Q3 2021 Advantage Solutions Inc Earnings Call
Good afternoon, and welcome to advantage solution third quarter 2021 earnings conference call.
Today's call is being recorded and we have allocated one hour so prepared remarks and Q&A.
At this time I'd like to turn the conference over to Deborah.
Keep investor Relations and strategy officer for advantage.
Thank you you may begin.
Thank you operator.
Thank you everyone for joining US an advantage solutions 2021 third quarter earnings conference call on.
On the call with me today are Tanya <unk>, Chief Executive Officer, Brian Stevens, Chief Financial Officer, and Chief Operating Officer, Joe Griffin, President and Chief Commercial Officer, and Dan Morrison, Our senior Vice President of Finance and operations.
During this call management in a forward looking statements within the meaning of the federal Securities laws.
These statements are based on management current expectations and involve risks and uncertainties that could differ materially from actual events in those described in the forward looking statements forward looking statements are based on the company's current expectations and are subject to inherit 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 section titled risk factors and management's discussion and analysis of financial condition and results of operation and elsewhere in the company's filings with the Securities and Exchange Commission.
I'll forward looking statements are expressly qualified in their entirety by such factors company.
The company does not undertake any duty to update any forward looking statements, except as required by law.
No management's remarks today will highlight certain non-GAAP financial measures our earnings release issue earlier today presents reconciliations at these non-GAAP financial measures to the most comparable gap numbers, which can be found on the investors section of our website at H T. T. P. S advantage solutions Dot net.
The company has also prepared presentation slides, which are posted on advantages Investor Relations website, you may want to refer to the slides during today's call. Please call is being webcast and a recording of this call will also be available on our website.
And now I'd like to turn the call will go to Tanya Hilmer.
Thanks, Dan Good afternoon, everyone as I did on our first few cause I'm gonna start by framing the advantage pollution.
Where the leading provider about for sales and marketing solution to consumer goods companies and retailers, we have a strong platform I've competitively advantaged services like headquarters sale retail merchandising.
In store standpoint, digital camera and shopper marketing.
And for brands and retailers of all sizes, our job is to help them get the right product on the shelf, whether it's physical or digital and into the hands of consumers. However, they shop.
<unk> value on this platform is simple, but it's not easy and that's the most fundamental level, where a trusted partner and problem solver, we help our clients sell more while spending lack we operate very efficiently providing fuel for growth.
We reinvest and attractive returns both organically and through Tekken acquisition, and as we deliver value our platform compounds overtime growing profits at more than two and a half times the pace of the S. N P.
And so grateful to our associates for the work that they do in the office and in the field and I want to take this opportunity to publicly thank them.
They are providing a central high returns services, helping consumer goods companies and retailers navigate out of this pandemic better cheaper and faster.
Once I conclude my remarks, I'll turn things over to Brian to discuss our financial results and then after that we'll open the call for questions I'll jump right into today's update.
As we look ahead advantage remains well positioned in a very dynamic operating environment.
Demand for essential services remain high as we help our partners navigate through unprecedented change in both brick and mortar and E. Commerce, we're investing to stand that tens of thousands of associates in a still choppy labor market to.
To help our clients and customers navigate unchartered water and salt unprecedented challenges every single day and.
And we're being disciplined and realizing price to offset wage inflation and our most labor intensive services with more to come on that later.
<unk> like this with lots of change as I've mentioned before our winter compounding platform really shine in fact, there may not be a better time to be a low cost scaled provider of essential services that extend all the way to the shop.
I'm very proud of our team, they're helping our brand and our retail partners work through near record inflation.
Applying demand imbalance is fragile global supply chains, and a rapidly shifting marketing mix the.
The path ahead may not be Susan our market, but we've got an amazing team and services deployed to win over the long term.
You're rolling down a bit we had healthy performance in our third quarter in the face of a dynamic and difficult operating environment and.
And the steady delivery year to date gives us the confidence to affirm are upwardly revised 2021, adjusted EBITDA guidance of 520 to 530 million.
We continue to see recovery and services most impacted by Covid, particularly in store sampling where events were up approximately 13% from the second quarter of this year.
Elevated at home demand continues to benefit our sales segment supported by steady volume and rising crime trends relative to pre COVID-19 level.
Our higher growth and higher margin digital services continue to deliver strong results annualizing to nearly a quarter of our prophet and providing a strong set of solutions to brands and partner in in Omnichannel World Post Covid.
As we bring sampling back to stores and we scale further in retail merchandising, we're standing up tens of thousands of new associates. This requires a significant investment in our talent and our workforce that will continue as we returned to full operation over the coming quarter.
In addition to our workforce investment we're also investing through the P&L in service innovation and a unique trade promotion optimization offering.
We're completing tech in acquisitions that add capabilities at attractive returns.
We have a robust pipeline of new business opportunities as we come out of the pandemic and we're being disciplined about taking Christ and a majority of our businesses that are most impacted by wage inflation with hikes of mid to high single digit we're not yet back to normal, but we're navigating the path to a new normal.
Quite well.
Turning to an update on our financial performance.
Some highlights from the recently completed third quarter. The business continues to deliver solid financials as the world reopened and we work through what we hope are the final innings of the pandemic.
Revenue continued to recover nicely in the quarter growing 18% year over year as in store sampling continues to build back in our marketing segment.
As the anticipated adjusted EBITDA declined modestly down 2% year over year I'm continued upfront investment in recruiting to build back our workforce in COVID-19 impacted operations Nix related decline and workforce investment in the sales segment.
And quickly on the segment.
Revenue growth remains strong in our sales segment at 10% year over year, driven by healthy rebounds in the Covid impacted international business and growth in retail merchandising services.
Offsetting some of our growth we had modest declines in headquarters sales revenue.
It's worth, noting however that while headquartered services are moderating from Covid peaks. They do remain above 2019 Creek COVID-19 level the.
The sales segment did see a forecasted year on year EBIT declined down 7%. This was driven primarily by upfront cost to ramp new business wins lower margin revenue mix from the type of work that we've won and continued investment in our merchandising work for.
To elaborate on the mix component you expected declines in headquarters services against last year's elevated Covid level cannot high decremental margin. While the addition of retail merchandising and international revenue came at lower incremental margin.
Moving to our marketing segment the revenue rebound continued F over 37% versus 2020 as a steady return of in store product demonstration at our largest sampling client delighted consumers and our digital services continue to have significant adoption.
Marketing also saw solid EBIT growth in the quarter up 12% year over year. This was primarily driven by healthy growth in digital offsetting significant investment in some of our in store sampling services to acquire and onward talent offsetting some supply chain challenges with single serve.
Ample availability and the roll off of high margin prior year Covid related services for retailers when sampling was done.
As we sit here today with just over a half a quarter to go in the 20th 21 calendar year in the same segment, we continue to see solid consumption patterns in the sales segment as.
As baseline volume remains elevated from pre COVID-19 level.
We expect it to continue to some degree with hybrid working as a trend.
But expect that volumes will continue to normalize further as more people go back to work and school and the coming quarters.
We're also seeing consumer goods supply chain struggle hurting some clients ability to get products to store.
Setting these headwinds were helping manufacturers navigate a more dynamic pricing environment to offset commodity and wage inflation. The C. P. G pricing tailwind directly benefits are headquartered sales business is commission grow with client business.
In the marketing segment.
In store product demonstration and sampling continues to receive strong support in our rollout and shoppers are very pleased to see the events that they've missed.
Brands are eager to bring innovation and product news to market and demand for events continues to grow as we've noted ending up teams of tens of thousands of trying to associate something that we're uniquely good at doesn't happen overnight and it's complex and costly, particularly in today's top talent.
[noise] market, we continue to invest to recruit and to train and to retain particularly in the in the store sampling services that we're bringing back to life. We expect that this will continue through the balance of 2021 and into next year.
As you can see our full year guidance anticipate a solid inflection in queue for performance both against depressed prior year comps and a Q3 that was squeezed a bit by mixed drag and temporary reinvestment.
He drivers of our expected robust Q4 are healthy pricing trend in our headquarters failed services.
Continued outperformance in digital services and solutions.
Flow through a pricing to offset wage inflation and steady recovering and sampling as we continue to staff up there to absorb are fixed costs and recruiting investment.
On the Covid front, we're watching things very closely we.
We continue to expect the pandemic disruption to subside as the state of health improved, but we remain nimble and prepared for a whiter than normal range of outcomes. As noted earlier, we are affirming or 2021, adjusted EBITDA guidance of 520 530 million.
As many of you know, we plan cautiously and execute relentlessly.
Even solid organic performance and check in acquisitions year to date, we're comfortable in our outlook with just a few weeks ago and believe we're positioned well to deliver against this range and a wide set of macros scenario ably navigating meaningful inflation and labor and supply chain disruption that no one can.
I have four cats.
Before I turn it over to Brian for more details on the financial I do want to highlight the share repurchase authorization, we communicated in a separate release after the close today.
We continue to believe are heavily discounted share price is meaningfully disconnected from our stable fundamentals and healthy outlook, given that will be opportunistic and buying back the business that we know that our.
100 million dollar authorization will be utilized when two basic conditions on that chair.
Chairs trade it meaningful discount to a conservative estimate of intrinsic value and share repurchase compared favorably to alternative uses of capital deployment, including are highly value accretive M&A program with that I'll turn it over to Brian.
Thank you Tom you have a good afternoon, everyone great to be speaking with your time you touched on the third quarter highlights so I'm going to share a little bit more color of the segment level, if they could get into a full year guidance as time I mentioned earlier, we do revenue, 18% year over year in the third quarter to 929 million, primarily driven by the mortgage.
<unk> as in George sampling continue this return to operations in the corner.
That is expected adjusted EBITDA declined slightly 2% year over year to 134 million, primarily driven by anticipated decline in the sale segment, which resulted from some moderation and an order she'll service relative lost yours elevated COVID-19 levels.
Also contributed to the coin that's Tanya mentioned earlier is the ongoing investment we are making to stand up very large laser forces to bring Colby impacted franchises back to full operation and the scaling to help me, making sure Gage in a retail merchandiser services.
Turning to our segment Bill segment revenues grew 10% year over year to 597 million retail merchandising services and recovery of the cold It impacted international business wrote most of this growth.
El segment, adjusted EBITDA was 95 million down year over year from lower margin revenue mix, including the anticipated moderation in the headquarters she'll services and investment in our workforce marketing segment revenue were up 37% year over year to 332 million. This represents the second.
Consecutive quarter of growth following the pandemic impact your quarters, <unk> 39 per cent and minus 31 per cent.
So just to be but Ah in marketing was up 12% year over year 239 million driven primarily by two drinks in our digital business and enforce samplings returned of operation more than offsetting upfront investment to build back or were forced to support samplings returned the operations.
Turning to overall mortgage third quarter adjusted EBITDA Morgan came in at 14, 44% down.
Down 300 bits from the elevated COVID-19 levels in 2020 expected you over your emergency dip was primarily attributable to two factors first normalizing revenue mix is a lower mortgage service continue to recover from Covid.
And second upfront investment to stand up labor and Ah in store sampling in retail merchandising services.
His recent pricing moves to also wage inflation flow through and arriving sampling volumes absorb more fixed cost and investment expense, we expect to send one to eat.
Turning now to a full year 2021 outlook.
That's Tony noted, we're comfortable with our fiscal your 2021 adjusted EBITDA range of 520 530 million some items to keep in mind with just a few weeks to go into your.
Q4 will have continued investment in recruiting training and retaining talent and labor intensive services, particularly as we bring large operations like insured sampling that's a full operations and scale up further in retail merchandiser.
Gambling and demonstrations should continue to ramp suddenly.
Hoping to labor supply returning to Marcus and the supply chain being able to deliver a favorable fraught with.
At home demand has remained elevated above three children levels, even with a return to in person learning and hard work.
Our pipeline a high return M&A opportunities as robust we've closed a handful deals and have more we expect to close over the coming quarters. We will continue to pursue pricing to Austin wage inflation and a labor intensive services engaging receptive partners in dialogue about the need for speed and recruiting strong talent in this market.
We continue to make the room for a moderate amount of medium term investments through the piano Elvis your bidding on strong organic growth ideas and projects for more talented leaders and these will pay off in 2022 and beyond.
Somebody all the stuff we had a solid first three quarters, we've got some investment to bring a large workforce back into operations and some unknowns in the homestretch of ear will be scrubbed the forecast pretty relentlessly can remain confident about the strong finished you're the you're the delivers the annual guidance we should.
Now turning to some balance sheet items is tania indicated our net debt to EBITDA finished a quarter approximately 3.9 times in line with cute two levels.
Free cash flows should ramp up in Q4 and into 2022 as.
As noted in the last quarter, we now have no meaningful maturity in the next four plus years also note on October 28th 2021. The company successfully repriced. It's 1.3 billion first lien term loan down by 75 minutes to a 5.25% interest rate.
And you wanted to check the interest savings or roughly 10 million or 7 million after tax will be realized annually for the remaining six years until maturity.
At the end of Q3.
Total funded <unk> upstanding was down to approximately 2.1 billion.
A summary of our debt and equity capitalization can be found on Friday in the supplementary slides for two three results that posted on it or Investor Relations website.
And with that I'll turn it back over to Tiger.
We're enthusiastic about 2021 M beyond here to advantage, we believe in the power of our business model of delivering need to have services for brands and retailers and we do it better cheaper and faster than they can do it themselves.
We will continue to focus on helping our clients that emerged from unprecedented disruption and change we will continue to deliver both cost efficiency and sales efficiencies to clients, which is real growth. This is how we serve existing clients well and generate new business wins.
We're winning with how can acquisitions and stepped up reinvestment through the P&L, bringing technology enabled services to meet our client needs.
Sam any closing thoughts before we open it up to Q&A.
Thanks, Tanya I'll.
All done my fundamental investor had again to wrap this up.
Advantages in central provider sticky sales and marketing services with a proven history of healthy organic growth and returns on capital and admirable track record of navigating unprecedented disruption drink COVID-19.
A compelling case that will emerge stronger postpone debit.
This baffling and bifurcated market are compounding fundamentals trade hands up well under 10 times EBITDA for.
For perspective that share price implies no groups ever again.
It's flawed assumption in my view represents an opportunity to fulfill a long term investors is tania noted or expressing confidence at our own risk reward with our first ever share repurchase program.
Authorize it investments and yes, it we know best ourselves.
The fog clears, we plan to grilled liquidity escape from broader spec skepticism can move past enlist alarmists labor market headlines with.
With time patience is fundamental value delivery, we expect to close or discount to the consumer goods and markets, we serve and the services businesses, we could be coke against.
As each turn of equity value that a cruise is worth more than 20% to our total fair value Bottomline.
Bottom line I liked the symmetry here and encourage folks to dig a bit deeper and reach out to us to discuss AVB.
With that now.
Now like to ask the operator to open the call for questions.
We will now begin the question and answer session.
The question no crestor been one on your Touchtone phone, you're using a speaker phone. Please pick up your handset before pressing the keys.
Withdraw your question. Please press Star then too.
At this time, we will pause momentarily tell some more roster.
Our first question today comes from Tony tough one with Morgan Stanley. Please go ahead.
Thanks, So much uhm tunny to talk to about a couple of the different factors that are impacting L. The challenging staffing environment, which we're seeing across you know a number of our business services companies as well as the supply chain issues is there a way to frame how much demand that you have.
<unk> been able to meet because of any of these factors.
That's a great question, Tony and I would just start you know with the backdrop of acknowledging what you said, it's certainly a dynamic labor environment right now and we expect investment and labor to continue through the balance of this year.
An internet.
And demand definitely exceeds supply, we're not reporting on the demand versus the supply, but I'll tell you that the investment that you see are most heavily weighted towards the upfront recruiting as we stand up our large demo work for us and we grow quickly in retail merchandising weather's been.
A lot of demand and I think it's really a testament to the fact that these services are needed to have and that's been proven they're out COVID-19 and the investments that you've seen and we will continue to see our critical you're gonna see sampling and demo continue the trend back to.
<unk> pre COVID-19 levels and you know as we noted supply and demand is something that we're dealing with every day were racing to staff the robust demand and you'll see each platform continue to roll back over time and as we talked about you'll see the discipline.
Way.
That we're working to get our worker back we've not been immune from wage inflation as you can imagine we all see it in the headlines but to offset this we've been very disciplined and taking pride.
And a majority of <unk> of our businesses most impacted by wage inflation with types of mid to high single digit and more to come as needed and the reason that I share. This with you is because.
As you can imagine that's helping us to meet that demand more quickly because we've been working in partnership with brands and retailers to be able to take price to increase wages to get our workers back and out there servicing the customers and the shoppers and again, it's a testament to what we've been.
Saying, all along that a value added services I need to have not nice to have and I think it really illustrates the value of our model, which is that plants are relying on our capabilities and the scale to deliver critical services efficiently, it's not easy for anybody, but we have great expertise in recruiting.
Raining and retaining talent.
Great and then related you know you you made a.
Sort of a high level of investment in third quarter, which you add talked about previously until definitely expected.
Just talk about you know, how you're thinking about the level of investment and four Q relative to three Q.
So the shape of the year's unfolding about as we forecasted and as we tried to signal with each of these calls they're puts and takes but we're reaching the end point that we've committed to queue for shaping up to finish the year nicely just a few weeks ago and we feel very good about our ability to land.
Here in our adjusted EBITDA range, and two factors really drive to Four's inflection first our business is generally higher as you can imagine in queue for because of the holidays and second our business is ramping further in queue for as a covert impacted businesses work their way back towards full operation.
<unk>. So two four will also show continued flow through of discipline price hikes that I mention to offset wage inflation and some lift from healthy CPG traced pricing trends that we've all seen that are eating our headquarters sales commissions.
Perfect. Thanks, so much.
Thank you Tony.
Again, if you'd like to ask a question of the stars on 171 to ask a question.
Our next question comes from Jason The English with Goldman sauce. Please go ahead.
Hey, guys. Thanks, a lot ma'am I've got a few questions you tiny, let's let's let's call. It a throw that last comment you just made the price increases are eating your headquarters so sales.
Oh exactly our headquarters sales down.
I don't really fully appreciate it given that we've got so much price in the system demand remains elevated what was the transitory boost last year that smell falling away.
Well there was definitely elevated demand, we still see elevated demand versus 19, but certainly not when pantry level was occurring you know you mentioned supply chain and that does create some short term noise, it's hard for us to sell what's not available but.
That's reflected in our outlook and we expect it to work itself out, but again supply chain is another great example of where short term pay increase longterm game for our business and we're working with clients to help figure those problems out. So we've proven ourselves to be a tested in central partner to our clients and we're.
Genuine to do that we don't have an immediate solve for supply chain and that does affect flow through the headquarter condition, but we are working tirelessly to ensure that everything that's available gets presented flawlessly on the shelf, whether it's physical or virtual and there's never been a higher premium on flawless execute are cute.
Execution, all the way to the shelf and you see that again by people being willing to pay more for it and we think that <unk>.
Really what we've learned again and reinforced through Covid and this long period, which is.
These services I need to have.
Tiny we we seem to have passed the pantry those days grocery store sales are up.
C. P. G company reported sales are up I still can't tie it all out in terms of why your commission stream on the on what seems to be a growing revenue pool is shrinking have you have you suffered commission compression or have you lost some headquarters shelves accounts.
No we have not seen any compression.
In our headquarter margins since you know the last few years as we talked about the last time that we really saw that was consolidation. So it's really not a compression issue. Some of what you may be seeing though is some of the supply chain issues affect us <unk>.
More than they do the garage broader CPG community, because we don't have headquarters or headquarter conditions at the largest account.
So often times, it's the tier two into your free account, where the cut happen in supply chain. So that's likely the disconnect that you're seeing in overall C. P G and the advantage headquarter business.
Got it got it that makes more sense. Thank you for filling in the gaps there uhm pivoting to the marketing side of the business.
You've mentioned about sort of the appetite to bring sampling back in progress there, but I'm looking at your side for a man. We're just creeping barely sort of creeping all your and I I asked I asked the sort of a <unk>.
Call you guys do like educational call, but.
We've gone kind of two years now without sampling and businesses humming for all the major manufacturers and for Costco.
Is it reasonable to assume that we're not gonna get all the way back to 100 per cent that they've found that they can live without some of this costly sampling activity.
I don't think that's the case at all we're actually seeing the opposite as we talked about the demand is greater than the supply and I would just say again, you know we can't overemphasize them off the.
The bill, but it is to stand up tens of thousands of people and you're seeing steady progress that's exactly what we expected and we still expect progress towards Creek Covid level and we expect continued improvement in Q4 verses two three just like we saw in two three verses two two.
But given a tough labor environment. Some of the rebuild is likely to push into the early part of next year. There was always a fuse on how long it would take to stand up these businesses is burning a little slower than we probably would've guessed that people have come back to work more slowly than we expected. After stimulus ended the good news is that.
Contrary to what you asked about earlier the demand for the services from brands and from retailers.
And from consumers remains very strong.
That's good that's good to you one more question that I don't want to be too much for quahog, so password on but I think Brian and comments about like fourth quarter said flow through a pricing to also wage inflation will build I was hoping you could give us sort of an update on that where do you stand in terms of wage inflation like how's.
And your piano overall, and then of course, where do you stand on that also in terms of your ability to push through pricing to to pass it on.
Yeah, well you can imagine we've had a number of those conversations with our both brand partners and in our largest labor businesses and we've taken place in a majority of our businesses that are most impacted by wage inflation and on average those price hikes during the mid.
Just single digit range, they're gonna flow through at different times, because the conversations happen at different times, but our pricing progress matches up well with our CPG clients in terms of the ground that we've covered and the magnitude of pricing that we've worked through.
In partnership with brands and with retailers.
Got it Okay, I've got many more questions, but I'm gonna I'm Gonna pass it on and get back into the queue.
Okay. Thank you Jason.
Does that mean, if you'd like to ask a question of the started on the wall.
It doesn't want to ask a question.
You would like to ask a question. Please press star of it <unk>.
There being no further questions. This will conclude our question and answer session I would like to turn the conference back over to Tanya Domer for any coaching remarks.
Thank you everybody for your questions and your support we look forward to the one off and Jason I know, we have scheduled session I do so hopefully I'll have all those questions ready and to everyone else all of our.
All of our partners on the policy. Please get your questions ready and we look forward to all of our follow up sessions with Ya. Thanks, So much.
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