we're doing. And this is a couple of quarters on. As far as when does that stop, I think that just is dependent upon each customer's decision on how they look at things. But our job all along in some of these -- many of these instances, it's almost non-regrettable is what we call it, but that's not our long-term strategy, to be clear. We are going to grow volume. I'll give you a couple of touch points right now on why I'm pretty enthused about what's getting ready to come. I talked about Steve, his background, he's putting his strategy work to it. We got a new leader out in the field, Karla. Karla Perez comes to us with background as well in this industry. She's off and running as well. We've talked about MDRs a bit. The MDRs are -- the target is to -- and we'll give you exact numbers when we get in '22, but we're planning to about triple to go 4x X on the MDRs that we have. But where we sit right now as we exit -- as we come out of Q3 and into Q4 is the average weekly revenue being produced by the MDRs are what we used to get out of a new sales rep, twice, okay? So that -- you'll see more about that as we go forward. I would say in your ads over stocks, the ads over stops are somewhat neutral to a little bit -- it's not helping us -- we're not getting a lot of lift. A lot of that though is also tied into some of those customers that were the $0.55 per pound customers who have made certain choices that's going to have some more stops coming out of them. That's just the way the business runs. But to me, as we move through this, direct sales is turning for us right now. The MDRs are already going for us. National accounts continue to be very good. Canada is growing way above -- well, not way above, above what we thought, I'll put it to you that way. And as I've talked about, it's just the field, and we can fix the field. The field -- a lot of that will be the MDRs fixing that, and a lot of that will be the quadrant 3 and 4 market centers, joining us and the rest of the company where we need to be, and I'll close with this, is that for the first time ever, we're going to have a leadership conference in the first month that we start the business that everyone wants that aligned on what their exact role is to grow this business. And it will come naturally because of the alignment of these in a route-based business. That's how it works. So it's not one thing that you win with, it's 4 or 5. And so it will come, and we do Q4 and we'll show that in '27, how it's going to come, when it's going to come and why it's going to come, okay?