Q2 2022 Advantage Solutions Inc Earnings Call
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Good afternoon, and welcome to advantaged solutions second quarter 2022 earnings call.
Today's call is being recorded and we have a lot of one hour for prepared remarks and Q&A.
At this time I'd like to turn the conference over to lots of glass in Investor Relations. Thank you Sir you may begin.
Thank you operator, thank you everyone for joining us on advantaged solutions 2022 second 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 the 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 management's discussion and analysis of financial condition and results of operation and.
And elsewhere in the company's filings with the Securities and Exchange Commission.
All forward looking statements are expressly qualified in their entirety by such factors. The company does not undertake any duty to update or revise any forward looking statement, whether as a result of new information future events or otherwise except as required by law.
Please note management's remarks today, we'll highlight certain non-GAAP financial measures.
Our earnings release, which was issued earlier today presents a reconciliation of these non-GAAP financial measures to the most comparable GAAP measure, which can be found on the investors section of our website at advantaged solutions Dot net.
The company has also prepared presentation slides, which are posted on the website.
You may want to refer to these slides during today's call.
The 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 Joe Griffin.
Thanks, Bob Good afternoon, everyone. Thank you for joining us today on our 2022 second quarter results conference call on today's call I'd like to begin by sharing our second quarter highlights and macroeconomic trends and then move to an update on our 2022 investment activity, which remain an important area.
Okay.
Brian will then provide additional details on our second quarter financial performance as well as an update on our full year outlook.
Our success continues to hinge on our talent and an advantaged. We are taught first our successful track record in managing a large flexible workforce remains an enduring competitive advantage for the company and I would like to take a moment to thank the advantaged associates for their continued dedication and the work they do today.
And day out to serve our client, they're providing essential high return services, helping consumer goods companies and retailers navigate the current environment better cheaper and faster.
Let's begin with a few key messages from this past quarter.
From a macro standpoint online and in store consumer demand remains volatile inflation, it's clearly top of mind for consumers, which has started to result in trade down behavior, It's a lower priced alternative channels and products, including private label, both areas in which advantaged participate and offers.
Service it.
Despite the uncertain operating environment. We are pleased to report that our Q2 results were in line with our expectations for the quarter.
Once again, we delivered strong year on year revenue growth of approximately 15%.
Similar to the first quarter, we continued to see a lift in our businesses that were most impacted by the pandemic with in store sampling and demonstration events up 49% year on year.
Measured against pre pandemic level Q2 in store sampling and demonstration events were at 64% of Q2, 'twenty 19 level.
61% last quarter.
In addition, I am very pleased with our continued strategic M&A effort.
Here, we remain focused on acquiring tuck in asset, particularly in areas that help brands and retailers navigate an increasingly omni channel world.
So far this year, we have completed three acquisitions, including brands share this past quarter.
Branch Harris expertise and capabilities in E. Commerce sampling are highly complementary to our own and further enhance our existing offering.
However, as expected and consistent with last quarter adjusted EBITDA margins declined due to a shift in revenue mix headwinds from wage increases and our ongoing investment activity.
We are spending on wages recruiting and retention and the challenging labor market just stand up significant numbers of new associates to meet client demand for our must have services.
We also continue to invest in developing new higher growth and margin accretive offering together with infrastructure to improve company wide efficiency.
Furthermore, we are constantly engaging in dialogue with partners and implementing pricing increases.
As previously discussed we continue to see a timing lag as a result of the dynamic labor market.
And what are expected to persist until the employment market stabilizes.
Despite these pricing actions, we did not lose any client in the second quarter as a result.
Within this context I'd like to expand a bit further on our financial performance in the second quarter.
As noted earlier revenues were up approximately 15% year on year for the second quarter driven largely by the continued recovery in our in store sampling and demonstration business along with further growth in retail merchandising services.
Partially offset by declines in foodservice on third party selling in retailing surfaces.
As anticipated.
Our second quarter adjusted EBITDA margin contracted by approximately 340 basis points from the prior year period, reflecting the following.
A shift in revenue mix with our historically lower margin in store sampling and demonstration business regaining momentum.
The ongoing investment activities I just referenced.
Notably in the second quarter related to staffing and recruiting.
And a prior year client law in our food.
Foodservice business.
Despite the labor market headwinds and inflationary backdrop advantage has delivered performance in line with expectations and the ongoing investments, we are making position the business well heading into the future.
As a reminder, we are making investments in three key areas.
First is talent, we are stepping up spending on wages recruiting and retention.
Second in renovation, we are accelerating investment in infrastructure system and tools to improve productivity and operational efficiencies across the enterprise and finally in innovation, we're investing for scale adjacent and complementary services with a targeted focus on data intelligence.
And digital offering.
We continue to make progress during the second quarter in each of these three areas. We remain confident that our efforts will strengthen our franchise and enhance our competitive advantages, while driving growth improving efficiencies and better positioning advantaged to capitalize on future opportunities.
Let's take a closer look at each area, starting first with talent.
We are investing to stay competitive on wages and continuing to stand up our workforce in in store sampling and demonstration activities. We are also investing in wages to improve retention among our existing associates and recruiting new associates in key positions to further drive our growth and development.
Now, let's move on to activities within our renovation, where we are investing in our core business to enhance productivity and cost efficiency.
Here, our key focus is investing in new recruiting software that has already materially improved speed to hire and that we expect to reduce cost to hire across our enterprise in the back half of 2022.
This software is enabling our business to more efficiently acquire talent and the early results are positive.
Furthermore, we are investing behind the consolidation of in store execution platform across the organization. We believe this will enable us to improve the quality of our offering to our partners, while enhancing internal reporting consistency and driving potential cost efficiencies.
And finally with innovation, we believe a key future growth driver for advantage, if new data and digital solutions that create even better commercial outcomes for both our CPG manufacturer and a retail client.
To this end during the second quarter, we introduced advantaged intelligent services, which combines at scale the company data analytics intelligence and technology capability.
We are also investing in world class leadership to oversee these services with the addition of Alex Kelleher, who joined us from Deloitte digital.
Alex this vast experience and starting growing and managing data driven companies makes him ideally suited to drive development ready solution.
In marketing, we recently announced the launch of advantaged unified Commerce. These services collectively provide consumer goods brands, a holistic solution across e-commerce, and brick and mortar including audience identification in store and digital media multichannel activation attribution and analytics.
All powered by a technology platform and award winning creative team.
As we look ahead to the second half of the year I also wanted to just share a bit of color on our third quarter.
Starting first with the headwinds, which are not unique to advantaged supply chain challenges persist and inflationary pressures as chaired by leading retailers are changing shopping behavior wage inflation continues to increase and remains at historically high levels.
That said, our surfaces roaming and need to have rather than a nice to have and we continue to have cost advantaged scale in delivering our offering.
Looking at the key tailwind we continue to expect the pandemic disruption just slowly subside and anticipate a continued rebound in those services, notably in store sampling and demonstration which were most heavily impacted by COVID-19.
Taken together, we are affirming our full year adjusted EBITDA guidance range of 490 million to $510 million, which Brian will speak to further along with additional detail on our second quarter performance with that I'll turn it over to Brian .
Thank you Jill and good afternoon, everyone, Joe spoke to our second quarter highlights so I'll share a bit more color on our segment level results and provide an update on our full year guidance.
Q2 sales segment revenue of $604 million were up 8% year on year sales segment, adjusted EBITDA of $72 million declined 20% year on year.
Sales improvement was driven by the strength of our retail and merchandising services, partially offset by a decrease in third party selling and retail services.
The decline in adjusted EBITDA is largely a result of investments in wage and technology higher costs from inflationary pressures and the loss of a foodservice client in the prior year.
Most of the segment revenues of $377 million were up 31% year on year marketing segment, adjusted EBITDA of $37 million was up 13% year on year due primarily to increased in store sampling and demonstration volumes. Following the return of our in store events, partially offset by.
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In the aggregate adjusted EBITDA margins came in at 11%.
Down 340 basis points year over year, reflecting a decline of 406 basis points, and our salesmen and 155 basis points in the marketing segment.
The lower margin is due to the revenue mix shift, reflecting our increased lower margin revenue, primarily driven by meaningful increases in our in store sampling and demonstration business and.
And our single source retail merchandising services and modest compression from inflationary pressures.
Moving on to discuss some of the balance sheet items, our net debt to adjusted EBITDA finished the second quarter at approximately four one times.
In addition, we continue to expect free cash flow to ramp throughout the year with growth more heavily weighted towards the back half of the year.
In line with Q1, our debt profile remains healthy and we have no meaningful maturities in the next four years.
At the end of Q2, our total funded debt outstanding continued to be approximately $2 1 billion.
A summary of our debt and equity capitalization can be found on slide six in the supplementary slides for Q2 results posted in the investors section on our website.
In terms of capital allocation, we continue to prioritize M&A and organic investment to drive continued long term sustainable growth.
We will also consider options to pay down debt and repurchase shares based on the best interest of our stakeholders.
Now turning to our outlook for fiscal 2022 as Joe highlighted we are reiterating our fiscal 2022, adjusted EBIT guidance range of $490 million to $510 million.
The following are some of the additional considerations of our 2022, adjusted EBITDA expectations and high level financial performance.
First we want to reemphasize as costs increase we are being proactive around pricing with regards to the marketing segment. We have been very successful in obtaining price increases in order to fully offset the elevated wages of our employees.
Within our sales segment, our commission business is inherently protected with pricing structure, providing a natural offset to inflation well within our retail services business, we are having productive ongoing discussions.
The result of these discussions thus far has been positive that being said the labor market remains dynamic and until it stabilizes. We expect to continue to see a several month lag in pricing implementation.
Second turning to growth in terms of fueling organic growth. We are focused on executing against our investment strategy to drive long term value creation in fiscal 2022 is very much a year of developing and prototyping. These higher growth higher margin solutions in order to scale them effectively in 2023 and beyond.
We are making progress in innovation, where we are investing in our digital media and retail data and analytic tools.
Regarding M&A, which continues to be an important part of our growth and value creation strategy. So far in 2022, we have closed three acquisitions. Looking ahead, we have a robust pipeline of attractive high return opportunities. We will continue to be opportunistic and pursue accretive tuck in acquisitions that will strengthen our existing.
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Or align with our future strategic growth plans.
Third with respect to our leverage we expect debt levels to remain consistent in 2022, however, given our adjusted EBITDA guidance, we expect net debt levels to adjusted EBITDA at the year end to be slightly elevated from 2021 levels.
In 2023, we expect to continue steadily deleveraging our balance sheet and.
And lastly regarding our financial performance as we look ahead, we anticipate our revenues and adjusted EBITDA will be stronger in the back half of the year as compared to the first half.
Aborted by the ongoing recovery and scale of our in store sampling and demonstration business with that we will open it up the call for questions and answer session operator.
Thank you we will now conduct a question and answer session if you'd like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is there any question Q.
You May press star two if he would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing this darkies once again Thats star one at this time, one moment, while we poll for our first question.
Our first question comes from Toni Kaplan with Morgan Stanley . Please proceed.
Thank you very much first I wanted to ask about the staffing you mentioned you know you're spending a lot on recruiting and retention and really staffing shortages have been an issue for a number of quarters now and we are seeing it across other companies as well just any thoughts on.
When that could normalize and what will drive the normalization there really appreciate it.
Hi, Tony Thank you sure I'll give you a little bit of an overview and have Brian add more detail, but yes. It is going to be very hard to for anybody to determine when the staffing situation will normalize what I can tell you is that with.
Every passing.
Passing month, we get more aggressive with our mitigation plans, which we've talked about include the implementation of new software to dramatically improve our speed to hire and reduce the number of candidates required to place a higher we continue.
<unk> to work on the structure and process around our recruiting engine, we continue to invest in wages and that continues to be an evolving journey as well to ensure that we have the right labor.
Supply all of the demand so I can't predict when this will normalize but what I can predict is that we will continue to improve our delivery. Despite the challenges because every day our mitigation plans.
We need to prove out better statistics, Brian .
Brian what would you add to my response.
Thanks, you don't know I think you covered all of the key aspects. The only thing I guess I would add to it is.
Turnover has been kind of a rising challenge for US Q4, and Q1, and we've seen that start to dissipate a little bit in Q2.
And as you know, it's like a net sum game. So we need to hire the number of associates to deliver against the needs for our clients and customers.
But also make sure that we're outpacing turnover and and we're starting to see a net positive positive progress in Q2 and mind you. It's only one quarter, but it goes to the point with Jill talked about was the implementation of the recruiting software as it went live at the end of Q1.
We've seen over 50% increase in our speed to hire which has been very helpful. And we think that that will continue to ramp in the back half of the year.
That's great and.
I wanted to ask about just in general some of our consumer analysts have started to see early signs of trade down and like high frequency purchases.
You know likely as a result of inflation is that something you're seeing as well and how does that impact you on like the sales Commission side, if that does continue thanks.
Thanks again, Tony So we are.
Also being and monitoring that consumer trade down behavior, and so far it's not tremendously impacting us in a material way that's not to say that we're immune to it we're seeing consumers show more price.
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Certainly something that we're watching with regard to our commissions as you as you stated the.
The impact hasn't been materially negative to us we have some other natural hedges in our business that help us on some of the trade down behavior has consumers moving to other channel in which we provide services and it is also.
Creating a picked up as we've seen.
From since March and the private brand space and we participate in private brand as well.
So again, our portfolio of service offerings continues to help us.
As the consumer shifts a week.
We are able to mitigate some of that shifting.
Terrific. Thanks, so much.
Thank you.
Once again to ask a question at this time, Please press star one on your telephone keypad.
Our next question comes from Jason English with Goldman Sachs. Please proceed.
Hey, good evening folks thanks for sneaking me in.
I know you've highlighted the continued sort of negative business mix shifts within sales.
And the recovery post COVID-19 as a headwind to margins and profitability.
Hoping you could tell us what remedial actions you've taken to try to improve the profit profile of some of those services.
They are not you are raising prices on things like I suspect, it's a lot more of the in store merchandising resets.
The the localized labor stuff and.
And if so what are you seeing on the competitive front is this like a unified front from the industry or are you trying to move out in solo two to restore profitability.
Thanks, Jason and good to hear from you I'm going to try to make sure I capture all of your questions and I'm sure you will let me know if I don't Brian will chime in.
But certainly are a mixed shift.
Has impacted our margins and we are absolutely continuing to take price.
As we've spoken about price comes faster in some areas of our mix than others. There is a lag and that is an impact yet we are successfully as we mentioned in our prepared remarks, taking price and not experiencing client results.
As a or client loss as a result.
Which again reinforces our must have services, where we're able to take price.
And I would say that we are also as part of our renovation investments working very hard on our internal efficiencies and our cost to serve and managing.
That down over the long term to help in the margin area with the mix shift that we're experiencing we are.
Very happy about the return of demo.
With the return of demo.
<unk>, a lower margin portion of our portfolio that will come with some mix shift, but I would like to add that we're very excited to have that creep in the revenue and EBITDA at the same time, albeit it is adjustment an adjustment to what we were experiencing during the pandemic when demo with Pos.
Brian .
What did I Miss out other questions, maybe you might have something to add.
I think he covered most everything really well the only thing I would add to it is is that you know as we've had the the restoration of our international business.
And that inherently is a lower margin business because of the retail activity that we provide and because of the accounting that we require which makes us.
Under GAAP, we were required to recognize 100% of the revenue, but only our proportional set for proportional piece of the profit.
And then the other piece that is impacting margins is we are spending more heavily in talent acquisition unemployment marketing.
Then we have spent historically so as the labor market continues to stabilize we anticipate that would that would go down so otherwise you covered everything perfectly.
Okay, Yes.
It's less about margin rate I mean, this is one of the lowest petty profit quarters in a long long time.
And that's despite acquiring presumably more profit and I'm.
I'm looking at this excluding the including stock based comp and my number is as you know with <unk>.
In terms of how I just the carrier count.
So it's not just a rate issue is penny profit it sounds like Youre, saying, Hey. This is just the cost of doing business to recruit a lot of talent that's going to weigh on it. So back to my question of is the industry pricing I hear you are but we also know that these relationships are kind of sticky you can raise price and just it's the switching costs are high no one's going to switch out day one.
But it could agitate them. It causes switch out 12 months down the road. So I think it is important for us to understand whether or not this is a unified front across the industry.
Yeah.
Yes, so again I would say, it's hard for us to comment on what Costa in CROSSMARK, we're doing but what I can say is is that because of the fact that we are aggressively going after price and we have not seen a either a degradation in our services that we're providing for a switching of those services.
It gives us screens that we're still best in class and best in market and understanding that.
When we're having these conversations with the manufacturers they understand.
That it's needed to make these adjustments I mean again, no one's happy about having discussions around increasing costs.
But they they know that.
They need the services so.
The challenge we have right now because of the labor market is still dynamic is that we're still in kind of a three to nine month lag as far as actually getting price increases to cover the wage increases that are real time.
Understood. Thanks, a lot I'll pass it on.
Thanks, Jason.
Thank you there are no further questions in queue at this time I would like to turn the call back over to Joel Kaufman Chief Executive Officer.
Yeah.
Thank you operator.
While market conditions remain uncertain, we are making the right investments and strategic decisions to move advantages business forward successfully and our clients do continue to rely upon us to help them navigate this evolving e-commerce and brick and mortar environment at scale, our ability to manage a very large labor force enables us to provide.
Our services better faster and more efficiently and I remain confident in our business model and our efforts across the entire enterprise to push the company forward.
Again, I want to very much. Thank all of our advantaged associates for their hard work and dedication and certainly want to thank all of you for your time. This afternoon, we look forward to sharing our progress with you on our third quarter call in November .
Hugh.
Thank you. This does concludes today's teleconference. You may disconnect. Your lines at this time and thank you for your participation and have a great day.