Advantage Solutions Inc. Q4 FY2021 Earnings Call

Good afternoon and welcome to Advantage Solutions, Fourth Quarter and full-year 2021 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 Dan Riff, Chief Investor Relations and Strategy Officer for Advantage. Thank you. You may begin.

Thank you, Operator. Thank you, everyone for joining us on Advantage Solutions 2021, Fourth Quarter Earnings Conference Call. On the call with me today are Tanya Domier, Chief Executive Officer, Brian Stevens, Chief Financial Officer and Chief Operating Officer, Jill Griffin, President and Chief Commercial Officer, and Dan Morrison, our Senior Vice President of Finance and Operations. 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 risks and uncertainties that could differ materially from actual events and those described in the forward-looking statements. Forward-looking statements are based on the company's current expectations and are subject to inherent uncertainties, risks, and assumptions 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 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 any forward-looking statements, except as required by law. Please note management's remarks today will highlight certain non-GAAP financial measures. Our earnings release issued earlier today presents reconciliations of these non-GAAP financial measures to the most comparable GAAP numbers, which can be found on the Investors section of our website at https://advantagesolutions.net. The company has also prepared presentation slides, which are posted on Advantage's investor Relations 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. And now I'd like to turn the call over to Tanya Domier.

Thank you, Dan, and good afternoon everyone. As many of you may have noticed, we issued a press release today announcing my transition after more than thirty years with Advantage, and nearly ten years as CEO, to the role of Executive Chair. I am excited to introduce Jill Griffin, our President and Chief Commercial Officer, as our next CEO. Jill has been a remarkable leader and has a strong track record of creating value. She embodies Advantage's culture and values, having joined us 14 years ago and successfully leading our marketing division. I believe Jill is the perfect person to guide the next phase of Advantage's journey. I am grateful for her leadership and confident that she will continue to drive this business forward. Once I transition to the Executive Chair role on April 1, I will remain on the Board of Directors and support Jill and the team as they continue to build the business. I will not elaborate further on this announcement during this call, but I encourage you to read our press release and my letter to associates on our website for more information. With that, let's move on to our results. To start, I'll give an overview of our performance. Advantage Solutions is a premier provider of outsourced sales and marketing solutions to consumer goods companies and retailers. Our data and technology-driven services help our clients efficiently get their products to consumers, whether in-store or online. We are a trusted partner and problem solver, focused on helping our clients sell more while spending less. We operate efficiently and reinvest in growth at attractive returns, both organically and through acquisitions. I want to express my gratitude to our associates for their hard work, helping our partners navigate the challenges presented by the pandemic. Now, I’ll delve into our Q4 2021 highlights and provide a high-level outlook for 2022. Despite a challenging year, we achieved solid year-over-year revenue growth in Q4, with healthy margins, even amidst service mix and wage increase pressures. Our higher margin digital services grew significantly, and we also saw a recovery in businesses affected by COVID, particularly with a 20% increase in sampling events from the previous quarter. We faced some supply chain challenges but enjoyed a substantial recovery in Europe, although there was some slowdown towards the end of the quarter and into 2022 due to COVID. We continued to focus on recruiting and retention, adding tens of thousands of new associates. Reflecting on 2021 as a whole, it was not the post-COVID normalization we anticipated. Supply chain issues hindered our ability to innovate, and adjustments in service mix, along with rising recruiting costs, impacted our adjusted EBITDA growth. While we saw healthy revenue growth in our sales segment, net recruiting and wage costs constrained our adjusted EBITDA. Our marketing segment performed well, particularly due to robust growth in sampling and digital services. We achieved a strong revenue and adjusted EBITDA for 2021, despite underestimated challenges such as labor market disruptions and inflation. In Q4, we saw revenue growth of 21% year-over-year, driven by strong performance in retail merchandising, recovery in sampling, and sustained growth in digital services. Adjusted EBITDA grew 16% year-over-year, outpacing our previous guidance. Our sales segment grew by 15%, mainly due to the recovery in the international business and growth in retail merchandising services. While we faced challenges in Foodservice, our marketing segment saw a significant rebound, with a 34% revenue increase compared to the prior year. Looking ahead to 2022, we remain focused on helping brands and retailers navigate challenges such as inflation and supply chain issues. We will continue to prioritize talent by increasing investments in wages and retention, scale our digital services, and enhance our infrastructure to drive productivity. We expect adjusted EBITDA in 2022 to be in the range of $490 million to $510 million, reflecting our commitment to long-term, high-return investments. While the environment remains challenging, particularly with rising supply chain issues and labor costs, we believe our strategies will yield dividends over time. As the year begins, we anticipate adjusted EBITDA will be closer to levels seen in 2018 or 2019, rather than those in 2020 or 2021. We're also closely monitoring the pandemic's impact on our business and prepared for a range of potential outcomes. With that, I’ll hand it over to Brian to discuss our financial results.

Thank you, Tanya. And good afternoon, everyone. It's great to be speaking with you. Tanya touched on the fourth-quarter and full-year highlights, so I'll share a bit more color at the segment level. In Q4, sales segment revenue of $631 million was up 15% year-on-year. Segment adjusted EBITDA of $94 million was up 5% year-on-year. Marketing segment revenue of $402 million was up 34% year-on-year, and segment adjusted EBITDA of $60 million was up 39% year-on-year. Breaking down the drivers of our revenue growth in Q4, about 40% came from growth in sampling and demonstration, another 20% came from market growth and share gains in our high-performing retail merchandising services, which includes an acquisition that we made in September, and continued digital gains drove another 12% of our growth. Drilling a bit further into the drivers of our adjusted EBITDA growth in Q4, marketing gains drove just over three-quarters of the year-on-year adjusted EBITDA growth, with lower performance-based compensation, profit recovery in sampling and demonstration, and solid incremental margin in digital services driving marketing profit growth in the quarter. On the sales side, international profit and lower performance-based compensation more than offset adjusted EBITDA headwinds in our headquarters, retail, and Foodservice areas. Turning to full-year 2021, sales segment revenue of $2.324 billion was up 13% year-on-year, with segment adjusted EBITDA of $363 million up 1% year-on-year. Marketing segment revenue of $1.278 billion was up 17% year-on-year, while segment adjusted EBITDA of $158 million was up 24% year-on-year. As we suggested, full-year adjusted EBITDA margins landed squarely between 2019 pre-COVID levels and 2020 elevated levels. Breaking down the drivers of our revenue growth in 2021, 25% came from the strong year-on-year gains of our high-margin, high-return digital services and solutions. Just under 30% came from marketing growth in share gains in our high-performing retail merchandising services, while just under 20% came from recovery in our international business. Just over 15% of our 2021 revenue growth stemmed from accelerating recovery in our sampling and demonstration services. Delving deeper into the drivers of our adjusted EBITDA growth in 2021, marketing gains drove nearly 90% of the year-on-year adjusted EBITDA growth, and strong digital growth explains most of the marketing segment adjusted EBITDA gains. On the sales side, international profit gains and lower performance-based compensation more than offset adjusted EBITDA headwinds in our headquarters, retail merchandising, and Foodservice areas. Looking at some balance sheet items, our net debt-to-EBITDA finished the quarter at approximately 3.7 times. Our debt profile is healthy, and we have no significant maturities in the next four years. At the end of Q4, our total funded debt outstanding was approximately $2.1 billion. A summary of our debt and equity capitalization can be found on Slide 9 in the supplementary slides for Q4 results that are posted on our Investor Relations website. Briefly touching on a few items related to our 2022 outlook. First, I want to reiterate that we're moving aggressively to realize pricing in our essential, need-to-have services where we're adjusting wages. That initiative is being led from the top and grounded in hard facts about labor inflation on ROI. Our guidance is somewhat conservative about pricing success, but early signs are encouraging. Second, regarding free cash flow, after a year of reinvesting in working capital to support COVID impacted businesses, we expect a more normal year of free cash flow conversion in 2022; it's safe to assume that approximately one quarter or more of our adjusted EBITDA converts to equity free cash flow for the year. Lastly, concerning leverage, given our adjusted EBITDA guidance and plans to reinvest through 2022, we expect net debt-to-EBITDA to increase slightly compared to 2021 levels. We intend to continue our deleveraging path in 2023 and beyond. With that, I'll turn it back over to Tanya.

Thanks, Brian. We're proud of how we navigated a tumultuous 2021, and we're excited about our plans to invest in both renovation and innovation in 2022 and beyond. As a team, we've grown this business through seismic shifts and meaningful challenges, and our 2022 adjusted EBITDA guidance gives us a healthy pool of funds to generate attractive returns with a very strong foundation that we can compound from. We're grateful for your interest and your support as owners and prospects, and we're eager to share more thoughts, perspectives, and insights today, and also in coming days, and much more deeply in a future Analysts Day. Dan, any closing thoughts before we open it up for Q&A?

Thanks, Tanya. As many of you know, ADV shares have been weighed down by tough performance across the vast majority of recent leasebacks. We're also not blessed with a readily accessible universal public comparable or abundant share liquidity. But we do have a long-term history of value creation, a high growth, high returns set of digital services that are accelerating out of COVID, and a thoughtful plan to reinvest in labor, innovation, and renovation to accelerate our sustainable growth rate, expand our margins, and boost our returns from here. That attractive profile is trading inside of nine times, a conservative adjusted EBITDA guidance level, and at a mid-to-high single-digit equity free cash flow yield. I like the asymmetry as an owner and as an operator at Advantage. With that, I'd now like to ask the Operator to open the call for questions.

We will now begin the question-and-answer session. If you are using a speaker phone, please pick up your handset before pressing the keys. At this time, we will pause momentarily to assemble our roster. Our first question comes from Jason English with Goldman Sachs. Please go ahead.

Hey, good morning, folks. Thanks for slotting me in, and Tanya, congratulations on a long and illustrious career there, and I'm going to sorely miss working with you on a regular basis or at least having our colorful conversations quarterly.

Me too.

I don't know if Jill's there, but if she is, congrats, Jill, on the new elevated position, well-earned, well-deserved.

Thank you so much.

Jill, now that I definitively know you are there. We got a new guidance out today, delivered by Tanya. Do you feel ownership in this guidance for fiscal '22?

I do, fully.

Now to help me understand some of the puts and takes, you gave three buckets for the reason why the EBITDA is lower than certainly you would expect it collectively many months ago, and something we had expected talent, innovation, renovation. Talent and renovation don't sound like high return investments; they sound like rebased cost to compete to me. Am I wrong in that? And innovation sounds like it could be the area where you could actually get some positive return. How much of that investment is going into innovation?

I'm assuming Tanya, you want me to take this? I'll jump right in and give my perspective and then Dan, I'm going to ask you to step in when we get to what we can say about quantifying or not. But Jason, I'll just address generally the strategy going forward, which echoes a lot of what Tanya has already shared. For sure, there is a bucket of this that is defense and a bucket that is offense, and you're seeing the wage pressure, supply chain, and inflation that we are facing. It is absolutely a challenge, but I also want to say that managing labor has always been a primary strength of our business, and it's why the largest brands and retailers outsource to us over time. So while we actually need to increase wages, we're very confident in the strategies that we have in place to drive efficiencies, new systems, structures, talent sharing, as well as take price to work on that. So you're right in that. That isn't a future growth bucket of investment; it is a required investment given the headwinds we're all facing, and we feel really confident in our strategies to address it. Now turning over to the innovation, we have still many great seeds that we have planted both pre-pandemic and during the pandemic that now we are going to lean into. These are new category adjacencies, a lot of the areas that we've been talking about with you over the last couple of years in E-commerce and data, tech, and retail media, and we are very excited about being able to lean in harder now that we're coming out of some of the daily urgencies that the pandemic was driving our focus on.

And let me come back with I guess one more. A lot of these seem like things that you would hope that you could price for, but I'm cognizant that this seems like almost an every couple of year type event where something happens in the marketplace that causes your profitability to be rebased lower. Whether it'd be pressure from the manufacturing community on one era, whether it be pressure from Walmart, or the bill that they gave you and your need to address that through acquisition or now labor cost. All of them have resulted in a reset low on profitability that you've been unsuccessfully able to pass through or price to. Is there any reason to believe that this is different, that this isn't just a structural reset that in the end you're not going to be able to price for this? This is a lower enduring profitability level for the business.

So I think, Jason, those are really good questions and we know that the labor markets are as tough as they've ever been and we are raising wages in an incredibly competitive market. If you look to last year and how we were able to take price, we simply have not been able to take it fast enough because we have to invest ahead of price. So where does this settle out? Your guess is as good as ours. All we know is we've evolved with the business. We've been able to take value in the business. If you look at what we've been able to do in the sales business during COVID and increase our margins through digital services, returning now a quarter of our profit. All of those things are very important because they show our ability to evolve. Will there be things that come up in the market from pricing to retailer programs? Yes, they will. But specifically, when we're talking about investing in talent, we actually think it does have good returns and we believe we will be able to price over time, but we're giving ourselves room. That's why we've taken guidance down because there are many uncertainties in wage and it has been really hard to get it right. But talent is our most valuable asset, and we have been able to earn on that over time. So is it easy? No. Is it dynamic? Yes. But we're going to keep doing what we do, which is invest to grow.

Understood. Thank you very much. I'll pass it on.

Again, if you have a question, please standby as we pull for questions. Showing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Tanya Domier for any closing remarks.

Thank you all very much for your participation and for listening to us today. We look forward to following up with you in our sessions. Have a great night, take care.

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