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spk03: Good afternoon and welcome to Advantage Solutions first quarter 2022 earnings conference call. Today's call is being recorded and we have allocated one hour for prepared remarks and questions and answers. At this time, I'd like to turn the conference over to Larsa Blassen from Investor Relations for Advantage. Thank you. You may begin.
spk00: 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'll 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 forelooking statements are expressly qualified in their entirety by such factors. The company does not undertake any duty to update any forelooking statement 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.
spk06: Thanks, Lhasa. Good afternoon, everyone. Thank you for joining us to discuss our first quarter results and our first earnings call since becoming CEO on April 1st. I am honored and privileged to serve as Advantage Solutions CEO. We have many exciting opportunities in front of us, and I look forward to partnering with the Board of Directors, our senior leadership team, and our associates around the globe to continue driving profitable growth across the enterprise. Similar to previous earnings calls, I'd like to start by providing a high-level overview of our business. Advantage Solutions is a leading provider of outsourced sales and marketing solutions to consumer goods companies and retailers. Our data and technology-driven services, which include headquarter sales, retail merchandising, in-store and online sampling, digital commerce, omnichannel marketing, retail media, and others help brands and retailers of all sizes get products into the hands of consumers anytime, anywhere, in any channel in which they choose to shop. At the most fundamental level, we are a trusted partner and problem solver for our clients. We help our clients sell more while spending less. We operate efficiently, providing fuel for growth. We reinvest into our business at attractive returns, both organically and through tuck-in acquisitions. And as we deliver value, our platform compounds over time. Our success hinges on our talent, and at Advantage, we are talent first. Our successful track record in managing a flexible, large workforce remains an enduring competitive advantage for the company. I would like to take a moment to thank the Advantage Associates for their continued dedication and the work they do day in and day out to serve our clients. They are providing essential, high-return services, helping consumer goods companies and retailers navigate the current environment better, cheaper, and faster. On today's call, I'd like to begin by sharing our first quarter highlights and then move to an update on the 2022 investment activities we outlined on our call last quarter. First, a few key messages from this past quarter. Importantly, Q1 results were largely consistent with our expectations. On the top line, we delivered strong year-on-year revenue growth of approximately 16%. As the recovery from the pandemic progresses, we continue to see a meaningful improvement in our businesses most impacted by COVID, with in-store sampling events up 62% year-on-year. In line with recent prior quarters, our international business continued to rebound as operating conditions improved across Europe as restrictions eased and businesses reopened. I am very pleased with our year-to-date M&A activities Here, we remain focused on acquiring tuck-in assets, particularly in areas that help brands and retailers navigate an increasingly omnichannel world. However, as expected, adjusted EBITDA margins declined due to a shift in revenue mix, headwinds from wage increases on our ongoing investment activities. This includes investing in new higher growth and margin accretive offerings, together with infrastructure to improve efficiencies. We are also spending in wages, recruiting, and retention to stand up significant numbers of new associates to meet client demand for our must-have services. With that as a backdrop, I'd like to drill down a bit deeper on our financial performance in the first quarter. Revenues continue to grow solidly in the quarter, up approximately 16% year on year, driven largely by the continued recovery in our in-store sampling and demonstration services, along with further growth in retail merchandising services and international businesses. As anticipated, our first quarter adjusted EBITDA declined 13% from the prior year period, reflecting the following, 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 food service 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've 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're stepping up spending in wages, recruiting, and retention. Taken together, we expect these efforts will strengthen our franchise and widen our operating moat 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 capability combined with our existing physical reach and presence is unique, helping our clients and customers gain insight 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 stacks that power, enable, and optimize location-based retail execution work. We are investing in digital tools and software. We are confident we'll add measurable value and unlock synergies by improving existing staff utilization rates 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 headwinds. Supply chain challenges continue to persist and out-of-stocks 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 delivering 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 to 510 million. With that, I'll turn it over to Brian.
spk01: Thank you, Jill, and good afternoon, everyone. It's 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 90% 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 EBIT results, the year-over-year decline was predominantly due to higher labor costs to increase headcounts in support of our return to full-scale operation in our in-store 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 at 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 3.9 times. 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 four years. At the end of Q1, our total debt outstanding was approximately $2.1 billion. A summary of our debt and equity capitalization can be found on slide eight 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 Phil mentioned, we are reiterating our fiscal 2022 adjusted EBITDA guidance in the range of $490 to $510 million. Let me provide some additional detail on the key considerations underlying our 2022 adjusted EBITDA expectation and the 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, quote, 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 are aligned with our future strategic growth avenues, fill service and our technology gaps, or strengthen our existing capabilities. Third, on free cash flow, we expect to drive approximately one 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, demonstration in international businesses, and continued strong contribution from our digital marketing services. With that, I'll turn it back over to Jill.
spk06: Thank you, Brian. We are operating in a dynamic environment, but I am confident that the macro uncertainty that exists will ultimately play to advantageous strengths as a company. We have a tremendous roster of longstanding 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 investment 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.
spk04: Thank you, ma'am.
spk03: Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star and then one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and then 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. The first question we have is from Toni Kaplan from Morgan Stanley. Toni Kaplan Thank you.
spk05: I wanted to ask about inflation, if you've seen any of the inflationary pressures abating on either the labor or the supply chain front.
spk04: Sure, I can take that.
spk06: Go ahead. Yeah, go ahead. That's fine. Oh, go ahead.
spk01: No worries. So, you know, I'd 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're, I guess, more evident in some of the higher-density markets, but we are still seeing those challenges.
spk04: Yep, that's great.
spk06: We are definitely still amidst the inflation, and we're – We're battling it on all fronts and we're beginning to see some of the impact also on consumer reaction to the pricing.
spk05: Yep. Understood. Just on hiring, have you been able to hire as much as you'd like? I know we've talked in prior quarters about the tight labor market, maybe impacting that and impacting, uh, potentially having a constraint on demand from the hiring side. So just wanted to update there. Yep.
spk06: We still are experiencing more demand than we have supply, so that is an ongoing pressure. We are continuing to invest in our tools and in our recruiting group, as we talked about, in our speaking points about speeding our, 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.
spk05: 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 wanted to understand the drivers of that a little bit more fully. Thank you.
spk04: Go ahead.
spk06: Go ahead, Brian. Brian and I will get this down. Okay, sorry.
spk01: 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'll probably see more pressure on margins in the balance of year than And then that'll get us to kind of a stabilized baseline that we can grow off of in 2023 and kind of going forward.
spk04: Very helpful. Thank you. Thank you.
spk03: Ladies and gentlemen, just a reminder, if you would like to ask a question, please press star and then one now. The next question we have is from Faisal Ali from Deutsche Bank. Please go ahead.
spk02: Yes, hi, thank you. So also wanted to touch on margins. You know, you, 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 Your overall margin decline, 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 something sort of health insurance related. So just curious if there's a way to break down that margin decline at all.
spk01: Sure. Well, I mean, there's a lot into that question. So what I can do is just talk generally about it. So let's first talk what you talked about as far as innovation, renovation, and talent. So a lot of the investment 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 into 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 a leading technology. We've been working on it for the past nine months. and it's going to be fully deployed over the next couple of weeks, which will help us on speed to 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 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 maintain that investment in the upcoming, for sure, second quarter, but likely in the second, third quarter until we get back to a normalized level of associates. You are seeing, we talked about the food service loss that we had. That is impacting us in Q1. It was a mid-year loss last year, so it'll impact us in Q1 and Q2, but we'll lapse it Q3 going forward. And then lastly, I think that the big piece is, remember last year we had, 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.
spk02: Okay, thank you for all of that. And then, Jill, I'm curious, as you were talking about innovation, you talked about investments to scale adjacent complementary services. you know, 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, you know, this would drive growth, revenue, sort of what types of products are you really talking about? Maybe just give us some examples.
spk06: Sure, thank you. So we are, 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 you know perfecting what we do in terms of helping with allocation management and aligning purchase orders to production schedules and tracking warehouse out of stocks 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 be met in what order so you'll see a lot of that coming from us you'll also see 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're helping them to be able to make those offerings very powerful and effective for our brands. And we're 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.
spk02: Okay, that's super helpful. And I just quickly, I know 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, you know, when these are sort of I don't know if commercialized is the right word, but when they're commercialized and implemented?
spk06: 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 one. We're continuing to put all of the innovations 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 can go through a very rigorous process to make sure that they meet our return requirements.
spk02: Understood. Thank you so much.
spk04: Absolutely. Thank you. Thank you.
spk03: 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.
spk06: 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.
spk04: Thank you. This concludes today's conference. You may now disconnect your lines. Thank you for your participation.
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