Advantage Solutions Inc.

Good afternoon and welcome to Advantage Solutions' third quarter 2022 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 Lassa Glasson, Investor Relations for Advantage. Thank you. You may begin.

Thank you, Operator. Thank you, everyone, for joining us on Advantage Solutions' 2022 third 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 forelooking statements within the meaning of federal securities laws. These statements are based on management's current expectations 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 four liquid statements. Actual outcomes and results could differ materially due to 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 Securities and Exchange Commission. All four liquid statements are expressly qualified in their entirety by such factors. The company does not undertake any duty to update or revise any forelooking statements, whether as a result of new information, future events, or otherwise, except as required by law. Please note that 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 is also available on the website. And now I'd like to turn the call over to Advantage's CEO, Jill Griffin.

Thanks, Lhasa. Good afternoon, everyone. Thank you for joining us today on our 2022 third quarter results conference calls. I'd like to begin by providing commentary on some of the trends that we are seeing across our businesses, along with key highlights from the third quarter. Brian will then provide additional details on our third quarter financial performance, as well as an update on our full year outlook. Before we begin, I'd 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 service our clients. amidst an incredibly difficult operating backdrop, I am exceptionally proud of our team's achievements and their efforts are commendable. Our associates are providing essential, high-return services, helping consumer packaged goods companies and retailers navigate the current environment better, cheaper, and faster. Our talented team is a true source of competitive advantage for our company. With that, let's start with a few key observations from this past quarter regarding the exceptionally challenging business environment that is being driven by the limited availability of labor, continued wage inflation, and other macroeconomic conditions. Starting first with labor availability, it remains very difficult for large employers like Advantage to find and retain talent to meet the demand for our must-have services. insufficient labor availability has impacted both our sampling and demonstration business, as well as our retail merchandising business. While our previous forecast anticipated the labor market improving in the second half of 2022, trends have actually gotten worse as the year progressed in both the absolute and relative to our expectations. To this point, key indicators, including labor participation rates, remain at historically low levels. In addition, inflation related to cost to serve has continued to remain elevated throughout the second half of 2022. Whereas we had anticipated some stabilization as the year progressed, we continue to see ongoing growth, most notably in wages. Last but not least, Broader macroeconomic uncertainty exacerbated by recent Fed monetary policy is changing how consumers, retailers, and CPG brands spend. Business opportunities with new and existing customers have not materialized as anticipated and in some cases have been pushed out to future periods. While the supply chain is in a better position than it was a year ago, out of stocks remain at historically high levels and retailers continue to face difficulties. These challenges notwithstanding, once again, Advantage delivered solid year-on-year revenue growth of approximately 13%, largely driven by the recovery of our businesses most impacted by the pandemic. Similar to recent prior quarters, the growth was led mainly by the continued recovery in our in-store sampling and demonstration business. In-store sampling and demonstration events were up 41% year on year. As measured against pre-pandemic levels, third quarter in-store sampling and demonstration events were at 65% of third quarter 2019 levels, only a slight improvement from 64% last quarter. highlighting the slower than anticipated recovery in our marketing segment. In addition, we saw further growth in retail merchandising services, which was partially offset by declines in third party selling and retailing services. Overall, the build back of our COVID impacted businesses has been steady, but it has progressed at a much slower pace than we had originally anticipated as we were heading into 2022 due to the worsening labor and macroeconomic environment. As expected and consistent with last quarter, adjusted EBITDA margins declined. For the third quarter, margins were down by approximately 315 basis points due to a shift in revenue mix and headwinds from cost pressures. This includes spending on wages and benefits, recruiting and retention in a challenging labor market to stand up significant numbers of new associates to meet increasing demand for our services. To help offset the impact of higher wages, we are continuously implementing pricing increases. As we have highlighted in previous disclosures, we continue to see a timing lag between these discussions and when price increases are implemented. We would expect this to persist until the employment market stabilizes. Importantly, despite these ongoing pricing actions, clients have generally been understanding of the increases. Importantly, despite the overall macro challenges, through the first nine months of 2022, we have achieved nearly 15% year-over-year revenue growth and a sequential improvement in adjusted EBITDA during each sequential quarter. Looking ahead, however, the return to a more normalized pre-pandemic operating environment is proving to take much longer than we anticipated. During the course of the year, as I noted earlier, we have seen no improvement in the labor market. Fundamentals and headwinds from wage inflation continue to exacerbate. As a result, we are continuing to invest to stay competitive on wages as we maintain efforts to stand up our workforce in our in-store sampling and demonstration activities and other business areas across the enterprise. Importantly, we are seeing incremental benefits from our new recruiting software that has materially improved speed to hire despite the challenging market backdrop. This software is enabling our businesses to more efficiently acquire talent, and the early results are positive, including a reduction in time to hire in the third quarter compared to a year ago. However, despite these proactive efforts, we are simply not able to hire and retain enough associates to service the continued strong demand from our customers. As a result, the rebound we were expecting in the second half of 2022 will be more muted than we had anticipated and will ultimately extend beyond this year. That said, our services remain need-to-have rather than nice-to-have, and we continue to have cost-advantaged scales in delivering our offerings as evidenced by the continued growth in retail revenue. All taken together, we are reducing our full-year adjusted EBITDA guidance to a range of $430 to $440 million. Brian will provide more details on the drivers of that decrease shortly. Concurrently, given the macro labor and inflationary headwinds and the longer path to a more normalized operating environment, we are making a pivot with respect to our capital allocation priorities. In the current environment, we intend to be much more focused on deleveraging our balance sheet with less emphasis on M&A in the near term until macroeconomic conditions exhibit more definitive signs of normalization. With that, I'll turn it over to Brian for additional details on our third quarter performance and outlook.