Good afternoon and welcome to Advantage Solutions Third Quarter 2021 Earnings Conference Call. Today's call is being recorded and we have allocated one hour for prepared remarks and Q&A. At this time, I'd like to turn the conference over to Deborah, Chief Investor Relations and Strategy Officer for Advantage. Thank you. You may begin..

Thank you, operator. Thank you everyone for joining us on Advantage Solutions 2021 third quarter earnings conference call.

On the call with me today are Tanya Domier, Chief Executive Officer, Brian Stevens, Chief Financial Officer and Chief Operating Officer, Jill Griffin, President and Chief Commercial Officer and Dan Morrison, our Senior Vice President of Finance and Operations.

During this call, management may make forward-looking statements within the meaning of the federal securities laws. These statements are based on management's current expectations and involve risks and uncertainties that could differ materially from actual events and those described in the forward-looking statements.

Forward-looking statements are based on the company's current expectations and are subject to inherent uncertainties risks and assumptions that are difficult to predict.

Actual outcomes and results could differ materially due to a number of factors including those described more fully in the sections titled Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operation. And elsewhere in the company's filings with the Securities and Exchange Commission.

All forward-looking statements are expressly qualified in their entirety by such factors. The company does not undertake any duty to update any forward-looking statement except as required by law. Please note, management's remarks today will highlight certain non-GAAP financial measures.

Our earnings release issued earlier today presents reconciliations of these non-GAAP financial measures to the most comparable GAAP numbers. Which can be found on the Investors section of our website at https//advantagesolutions.net. The company has also prepared presentation slides which are posted on Advantage's Investor Relations website.

You may want to refer to the slides during today's call. This call is being webcast and a recording of this call will also be available on our website. And now I'd like to turn the call over to Tanya Domier..

Thanks, Dan. Good afternoon, everyone. As I did on our first few calls, I'm going to start by framing the Advantage Solutions business. We're the leading provider of outsourced sales and marketing solutions to consumer goods, companies and retailers.

We have a strong platform of competitively advantaged services like headquarter sales, retail merchandising, in-store sampling, digital commerce and shopper marketing.

And for brands and retailers of all sizes, our job is to help them get the right products on the shelf, whether it's physical or digital and into the hands of consumers however they shop. Creating value on this platform is simple, but it's not easy. And at the most fundamental level we're a trusted partner and problem solver.

We help our clients sell more while spending less, we operate very efficiently providing fuel for growth. We reinvest attractive returns, both organically and through tuck-in acquisitions and as we deliver value our platform compounds over time growing profits at more than 2.5 times the pace of the S&P.

I am so grateful to our associates for the work that they do in the office and in the field. And I want to take this opportunity to publicly thank them. They're providing essential high return services helping consumer good companies and retailers navigate out of this pandemic better, cheaper and faster.

Once I conclude my remarks, I'll turn things over to Brian to discuss our financial results and then after that we'll open the call for questions. I'll jump right into today's update. As we look ahead, Advantage remains well positioned in a very dynamic operating environment.

Demand for our essential services remains high as we help our partners navigate through unprecedented change in both brick and mortar and e-commerce. We're investing to stand up tens of thousands of associates in a still choppy labor market to help our clients and customers navigate unchartered water and saw unprecedented challenges every single day.

And we're being disciplined in realizing price to offset wage inflation in our most labor intensive services with more to come on that later. Times like this with lots of change, as I've mentioned before or when our compounding platform really shines.

In fact, there may not be a better time to be a low-cost scaled provider of essential services that extend all the way that the shelf. I'm very proud of our team. They're helping our brand and our retail partners worked through near record inflation, supply and demand imbalances, fragile global supply chains and a rapidly shifting marketing mix.

The path ahead may not be smooth in our markets, but we've got an amazing team and services deployed to win over the long term. Drilling down a bit, we had healthy performance in our third quarter in the face of a dynamic and difficult operating environment.

And this steady delivery year-to-date gives us the confidence to affirm our upwardly revised 2021 adjusted EBITDA guidance of $520 million to $530 million. We continue to see recovery in services most impacted by COVID particularly in-store sampling where events were up approximately 13% from the second quarter of this year.

Elevated at-home demand continues to benefit our sales segment supported by steady volume and rising price trends relative to pre-COVID level.

Our higher growth and higher margin digital services continue to deliver strong results annualizing to nearly a quarter of our profit and providing a strong set of solutions to brands and partners in an omnichannel world post COVID.

As we bring sampling back to stores and we scale further and retail merchandising we're standing up tens of thousands of new associates. This requires a significant investment in our talent in our workforce that will continue as we return to full operation over the coming quarter.

In addition to our workforce investment, we're also investing through the P&L in service innovation and a unique trade promotion optimization offering. We're completing tuck-in acquisitions that add capabilities at attractive returns.

We have a robust pipeline of new business opportunities as we come out of the pandemic and we're being disciplined about taking price in a majority of our businesses that are most impacted by wage inflation with hikes of mid to high single-digit. We're not yet back to normal, but we're navigating the path to a new normal quite well.

Turning to an update on our financial performance. Here's some highlights from the recently completed third quarter. The business continues to deliver solid financials as the world reopens and we work through what we hope are the final innings of the pandemic.

Revenue continued to recover nicely in the quarter, growing 18% year-over-year as in-store sampling continues to build back in our marketing segment.

As we anticipated, adjusted EBITDA declined modestly down 2% year-over-year on continued upfront investment in recruiting to build back our workforce in COVID impacted operations, mix-related declines and workforce investments in the sales segment.

Touching quickly on the segment, revenue growth remained strong in our sales segment at 10% year-over-year driven by healthy rebound in the COVID impacted international business and growth in retail merchandising services. Offsetting some of our growth, we had modest declines in headquarter sales revenue.

It's worth noting, however, that while headquartered services are moderating from COVID peaks, they do remain above 2019 pre COVID level. The sales segment did see a forecasted year-on-year EBITDA declined, down 7%.

This was driven primarily by upfront costs to ramp new business wins, lower-margin revenue mix from the type of work that we've won, and continued investment in our merchandising workforce.

To elaborate on the mix component, we expected declines in headquarter services against last year's elevated COVID levels came at high detrimental margin, while the addition of retail merchandising at international revenue came at lower incremental margin.

Moving to our marketing segment, the revenue rebound continued up over 37% versus 2020 as the steady return of in-store product demonstration at our largest sampling clients delighted consumers and our digital services continue to have significant adoption. Marketing also saw solid EBITDA growth in the quarter, up 12% year-over-year.

This was primarily driven by healthy growth in digital offsetting significant investment in some of our in-store sampling services to acquire and onboard talent, offsetting some supply chain challenges with single serve sample availability and the roll off of high margin prior year COVID related services for retailers when sampling was done.

As we sit here today with just over half a quarter to go in the 2021 calendar year in the sales segment, we continue to see solid consumption patterns in the sales segment as baseline volume remains elevated from pre-COVID level.

We expect this to continue to some degree with hybrid working as a trend but expect that volumes will continue to normalize further as more people go back to work and school in the coming quarters. We're also seeing consumer goods supply chain struggle hurting some client's ability to get products to stores.

Offsetting these headwinds, we're helping manufacturers navigate a more dynamic pricing environment to offset commodity and wage inflation. The CPG pricing tailwinds directly benefits our headquarter sales business is commission grow with client business.

In the marketing segment, in-store product demonstration and sampling continues to receive strong support in our rollout and shoppers are very pleased to see the events that they've missed. Brands are eager to bring innovation and product news to market and demand for events continues to grow.

As we've noted, ending up teams of tens of thousands of trained associate something that we're uniquely good at doesn't happen overnight and it's complex and costly particularly in today's top talent market. We continue to invest, to recruit, and to train and to retain particularly in the in-store sampling services that we're bringing back to life.

We expect that this will continue through the balance of 2021 and into next year. As you can see our full year guidance anticipates a solid inflection in Q4 performance both against depressed prior year comps and a Q3 that was squeezed a bit by mix drag and temporary reinvestment.

Key drivers of our expected robust Q4 our healthy pricing trends in our headquarter sales services, continued outperformance in digital services and solutions flow through a pricing to offset wage inflation and steady recovering and sampling as we continue to step up there to absorb our fixed costs and recruiting investment.

On the COVID front, we're watching things very closely. We continue to expect the pandemic disruption to subside as the state of health improved, but we remain nimble and prepared for a wider than normal range of outcomes. As noted earlier, we are affirming our 2021 adjusted EBITDA guidance of $520 million to $530 million.

As many of you know we plan cautiously and execute relentlessly.

Given solid organic performance and tuck-in acquisitions year-to-date, we're comfortable in our outlook, which is a few weeks to go and believe we're positioned well to deliver against this range in a wide set of macro scenario ably navigating meaningful inflation and labor and supply chain disruptions that no one can afford.

Before I turn it over to Brian for more details on the financials. I do want to highlight the share repurchase authorization we communicated in a separate release after the close today. We continue to believe our heavily discounted share price is meaningfully disconnected from our stable fundamentals and healthy outlook.

Given that we will be opportunistic in buying back the business that we know best our own. The $100 million authorization will be utilized when two basic conditions are met.

Shares trade at meaningful discount to our conservative estimate of intrinsic value and share repurchase compared favorably to alternative uses of capital deployment, including our highly value accretive M&A program. With that, I'll turn it over to Brian..

Thank you, Tanya, and good afternoon everyone. It's great to be speaking with you. Tanya touched on the third quarter highlights. So I'm going to share a little bit more color at the segment level and speak again to our full-year guidance.

As Tanya mentioned earlier, we grew revenue 18% year-over-year in the third quarter to $929 million, primarily driven by the marketing segment as in-store sampling continued its return to operations in the quarter.

As expected, Adjusted EBITDA declined slightly 2% year-over-year to $134 million, primarily driven by anticipated decline in the sales segment, which resulted from some moderation and headquarter sales service relative to last year's elevated COVID levels.

Also contributed to decline as Tanya mentioned earlier is the ongoing investment we are making to stand up very large labor forces to bring COVID impacted franchises back to full operation and the scale and the healthy market share gains in our retail merchandising services.

Turning to our segments, sales segment revenues grew 10% year-over-year to $597 million. Retail merchandising services and a recovery of the COVID impacted international business drove most of this growth.

Sales segment adjusted EBITDA was $95 million down year-over-year from lower margin revenue mix, including the anticipated moderation in the headquarter sales services and investment in our workforce.

Marketing segment revenue were up 37% year-over-year to $332 million this represents the second consecutive quarter of growth, following the pandemic impacted quarters minus 39% and minus 31%.

Adjusted EBITDA in marketing was up 12% year-over-year to $39 million driven primarily by continued strength in our digital business and in-store samplings returns to operation. More than offsetting upfront investment to build back our workforce to support samplings return to operations.

Turning to overall margins, third quarter adjusted EBITDA margin came in at 14.4%, down 300 bps from the elevated COVID-19 levels in 2020. The expected year-over-year margin dip was primarily attributable to two factors. First, normalizing revenue mix as a lower-margin service continue to recover from COVID.

And second, upfront investment to stand up labor in our in-store sampling and retail merchandising services. As recent pricing moves to asset wage inflation flow through and rising sampling volumes absorb more fixed cost and investment expense, we expect this headwind to ease.

Turning now to a full-year 2021 outlook, as Tanya noted, we are comfortable with our fiscal year 2021 adjusted EBITDA range of $520 million to $530 million. Some items to keep in mind with just a few weeks ago in the year. Q4 will have continued investment in recruiting, training and retaining talent and labor intensive services.

Particularly, as we bring large operations like in-store sampling back to full operations and scale up further in retail merchandising. Sampling and demonstrations should continue to ramp steadily turning to labor supply returning to market and the supply chain being able to deliver sample product.

At-home demand has remained elevated above pre COVID levels even with the return to in-person learning and hybrid work. Our pipeline of high return M&A opportunities is robust. We've closed a handful of deals and have more, we expect to close over the coming quarters.

We will continue to pursue pricing to offset wage inflation in our labor intensive services engaging receptive partners and dialog about the need for speed and recruiting strong talent in this market.

We continue to make room for a moderate amount of medium term investments through the P&L this year, betting on strong organic growth ideas and projects from our talented leaders and these will pay off in 2022 and beyond. Summing all this up, we had a solid first three quarters.

We've got some investment to bring in large workforce back into operations and some unknowns in the home stretch of the year. But we've scrubbed the forecast pretty real and let's see and remain confident about the strong finish to the year that delivers the annual guidance we shared.

Now turning to some balance sheet items as Tanya indicated, our net debt-to-EBITDA finished the quarter approximately 3.9 times in line with Q2 levels. Free cash flow should ramp up in Q4 and into 2022.

As noted in last quarter, we now have no meaningful maturities in the next four plus years also note on October 28, 2021, the company successfully repriced it's $1.3 billion first lien term loan down by 75 bps to a 5.25% interest rate.

Our annually projected interest savings are roughly $10 million or $7 million after-tax, will be realized annually for the remaining six years until maturity. At the end of Q3, our total funded debt outstanding was down to approximately $2.1 billion.

A summary of our debt and equity capitalization can be found on slide eight in the supplementary slides for Q3 results that posted on our Investor Relations website. And with that, I'll turn it back over to Tanya..

We're enthusiastic about 2021 and beyond here at Advantage. We believe in the power of our business model of delivering need to have services for brands and retailers, and we do it better, cheaper and faster than they can do it themselves. We will continue to focus on helping our clients emerge from unprecedented disruption and change.

We will continue to deliver both cost-efficiency and sales efficiencies to clients, which is a real growth. This is how we serve existing clients well and generate new business wins. We're winning with tuck-in acquisitions and stepped up reinvestment through the P&L, bringing technology-enabled services can meet our client needs.

Dan, any closing thoughts before we open it up to Q&A.

Thanks, Tanya. I've done my fundamental investor had again to wrap this up. Advantage is an essential provider sticky sales and marketing services with a proven history of healthy organic growth and returns on capital.

An admirable track record of navigating unprecedented disruption during COVID and a compelling case that will emerge stronger post pandemic. In this battling and bifurcated market, our compounding fundamentals trade hands at well under ten times EBITDA. For perspective, that share price implies no growth ever again.

This flawed assumption in my view represents an opportunity to fellow long-term investors. As Tanya noted, we're expressing confidence that our own risk reward with our first ever share repurchase program. Authorizing an investment in the asset, we know best ourselves.

As the fog clears, we plan to grow liquidity escape from broader speck skepticism and move past enlist alarmist labor market headlines. With time, patients and fundamental value delivery we expect to close our discount to the consumer goods end markets we serve and the services business as we could be count again.

In each turn of equity value that accrues is worth more than 20% to our total fair value. Bottom line, I like the asymmetry year and encourage folks to dig a bit deeper and reach out to us to discuss ADD. With that I'd now like to ask the operator to open the call for questions..

[Operator Instructions] Our first question today comes from Toni Kaplan with Morgan Stanley. Please go ahead..

Tanya, you talked about a couple of the different factors that are impacting you the challenging staffing environment which we're seeing across a number of our business services companies as well as the supply chain issues.

Is there a way to frame how much demand that you haven't been able to meet because of any of these factors?.

That's a great question, Toni, and I would just start with the backdrop of acknowledging what you said it.

Certainly a dynamic labor environment right now and we expect investment and labor to continue through the balance of this year and into next and demand definitely exceeds supply we're not reporting on the demand versus the supply that I'll tell you that the investments that you see are most heavily weighted towards the upfront recruiting as we stand up our large demo workforce and we grow quickly in retailer merchandising where there has been a lot of demand.

And I think it's really a testament to the fact that these services are need to have, and that's been proven they are out COVID and the investments that you've seen and will continue to see are critical.

You're going to see sampling and demo continue to trend back towards pre COVID levels and as we noted supply demand is something that we're dealing with every day. We're racing the staff to robust demand.

And you'll see each platform continue to roll back over time and as we talked about you'll see the disciplined way that we're working to get our workers back.

We've not been immune from wage inflation as you can imagine, we all see it in the headlines, but to offset this, we've been very disciplined in taking price and a majority of -- of our businesses, most impacted by wage inflation with hikes of mid-to-high single digits and more to come as needed.

And the reason that I shared this with you is because as you can imagine that's helping us can meet that demand more quickly because we've been working in partnership with brands and retailers to be able to take price to increase wages to get our workers back and out there servicing the customers and the shoppers.

And again, it's a testament to what we've been saying all along. These are value-added services, the need to have, not nice to have and I think it really illustrates the value of our model which is that clients are relying on our capabilities and the scale to deliver critical services efficiently.

It's not easy for anybody, but we have great expertise in recruiting, training and retaining talent..

And then related, you made a sort of a high level of investment in third quarter, which you had talked about previously and so definitely expected. Just talk about how you're thinking about the levels of investment in 4Q relative to 3Q..

Through the shape of the years and holding about as we forecasted and as we tried to signal with each of these calls our puts and takes.

But we're reaching the end point that we've committed to Q4 shaping up to finish the year nicely just a few weeks to go and we feel very good about our ability to land the year and our adjusted EBITDA range and -- in a two factors really drive Q4's inflection. First, our business is generally higher as you can imagine in Q4 because of holidays.

And second, our business is ramping further in Q4, as our COVID impacted businesses work their way back towards full operation.

So Q4 will also show continued flow through of disciplined price hikes that I mentioned to offset wage inflation and some lift from healthy CPG trade pricing trends that we've all seen that are aiding our headquarter sales commissions..

[Operator Instructions] Our next question comes from Jason English with Goldman Sachs. Please go ahead..

I've got a few questions. Tanya, let's pull lot of thread of that last comment you just made the price increases are aiding your headquarter sale -- sales.

How exactly our headquarter sales down? it's -- I don't really fully appreciate it, given that we've got so much price in the system, demand remains elevated, what was the transitory boost last year, that's now fall in a way?.

There is definitely elevated demand, we still see elevated demand versus '19, but certainly not when pantry level was occurring. You mentioned supply chain and that does create some short-term noise. It's hard, so what's not available but that's reflected in our outlook, and we expect it to work itself out.

But again, supply chain is another great example of where short term paying creates long-term gain for our business and we're working with clients to help figure those problems out. So we've proven ourselves to be a trusted in central partners to our clients and we're continuing to do that.

We don't have an immediate solve for supply chain, and that does affect flow through the headquarter commission, but we are working tirelessly to ensure that everything that's available gets presented flawlessly on the shelf, whether it's physical or virtual. And there has never been a higher premium on flawless execution all the way to the shelf.

And you see that again by people being willing to pay more for it and we think really what we've learned again and reinforce through COVID and this long period which is these services are need to have..

Tanya, we seem to have passed the pantry load phase. I mean the grocery store sales are up, CPG company reported sales are up. I still can't hire allowed in terms of why your commission stream on what seems to be a growing revenue pool is shrinking.

Have you -- have you suffered commission compression or have you lost some headquarter sales -- accounts?.

No, we have not seen any compression in our headquarter margins since the last few years, as we talked about the last time that we really saw that was consolidation.

So it's really not a compression issue, some of what you may be seeing though is some of the supply chain issues affect us more than they do the broader CPG community because we don't have headquarters or headquarter commissions at the largest accounts.

So oftentimes it's the Tier two and Tier three accounts where the cut happened in supply chain so that's likely the disconnect that you're seeing in overall CPG and the advantage headquarter business..

Got it. That makes more sense. Thank you for filling in the gaps there. Pivoting to the marketing side of the business, I know you've mentioned about sort of the appetite to bring sampling back in progress there. But I'm looking at your Slide four and ma'am we're just creeping.

We're barely sort of creeping higher and I asked -- I asked this on a recent call, you guys did like educational call but we've gone kind of two years now without sampling and business is humming for all the major manufacturers and for Costco.

Is it reasonable to assume that we're not going to get all the back to a 100% that they found that they can't live without some of this costly sampling activity?.

I don't think that's the case at all. We're actually seeing the opposite. As we talked about the demand is greater than supply and I would just say again, we can't overemphasize enough the build that it is to stand up tens of thousands of people, and you're seeing steady progress.

That's exactly what we expected and we still expect progress towards pre COVID levels and we expect continued improvement in Q4 versus Q3 just like we saw in Q3 versus Q2. But given a tough labor environment, some of the rebuild is likely to push into the early part of next year.

There is always a fuse on how long it would take to stand up these businesses. It is burning little slower than we probably would have guessed as people have come back to work more slowly than we expected after stimulus ended.

The good news is, though contrary to what you asked about earlier the demand for the services from brand and from retailers and from consumers remained very strong..

That's good, that's good to hear. One more question. I don't want to be too much of a call hog. So, I'll pass it on. But I think Brian and comments about like fourth quarter said flow through a pricing to offset wage inflation will build. I was hoping you could give us sort of an update on that.

Where do you stand in terms of wage inflation, like how is it hitting your P&L overall and then of course, where do you stand on that offset in terms of your ability to push through pricing to pass it on?.

Yeah, once you can imagine, we've had a number of those conversations with our both brand partners and in our largest labor businesses and we've taken price in a majority of our businesses that are most impacted by wage inflation and on average, those price hikes are in the mid-to-single digit range.

They're going to flow through at different times, because of the conversation happens at different times, but our pricing progress matches up well with our CPG clients in terms of the ground that we've covered and the magnitude of pricing that we've worked through in partnership with brands and with retailers..

[Operator Instructions] There being no further questions. This will conclude our question and answer session. I would like to turn the conference back over to Tanya Domier for any closing remarks..

Thank you everybody for your questions and your support. We look forward to the one-off and Jason, I know we have a scheduled session I think hopefully all those questions ready and to everyone else, all of our of our partners on the call please get your questions ready and we look forward to all of our follow-up sessions with you. Thanks so much..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..