Advantage Solutions Inc. Q1 2023 Earnings Call
Good morning, and welcome to be advantaged solutions first quarter 2023 earnings 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 Kimberly <unk> Investor Relations for advantaged. Please go ahead.
Thank you operator, and thank you everyone for joining us on advantaged totally signed its first quarter 2023 earnings conference call on.
On the call with me today are Dave Peacock, Chief Executive Officer, and Chris Crowley, Chief Financial 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.
Actual outcomes and results could differ materially due to a number of factors, including those described more fully in the company's annual report on Form 10-K filed with the SEC.
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, 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 reconciliations of these non-GAAP financial measures to the most comparable GAAP measure. This call is being webcast and a recording of this call will also be available on the website.
Now I'd like to turn the call over to advantages CEO , Dave Peacock.
I'll provide more color on our performance and our outlook in a few minutes.
I want to start by thanking everyone on the advantaged team for their hard work this past quarter.
My first 100 days and advantaged I've spent considerable time in the market connecting with many of our stakeholders I've been consistently impressed by the caliber of our talented teams their heart for service and their unwavering commitment to delivering results, which is evident in the feedback I've heard from clients and customers the new business, we're winning.
Our solid performance for the quarter.
Specifically, our revenue and adjusted EBITDA were ahead of our plan and that stronger business performance along with a focus on working capital led to an improved free cash flow performance as well.
Together with our newly formed executive leadership team, we've been assessing our services capabilities and potential.
We're setting the stage for long range business plan will position advantaged for long term profitable growth, we will share this plan in the coming months.
Advantage is uniquely positioned at the intersection of brands and retailers with extensive reach and breadth of services that span the entire path to purchase.
Our operational scale is unmatched with nearly 4000 clients spanning 17 channels of trade and most of the largest U S grocery retailers regarding advantaged as their exclusive in store experiential partner.
It's a competitive position that gives us critical insights and a strategic perspective to both inform and help achieve our clients' goals, including how best to play and where to pivot to optimize performance and doing so we also make consumers' lives easier.
Our people powered culture data driven insights create collective intelligence that differentiate our execution.
In fact through by many meetings with clients I had been repeatedly reminded us a clear value of our work.
Theyre up against the evolving consumer behavior supply chain challenges and labor constraints, all while CPG or accelerating innovation at a pace closer to pre COVID-19 levels.
As a result advantages offerings are needed now more than ever.
During the first quarter, we successfully continued to increase pricing in cases, where we believe the value of our services were not yet fully realized as well as areas, where incremental labor cost inflation necessitated the change.
While we are beginning to see the benefit from price increases it's important to remember that those initiatives take time.
The contract based nature of our work often results in a lag to implement price increases on the sales side of our business as compared to the CPG and retail industries, where price increases can be implemented and realized more quickly.
We will see these changes as the year progresses fully anticipate better revenue management reflected in margin improvements.
We've also been very active and successful in winning new business, while increasing the scope of existing business demonstrating the value we provide to our clients and customers.
Overall, we delivered a strong first quarter result, with advantaged generating $1 billion in revenue an increase of 10, 6% year over year and adjusted EBITDA of $92 million.
I am confident in our capabilities and our potential together with the deep expertise of our newly formed executive leadership team. We are taking decisive actions to leverage our strengths to drive operational excellence and position advantaged for long term profitable growth, we're seeing some early progress at.
It takes a favorable cash flow yield and our strong balance sheet to create the capacity to invest in growth.
In Q1.
Vantage generated approximately $70 million of adjusted Unlevered free cash flow, representing a significant increase versus the prior year driven by solid performance in working capital year over year.
With all roads, leading back to our people we experienced notable growth in our recruitment and retention efforts.
We had approximately 900 net new hires in the quarter, which has helped fuel growth in our sales segment and supported continued improvements in our sampling and demonstration business.
Event counts have now reached approximately 77% of comparable 2019 levels up from 72% last quarter.
We reduced turnover by approximately 25% year over year across our enterprise, we will continue to refine our talent practices to strengthen retention in the future.
And thanks to our top talent, we were once again recognized by AD age as the number one experiential marketing agency and top promotion agency for the 10th consecutive year.
Our executive leadership team is identifying operational enhancements new ways of collaborating and exploring white space, where advantage has the right to win.
We're confident that aligning our core competencies, while enhancing capabilities will deliver more value to our stakeholders.
Natural strength is critical and we intend to build capacity to invest in innovation improve our balance sheet. We will do this by enhancing our cash generation, enabling us to reduce our debt while investing in core areas of our company.
With financial strength, we can make more strategic investments and the right technology modernize our systems and improve our reporting.
Our sales and marketing platforms generate massive amounts of data given our unique positioning within the consumer retail ecosystem.
Under the leadership of our new Chief Digital Officer, we're working to improve our tech infrastructure simplify our processes and calibrate our analytics to assess this data more efficiently and.
In doing so we'll be able to work smarter faster and expand our strategic service offerings.
We will make it easier for associates to do their jobs and for clients to do business with us.
None of this is possible without our people.
Led by our new Chief of HR, we're implementing a competitive and holistic talent strategy to deliver an exceptional associate experience that drives retention fuels growth and positions us as an inclusive employer of choice.
We're also continuing to build on our strong track record of providing differentiated services to retailers. We continued to grow this part of our business, while working to create new service offerings and enhance our penetration with existing retailers to help them grow their businesses more effectively.
With that I'll turn it over to our new Chief Financial Officer, Kris Roy for more on our financial performance and outlook.
Chris It's great to have you on the team and welcome to your first of many advantage earnings calls.
Thank you Dave I'm excited to be here on the other side of these calls as a CFO of advantage I look forward to working with you, Dave and the rest of the team and establishing a consistent enduring level of growth for the company.
There's a tremendous amount of value to unlock for all stakeholders and although it is early days my conviction in this business is high and its only grown in my short time here.
I am joining advantage after over 25 years and sell side research. Most recently at Stifel and I believe that experience and familiarity with the consumer and retail sector will serve me well in this position and advantaged more holistically.
The great benefit of working with the entire finance team, we're aiding the EMI assimilation into the organization and get any positioned quickly to succeed in this role.
Now, let's get into the performance for the quarter on a consolidated basis first quarter revenues grew 10, 6% year over year to total $1 billion, excluding unfavorable foreign exchange rates revenue increased by 12, 1%.
First quarter, adjusted EBITDA declined four 8% year over year to $92 million.
Sales segment revenues of $613 million increased three 6% year over year.
Sales segment, adjusted EBITDA of $66 million declined three 5% year over year.
Topline growth was driven by growth in retail merchandising services and our European joint venture along with success in our pricing initiatives.
Marketing segment revenues of $399 million were up 23, 5% year over year.
Marketing segment, adjusted EBITDA of $26 million was down 8% year over year, driven largely by the flow through of headwinds in our higher margin digital services, partially offset by the aforementioned return of sampling and demonstration events.
In the aggregate the adjusted EBITDA margin came in at nine 1% down 150 basis points year over year, reflecting a decline of 80 basis points in the sales segment and 220 basis points in the marketing segment.
Let's move on to discuss some balance sheet items, our net debt to adjusted EBITDA finished the first quarter at approximately four five times. It remains our goal to delever, our balance sheet and reduce our leverage ratio over time, and we continue to explore various initiatives, which adhere to that goal.
For the first quarter, we achieved adjusted Unlevered free cash flow conversion of approximately 75% of adjusted EBITDA, reflecting significant improvement from the same period a year ago as a result of working capital improvements.
In line with the prior quarter, our debt profile remains healthy and we have no meaningful maturities in the next four years.
At the end of the first quarter, our total funded debt outstanding continued to be approximately $2 billion.
We've also taken tangible steps to mitigate future risk and promote a healthy balance sheet.
We voluntarily paid down a small amount of floating rate debt at an attractive discount and we'll continue to monitor opportunities to deploy capital that the leverages the balance sheet, we'll generate a favorable rate of return.
In April we also initiated a favorable color on $300 million of our term loan, resulting in 84% of our debt being hedged or at a fixed interest rate and allowed us to capture most of the downside interest rates should it occur.
Additionally, we completed a small divestitures subsequent to quarter end the generated cash to further strengthen our balance sheet.
Turning to our outlook for the full year of 2023, we are reconfirming adjusted EBITDA in the range of $400 million to $420 million inclusive of the impact from the completed divestiture.
Looking ahead, we will continue to pursue pricing initiatives to offset wage and ancillary spend increases to preserve margin wild.
While wage inflation has begun to moderate as Dave noted the.
The rate remains elevated relative to historical levels.
Labor cost increase we remain diligent with regard to revenue management and our cost structure.
You for your time and I'll turn it now back over to Dave.
Thanks, Chris we are just getting started and have a lot of work to do we do not believe that one quarter defined success, but we're pleased with our start I am confident in our leaders in our company, both new and legacy who are uncovering and capitalizing on the opportunities every day, both for our own operations.
And for our clients and customers.
We have tens of thousands of associates, who are a powerful force for consumer and retail businesses and the passion and commitment that I've seen in market visits gives me incredible optimism and confidence in our future. We will now take your questions operator.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
The first question is from Faiza <unk> of Deutsche Bank. Please go ahead.
Yes, hi, good morning, and congrats Chris Nice to hear you on the other side.
I guess I wanted to start first around you know pricing them can you talk about where you are in the cycle right now.
Where are the specific areas, where you're getting better pricing from customers and how should we think about that for the rest of what they are.
Yeah.
Thanks, Mike This is Dave <unk> got high.
Thanks for the question pricing is going well, we're seeing success in.
In multiple areas of our business right now I think there is a strong recognition of the labor inflation that we obviously experienced over the last year plus.
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And while labor inflation is moderating a bit from maybe a year ago. You were obviously still experiencing it everybody saw the information from the government just.
Just a few weeks ago, but we feel good about the pricing outlook for our business.
We've seen it in both those areas of our business that service retailers more directly as well as those.
On the consumer packaged goods side.
There is a strong demand for retail activity. If you will both funded from consumer products companies with all the innovation coming and a strong desire to leverage off shelf merchandising and we also see it in our.
Retail funded area, where we do a lot of resets directly for me on behalf of retailers as they are working in more private label products as well as some of the innovations coming from their branded product partners.
Understood and then Dave I know you've been spending a lot of time with your customers talk a bit you touched on this in some of your comments, but give us a bit more color in terms of what you're hearing from from your customers. What are they looking for from you and I believe you mentioned, some new business wins within the sales cycle.
So maybe talk about you know what are some of the areas, where you're gaining some some traction in these new business wins.
No absolutely and think of our customers kind of broken into as we have to mention the branded consumer products companies and retailers.
You, obviously are seeing it as a branded consumer products side, our strong move back into innovation, a lot of new items coming to market the.
The innovation engines are back on but many of our.
Many of our clients, which is great to see and as I mentioned, we actually just had a survey with our manufacturers and CPG companies.
And then kind of top tool that they're using to drive performance at retail right now is off shelf merchandising and positioning which is which serves well our retail merchandising segment.
We're hearing a lot of optimism.
About.
I think the year from our CPG partners from the retail side Youre, obviously seeing in many cases units down overall.
And you are seeing private label outpacing the growth of branded products, but.
Both so from a dollar standpoint growing well.
Yeah.
Well, we you hear a lot in the media, obviously right now about looming recession or concern over the debt ceiling I think.
So far what we're hearing is cautious optimism as it relates to the consumer obviously, the labor markets being constrained can be challenging for us but.
The more funds in the consumers' pockets.
It is going to continue to drive.
I think the continued visits and they are spending in stores. So.
<unk>.
Pretty I'd say cautiously optimistic is the feedback we have been in 40.
Client meetings over the last few months.
In person actually three just in the last six days.
We've had great discussions around where they see the business going in and as I said I think theres. There is cautious optimism for this year and you've obviously been tracking some of the reports that have come out for the first quarter for many companies.
Great and then just last one if I may.
Can you give us a sense on how you're thinking about you know free cash flow conversion for the year. It sounds like you had some good conversion this quarter because of working capital developments. So just help us a bit in terms of how we should think about that for the course that they are.
Hi, Faiza, it's Chris growing and great to speak to you from this side.
This is where I get involved right. So our unlevered free cash flow was quite strong in the quarter.
It's really going to be a driving force of the rest of the year, we saw really good working capital improvement through the quarter.
I would just say well we're pleased with the first quarter, it's our intent to keep driving improvements in free cash flow I would just obviously working capital improvements our focus but you know one of the best drivers of free cash flow was profit growth. So that's our that's our key here our goal.
So the the main driver of the working capital improvement was better receivables and better Dsos.
Some of this was the year over year comparisons and some of it was you know our work internally to do that so to accomplish that we have financially stable large and midsized customers cash cycles are stable overall, so its ADR performance in the quarter and that should continue throughout the year.
Great. Thank you so much.
The next question is from Greg parish of Morgan Stanley . Please go ahead.
Hey, good morning, Thanks for taking my question and welcome to Chris as well.
So just wanted to circle back on pricing real quick I think you called out pricing realization in both segments. So I guess how was that versus your initial plan are you kind of are you ahead of schedule. At this point are behind and then also sort of in terms of guidance and it's sort of related but how much how much more pricing do you have to execute on in order to achieve it.
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I'd say, we're effectively on a plan and then realizing the pricing we expected coming into the year.
Obviously, we need to see how things unfold as we move through the year, because the timing of our contracts and when they renewed Barry but so far we are on schedule.
Okay Fair enough and then I wanted to talk about capital allocation prior management sort of shifted its focus towards debt pay down now that you're sort of both in your seats can you confirm that your focus too and then.
Previously you were looking at potential asset sales or something in the quarter. If you could maybe confirm what that asset was that that'd be helpful. And then are you looking at further divestitures. So I guess broadly can you give you a sort of high level capital hours at capital allocation philosophy, and then also sort of a near term plan to execute on it.
Yeah, I mean, our capital allocation policy is to reduce our debt.
So that really Hasnt changed I'll, let Chris expound a bit more on the recent divestiture, but.
We're obviously as a new management team assessing the portfolio and looking to determine.
You know both fit strategically but also.
No value if you will in the market and what can position us well as it relates to.
Achieving our goal of paying down debt.
And also just our kind of internal what merits internal resource allocation in the form of both.
Funding and people as it relates to the divisions of our company. So we're going through.
A pretty rigorous review I mentioned in my comments about a plan that will come forward I don't want to oversell that in the sense that you know we're going to release, some 50 page document to the world but.
We will probably talk a little more in detail in the coming months about.
How we specifically expect to get our leverage ratio in a much better place.
Yeah, I'll just add on that.
Dave Hi, Greg look forward to working with you.
Let me start with the Divesture, we can't offer specifics on that.
The best we can say, it's less than 3% of revenue and EBITDA. So it is a non core business. It was the third party E Commerce reseller, and we divested of that business and we're now out of that business.
Overall.
And in terms of debt repayment I think that as Dave said, that's our focus now right. So.
In the quarter, we had our gross debt or net debt and our net debt to EBITDA all went down sequentially and that's driven by a slight reduction in.
That overall as well as an increase in cash.
You did buy back a small amount of debt in the quarter and you know we're going to continue to focus on our balance sheet in general and improving our balance sheet. That's in our kind of top list of priorities for the year.
Just to add one other point year, 84% of our debt is fixed or hedged.
This recent caller, we put on placement in place on another $300 million of debt.
And that allows us to control any upside in rates and actually allows us to capture the downside in rates from here. So.
I like the improved you know kind of fixed in nature of our balance sheet.
Greg one more thing too on that I do want to reinforce.
When the business necessitates it or we see opportunities to invest in the business we will.
And that can be in the technology area that may be in areas in support of our demonstration business as it comes back and grows.
So I do want to reinforce that we will invest in our business because we do see the opportunities for growth.
But we obviously are also prioritizing debt repayment.
Okay, Great. That's all very helpful. I appreciate the color.
And then lastly for me just maybe if you could give us an update on labor labor availability wages, obviously labor numbers last week, it's still very hot and tight out there, but I I don't know if you know if you've maybe theres no change, but just wanted to kind of get an update on what you're saying.
I think I'd say, it's shifting a bit.
You are right. If you look at labor position labor participation rates dipped a bit.
Kind of month over month, and you obviously saw the numbers as it relates to unemployment and job creation.
We had 900 net new hires in the quarter. So we've had three consecutive quarters of net new hires.
And continuing to see success in that area and what I like seeing as our new Chief Digital officer, and our new chief of HR, partnering and finding better ways and quicker ways and this also is included in our workforce management group.
To get people from kind of higher to enroll if you will one of the things that we've seen and I saw this when I was working in grocery retail the quicker you can get people through what I call the hiring funnel.
The more success youre going to have both in attracting candidates, but also keeping them longer term because you just make it less difficult to join the company. So that's one of our focus areas.
And it's more of it's paying off right now as we're seeing much better it's Ricky.
Recruiting efforts and we are seeing a little bit about.
Reduction in turnover as well so we're starting to see some stickiness with the current labor force.
Great. Thank you very much.
The next question is from Jason English of Goldman Sachs. Please go ahead.
Hey, good morning folks thanks for slipping me in and congrats Chris on the new role.
I must apologize in advance I'm juggling four different earnings calls this morning, I missed much of your prepared remarks, so I apologize if I ask you something redundant.
But it's great to hear the progress on the labor front that you just mentioned I am curious, if we could delve deeper and the progress on the pricing front, there's a lot of chatter in the industry right now about increased tension between manufacturers and brokers with manufacturers not just pushing back on price, but actually trying to get commission dollars down.
And threatening polling businesses et cetera.
I'm curious if you think those concerns.
Our sensationalized, if you're actually seeing it play out.
And how the interplay between the between the interaction is a negotiated price between your manufacturing clients into in yourself is progressing.
Thanks, Jason.
Yes, you mentioned and you may not have comparative I bet I've been with.
40 client meetings in person over the last couple of months in.
You know I have not experienced what you reference in my interactions with our clients.
Clearly, there's always sort of a push and pull as it relates to pricing at any time, whether it's an inflationary period or a deflationary period, but.
Yes, I have not I have not experienced that sort of tension. If you will that said I mean at the end of the day, we actually have a responsibility as well to make sure that we're delivering our services more efficiently and one of the things we're doing more and more as we can.
Speak with our clients and I'm going to I want to reiterate you really have in CPG companies, but the retailers as well theres a lot of what we do.
On behalf of them for the retailers directly.
And we're.
We're talking a lot about the results and what are the desired results and what are their objectives and what are we trying to achieve.
And getting less into sort of the.
If you will the how many bodies are hot because at the end of the day, if we can be more efficient in what we do whether that's through technology or just better process controls within the functions in past we perform.
It takes some pressure off that pricing side, but so far we've had.
Very good and reasonable discussions with both our CPG and retailer partners as it relates to pricing.
Okay.
That's good to hear.
And in terms of sampling.
I see the progress you are showing it in your slides.
Good to see the continued progress there.
It's still well below 2019 levels, how much of that is labor constraints and how much of that is lost demand meeting with some of these manufacturers are spending a lot more retail media.
Other other commitments they pulled back the sampling maybe they discovered they didn't need it or we are we are at a rebase level in your view.
No I would say a lot of it is and with labor constraint and just as I mentioned earlier getting the net hires up.
Anytime you have an innovation environment like we have now.
Survey, we just performed with our with our CPG partners over 90%.
Are enhancing their innovation efforts in the third over a third have said they are aggressively pursuing innovation.
That plus private label growth can those be can both lead to increased demand for sampling so.
It's really what I would say a focus for us is sort of an execution rate and in our ability to bring people in and get them trained and as we say from hire to card.
Shorten that time period, so that we get people in and.
And get these jobs filled because the demand is there.
Got it okay. Good to hear thanks, guys I'll pass it on.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to Dave Peacock for closing remarks.
Thank you no I cant reiterate enough that we're very pleased with the quarter. We don't obviously declared victory. After one quarter. We've got a lot of work to do the team is very committed.
Uncovering opportunities every day to both improve the services, we provide to our clients and customers.
And enhancing the employee experience within our organization.
If you remember that the associate experience is critical to our success because we're a people based business and people powered business.
And we remain focused on that we thank you for your time and we look forward to speaking to you again.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.