Q4 2022 Advantage Solutions Inc Earnings Call
Speaker 1: The.
Speaker 1: The.
Speaker 2: Ladies and Gentlemen, Good Afternoon and Welcome to Advantage Solutions 4th Quarter and Full Year 2022 Earnings Conference Call. Today's call is being recorded and we have allocated 1 hour for prepared remarks and Q&A.
Speaker 2: At this time, I would like to turn the conference over to Kimberly Estekin in investor relations for Advantage. Thank you. You may begin. Thank you, operator. Thank you, everyone, for joining us on Advantage Solutions' fourth quarter and fiscal year 2022 earnings conference call. On the call with me today are Dave Peacock, chief executive officer of the United States Department of Defense. Thank you. Thank you, everyone, for joining us. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.
Speaker 2: 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 evolve assumptions, risks, and uncertainties.
Speaker 2: 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 section titled Risk Factors and management's discussion and analysis of financial condition and results of operations 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.
Speaker 2: 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 management's remarks today will highlight certain non-GAAP financial measures. Our earnings release, which was issued today, presents reconciliation of these non-GAAP financial measures to the most comparable GAAP measure.
Speaker 2: which can be found on the investors section of our website at advantage solutions.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 this call will also be available on the website. It does appear to be a Gould and Mess tube for said officers where there may be — and the U.K.
Speaker 3: And now I'd like to turn the call over to the manager CEO , Dave Peacock. Thanks, Kimberly. Good afternoon, everyone, and thank you for joining us. I also want to thank everyone on the Advantage team who helped to welcome me to the company. I'm excited for the work we are embarking upon together. Today is my first earnings call since joining Advantage, and it also marks my exactly one month to company. In the past four weeks, I've spent time with our team to understand the state of our business. Thank you very much.
Speaker 3: I spent time with our Board of Directors to review our financial performance and discuss our strategic plans for growth. And I've spent time with clients and associates. My brief time here, I've seen new opportunities for our company which serve as constant reminders that my decision to join this team at this time was the right one. And talking with our clients is clear that the work we do is highly valued and critical to the success of their businesses. It's also clear that advantages capabilities are as relevant now as they've ever been given the challenging labor market for our retail customers.
Speaker 3: and given intense competition among CPG players. Our company is a necessary component of our clients' ongoing operations, and due to our scale, breadth, and depth of experience, we are able to adapt as their needs evolve. I see opportunities to reinforce our connection to our clients by enhancing the processes and analytics, and underpin the relationship.
Speaker 3: We will also be driving value for clients by leveraging insight across our sales and marketing platform to help better inform our collective decisions and actions. I business with associates and retail trades so far have left me motivated by the culture and diversity of advantages team and the legacy of winning that has been nurtured throughout the organization.
Speaker 3: It's one that sits at the intersection of CPG and retail and promotes the seamless functioning of the broader consumer ecosystem. As I consider the experience of working at Advantage for our associates, we need to be more intentional in our onboarding efforts and provide a clear path for those associates who are looking to advance within our company. I also see the potential to more tightly convey both our purpose and
Speaker 3: Number one market share in essential sales and marketing services and the number one position and experiential and event marketing.
Speaker 3: Revenue for the full year also tops $4 billion for the first time in company history. Those top line results are indicative of a proven track record across economic cycles and our great foundation to build upon.
Speaker 3: With not quite 30 days under my belt, I'm continuing to fully immerse myself in our business and we'll spend the next few months building a further understanding of our capabilities, our challenges and the opportunities that will allow us to deliver value to all of our stakeholders in years to come. I will be providing that outlook later this summer, leaning on five key teams to guide my initial thinking. Thank you.
Speaker 3: First, a relentless focus on the core value proposition to customers. It is paramount to an effective organization. Next, this business should provide strong cash flow yield, and this will be a guiding focus for how we operate going forward. This leads into the importance of our balance sheet. A strong balance sheet is the foundation of any good business, and we will reduce our debt level and associated ratios over time.
Speaker 3: Forts, people make all the difference in this business, so a transparent, effective process for assessing, pertaining, and attracting talent at all levels is critical as is ensuring an inclusive culture with clear opportunity for upward mobility.
Speaker 3: And finally, we must have optimized processes, supported by systems and analytics that are executed with precision is how a company like ours leverageesa scale and relative market position most effectively and creates value for all constituentsi'm excited about this team's commitment to deliver and I look forward to sharing more about our strategy in the months to come. With that, I'll turn it over to Brian for more about our financial performance and outlook.
Speaker 3: Thank you, Dave. It's great to have you as part of the team, and I'm looking forward to continuing our partnership together. Let's begin with our P&L results for the fourth quarter. On a consolidated basis, fourth quarter revenues improved 6.8% year-over-year to 1.1 billion. Dell segment revenues of 665 million increased 5% year-over-year. Dell segment adjusted the best of EBITDA of 78 million decline.
Speaker 3: 17% year over year. Revenue improvement was driven by the strength in our lower margin business services, including retail and merchandising services, which was partially offset by a decrease in third-party selling and retail services. The decline in adjusted EBITDA is largely a result of the continued inflationary pressures that we discussed on previous earnings calls.
Speaker 3: The marketing segment revenues of $438 million were up 9% year over year. The growth was primarily driven by the continued return to our in-store sampling and demonstration services to higher event count volumes. Marketing segment adjusted EBITDA of $35 million was down 42% year over year driven largely by the ongoing spend and inflationary impact of recruiting, wage and employee benefit expenses coupled.
Speaker 3: with headwinds and our higher margin digital businesses services. In the aggregate, as anticipated, adjusted EBITDA margins came in at 10.2% down 470 basis points a year over a year, reflecting a decline of 320 basis points in the sales segment and 690 basis points in the marketing segment. Moving on to discuss some balance sheet items. In October , we conducted our annual impairment test, which led to the non-tash goodwill impairment of 1.368 billion and 205 million non-cash and tangible asset impairment charge.
Speaker 3: These impairment charges were mainly due to a sustained decline in the company's quoted share price, headwinds from inflation, and the rising interest rates. This impairment is a non-cash charge in the fourth quarter and does not impact cash flow of the company. Our net debt to adjusted EBITDA finished in the fourth quarter at approximately 4.5 times.
Speaker 3: And it remains our goal to de-lever a balance sheet and reduce our leverage ratio over time, and we are open to considering very initiatives that adhere to that goal. For the full year, we achieved leverage pre-cash flow conversion prior to earnouts or M&A of approximately 20% of adjusted EBITDA, which we believe will improve in 2023. Stand line with prior quarter are debt profile remains healthy, and we have no meaningful maturities in the next four years. At the end of the fourth quarter, our total funded debt outstanding continue to be approximately 2 billion.
Speaker 3: A summary of our debt equity capitalization can be found on slide 6 in the supplementary slides for the fourth quarter results posted in the investor section of our website. Now turning to the outlook for fiscal 2023, for the year we anticipated adjusted EBITDA and the range of 400 to 420 million prior to adjustments related to any acquisitions and divestitures. While this is a decline from our 2022 results, we believe it is prudent given the continued industry headwinds and the uncertain macro economic conditions. As the quarters progress and we have more visibility around our business, we will reap.
Speaker 3: of this call we believe this is the right adjusted even arranged for the year.
Speaker 3: First, labor availability continues to be tight. Relative to our previous expectations, this has resulted in a more gradual rebuild on our in-store sampling and demonstration business services, as well as our retail merchandising business services, despite continued demand for our offering.
Speaker 3: While labor is starting to show signs of improvement, this improvement is slower than the company had previously anticipated. We expect labor to remain top of mind challenge in 2023 and we plan to continue investing in our ability to track and retain talent. On a positive note, we are continuing to see the benefits from our new recruiting software
Speaker 3: that has improved our speed to higher despite the challenging market backdrop. Overall, speed to higher in 2022 was approximately 25% faster than 2021, and in the fourth quarter, it's managed made approximately 1500 net new hires. Second, inflationary pressures.
Speaker 3: have also negatively impacted the profitability of our business. In operating our workforce sub-scale, we're not able to fully leverage certain fixed costs and our labor-intensive business services, which has negatively impacted our margins. Furthermore, we continue to see a price lag associated with our sales business segment, given the ongoing higher-than-average increase in wages.
Speaker 3: travel, gasoline, and other expenses. Third, broad macroeconomic uncertainty has challenged consumers, recalers, and TPG brands, resulting in involved demand signals across the ecosystem. In the new year, we will continue to pursue pricing opportunities to offset wage and antitallery standard increases and preserve margin. While the year-over-year wage inflation slowed to mid-single digits in the second half of 2022, compared to high-single digits to low double digits in the first six months of the year, this is still well above our long-term inflationary rate increases. As labor costs increase, we're making diligent with regards to pricing and continue to approach our customer's price increases. We will also continue to prioritize deleveraging our balance sheet in 2023 and work to drive a continued rebound of our in-sourced sampling and demonstration services.
Speaker 3: Although securing labor remains challenging, we remain confident that the business will continue to build back this year. Thank you very much. I'll turn it back over to you, Dave. Thank you, Brian . There is no doubt that 2022 was a difficult year for advantage. And while macro conditions remain challenging, we are taking the right steps to position the company strongly for the future. Operational redesign, technology enhancement, efficiency initiatives, and aligning pricing to value are not only enabling us to weather the current environment, but are also helping us to establish the necessary building blocks for long-term success.
Speaker 3: We welcome your questions and will now open up the line. Operator. Thank you. Ladies and Chairman, at this time we will be conducting a question and answer session.
Speaker 4: If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.
Speaker 4: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Ladies and gentlemen, we will wait for a moment while we poll for questions. Our first question comes from the line of Tony Kaplan from Morgan Stanley . Please go ahead. Good evening. This is Greg Parrish, on for Tony. Thanks for taking our question.
Speaker 5: I welcome to Dave's report to work with you. Dave, want to start with you, giving your fresh perspective here, has clearly been some headwinds facing the company. What moves the needle in the right direction? Is it just labor, headwind, alleviating, or what are your key initiatives really to drive this thing in the right direction? Thanks, Greg. Another part of working with you and Tony.
Speaker 3: Look, I think you've got external and internal opportunities for improvement, right? You've got a macro environment, you know, with significant labor inflation, you've got, you know,
Speaker 3: What is it now? I think two openings for every worker right now. I mean, it's a significantly different labor environment that we've seen historically. That, like any other cyclical dynamic, should bounce back eventually. The question is just as when. And then internally, we've got to find ways to deliver on our clients and customers expectations.
Speaker 3: where there's innovation, there's a desire for sampling and to get products in front of people.
Speaker 5: So we've got a number of numbers that we can pull both internally and then you've got the macro environment that we're optimistic eventually will be more favorable for our business. Great. And then follow up along those lines. We'll talk about passing through costs. I mean, I think it's been an issue and I think even it's on one of the slides here.
Speaker 5: Dave, with your client facing background, right? How do you go about enhancing the value proposition? Really better able to be better able to pass through cost to your customers? Greg, I think you hit the nail in the head. It's reinforcing that value proposition. And I've spent a lot of my time in the first 30 days visiting with clients. I think I've had 18 or 19 different client meetings, a lot of traveling, and understanding what's important to them, how we should be tracking their business alongside them, getting ahead of any gaps or performance or opportunities for better performance in the marketplace, and both addressing them right away and bringing them to them. It is not an overly complex business, but it's highly executional complex business.
Speaker 5: It requires a lot of attention to detail. And I think as I've spoken to clients, I've been reassured that the value we provide. You know, the moment of truth for a lot of our brands, products, and with their customer's, is at retail. It's that decision point when someone's going to make a purchase. And we have a great opportunity to influence that with the work we do, and then provide those insights back so that they can, and we can make better decisions as far as activities. So, I think it's building on that continuous loop reinforcing that value proposition, and always demonstrating a strong ROI that justifies, you know, the value we're creating for them.
Speaker 5: Thanks for that. I'm just going to slip one last one and then I'll hop out here. I just wanted to ask about competition. Two big competition competitors on the sales side and they're more organized now than they were a few years ago and they're also competing on price. How much is that impacting you? I think, Brian , you've said a couple of times that when we've talked over the last year that you haven't lost any customers yet to price. I guess that's still the case. How much of that is really playing a factor in your ability to pass through price right now? I don't know if you can update us on that.
Speaker 5: you know, with more than 60,000 employees, with over 3,000 clients, and a significant position in the marketplace, both with retailers and with our branded CPG companies, we've got a unique perspective being at that intersection on the business, especially with the breadth of categories and business we work on. So...
Speaker 5: Keith for us is just making sure that each of those relationships and each of those partnerships is managed properly and that we're leveraging that collective intelligence to provide value to our clients and customers. Thank you very much. Thank you. Our next question comes from the line of Jason Englisch from Goldman Sachs. Please go ahead.
Speaker 5: If folks, thanks for slot me in and pleasure to meet you with the phone Dave. Look forward to meeting in person. I've got a number of questions. So first, starting with your confidence in the 4-to-420 for next year. If we take where you finish the year and we apply normal seasonality to it, normally to over like 30% of EBITDA in the fourth quarter, it applies 370 million EBITDA at the run rate you exed. So what gets better next year to get you to 4-to-420?
Speaker 5: I appreciate it Jason, I look forward to working with you. I'll give you some high level thoughts initially, Brian may have an opinion as well. First I'd say, well there's been historic averages as it relates to how our EBITDA has, or where it's been derived by quarter in this environment, especially where you have the volatility of both the labor market, you've got timing of pricing rolling in relative to contracts, you've got a recovering demo business. The percentage of EBITDA that comes from a quarter may change, number one. While we're seeing the first quarter...........................
Speaker 5: a little bit like the fourth still as we look out. And obviously we know both demonstrations are going to be booked. We have obviously clear line of sight on some of our contractual terms and the work we're going to be doing and a pretty good understanding of where rage rates should go. We have confidence in the guidance we provided. Yeah, Jason, if maybe I can add a little bit more, agree with what Dave's saying. If you look at Q4, first of all, if you look at the COVID impact of 21 versus not being in COVID in 22, and you look at the second quarter to second quarter, third quarter to third quarter and just apply a trending for Q4, that's about half of the difference. And then also in Q4 specifically, we have a timing difference in the sense of for demo, we had a price increase in Q4 of 21 to address wage inflation in 22. We did get a significant price increase in Q4 of this year, but it's effective Q1 of 23. And so there's a quarter timing difference.
Speaker 5: You'll see that flow through and Q1 going forward. And then also we've had headwinds, which I'm sure you've seen in the sector on the digital advertising aspects that hit us in Q4 as well. So there's some differences within the quarter that we think give us confidence I guess going into our 400 to 420 for next year. Okay. Okay. Okay. And I want to come back to the pricing comment before I get there. I want to stay a little higher level. Your guys.
Speaker 6: Basic production or break here in this case basic labor as such is this it's just like a reasonable base case that this is the right level for this business and If you tried to get greedy like any private label manufacturer would and chase a higher margin You're going to lose business and it becomes just this sort of spiral where you you get stuck in this 9 to 10 which can be fine right in terms of cash generation if you're if you're a
Speaker 5: if you're generating good cash, but I just want to get level set expectation on run rate margins. No, Jason, that's a great question. I know you've written about this in the past. And I came from a background on the investment side where we looked at contract manufacturing quite a bit in the previous role before joining Advantage. A couple things to think about when you make that comparison. One, I do think this should be a low teens margin business long-term. You're seeing volatility in the business when you see this sort of swollen margin that occurred as a demo fell off during COVID. And then the snapback of that lagging pricing relative to labor cost inflation, a little bit of labor cost mix, if you will, kind of full-time hourly relative to part-time hourly as it relates to just the full-time hourly wouldn't change as far as the number of people, but to the degree there's more part-time hourly available, that group would swell in size a little bit.
Speaker 5: So on the contract manufacturing point, and this is stuck with me after reading some of your work previously, first I'd say one difference. When I look at... We know this business pretty well on the private label side. When I looked at the top 10 categories in private label, they're anywhere from, on average, on a 10 to 20 different...
Speaker 5: contract manufacturers, where we're in a different situation where you've kinda got, you know, what I'd say, kinda three national alternatives, us being the largest regional network and doing it yourself. So you've just got less options from that standpoint when you look at just what evaluation has created. And when you factor in the thought that we do believe that this could be, um,
Speaker 5: slightly higher margin and look right now if you look at trading multiples of where some contract manufacturers have traded historically at least in the last seven eight years you apply that multiple to our business and we should have a $5 stock price today. So to your point it's not all bad, but I think there are differences and you know I layer in the fact that we need to and I mentioned that my prepared comments
Speaker 5: be very dogmatic about leveraging the insights we benefit from being at sort of this intersection of, you know, CPG and retail, brand and private label, and make sure that we're providing as much value as possible for our clients. We think the revenue side of these businesses is absolutely critical. I'm not diminishing the production side, but if we're the partner we should be with our clients and customers, the support we provide should come with a premium.
Speaker 5: And if your services are so critical and create so much value, why have you not been able to raise price successfully? Well I think one we have, some of that is going to start rolling through as Brian said, as you move in through the year. And I think there is opportunity to reinforce the ROI and have discussions with some of our clients and customers relative to the price that we're charging. So I do think that is an opportunity going forward, but we have taken steps in that regard over the last 12 months. You do see contractual timing also impacting or contract timing, impacting sort of a lag as it relates to when you can capture.
Speaker 5: not acquiring revenue streams, requiring a service and capability that we can leverage our relationships with the clients, our relationships with the retailers, the depth and breadth of our personnel, our technology, and so it's blended together with our growth for overall business. So...
Speaker 5: We run them together with the businesses not separately, so it's not easy to separate those apart. So you're paying higher multiples? Good, six. On average, in aggregate. I'm saying historically we've talked about paying on average mid-single digits multiples.
Speaker 6: Right, but now your buying businesses wouldn't know either, just capabilities. Okay. Okay. I'll pass it on.
Speaker 7: businesses with no evidah just capabilities. No, the businesses have evidah. Okay. Okay. I'll pass it on.
Speaker 5: Ladies and gentlemen, since there are no further questions, I would like to turn the conference over to Dave Peacock, CEO for closing comments. Thank you Ryan. I firmly believe advantage of the bright future and a strong foundation from which to build an even better company. Along with my entire management team, one of our core goals in 23 is to rebuild credibility with you, our investors. Our associates are providing essential services to provide a high yield for our clients and customers.
Speaker 5: and helping our CPG companies and retailers navigate the current environment efficiently and with more conviction. Our scaled talent and team is a true source of competitive advantage for our company and we intend to unlock this value as we work to better enable the organization to drive growth. Thank you again for your time today. I look forward to meeting some of you at the upcoming UBS conference later this month.
Speaker 4: as well speaking our first quarter call may. Thank you. The conference of Advantage Solutions has now concluded. Thank you for your participation. You may now disconnect your lines.
Speaker 1: The.