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Operator
Ladies and gentlemen, good morning and welcome to the Advantage Solutions second 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 Chokshi, Investor Relations and Strategy for Advantage. Thank you and you may begin, sir.
Sean Chokshi
Thank you, Operator, and thank you, everyone, for joining us on Advantage Solutions' second quarter 2023 earnings conference call. On the call with me today are Dave Peacock, Chief Executive Officer, and Chris Grohe, 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 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. 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. Thanks, Sean.
Dave Peacock
Good morning, everyone, and thank you for joining us. I want to start by thanking everyone on the Advantage team for their hard work this past quarter. I've continued to spend time in the market connecting with many of our team members and remain impressed by their care for one another, commitment to service excellence, and passion for strengthening relationships and results. It's evident in the positive feedback I've constantly heard from our brand and retail partners and our solid performance for the quarter. I'm pleased to report another consecutive quarter of improving company performance. Together, we delivered $1 billion in revenue, an increase of 5.7% year over year, and adjusted EBITDA of $104 million. Furthermore, we continue to make strides on cash flow performance, which Chris will provide more color on in his remarks. Our executive leadership team continues to fortify the strategy we're building together to maximize the company's full potential and position the business for long-term profitable growth. As part of this strategy, we are investing both time and money behind technology modernization and best-in-class talent management initiatives, which include building a more diverse leadership team reflective of our broader workforce and creating a more inclusive organization for all teammates. The intent is to strengthen our culture, simplify our operations, improve our financial discipline, and enhance our processes as a unified company to deliver more value to our stakeholders. Advantage holds a unique position at the intersection of brands and retailers with extensive reach and breadth of services spanning the entire purchase path. We are a market leader in terms of operational scale with more than 4,000 clients across 17 trade channels and most of the largest U.S. grocery and several big box retailers partnering with Advantage to serve as their exclusive in-store experiential partner. It's a competitive position that gives us critical insights and a strategic perspective on today's shoppers. Being at this vantage point, we arguably know more about shopper expectations and demands than any company in the industry. We regularly leverage this knowledge and expertise to both inform and help achieve our clients' goals, including how best to play and where to pivot to optimize performance. In doing so, we also make consumers' lives easier. For example, we conduct a quarterly survey among dozens of brand manufacturers and retailers to gain robust data on marketplace trends, emerging dynamics, and the macro operating outlook over the next six to 12 months. These surveys are packed with valuable, unvarnished insights that are unmatched in the industry. Advantage's latest Outlook report, which we'll release publicly in the weeks ahead, reveals several trends that continue to drive demand for Advantage's services while complementing our deep expertise, relentless execution, and trusted relationships in the industry. For starters, in-store labor for retailers is critical. Retailers continue to face labor shortage challenges. In fact, lack of in-store labor and planogram oversight are the top two factors affecting on-shelf availability. Moving forward, retailers plan to increase self-checkup and reduce in-store labor, with many saying they will use third-party relationships to combat the labor issue. Additionally, product innovation is a top priority for both manufacturers and retailers. Nearly every CPG manufacturer in our study says they are targeting innovation at mainstream or premium-priced products with a heavy focus on health and wellness. And more than half indicate they are focusing on at- and in-home indulgences, indicating a bullish outlook on consumer appetite for premium items. Manufacturers' current and future focus on innovation is well-timed since a majority of retailers expect to increase their acceptance of innovation and will accept new item cut-ins outside of a reset window. We expect more manufacturers to consider retail exclusives with early innovation launches. We will share the full slate of industry-leading insights when we release the next Advantage Outlook later this month. During the second quarter, we continued to realize revenue gains in cases where we believed the value of our services were not yet fully realized, as well as areas where incremental labor costs inflation necessitated increases in pricing. Across our businesses, we are experiencing labor costs inflation at mid-single digits consistent with the market and moderating relative to prior year. While we continue to see the benefit from price increases, it's important to remember that these initiatives take time. We expect to see these changes as the year progresses and fully anticipate better revenue management reflected in margin improvements. We also are focused on driving efficiency in our business, recognizing the need to deliver services in a way that is more precise and generates a greater yield on the time and cost expended. Additionally, we are sharpening our focus on more effective cash generation. In the second quarter, our executive leadership team has continued to drive change, and we're making sequential progress, as our results suggest. On a year-to-date basis, Advantage generated approximately $188 million of adjusted unlevered free cash flow, representing a significant increase versus the prior year, driven by solid improvement in working capital. We had approximately 1,000 net new hires in the quarter, which has supported continued improvements in our sampling and demonstration business. Event counts are up 24% year over year, reaching approximately 78% of comparable 2019 levels, and we expect to further close the gap over the next few quarters. Relatedly, we reduced turnover across our enterprise by an additional 10% quarter over quarter, with significant improvements in our part-time retention rates. We will continue to refine our talent practices to strengthen retention in the future, which should allow us to provide better service to our brand and retail partners, enhance volumes, and limit talent acquisition and training costs. Given our sheer breadth and scale as exemplified by our 75,000-plus associates and 100 million hours of annual service, we continue to regularly identify operational enhancements and levers by which we can simplify our service offerings while driving performance. Our team is energized for this challenge and is invigorated by the opportunities that we see for this business. At the end of the day, we're happy to be an organization that supports a sticky, fragmented customer base and is anchored in two long-term secular growth industries in CPG and retail. With that, I'll turn it over to Chris for more on our financial performance and outlook.
Chris
Thank you, Dave. I continue to grow increasingly confident in our ability to strategically position this business for long-term success and deliver value to all stakeholders. Now let's get into the performance for the quarter. On a consolidated basis, second quarter revenue grew 5.7% year over year to total $1 billion. Excluding unfavorable foreign exchange rates and acquisitions and divestitures, revenues increased by 7.7%. Second quarter, adjusted EBITDA declined 3.8% year over year to $104 million. Sales segment revenues of $600 million decreased 0.7% year over year, but were up 1.8%, excluding foreign exchange and acquisitions and investors. Sales segment adjusted EBITDA of $64 million declined 11.3% year over year. The revenue decline was driven by our completed divestiture and intentional client exit, partially upset by growth in retail and merchandising services, 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 mixed shift toward lower margin business services, as we discussed on prior earnings calls, inflationary pressures, and the completed divestiture. Marketing segment revenues of $437 million were up 16% year-over-year and up 17.1%, 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, as well as pricing realization in this business, with digital services starting to show signs of stabilization. marketing segment adjusted EBITDA of $41 million was up 10.8% year-over-year, driven largely by the aforementioned return of sampling and demonstration events and pricing realization. In the aggregate, the adjusted EBITDA margin came in at 10%, down 100 basis points year-over-year, marking an improvement in trajectory from Q1's approximately 150 basis point year-over-year compression. Let's move on to discuss some balance sheet items. Our net debt to adjusted EBITDA finished the second quarter at approximately 4.3 times. We will continue to explore opportunities to delever our balance sheet and reduce our leverage ratio over time. For the second quarter, we achieved adjusted unlevered free cash flow conversion of approximately 114% of adjusted EBITDA, reflecting continued emphasis on optimizing working capital. In line with the prior quarter, our debt profile remains healthy, and we have no meaningful maturities in the next four years. At the end of the second quarter, our total funded debt outstanding continued to be approximately $2 billion. We've doubled down on our initiatives to stabilize our balance sheet and protect against future interest rate risk. During the quarter, we voluntarily repurchased $52 million of floating rate debt at an attractive discount and will continue to monitor opportunities to deploy capital that deleverages the balance sheet while generating a favorable rate of return. As of June, approximately 85% of our debt is hedged or at a fixed interest rate. A summary of our debt and equity capitalization can be found on slide five in the supplementary slides for the second quarter results posted on the investor section of our website. Turning to our outlook, for the full year 2023, we are reconfirming adjusted EBITDA in the range of $400 million to $420 million. Our guidance contemplates the continued realization of pricing, growth of in-store sampling and demonstration events, as well as the divestiture that closed early in second quarter and the 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 to Dave.
Dave Peacock
Thanks, Chris. We're pleased with the progress, but continue to acknowledge that there remains a lot of work to be done. I am confident in the leaders of our company, both new and legacy, who continue to work towards enhancing our people-powered culture, optimizing our operations, and serving our brand and retail partners. The people of Advantage have done tremendous work growing the company to what it is today. We have more than 75,000 associates who wake up every day with a focus on serving on behalf of the brands we represent and for the retailers where they work. It's our job to enable their efforts and to help them also realize their personal goals so that we become the employer of choice for them and others. Our collective success requires us to have a workforce that reflects the communities where we live and work. We are committed to improving representation and belonging through our diversity and inclusion efforts as we also bring more fresh perspectives to how we deliver innovative solutions for our brand and retail partners. With the passion and commitment to growth that I see on a daily basis, I'm confident in the company we're continuing to build as we pave the path to sustainable long-term growth. We'll now take your questions. Operator?
Operator
Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and 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 keys. Ladies and gentlemen, we will wait for a moment while we poll for questions. Our first question comes from the line of Greg Parrish with Morgan Stanley. Please go ahead.
Greg Parrish
Greg, good morning. Congrats on the result. I sort of want to talk about margin. Clearly some improvement from first quarter to second quarter here. So is this level here the right way to think about the back half? And I know you talked about continued realization of pricing. So did some of that come through? Did the second half get a little bit better? And then this is way too early, understandably, but I just wanted to potentially talk about 2024 and margin level. I don't know if you have any thoughts there that would be helpful to you.
Dave Peacock
Thanks, Greg. Yeah, this is Dave. Look, we were first very pleased by the second quarter results and really want to acknowledge our team for stepping up and doing a great job. You're exactly right. We saw a little bit of margin improvement. We're seeing better pricing flow through, in fact, year-to-date of our organic growth. Pricing is just under a third of it. And we'll probably continue to see pricing improvements in the second half. We do envision margins being a bit better in the second half. And a combination of factors are driving that. Obviously, some of the revenue, the pricing side, and then obviously just the general mix of performance within the business. And as it relates to 24, it is early. We're still a fairly new management team. While I've been around six months, A lot of the team members, including Chris sitting here, are less than that. So we want to make sure we have full visibility and understanding in the business before we put any guidance out for 24.
Greg Parrish
Great. And then sort of a similar question on Hayden's first half, second half, thinking about the free cash flow conversions, again, strong in the first half. How do we think about that in the second half and some of that reverse a little bit?
Dave Peacock
I think as we look at unlevered free cash flow, we're sort of seeing it probably being a good level to think about as like 65% plus on a sustaining basis. So you're going to see... you know, potentially a little bit less in the second half could be just as good. You know, the team has done a phenomenal job, and I'll have Chris make a few comments, but I want to acknowledge him and his team for really finding creative ways to, as I call it, wring more cash out of the business and get more cash yield out of our activities. So as that continues and we are kind of pulling every lever, we're optimistic about the second half.
Chris
Just to add to that, Greg, Dave said it well. You know, in the second half, just to keep in mind, you know, we've talked about investments. There are real investments that are occurring here, especially in tech. And so we want to just keep that in mind as part of our outlook for the second half of the year, therefore, in our cash conversion. But I think at the same time, there's an intense focus. Well, I know there's intense focus internally on working capital. So I think if we can continue to make some progress there, I hope we can do a little better than that. But I think that 65% plus is a good average. you know, it's right at, let's call it at 100% in the first half of the year. Again, working capital being the key driver there. I hope to continue that. And if we do, I hope we can, you know, generate even more cash in the second half of the year.
Greg Parrish
Great. And then I was going to slip in one more. It's any updates or strategic review and sort of assets that you're looking at. And then maybe to get a little bit more specific, because this has been coming up, but thinking about marketing, specifically the sampling business, and, you know, why that fits. And I understand, I think, when Damon was bought, there was a real rationale for, you know, a large retailer went preferred provider. But, you know, as you're sitting here, and there's clearly some opportunities to pay down debt, like, does, you know, why does the sampling business really fit with sales? If you could kind of walk us through that.
Dave Peacock
No, Greg, appreciate that. Yeah, I think as we get into our November meeting, we'll talk a little bit about where we're headed from a strategic standpoint, and then even more so as we get into early next year. You know, I like to let our actions speak for us and our results, more importantly. And so you can see already, and again, it's very early for the team, where we're focused and how we're trying to bring discipline around cash generation and paying down debt. and getting our balance sheet in a good spot. And we're very pleased with the results thus far. Of the sampling business or demonstration business, you know, it's interesting. It's a good business in the sense that there is a certain level of consistency in demand for that type of service, especially when you see 98% plus of manufacturers really dialing up innovation, and some of those are doing so in a significant way, and you're finding retailers more receptive to innovation. You compound that with the fact that you're seeing private label grow at about a half a share point, if you will, total store. Private labels are often, in many retailers, part of what you're sampling. We've seen consistency in demand, and it's a business for us that from a kind of working capital or cash flow standpoint is also a good one. But that's probably as far as I'm going to go as it relates to talking about anything related to our strategic review. But we remain bullish on the demonstration business and see opportunity both for growth and a little bit of better margin realization.
Greg Parrish
All right, very helpful. Congrats on the result. Happy Friday. Thank you. Thank you.
Operator
Thank you. Our next question comes from the line of Jason English with Goldman Sachs. Please go ahead.
Jason English
Hey, Jason. Hey, guys. Hey, hey. Good morning, everyone. Thank you for slotting in for the question. A couple of quick questions. You mentioned that retailers are still facing really tight labor conditions. Are you still facing really tight labor conditions, and does this remain a gating factor in terms of how quickly you can recover your sampling business?
Dave Peacock
We're seeing a continued tight labor market, but you saw that we're seeing pretty strong net new hires. We are, I think, over 75,000 teammates now, so we've seen that slowly build back, obviously, in the last year or so. We saw turnover down 10%, and that's actually really important. I mean, for us, the more we can retain. And if you can imagine in some of these businesses, we had had people, you know, serving for a long time and then the pandemic hit and some of those businesses virtually shut down. So it's rebuilding that. But the good news is we've had a successful track record of retaining people and we want to continue to leverage that. And we have a lot of talent management efforts underway to give people as many opportunities as possible to advance within the company, which is one of the the key enablers to retention. But it is. I won't sugarcoat it. It's still a tight market. You saw the unemployment was down to 3.5%. The U.S. added another 200,000-plus jobs in the report that came out today. So it's one we see worth watching, but we're pleased with our retention rate so far.
Jason English
Okay. So on the marketing and sampling side, are you back to Brighton? Should we sort of take the run rate you have here and say, This is a reasonable run rate going forward. You're back to the level of sampling that the market's comfortable with. You're able to supply the sampling. There's no real further ramp on that one.
Dave Peacock
No, we think there's still a gap to close. It's a combination of factors. Some of it is supply-based as far as the supply chains and product availability, especially when you're dealing with new or innovative items. Some of it is personnel, and so we continue, especially in regional pockets, if you will. Southeast is a little tighter as it relates to labor than a lot of other parts of the country, as an example. And then some, obviously, is just some of our customers getting those programs back, even still post-COVID and going within their stores as they assess their strategy going forward. So there's a number of factors, but we do see continued growth and gap closing as it relates to event count.
Chris
Jason, just to add to that, we're a little less than 80% of where we were in 2019, and I think we're going to continue to see each quarter just a sequential improvement, sort of a few percentage points, and just keep plotting our way back to that 2019 level. And evidence so far this year would indicate that each month we're seeing that sequentially improve, so I think that should continue.
Jason English
Thank you. I appreciate the numbers there, Chris. As you know, they're always helpful. Two more questions for me. It's great to see you stabilizing margins. I know your aspirations are not to stabilize but to restore margins, which would appear to be requisite on further pricing actions to not only kind of cover the ongoing labor inflation but catch up with the stuff that you fell behind on. In light of the inflationary environment more holistically and the fact that retailers are becoming more much less accommodative for price increases because they see the cost pressures not as widespread. And manufacturers, I suspect, are going to be as disciplined as they always are in terms of trying to fight that. How is that impacting your ability to price, whether we're talking about this year, next year, like the forward? How does that evolving environment influence your pricing policy?
Dave Peacock
Yeah, as I mentioned before, a little under a third of our organic growth year-to-date has come from price. and where we need to have those conversations, and everybody's obviously aware of labor inflation. I think those conversations have gone well. We look at our retailer and CPG customers really as partners, and we talk a lot about that, and that's how they refer to us. And so in that spirit of partnership, we have to share the fact that we are dealing with cost escalation. At the same time, it's incumbent upon us to realize the value proposition of or the need relative to what we're doing. And I mentioned before, for example, with the demonstration, what you see with a lot of the innovation and private label growth Private label, obviously, is a business that we're steeped in from the legacy daemon side, and we're seeing opportunity with that business as well. And even the merchandising we're doing for retailers, things like resets, are a bit in higher demand because you're seeing a little higher interest in cutting in between reset windows. You're seeing, with the innovation growth, a lot of need to reset. So the demand for the business is there, and whenever you have demand – and then you've got real cost pressures, usually you can have a rational conversation relative to price.
Jason English
Okay. And, yeah, that makes sense in terms of the cut-ins and the merchandise, the interest when all the CPG companies are saying innovation. The other side of the sales equation, you do have a commission-based business, and as we looked across the brand of landscape, buying has been exceptionally soft, and we'll quickly be at a point where price is de minimis, if not negative, for some categories. What is the... That seems to have negative implications for the commission side of your business. What is your outlook there? And can you remind us how big that is in context of your overall sales segment?
Dave Peacock
Yeah. Commission side could be as much as about 25%. So we've got other contracts in place that are not commission-based. And, yeah, And look, you obviously have to negotiate those commission rates as well in light of the activities we're performing in the market and the same inflationary pressures that we're facing. So, you know, we still have some opportunities there. And from an aggregate, as you zoom out, what we do and the services we provide from a total of someone's cost of goods sold can be pretty small. And so when you look at their margins, for instance, Some of the pricing actions probably have pretty minimal impact. But, yes, we are seeing volumes, the same thing you're seeing, Jason, in the market, slip for a lot of the manufacturers and the desire to get increased traffic and increased volume. And I think that increased volume leads to a lot more out-of-file merchandising opportunities, which plays into that. one of our strengths as far as what we do both for CPGs and for retailers. So it does create more demand for what we're doing and an opportunity to continue to grow our business.
Jason English
Understood. Makes sense. Thank you for your time. I'll pass it on.
Operator
Thanks, Jason. Thank you. As there are no further questions, I would now hand the conference over to Dave Peacock, Chief Executive Officer for Closing Comments.
Dave Peacock
Thanks a lot, guys. Look, it was a quarter that we're pleased with, yet at the same time, you know, we're never satisfied with our results. So we remain committed to focusing on those things that can get us to getting a balance sheet where we're much more in a stronger position relative to our debt. And look, the future for our business is bright. We've talked about some of the things through the Q&A that we feel are helping drive demand and create some tailwinds. So we remain optimistic and, again, really appreciative of the great work our team did the last three months.
Operator
Thank you. The Conference of Advantage Solutions has now concluded. Thank you for your participation. You may now disconnect your lines.
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