Good morning and welcome to Advantage Solutions Third Quarter 2023 Earnings 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 Sean Choksi, Investor Relations and Strategy for Advantage. Thank you. You may begin..

Thank you, operator, and thank you, everyone, for joining us on Advantage Solutions' third quarter 2023 earnings conference call. On the call with me today are Dave Peacock, Chief Executive Officer; and Chris Growe, Chief Financial 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 the federal securities laws. These statements are based on management's current expectations and involve assumptions, risks and uncertainties 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 company's annual report on Form 10-K filed with the SEC. All forward-looking statements are expressly qualified in their entirety by such factors.

The company does not undertake any duty to update or revise 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. This call is being webcast, and a recording of this call will also be available on the company's website. And now I'd like to turn the call over to Advantage’s CEO, Dave Peacock..

branded services; retail services; and experiential services. Within branded services, the economic buyer is the consumer packaged goods manufacturer or an agent representing the manufacturer.

Branded services includes our headquarter sales services where our teams execute as a strategic extension of CPG teams by selling their brands into retailers and executing their merchandising plans in thousands of retailers across the country.

In addition, our brand-driven marketing solutions and our e-commerce marketing teams will report into this segment, among other capabilities. Retail services brings together capabilities and offerings where the economic buyer is the retailer.

This includes, but is not limited to our single-source merchandising division called SAS and Daymon, which develops, builds and manages private brand strategies on behalf of retailer customers.

Lastly, our market-leading demonstration and sampling businesses will form the core of our experiential services segment which serves both retail customers and CPG brand manufacturers in-store and at home.

Our simplified and interconnected structure across branded retail and experiential services will enable more seamless execution, increased precision and unlock value for our stakeholders. To further accelerate our growth journey, we will enhance our processes and platforms. We're proud of our reach, agility and reputation for service.

However, we have taken disparate approaches to running our individual divisions, which has also been compounded by underinvestment and overcomplexity in technology and systems. We have an opportunity to work smarter and faster. We intend to support our three business segments by centralizing all of our shared service functions.

We will enhance our processes by building more cohesive ways of working and leading through best practices across finance, HR, communications, legal and IT.

These changes will not only allow us to drive efficiencies and operational excellence, our centralized shared services model will also enable our branded retail and experiential services segments to focus more directly on driving business growth by solving problems that our clients and customers face.

To me, technology is an extremely critical enabler to any strategy, and we have an opportunity to move from siloed duplicative data platforms to a more integrated cloud-based infrastructure with consistent reporting, analytics and enhanced artificial intelligence capabilities.

Our plans include investing in tech modernization to upgrade our capabilities and speed. These enhancements will create a stronger and more stable beta environment, allowing us to manage complex data sets and drive actionable insights even faster.

We have a strong technology foundation to build upon, but we need to upgrade some legacy systems to enable the heightened expectations that we have for our company. None of the structure or process enhancement can work without great people.

We are fortunate to have a great team, however, we can better enable this team to realize their personal and professional dreams through improved talent management and better training. We will invest in top tier systems to help us both provide more opportunities for our teammates and deploy them more efficiently.

We will also upskill key roles and add capabilities where needed within the organization. While systems and processes are important, people stay with a company and commit themselves based on the experience they have with that company. The experience many of our employees have at Advantage is mixed and can improve.

This starts with a culture rooted in values that are modeled throughout every level of the organization and an inclusive workplace where every teammate feels they're valued and belong. These principles will underpin our DE&I efforts and service the energy behind our overall talent strategy.

In addition to simplifying our structure, enhancing our processes and platforms, we will strengthen our financial discipline. Our business has historically maintained an overweighted focus on topline growth at times at the expense of profitability and cash flow. This is changing.

We will look to achieve profitable growth and capture appropriate value for our services while maintaining a healthy balance sheet. Furthermore, we are behind on updating our infrastructure, resulting in several very manual processes.

We're investing significantly in making the right changes between gender efficiencies, speed and accuracy in reporting. The changes we're implementing will improve how we forecast convert revenue into cash and bring enhanced rigor to our capital spending.

While it will take time to fully adopt new systems and enhanced processes, I am confident in the team's ability to achieve that goal over the coming months and years.

We also plan to introduce new financial and operational performance metrics designed to track progress against our strategic priorities while driving transparency and accountability for delivering results.

We expect to begin reporting on these metrics and segmented results under the new structure on a quarterly basis beginning with our Q1 2024 results and plan to establish long-term targets to orient investors around their future goals.

Our objective is to position Advantage as an employer of choice and a partner of choice with the right plans, the right people and the right capabilities to drive sustained profitable growth and position us as an investment of choice.

Our teammates will deliver through shared values and a sense of purpose to connect people with the products and experiences that enrich their lives. We're fortunate to be an organization that supports a sticky, fragmented customer base anchored in the long-term secular growth industries in CPG and retail.

And I'm confident that the moves we're making in the coming year will set us up for the next phase of growth. By simplifying our structure, enhancing our processes and platforms and strengthening our financial discipline, we are poised to deliver new value for our teammates, clients, customers and investors.

With that, I'll turn it over to Chris for more on our financial performance and outlook..

Thank you, Dave. While our current business has significant room for improvement as it relates to simplification and process optimization, we believe that our long-term profitability will be driven by our ability to create value for both retailers and brands through our portfolio of differentiated services, which remains unwaveringly strong.

I'm excited about our transformation work underway to drive that value. On a consolidated basis, third quarter revenues grew 4.3% year-over-year to a total of $1.1 billion. Excluding unfavorable foreign exchange rates and acquisitions and divestitures, revenue increased by 5.8%.

Third quarter adjusted EBITDA was down 4.3% year-over-year to $113.1 million. Sales segment revenue decreased 2.7% year-over-year to $629 million, down only 0.7% excluding changes in foreign exchange rates and acquisitions and divestitures. Sales segment adjusted EBITDA declined 12.1% year-over-year to $67 million.

The revenue decline was driven by our completed divestiture and intentional client exit in late 2022, partially offset by success in our pricing initiatives and growth in our European joint venture.

The decline in adjusted EBITDA in the sales segment is largely a result of inflationary pressures in line with expectations, including wage and incentive compensation and increased technology spend. Marketing segment revenues of $468 million were up 15.5% year-over-year and up 16.3%, excluding foreign exchange and acquisitions and divestitures.

This growth was primarily driven by the continued return of our in-store sampling and demonstration services to higher event counts and pricing realization across the business.

Marketing segment adjusted EBITDA of $46 million was up 9.8% year-over-year, driven largely by the aforementioned return of sampling demonstration events and pricing realization, partially offset by inflationary pressures and increased technology spend. In the aggregate, our total adjusted EBITDA margin came in at 10.3%. Moving to our balance sheet.

We continue to prioritize opportunities to delever our balance sheet and reduce our leverage ratio. For the third quarter, our net debt to adjusted EBITDA ratio finished at approximately 4.2x relative to the 4.5x at the beginning of 2023. We also continue to emphasize working capital management.

For the third quarter, we converted approximately 94% of adjusted EBITDA to adjusted unlevered free cash flow. In line with the prior quarter, our debt profile remains healthy, and we have no meaningful maturities in the next four years.

During the quarter, we voluntarily repurchased approximately $57 million of floating rate debt at an attractive discount, and we'll continue to monitor opportunities to deploy capital that deleverages the balance sheet while generating a favorable rate of return. At the end of the third quarter, our total funded debt outstanding was below $2 billion.

As of September 30, approximately 88% of our debt is hedged or at a fixed interest rate. A summary of our debt and equity capitalization can be found in the supplementary slides for the third quarter results posted on the Investors section of our website.

Additionally, we're happy to comment on an activity subsequent to quarter end that marks progress in our efforts to simplify our business. We completed a small divestiture of a niche retail analytics platform, Atlas Technology Group to Crisp in Q4.

The transaction was accretive for us on a trading value basis and we're excited to work with Crisp, a leader in collaborative commerce for CPGs and retailers going forward.

Crisp is a leading cloud-based data sharing platform that will offer Advantage's clients with enhanced supply chain and product availability information, enabling them to make faster decisions, optimize inventory and marketing and drive sales and loyalty.

Turning to our outlook for the full-year 2023, we remain pleased by our deliberate steps to improve our financial discipline, combined with steady improvement in the economic backdrop. As such, we're more confident in delivering adjusted EBITDA around the upper end of the guidance range of $400 million to $420 million.

Our guidance contemplates the continued realization of pricing, growth in in-store sampling and demonstration events as well as the completed divestitures and accelerated investments behind technology and talent.

We remain diligent with regards to revenue management, our cost structure and our cash generation as we continue to strengthen our financial discipline to help fuel growth. Thank you for your time. I'll now turn it back over to Dave..

Thanks, Chris. I am confident in the leaders of our company, both new and legacy. We continue to work towards enhancing our people-first culture, optimizing our operations and serving brands and retailers. The people of Advantage have done tremendous work growing the company to where it is today.

We have more than 70,000 teammates who wake up every day with a focus on serving the brands we represent and retailers where they work while enriching lives in our communities along the way.

It's our job to enable their efforts and help them realize their personal and professional goals, a key step to becoming the employer of choice we endeavor to be. While we are always proud to celebrate our strengths and successes, we remain unsatisfied.

That healthy tension is creating the energy and momentum we need to challenge the status quo and create a better future for Advantage Solutions. We look forward to providing you with more details as our ongoing transformation journey progresses at Advantage. We will now take your questions.

Operator?.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Faiza Alwy with Deutsche Bank. Please go ahead..

Yes. Hi. Good morning. Thank you. So it looks like there's a lot of changes that you're contemplating at the company. Just two questions related to that. One is, are you able to size the potential divestitures that you are considering? And give us a bit more color around the type of businesses that you think don't belong with the company in the future.

And then secondly, you've mentioned underinvestment in technology historically, how are you thinking about sort of the magnitude and the pacing of that technology investment over time?.

Thanks, Faiza. Appreciate the question. On divestitures, we're not really ready to disclose a lot of detail. We hopefully will know more by the fourth quarter. We're obviously going through review some of the operations.

And then obviously, for process sensitivities as well as personnel sensitivities, we want to be kind of smart about how and when we provide more guidance on that. As it relates to IT investment, I think we'll see increased spend over the next, call it, two years and even starting this year a little bit.

It's actually showing up a little bit in our numbers. And it is a combination of OpEx and CapEx. I will say that the CapEx spend that we're looking at is not out of a range bound that we've spent before.

So it's not a significant increase, but we are going to see kind of a greater portion of our CapEx, especially next year, being devoted to technology spend. And then on the OpEx side, it will be a reasonable increase in order to accelerate, frankly, some of the system transformation we're looking to do..

Understood. That's very helpful. And then maybe you've talked a lot about how you've gathered feedback from a lot of different types of stakeholders, including your branded and retail partners.

I'm curious if you can give us some examples or bring to life sort of some of what you heard and what led you to make some of these – take some of these actions at this point..

Yes, absolutely. And note that we're not looking a switch and everything is changing at once. This is actually a lot of work that's in progress. So as I would call it, we're bringing our organization along.

But some of it was in the complexity of our current segments and trying to understand where different businesses kind of resided almost within sales and marketing and trying to really start from the economic buyer, if you will.

And I mentioned in our prepared comments that if you think about our business, we have a range of services for CPG firms, a range of services for retailers and then this leading position in experiential space that really touches both closely. So we felt it would be better to organize that way.

Also on the shared service side, this is simply a difference in strategy. The business had been more of a holding company of somewhat disparate businesses. And my personal background is coming from businesses where you've got a single HR group, a single finance group, a single IT group, et cetera. And I believe you get efficiencies from that.

You can have kind of skill you need and talent in those parts of the business, and you can ensure that you just have efficiency in one way of working versus different HR policies and different companies, et cetera.

So it makes us a little bit easier to work for, if you will, and I think enhances the effectiveness of the work that comes from the shared service group. So that is the why. The feedback from different constituencies was effectively, we needed to be easier to understand.

And as we move towards the fourth quarter and into the first quarter, we'll be able to go in more detail as to what we're doing. And I think even you will find this a little easier to understand in sort of how we – how our business works and frankly, why it's such a great business..

Great. Thank you.

Just one quick one, and apologies if I missed this in the prepared remarks, but have you sized the divestitures that happened in 4Q?.

We have not given that information, Faiza, in terms of sizing it. It's a relatively small business, but we did call it value accretive, right? So we've got cash in the door. That will be at a level that's enough to be better than our multiple and better – and allow us to utilize that capital. So....

Perfect. Thank you..

Our next question comes from Jason English with Goldman Sachs. Please go ahead..

Hey. Good morning, folks. Thanks for slot me in. A lot to chew on today. So let's start with a few questions around the organization. Obviously, your business is very much a relationship business.

What is the risk, if any, of disruption for any of the key relationship managers? Are they still going to be connected effectively to the same clients?.

Yes, Jason. This is Dave. They will be. And if anything, some of the feedback from clients has been positive as we've pressure tested the approach we're taking..

And why is it positive? Like why is it so obvious to clients that you have this change? It seems like if I'm a CPG client, maybe the change isn't so obvious to me that it sort of – it feels like business as usual..

I think it's business as usual to some degree, which speaks to your question around – concerns around relationship managers. By being business as usual and being a relational business, we are not disrupting those relationships. So I think that answers your first question.

But I think it allows us to structure in a way to have the right talent and kind of weight, if you will, in leadership devoted to each of our client or customer segments..

Okay, okay. And you mentioned shared services. I think many of us have always thought the real value of the business model is the shared labor force, the syndication of the shared labor force, the ability to leverage those economies of scale.

That shared labor force has historically served both retailers and CPG brands, whether we're talking resets on behalf of retail or surge marketing, et cetera, in store and CPG's behalf.

Where does that fit here in a structure where you've now broken out retail services separate from CPG services?.

Well, I think, one, the shared labor force actually can be reinforced by what we're doing. By having one single HR unit and taking one collective approach to talent acquisition to leverage ultimately, a similar technology across the platform, it's only going to frankly help on the shared labor side, I think.

And so yes, this, if anything, will reinforce that part of our business..

So that labor force is one year shared services that's effectively going to be reporting up into two groups, the branded services group and the retail services group.

Is that right?.

No, I think that you have to look at it as you've got different commercial businesses, but you've got one way of working for the most part. So if you think of things like performance management, you think of things like onboarding, you think of things like from hire to in position and how do you reduce that timeframe.

When you centralize HR processes and systems, it helps all those situations. And I'm going to really reinforce this notion of kind of speed from hire into position. That's one that we've seen just industry-wide. I mean anyone but large workforce can share that, that's a key enabler to talent acquisition and retention.

And that's going to be better enabled when we consolidate our systems and our approach to talent acquisition..

Okay, okay. Hopefully, I can get a little more clarity on how this is all structured as it takes shape and you start to disclose more because I'm admittedly still a little confused. The – associated with this, you are centralizing functions.

Centralization of functions usually unlocks a lot of savings, but at the same time, your saying, "Geez, our systems are antiquated, our processes are a little out of date.

We've got to spend some money to go after those." Are those net neutralized? Or should we expect this to be a net cost savings program next year?.

It's a good question. I think to your point, it's kind of both and. So you're going to see an increase in investment next year. I think over time, you're going to see the savings and the efficiencies.

But we've got some work to do as it relates to both our systems and our talent practices to ensure that we've got the greatest retention levels possible with our workforce and that we're deploying them as efficiently as possible..

Okay. And I'm way over my normal question limit, but I'm greedy, I guess, so I'm going to squeeze in one more. I don't want to lose track of what's been the core issue here for the last couple of years, and that's been pricing power and your ability to mitigate escalating labor inflation cost with price.

It sounds like you're still not caught up, like it's not even running at a treadmill and breaking even now, you're still leaking.

So is there – I mean, is this a recognition that you're not going to get there and you have to address the delta by attacking cost? Or is there still reason to believe that you can at least get back to a point where pricing is able to keep pace with inflation, recognizing that recovery of what's gone is probably gone? And if there is the opportunity to get back to where you're at least keeping pace, what's got to change to get there? And how long is it going to take?.

Yes, it's a good question. I think as we reported, if you will, we're narrowing that gap. We're improving our pricing capabilities each quarter. We're bringing in some talent as well, who really understands revenue management at its core, which will, I think, help us.

You're obviously seeing labor and wage inflation abate a bit, although still higher than traditional. You have to believe cyclically that will improve over time.

But your point about cost, look, our job is to make sure that we realize the greatest value for the services we offer, that we manage our mix and that we also are as efficient as possible in what we do. And to your point, I think there's things we can do on the cost side that can help kind of mitigate some of the inflationary pressure we've seen..

Okay. Helpful. Thank you. I will pass it on..

There are no further questions at this time. I would like to turn the floor back over to Dave Peacock for closing comments. Please go ahead..

Thank you so much. Look, we feel very confident in the trajectory of the business. We feel we have a right to win with essential services, talented teammates, deep relationships and with upside to grow.

And we're also very committed on continuing to generate cash in this business and be strategic about how we manage our balance sheet and also enhance value for the shareholders. So there's more to come. It's an exciting time at Advantage Solutions, and we thank you for your time..

This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation, and have a great day..