Q3 2022 Advantage Solutions Inc Earnings Call

November 9, 2022

[music].

Good afternoon, and welcome to advantaged solutions third quarter 2022 earnings Conference call. Today's call is being recorded and we have allocated one hour for prepared remarks and Q&A.

At this time I'd like to turn the conference over to Lhasa Glasson Investor Relations for advantage. Thank you you may begin.

Thank you operator, thank you everyone for joining us on advantaged solutions 2022 third 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 management's discussion and analysis of financial condition and results of operation and elsewhere in the company's filings with the Securities and Exchange Commission.

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 statements, whether as a result of new information future events or otherwise except as required by law.

Please note that managements remarks today, we'll 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 solution starting that.

The company has also prepared presentation slides, which are posted on the website.

May want to refer to the slides during today's call.

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

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

Thanks good.

Good afternoon, everyone. Thank.

Thank you for joining us today on our 2023rd quarter results Conference call.

Begin by providing commentary on some of the trends that we're seeing across our businesses along with key highlight from the third corner.

Brian will then provide additional details on our third quarter financial performance as well as an update on our full year outlook.

Before we begin I'd like to take a moment to thank the advantage associates for their continued dedication and the work day in and day out to service our clients.

Amit and incredibly difficult operating backdrop, I am exceptionally proud of our team's achievements and their efforts are tremendous.

Oh.

Our associates are providing essential high return services.

Humor packaged goods companies and retailers navigate the current environment better cheaper and faster.

Our talented team is a true source of competitive advantage for our company.

With that.

Let's start with a few key observations from this past quarter regarding the exceptionally challenging business environment that is being threatened by the limited availability of labor continued wage inflation and other macroeconomic condition.

Starting first with labor availability.

It's very difficult for large employers like advantage to find and retain talent to meet the demand for our must have services.

Insufficient labor availability has impacted both our sampling and demonstration business as well as our retail merchandising but.

Well, our previous forecast anticipated the labor market improving in the second half of 2022.

Trends have actually gotten worse as the year progressed.

In both the absolute and relative to our expectation.

At this point he indicators, including labor participation rates remain at historically low levels.

In addition in.

Inflation related to cost of therapy has continued to remain elevated throughout the second half of 2022.

Whereas we had anticipated some stabilization as the year progressed, we continue to see ongoing growth.

Most notably in wages.

Last but not least.

Broader macro economic uncertainty exacerbated by recent fed monetary policy of changing how consumers retailers and CPG brands.

Business opportunities with new and existing customers have not materialized as anticipated and in some cases have been pushed out to future periods.

While the supply chain is in a better position than it was a year ago.

The stock remains at historically high levels and retailers continue to face difficulties.

These challenges notwithstanding once again advantage delivered solid year on year revenue growth.

Proximately, 13%.

Really driven by the recovery of our businesses most impacted by the pandemic.

Similar to recent prior quarters. The growth was led mainly by the continued recovery in our in store sampling and demonstration business.

In store sampling and demonstration events were up 41% year on year.

As measured against pre pandemic levels third quarter in store sampling and demonstration events were at 65% of third quarter 2019 levels only a slight improvement from 64% last quarter, highlighting the slower than anticipated recovery.

In our marketing segment.

In addition, we saw further growth in retail merchandising services, which was partially offset by declines in third party selling and retailing services.

Overall, the build back of our Covid impacted businesses has been steady, but it has progressed at a much slower pace than we had originally anticipated as we were heading into 2022 due to the worsening labor and macro economic environment.

As expected and consistent with last quarter.

Adjusted EBITDA margins declined for the third quarter margins were down by approximately 315 basis points.

Due to a shift in revenue mix and headwinds from cost pressure.

This includes spending on wages and benefits.

Recruiting and retention in a challenging labor market to stand up significant numbers of new associates to meet increasing demand for our services.

To help offset the impact of higher wages, we are continuously implementing pricing increases.

As we have highlighted in previous disclosure, we continue to see a timing lag between these discussions and when price increases are implemented.

We would expect this to persist until the employment market stabilize it.

Importantly, despite these ongoing pricing actions clients have generally been understanding of the increases.

Importantly, despite the overall macro challenges through the first nine months of 2022.

We have achieved nearly 15% year over year revenue growth and a sequential improvement in adjusted EBITDA during each sequential quarter.

Looking ahead, however, the return to a more normalized pre pandemic operating environment is proving to take much longer than we anticipated.

During the course of the year as I noted earlier, we have seen no improvement in the labor market fundamentals and headwinds from wage inflation continue to exacerbate.

As a result, we are continuing to invest to stay competitive on wages as we maintained efforts to stand up our workforce in our in store sampling and demonstration activities and other business areas across the enterprise.

Importantly, we are seeing incremental benefits from our new recruiting software that has materially improved speeds or higher despite the challenging market backdrop.

Software is enabling our businesses to more efficiently acquire talent and the early results are positive, including a reduction in times of higher in the third quarter compared to a year ago.

However, despite these proactive efforts.

We are simply not able to hire and retain enough associates to service. The continued strong demand from our customers.

As a result, the rebound we were expecting in the second half of 2022 will be more muted than we had anticipated and will ultimately extend beyond this year that said our services remain need to have rather than a nice to have and we continue to have cost advantage scale and.

<unk> our offerings as evidenced by the continued growth in retail revenue.

All taken together, we are reducing our full year adjusted EBITDA guidance to a range of $430 million to $440 million.

Brian will provide more details on the drivers of that decrease shortly.

Concurrently given the macro labor and inflationary headwinds and the longer path to a more normalized operating environment.

We are making a pivot with respect to our capital allocation priorities.

In the current environment, we intend to be much more focused on deleveraging our balance sheet with less emphasis on M&A in the near term until macroeconomic conditions exhibit more definitive signs of normalization.

With that I'll turn it over to Brian for additional details on our third quarter performance and outlook.

Thank you Jill and thank you everyone for joining the call.

He will discuss our third quarter highlights so I'll provide a bit more color on our segment level results and our full year guidance.

Beginning with our sales segment third quarter sales segment revenue of $646 million increased 8% year on year.

Sales segment, adjusted EBITDA of $76 million declined 20% year on year.

Revenue improvement was driven by strength in low margin businesses, such as 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 investment in wage and technology and higher costs from inflationary pressures.

Marketing segment revenue of $405 million were up 22% year on year marketing segment, adjusted EBITDA of $42 million was up 9% year on year due primarily to higher in store sampling and demonstration volumes. Following the return to in store events, partially offset by wage and inflationary.

<unk> pressures.

Aggregate adjusted EBITDA margins came in at 11, 3% down 315 basis points year over year.

Flexing a decline of 416 basis points in the sales segment.

123 basis points in the marketing segment.

The lower margin is due to a revenue mix shift reflected an increase in our lower margin revenue, primarily driven by increase in our in store sampling and demonstration businesses.

And single source retail merchandising services, coupled with inflationary pressure driving higher expenses in such areas as labor and medical benefits.

Moving on to discuss some balance sheet items, our net debt to adjusted EBITDA finished the third quarter to approximately $4 two times display.

Despite the inflationary environment and the continued cost pressure, we continue to expect free cash flow to ramp throughout the balance of the year with growth expected to continue in the fourth quarter.

For the full year, we anticipate free cash flow conversion of approximately 15% to 20% of adjusted EBITDA, which taking into account unusually high earn out payments in 2022, a nonrecurring payroll tax payment related to the cares Act.

And working capital related to the rebuild of our sampling and demonstration business.

None of these items, we expect a more normalized free cash flow conversion rate to be 35% to 40%.

In line with prior quarter, our debt profile remains healthy and we have no meaningful maturities in the next four years.

At the end of the third quarter. 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 the third quarter results posted in the investors section of our website.

I'd like now to briefly discuss our capital allocation strategy as a result of our current operating environment and macroeconomic conditions as Jill noted in her remarks, we are shifting our priorities to focus more on deleveraging of our balance sheet with less emphasis on M&A.

Now turning to our outlook for fiscal 2022 as Joe mentioned, we are updating our fiscal year 2022, adjusted EBITDA guidance to a range of $430 million $240 million from $490 million to $510 million anticipated previously.

I will now discuss a few key factors behind the reduction in our outlook.

First.

Labor availability continues to be exceptionally tight.

And it has to return to normalcy is happening much more slowly than expected in fact as measured by traditional indicators and has worsened over the course of the year.

Relative to our previous expectations. This has resulted in a more gradual rebuild of our in store sampling and demonstration businesses as well as our retail merchandising business. Despite continued solid demand for our offerings.

Continued inflationary pressures primarily in wages have also negatively impacted the profitability of our business. Moreover, and operating our workforce subscale, we are not able to fully leverage certain fixed costs and our labor intensive businesses, which is nevertheless negatively impacted our margins.

Looking at other areas of our cost base, we are seeing higher than anticipated costs with our benefits, including medical traveled gasoline and other key items.

Third broad macroeconomic uncertainty has challenged consumers retailers and CPG brands.

New and expanded engagements have also been slower to materialize throughout the year than we anticipated and.

And we are also seeing certain projects that we anticipated executing in 2020 to be deferred until 2023.

As we look ahead to the fourth quarter, we expect these macroeconomic headwinds to persist throughout the balance of the year.

We are working proactively to mitigate these impacts to your advantage.

The following are some of the additional considerations as it relates to our business and the high level performance for the remainder of the year.

First we want to reiterate that as labor cost increase we are still very diligent in regards to pricing and as a result of these discussions continue to be positive that being said the lai market remains dynamic and until it stabilizes, we expect to complete several months lag in pricing implementation.

With respect to leverage we will continue to prioritize deleveraging of our balance sheet. However, given the adjusted EBIT guidance, we anticipate that our 2022 net debt to adjusted EBITDA at the year end will be slightly elevated from 2021 levels.

And third we expect our financial performance to show continued sequential improvement in the fourth quarter.

Looking beyond 2022, the continued rebound of our in store sampling and demonstration business is expected to provide a tailwind for advantage.

Although the path to returning to pre pandemic levels has taken longer than anticipated.

Securing labor continues to be our biggest challenge based on our strong customer demand. We remain confident that sampling administration businesses will continue to build back in 2023.

The macroeconomic environment is evolving in real time, and we are diligently working to be better positioned to handle the ongoing headwinds.

We will provide more formal guidance for fiscal 2023 on our fourth quarter and full year earnings call in early March.

With that we will now open up the call for question and answer session operator.

Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

Youre 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.

And the first question will be from Jason English with Goldman Sachs. Please go ahead.

Hey, good afternoon folks.

A few a few quick questions first on what's happening in the here and now.

I understand that it's taking longer for things to return to normalcy, particularly given the labor environment.

But historically you generated roughly two thirds of your earnings or EBITDA in the first three quarters and a third and the fourth quarter.

So.

Just based on kind of run rate of where youre already this year forgetting about incremental improvement history suggests you should be or any $480 million EBITDA. This year roughly 144 in the fourth quarter.

You're saying <unk> is actually going backwards and will instead be closer to something around $1 15, or so so.

Whats, causing the backward move like what are the incremental pressure points, they're building in making the business worse in <unk> than what you've been tracking so far this year.

Thank you.

So our right that on historic.

Seasonality in our business should.

Have us keeping our numbers however.

As we're going through the year as we've mentioned the labor market is getting more difficult not better which is not what we planned and wages are continuing to increase.

They are not yet stabilized things and while we are continuing to take price and we feel very successful in those efforts. There is still a lag and there will continue to be this cycle as wages continue to increase.

There's a lag between.

The wages.

And pricing.

And most notably I would say the change is due to the macroeconomic environment, becoming more challenged and this is affecting how consumers make spending decisions, it's affecting how our retailers and our suppliers are making decisions and we are seeing.

A slowdown in some of our new and expanded engagements and as we mentioned.

Push out of some of those engagements to future periods as everybody braces for what's happening in the macro economy in that.

I would say is our most notably the new that you're asking about.

Got it that's helpful.

Now looking forward I'm not asking you for guidance for next year I know, it's preliminary but you gave us some pieces on free cash flow you talked about the cares act the earn out the working capital burden all of which have pressured your free cash flow conversion ratio for the year I think you mentioned.

Do you expect still more.

Eventually to get back to more normalized free cash flow conversion of 30% to 40% as a percentage of your EBITDA.

Is there any reason to believe that you can't get back there next year.

I think I think.

We do believe that there is reason to believe that we can get back there next year I think that when you look at some of the events that happened this year and specifically you talked about the cares Act. That's a perfect example, paying $25 million. This year of deferrals, we won't have any payments next year. I think another example of that is is that we paid out <unk>.

<unk> larger earn outs than normal this year and we can already estimated earn outs next year and it's going to be significantly lower than what we would expect for payments next year now.

Are going to have still some ramp up costs associated with the demo continuing to build next year.

But it's not going to be anywhere near what we had this year. So I think those three things alone give us reason to think that.

Our cash flow conversion can be.

More in line with a normalized level next year.

Maybe low end, maybe a bit below fair.

Fair.

Okay last question.

Joe a lot of these issues that are affecting the business are clearly out of control you can't control labor.

Can't control the great obviously.

Can't control like the cost structure of the business.

Is there more you can do on that front, Eric first remind us like what have you done it because I know you've already done a lot have you realize the full impact of that this year or will it be spillover benefits from actions you've already taken and are there more actions you can take to tighten the belt and rightsize our cost structure in the face of all this external cost pressure.

Hi, yes, so yes.

And we have been taking actions, yes, we are going to continue.

To realize the benefits of the actions we've already taken and yes. There is more we can do so let me bring a little bit of context to those answers.

Let's just go to hiring since that is so critical we are very.

Our business very focused on labor and we've been talking about the T. A talent acquisition software that we implemented to drive efficiencies and to drive cost out of the system.

And what we're seeing now is that year over year, our speed to hire is up 40%.

And that is a partial year of implementation of this talent acquisition software as one of the positives we are making progress with that software in our net hires but there's an improvement significantly over Q2, and Q3 and I would say that we.

Historically operate as a very lean team our job in the industry is to do the work better faster cheaper. We are wired that way, we have a an internal lean team that ensures that we are operating efficiently across the company.

And you can bet that team is very busy in ensuring that all of the restructuring that we are doing the centralization of our labor teams the optimization of the utilization of our workforce. So that we are getting more work out of each individual associates are all action.

That we have taken and that we're continuing to evolve into and that will produce more benefit in 'twenty three.

I'm going to also say.

Although it is not directly your question. We are pleased with the momentum that we are building in pricing to recoup these cost increases and well of course, there will continue to be a lag until there is a stabilization effect in the marketplace.

Continuing to take to have those discussions we're continuing to be successful our clients and customers understand the dynamic and we're encouraged by again, both our ability to get more efficient and to take cost out of the system as well as where you said, it's out of our control and.

We cannot do that and be able to pass that all in pricing.

Uh-huh. Thanks.

Thanks, That's really helpful. One comment and then I'll pass it on.

Claude the capital allocation decision.

Alright move.

And with that I'm done I'll pass on that front. Thank you.

Jason Thank you for that we appreciate it.

Thank you and our next question will be from Toni Kaplan from Morgan Stanley . Please go ahead.

Thanks, So much I wanted to ask about the event count them it sort of stagnated around sort of this mid 60% of 2019 levels. How should we think about the recovery going forward is is the limiting factor still labor or is.

Demand, they're not recovering like once it got would've thought I guess.

Right. Thanks Toni.

Yeah. The the way to think about that is this is a labor availability issue. This is not a demand issue.

We are still very encouraged by the demand can be outpacing our supply.

And particularly in the demonstration business recovery.

And we are.

That demand as fast as we possibly can with labor improvements and we absolutely project that to continue I understand your point why why was the increase from Q2 to Q3, not more and that is again not a demand issue that is the.

Increasingly difficult labor environment that we did not predict to be increasingly difficult.

Yeah, Okay that makes sense and also just wanted to ask about sort of the on the cost side your ability to pass through costs I know.

With marketing and commissions.

I think you have some ability to do that I think maybe in merchandising, there's maybe a bit of a lagging impact from mix I guess, just trying to understand if anything has changed with regard to the ability to pass on some of it.

This cost.

No. There hasnt there has not been H change. It is this ongoing cycle. So you you're recalling it correctly that in our marketing business, we have been able to recover those are take those price increases.

Faster too.

Cover the car than we can in our merchandising business, where there is somewhat of a lag between when we can realize the price increase and when we have to incur the increased cost.

So that dynamic is exactly the same.

And it is just now an ongoing cycle because again, the labor market isn't getting better as we had hoped and predicted it is continuing to be difficult and in a few periods.

Recently has been worse.

We just predict that this cycle of cost and price will continue until there is stabilization and you are recalling it correctly and it has not changed.

Terrific. Thank you.

Thank you.

And the next question will be from Phase I always.

Deutsche Bank. Please go ahead, yes.

Yes, hi, thank you.

I wanted to follow up on the demand question and you know wonder a little bit more perspective around what you're seeing what what's the CPG environment like because it just intuitively it just feels like yes. Your services or you know might be need to have and you know.

CPG customers.

Once these services, but it also seems like they want it at a certain price.

So I'm curious on you know there are supply chain challenges certainly give us a little bit more perspective on the demand and sort of where we are in that cycle.

Sure.

So yes.

Suppliers and retailers are of course under pressure.

And.

Despite the pressure our services are a must have and they so they need our services and they are therefore willing to invest generic service but.

I will just go specifically to demo since you're asking about the demand I think tied to my answer.

And because our demonstration activities are absolutely fundamental to our retailer partners in store experience and their go to market strategy, our retailers work with us and with the suppliers to ensure that there is.

Investment in these activities and that certainly sustain the demand for our services to a place where we are very optimistic about the recovery.

We just have to get the labor.

Okay, Okay, and can you give us a bit more perspective on you know maybe quantify if you can like are these.

It sounds like Youre, having to put through wage increases.

Can you quantify some of that whether it's on a year over year basis or sequentially like how much are your costs going outside and get what what what type of pricing are you expecting.

Yes, I think that's a great question I think if you look at the overall average for the year, it's roughly about seven 5% as far as the wage increases the one thing that that I would say is is that it's on a declining scale when you look year over year.

Which which gives us indication that we're going to be I think has.

Momentum going into next year.

And then as far as the pricing and what we've been able to pass along again.

We touched on earlier the commission rate.

Largely has offset some of the increases that we've had in wage.

The demonstration businesses we have.

<unk> partnered with the retailers and have and continue to have.

Those discussions and they've been very productive.

It's the one more on the retail services, whether they're a manufacturer retailer driven that.

That usually have a lag time to it.

And those.

<unk> have been successful and they continue to be successful. It's just unfortunately, they do have a lag because we need to show the actual increases that we've had.

In wages and we have been able to cover those increases when we've had those discussions but until the labor market stabilizes to Joe's point earlier.

We're still going to be in a catch up mode from that perspective.

Okay. Okay.

And then just wanted to talk about the investments that you had highlighted earlier in the year.

So I thought I heard you talking about you know cost savings as well and my impression was that some of these investments were maybe more discretionary so just walk us through like what's your have you has anything changed with respect to those investments.

So when we started the year, we talked about three different categories of investment.

Which were in waves and talon.

Innovation and renovation.

And in some of our earlier call.

<unk> passed that point, but earlier than now we have been evolving that strategy as the market.

<unk> became the more difficult than anticipated and we had absolutely deliberately backed off.

All of the innovation in favor of more investment in talent and wage for all the reasons that we've been discussing and continuing to also invest in renovation, which is specifically.

Around the talent acquisition software example, that I just gave.

So when you I think when you were talking about some of the more discretionary items I would say those would be in the bucket of innovation and we have been much more careful and methodical deliberate and pulled back on some of those while we focus on talent.

Wage and renovation and some of those innovations that will continue because they are absolutely critical to helping our suppliers and our retailers navigate.

In particular, some of the data centric supply chain services that we've been building those are critically needed today. So we're investing very selectively and things that are needed right now.

Okay. Okay, and then if I may just last question on you.

You mentioned, some new business, but I think you said was delayed is that really just because of the labor environment or is there like what what's driving that.

Sure.

So what we're seeing in certain cases is because of the very.

Challenging macroeconomic environment that is impacting the consumer and it's been also impacting our retailers and brands in some cases, our current clients and customers are delaying some of the projects that we otherwise anticipated and.

In some cases some of the new engagements that we anticipate and have not come through and we believe that's a reflection of a general.

More cautionary approach to the current environment by all of the participants.

Okay got it thank you so much.

Absolutely. Thank you for attending.

Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Joe Griffin for any closing remarks.

Thank you operator.

Well, while market conditions remain very dynamic as we have discussed and labor remains extremely difficult as we've discussed our core competency of managing a large labor forces in very high demand by our customers.

I want to again sincerely. Thank all of our advantaged associates for their hard work ingenuity collaboration and determined and serving our clients and customers and shoppers as we all navigate this ongoing volatility I.

I am so proud of the progress our teams are making towards rebuilding our workforce amid this challenging backdrop and not only are we steadily recovering, albeit not nearly as fast as we would like we are making the right strategic decisions to move advantaged business forward for the longer term as well operate.

And we will redesign you've heard technology enhancement efficiency savings pricing actions.

These these items are not only enabling us to weather. This current environment, but these are also the key building blocks for our future.

Our clients continue to rely upon us to help them navigate the evolving e-commerce and brick and mortar channels at scale.

Our ability to manage a very large labor force enables us to provide our services better faster and more efficiently than our customers can buy can do so by themselves and that is important right now.

As exemplified by our quarter over quarter improvement throughout the year. Despite this worsening market.

I remain very confident in our business model and the efforts of our entire enterprise to push the company forward. Thank you for your time. This afternoon, and we look forward to sharing our progress with you on our fourth quarter call in March.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

[music].

Good afternoon, and welcome to advantaged solutions third quarter 2022 earnings Conference call. Today's call is being recorded and we have allocated one hour for prepared remarks and Q&A.

At this time I'd like to turn the conference over to Lhasa Glasson Investor Relations for advantage. Thank you you may begin.

Thank you operator, thank you everyone for joining us on advantage solutions 2022 third quarter earnings conference call on.

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.

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 elsewhere in the Companys filings with Securities and Exchange Commission.

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.

May want to refer to the slides during today's call.

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

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

Thanks, a lot Sir.

Good afternoon, everyone. Thank.

Thank you for joining us today on our 2022 third quarter results conference call.

Begin by providing commentary on some of the trends that we are seeing across our businesses along with key highlight from the third quarter.

Brian will then provide additional details on our third quarter financial performance as well as an update on our full year outlook.

Before we begin I'd like to take a moment to thank the advantage associates for their continued dedication and the work they do day in and day out to service our clients.

Amit and incredibly difficult operating backdrop, I am exceptionally proud of our team's achievements and their efforts are commendable.

Our associates are providing essential high return services, helping.

Being consumer packaged good companies and retailers navigate the current environment better cheaper and faster.

Our talented team is a true sort of competitive advantage for our company.

With that.

Let's start with a few key observations from this past quarter regarding the exceptionally challenging business environment that is being driven by the limited availability of labor continued wage inflation and other macroeconomic condition.

Turning first with labor availability.

Very difficult for large employers like advantage to find and retain talent to meet the demand for our.

Services.

Insufficient labor availability has impacted both our sampling and demonstration business as well as our retail merchandising business.

Our previous forecast.

Anticipated the labor market improving in the second half of 2022.

Trends have actually gotten worse as the year progressed.

In both the absolute and relative to our expectations.

To this point key indicators, including labor participation rates remain at historically low levels.

In addition in.

Inflation related to cost to serve has continued to remain elevated throughout the second half of 2022.

Whereas we had anticipated some stabilization as the year progressed, we continue to see ongoing growth.

Most notably in wages.

Last but not least.

Broader macroeconomic uncertainty exacerbated by recent fed monetary policy is changing how consumers retailers and CPG brand spend.

Business opportunities with new and existing customers have not materialized as anticipated and in some cases have been pushed out to future periods.

While the supply chain is in a better position than it was a year ago.

To dock remain at historically high levels and retailers continue to face difficulties.

These challenges notwithstanding once again advantage delivered solid year on year revenue growth.

Approximately 13%.

<unk> driven by the recovery of our businesses most impacted by the pandemic.

Similar to recent prior quarters.

The growth was led mainly by the continued recovery in our in store sampling and demonstration business.

In store sampling and demonstration events were up 41% year on year.

As measured against pre pandemic level third quarter in store sampling and demonstration events were at 65% of third quarter 2019 levels only a slight improvement from 64% last quarter, highlighting the slower than anticipated recovery in our.

The marketing segment.

In addition, we saw further growth in retail merchandising services, which was partially offset by decline in third party selling and retailing services.

Overall, the build back of our Covid impacted businesses.

<unk> study, but it has progressed at a much slower pace than we had originally anticipated as we were heading into 2022 due to the worsening labor and macroeconomic environment.

As expected and consistent with last quarter.

Adjusted EBIT margin decline for the third quarter margins were down by approximately 315 basis points.

Due to a shift in revenue mix and headwinds from cost pressures.

This includes spending on wages and benefits.

Recruiting and retention in a challenging labor market and a significant numbers of new associates to meet increasing demand for our services.

To help offset the impact of higher wages, we are continuously implementing pricing increases.

As we have highlighted in previous disclosures, we continue to see a timing lag between these discussions and when price increases are implemented.

We would expect that to persist until the employment market stabilizes.

Importantly, despite these ongoing pricing actions clients have generally been understanding of the increases.

Importantly, despite the overall macro challenge it.

Through the first nine months of 2022.

We have achieved nearly 15% year over year revenue growth and a sequential improvement in adjusted EBITDA during each sequential quarter.

Looking ahead, however, the return to a more normalized pre pandemic operating environment is proving to take much longer than we anticipated.

During the course of the year as I noted earlier, we have seen no improvement in the labor market fundamentals and headwinds from wage inflation continue to exacerbate.

Importantly, we are seeing incremental benefits from our new recruiting software that has materially improved speeds or higher despite the challenging market backdrop. This software is enabling our businesses.

More efficiently acquire talent and the early results are positive, including a reduction in times of higher in the third quarter compared to a year ago.

However, despite these proactive efforts.

Were simply not able to hire and retain enough associates to service. The continued strong demand from our customers.

<unk> our offerings as evidenced by the continued growth in retail revenue.

All taken together, we are reducing our full year adjusted EBITDA guidance to a range of $430 million to $440 million.

Brian will provide more details on the drivers of that decrease shortly.

Concurrently given the macro labor and inflationary headwinds and the longer path to a more normalized operating environment.

We're making a pivot with respect to our capital allocation priorities.

With that I'll turn it over to Brian for additional detail on our third quarter performance and outlook.

Thank you Jill and thank you everyone for joining the call.

He will discuss our third quarter highlights so I'll provide a bit more color on our segment level results and our full year guidance.

Beginning with our sales segment third quarter sales segment revenue of $646 million increased 8% year on year.

Sales segment, adjusted EBITDA of $76 million declined 20% year on year.

Revenue improvement was driven by strength in low margin businesses, such as retail and merchandising services.

Partially offset by a decrease in third party selling and retail services.

A decline in adjusted EBITDA is largely a result of investment in wage and technology and higher costs from inflationary pressures.

Scenario pressures.

Aggregate adjusted EBITDA margins came in at 11, 3% down 315 basis points year over year, reflecting a decline of 416 basis points in the sales segment.

123 basis points in the marketing segment.

The lower margin is due to a revenue mix shift reflected an increase in the lower margin revenue, primarily driven by increase in our in store sampling and demonstration businesses.

And single source retail merchandising services, coupled with inflationary pressure driving higher expenses in such areas as labor and medical benefits.

Moving on to discuss some balance sheet items, our net debt to adjusted EBITDA finished the third quarter to approximately $4 two times.

And working capital related to the rebuild of our sampling and demonstration business.

Net of these items, we expect a more normalized free cash flow conversion rate to be 35% to 40%.

In line with prior quarter, our debt profile remains healthy and we have no meaningful maturities in the next four years.

At the end of the third quarter. 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 and the supplementary slides for the third quarter results posted in the investors section of our website.

Now turning to our outlook for fiscal 2022 as Joe mentioned, we are updating our fiscal year 2022, adjusted EBIT guidance to a range of $430 million $240 million from 490 million to $510 million anticipated previously.

I will now discuss a few key factors behind the reduction in our outlook.

First.

Labor availability continues to be exceptionally tight.

And it has to return to normalcy is happening much more slowly than expected in fact as measured by traditional indicators. It has worsened over the course of the year.

Continued inflationary pressures primarily in wages have also negatively impacted the profitability of our business. Moreover, and operating our workforce sub scale, we are not able to fully leverage certain fixed costs and our labor intensive businesses, which is nevertheless negatively impacted our margins.

Looking at other areas of our cost base, we are seeing higher than anticipated costs with our benefits, including medical traveled gasoline and other key items.

Third broad macroeconomic uncertainty has challenged consumers retailers and CPG brands.

New and expanded engagements have also been slower to materialize throughout the year than we anticipated and we have also seen certain projects that we anticipated executing in 2020 to be deferred until 2023.

As we look ahead to the fourth quarter, we expect these macroeconomic headwinds to persist throughout the balance of the year. We are working proactively to mitigate these impacts to your advantage.

The following are some of the additional considerations as it relates to our business and the high level performance for the remainder of the year.

We want to reiterate that as labor cost increase we are still very diligent in regards to pricing and as a result of these discussions continue to be positive.

That being said la market remains dynamic and until it stabilizes, we expect to complete several months lag in pricing implementation.

Second with respect to leverage we continue to prioritize deleveraging of our balance sheet. However, given the adjusted EBIT guidance, we anticipate that our 2022 net debt to adjusted EBITDA at the year end will be slightly elevated from 2021 levels.

And third we expect our financial performance to show continued sequential improvement in the fourth quarter.

Looking beyond 2022, the continued rebound of our in store sampling and demonstration businesses is expected to provide a tailwind for advantaged.

Although the path to returning to pre pandemic levels has taken longer than anticipated.

Securing labor continues to be our biggest challenge based on our strong customer demand, we remain confident that sampling and demonstrate some businesses will continue to build back in 2023.

The macroeconomic environment is evolving in real time, and we are diligently working to be better positioned to handle the ongoing headwinds.

We will provide more formal guidance for fiscal 2023 on our fourth quarter and full year earnings call in early March.

With that we will now open up the call for question and answer session operator.

Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

Youre 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.

And the first question will be from Jason English with Goldman Sachs. Please go ahead.

Hey, good afternoon folks.

A few a few quick questions first on what's happening in the here and now.

I understand that it's taking longer for things to return to normalcy, particularly given the labor environment.

But historically you generally are roughly two thirds of your earnings or EBITDA in the first three quarters and a third and the fourth quarter.

So.

Just based on kind of run rate of where you're already this year, we're getting about incremental improvement history suggests you should be or any $480 million EBITDA. This year roughly 144 in the fourth quarter.

You're saying <unk> is actually going backwards and will instead be closer to something around $1 15, or so so.

What's causing the backward move like what are the incremental pressure points Theyre building in making the business worse in <unk> than what you've been tracking so far this year.

Okay.

Thanks.

You are right.

Hi.

Historic season.

Seasonality in our business should.

But keeping our numbers however.

We're going through the year as we've mentioned.

The labor market is getting more difficult not better which is not what we planned and wages are continuing to increase.

And they are not yet stabilizing and while we are continuing to take price and we feel very successful in those efforts. There is still a lag and there will continue to be the cycle as well.

Wages continue to increase where there's a lag between.

The wages and pricing and <unk>.

Most notably.

I'd say the change is due to the macroeconomic environment, becoming more challenged and this is affecting how consumers make spending decisions, it's affecting how our retailers and our suppliers are making decisions and we are seeing.

A slowdown in some of our new and expanded engagements and as we mentioned a push out of some of those engagements to future periods as everybody braces for what's happening in the macro economy in that.

I would say, most notably the new that Youre asking about.

Got it that's helpful.

Now looking forward I'm not asking you for guidance for next year I know, it's preliminary but.

Give us some pieces on free cash flow you talked about the cares act the earn out the working capital burden all of which have pressured your free cash flow conversion ratio for the year.

You mentioned.

Do you expect still more.

Eventually to get back to more normalized free cash flow conversion of 30% to 40% as a percentage of your EBITDA.

Is there any reason to believe that you can't get back there next year.

I think I think.

<unk> larger earn outs than normal this year and we can already estimate earn outs next year and it's going to be significantly lower than what we would expect for payments next year now.

Are going to have still some ramp up costs associated with demo continuing to build next year.

But it's not going to be anywhere near what we had this year. So.

I think those three things alone give us reason to think that.

Our cash flow conversion can be.

More in line with a normalized level next year.

Maybe low end, maybe a bit below fair.

Sure.

Okay last question.

Joe a lot of these issues that are affecting the business are clearly out of your control, but you can't control labor Bill that you can't control the rates, obviously, but there are things you can control the cost structure of the business.

Okay is there more you can do on that front, Eric first remind us like what have you done it because I know you've already done a lot have you realize the full impact of that this year or will it be spillover benefits from actions you've already taken and are there more actions you can take to tighten the belt and rightsize our cost structure in the face of all this external cost pressure.

Yes, so yes.

We have been taking actions, yes, we are going to continue to realize the benefits of the actions we've already taken and yes. There is more we can do so let me bring a little bit of context to those answers.

Let's just go to hiring since that is so critical we are very business very focused on labor and we've been talking about the Ta talent acquisition software that we implemented to drive efficiencies and to drive cost out of the system.

And what we're seeing now is that year over year, our speed to hire is up 40%.

And that is a partial year of implementation of this talent acquisition software as one of the positives we are making progress with that software in our net hires but theres an improvement significantly over Q2, and Q3 and I would say that.

<unk> historically operated as a very lean team our job in the industry is to do the work better faster cheaper. We are wired that way, we have an internal lean team that ensures that we are operating efficiently across the company.

That we have taken and that we're continuing to evolve into and that will produce more benefit in 2003.

I'm going to also say.

Although it is not directly your question we.

<unk> pleased with the momentum that we are building in pricing to recoup these cost increases and well of course, there will continue to be a lag until there is a stabilization effect in the marketplace. We are continuing to take to have those discussions we're continuing to be.

Successful, our clients and customers understand the dynamics and we're encouraged by again, both our ability to get more efficient and to take cost out of the system as well as where you said it's out of our control and we cannot do that and be able to test that.

In pricing.

Uh-huh. Thanks.

Thanks, That's really helpful. One comment and then I'll pass it on.

The capital allocation decision.

The rate move.

And with that I'm done I'll pass on that front. Thank you.

Jason Thank you for that we appreciate it.

Thank you and our next question will be from Toni Kaplan from Morgan Stanley . Please go ahead.

Thanks, so much.

I wanted to ask about the event count.

Stagnated around sort of this mid 60% of 2019 levels.

How should we think about the recovery going forward is is the limiting factor still labor or is demand, they're not recovering like well I think that would've thought I guess.

Right. Thanks Toni.

Yes.

<unk> to think about that is this is a labor availability issue.

It is not a demand issue.

We are still very encouraged by the demand can be outpacing our supply and.

And particularly in the demonstration business recovery.

And we are.

Increasingly difficult labor environment that we did not predict to be increasingly difficult.

Yep Okay.

Makes sense and also just wanted to ask about sort of the on the cost side your ability to pass through costs I know.

With marketing and commissions.

I think you have some ability to do that I think maybe in merchandising, there's maybe a bit of a lag.

Impact from mix I guess, just trying to understand if anything has changed with regard to the ability to pass on some of the increased costs.

No. There hasnt there has not been a change it is this ongoing cycle, so you're recalling it correctly that in our marketing business, we have been able to recover those or take those price increases.

Faster.

To cover the car than we can in our merchandising business, where there is somewhat of a lag between when we can realize the price increase and when we have to incur the increased cost.

So that dynamic is exactly the same.

And it is just now an ongoing cycle because again the labor market isn't getting better as we had hoped and predicted it is continuing to be difficult in a few periods.

Recently has been worse.

We just predict that this cycle of <unk>.

And price will continue until there is stabilization and you are recalling it correctly and it has not changed.

Terrific. Thank you.

Thank you.

And the next question will be from Phase I always.

Deutsche Bank. Please go ahead.

Yes, hi, thank you.

I wanted to follow up on the demand question and I wanted a little bit more perspective around what you're seeing what's the CPG environment like because it just intuitively it just feels like yes, your services or might be need to have and youre.

CPG customers.

Once these services, but it also seems like they wanted at a certain price.

So I'm curious on there are supply chain challenges, certainly give us a little bit more perspective on the demand and sort of where we are in that cycle.

Sure.

So yes.

Suppliers and retailers are of course under pressure.

And.

Despite the pressure our services are a must have and they so they need our services and they are therefore willing to invest in our services.

I will just go specifically to demo since you're asking about the demand I think tied to my answer.

And because our demonstration activities are absolutely fundamental to our retailer partners in store experience and their go to market strategy, our retailers to work with us and with the suppliers to ensure that there is.

Investment in these activities and that certainly sustain the demand for our services to a place where we are very optimistic about the recovery.

We just have to get the labor.

Okay, Okay, and can you give us a bit more perspective on maybe quantify if you can like are these.

It sounds like you're having to put through wage increases.

Can you quantify some of that whether it's on a year over year basis or sequentially like how much are your costs going up by and what type of pricing are you expecting.

Yes, I think that's a great question I think if you look at the overall average for the year, it's roughly about seven 5% as far as the wage increases. The one thing that I would say is is that it's on a declining scale when you look year over year.

Which which gives us indication that we're going to be I think has.

Momentum going into next year.

And then as far as the pricing and what we've been able to pass along again.

We touched on earlier the commission rate.

Largely has offset some of the increases that we've had in wage.

The demonstration businesses we have.

<unk> partnered with the retailers and have and continue to have.

Those discussions and they've been very productive.

It's the one more on the retail services, whether they're a manufacturer retailer driven that usually have a lag time to it.

And those.

Have been successful and they continue to be successful.

Unfortunately, they do have a lag because we need to show the actual increases that we've had.

In wages and we have been able to cover those increases when we've had those discussions but until the labor market stabilizes to Joe's point earlier.

We're still going to be in the catch up mode from that perspective.

Okay. Okay.

And then just wanted to talk about the investments that you had highlighted earlier in the yard.

So I hope.

I heard you talking about cost savings as well and my impression was that some of these investments were maybe more discretionary so just walk us through like what's your have you has anything changed with respect to those investments.

So when we started the year, we talked about three different categories.

<unk>.

Which were in waves and talent.

Innovation and renovation.

And in some of our earlier.

Or past that point, but earlier than now we have been evolving that strategy as the market.

Became more difficult than anticipated and we had absolutely deliberately backed off.

Some of the innovation in favor of more investment in talent and wage for all the reasons that we've been discussing and continuing to also invest in renovation, which is specifically.

Around the talent acquisition software example, that I just gave.

So when you I think when you were talking about some of the more discretionary items I would say those would be in the bucket of innovation and we have been much more careful methodical and deliberate and pulled back on some of those while we focus on talent.

Wage and renovation and some of those innovations that will continue because they are absolutely critical to helping our suppliers and our retailers navigate.

In particular, some of the data centric supply chain services that we've been building those are critically needed today. So we're investing very selectively and things that are needed right now.

Okay. Okay, and then if I may just last question on.

You mentioned, some new business that I think you said was delayed.

Is that really just because of the labor environment.

They're like what what's driving that.

Sure. So what we're seeing in certain cases is because of the very.

Challenging macroeconomic environment that is.

Impacting the consumer and as Ben Ali.

Also impacting our retailers and brands in some cases, our current clients and customers are delaying some of the projects that we otherwise anticipated and in some cases some of the new engagements that we anticipate and have not come through and we believe that's a reflection of the general.

<unk>.

More cautionary approach to the current environment by all of the participants.

Okay got it thank you so much.

Absolutely. Thank you for attending.

Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Joe Griffin for any closing remarks.

Thank you operator.

I am so proud of the progress our teams are making towards rebuilding our workforce amidst this challenging backdrop and not only are we steadily recovering, albeit not nearly as fast as we would like we are making the right strategic decision to move advantage of business forward for the longer term as well operate.

And we will redesign you've heard technology enhancements efficiency savings pricing actions.

These items are not only enabling us to weather the current environment, but these are also the key building blocks for our future.

Our clients continue to rely upon us to help them navigate the evolving e-commerce and brick and mortar channels at scale.

As exemplified by our quarter over quarter improvement throughout the year. Despite this worsening market.

I remain very confident in our business model and the efforts of our entire enterprise to push the company forward. Thank you for your time. This afternoon, we look forward to sharing our progress with you on our fourth quarter call in March.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Q3 2022 Advantage Solutions Inc Earnings Call

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