ADV - NASDAQ

Greetings, and welcome to the Advantage Solutions Second Quarter 2025 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce Ruben Mella, Vice President of Investor Relations. Thank you, and Ruben, you may begin.

Thank you, operator. Welcome to Advantage Solutions' Second Quarter 2025 Earnings Conference Call. Dave Peacock, Chief Executive Officer; and Chris Growe, Chief Financial Officer, are on the call today. Dave and Chris will provide the prepared remarks, after which, we will open the call for a question-and-answer session. During this call, management may make forward-looking statements within the meaning of the federal securities laws. Actual outcomes and results could differ materially due to several factors, including those described [ more fully ] in the company's annual report on Form 10-K filed with the SEC. All forward-looking statements are qualified in their entirety by such factors. Our remarks today includes certain non-GAAP financial measures, which are reconciled to the most comparable GAAP measure in our earnings release. As a reminder, unless otherwise stated, the financial results discussed today will be from continuing operations and revenues will exclude pass-through costs. And now I would like to turn the call over to Dave Peacock.

Thanks, Ruben. Good morning, everyone. Thank you for joining us. Before we get started, I want to thank our teammates for their continued commitment to successfully serving our clients who continue to navigate ongoing market uncertainty. Our second quarter revenues of $736 million and adjusted EBITDA of $86 million, were down 2% and 4%, respectively from the prior year. Our performance was in line with our internal plan, and we are pleased with the sequential improvement in the business relative to the first quarter. We made solid progress toward resolving the first quarter staffing shortfall, enabling both our experiential and retailer services teams to increase execution volume. This operational improvement contributed to year-over-year adjusted EBITDA growth across both segments. As of July, staffing has largely returned to desired levels for the second half of the year, and we are confident in our ability to continue to recruit and retain personnel to meet client demand. Our financial results continue to be impacted by a client loss in branded services last year, which accounted for the entirety of the company's EBITDA decline. Additionally, we continue to invest behind our transformation initiatives, which weighed on profitability in the quarter. Both of these items will be mostly lapped on a year-over-year basis starting in Q3. Given our scale, serving over 4,000 clients and retail stores operating in over 90% of

Thank you, Dave, and welcome to all of you joining the call today. I will review our second quarter 2025 performance by segment, discuss our cash flow and capital structure and expand on Dave's guidance commentary. In Branded services, we generated $257 million of revenues and $34 million of adjusted EBITDA, down 10% and 21% on a year-over-year basis, respectively. This segment continues to experience challenges, namely within brokerage and omni-commerce marketing, which we are working expeditiously to address. While some of the declines are business specific, including the aforementioned client loss from last year, which account for more than 1/3 of the segment EBITDA decline. We also continue to combat a difficult macroeconomic backdrop. In experiential services, we generated $249 million of revenues and $26 million of adjusted EBITDA, up 6% and 14% on a year-over-year basis, respectively. The recovery in staffing levels enabled our teams to execute more events in the quarter. Events per day increased by 1% versus the prior year and were up 5%, excluding the client loss last year. Execution rates were approximately 93% on greater volume. As a result, margins returned to expected levels, expanding by approximately 80 basis points year-over-year to 10.4%. In Retailer Services, on a year-over-year basis, revenues were down slightly to $231 million and adjusted EBITDA grew 8% to $26 million. Merchandising activity increased in the quarter due to improved staffing levels and uptick in project activity, including a pull forward from the third quarter and diligence in pricing to manage rising labor costs. Partially offsetting these items was softness in advisory and agency work, where we were impacted by the continued unfavorable channel mix. I would note that for both experiential and retailer services, higher shared service costs and a higher allocation of those dollars weighed on profit growth in the quarter. Moving to balance sheet and cash flow. We ended the quarter with $103 million of cash on hand, reflective of a heavier use of working capital in the first half of the year. As a result, we did not repurchase debt or shares in the quarter. We received $22.5 million in proceeds on July 31 related to the first of 2 deferred purchase price installments for June Group. With cash on hand, these proceeds, expectations for stronger cash generation in the second half of the year and approximately $400 million available on the untapped revolving credit facility we have ample liquidity to operate the business in the current macroeconomic climate, while investing for growth and opportunistically paying down debt. Our net leverage ratio was approximately 4.6x of adjusted EBITDA, including [indiscernible] operations. We expect this level to taper over the balance of the year. Turning to cash generation. We ended the quarter at approximately 70 days of sales outstanding, a 1-day improvement from the first quarter as cash collections began to recover after the cutover to the new ERP system. The vast majority of the company is now on the new system, and we expect DSOs to decrease in the second half of the year. CapEx in the quarter was $2 million due to the timing of transformation investments and a significant undercapitalization of labor. We now expect CapEx to end the year in the range of $50 million to $60 million below our original guidance. Adjusted unlevered free cash flow was $57 million and the conversion rate was 66%, driven by the lower-than-expected CapEx. As Dave highlighted, we are maintaining our full year guidance, we expect shared service costs to decline year-over-year in the second half of the year. Headcount has decreased by approximately 8% in Finance and IT since the end of last year due to the use of automation and technology to streamline back-office functions. We also expect restructuring and reorganization costs for the full year to decline by roughly 50% compared to 2024. Branded services will remain under pressure, but we anticipate that the top line will start moving towards stabilization by the end of this year and into early 2026. From a seasonality perspective, the second half of the year is the peak season for Experiential and Retailer Services. As Dave mentioned, Retailer Services faces a difficult third quarter due to project timing and year-over-year discrete comparison factors, but we do expect a favorable comparison in the fourth quarter. Full year adjusted EBITDA margin should be mostly in line with the prior year during this period of transformation investment. We continue to expect 2025 adjusted unlevered free cash flow to be over 50% of adjusted EBITDA. Cash generation is expected to improve in Q3 and Q4 from an artificially low level in the first half of this year. Excluding the approximately $45 million year-end payroll timing shift into 2025, we anticipate adjusted unlevered free cash flow conversion of roughly 100%, and net free cash flow conversion exceeding 30% in the second half of the year. We are targeting a net free cash flow conversion rate of at least 25% next year and beyond, turning more in line with the performance in 2023 before the strategic investment in the transformation. Interest expense remains in the range of $140 million to $150 million, assuming no additional debt repurchases. Thank you for your time. I will now turn it back over to Dave.

Thanks, Chris. We believe our expertise and range of services positions us well to navigate the current macroeconomic environment with resilience and agility. At the same time, we will continue to make progress towards completing the strategic initiatives that will enable Advantage to reach its full potential as a technology-driven industry-leading service provider and generate meaningful cash flow for our shareholders. Operator, we are now ready for the Q&A session.

[Operator Instructions] Our first question is from Faiza Alwy of Deutsche Bank.

I wanted to ask about branded services and the investment reductions that you talked about that are impacting the brokerage and omnicommerce marketing services. I'm curious, is that -- are you seeing that across the board? Or is that specific to a particular type of customer, whether it's large versus small or a particular category? And then like, are there signs of that improving because you talked about stabilization by the end of the year. So just curious if that's driven by something else, whether it's new business or are you expecting these market headwinds to improve?

This is Dave. I appreciate the question. So I'd say the reductions that we referenced really depends on the client and their situation within the marketplace. So it's not a pattern that we recognize across all our clients, nor is it even category specific. It's almost company specific, but you are seeing that. I'd say a little more so on the marketing side, which is obviously a smaller piece of our business than on the sales agency side. It has been reported pretty broadly that you're seeing some pullback in marketing to consumers. But -- and then as we get into the second half, one, we were lapping the client loss we referenced in the first half that -- we largely are going to be passed as we get in the third quarter. There's a little bit of economics there in July. And then we've got wins that we've got plant wins that could be smaller. But when you add them up, they're meaningful, that should help us with sequential growth as we get into the second half.

Understood. And then you talked about the new workforce system, and it sounds like that your -- it's basically going to be available in the second half. So talk a bit more about -- you mentioned more subjectively, some of the benefits that you're expecting. I guess what does that mean in terms of -- whether it's the EBITDA margin uplift. And maybe more generally, as you think about the transformation costs, like are we towards the end of the transformation costs? And just help us as to where we are in the cycle of, one, the costs and two, achieving -- starting to achieve some of the benefits of implementing these new systems. .

Sure. Absolutely. And that's kind of 2 questions, which is good because I can tackle them both. And I'll start with the latter first. So on transformation costs, we are. We're seeing pretty significant reductions in restructuring costs and onetime costs that would be helped -- just against EBITDA. In fact, year-to-date, we're about half of the level that we were this time last year, and we're going to see continued decline as you go through the year. We also had lower shared service costs in the second half of this year than in the first half of this year. as we kind of lap the increases that we saw last year, and we're starting to see some ramp down as it relates to transformation costs. It doesn't mean we're not investing in our business. There are still specific initiatives we're investing in and labor is one of them. Labor -- improving our labor utilization, improving the teammate experience has been a priority for us and lay out in the prepared remarks, what we're thinking about there. One example of where we're seeing benefit of an overall system improvement with our labor approach. And some of it is system-based, meaning technology and some of it is just improved process and workflow. But we had a net reduction in overall hires in the first quarter of about 1,500 people, and we had a net higher in the second quarter of 1,400. So it's almost 3,000 person swing, if you will, from first quarter to second quarter. And part of that is driven by shorter time from application to higher better S&OP or sales and operations demand signals so that we are hiring the appropriate amount of personnel for the work required. And then we track really closely what we call, the application of higher funnel and where we may have gaps because along that path, you can lose potential teammates. And so we've been much more rigorous with our workforce operations team in tracking that funnel so that we have a higher percentage of folks that make it through it and then ultimately get onboarded into the company. So we feel really good about both the pilot that's been going on, where we've been sharing labor across geographies versus being banner-specific, but also just in the improvement in workflows within their workforce operations.

If I can just add to that. Faiza, if we did get to a point where throughout the quarter, we improved on the hiring front. And I think we entered the second half in a good place. What I just want to know is that -- I think that manifests itself, especially in the retailer segment, where we get better staffing levels there overall, which puts us in a good place to be able to take on some incremental project work, which can be very beneficial for us, and then also stronger execution in experiential, not only execution of rate, but also the ability to handle more demos. We've seen really good demand signals there that they put us into good place to be able to accommodate those, and that should benefit our Experiential segment, particularly in the second half of the year.

All right. Great. And then just last one on cash flow, right? So you're talking about slightly better cash flow conversion. Is that primarily coming from lower CapEx? And whether -- I know you mentioned timing of projects. But is this -- are we shifting CapEx into next year? Or just give us a bit more color around what's driving the lower CapEx this year?

Yes. So obviously, we did take the CapEx down a little bit, about $15 million at the midpoint. And that would, therefore, be a little bit of a benefit to the cash flow. But the real benefit is coming from the improved DSO, which we saw at the beginning [indiscernible] this quarter, we'll see really kind of take hold in Q3 and especially across Q4. And then also the lower restructuring costs year-over- year that some of the big factor for the second half of the year. So you've got a stronger EBITDA kind of top to bottom, stronger EBITDA contributor -- contribution, less CapEx much better working capital. Working capital then becomes a benefit to the company, working capital source in the second half of the year, and then you'll see the lower restructuring costs as well. So all those things contribute to the better cash flow performance for the second half of the year. And I will say it's in line what we expected with what we indicated last quarter. It's coming through as expect.

Our next question is coming from Greg Parrish with Morgan Stanley.

Congrats on the result. I just want to unpack branded EBITDA heading into the second half. I mean I think to hit the guide, we had to see some improvement there, right? How you did that last year? I think in the quarter, you [indiscernible] decline as client loss. So I guess, backing that out, right, the other 2/3, like maybe how does the other 2/3 improve in the second half? Maybe just kind of unpack the drivers there and what we should expect? .

Yes. This is Dave. We see a few things, Greg. We see -- we talked about it a minute ago, just wins in the business. Number one, we see a little bit of seasonality where you've got orders which is how we're obviously paid through a commission-based business from a revenue standpoint, increasing as you get into the back half of the year with things like holidays, especially the categories that most represent our client base when you think of things like food and personal care. So those are 2 of the big drivers. We've also obviously been able to manage our cost to serve. We talked about our new Pulse program, which we're really excited about because it's giving us kind of greater fidelity in the decisioning that we have within the business because if you can think about a sales business, you're assessing information to take action to improve an outcome effectively. And we are getting faster signals as it relates to brand performance and especially those things that are kind of the root cause drivers to market share growth or decline. So we're able to to capitalize on those more quickly. But it also -- because it's leveraging expansive data and analytics, in an automated way, it's also a little bit more efficient as well. So that combination puts us in a position to see some growth as we get into the second half.

Great. Very helpful. I'm starting to come back to the CapEx point, but I mean the $2 million was a little bit surprising. So I guess, I mean does that slow down like your completion of some of the technology investments that you're doing? I'm just trying to better understand here.

I think it looks -- honestly, there's been -- so it was lower than we expected in the quarter and truly a lot of it is timing. But we did bring the overall guidance down by $15 million at the midpoint. So there is less overall spending. And I would just say that we do expect the second half to be a heavier level of spend overall, largely all IT projects are the main driver of our spend for the year. We have give visibility to those. And as I've said to you before, if we can push the timing out when we pay them, then we're going to take advantage of that, and there's been a little bit of that. We did also talk in the script about just underutilizing capitalizing labor, however I say that properly, but we capitalized labor at the proper rate, which it comes through more OpEx than CapEx. And I think it's something we're working on very diligently. And a lot of it comes down to planning and planning around our projects to make sure that we're accomplishing those on time and starting with on time. If not, you can tend to see that bleed into OpEx. So there was an element of that as well. But with that said, I would say that maybe some of this shifted a bit into '26. But really, at the end of the day, there's just a more efficient delivery of the capital products we expect for the year now.

Okay. That's helpful, too. And then maybe just lastly from me. On the wage front, maybe just kind of update. I mean, obviously, you kind of reverted some of the headwinds you had in the first quarter on labor availability, but then just on the wage front, just kind of mark us to market here on where we're at? And what you're seeing from the market in terms of wages? .

Yes. We have seen pretty consistent wage inflation through the year. And about what we expected in that, call it, 3% range overall for the year, and we've been able to manage that quite well. I'd also say that in the quarter, our pricing nearly offset our labor inflation was very close. So I felt good about that progress we made on getting some price increases through -- to help offset, was obviously still some higher labor costs that are coming through in the economy today in our business. I think for the second half of the year, I expect that same consistency, we don't have a lot of incremental sort of regulatory type changes that are occurring there. So I feel like we're in a pretty good place to be able to mostly offset that -- the labor cost inflation with pricing.

Our next question is coming from Joseph Vafi with Canaccord Genuity.

Well, [ Johnson ] on here for Joe. So you can maybe drill down a bit on resolving that staffing shortfall in July? And anything you can share kind of about the demand signals there that have given me confidence in those levels being more sustainable through the rest of the year? And then maybe if you can drill down in the retail services, and how we should think about kind of that staffing uplift against maybe some more difficult Q3 comps in that project from a project timing perspective?

Yes. So we do have that staffing shortfall in July. In fact, the trajectory of our kind of workforce operations and talent acquisition continues a pace even as we move into July. When we talk about the project timing, it's literally just that, and we referenced the fact that some of these projects. And this can happen on a year-over-year basis that may have occurred in Q3, maybe shifting more into Q4, and which is why you'll see a little bit in the retailer segment, especially a part of that business, a little bit of shortfall in Q3 versus prior year, but much better Q4 and we have visibility to that. On the demand signal front, we're seeing strong demand for demos and on the experiential space and such that we're better able to meet that demand and hit higher level of execution rates because of the strength of our hiring and talent acquisition and overall retention plans. And then we feel very good about the S&OP process with our retailer group and being able to kind of flex that force as needed based on project timing. And a lot of these projects occur in the third quarter and going into the early fourth. Obviously, as you get into holiday periods, retailers look to have fewer -- less third-party labor in the stores, which is very common and normal and is in our normal seasonality. But in the retailer space is the one where just due to timing, you're going to have a little bit of less project work in the third quarter, but we know that gets kind of compensated for in the fourth quarter.

There are no further questions at this time. I want to turn the call back over to Dave Peacock for closing comments.

Thank you, Janice. We will be attending the Canaccord Growth Conference on August 12 next week in Boston with a webcast of a fireside chat at noon Eastern Time. We hope to see you there. And again, thank you for joining us today.