Q1 2022 Advantage Solutions Inc Earnings Call

May 10, 2022

Good afternoon, and welcome to Atlantic It solutions first quarter 2022 earnings conference call.

Today's call is being recorded.

<unk> allocated one hour for prepared remarks and question Onthe.

At this time I'd like to turn the conference over to Norfolk blocking PS.

You bet your relation toy cottage. Thank you you may begin.

Thank you operator, thank you everyone for joining us on the dental solutions 2022 first quarter earnings conference call.

On the call with me today are Joe Griffin, Chief Executive Officer, and Brian Stevens, Chief Financial Officer, and Chief operating Officer.

After their prepared remarks, we will open the call for a question and answer session.

During this call management may make forward looking statements within the meaning of federal Securities laws.

These statements are based on management's current expectation.

And involve assumptions risks and uncertainties that are difficult to predict and could cause actual results to differ materially from those expressed or implied by such forward looking statements.

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 managements 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.

<unk> does not undertake any duty to update any forward looking statement, except as required by law.

Please note management's remarks today, we will highlight certain non-GAAP financial measures our earnings release, which was issued earlier today presents reconciliations of these non-GAAP financial measures to the most comparable GAAP measure.

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 the website you may want to refer to the slides during today's call.

This call is being webcast and a recording of the call will also be available on the website.

And now I'd like to turn the call over to Joe Griffin.

Thanks, Lisa good afternoon, everyone.

Thank you for joining us to discuss our first quarter results and our first earnings call since becoming CEO on April 1st.

I am honored and privileged to serve as advantaged. The Lucerne CEO , we have many exciting opportunities in front of us and I look forward to partnering with the board of directors, our senior leadership team and our associates around the globe to continue driving profitable growth across the enterprise.

Similar to previous earnings calls I'd like to start by providing a high level overview of our business.

Advantage. The Lucerne is a leading provider of outsource sales and marketing solution to consumer good companies and retailer.

Our data and technology, driven services, which include headquarter sale retail merchandising in store and online sampling digital commerce, Omnichannel marketing retail media and others help brands and retailers of all sizes get product into the hands of consumers anytime.

Anywhere in any channel in which they choose to shop.

At the most fundamental level, we are a trusted partner and problem solver for our clients.

We help our clients sell more while spending less.

We operate efficiently providing fuel for growth.

We reinvest into our business at attractive returns, both organically and through tuck in acquisitions.

And as we deliver value our platform compounds over time.

Our success hinges on our Cowen and advantage, where talent first our successful track record in managing our flexible large workforce remains an enduring competitive advantage for the company.

I would like to take a moment to thank the advantage of associates for their continued dedication and the work they do Dan and day out to serve our clients.

They are providing essential high returning services, helping consumer goods companies and retailers navigate the current environment better cheaper and faster.

On today's call I'd like to begin by sharing our first quarter highlights and then move to an update on the 2022 investment activities, we outlined on our call last quarter.

First a few key messages from this past quarter.

Accordingly, Q1 results were largely consistent with our expectations on the top line, we delivered strong year on year revenue growth of approximately 16%.

As the recovery from the pandemic progresses, we continue to see a meaningful improvement in our businesses most impacted by Covid with in store sampling events up 62% year on year.

In line with recent prior quarters, our international business continued to rebound as operating conditions improved across Europe as restrictions ease and businesses reopened.

I am very pleased with our year to date M&A activities here, we remain focused on acquiring tuck in asset.

Particularly in areas that help brands and retailers navigate an increasingly omni channel world.

However, as expected.

Adjusted EBITDA margins declined due to a shift in revenue mix.

Headwinds from wage increases on our ongoing investment activities.

This includes investing in new higher growth and margin accretive offering together with infrastructure to improve efficiencies we.

We are also spending in wages recruiting and retention to stand up significant numbers of new associates to meet client demand for our must have services.

With that as a backdrop I'd.

Like to drill down a bit deeper on our financial performance in the first quarter.

Revenues continued to grow solidly in the quarter up approximately 16% year on year, driven largely by the continued recovery in our in store sampling and demonstration of services.

Along with further growth and retail merchandising services and international businesses.

As anticipated our first quarter adjusted EBITDA declined 13% from the prior year period, reflecting the following.

A shift in revenue mix with historically lower margin demo business regaining momentum.

The ongoing reinvestment activities I, just referenced most notably in the quarter related to staffing and recruiting.

Continued challenges in our foodservice business and we also experienced an unusual increase in the amounts of self insured medical claims.

Turning to segment results for the first quarter.

Revenue growth remains strong in our sales segment up 11% year on year, driven by growth in retail merchandising services and a healthy rebound in the Covid impacted international business.

Sales segment adjusted EBITDA declined 19%, primarily due to the increase in share of lower margin merchandising revenue that drove the overall topline increase as well as heightened cost pressure in our merchandising workhorse.

Moving to our marketing segment, the recovery continued with revenue up 26% compared with the first quarter last year as in store product demonstration recovered significantly compared to a year ago.

Marketing segment, adjusted EBITDA expanded modestly in the quarter up 4% year on year. This was driven by revenue growth offset by increased head count and related salary cost.

Now that I've shared more color on advantages first quarter results I would like to provide additional detail on the important investments we are undertaking in 2022.

As a reminder, this investment will come in three key areas.

First in innovation, we are investing to scale adjacent and complementary services with a targeted focus on higher growth higher margin data intelligence and digital offerings.

Second in a renovation we are accelerating investment in infrastructure systems and tools to improve productivity and operational efficiencies across the enterprise.

And finally in talent, we're stepping up spending and wages recruiting and retention.

Taken together, we expect these efforts will strengthen our franchise and widen our operating mode, while driving growth improving operational efficiencies and better positioning advantage to capitalize on the many opportunities ahead.

Let's take a deeper dive into each starting first with innovation.

We believe a key future growth driver for advantage is new data and digital solutions that create even better commercial outcomes for our clients.

Pandemic has accelerated and changed what's neat business succeed for both manufacturers and retailers.

Growth in e-commerce within CPG retailing has created fundamental shifts in consumer behavior, which has in turn impacted retailer. This is why we are evolving our service offerings and focus to better meet the needs and expectations of boats.

To this end we are launching new services at advantage to better address the evolving marketplace and investing in new leadership to run this practice area.

These new services aggregate organize and create unique database retail centric solutions that drive more automated decisions for CPG manufacturers and retailers.

We see this as the cornerstone of our evolution and.

And a top priority as we look to strategically transition into more data directed services.

This new scaled data intelligence capability combined with our existing physical reach and presence is unique.

Helping our clients and customers gain insights and pull it all the way through to the transaction regardless of the channel.

We also continue to invest in deepening and widening our capabilities in other core areas of the strategy such as data driven supply chain services retail media and retail P. O S analytics.

Now, let's move on to activities within renovation, where we are reinvesting in our core business to enhance productivity and cost efficiency.

A key area of focus.

Is new digitally driven recruiting activities that will materially improve speed to hire and reduce cost to hire across our entire enterprise and particularly in our high volume retail services group.

The development of these digital tools will allow our businesses to more efficiently acquire talent.

Another core area is our operating technology stacks that power enable and optimize location based retail execution work.

We are investing in digital tools and software, we are confident will add measurable value and unlock synergies by improving existing staff utilization rate.

The dining program execution, increasing in store insights and providing new data opportunities.

And finally within talent, we are investing to stay competitive on wages and fully capitalize on our innovation and renovation initiatives.

These investments are both in wages to improve retention among our existing associates.

Along with recruiting new associates to further drive our growth and development.

As we look ahead I also wanted to share a bit of color on our second quarter.

Starting first with the headwind.

Hi chain challenges continue to persist and out of stocks remain elevated pressuring adjusted EBITDA.

Likewise, the labor market continues to remain very tight which as noted earlier requires additional incremental funding to recruit and retain across both hourly and professional ranks.

That said, we continue to expand our efforts to realize price from customers to fund wage increases in 2022 as we did in 2021 week.

We expect this to result in higher adjusted EBITDA in the second half of 2022.

Our services remain high ROI needs to have rather than a nice to have offerings and we have cost advantage scale and delivering even in the face of wage inflation.

Looking at the key tailwind we continue to expect the pandemic disruption to slowly subside and anticipate a continued rebound in the services that were most negatively affected by Covid that being said, we remain prepared for a wider than normal range of outcome.

Altogether, we are affirming our full year adjusted EBITDA guidance range of 492 $510 million with that I'll turn it over to Brian .

Thank you Jill and good afternoon, everyone. It's great to be speaking with you.

She will discuss our first quarter highlights so I'll share a bit more color on our segment level results and our full year guidance.

In Q1 sales segment revenues of $592 million were up 11% year on year and self segment adjusted EBITDA of $68 million declined 19% year on year.

Segment revenues of $323 million was up 26% year on year, the marketing segment adjusted EBITDA of $29 million was up 4% year on year.

Our revenue growth in Q1 was primarily driven by continued improvement of our sampling and demonstration following the return of in store events strengthened by our retail and merchandising services, including solid contributions from an acquisitions. We made in September as well as ongoing recovery of our Covid impacted international.

No.

Partially offsetting this growth as we anticipated with softness in headquarter sales from peak Covid levels, Although I am pleased to note headquarter services revenues continued to exceed pre pandemic levels turning to our Q1 adjusted EBIT results the year over year decline was predominantly due to higher labor costs.

<unk> increased headcounts in support of our return to full scale operation.

In store sampling and retail merchandising along with continued challenges in our foodservice businesses increased investment in new technology and unusually high medical benefit expense. In addition, adjusted EBITDA margin came in at 10, 6% down 351 basis points year over year, reflecting you <expletive>.

Klein of 421 basis points in the social Nick Goodman at 183 basis points in the marketing segment.

The lower margin is due to the revenue mix shift, reflecting an increase in lower margin revenue, primarily driven by meaningful increases in our single source retail merchandise and services and continue recovery of our international business.

Moving on to discuss some of the balance sheet items, our net debt to adjusted EBITDA finished the quarter at approximately three nine times, we expect free cash flow to ramp throughout the year with growth more heavily weighted towards the back half of the year.

In line with last quarter, our debt profile remains healthy as we have no meaningful maturities for the next four years.

At the end of Q1, our total debt outstanding was approximately $2 1 billion, a summary of our debt and equity capitalization can be found on slide eight in the supplementary slides for Q1 results posted on our Investor Relations website.

In terms of capital allocation, we continue to prioritize strategic M&A and organic investment to drive continued long term sustainable growth.

We'll also consider options to pay down debt and repurchase shares.

Now turning to our outlook for fiscal 2022 as Joel mentioned, we are reiterating our fiscal 2000, <unk> adjusted EBITDA guidance in the range of $4 $90 million to $510 million.

Let me provide some additional detail on the key considerations underlying our 2022, adjusted EBIT expectation and high level of financial performance first we want to emphasize that we continue to have active discussions and work with our clients to implement targeted price increases across our critical quote need to have services.

Amidst the backdrop of rising inflation increasingly challenged labor market.

Second turning to growth.

In terms of fueling organic growth, we are focused on executing against our investment strategy as we continue to invest in innovation renovation and talent to drive long term value creation.

Fiscal 2022 is very much a year in developing and prototyping. These higher growth higher margin solutions in order to scale them effectively in 2023 and beyond.

Regarding M&A, which as Joe noted continues to be an important part of our growth and value creation strategy.

So far in 2022, we have closed three acquisitions, primarily focused on marketing services. Looking ahead, we have a robust pipeline of attractive high return opportunities. We will continue to opportunistically pursue accretive tuck in acquisitions that are aligned with our future strategic growth avenues.

Field service, and our technology gaps or strengthen our existing capabilities.

Third on free cash flow, we expect to drive approximately one quarter or more of adjusted EBITDA conversion to free cash flow. This year with a more normalized 35% to 40% conversion rate resuming in 2023.

Fourth on leverage given our adjusted EBITDA guidance, we expect net debt to EBITDA at year end to be slightly elevated from 2021 levels, given our investment in strategy and capital allocation plans.

Beginning in 2023, we plan to resume our previously stated objective of steadily deleveraging our balance sheet.

And lastly regarding our financial performance as we look ahead.

We anticipate our revenues and adjusted EBITDA will be significantly stronger in the back half of the year as compared to the first half supported by the ongoing recovering and scale of our sampling demonstration and international businesses and continued strong contribution from our digital marketing services.

I'll turn it back over to Jill.

Thank you Brian .

We are operating in a dynamic environment, but I am confident that the macro uncertainty that exists will ultimately play to advantage of strength as a company. We have a tremendous roster of long standing blue chip customers spanning CPG brands and retailers and we provide must have services for these clients.

Thanks to our core competency in managing a large labor force, we do it better faster and cheaper than they can themselves now more than ever our clients are looking to us to help them navigate fast changing conditions in both e-commerce and brick and mortar channels at scale.

Our path forward requires targeted investments to better position us to take advantage of the significant growth opportunities that lie ahead and to operate more efficiently.

I believe in our team I believe in our value proposition and I believe in our ability to execute thank.

Thank you for your attention today and with that operator, let's please open the call for questions.

Thank you ma'am, ladies and gentlemen at this time, we will be conducting a question and answer session.

We'd like to ask a question. Please press Star then one on your telephone keypad.

Information tone will indicate your line was in the question queue. You May Press Star and then two if you would like to move your question from the queue.

Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star.

The first question is from Toni Kaplan from Morgan Stanley .

Thank you.

Wanted to ask about inflation, if you've seen any of the inflationary pressures abating on either the labor or the supply chain front.

Sure I can take that Oh go ahead, yeah, it's all right that's fine.

Yes.

No worries.

So I'd say.

Maybe I can talk about the.

The wages and then Joe can maybe touch on the supply chain, but.

On the wage piece of it.

Fortunately, we are still seeing inflationary pressures.

There.

Yes, more evident in some of the higher density markets.

But we are still seeing those challenges.

Right Yep, that's great we are definitely still amidst the inflation and where.

We're battling it on all fronts and we're beginning to see some of the impact also on consumer reaction to the pricing.

Yep understood.

Just on hiring.

Have you been able to hire as much as you'd like I know we've talked in prior quarters about.

The tight labor market may be impacting that and impacting us potentially demand you know having a constraint on on demand from the hiring side. So trying an update there.

Yeah, we still are.

Are experiencing more demand than we have supply so that is an ongoing pressure.

We are continuing to invest in our tools.

In our in our recruiting group as we talked about in our speaking points about speeding or increasing our recruiting as well as beating our time to hire and increasing our utilization of our existing workforce are all very key component.

Of dealing with the continuing very pressured labor market.

Great and just to sneak one more in one.

Wanted to ask about the trajectory of margins I think youre expecting an improvement in second half.

Second half so wanted to understand are the.

The drivers of of that a little bit more fully.

Yes.

Yeah go ahead go ahead, Brian well, Brian and I will get this down [laughter].

Oh, sorry.

Sure so specifically on margins.

Just so you know our expectation as the retail business on the <unk>.

Cell centric side and then also on the.

The demo business as it starts to come back and fully ramped.

It actually will have pressure on margins.

Revenue and EBITDA will increase substantially so so actually we'll probably see more pressure on margins in the balance of year.

Then that will get us to kind of a stabilized baseline that we can grow off of in 2023 and kind of going forward.

Very helpful. Thank you.

Thank you ladies and gentlemen, Mr reminder, if you would like to ask a question. Please press star and then one no the next.

Cushing inhibition side, the one from Deutsche Bank. Please go ahead.

Yes, hi, thank you.

So also I wanted to touch on margins.

You know you I think Brian you mentioned, a number of different factors and I know, we've been talking about investments and wage pressures and all of that.

I was wondering if you could help quantify and break down sort of that 350 basis points.

Year over year margin decline are you able to isolate and see how much of that was investment then.

Innovation renovation, how much maybe was attributable to mix versus you know rising costs. I believe you mentioned something sort of health insurance related. So just curious if there's a way to break down that.

Sure.

Theres a lot into that question. So what I can do is just talk generally about it. So let's first talk what you talked about as far as innovation renovation of talent.

So a lot of the investment we've made in talent, which is.

Said another way is increase in wage.

We've made that investment. So you are seeing that reflected into the margin as far as increased wages as far as renovation I would say that were partially into that meaning that we have made significant advancements in technology.

The two biggest ones are on the retail side.

As far as enabling us to real time information and dynamic routing.

And then the other one is on the talent acquisition side, which we're deploying a leading technology moving working on it for the past nine months.

It's going to be fully deployed over the next couple of weeks, which will help us on.

Speed to hire.

And addressing what Joe talked about is the recruits and and hiring more people and getting more people into the funnel. So we're excited about both of those and then as far as the innovation. It's still early stages on that so there really isn't a lot of.

Yes impact to the margin that you see there.

And then when you when you look at the margin and the other things that are impacting it.

A couple of them. So one medical we did see an increase in medical expense. This quarter were self insured and so we had an unusual spike this quarter significantly higher than we have in previous quarters.

And so it's hard to say, what's going to happen in the future, but it is unusually high for this quarter.

And so I think it would be reasonable to expect that it would come down from there.

And then talent acquisition costs, those are still high and elevated so we still see those and our expectation is that investment will continue to continue to maintain that investment in the upcoming for sure second quarter, but likely in the second and third quarter.

Will we get back to a normalized level of <unk>.

Yes.

You are seeing we talked about the foodservice lots that we had that is impacting us in Q1.

It was a mid year lost last year, or so will impact us in Q1, and Q2, but we will lap that Q3 going forward.

And then lastly, I think that the big pieces remember last year, we had.

Covid impacted to the positive and so we had positive flow.

In our sales business, which is it's not as.

<unk>.

In Q1 this year, so that's a lot, but but those are the main drivers that you're seeing as far as the the.

Kris and margin and ultimately decrease in EBITDA.

Okay. Thanks. Thank you for all of that and then I'm curious as you were talking about innovation and you talked about investments to scale adjacent complimentary services.

Higher growth higher margin data intelligence digital offerings.

I'm curious if you could sort of bring to life. Some of these things maybe give us some examples in terms of how youre thinking.

And this would this would drive growth revenue sort of what types of products are you are you really talking about maybe just give us some examples.

Sure. Thank you. So we are as we mentioned we are focusing on data E. Commerce intelligence and this is a mix of.

Creating services that underpins the core of what we do and make our labor deployment more strategic more targeted more E sessions, including creating more value in the data that we extract when we are executing we are.

Going to be creating new supply chain solution that have emerged as a must have for our clients and customers as we all know the supply chain has been significantly challenged and these include.

Perfecting what we do in terms of helping with allocation management and aligning purchase orders to production schedules and tracking warehouse out of stocks and making sure that we put the inventory in the most necessary places and understanding what is actually on the shelf and in the warehouse and where the.

Needs must be met in what order so youll see a lot of that coming from us you'll also see.

Some very important investments in our retail media.

Because we sit at the center of our brands and our retailers and as retailers are creating retail media offerings, we're helping them.

To be able to.

Make those offerings very powerful and effective for our brands and we're on the other side, helping our brands.

Evaluate holiday should allocate their very important media dollars against the highest return activities. So those are some of the examples of the areas that we're leaning into an innovation.

Okay. That's super helpful and I just quickly I know, Brian had mentioned that it's early in terms of these investments when do you expect to see a return on this like I'm, assuming most of the investments I would expect it to happen through the course of this year.

But how should we think about you know when when these are sort of I don't know if commercialized is the right word, but when they're commercializing implemented.

Absolutely. Thank you that is a very important question and as you would expect it will be an evolving answer.

We are not we're not spending all the money day, one we're continuing to put all of the innovation through a very rigorous evaluation process in order to release, the funds and to trigger the activity and we are expecting in some cases for the revenue to be produce towards the back half of this.

Year, and then the bottom line impact to come in the first part of next year, but it's important to note that this will not all be at one time, because as I said, we are strategically evaluating and releasing dollars to our very talented entrepreneurs.

The ideas come in and can go through.

A very rigorous process to make sure that meet our return requirements.

Understood. Thank you so much.

Absolutely. Thank you.

Thank you ladies and gentlemen.

<unk> reached the end up on a question and answer session and I would like to turn the call back to Joe <unk> for closing remarks. Please go ahead.

Thank you so much to all of you for your support and for joining US on today's call. We look forward to updating you further on all of these initiatives in our results. When we report second quarter in August .

Thank you so much.

Thank you.

This concludes today's conference you may now disconnect your lines. Thank you for your participation.

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[music].

Good afternoon, and welcome to Atlantic Solutions fourth quarter 2022 earnings Conference call.

Today's call is being recorded and we have allocated one hour for prepared remarks and question Arthur.

At this time I'd like to turn the conference over to lots and lots of PS.

From an investor relations for advantage. Thank you you may begin.

Thank you operator, thank you everyone for joining us on the dental solutions 2022 first quarter earnings conference call.

On the call with me today are Joe Griffin, Chief Executive Officer, and Brian Stevens, Chief Financial Officer, and Chief operating Officer.

After their prepared remarks, we will open the call for a question and answer session.

During this call management may make forward looking statements within the meaning of federal Securities laws.

These statements are based on management's current expectations and involve assumptions risks and uncertainties that are difficult to predict and could cause actual results to differ materially from those expressed or implied by such forward looking statements.

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 managements 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.

Company does not undertake any duty to update any forward looking statement, except as required by law.

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 the website you may want to refer to the slides during today's call.

This call is being webcast and a recording of the call will also be available on the website.

And now I'd like to turn the call over to Joe Griffin.

Thanks, Lisa good afternoon, everyone.

Thank you for joining us to discuss our first quarter results and our first earnings call since becoming CEO on April 1st.

I am honored and privileged to serve as advantaged. The Lucent CEO , we have many exciting opportunities in front of us and I look forward to partnering with the board of directors, our senior leadership team and our associates around the globe to continue driving profitable growth across the enterprise.

Similar to previous earnings calls I'd like to start by providing a high level overview of our business.

Advantaged solutions is a leading provider of outsource sales and marketing solution to consumer good companies and retailers.

Our data and technology, driven services, which include headquarter sale retail merchandising in store and online sampling digital commerce.

Any channel marketing retail media and others help brands and retailers of all sizes get product into the hands of consumers anytime anywhere in any channel in which they choose to shop.

At the most fundamental level, we are a trusted partner and problem solver for our clients.

We help our clients sell more while spending less.

We operate efficiently providing fuel for growth.

We reinvest into our business at attractive returns, both organically and through tuck in acquisitions.

And as we deliver value our platform compounds over time.

Our success hinges on our talent and advantaged, where talent first our successful track record in managing our flexible large workforce remains an enduring competitive advantage for the company.

I would like to take a moment to thank the advantage of associates for their continued dedication and the work they do Dan and day out to serve our clients.

They are providing essential high return services, helping consumer goods companies and retailers navigate the current environment better cheaper and faster.

On today's call I'd like to begin by sharing our first quarter highlights and then move to an update on the 2022 investment activities, we outlined on our call last quarter.

First a few key messages from this past quarter importantly.

Importantly, Q1 results were largely consistent with our expectations on the top line, we delivered strong year on year revenue growth of approximately 16%.

As the recovery from the pandemic progresses, we continue to see a meaningful improvement in our businesses most impacted by Covid with in store sampling events up 62% year on year.

In line with recent prior quarters, our international business continued to rebound as operating conditions improved across Europe as restrictions ease and businesses reopened.

I am very pleased with our year to date M&A activities here, we remain focused on acquiring tuck in assets.

Particularly in areas that help brands and retailers navigate an increasingly omni channel world.

However, as expected.

Adjusted EBITDA margins declined due to a shift in revenue mix headwind.

Headwinds from wage increases on our ongoing investment activities there.

This includes investing in new higher growth and margin accretive offering together with infrastructure to improve efficiencies.

We are also spending in wages recruiting and retention to stand up significant numbers of new associates to meet client demand for our must have services.

With that as a backdrop I'd like to drill down a bit deeper on our financial performance in the first quarter.

Revenues continued to grow solidly in the quarter up approximately 16% year on year, driven largely by the continued recovery in our in store sampling and demonstration of services, along with further growth and retail merchandising services and international businesses.

As anticipated our first quarter adjusted EBITDA declined 13% from the prior year period, reflecting the following a shift in revenue mix with historically lower margin demo business regaining momentum.

Ongoing reinvestment activities I, just referenced most notably in the quarter related to staffing and recruiting.

Continued challenges in our foodservice business.

And we also experienced an unusual increase in the amounts of self insured medical claim.

Turning to segment results for the first quarter.

Revenue growth remains strong in our sales segment up 11% year on year, driven by growth in retail merchandising services and a healthy rebound in the Covid impacted international business.

Moving to our marketing segment, the recovery continued with revenue up 26% compared with the first quarter last year as in store product demonstration recovered significantly compared to a year ago.

Marketing segment, adjusted EBITDA expanded modestly in the quarter up 4% year on year. This was driven by revenue growth offset by increased head count and related salary cost.

Now that I've shared more color on advantages first quarter results.

I would like to provide additional detail on the important investments we are undertaking in 2022.

As a reminder, this investment will come in three key areas.

First in innovation, we are investing to scale adjacent and complementary services with a targeted focus on higher growth higher margin data intelligence and digital offering.

Second in a renovation we are accelerating investment in infrastructure, the sympson tools to improve productivity and operational efficiencies across the enterprise.

Finally in talent, we're stepping up spending and wages recruiting and retention take.

Let's take a deeper dive into each starting first with innovation.

We believe a key future growth driver for advantage is new data and digital solutions that create even better commercial outcomes for our clients.

Pandemic has accelerated and changed what's neat business succeed for both manufacturers and retailers the growth in E. Commerce within CPG retailing has created fundamental shifts in consumer behavior, which has in turn impacted retailers. This is why we are evolving our service offerings and focus to better.

Meet the needs and expectations of boats.

To this end we are launching new services at advantage to better address the evolving marketplace and investing in new leadership to run this practice area.

These new services aggregate organize and create unique database retail centric solutions that drive more automated decisions for CPG manufacturers and retailers.

We see this as the cornerstone of our evolution.

And a top priority as we look to strategically transition into more data directed services.

This new scaled data intelligence capability combined with our existing physical reach and presence is unique.

Helping our clients and customers gain insights and pull it all the way through to the transaction regardless of the channel.

We also continue to invest in deepening and widening our capabilities in other core areas of the strategy such as data driven supply chain services retail media and retail P. O S analytics.

Now, let's move on to activities within renovation, where we are reinvesting in our core business to enhance productivity and cost efficiency.

A key area of focus.

Is new digitally driven recruiting activities that will materially improve speed to hire and reduce costs to higher across our entire enterprise and particularly in our high volume retail services group.

The development of these digital tools will allow our businesses to more efficiently acquire talent.

Another core area is our operating technology stacks up power enable and optimize location based retail execution work.

We are investing in digital tools and software, we are confident will add measurable value and unlock synergies by improving existing staff utilization rates.

The dining program execution, increasing in store insights and providing new data opportunities.

And finally within Thailand, we are investing to stay competitive on wages and fully capitalize on our innovation and renovation initiatives.

These investments are both in wages to improve retention among our existing associates.

Along with recruiting new associates to further drive our growth and development.

As we look ahead I also wanted to share a bit of color on our second quarter.

Starting first with the headwind.

Hi chain challenges continue to persist and out of stocks remain elevated pressuring adjusted EBITDA.

Likewise, the labor market continues to remain very tight which as noted earlier requires additional incremental funding to recruit and retain across both hourly and professional ranks.

That said, we continue to expand our efforts to realize price from customers to fund wage increases in 2022 as we did in 2021 weeks.

We expect this to result in higher adjusted EBITDA in the second half of 2022.

Our services remain high ROI needs to have rather than a nice to have offerings and we have cost advantage scale and delivering even in the face of wage inflation.

Looking at the key tailwind.

We continue to expect the pandemic disruption to slowly subside and anticipate a continued rebound in the services that were most negatively affected by Covid that being said, we remain prepared for a wider than normal range of outcome.

Altogether, we are affirming our full year adjusted EBITDA guidance range of 492 $510 million with that I'll turn it over to Brian .

Thank you Joe and good afternoon, everyone. It's great to be speaking with you.

She will discuss our first quarter highlights so I'll share a bit more color on our segment level results and our full year guidance.

In Q1 sales segment revenues of $592 million were up 11% year on year and sales segment adjusted EBITDA of $68 million declined 19% year on year.

Marketing segment revenues of $323 million was up 26% year on year, the marketing segment adjusted EBITDA.

$29 million was up 4% year on year.

Our revenue growth in Q1 was primarily driven by continued improvement of our sampling and demonstration following the return of in store events shrinking by our retail and merchandising services, including solid contributions from the acquisitions, we made in September as well as ongoing recovery of our Covid impacted internet.

National businesses.

Offsetting this growth as we anticipated with softness in headquarter sales from peak Covid levels, Although I am pleased to note headquarter services revenues continue to exceed pre pandemic levels turning to our Q1 adjusted EBIT results the year over year decline was predominantly due to higher labor costs to increase head.

In support of our return to full scale operation.

In store sampling and retail merchandising along with continued challenges in our foodservice businesses increased investment in new technology, and unusually high medical benefit expense.

Adjusted EBIT margin came in at 10, 6% down 351 basis points year over year, reflecting a decline of 421 basis points in the social ligament.

83 basis points in the market.

<unk> margin is due to the revenue mix shift, reflecting an increase in lower margin revenue, primarily driven by meaningful increases in our single source retail merchandise and services and continued recovery of our international business.

In line with last quarter, our debt profile remains healthy as we have no meaningful maturities for the next four years at the end of Q1, our total debt outstanding was approximately $2 1 billion.

Many of our debt and equity capitalization can be found on slide eight in the supplementary slides for Q1 results posted on our Investor Relations website.

In terms of capital allocation, we continue to prioritize strategic M&A and organic investments to drive continued long term sustainable growth.

We will also consider options to pay down debt and repurchase shares.

Now turning to our outlook for fiscal 2022 as Joel mentioned, we are reiterating our fiscal 2000, <unk> adjusted EBITDA guidance in the range of $4 $90 million to $510 million.

Let me provide some additional detail on the key considerations underlying our 2022, adjusted EBIT expectation and high level of financial performance.

We want to emphasize that we continue to have active discussions and work with our clients to implement targeted price increases across a critical need to have services amidst the backdrop of rising inflation increasingly challenged legal market.

Turning to growth in terms of fueling organic growth. We are focused on executing against our investment strategy as we continue to invest in innovation renovation and talent.

<unk> long term value creation fiscal 2022 is very much a year in developing and prototyping. These higher growth higher margin solutions in order to scale them effectively in 2023 and beyond.

Regarding M&A, which as Joe noted continues to be an important part of our growth and value creation strategy.

Field service, and our technology gaps or strengthen our existing capabilities.

Third on free cash flow, we expect to drive approximately one quarter or more of adjusted EBITDA conversion to free cash flow this year.

A more normalized 35% to 40% conversion rate resuming in 2023.

Fourth on leverage given our adjusted EBIT guidance, we expect net debt to EBITDA at year end to be slightly elevated from 2021 levels, given our investment strategy and capital allocation plans.

Beginning in 2023, we plan to resume our previously stated objective of steadily deleveraging our balance sheet.

And lastly regarding our financial performance as we look ahead.

Thank you Brian .

These clients.

Our path forward requires targeted investments to better position us to take advantage of the significant growth opportunities that lie ahead and to operate more efficiently I believe and our team I believe in our value proposition and I believe in our ability to execute.

You for your attention today and with that operator, let's please open the call for questions.

Thank you ma'am.

Ladies and gentlemen at this time, we will be conducting a question and answer session.

If you would like to ask a question. Please press Star then one on your telephone keypad.

A confirmation tone will indicate your line is in the question queue. You May Press Star and then two if you would like to move your questions from the queue.

Co participants using speaker equipment, it may be necessary to pick up your handset before pressing the star.

The first question is from Toni Kaplan from Morgan Stanley .

Thank you.

Wanted to ask about inflation, if you've seen any of the inflationary pressures abating on either the labor or the supply chain front.

Sure.

Oh go ahead, yes, its all right that's fine.

Oh go ahead.

No worries.

So I would say.

Maybe I can talk about the.

The wages and then Joe can maybe touch on the supply chain, but I on.

On the wage piece of it.

Fortunately, we are still seeing inflationary pressures.

There.

More evident in some of the higher density markets.

But we are still seeing those challenges.

Right Yep, that's great we are definitely still amidst the inflation and we're.

We're battling it on all fronts and we're beginning to see some of the impact also on consumer reaction to the pricing.

Yep understood.

Just on hiring have you been able to hire as much as you'd like I know we've talked in prior quarters about.

The tight labor market may be impacting that and impacting us potentially demand.

Having a constraint on on demand from the hiring side, so trying an update there.

Yeah, we still are.

Are experiencing more demand than we have supply so that is an ongoing pressure.

We are continuing to invest in our tools.

In our in our recruiting group is we talked about in our speaking points about speeding or increasing our recruiting as well as beating our time to hire and increasing our utilization of our existing workforce are all very key component.

<unk> of dealing with the continuing very pressured labor market.

Great.

Just to sneak one more in.

I wanted to ask about the trajectory of margins.

I think youre expecting an improvement in second half second half so wanted to understand.

The drivers of of that a little bit more fully.

Sure Yes.

Yeah go ahead go ahead, Brian well, Brian and I will get this down [laughter].

Sorry.

Sure so specifically on margins.

Just so you know our expectation as the retail business on the retail centric side and then also.

The demo business as it starts to come back and fully ramped.

We will have pressure on margins.

Revenue and EBITDA will increase substantially so so actually we'll probably see more pressure on margins in the balance of year, and then that will get us to kind of a stabilized baseline that we can grow off of in 2023 and kind of going forward.

Very helpful. Thank you.

Thank you ladies and gentlemen, just a reminder, if you would like to ask a question. Please press star and then one no.

The next question her between besides the one from Deutsche Bank. Please go ahead.

Yes, hi, thank you.

So also wanted to touch on margins.

You I think Brian you mentioned, a number of different factors and I know, we've been talking about investments and wage pressures and all of that.

I was wondering if you could help quantify and break down sort of that 350 basis points.

Year over year margin decline are you able to isolate how much of that was investment then.

Sure.

Theres a lot into that question. So what I can do is just talk generally about it. So let's first talk what you talked about as far as innovation renovation of talent. So a lot of the investment we've made in talent, which is.

Said another way is increase in wage.

Made that assessment. So you are seeing that reflected into the margin as far as increased wages as far as renovation I would say that were partially into that meaning that we have made significant investments in technology.

The two biggest ones are on the retail side.

As far as.

Enabling us to real time information and dynamic routing.

And then the other one is on the talent acquisition side, which we're deploying a leading technology moving working on it for the past nine months.

It's going to be fully deployed over the next couple of weeks, which will help us on speed to hire.

And.

In addressing what Joe talked about is the recruits and hiring more people and getting more people into the funnel. So we're excited about both of those and then as far as the innovation. It's still early stages on that so there really isn't a lot of.

Yes impact to the margin that you see there.

And then when you when you look at the margin and the other things that are impacting you touched on a couple of them. So one medical we did see an increase in medical expense. This quarter were self insured and so we had an unusual spike this quarter significantly higher than we have in previous quarters.

And so that's how.

Hard to say, what's going to happen in the future, but it is unusually high for this quarter.

So I think it would be reasonable to expect that it would come down from there.

And then talent acquisition costs, those are still high and elevated so we still see those and our expectation is that investment will continue to will continue to maintain that investment in the <unk>.

Coming for sure second quarter, but likely in the second and third quarter.

Until we get back to a normalized level of associates.

You are seeing we talked about the foodservice lots that we had that is impacting us in Q1.

The midyear loss last year, so will impact us in Q1, and Q2, but we will lap that Q3 going forward.

And then lastly, I think that the big pieces remember last year, we had was COVID-19 impacted to the positive and so we had positive flow.

Our sales business, which is it's not as impacted.

In Q1 this year, so that's a lot, but but those are the main drivers that you're seeing as far as the.

The decrease in margin and ultimately decrease in EBITDA.

Okay. Thanks, Thank you for all of that.

And then.

I'm curious if you were talking about innovation and you talked about investments to scale adjacent complimentary services.

A higher growth higher margin data intelligence digital offerings.

I'm curious if you could sort of bring to life. Some of these things maybe give us some examples in terms of how youre thinking.

This would this would drive growth revenue sort of what types of products are you are you really talking about maybe just give us some examples.

Sure. Thank you.

So we are as.

As we mentioned we are focusing on data E Commerce intelligence and this is a mix of.

Creating services that underpins the core of what we do.

And make our labor deployment more strategic more targeted more E sessions, including creating more value in the data that we extract when we are executing we are going to be creating new supply chain solution that have emerged as a must have.

Have for our clients and customers as we all know the supply chain has been significantly challenged.

These include.

The needs must be met in what order. So youll see a lot of that coming from us you'll also see.

Some very important investments in retail media, because we sit at the center of our brands and our retailers and as retailers are creating retail media offerings, we're helping them to be able to.

Make those offerings very powerful and effective for our brands and we're on the other side, helping our brands evaluate.

Evaluate holiday should allocate their very important media dollars against to the highest return activities. So those are some of the examples of the areas that we're leaning into an innovation.

Okay. That's super helpful and I just quickly I know, Brian had mentioned that it's early in terms of these investments when do you expect to see a return on this like I'm, assuming most of the investments are expected to happen through the course of this year.

But how should we think about when when these are sort of I don't know if commercialized is the right word, but when they're commercializing implemented.

Absolutely. Thank you that is a very important question and as you would expect it will be an evolving answer.

The ideas come in and can go through.

A very rigorous process to make sure that being meet our return requirements.

Understood. Thank you so much.

Absolutely. Thank you.

Thank you ladies and gentlemen.

<unk> reached the end up our question and answer session and I would like to turn the call back to Joe Griffin for closing remarks. Please go ahead.

Thank you so much.

Thank you.

This concludes today's conference you may now disconnect your lines. Thank you for your participation.

Q1 2022 Advantage Solutions Inc Earnings Call

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