Good afternoon, and welcome to Advantage Solutions' Second Quarter 2022 Earnings Call. Today's call is being recorded and we have allocated 1 hour for prepared remarks and Q&A. At this time, I'd like to turn the conference over to Lasse Glassen, Investor Relations. Thank you, sir. You may begin.

Thank you, operator. Thank you, everyone, for joining us on Advantage Solutions' 2022 second quarter earnings conference call. On the call with me today are Jill 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 statement, 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 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 advantagesolutions.net. The company has also prepared presentation slides, which are posted on the website. You may want to refer to these slides during today's call. The call is being webcast, and a recording of this call will also be available on the website. And now I'd like to turn the call over to Jill Griffin.

Thanks, Lasse. Good afternoon, everyone. Thank you for joining us today on our 2022 second quarter results conference call. On today's call, I'd like to begin by sharing our second quarter highlights and macroeconomic trends and then move to an update on our 2022 investment activities, which remain an important area of focus. Brian will then provide additional details on our second quarter financial performance as well as an update on our full year outlook. Our success continues to hinge on our talent, and at Advantage, we are talent first. Our successful track record in managing a large flexible workforce remains an enduring competitive advantage for the company. And I would like to take a moment to thank the Advantage associates for their continued dedication and the work they do day in and day out to serve our clients. They are providing essential, high-return services, helping consumer goods companies and retailers navigate the current environment better, cheaper, and faster. Let's begin with a few key messages from this past quarter. From a macro standpoint, online and in-store consumer goods demand remains volatile. Inflation is clearly top of mind for consumers, which has started to result in trade-down behavior to lower-priced alternative channels and products, including private label, both areas in which Advantage participates and offers services. Despite the uncertain operating environment, we are pleased to report that our Q2 results were in line with our expectations for the quarter. Once again, we delivered strong year-on-year revenue growth of approximately 15%. Similar to the first quarter, we continue to see a lift in our businesses that were most impacted by the pandemic with in-store sampling and demonstration events up 49% year-on-year. As measured against pre-pandemic levels, Q2 in-store sampling and demonstration events were at 64% of Q2 2019 level, up from 61% last quarter. In addition, I am very pleased with our continued strategic M&A efforts. Here, we remain focused on acquiring tuck-in assets, particularly in areas that help brands and retailers navigate an increasingly omnichannel world. So far this year, we have completed three acquisitions, including Brandshare this past quarter. Brandshare's expertise and capabilities in e-commerce sampling are highly complementary to our own and further enhance our existing offering. However, as expected and consistent with last quarter, adjusted EBITDA margins declined due to a shift in revenue mix, headwinds from wage increases, and our ongoing investment activities. We are spending on wages, recruiting, and retention in the challenging labor market to onboard significant numbers of new associates to meet client demand for our must-have services. We also continue to invest in developing new higher-growth and margin-accretive offerings together with infrastructure to improve company-wide efficiencies. Furthermore, we are constantly engaging in dialogue with partners and implementing pricing increases. As previously discussed, we continue to see a timing lag as a result of the dynamic labor market and would expect this to persist until the employment market stabilizes. Despite these pricing actions, we did not lose any client in the second quarter as a result. Within this context, I'd like to expand a bit further on our financial performance in the second quarter. As noted earlier, revenues were up approximately 15% year-on-year for the second quarter driven largely by the continued recovery in our in-store sampling and demonstration business, along with further growth in retail merchandising services, partially offset by declines in food service and third-party selling and retailing services. As anticipated, our second quarter adjusted EBITDA margin contracted by approximately 340 basis points from the prior year period, reflecting the following: a shift in revenue mix with our historically lower-margin in-store sampling and demonstration business regaining momentum; the ongoing investment activities I just referenced, most notably in the second quarter related to staffing and recruiting; and a prior year client loss in our foodservice business. Despite the labor market headwinds and inflationary backdrop, Advantage has delivered performance in line with expectations, and the ongoing investments we are making position the business well heading into the future. As a reminder, we are making investments in three key areas: first, in talent, we are stepping up spending on wages, recruiting, and retention; second, in renovation, we are accelerating investment in infrastructure, systems, and tools to improve productivity and operational efficiencies across the enterprise; and finally, in innovation, we're investing to scale adjacent and complementary services with a targeted focus on data, intelligence, and digital offerings. We continue to make progress during the second quarter in each of these three areas. We remain confident that our efforts will strengthen our franchise and enhance our competitive advantages while driving growth, improving efficiencies, and better positioning Advantage to capitalize on future opportunities. Let's take a closer look at each area, starting first with talent. We are investing to stay competitive on wages and continuing to onboard our workforce in in-store sampling and demonstration activities. We are also investing in wages to improve retention among our existing associates and recruiting new associates in key positions to further drive our growth and development. Now let's move on to activities within renovation, where we are investing in our core business to enhance productivity and cost efficiency. Here, a key focus is investing in new recruiting software that has already materially improved speed to hire and that we expect will reduce costs to hire across our enterprise in the back half of 2022. This software is enabling our business to more efficiently acquire talent, and the early results are positive. Furthermore, we are investing behind the consolidation of in-store execution platforms across the organization. We believe this will enable us to improve the quality of our offering to our partners while enhancing internal reporting consistency and driving potential cost efficiencies. Finally, with innovation, we believe a key future growth driver for Advantage is new data and digital solutions that create even better commercial outcomes for both our CPG manufacturer and retail clients. To this end, during the second quarter, we introduced Advantage Intelligence Services, which combines at scale the company's data, analytics, intelligence, and technology capability. We are also investing in world-class leadership to oversee these services with the addition of Alex Kelleher, who joined us from Deloitte Digital. Alex's vast experience in starting, growing, and managing data-driven companies makes him ideally suited to drive development for these solutions. In marketing, we recently announced the launch of Advantage Unified Commerce. These services collectively provide consumer goods brands a holistic solution across e-commerce and brick-and-mortar, including audience identification, in-store and digital media, multichannel activation, attribution, and analytics, all powered by a technology platform and award-winning creative team. As we look ahead to the second half of the year, I also wanted to share a bit of color on our third quarter. Starting first with the headwinds, which are not unique to Advantage. Supply chain challenges persist in inflationary pressures as shared by leading retailers are changing shopping behavior. Wage inflation continues to increase and remains at historically high levels. That said, our services remain essential rather than optional, and we continue to have a cost advantage, scaling in delivering our offering. Looking at the key tailwinds, we continue to expect the pandemic disruption to slowly subside and anticipate a continued rebound in those services, notably in-store sampling and demonstration, which were most heavily impacted by COVID-19. Taken together, we are affirming our full year adjusted EBITDA guidance range of $490 million to $510 million, which Brian will speak to further along with additional detail on our second quarter performance. With that, I'll turn it over to Brian.

Thank you, Jill, and good afternoon, everyone. Jill spoke to our second quarter highlights. So I'll share a bit more color on our segment-level results and provide an update on our full year guidance. In Q2, sales segment revenue of $604 million was up 8% year-on-year. Sales segment adjusted EBITDA of $72 million declined 20% year-on-year. Sales improvement was driven by the strength of our retail and merchandising services, partially offset by a decrease in third-party selling and retail services. The decline in adjusted EBITDA is largely a result of investments in wage and technology, higher costs from inflationary pressures, and the loss of a food service client in the prior year. Marketing segment revenues of $377 million were up 31% year-on-year. Marketing segment adjusted EBITDA of $37 million was up 13% year-on-year, due primarily to an increase in-store sampling and demonstrated volumes following the return of our in-store events, partially offset by investments and cost headwinds. In the aggregate, adjusted EBITDA margins came in at 11%, down 340 basis points year-over-year, reflecting a decline of 406 basis points in the sales segment and 155 basis points in the marketing segment. The lower margin is due to revenue mix shift, reflecting our increased lower margin revenue, primarily driven by meaningful increases in our in-store sampling and demonstration business and our single-source retail merchandising services, and modest compression from inflationary pressures. Moving on to discuss some of the balance sheet items. Our net debt to adjusted EBITDA finished the second quarter at approximately 4.1x. In addition, we continue to expect free cash flow to ramp throughout the year with growth more heavily weighted towards the back half of the year. In line with Q1, our debt profile remains healthy, and we have no meaningful maturities in the next four years. At the end of Q2, our total funded debt outstanding continued to be approximately $2.1 billion. A summary of our debt and equity capitalization can be found on Slide 6, and the supplementary slides for Q2 results posted in the Investors section on our website. In terms of capital allocation, we continue to prioritize M&A and organic investment to drive continued long-term sustainable growth. We will also consider options to pay down debt and repurchase shares based on the best interest of our stakeholders. Now turning to our outlook for fiscal 2022. As Jill highlighted, we are reiterating our fiscal 2022 adjusted EBITDA guidance range of $490 million to $510 million. The following are some of the additional considerations of our 2022 adjusted EBITDA expectations and high-level financial performance. First, we want to reemphasize that as costs increase, we are being proactive around pricing. With regards to the marketing segment, we have been very successful in obtaining price increases in order to fully offset the elevated wages of our employees. Within our sales segment, our commission business is inherently protected with pricing structure providing a natural offset to inflation, while within our retail services business, we are having productive ongoing discussions. The results of these discussions thus far have been positive. That being said, the labor market remains dynamic and until it stabilizes, we expect to continue to see a several-month lag in pricing implementation. Second, turning to growth. In terms of fueling organic growth, we are focused on executing against our investment strategy to drive long-term value creation, and fiscal 2022 is very much a year of developing and prototyping these higher-growth, higher-margin solutions in order to scale them effectively in 2023 and beyond. We are making progress in innovation, where we are investing in our digital media and retail data and analytic tools. Regarding M&A, which continues to be an important part of our growth and value creation strategy, so far in 2022, we have closed three acquisitions. Looking ahead, we have a robust pipeline of attractive high-return opportunities. We will continue to be opportunistic and pursue accretive tuck-in acquisitions that will strengthen our existing capabilities and align with our future strategic growth plans. Third, with respect to our leverage, we expect debt levels to remain consistent in 2022. However, given our adjusted EBITDA guidance, we expect net debt levels to adjusted EBITDA at year-end to be slightly elevated from 2021 levels. In 2023, we expect to continue steadily deleveraging our balance sheet. And lastly, regarding our financial performance, as we look ahead, we anticipate our revenues and adjusted EBITDA will be stronger in the back half of the year compared to the first half, supported by the ongoing recovery and scale of our in-store sampling and demonstration business. With that, we will open it up for a questions-and-answer session.

Our first question comes from Toni Kaplan with Morgan Stanley. Please proceed.

Thank you very much. First, I wanted to ask about the staffing. You mentioned you're spending a lot on recruiting and retention, and really staffing shortages have been an issue for a number of quarters now, and we are seeing it across other companies as well. Just any thoughts on when that could normalize and what will drive the normalization there? Really appreciate it.

Toni, thank you. Sure. I'll give you a little bit of an overview and have Brian add more detail. But yes, it is going to be very hard for anybody to determine when the staffing situation will normalize. What I can tell you is that with every passing month, we get more aggressive with our mitigation plans, which we've talked about include the implementation of new software to dramatically improve our speed to hire and reduce the number of candidates required to hire faster. We continue to work on the structure and process around our recruiting engine. We continue to invest in wages, and that continues to be an evolving journey as well to ensure that we have the right labor to supply all of the demand. So I can't predict when this will normalize, but what I can predict is that we will continue to improve our delivery despite the challenges because every day, our mitigation plans continue to show better statistics. Brian, what would you add to my response?

Thanks, Jill. No, I think you covered all of the key aspects. The only thing I guess I would add to it is turnover has been kind of a rising challenge for us in Q4 and Q1. We've seen that start to dissipate a little bit in Q2. As you know, it's like a net sum game. So we need to hire the number of associates to deliver against the needs for our clients and customers but also make sure that we're outpacing turnover. We're starting to see net positive progress in Q2. And remind you, it's only one quarter, but it goes to the point, what Jill talked about was the implementation of the recruiting software that went live at the end of Q1. We've seen over a 50% increase in our speed to hire, which has been very helpful. And we think that will continue to ramp in the back half of the year.

That's great. And wanted to ask about just in general, some of our consumer analysts have started to see early signs of trade down in like high-frequency purchases, likely as a result of inflation. Is that something you're seeing as well? And how does that impact you on the sales commission side if that does continue?

Thanks again, Toni. So we are also seeing and monitoring the consumer trade-down behavior. So far, it's not tremendously impacting us in a material way. That's not to say that we're immune to it. We're seeing consumers show more price sensitivity, which is certainly something that we're watching concerning our commissions, as you stated. The impact hasn't been materially negative to us. We have some other natural hedges in our business that help us. Some of the trade-down behavior has consumers moving to other channels in which we provide services. It is also creating a pickup, as we've seen since March in the private brand space, in which we participate as well. So again, our portfolio of service offerings continues to help us. As the consumers shift, we are able to mitigate some of that shifting.

Our next question comes from Jason English with Goldman Sachs. Please proceed.

I know you've highlighted the continued sort of negative business mix shift within sales in the recovery post COVID as a headwind to margins and profitability. I was hoping you could tell us what remedial actions you've taken to try to improve the profit profile of some of those services, whether or not you are raising prices on things like, I suspect it's a lot more of the in-store merchandising, resets, or the localized labor stuff. And if so, what are you seeing on the competitive front? Is this like a unified front from the industry? Or are you trying to move out in solo to restore your profitability?

Thanks, Jason. Good to hear from you. I'm going to try to make sure I capture all of your questions, and I'm sure you will let me know if I don't. Brian will chime in. But certainly, our mix shift has impacted our margins, and we are absolutely continuing to take price. As we've spoken about, price comes faster in some areas of our mix than others. There is a lag, and that is an impact, yet we are successfully, as we mentioned in our prepared remarks, taking price and not experiencing client loss as a result, which again reinforces our must-have services where we're able to take price. I'd also say that we are, as part of our renovation investments, working very hard on our internal efficiencies and our cost to serve and managing that down over the long term to help in this margin area with the mix shift that we're experiencing. We are very happy about the return of demos. With the return of demos being a lower margin portion of our portfolio, that will come with some mix shift. But I would like to add that we're very excited to have that in the revenue and EBITDA, even if it is an adjustment to what we were experiencing during the pandemic when demos were paused. Brian, what did I miss out of the questions? Maybe you might have something to add.

I think you covered most everything really well. The only thing I would add to it is that as we've had the restoration of our international business, that inherently is a lower-margin business because of the retail activity that we provide and because of the accounting that we require, which makes us, under GAAP, recognize 100% of the revenue but only our proportional piece of the profit. And then the other piece that is impacting margins is we are spending more heavily in talent acquisition and employment marketing than we have spent historically. So as the labor market continues to stabilize, we anticipate that would go down. So otherwise, you covered everything perfectly.

Okay. It's less about margin rate. I mean this is one of the lowest penny profit quarters in a long, long time. And that's despite acquiring presumably more profit. And I'm looking at this excluding the stock-based comp in my numbers, as you know, with - in terms of how I adjust the account for that. So it's not just a rate issue, it's penny profit. It sounds like you're saying this is just the cost of doing business to recruit a lot of talent that's going to weigh on it. So back to my question of like, is the industry pricing - I hear you are, but we also know that these relationships are kind of sticky. You can raise price and just the switching costs are high. No one is going to switch out day one, but it could agitate them and cause a switch out 12 months down the road. So I think it is important for us to understand whether or not this is a unified front across the industry.

Yes. So again, I would say it's hard for us to comment on what Acosta and Crossmark are doing. But what I can say is that because of the fact that we are aggressively going after price, and we have not seen either a degradation in our services that we're providing or a switching of those services, it gives us screens that we're still best-in-class and best in market. Understanding that when we have these conferences with the manufacturers, they understand that it's needed to make these adjustments. Again, no one's happy about having discussions around increasing costs, but they know that they need these services. The challenge we have right now because the labor market is still dynamic is that we're still in kind of a 3-to 9-month lag as far as actually getting price increases to cover the wage increases that are real-time.

There are no further questions in queue at this time. I would like to turn the call back over to Jill Griffin, Chief Executive Officer.

Thank you, operator. While market conditions remain uncertain, we are making the right investments and strategic decisions to move Advantage's business forward successfully. Our clients do continue to rely upon us to help them navigate this evolving e-commerce and brick-and-mortar environment at scale. Our ability to manage a very large labor force enables us to provide our services better, faster, and more efficiently, and I remain confident in our business model and our efforts across the entire enterprise to push the company forward. Again, I want to very much thank all of our Advantage associates for their hard work and dedication and certainly want to thank all of you for your time this afternoon. We look forward to sharing our progress with you on our third quarter call in November. Thank you.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation. Have a great day.