Q4 2021 Advantage Solutions Inc Earnings Call
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Good afternoon, and welcome to the advantaged solutions fourth quarter and full year 2021 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'd like to turn the conference over to Dan riff, Chief Investor Relations and strategy Officer for advantage. Thank you you may begin.
Thank you operator.
Thank you everyone for joining us on advantage solution 2021 fourth quarter earnings Conference call.
On the call with me today are <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 Finance and operation.
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 discussion and analysis of financial condition and results of operation and elsewhere in the Companys 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 to the most comparable GAAP numbers, which can be found on the investors section of our website.
At https advantage solution 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.
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 to Omar.
Thanks, Dan Good afternoon, everyone as I'm sure. Most of you have seen by now we put out a press release today announcing that after more than three decades at advantage and I'm. Our 10 years as CEO I have decided it's time for needed trains that came to an executive chair role and pass the baton to the next generation of amazing.
Leadership at our company. The plan that we've shared is the result of multiple years on succession planning with the board and I couldn't be more excited to share that Joe Griffin, our president and Chief commercial officer will become our next CEO .
Joe is a proven leader and she knows how to create value she's a champion of advantage culture and values. She joined advantage 14 years ago and soon after replace me as the leader of our marketing Division, which she quickly and consequently grew into a multibillion dollar business.
She has been my partner in building the business for over a decade and I can't think of a better person to write the next chapter of the advantage story.
It's been extremely rewarding to see her grow as a leader throughout her career and with Joe at the helm I am grateful knowing that I leave the business in better and more capable hands and I am confident that under her leadership. The best is yet to come for advance it.
When I transition into the executive chair role on April for all serve on the board of directors and I will continue to support Joe and the team as they build the business.
Take any more time to discuss this announcement on this call, but I hope that you all read our press release and I also hope that Youll read my letter to associate that posted in the newsroom of our website, if you'd like to learn more so with that we'll now turn to our results.
As I did on our first few calls him to start just by framing that isn't it.
Advantaged solutions is a leading provider of outsource sales and marketing solutions and consumer goods companies and retailers.
Our data and our technology, driven services, which include headquarter sales and retail merchandising in store and online sampling digital commerce, Omnichannel marketing retail media and other.
All of our brands and retailer of every size gets their products into the hands of consumers wherever they shop.
And we talk a lot about the fact that creating value on the platform is simple, but it's not easy.
Most fundamental level, we're a trusted partner and a problem solver.
Help our clients sell more while they spend less.
Operate efficiently providing fuel for growth.
We reinvest at attractive returns, both organically and through tuck in acquisitions.
And we deliver value and as we do that our platform compounds overtime.
I'm, so grateful to our associates for all of the work that they do and I just wanted to take this opportunity to publicly thank them. They are providing essential high return services, helping our partners and helping consumer goods companies and retailers navigate out of this pandemic as we've talked about.
<unk> and cheaper and faster once I conclude my remarks today, I'll turn things over to Brian to talk about our financial results and after that we'll open the call for questions.
Now I'll jump into the results and the start I'll share highlights from Q4, and 2021 and our high level outlook for 2022 so.
So first a few headlines from Q4, a strong finish to a challenging year.
In Q4, we delivered solid year over year revenue growth with healthy low double digit incremental margins. Despite the headwinds from our service mix and wage increases.
Our higher margin digital services grew at double digit rates again.
We saw continued recovery in business is most impacted by COVID-19 with sampling events up 20% quarter on quarter.
We saw sustained at home consumer goods demand and at the same time experience the pain of our clients supply chain challenges.
We enjoyed a robust rebound in Europe . Thanks.
This reopening but did see some tempering at quarter end and into 2022 tied to Covid.
And we continued the difficult mission, we've been discussing each quarter.
<unk> heavily in recruiting and retention to stand up tens of thousands of new associates.
Looking back over full year 2021.
'twenty, one was not a normalizing post COVID-19 year that we all probably expected.
<unk> continued for longer in Covid aided business.
And rebounds were slower than our COVID-19 impacted businesses.
Consumer purchase decisions were dictated as much by shelf availability is brand preference or price point, we saw supply chain hiccup dayni efforts to revive innovation pipeline.
And shifting service next elevating recruiting costs and rising wages net we converted less of our revenue growth to EBITDA gain.
In the context of this dynamic environment. The sales segment posted healthy revenue growth, but net recruiting and wage costs all constrained EBITDA growth.
And our marketing segment rebounded nicely on steady rebuild in sampling and sustained strength in digital services and speaking of digital our aggregate collection of digital services generated a high teen share of revenue and nearly a quarter of advantage EBITDA leveraging organic expertise.
And value accretive tuck in acquisitions to help brands and retailers navigate an increasingly omni channel world.
In retail merchandising headquarter for grocery and also foodservice, we saw some EBITDA pressure.
International saw a nice recovery in was a pocket of EBITDA strength.
And in the end, we met our commitment we delivered the adjusted EBITDA that we targeted and we like many others underestimate. It a number of headwinds that include labor market disruption inflation and supply chain unrest, but we came through and delivering on our commitments and NAV.
Advocating ably in real time.
I really couldn't be more proud of the advantage team for impressively posting very solid 2021 revenue and EBITDA results.
And I'm very grateful for their work in evolving our business with nimble scrappy boots, dropping we have an ideal foundation as we look ahead to a new normal and we plan to invest ambitiously and very thoughtfully to win.
And with that as context, I'd like to drill down a bit deeper.
Here are some financial highlights from the recently completed fourth quarter revenue.
Continued to grow solidly in the quarter up 21% year on year, driven by outsized growth in retail merchandising continued outperformance in digital and ramping recovery in sampling and demonstration and as our full year guidance implied Q4, adjusted EBITDA inflected nicely.
<unk> growing 16% year over year, despite the mix headwind and despite the investments in labor and wages as I mentioned earlier.
Touching quickly on the segments in Q4.
Revenue growth remains strong in our sales segment up 15% on year, driven by healthy rebounds in the Covid impacted international business and also in growth in retail merchandising services and then offsetting some of our robust revenue growth we had a decline in foodservice.
Our sales segment EBITDA grew 5% as lower variable compensation expense and strengthen international more than offset mix and labor headwinds and our headquarter retailer services and challenging decremental margins in foodservice.
Moving to our marketing segment the revenue rebound continued up 34% versus 2020 as in store product demonstration at our largest sampling plant ramped up as quickly as we could staff demonstration teams and.
And our digital services continued to outpace robust e-commerce and market growth.
Marketing also saw solid EBITDA growth and operating leverage in the quarter up 39% on the year and this was driven by strong profit growth in sampling and digital services.
Now that I've shared more color on advantages solid execution to finish 2021, I'm going to turn our expectation to 2022 at a high level.
And I'll start by first talking about what unchanged, we continue to help brands and retailers solve problems and win in the marketplace.
Today that means helping to navigate record inflation for quite chain constraints and shifts in consumer demand and marketing mix.
As a culture, we continue to plan cautiously and execute relentlessly, placing a very high value on doing what we say and keeping our commitments.
As a team we've taken a deep dive into our historical drivers of value creation, and we've done a thoughtful analysis of both the challenges and the opportunities that have emerged post COVID-19 and had a humbling reality check as we evaluated structural shifts in the labor market from here.
The new normal whatever the new normal is but in the consumer goods market place is likely to be different in any way, especially for labor market, but our ability to evolve remains core to our DNA.
The next stage of our evolution will come with opportunistic reinvestment there.
The reinvestment will really come in three four first in talent.
And we're focusing even more funding on talent stepping up investments in wage and recruiting and retention and second in innovation, we're investing to scale adjacent and complementary services, especially in digital.
And then third we're pursuing renovation accelerating investment in infrastructure and systems and tools to help us to continue to drive productivity and collectively these moves will strengthen and extend our franchise and widen our operating mode.
As we reinvest in the business and we continue to navigate an environment with a wide range of outcomes, especially around inflation and labor, we expect to deliver an adjusted EBITDA range in 2022 of 490 to 510, none yet.
The outlook reflects an initial budget for 2022 that showed modest year over year adjusted EBITDA growth versus 2021, our performance that we could have chosen to pursue.
But instead, our leadership and our board decided to pursue a compelling portfolio of high return reinvestment opportunities to position advantaged solutions, even better for the long term.
As I suggested these investments include a mix of talent innovation and renovation opportunities within talent, we're investing to stay competitive on wage share resources across our business units streamline recruiting and boost retention and within innovation, we plan to deploy.
Capital to accelerate growth in higher margin higher return franchises, most likely to thrive post COVID-19 with our most talented entrepreneurs.
Within renovation, we're accelerating the pace that we refresh and revitalize our infrastructure Foundation.
Renovation investments will enhance our productivity and improve our flexibility as an enterprise and as always we have a high return expectations for our Reinvestments at advantage teams getting capital had submitted rigorous business cases, they face intensive milestone and payback reviews and will continue to share.
All are on progress and pay back with the Investor community as we go.
I'm sure. Many of you are going to have questions on our outlook and I will look forward to those and so will the team in a few minutes I also wanted to share a bit of color on our first quarter with just one month ago.
And I guess hurt the punch line is really not getting any easier out their supply chain challenges are bad to worse among brands and the out of stocks remain high and this in turn squeezes revenue and EBIT and then large components of our sales segment labor.
Labor continues to challenge us as well, we're spending more to recruit and to retain and we're battling turnover in both hourly and professional ranks we.
We believe that the investments that I mentioned here will pay great dividends over time, and likewise, we expect that our efforts to realize pricing to fund these wages should move the needle again in 2022.
As they did in 2021, because our services remain a high return on investment and their need to have rather than a nice to have offerings.
Also have cost advantage scale in delivering them, even in the face of wage inflation.
While we don't provide quarterly guidance, one might assume that Q1, adjusted EBITDA ends up closer to 2018 or 2019 levels, rather than 'twenty or 2021 .
Finally on the Covid front, we're watching things very closely we'll continue to expect the pandemic disruption to get better as the state of health improves, but we remain nimble and we remain still prepared for a wider than normal range of outcomes and with all of that I'll turn it over to you Brian .
Thank you Tanya and good afternoon, everyone. It's great to be speaking with you.
You touched on the fourth quarter and full year highlights so I'll share a bit more color at the segment level.
In Q4 sales segment revenue of $631 million was up 15% year on year.
Segment EBITDA of $94 million was up 5% year on year.
Marketing segment revenue of $402 million was up 34% year on year.
EBITDA was $60 million was up 39% year on year.
Breaking down the drivers of our revenue growth in Q4.
40% came from growth in sampling and demonstration.
Another 20% came from market growth and share gains in our high performing retail merchandising services.
<unk> an acquisition that we made in September .
And continued digital gains drove another 12% of our group.
And drilling a bit further into the drivers of our EBITDA growth in Q4.
We're getting gains drove just over three quarters of the year on year adjusted EBITDA growth.
Lower performance based compensation.
Profit recovery and sampling and demonstration and solid incremental margin in digital services drove marketing profit growth in the quarter.
On the sales side international profits and lower performance based compensation more than offset adjusted EBITDA headwinds in our headquarter retail and foodservice areas.
Turning to full year 2021 cell segment revenue.
232, 4 billion was up 13% year on year.
Segment EBITDA of $363 million was up 1% year on year.
Marketing segment revenue of $1 $278 million was up 17% year on year and segment EBITDA of $158 million was up 24% year on year.
As we suggested full year adjusted EBITDA margins land squarely between 2019 pre COVID-19 levels in 2020 elevated levels.
Breaking down the drivers of our revenue growth in 2021.
25% came from strong year on year gains of our high margin high return digital services and solutions.
Just under 30% came from marketing growth and share gains in our high performing retail merchandising services.
Just under 20% came from recovery in our international business.
And just over 15% of our 2021 revenue growth came from accelerating recovery inner sampling and demonstration services.
Drilling a bit further into the drivers of our EBIT growth in 2021.
Mortgage gains drove nearly 90% of the year on year adjusted EBIT growth strong.
Strong digital growth explain the bulk of the marketing segment adjusted EBIT games.
On the sales side international profit gains and lower performance based compensation more than offset adjusted EBITDA headwinds in our headquarter retail retail merchandising and foodservice areas.
Turning now to some balance sheet items, our net debt to EBITDA finished the quarter at approximately three seven times.
Our debt profile is healthy we have no meaningful maturities in the next four years.
At the end of Q4, our total funded debt outstanding was approximately $2 1 billion.
A summary of our debt and equity capitalization can be found on slide nine in the supplementary slides for Q4 results that is posted on our industrial relations website.
Touching briefly on a few items related to our 2022 outlook first I want to reiterate that we are moving aggressively to realize price and our essential need to have services, where we're taking up wages.
This initiative is being led from the top and grounded in hard facts about labor inflation and Rois.
Our guidance is somewhat conservative about pricing success, but early signs are encouraging.
On free cash flow after a year of reinvesting in working capital to stand the Covid impacted businesses, we expect a more normal year of free cash flow conversion in 2022.
It's safe to assume that one quarter or more of our adjusted EBITDA converts to equity free cash flow for the year.
And finally on leverage given our adjusted EBITDA guidance and plans to reinvest through 2022, we expect net debt to EBITDA to end the year slightly up versus 2021 levels. We intend to continue our deleveraging path in 2023 and beyond.
I'll turn it back over to Tommy.
Thanks, Brian .
We're proud of how we navigated a tumultuous 2021, and we're excited about our plans to invest in.
In both renovation and innovation in 2022 and beyond.
The team we've grown this business through seismic shifts and meaningful challenges and our 2022 adjusted EBITDA guidance gives us a healthy pool of funds to generate attractive returns with a very strong foundation that we can compound from.
We're grateful for your interest and your support as owners and prospects and we're eager to share more thoughts and perspectives and insights today and also in coming days and much more deeply in future analyst day.
Stan any closing thoughts before we open it up for Q&A.
Thanks Tanya.
As many of you know Adv shares have been weighed down by tough performance across the vast majority of recent these books were also not blessed with a readily accessible universe public comparables or abundant share liquidity, but.
But we do have a long term history of value creation.
High growth high returns that are digital services that are accelerating out of Covid is a thoughtful plan to reinvest in labor innovation and renovation to accelerate our sustainable growth rate expand our margins and boost our returns from here.
And that attracted profiles trading inside of nine times, a conservative adjusted EBITDA guidance level.
And at a mid to high single digit equity free cash flow yield.
I liked the asymmetry is an owner and as an operator.
With that I'd now like to ask the operator to open the call for questions.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question comes from Jason English with Goldman Sachs. Please go ahead.
Hey, good morning folks thanks for slipping me in and congratulations on a long illustrious career, there and I'm going to surely Miss working with you on a regular basis really seven or our colorful conversations quarterly.
Me too.
I don't know if Jos there, but if she is Ah congrats Joe on the.
Yeah.
Well deserved.
So much.
No Joe.
I know you are there.
We've got a new guidance out today, it's been delivered by Tanya.
Do you feel ownership and this guidance for fiscal 'twenty two.
I do.
Fully.
Now to help me understand some of the puts and takes.
You gave three buckets for the reason why the EBITDA is lower than you had expected.
Actively many months ago, and something we had expected talent innovation and renovation.
Talent and renovation don't sound like high return investments they sound like Rebased cost to compete to me.
Am I wrong in that.
Innovation sounds like it could be the area, where you could actually get some positive return how much of that investment is going into innovation.
I'm, assuming Tony you want me to take this.
I'll jump right in and give my perspective and then.
Dan I'm going to ask you too.
Step in when we get to what we can say about quantifying or not but Jason I'll just address.
Generally the strategy going forward.
Which echoes a lot of what Tommy has already shared.
For sure.
There is a bucket of this that is defense and a bucket that is often and you're.
Youre seeing the wage pressure the supply chain the inflation that were facing and it is absolutely.
A challenge, but I also want to say that you know managing labor has always been a primary strength of our business and it's why the largest brands and retailers outsource to us over time.
While we absolutely need to increase wages, we're very confident in the strategies that we have in place to drive efficiencies new system structures talent sharing as well as take pride to work on that so.
Youre right in that that isn't a.
Future growth.
Bucket of investment it is a required investment given the headwinds we're all facing and we feel really confident in our strategies to address it now turning over to the innovation we have.
So many great.
Seeds that we planted both pre pandemic and during the pandemic that now we are going to lean into these are new category Adjacencies a lot of the areas that we've been talking about with you over the last couple of years in E Commerce and data Tech and retail media and we.
We are very excited about being able to lean in harder now that we're coming out of some of the daily Urgencies that the pandemic was driving our focus on.
Okay.
And Amit, let me come back with them with I guess one more.
A lot of these seem like things that.
But you would hope you could price for.
Cognizant that seems like almost in every couple of year type of event, where something happens in the marketplace that causes your profitability you'd be rebased lower.
Whether it be pressure from the manufacturing community in one area or whether it be pressure from Walmart or the boom that I gave you and you need to kind of.
Address that through acquisition.
Or now labor costs all of them have resulted in a reset lower profitability.
<unk> been on successfully able to pass through a price too.
Is there any reason to believe that this is different but this isn't just sort of a structural reset that youre not going to be on the price for this this is a lower profitability level for the business.
I think Jason those are really good questions and we know that the labor markets are as tough as they've ever been.
And we are raising wages in an incredibly competitive market and I think if you look to last year and you look at how we were able to take price.
We just have not been able to take it faster because we have to invest ahead of price.
Where does that settle out your guess is as good as ours. All we know is we've evolved with the business we've been able to.
<unk> value in the business. If you look at what we've been able to do in the sales business during Covid and increase our margins for digital services, which are now a quarter of that.
Quarter of our profit.
All of those things are very very important because they show our ability to evolve will there be things that come up in the market from pricing to retailer programs, yes, yes, they will but specifically.
When we're talking about investing in talent, we actually think it does have good returns and we believe we will be able to price over time, but we're giving ourselves that room and that's why we've taken guidance down because there are a lot of uncertainties in wage and it's been really hard to get it right, but talent is our most valuable asset.
And we have been able to earn on that over time so.
Is it easy no is it dynamic yes.
But we're going to keep doing what we do which is invest to grow.
Yes understood. Thank you very much I'll pass it on.
Yes.
Again, if you have a question. Please press Star then one.
Please standby as we poll for questions.
Showing no further questions. This concludes our question and answer session I would like to turn the conference back over to Tania dual Meyer for any closing remarks.
Thank you all very much for your participation and for listening to us today, and we look forward to following up with you in our sessions have a great night take care.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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