Advantage Solutions Inc.

Welcome to Advantage Solutions' second quarter earnings conference call. Dave Peacock, Chief Executive Officer, and Chris Growe, Chief Financial Officer, are on the call today. Dave and Chris will provide their prepared remarks, after which 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. and many more. Thanks, Operator. Good morning and thank you for joining us.

First, I want to acknowledge our teammates. We have over 60,000 people who spend the majority of their days in service of our clients and customers. From our retail merchandising reps moving between stores to ensure our clients' products are on shelf, to samplers delighting our retail partners' customers with a pleasant experience and great products, to our key account managers calling on retailers in an effort to add a little more push behind the great brands that we represent. These and thousands of others work in pursuit of exceeding client expectations, and I appreciate the energy and effort they bring each day. Second quarter net revenues of $757 million were up 3% year over year and 4% excluding the effect of divestitures, while adjusted EBITDA of $76 million declined 12% and declined 9% excluding divestitures, reflecting several one-time factors in mixed performance across our segments. Experiential Services delivered another very strong quarter, and both demand signals and execution continued to improve across this business, giving us confidence in second-half growth. Retailer services revenues increased 3% year-over-year, but adjusted EBITDA was down approximately 25% year-over-year, reflecting project timing and costs associated with early-stage project work that we do not anticipate repeating. We expect growth in the second half of the year. In branded services, revenue declined 13% year-over-year and was down 11% excluding divestitures as the recovery is taking longer than expected and we are impacted by the same persistent challenges as our CPG clients. Cash generation remains solid with $19 million in adjusted unlevered free cash flow despite an incremental working capital impact from our SAP final phase implementation. We ended the quarter with $102 million in cash. Turning to our growth initiatives, clients continue to prioritize programs that can demonstrate clear ROI, support trial and discovery, and convert demand into purchases. That trend aligns directly with the capabilities we have built across Advantage. Experiential services is the clearest proof point. Demand for product demonstrations continues to exceed our expectations with meaningful opportunities to expand event volume across existing customers and support growth with new customers. We are adding capacity where demand signals are strongest and remain confident in our ability to recruit and staff as needed. We have seen strong growth across the spectrum of customers we serve, both in the US and internationally, with even higher daily event volumes in our international regions. We believe this provides a useful blueprint for what can be achieved in the US as programs mature and as we continue to improve labor readiness and execution. In our CPG-facing work, branded services merchandising projects were a relative bright spot. We are focused on scalable, high-return opportunities that can become durable, long-term relationships as we deploy a highly trained and experienced team against what we see as recurring issues and out-of-stocks retail. In addition, our pulse selling system is improving visibility into on-shelf availability, item velocity, and distribution gaps, allowing our teams to target resources more precisely and helping clients connect spending to measurable returns. Finally, we continue to develop our alert-based execution model, allowing Advantage to see out-of-stocks distribution voids and missing displays in almost real-time. Turning to our productivity initiatives, our productivity agenda spans labor planning, process standardization, technology, and operating visibility. Together, these initiatives are designed to manage costs prudently, improve execution quality, and create capacity to support growth. Our centralized labor model continues to enhance labor planning and execution, which is critical as experiential services demand and retailer services project activity increase. Experiential execution rates of approximately 95% in the quarter demonstrate the efficacy of this model. We are also in the final stages of our enterprise technology transformation, and these new systems will help us support improved data integrity, process discipline, and operating visibility. We plan to complete the heavy lifting of this transformation this year, and in 2027, we expect to fully leverage these platforms and realize the benefits of the investments we've made to drive better decision-making and efficiency. While many companies are grappling with the existential risks from AI, we are focused on the opportunities to enhance our physical network that was built over decades. We continue to prioritize integrating AI across advantage in pursuit of better service levels, a better teammate experience, and greater efficiency. We have established a governance structure, including a newly created chief AI officer role that is tightly aligned with our tech and data teams. We are prioritizing training and fluency across our organization and the deployment of the right tools to our teammates. We remain focused on empowering our people to opportunistically employ a wide variety of AI tools that best fit their respective use cases and define efficiencies in everything they do. We are making sure our teams are educated on the potential of these AI models, how to use them effectively, and encouraging them to find opportunities for efficiency, speed, or enhanced service quality. Our priorities range from personal productivity to enterprise-wide initiatives that deliver faster insights and more precise resource deployment. We have several pilots we have developed across our workforce operations that we expect to increase efficiency, including a new event manager compliance tool, photo verification tool, cartless automation, and a supervisor intelligence dashboard. We continue to develop new AI-led opportunities to bring both efficiency and operational excellence to our business. Turning to the macro environment, the core consumer themes and case-shaped economy we discussed last quarter have persisted. Lower and middle-income households remain highly focused on value with purchases increasingly planned around promotions and price points. Higher-income consumers continue to shift portions of their baskets toward healthier and better-for-you options, but they are also becoming more deliberate about the value they receive. Emerging brands continue to also gain share of the industry in many categories as consumers seek variety and gravitate to product discovery. Value-seeking behavior is broadening across income groups. We are also seeing greater price competition among large retailers seeking market share gains in traffic. These trends reinforce the need for highly measurable, cost-effective programs that can drive trial, discovery, and conversion. Advantages well-positioned to help clients navigate this volatile operating environment by supporting their growth plans and helping them gain market share in as efficient a manner as possible. We have adapted our business accordingly by emphasizing execution quality, disciplined staffing, and measurable ROI. As a scaled outsourced labor provider, we are well-positioned to support clients seeking flexible capacity and greater efficiency. We continue to monitor energy prices, tariffs, and geopolitical developments which are affecting consumer behavior. Our outlook does not incorporate a major change in underlying consumer health. Now, turning to our segment results. Experiential Services delivered another very strong quarter. Event volumes increased 18% with strong incremental margins supported by healthy demand across existing customer relationships and new vendor activity. With revenue growing at a healthy rate, improving profitability remains a priority even as we invest in infrastructure to support higher long-term demand. We are focused on labor efficiency, stronger training and safety protocols, consistent execution, and a shift toward higher return demos. We expect continued momentum in the second half of the year. In branded services, the recovery is taking longer given constrained CPG spending, procurement-driven dynamics, client insourcing, and select client losses. Our focus is on stabilizing the revenue base while protecting profitability. That means strengthening client retention and executive engagement, improving pipeline conversion, hiring and retaining the right talent, and demonstrating measurable ROI through our data, analytics, and execution capabilities. CPG merchandising projects performed well this quarter, and we are hopeful this is a leading indicator for the rest of the business. Well, we are not assuming a near-term inflection. We do expect modest improvement in the second half of 2026. Retailer services had a softer quarter, primarily due to project timing, a difficult comparison with an unusually strong prior year period, and higher execution costs on merchandising projects. We view these factors as temporary and largely specific to the second quarter. We expect performance to improve sequentially through the second half as larger projects ramp up. The pipeline remains encouraging, and we expect project-related earnings volatility to moderate in the second half. Our priorities in retailer services are clear. Align staffing with demand, improve execution discipline and operating consistency, and better match costs with associated revenue streams. Cash generation remains a structural strength of our business and a core priority. We saw a levered free cash flow of $19 million, or 25% of adjusted EBITDA, in the quarter. For the first half, unlevered free cash flow was 79% of adjusted EBITDA. We have seen some expected pressure on cash flow from working capital, which we believe will improve in the second half as we have moved past our final SAP implementation phase. Our capital allocation priorities remain unchanged. We intend to direct free cash flow primarily toward debt reduction while maintaining the liquidity and strategic flexibility required to operate the business. Turning to our outlook, we are taking a balanced view of the remainder of the year. That view reflects three dynamics, continued strength in experiential services, improving retailer services performance with a more normalized earnings cadence in the second half, and a more gradual recovery timeline in branded services. We are reiterating our full-year 2026 revenue and adjusted EBITDA guidance ranges, reflecting the successful execution of our growth initiatives and in consideration of the investments we are making into our business and our teammates. We are also reiterating full-year guidance of adjusted unlevered free cash flow of $250 to $275 million and net free cash flow conversion of 25%, excluding debt refinancing costs. We are encouraged by the strength of our experiential services demand and the progress across our growth agenda. At the same time, we are clear-eyed about the work required to stabilize branded services and reduce margin pressure driven by business mix. We remain focused on delivering for clients, generating cash, and building a more durable and profitable advantage. I'll now turn it over to Chris for more detail on our financial performance.

Thank you, Dave, and welcome to everyone joining us today. I will review our second quarter performance by segment, discuss our cash flow and capital structure, and provide additional detail on our outlook. I will outline our business results on a reported basis and also on an adjusted basis for divestitures, which weighed on our year-over-year performance. Thank you for joining us. Thank you for joining us. Thank you for joining us. Turning to experiential services, we generated $296 million of revenues and $34 million of adjusted EBITDA, up 19% and 32% year-over-year, respectively. Results were driven by accelerating demand for product demonstrations, higher event volumes, and strong operational execution. Demand remained healthy across both existing and new customers, and we continue to see opportunities to further increase event volumes in the second half of the year. Thank you for joining us. We also have a stronger project pipeline in the second half and expect project-related earnings volatility to moderate as these programs ramp. and many more. Thank you for joining us. Our Day Sales Outstanding, or DSO, remained elevated during the second quarter, primarily due to the impact of our final SAP implementation and customer payment timing, both of which we continue to view as temporary. We expect DSOs to improve steadily through the remainder of the year, including in the third quarter, supporting strong full-year cash flow generation. Adjusted unlevered free cash flow was $19 million in the second quarter, with a conversion rate of 25%. Thank you for joining us. In the second quarter, we repurchased approximately $15 million of our shares. These repurchases were primarily intended to help offset dilution from stock grants and exercises. As we look ahead, free cash flow will primarily be directed toward debt reduction. Finally, turning to our outlook, we are encouraged by our second quarter performance and continue to maintain a balanced outlook for the remainder of the year. Thank you for watching. From a business perspective, we continue to see strength in experiential services, sequential improvement and growth in retailer services, and a more gradual recovery in branded services on its path towards stabilization. Key factors influencing our outlook include experiential services demand and execution, retailer services project timing and second half project ramps, and the pace of recovery in branded services. Overall, we've taken a prudent view of the second half of the year. Thank you for your time. I'll now turn it back over to Dave. Thanks, Chris.

We remain encouraged by the momentum in experiential services and the expected improvement in retailer services as larger projects are ramping up. At the same time, we continue to focus on stabilizing branded services while protecting profitability. We're also advancing our productivity initiatives across labor planning, process standardization, technology, and operating visibility while integrating AI to support stronger service levels, a better teammate experience, and greater efficiency. Together with our focus on disciplined capital allocation and strong cash generation, we believe these efforts position an advantage to build a more durable and profitable business over the long term. I want to thank everybody for joining us today, and we look forward to speaking with you again next quarter. Operator, we're now ready for questions.

We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Greg Parish with Morgan Stanley. Greg, your line is now open.

Hey, guys. Good morning. Thanks for taking my question. Morning, Greg. Hey, maybe just on branded, I know you called out maybe more gradual recovery in second half, but thinking ahead to 2027 and beyond, in your view, what's the catalyst that really gets this business stabilized?

I think if you think about it, Greg, we're coming off a few kind of larger client losses, and there's various reasons for those. But as we move into 27, and we're talking about branded services first, we're seeing parts of that business demonstrate growth, which is kind of giving us some optimism. and then you're lapping like I said you know if you go back even three years you know we had some resignations we talked about and then a couple key client losses which has actually put us in a position to have a more kind of balanced and I'll call it more fragmented client base and you know if I look at our top you know 25-30 clients year over year they're growing and so all these things are signs to us that things are moving towards stabilization. It's just in a long lead contracted business, you have to get through kind of these quarterly cycles until you can realize that shift or that pivot. And then you just heard our results in retailer, which really are driven primarily by a tough comp. We had a pretty large, what I'll call one-time project in the second quarter of last year that did not repeat this year, but the underlying business remains strong. And, you know, we're never going to turn away significant project work, and we get it from time to time. But that business has been kind of a consistent, you know, slower grower than experiential, but consistent growing business for us. And we see opportunity with new lines of service that we can bring to our retail partners to give us optimism. And then experiential, The demand signals continue to be very strong, both from large clients, but also new business acquisition that we've been working on and we've realized as recently as the second quarter. So all of those things give us optimism as we look at 2017.

Great. That's helpful. And maybe just on the other side of the coin, just experiential, obviously a lot of strength, three quarters in a row here, 20% growth. I feel like we sort of talk about this a lot, but there's new demand, you have some new clients come on board, better labor availability. Not sure if I missed anything there, but maybe zooming out, thinking about next year beyond, I mean, how durable is this outsized strength that you've been seeing and experiential?

I think it's very durable. Like I mentioned, the demand signals are very strong from our clients, but also And think of it, too, from a macro standpoint. I mean, the growth of emerging brands in the industry and the growth of innovation and new products, even from more established or larger brands, is not slowing down. And so that stimulates the need for sampling and trial. and I think retailers justifiably so are realizing that sampling and experiential and then store demo and retail attainment, all those things are really important for the customer as they come into the store. And so they compete on that level and that works to support that business. And I want to give our team a shout out because they've done a really good job on the execution front. And if I think about when we are deploying AI, and I know it's a buzzy term and everybody wants to talk about it, We only really do so when we think there's real tangible benefits and where we see AI as an enabler to the business. I'd say experiential is a good example of that where we're really speeding up our time between application and when they actually are working at a cart. We're compressing that. So we're getting people through the funnel much quicker. Photo verification, which is important in this business. We found ways to really streamline that process. I rattled off a few in the prepared remarks. Those are just a few of the things that we're doing that where AI is bringing real advantage. When you put it all together, it's just driving better execution rates and efficiencies.

Greg, I would just add to that that we talked about this really to start the year and after last quarter as well, just the investments we're making in that business to sustain the growth. So you're seeing that here in Q2. You'll see it in the second half of the year. Really proud of the team to be able to put up nearly 20% revenue growth and that degree of incremental margin improvement. But I think I will make sure we just reiterate that we're preparing and getting the business in a place where we can continue to sustain this rate of growth. Your next question comes from the line of Luke Morrison with Canaccord. Luke, your line is now open.

Hey guys, thanks for taking the question here. So I think you called out CPG merchandising projects as a relative bright spot, possibly a leading indicator for the rest of branded. Can you just help me understand sort of like the underlying mix there? You know, is client spend rotating within that segment? Are you seeing a mix shift? Like help me understand what's happening with that comment.

So if you think about that business, two of the big drivers of the branded services are, you know, kind of headquarters selling or where we represent a client at a headquarters and then retail merchandising, where we are sending folks in to execute in store. And you're seeing persistent challenges within stock in a lot of categories, not every category, but probably a majority of categories across the store. And there's a lot of reasons for that. at retail. And you're not going to sell them if it's not on the shelf. And I think our clients understand that. So you're seeing an increase in project work so that you've got contracted continuity work. And if you look back maybe a year ago, projects were, call it, you know, maybe 15% of our total work in this space in the first half. Now they're close to a little under 25%. And so we saw a pretty nice lift in project work, a little over 20%. year over year, which is telling us that sort of unplanned need and or opportunity to either get more display space on the floor or remediate out of stocks. And as we look forward and have conversations with clients, both current and prospective, we see an opportunity to lean into this business. It's a syndicated business. We have some direct teams, but obviously we can realize pretty decent margins when you're utilizing an existing force out there against multiple clients to solve problems. And then we've also put some investment into this area in becoming more alert-based and more, how do I say, just bringing more efficacy to the work. these folks were typically allocated by time. So going into stores every week, every two weeks, every four weeks on behalf of clients, we're starting to pilot and realize great results and making a more alert base where we get a scan or a read from a store and we actually just go and address whatever that issue is, a drawn down display, out of stocks, whatever that might be. So that's allowing us to deploy resources more efficiently as well. And it's a great labor force. I mean, it's a team of, you know, roughly 5,000 folks, average tenure with the organization over nine years. A lot of dedicated folks that both sell and remediate problems for our clients and stores.

Yeah. Yeah. Okay. Super helpful. And maybe just to follow up, you've said reducing mixed-driven margin pressure is obviously a priority here. As I look at experiential, it's both your fastest grower and your lowest margin segment. So help me just think through what closes that gap. Is it labor efficiency? Is it event mix? Is it pricing? Is there something else there?

Yeah. Luke, it's Chris. Just to kind of address that in a couple different ways. Overall, when you have this, call it mixed modeling that's occurring this year with branded services down and experiential up, you're going to have that kind of weight on the margin profile of the business. We couldn't help but reinvest back in the business this year as well. So you're seeing a little less incremental margin and experiential this quarter, but it's all deliberate. And I would just say, again, puts us in a great place to be able to sustain the growth going forward. as I look ahead you know we talk about a path towards stabilization for branded services so that's what we we still see us on that path just maybe it's a little a little slower but I think you're going to see that you know slow and gradual improvement in the rate of decline there you're seeing really good growth and experiential and then retailer we talked about that being able to grow in the second half of the year so you've got you're going to have some you know equalization if I can say it that way of the margin across the businesses as One grows and one declines, and you're going to have – you've got investments that are influencing that, and then you've got the benefit of the stabilization of branded services that will allow us to achieve that kind of margin stability, ultimately margin growth next year.

Understood. I'll pass it on. Thank you. Thank you.

There are no further questions at this time. I will now turn the call back to Dave for closing remarks.

We want to thank everybody for joining and we look forward to connecting with this group next quarter.

This concludes today's call. Thank you for attending. You may now disconnect