Q4 2020 Advantage Solutions Inc Earnings Call
Good afternoon, and welcome to the advantage solutions fourth quarter and full year 2020 earnings Conference call. Today's call is being recorded and we've allocated one hour for prepared remarks and Q&A at this time I would like to turn the call over to Mr. Dan Morrison Senior Vice President of Finance and operations for advantage. Thank you you may begin.
Thank you operator, thank you for joining us on advantage solutions fiscal year, 2024th quarter and full year earnings conference call.
On the call today are Tanya Don Mayer Chief Executive Officer.
Brian Stevens, Chief Financial Officer, and Chief operating Officer, and Dan <unk>, Our new Chief Investor Relations and strategy Officer.
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 risks and uncertainties that could differ materially from actual events and those described in the forward looking statements.
Forward looking statements are based on the company's current expectations and are subject to inherent uncertainties risks and assumptions 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 sections titled risk factors and management's discussion and analysis of financial condition and results of operations and elsewhere in the company's filings with the Securities and Exchange Commission.
All forward looking statements are expressly qualified in their entirety by such factors.
The company does not undertake any duty to update any forward looking statement, except as required by law.
Please note management's remarks today, we'll highlight certain non-GAAP financial measures.
Our earnings release issued earlier today presents reconciliations of these non-GAAP financial measures for the most comparable GAAP numbers, which can be found on the investors section of our website at advantage solutions Dot net.
The company has also prepared presentation slides, which are posted on an advantage as the investor Relations website.
You may want to refer to the slides during today's call.
This call is being webcast and a recording of this call will also be available on the website.
And now I'd like to turn the call over to Tania Don Meyer.
Thanks, Dan Hello, everyone, it's for real.
And should we need it to public equity market I'll give a quick introduction I'm on you're doing my ear in on bandwidth advantage for over 30 years and I've had the pleasure of serving as CEO since 2013.
I'd like to start this call by thanking all of our associates who've worked tirelessly at home and in store for help.
Keep our brand and retailer partners business is running safely and smoothly throughout the COVID-19 pandemic.
I'm, so proud of our team's work.
On the communities in need during these trying times by making sure that food and essential products for our clients are available for consumers both in store and online.
We're very excited about our journey as a public operating company abstract and crisp on merger with on your part two in October on 'twenty 'twenty. The team is poised to help our clients navigate COVID-19 recovery three with 'twenty, 'twenty, one and beyond and I'd like to take a minute upfront to share a little debt.
More about the business that you.
As we advantage share of older units day in a leading provider of outsourced solution for consumer goods companies and retailers.
We have a strong platform competitive advantage sales and marketing services built over multiple decades.
Business critical services like headquarter sales retail merchandising in store sampling.
Digital commerce and shopper marketing for.
Brands and retailers of all sizes, we help them get the right products on the shelf, whether physical or digital and into the hands of consumers. However, consumers choose to shop, we enter day in partnership with our clients solving problems can do both efficiency and effectiveness and creative.
Value on this platform is simple, but it's not easy.
Most fundamental level.
And consumer goods companies and retailers and we're a trusted partner for that.
We help our clients some more while spending less.
Make them more effective and we also make them more efficient we win by providing best in class services every single day and by innovating on a nimble operating platform, which we'll talk about today.
We drive productivity to provide fuel for reinvestment in growth and simply put we're built to do it better and cheaper and faster at our leading scale. This stable model yield solid EBITDA margin, which we convert in Shandong debt free cash flow.
We then reinvest that free cash flow at very attractive incremental returns and driving growth by selling more asset light for services to our existing clients.
Recruiting new client and entering adjacent spaces, where we have the right to win further expanding and widening our competitive moat.
Through this model our business compounds over time, delivering compound growth for well over a decade at two times, our underlying end market organically and greater than three times in total.
We're proud of that as with all compounding games, we're working hard to keep at it for the long term we'd run a playbook that has enabled us to execute on this for a very long period of truth.
Now, let's hop into the substance of today's update.
Once they conclude my remarks on the business I'll turn things over to Brian Stevens and he'll discuss our financial results and after that well open up the call for questions.
There's no doubt that 2020 was a challenging year for everyone.
The pandemic put us all to the cash are.
Team is resilient.
Our team has innovated and our team is action oriented and we rose for the occasion, passing with flying colors.
COVID-19 presented unique challenges for our business.
Across our portfolio of services, we had both winners and losers during the pandemic.
On one hand large portions of our operations related to in store standpoint, foodservice and our international joint venture experienced temporary headwinds from the suspension of activities or virus related closures, leading to short term declines in 2020.
For the Covid loser on.
On the other hand, our core headquarters sales and merchandising team is providing services in traditional and E. Commerce channel has never been busier as we respond to consumer is elevated stay at home consumption vs, where the Covid winter and we expect them to sustain elevated demand levels well into 'twenty two.
'twenty one as many of US continue to work from home.
For a portion of our business continue to experience near term COVID-19 related headwinds, we expect to emerge from Covid, a bigger stronger business.
We have served our clients well through this pandemic and we've reinforced their trust in <unk>.
And we scaled nascent e-commerce services that will thrive post COVID-19.
Timing of an exact recovery, it's still tough to know with great certainty, but we believe the business will continue to improve throughout the year and will benefit as COVID-19 impacted businesses are restored to help as virus concerns and restrictions ease likely in the second half on 'twenty 'twenty. One one thing is clear.
And that's that we've never been more important and valuable partner to our brands and our retailers than we are today.
Our solutions play an essential role in the network that gets good consumers our team stepped up for clients with quality execution and new service innovation to meet their unique challenges presented by this virus this will pay dividends over time.
Fight the pandemic, we accomplished a whole lot in 2020, we successfully completed our merger with Conyers Park, two and refinanced our debt in October 28 on 'twenty 'twenty.
We met or exceeded the expectations, we had for the full year and we continued to make progress on our recovery in most COVID-19 operation.
Our business trends were in line with expectations in the sales segment.
Our teams are executing very well and capitalizing on tailwind from increased at home consumption and the demand for our critical services, our marketing segment revenues and earnings trends continue to improve from the second quarter lows of Covid.
We continue bringing back in store sampling events in a safe and measured way with our retail partners.
We also continued to see growth and adoption on digital and E Commerce sampling program.
Business is developed in early stages with clients in 2019 catapulting for word during COVID-19 and shouldn't compound growth at or above corporate average margin from here.
So as we sit here today more than two weeks into the first quarter. A couple of things that we're seeing that I think are of note.
First we continue to see strong consumption patterns in the sales segment as the baseline remains elevated from pre COVID-19 levels with consumers working on consuming more at home.
We expect however, the late March and early April pantry loading that we saw last year will create a tough comp for the next couple of months that said, we still believe there'll be net benefit for the first quarter on a year over year basis as at home consumption remains elevated across consumer state.
Yeah.
While were still being measured and flexible as we resume in store sampling with retailers in the marketing segment. We continue to receive strong support from our retail partners in our rollout and consumers are pleased at the event that they've met brands are eager to invest to drive sales and despite still being limit.
And in activity, we've seen event counts continue to grow.
Just count growth so far in the first quarter is exceeding our initial expectations.
It feels to be headed in the right direction on the virus spread but if there's one thing that this pandemic has reminded all of US is that we can't be certain therefore, we will remain disciplined and flexible in how we're managing the business as we make our way for the light at the end of the channel we expect that the Panther.
This disruption will continue over the coming quarters, but begin to subside in the second half as the state of helped improve on.
Our planning stance that we put into place as we were preparing to combine with Congress per assuming that the pandemic continued through the first half of 2021, and we're prepared for potentially choppy month for hat.
We're confident that based on the state of the business and the flexibility of our model, we can achieve better than forecasted EBITDA growth in 2020 one.
We're raising our 2021 adjusted EBITDA outlook from the 515 million that we shared last October to $515 million to $525 million.
That represents very healthy mid to high single digit EBITDA growth year over year and this takes us above the pre Covid 2019, EBITDA of $504 million. This is particularly impressive in light of our 2021 assumption that the in store sampling.
<unk> business will remain temporarily restrained by Covid for the first half of the year before building back towards pre COVID-19 levels in the second half of 'twenty 'twenty. One this would lead growth from an embedded recovery in the marketing business in our back pocket as we head into 'twenty 'twenty, two where we should benefit from a full.
For a year on his door simply which would support above normal growth next year as well.
Last but not least we continue to execute well against the value creation strategies that we shared with investors as part of our merger finding savings and reinvesting in talent and technology and in capabilities that allow us to be a better more valuable partner to clients.
I'll quickly touch on some of the highlights from 2020.
Our talented and nimble operating platform allowed us to pivot in response to COVID-19 headwinds and deliver results that we're proud of for all key stakeholders.
Starting with client.
Our extra ordinary associates helped ensure that our clients products were available to communities online and safely in store throughout the pandemic.
In addition, our team launched and scaled innovation to help me no needs on brands and retailers that were brought about by this pandemic, we repurposed our associates for them are suspended in store sampling operation to help retailers with urgent and critical needs.
As in store sanitation and pick and pack for online grocery pickup orders for example.
Recent offerings, such as e-commerce sampling and virtual demos scaled quickly to help brands and retailers surprise and delight consumers in new and safe way.
Turning to our associates for a minute, we continue to invest in training and promotion and hiring we supported numbers on the advantage family with the charity fund that we created and funded to help our associates in knee.
We provided additional support for our frontline associates, who continue to go into the stores on behalf of brands and retailers to make sure that essentials were available to communities in need.
These were a real heroes.
And finally, our diversity equity and inclusion for continued to make progress launching eight new employee resource groups for our associates debt.
Ban important underrepresented ethnicity, gender and affinity groups.
There's always more work to do in securing great talent, we're really pleased with the progress that we made in 2020.
Finally for owner.
We manage through the pandemic temporary headwinds with discipline.
Livery only a 3% decline in adjusted EBITDA, Despite revenues being down 17% as a result of Covid, we strengthened our balance sheet as part of our merger with pioneers part too.
Reducing year end net leverage to four times fiscal year 2020, adjusted EBITDA of 487 million and earnings number temporarily depressed from the pandemic.
And we reduced cash interest from over 200 million in 2019 to approximately $135 million a year on a pro forma basis after giving full year effects for the refinancing transaction that we completed in the fourth quarter of last year.
Now I'll quickly review, our actual performance in 2020 versus the 'twenty 'twenty outlook that we provided on our earnings call last year.
We met or exceeded the ranges, we previously communicated for our fiscal year 2020 outlet.
Revenue growth close the year down 17% in the range that we previously provided them down 19% to down 16 adjust.
Adjusted EBITDA closed the year at 487 million above the range. We previously provided for 180 million to 485 million. The outperformance was largely driven by better than expected results in the marketing segment sales.
Total segment results were in line with expectations and net leverage closed the year at four times slightly better than the 4.2 times that we previously provided.
As I mentioned, a minute ago and brand will elaborate on shortly we expect a better fiscal year 2021 and we're raising our adjusted EBITDA outlook to a range of 515 to 525 million from the previously communicated 515 million the increase is really driven.
And by three key factors first our confidence that the business that grew during COVID-19 will remain relatively strong.
Second our belief that business harmed by Covid will continue steady recovery and third continued cost discipline across our business.
This range of mid to high single digit profit growth in 2021 demonstrates the strength of our compounding platform.
Given the continued uncertainty around the timing and shape of a COVID-19 reopening we won't be providing 2021 revenue guidance at this time and we want to be very open about why put simply one of our largest on least profitable business unit has the widest range of Covid recovery outcomes for the year.
Year, because the revenue line is impacted by non economic pass through.
Seated with product samples, depending on the types of activity that we're performing.
Our 2021 revenue has a lot of non economic unknowable that we're reluctant to apply false precision to me.
More specifically in personal sampling events have a lot of pass through revenue from the products that we purchase to sample in store and recovery. In this event type is going to be driven by the state of health and policy, which is gonna be influenced by variables like vaccination rates the prevalence of new Covid variance.
And other assumptions that are just too hard for us to forecast.
Importantly, this business drives a wide range of revenue outcomes without necessarily driving wider EBITDA ranges.
So we've decided not to guess on revenue for now that said, we're very comfortable with the visibility and the control that we have over profit and will provide as much color as we can about the return of demos and sampling and the broader COVID-19 recovery from our unique vantage point at the Nexus of CPG.
<unk> and retailers.
Turning to the fourth quart.
When you look at the numbers for the fourth quarter you can see that the continued sequential recovery. He spoke about on the third quarter call continued in the fourth quarter recovery.
Recovery from the pandemic driven lows continued in both segment.
The sales segment continues to be a net beneficiary during the pandemic, while the marketing segment continues to be faced with temporary COVID-19 headwinds primarily in the in store sampling business.
Revenues of 815 million for the fourth quarter of 2020, representing sequential growth of approximately 8% on a quarter over quarter basis and improvement in the year over year decline versus the second and the third quarter going from 30% down against prior year.
In the second quarter for only 16% down in the for the.
The sequential revenue improvement in the fourth quarter was in both the sales and the marketing segment.
In our sales segment, we continue to see strength in our core headquarter sales in merchandising services in both traditional and E Commerce channel, where we're benefiting from in home consumption.
The business continues to trend favorably versus prior year, we continue to see a slow recovery in the foodservice and our international businesses, both improving versus second quarter. Low. However, these businesses remain meaningfully below pre COVID-19 levels and are unlikely to return to full operation.
Until COVID-19 related policy restrictions affecting in person dining in the United States and activities at retail locations in Europe.
In our marketing segment.
Momentum was driven by growth in our digital marketing business and the continued progress our teams are making on the relaunch of in store sampling activity with some other over important retailer accounts.
As many of you know from previous calls we temporarily suspended in store sampling program in partnership with our retailer clients in March in response to the pandemic, we began to bring those programs back to stores in the third quarter and actively continued to build in the fourth quarter.
Over the last few months, we've seen an eagerness for retailers and shoppers and brands to bring in person sampling back for store. This of course is being done in a measured way that protects the health and safety of our associates and shoppers in store and as we've mentioned on prior calls the safety.
Protocol that we put in place are critical for example, where state of local health suggests heightened caution we're managing the types of events that we're performing in store to reduce risk limiting activities to pre packaged sample.
Talking only and digital type events will flexibly manage event locations and event type as part of the natural evolution of a return to full operation post Covid.
Sampling event volume continues to build increasing from approximately 20000 events in April of 'twenty 'twenty two approximately 135000 events in January of 2021. This is still meaningfully below the 400000 events in January of last year.
But this represents a significant rebound from the April lows.
Continued improvement from what we reported for September of last year. We expect that this trend will continue to improve over the course of 2021 likely recovering at a faster clip in the second half of the year. Once the vaccine is widely distributed and administered and the state of health and policy.
<unk> allows for more in person event, we're excited to be back in for sampling and next time, you're on a store b share to say Hello to our team there should be more of us there as the year progresses.
Adjusted EBITDA was 133 million for the fourth quarter, representing an expected slight sequential decline of 3% on a quarter over quarter basis, and a decline of only approximately 8% versus the fourth quarter of 2019 favorable mix and disciplined cost management.
<unk> has helped us preserve earnings despite the revenue headwind from the pandemic that persisted in the fourth quarter. This was slightly ahead of what we guided to on our last call.
As we mentioned on our last call.
Expected a sequential slowdown in the adjusted EBITDA in the fourth quarter, we were right, but the quarter turned out to be a little better than we expected the slow down in the fourth quarter related primarily to lower earnings in the sales segment, driven by higher compensation and other personnel related investments associated.
With launching a people intensive piece of new business and an increase in corporate expenses from higher year end accruals, which gets allocated to the segment.
We expect the new business investment to continue into the first quarter of 2021, but moderate over the balance of the year I'm really pleased with how our teams have been able to manage costs with discipline during this difficult operating environment.
Discipline should set up nicely for adjusted EBITDA growth as the business for our customers.
Finally, we remain very focused on our mission to create value for all stakeholders and continue to make progress against the strategy that we outlined in our previous investor conversation.
And just to recap there are three fundamental pillars of our strategy first we work hard to operate with excellence. This means that we deliver best in class services to our clients, while driving productivity, reducing costs and increasing margins over time second we take a portion of the probe.
Activity savings that we generate and the ample free cash flow our business model produces and we reinvest in services to widen our moat accelerate innovation and drive our growth.
This includes service renovation, where we invest in talent and technology and tools to improve the results and value that we deliver for our clients in our existing services as well as service innovation.
We invest to add capabilities to create new and better solutions for brands and retailers evolving needs.
Good reinvestment opportunities exist, both organically through share gains and service expansion and Inorganically through M&A opportunities and we will continue to use tuck in acquisitions as a tool to add capability and value for our clients, where we can deploy capital at attractive prices.
And prospective returns.
Third.
We will nurture and protect our evolutionary culture. This enables us to build the business for two clients changing needs and it helps to ensure that we remain partners of choice for brands and retailers and it allows us to be nimble and opportunistic when fortune presents itself with compelling proposition to be.
Build a better more valuable advantage. These three pillars work harmoniously to create a virtuous cycle, where one strength and the other.
I'm very excited about our future.
Buoyed by the stable underlying growth in the consumer goods end markets, we serve which has fueled our businesses compounding over time, we expect additional tailwind over the next couple of years from a recovery from temporary COVID-19 softness in portions of our business tied to in person shopping excel.
<unk> Omni channel service adoption during COVID-19 that we believe likely six and continues to grow like online grocery pickup and delivery sampling.
And growth and adoption in our innovative digital and E Commerce solution.
Despite still not knowing the exact shape of recovery will take because of the uncertainty that remains around the virus vaccine rollout and timing of the economy reopening we believe we're well positioned to win under multiple recovery scenarios.
In addition on the other side of the pandemic our platform and strategy for compounding remains intact our.
Our nimble asset light business affords us the flexibility to adapt and best position ourselves to weather near term headwinds and capture long term tailwind as the recovery of all.
If we execute well like we have in prior decades, serving our clients well prudently reinvesting and capabilities to meet clients evolving needs. This is a formula that's proven itself worthy overtime and will give us ample runway to create value for our public shareholders over time.
With that I'll now turn it over to Brian to cover our fourth quarter and full year 2020 financial results and provide an update to our outlook for fiscal 2021.
Thank you Tanya and good afternoon, everyone. It's great to be speaking with you Tom you touched on the full year results a bit upfront, so I'm going to touch briefly on the full year and spend most of my time, giving color on the fourth quarter results.
As mentioned earlier, we finished the fiscal year 2020, with roughly 3.16 billion of revenue and $487 million of adjusted EBITDA. This represented 629 million or <unk> 17 per cent decline in revenues, but only a $17 million or three per cent decline in adjusted EBITDA.
This outstanding result is a testament to the nimbleness of our operating platform and the team's discipline in managing the business effectively during the pandemic.
Quickly realignment expenses and scaling service innovation to adapt to changes in short term demand.
Importantly, we were able to meet or beat the fiscal year 2020 outlook, we provided on our last call.
Revenue growth was within the range provided an adjusted EBITDA of $487 million came in higher than previously communicated range of 480 to 485 million turning.
Turning to the fourth quarter results, our total revenue declined $163 million or approximately 16% in the fourth quarter. This result was driven by organic declines in our marketing segment of $196 million, which contributed <unk> 19 percentage points of the decline partially offset by organic growth in the sales segment of $14 million.
Which contributed one percentage point of operating growth and the contribution of acquisitions closed earlier in the year of $20 million contributed another two percentage points for Boston and growth.
The organic decline in the marketing segment was primarily driven by temporary headwinds from the suspension of in store sampling programs. We manage on behalf of the retailers in response of COVID-19, and as Tom You mentioned earlier. These programs were largely pause at the end of March and have only really begun to resume their safe and measured return to operation.
The organic growth on the sales segment was driven by continued strength in our core headquarter sales on merchandising services in traditional and E. Commerce channels. Our teams have continued to support clients throughout the pandemic for variety essentials sales on merchandising services in store and online the.
The incremental at home consumption, we have seen during the pandemic and the acceleration of online sales at retail partners have been a tailwind to our sales business that we have seen continued in early 2021.
Despite a revenue decline of approximately 16% adjusted EBITDA of $133 million was only down $12 million or 8% versus prior year.
Total company a decline was driven almost entirely by COVID-19 related declines in our marketing seven which was only marginally offset by the growth on the sales segment.
As Tony mentioned earlier, we also had some expense in the quarter that we plan for that is related to elevated personnel related costs associated with new business. We are standing up in sales segment and higher corporate expense, which gets allocated to the segments.
The expense associated with the investment in standing up new business to continue through the first quarter of 2021 for normalized throughout the remainder of the year.
Again, the earnings Resiliency is a testament to the two things are highly variable cost structure and our teams great efforts to manage the business with discipline during the pandemic disruption.
Turning to margin for fourth quarter was another strong quarter for adjusted EBITDA margins coming in at 15, 6% for approximately 140 basis points higher than the fourth quarter of 2019 the.
The year over year margin improvement is primarily attributable to the higher margin revenue mix in the current year and some smaller permanent savings from real estate optimization.
<unk> in the quarter, partially offset by anticipated higher personnel related investments and corporate expense mentioned earlier.
The mix favorability is twofold. One this is in the portfolio that was negatively impacted during the pandemic such as EMS for sampling were generally lower margin components of the revenue mix and two businesses in the portfolio that are growing through the pandemic such as our in store and online sales and merchandising services.
And the sales segment and alternative sampling programs and the marketing segment generally generate accretive incremental margins.
Obviously some of these margin gains will reverse as we returned to a more typical mix post COVID-19, but improvements in such areas as real estate will be lasting.
Moving to a summary of our capitalization.
For the closing of our merger with plenty of part two in late October for Q3 balance sheet included total debt of $3 3 billion. The debt was refinanced as part of the merger, resulting in a significant reduction on our balance sheet leverage and a meaningful improvement in the maturity profile of our debt capitalization.
Net debt to adjusted EBITDA was reduced from approximately five seven times pre transaction LTM Q3, 2020, adjusted EBITDA of 499 million for approximately four times at the end of 2020 using fiscal year 2020, adjusted EBITDA of 487 million.
Our day leveraged balance sheet will yield meaningful cash interest savings that we expect to benefit cash flow for discretionary investment in 'twenty 'twenty. One we expect to reduce leverage will yield cash interest savings of over $70 million on a pre tax basis when compared to 2019.
Near term 2021 and 2022 term loan maturity is under the old capital structures will refinance and now we have no meaningful maturities for the next five years.
At the end of 2020, our total funded debt outstanding was approximately $2 2 billion for.
Debt to capitalization and consist of a new 400 million ABL revolver of which we had approximately $50 million of borrowings outstanding at year end. This.
This facility accrued interest on a floating basis and was priced at LIBOR, plus 225, with a 50 basis points LIBOR floor.
A new 1.325 billion first term lean loans.
This facility accrues interest on a floating basis, the most price at LIBOR, plus 525, with a 75 basis point LIBOR floor and.
On a 775 million new senior secured notes. These notes accrue interest at a six $6 five per cent per annum.
You probably noticed that we paid down $50 million of the ABL revolver balance that was outstanding after the close of the merger with quandary for them too.
Our equity capitalization and today's filing consist of.
318 million on 425182 shares of common day outstanding.
Outstanding This share count now includes the $5 million performance shares that were satisfied and market performance testing test.
18 million on 583333 warrants with an $11 50 exercise price.
That would not be in the money at the current share prices.
<unk> 2 million for 557188 performance restricted share units Psus, and a 1 million 745087 restricted stock units are issues granted in early 2021 as part of advantage solutions 2020 incentive Award plan.
Turning to our fiscal year 2021 outlook.
Tom you touched on this a little bit earlier, so I'll just take a minute to add color to the revised 2021 outlook.
We now expect fiscal year 2021 adjusted EBIT to be in the range of $515 million to $525 million an increase from the 515 million that we had previously shared as part of our merger as.
As Tania mentioned, given the continued uncertainty surrounding the timing and shape of the Covid reopening we wont be writing 2021 revenue guidance at this time.
The large in store sampling business had the widest range of Covid recovery outcomes on revenue for the year.
In person sampling events have pass through revenue from the Reimbursable product, we purchased two the sample in store and the recovery of this event is going to be driven by the state of health on policy, which will be influenced by variables that are too hard for us to forecast, we've decided not to guide revenue.
That said, we will continue to provide helpful color and updates as we move throughout the year.
The operating environment normalizes in the back half of 2020 one.
With respect to the underlying assumptions, we are expecting COVID-19 related restrictions to continue throughout the first half of 2021.
Vaccines are rolled out and Covid continues to limit activities.
With that we expect revenues and earnings are likely to improve versus 2020 as the year progresses revenues are likely to be suppressed in the first half due to the mix of activity as we continue to nimbly manage through the remaining months of Covid, but we expect the results to improve through the second half as the in store staff.
Business returns to full operation.
With respect to the first quarter of 2021, we will be up against the tough comp.
We did not begin to materially affect our operations until activity restrictions were introduced in the United States in the month of March.
As a result, the margin segment is expected to remain down meaningfully versus prior year because of the pandemic impact to in store sampling business in the sales segment is expected to comp favorably in the months of January and February against a pre Covid 2020 period, but the pantry loading we saw in March of 2020 will be a tough comp.
That will be partially offsetting.
Net we expect the business to be down year over year for the first quarter in line with what we saw in the latter quarters of 2020, but to continue the trend of sequential recovery.
Finally, we expect net debt to adjusted EBITDA to be down below four times by the end of 2021, and we'll continue to delever towards three times overtime as Covid impacted earnings return in the business continues to growth.
Summing all this up we met or exceeded the fourth quarter and fiscal 2020 expectations. We are raising our fiscal 2021 EBITDA outlook we.
We are continuing to delever steadily and we are poised for a COVID-19 recovery with that I'll turn it back for Tania for any concluding remarks she has.
Thanks, Brian and one quick update before we open for questions as a newly public company. When you take engagement with our investors very seriously and for that and we announced in early March that we've hired a talented and seasoned consumer investor to help us with strategic planning.
And investor relation, we've appointed Dan risks to the newly created role of Chief Investor Relations and strategy Officer. Many of you know Dan he brings more than two decades of experience investing and advising in the consumer space to advantage. Most recently he was the portfolio manager.
In the consumer sector at surveyor capital and in his new role he'll be responsible for overseeing investor relations and corporate strategy functions, bringing a unique perspective on capital allocation and value creation to our senior leadership team. We're very excited to have Dan on the team and we hope that you reach.
Out and say Hello, after our call.
Fine how about you introduce yourself and then turn it over to the operator to open the call for questions.
Sure. Thank you Tanya.
I'm excited to join the advantage team and work with us on the line.
As Tony mentioned I've spent most of my career investing in consumer businesses in advising management teams in the consumer sector I got to know advantage solutions back in 2015, when they were in Boston Visiting me and my Wellington days beyond the great team and culture. What drew me here is a tremendous opportunity to create and unlock value.
Dante just a platform that is compounded profits at low double digits for over a decade more than twice the broader markets right.
On this with highly recurring revenue dominant market share healthy mid teens EBITDA margins robust for free cash flow conversion and a high return on capital model.
The business is also poised for outsized near term growth.
From a COVID-19 recovery and well positioned to help retailers and consumer goods companies navigate lasting change in how consumers shop.
One might imagine that as I. Initially did that this profile would trade at a premium for the broader market, but it doesn't get it.
Newly public entity, the company's attractive fundamentals are on sale at a wide discount to the broader market I get excited and involved in these types of situations when I find them.
We encourage investors to reach out to learn more about us here on a plan to more than closed the valuation GAAP with that I'd now like to ask the operator to open the call for questions.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is on the question queue.
On a per search for if you will like to remove your question for the Q for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment. Please as we poll for questions.
Yeah.
Our first question comes from the loans, but she's Saputra with Deutsche Bank. Please go with your question.
Hi, Ah congrats on the good results and thanks for taking my question.
Tony I, just wanted to hone for their on the Covid, but notice as you talked about debt, particularly e-commerce and Ah just wanted to better understand how sustainable these trends are going forward.
I mean in your conversations with brand partners as well as the retailers how do you think about the sustainability of these trends. Thanks.
Yeah. Thank you for that question, it's a conversation that we're having a lot of dialogue and the and as you can imagine at the Nexus between consumers and retailers and brands is a part of the business that we'd been heavily relied on and you'll probably be surprised to know that you can.
Congress today, he is a half a billion dollar revenue business for us that we expect to double at low double digit rate driven by both organic compounding and continued tuck ins and you know that is a multitude of businesses for them first and third party.
Online businesses to convert all the way through to digital demo advisors, but I think the most important thing is that we've scaled to solve different types of problems for both brands and retailers and we see this acceleration of this business continuing.
And for the long term and we think for at the right place in the ecosystem to invest ahead of the trends on glad that we invested ahead of the trends because as you know important businesses like click and collect that's the perfect example of a rapidly scaling platform for innovation in our demo.
Sampling business with single serve bags on trial items delivered curbside and this business as an example has more than quadrupled during COVID-19 and we know that these trends are here to stay so we like our position in the market and we believe the accelerated trend.
Commerce low deck in the longer term.
Yeah.
That's very very helpful color on maybe just a quick question on the competitive dynamics.
And on page has consistently won market share and one new retailers.
Over the last few years can you just talk about the pipeline going forward anything in the pipeline that we should continue to monitor things.
Well, we have a very full pipeline and we're always working on new business. We actually think 2021 will be a much better new business year than 2020 was we really hunkered down during the pandemic to focus on our clients.
All of the problems that were emerging daily and weekly and monthly so with respect to our pipeline we have a strong new business pipeline with respect to competitors on what we're saying we really see the traditional competitor is rebuilding their capabilities rebuilding trust that they seem to be.
Focused on working.
You know working on their service levels were punishing Paul It seems like the right thing to do and as a reminder, the traditional competitor that you referred to really only compete with us in a portion of the business, which is the domestic part of our sales business, but we have a whole pipeline across many of our business.
And we think as we get beyond the pandemic brand.
And retailers will be looking to figure out how to grow and we're at a great a great position to help them with that.
That's helpful.
And maybe just if I can sneak in one more question just on the sampling events, it's good to see.
Those come back up and Jan I was wondering if you could provide any color for fab or also just based on your initial conversation where do you think those events might come in over the next few months any color will be helpful. Thank you.
Well I can't give you my clean numbers, but here's what I'll tell you why.
We expect that event count will steadily build.
As in store sampling returns that's what we've seen we believe it's going to continue at a measured pace in the first half it's been faster than we thought it would be.
This growth will accelerate in the second half of the year as COVID-19 related restrictions ease and in person events ramped back up towards pre COVID-19 levels in Q3, and Q4, but I would really look to in April of last year, We had 20000.
Sampling on that.
In January we had 135000 sampling events now that sounds good but that was against last January of <unk>.
For 100000 events. So we expect that will just be continual improvement it might be faster than we think but at this point. This sets us up very nicely to benefit not only from nice growth this year in sampling, but to benefit from a full year.
Sampling in 2022.
That's what and you know congrats.
Congrats.
Yeah. The last one you guys on payables.
Sorry for the last thing I would say about that is you know the consumer have really miss sampling, we have great stories about their excitement when they return and brands and retailers are really pleased to have the Max the marketing tactics starting to come back.
That's why you have flipped on yep. Thank you once again and congrats on good results. Thank you.
Yeah.
And once again, if you would like to ask a question. Please press star one on your telephone keypad. Our next question comes from the line of Jason English with Goldman Sachs. Please see with your question.
Hey, good afternoon folks are good evening and welcome to the team is terrific.
Tonya on that last point I can attest that both myself and my kids are definitely looking forward to getting a free food back at Costco Okay.
We're counting on you.
We will be there will be there and just let me know what.
So you came into this year of 2020 pre COVID-19 with some pretty good momentum you you'd picked up some new accounts you were gaining share you had a couple of acquisitions.
Do you think it's fair to say that absent Covid, you would have been probably closer to the high Andy for EBITDA growth algorithm.
Absolutely I mean, you know what kind of momentum we had going into January and February of last year and I, absolutely do believe that.
Yeah, It seems that way, which suggests that you would've been on track to deliver something closer to the 530, rather than the 47. So you you under on buyer.
By around $43 million, I think with a bit the puts and takes them some benefits on sales and some some headwinds in marketing.
Guidance for next year again sort of sticking to your algorithm. If we were to grow off that $5 30 of your mid point it would get you to.
551, near the midpoint of guidance 520, suggesting that you still expect to sort of under earn baseline by at least $30 million.
Which seems like a chunky number it's more than half of what the math computes to be the underwriting this year and on.
I guess my question is is why is there is there conservatism on that or is there a timing expectation like hey, maybe some of these benefits in sales fall away faster than the recovery in food service than the recovery in demo. So is the timing issue or just just a bit of a little bit more cushion because there's a lot of uncertainty out there on the world.
You know, Jason there's a lot of uncertainty.
And as we mentioned you know we expect Covid related restrictions to continue through at least the first half as vaccines are rolled out and we still don't have a full year on sampling. This year, we haven't guided for 2022, but we benefit from the remaining of recovery next.
Sure and you know I think that you know a lot of the timing is unknowable and we think that other revenues are likely to drag disproportionately in the first half due to the mix of activities during the remaining months of Covid.
And as you know on the revenue side, we expect on less economic passed through from in person sampling until the business returns to operation over the second half and respect for the segments. If you think about it in sales service and international those are slowly coming back for life and we think that's going to continue but it's on.
Knowable in terms of the timing of when and as I talked about you know answering the question on marketing sampling is ramping up really nicely, especially in our largest customers, but that said getting back to pre COVID-19 levels, let's take well into the second half. So I wouldn't expect you know.
They could be in effect until 2022 earnings that I love that will go into 2022 with still a full half of the benefit of sampling not realized in 2021 for.
Sure. It sets you up for most couple of years of outsized growth.
The the sales segment, I guess I'm, a little confused as to what what dampened earnings for first thing has dampened earnings.
The beat versus your guidance in September or your initial plan on September time merger was entirely driven by the sales segment for the sales segment certainly has over delivered.
Versus your initial expectations as.
As we progress through but nonetheless, it was named the earnings power is pretty dampened here on the fourth quarter and it sounds like that was due to a lot of spending decisions. So you've timed a lot of expenses to hit this quarter.
Can you can you walk me through what those are and where they're going in and what the the whole for return on those investments is.
Sure. So I would first start.
But Q4 played out largely in line with expectations, but it ended up a little better than what we told you on the Q3 call and we were really pleased he said quite solid revenue improvement across both of those.
And then sales and marketing adjusted EBITDA. It came in slightly ahead of what we guided to on our last call and what you're referring to the expected sequential slowdown was attributable really to two primary drivers. The first with planned higher compensation expense for startup investments to stand up a large.
New sales business and you can expect that to continue until for first quarter and then it's going to moderate after that point.
And then the second thing that was also planned for was just an anticipated increase in corporate expense at year end. So we're really pleased with the fourth quarter. We continue to make progress in re launching the COVID-19 related business, we see good momentum in the sales business from some elevated at home consumption and.
As we talked about the E Commerce service adoption remains very strong.
All right. Thank you I'll pass it on.
Thank you.
And with that leaves and gentlemen. This concludes our question and answer session as well as today's conference call. You May now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
Thanks, so much.
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Okay.
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