Good afternoon and welcome to Advantage Solutions’ First Quarter 2022 Earnings Conference Call. Today’s call is being recorded and we have allocated 1 hour for prepared remarks and question and answers. At this time, I’d like to turn the conference over to Lasse Glassen from Investor Relations for Advantage. Thank you. You may begin..

Thank you, operator. Thank you everyone for joining us on Advantage Solutions’ 2022 first quarter earnings conference call. On the call with me today are Jill Griffin, Chief Executive Officer; and Brian Stevens, Chief Financial Officer and Chief Operating Officer. After their prepared remarks, we will open the call for a question-and-answer session.

During this call, management may make forward-looking statements within the meaning of Federal Securities laws.

These statements are based on management’s current expectation and involve assumptions, risks and uncertainties that are difficult to predict and could cause actual results to differ materially from those expressed or implied by such forward-looking statements.

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 statements, except as required by law. Please note management’s remarks today will highlight certain non-GAAP financial measures.

Our earnings release, which was issued earlier today, presents reconciliations of these non-GAAP financial measures to the most comparable GAAP measure, which can be found on the Investors section of our website at advantagesolutions.net. The company has also prepared presentation slides, which are posted on the website.

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

a shift in revenue mix with historically lower margin demo business regaining momentum; the ongoing reinvestment activities I just referenced, most notably in the quarter related to staffing and recruiting; continued challenges in our foodservice business; and we also experienced an unusual increase in the amount of self-insured medical claims.

Turning to segment results for the first quarter, revenue growth remained strong in our sales segment, up 11% year-on-year, driven by growth in retail merchandising services and a healthy rebound in the COVID-impacted international business.

Sales segment adjusted EBITDA declined 19%, primarily due to the increase in share of lower-margin merchandising revenue that drove the overall top line increase as well as heightened cost pressure in our merchandising workforce.

Moving to our marketing segment, the recovery continued with revenue up 26% compared with the first quarter last year as in-store product demonstration recovered significantly compared to a year ago. Marketing segment adjusted EBITDA expanded modestly in the quarter, up 4% year-on-year.

This was driven by revenue growth, offset by increased headcount and related salary costs. Now that I have shared more color on Advantage’s first quarter results, I would like to provide additional detail on the important investments we are undertaking in 2022. As a reminder, this investment will come in three key areas.

First, in innovation, we are investing to scale adjacent and complementary services with a targeted focus on higher growth, higher margin data intelligence and digital offerings. Second, in renovation, we are accelerating investment in infrastructure, systems and tools to improve productivity and operational efficiencies across the enterprise.

And finally, in talent, we are stepping up spending in wages, recruiting and retention. Taken together, we expect these efforts will strengthen our franchise and widen our operating mode while driving growth, improving operational efficiencies and better positioning Advantage to capitalize on the many opportunities ahead.

Let’s take a deeper dive into each, starting first with innovation. We believe a key future growth driver for Advantage is new data and digital solutions that create even better commercial outcomes for our clients. The pandemic has accelerated and changed what’s needed to succeed for both manufacturers and retailers.

The growth in e-commerce within CPG retailing has created fundamental shifts in consumer behavior, which has in turn impacted retailers. This is why we are evolving our service offerings and focus to better meet the needs and expectations of both.

To this end, we are launching new services at Advantage to better address the evolving marketplace and investing in new leadership to run this practice area. These new services aggregate, organize and create unique database retail-centric solutions that drive more automated decisions for CPG manufacturers and retailers.

We see this as the cornerstone of our evolution and a top priority as we look to strategically transition into more data-directed services.

This new scaled data intelligence capabilities combined with our existing physical reach and presence is unique, helping our clients and customers gain insights and pull it all the way through to the transaction regardless of the channel.

We also continue to invest in deepening and widening our capabilities in other core areas of this strategy, such as data-driven supply chain services, retail media and retail POS analytics. Now let’s move on to activities within renovation where we are reinvesting in our core business to enhance productivity and cost efficiency.

A key area of focus is new, digitally driven recruiting activities that will materially improve speed to hire and reduce cost to hire across our entire enterprise and particularly in our high-volume retail services group. The development of these digital tools will allow our businesses to more efficiently acquire talent.

Another core area is our operating technology stats that power, enable and optimize location-based retail execution work. We are investing in digital tools and software.

We are confident we will add measurable value and unlock synergies by improving existing staff utilization rate, expediting program execution, increasing in-store insights and providing new data opportunities. And finally, within talent, we are investing to stay competitive on wages and fully capitalize on our innovation and renovation initiatives.

These investments are both in wages to improve retention among our existing associates, along with recruiting new associates to further drive our growth and development. As we look ahead, I also wanted to share a bit of color on our second quarter.

Starting first with the headwind, supply chain challenges continue to persist and out of stock to remain elevated, pressuring adjusted EBITDA. Likewise, the labor market continues to remain very tight, which, as noted earlier, requires additional incremental spending to recruit and retain across both hourly and professional ranks.

That said, we continue to expand our efforts to realize price from customers to fund wage increases in 2022 as we did in 2021. We expect this to result in higher adjusted EBITDA in the second half of 2022.

Our services remain high ROI need-to-have rather than nice-to-have offerings, and we have cost advantage scale in delivery even in the face of wage inflation. Looking at the key tailwinds, we continue to expect the pandemic disruption to slowly subside and anticipate a continued rebound in the services that were most negatively affected by COVID.

That being said, we remain prepared for a wider-than-normal range of outcomes. Altogether, we are affirming our full year adjusted EBITDA guidance range of $490 million to $510 million. With that, I will turn it over to Brian..

Thank you, Jill and good afternoon everyone. It is great to be speaking with you. Jill discussed our first quarter highlights, so I’ll share a bit more color on our segment level results and our full year guidance.

In Q1, sales segment revenues of $592 million were up 11% year-on-year and sales segment adjusted EBITDA of $68 million, declined 19% year-on-year. Marketing segment revenues of $323 million was up 26% year-on-year. And marketing segment adjusted EBITDA of $29 million was up 4% year-on-year.

Our revenue growth in Q1 was primarily driven by continued improvement of our sampling and demonstration following the return of in-store events, strengthened by our retail and merchandising services, including solid contributions from an acquisition we made in September as well as ongoing recovery of our COVID-impacted international businesses.

Partially offsetting this growth, as we anticipated, was softness in headquarter sales from peak COVID levels, although I am pleased to note headquarter services revenues continue to exceed pre-pandemic levels.

Turning to our Q1 adjusted EBITDA results, the year-over-year decline was predominantly due to higher labor costs to increase headcount in support of our return to full-scale operation in our in-source sampling and retail merchandising, along with continued challenges in our food service businesses; increased investment in new technology; and unusually high medical benefit expense.

In addition, adjusted EBITDA margin came in at 10.6%, down 351 basis points year-over-year, reflecting a decline of 421 basis points in the sales segment and 183 basis points in the marketing segment.

The lower margin is due to the revenue mix shift, reflecting an increase in lower margin revenue, primarily driven by meaningful increases in our single-source retail merchandise services and continued recovery of our international business.

Moving on to discuss some of the balance sheet items, our net debt to adjusted EBITDA finished the quarter at approximately 3.9x. We expect free cash flow to ramp throughout the year with growth more heavily weighted towards the back half of the year.

In line with last quarter, our debt profile remains healthy as we have no meaningful maturities for the next 4 years. At the end of Q1, our total debt outstanding was approximately $2.1 billion. A summary of our debt to equity capitalization can be found on Slide 8 in the supplementary slides for Q1 results posted in our Investor Relations website.

In terms of capital allocation, we continue to prioritize strategic M&A and organic investment to drive continued long-term sustainable growth. We will also consider options to pay down debt and repurchase shares.

Now turning to our outlook for fiscal 2022, as Jill mentioned, we are reiterating our fiscal 2022 adjusted EBITDA guidance in the range of $490 million to $510 million. Let me provide some additional detail on the key considerations underlying our 2022 adjusted EBITDA expectations and high-level financial performance.

First, we want to emphasize that we continue to have active discussions and work with our clients to implement targeted price increases across our critical need-to-have services amidst the backdrop of rising inflation and increasingly challenged labor market. Second, turning to growth.

In terms of fueling organic growth, we are focused on executing against our investment strategy as we continue to invest in innovation, renovation and talent to drive long-term value creation.

Fiscal 2022 is very much a year in developing and prototyping these higher-growth, higher-margin solutions in order to scale them effectively in 2023 and beyond. Regarding M&A, which as Jill noted, continues to be an important part of our growth and value creation strategy.

So far in 2022, we have closed three acquisitions, primarily focused on marketing services. Looking ahead, we have a robust pipeline of attractive, high-return opportunities.

We will continue to opportunistically pursue accretive tuck-in acquisitions that align with our future strategic growth avenues, field service and our technology gaps or strengthen our existing capabilities.

Third, on free cash flow, we expect to drive approximately on quarter or more of adjusted EBITDA conversion to free cash flow this year with a more normalized 35% to 40% conversion rate resuming in 2023.

Fourth, on leverage, given our adjusted EBITDA guidance, we expect net debt-to-EBITDA at year-end to be slightly elevated from 2021 levels given our investment and strategy and capital allocation plans. Beginning in 2023, we plan to resume our previously stated objective of steadily deleveraging our balance sheet.

And lastly, regarding our financial performance.

As we look ahead, we anticipate our revenues and adjusted EBITDA will be significantly stronger in the back half of the year as compared to the first half, supported by the ongoing recovery and scale of our sampling, administration and international businesses and continued strong contribution from our digital marketing services.

With that, I’ll turn it back over to Jill..

Thank you, Brian. We are operating in a dynamic environment, but I am confident that the macro uncertainty that exists will ultimately play to Advantage’s strength of the company. We have a tremendous roster of long-standing blue-chip customers spanning CPG brands and retailers, and we provide must-have services for these clients.

Thanks to our core competency in managing a large labor force, we do it better, faster and cheaper than they can themselves. Now more than ever, our clients are looking to us to help them navigate fast-changing conditions in both e-commerce and brick-and-mortar channels at scale.

Our path forward requires targeted investments to better position us to take advantage of the significant growth opportunities that lie ahead and to operate more efficiently. I believe in our team, I believe in our value proposition and I believe in our ability to execute. Thank you for your attention today.

And with that, operator, let’s please open the call for questions..

Thank you. [Operator Instructions] The first question we have is from Toni Kaplan from Morgan Stanley..

Thank you.

Wanted to ask about inflation, if you’ve seen any of the inflationary pressures abating on either the labor or the supply chain front?.

Sure. I can take that..

Hi, Toni. Go ahead. Yes. Go ahead..

No worries. So I can say on – maybe I can talk about the wages and then Jill can maybe touch on the supply chain. But on the wage piece of it, unfortunately, we are still seeing inflationary pressures. They are, I guess, more evident in some of the higher density markets, but we are still seeing those challenges..

Yes. That’s great. We are definitely still amidst the inflation. And we’re battling it on all fronts. And we’re beginning to see some of the impact also on consumer reaction to the pricing..

Yes, understood. Just on hiring, have you been able to hire as much as you would like? I know we’ve talked in prior quarters about the tight labor market may be impacting that and impacting potentially demand, having a constraint on demand from the hiring side.

So just wanted an update there?.

Yes. We still are experiencing more demand than we have supply. So that is an ongoing pressure. We are continuing to invest in our tools in our recruiting group as we talked about in our speaking points about increasing our recruiting as well as speeding our time to hire.

And increasing our utilization of our existing workforce are all very key components of dealing with the continuing very pressured labor market..

Great. And just to sneak one more in. I wanted to ask about the trajectory of margins. I think you’re expecting an improvement in second half.

So I wanted to understand the drivers of that a little bit more fully?.

Yes. So....

Go ahead. Go ahead, Brian. Brian and I will get this down. You take it..

Sorry. Sure. So specifically on margins, just so you know, our expectation as the retail business on the retail-centric side and then also on the demo business as it starts to come back and fully ramp that it actually will have pressure on margins. But revenue and EBITDA will increase substantially.

So actually, we will probably see more pressure on margins in the balance of year, and then that will get us to kind of a stabilized baseline that we can grow off of in 2023 and kind of going forward..

Very helpful. Thank you..

Thank you. [Operator Instructions] The next question we have is from Faiza Alwy from Deutsche Bank..

Yes. Hi, thank you. So I also wanted to touch on margins. I think, Brian, you mentioned a number of different factors. And I know we’ve been talking about investments and wage pressures and all of that.

I was wondering if you could help quantify and break down sort of that 350 basis points of year-over-year margin decline? Like are you able to isolate and say how much of that was investment and innovation, renovation, how much maybe was attributable to mix versus rising costs? I believe you mentioned some things sort of health insurance related.

So, just curious if there is a way to break down that margin decline at all?.

Sure. Well, I mean, there is a lot into that question. So what I can do is just talk generally about it. So let’s first talk to what you talked about as far as innovation, renovation and talent. So a lot of the investments we’ve made in talent which is, said another way, is increase in wage. We’ve made that investment.

So you are seeing that reflected in the margin as far as increased wages. As far as renovation, I would say that we’re partially into that, meaning that we have made significant investments in technology. And the two biggest ones are on the retail side as far as enabling us to real time information and dynamic routing.

And then the other one is on the talent acquisition side, which we’re deploying on leading technology. We’ve been working on it for the past 9 months. And it’s going to be fully deployed over the next couple of weeks, which will help us speed the hire.

And addressing what Jill talked about is the recruits and hiring more people and getting more people into the funnel. So we’re excited about both of those. And then as far as the innovation, it’s still early stages on that. So there really isn’t a lot of, yes, impact to the margin that you see there.

And then when you look at the margin and the other things that are impacting it, you touched on a couple of them. So one, medical, we did see an increase in medical expense this quarter. We’re self-insured, and so we had an unusual spike this quarter, significantly higher than we have in previous quarters.

And so it’s hard to say what’s going to happen in the future, but it is unusually high for this quarter. And so I think it would be reasonable to expect that it would come down from there. And then talent acquisition costs, those are still high and elevated. So we still see those.

And our expectation is that investment will continue to – we will continue to maintain that investment in the upcoming, for sure, second quarter, but likely in the second and third quarter until we get back to a normalized level of associates. You are saying – we talked about the food service loss that we had. That is impacting us in Q1.

It was a midyear loss last year, so it will impact us in Q1 and Q2, but we will lap the Q3 going forward. And then lastly, I think that the big piece is, remember, last year was COVID impacted to the positive. And so we had positive flow in our sales business, which is not as impacted in Q1 this year.

So that’s a lot, but those are the main drivers that you see as far as the decrease in margin and ultimately decrease in EBITDA..

Okay, thank you for all of that. And then Jill, I am curious as you were talking about innovation you talked about investments to scale adjacent complementary services, higher-growth, higher-margin data intelligence, digital offerings. I’m curious if you could sort of bring to life some of these things.

Maybe give us some examples in terms of how you’re thinking this will drive growth revenues. And what types of products are you really talking about? Maybe just give us some examples..

Sure. Thank you. So as we mentioned, we are focusing on data, e-commerce intelligence. And this is a mix of creating services that underpin the core of what we do and make our labor deployment more strategic, more targeted, more efficient, including creating more value in the data that we extract when we are executing.

We are going to be creating new supply chain solutions that have emerged as a must have for our clients and customers. As we all know, the supply chain has been significantly challenged.

And these include perfecting what we do in terms of helping with allocation management and aligning purchase orders to production schedules and tracking warehouse out of stock and making sure that we put the inventory in the most necessary places and understanding what is actually on the shelf and in the warehouse and where the needs must mean that in what order.

So you’ll see a lot of that coming from us. You will also some very important investments in retail media because we sit at the center of our brands and our retailers. And as retailers are creating retail media offerings, we are helping them to be able to make those offerings very powerful and effective for our brands.

And we are, on the other side, helping our brands evaluate how they should allocate their very important media dollars against the highest-return activities. So those are some of the examples of the areas that we’re leaning into in innovation..

Okay. That’s super helpful. And just quickly, Brian had mentioned that it’s early in terms of these investments. When do you expect to see a return on this? I’m assuming most of the investments are expected to happen through the course of this year.

But how should we think about when these are sort of, commercialized is the right word, but when they are commercialized and implemented?.

Absolutely. Thank you. That is a very important question. And as you would expect, it will be an evolving answer. We are not spending all of the money day 1. We are continuing to put all of the innovation through a very rigorous evaluation process in order to release the funds and to trigger the activity.

And we are expecting, in some cases, for the revenue to be produced toward the back half of this year and then the bottom line impact to come in the first part of next year.

But it’s important to note that this will not all be at one time because as I said, we are strategically evaluating and releasing dollars to our very talented entrepreneurs as the ideas come in and go through a very rigorous process to make sure that they meet our return requirements..

Understood. Thank you so much..

Absolutely. Thank you..

Thank you. Ladies and gentlemen, we have reached the end of our question-and-answer session. And I would like to turn the call back to Jill Griffin for closing remarks. Please go ahead..

Thank you so much to all of you for your support and for joining us on today’s call. We look forward to updating you further on all of these initiatives and our results when we report second quarter in August. Thank you so much..

Thank you. This concludes today’s conference. You may now disconnect your lines. Thank you for your participation..