Ladies and gentlemen, good morning, and welcome to the Advantage Solutions' Second 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 Sean Choksi, Investor Relations and Strategy for Advantage. Thank you, and you may begin, sir.

Thank you, operator, and thank you everyone for joining us on Advantage Solutions second quarter 2023 earnings conference call. On the call with me today are Dave Peacock, Chief Executive Officer, and Chris Growe, 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 statements 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 measures. This call is being webcast. And a recording of this call will also be available on the company's website. And now, I'd like to turn the call over to Advantage's CEO, Dave Peacock.

Thanks, Sean. Good morning, everyone, and thank you for joining us. I want to start by thanking everyone on the Advantage team for their hard work this past quarter. I've continued to spend time in the market connecting with many of our team members and remain impressed by their care for one another, commitment to service excellence, and passion for strengthening relationships and results as evident in the positive feedback I have constantly heard from our brand and retail partners and our solid performance for the quarter. I'm pleased to report another consecutive quarter of improving company performance. Together, we delivered $1 billion in revenue, an increase of 5.7% year-over-year, and adjusted EBITDA of $104 million. Furthermore, we continue to make strides on cash flow performance, which Chris will provide more color on in his remarks. Our executive leadership team continues to fortify the strategy we're building together to maximize the company's full potential and position the business for long-term profitable growth. As part of this strategy, we are investing both time and money behind technology modernization and best-in-class talent management initiatives, which include building a more diverse leadership team, reflective of our broader workforce and creating a more inclusive organization for all teammates. The intent is to strengthen our culture, simplify our operations, improve our financial discipline, and enhance our processes as a unified company to deliver more value to our stakeholders. Advantage holds a unique position at the intersection of brands and retailers with extensive reach and breadth of services spanning the entire purchase path. We are a market leader in terms of operational scale with more than 4,000 clients across 17 trade channels in most of the largest U.S. grocery and several big-box retailers partnering with Advantage to serve as their exclusive in-store experiential partner. It's a competitive position that gives us critical insights and a strategic perspective on today's shoppers. Being at this vantage point, we arguably know more about shopper expectations and demands than any company in the industry. We regularly leverage this knowledge and expertise to both inform and help achieve our clients' goals, including how best to play and where to pivot to optimize performance. In doing so, we also make consumers' lives easier. For example, we conduct a quarterly survey among dozens of brand manufacturers and retailers to gain robust data on marketplace trends, emerging dynamics in the macro operating outlook over the next six to 12 months. These surveys are packed with valuable unvarnished insights that are unmatched in the industry. Advantage's latest outlook report, which we will release publicly in the weeks ahead reveals several trends that continue to drive demand for Advantage's services, while complementing our deep expertise, relentless execution, and trusted relationships in the industry. For starters, in-store labor for retailers is critical. Retailers continue to face labor shortage challenges. In fact, lack of in-store labor and planogram oversight are the top two factors affecting on-shelf availability. Moving forward, retailers plan to increase self-checkout and reduce in-store labor with many saying that they will use third-party relationships to combat the labor issue. Additionally, product innovation is a top priority for both manufacturers and retailers. Nearly every CPG manufacturer in our study says they are targeting innovation at mainstream or premium-priced products with a heavy focus on health and wellness, and more than half indicate they are focusing on app and in-home indulgences indicating a bullish outlook on consumer appetite for premium items. Manufacturers' current and future focus on innovation is well timed since the majority of retailers expect to increase their acceptance of innovation and will accept new item cut-ins outside of a reset window. We expect more manufacturers to consider retail exclusives with early innovation launches. We will share the full slate of industry-leading insights when we release the next Advantage outlook later this month. During the second quarter, we continued to realize revenue gains 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 increases in pricing. Across our businesses, we are experiencing labor cost inflation at mid-single digits consistent with the market and moderating relative to the prior year. While we continue to see the benefit from price increases, it's important to remember that these initiatives take time. We expect to see these changes as the year progresses and fully anticipate better revenue management reflected in margin improvements. We also are focused on driving efficiency in our business, recognizing the need to deliver services in a way that is more precise and generates a greater yield on the time and cost expended. Additionally, we are sharpening our focus on more effective cash generation. In the second quarter, our executive leadership team has continued to drive change and we're making sequential progress as our results suggest. On a year-to-date basis, Advantage generated approximately $188 million of adjusted unlevered free cash flow, representing a significant increase versus the prior year, driven by solid improvement in working capital. We had approximately 1,000 net new hires in the quarter, which has supported continued improvements in our sampling and demonstration business. Event counts are up 24% year-over-year, reaching approximately 78% of comparable 2019 levels, and we expect to further close the gap over the next few quarters. Relatedly, we reduced turnover across our enterprise by an additional 10% quarter-over-quarter with significant improvements in our part-time retention rates. We will continue to refine our talent practices to strengthen retention in the future, which should allow us to provide better service to our brand and retail partners, enhance volumes, and limit talent acquisition and training costs. Given our sheer breadth and scale as exemplified by our 75,000-plus associates and 100 million hours of annual service, we continue to regularly identify operational enhancements and levers by which we can simplify our service offerings while driving performance. Our team is energized for this challenge and is invigorated by the opportunities that we see for this business. At the end of the day, we're happy to be an organization that supports a sticky fragmented customer base and is anchored in two long-term secular growth industries in CPG and retail. With that, I'll turn it over to Chris for more on our financial performance and outlook.

Thank you, Dave. I continue to grow increasingly confident in our ability to strategically position this business for long-term success and deliver value to all stakeholders. Now let's get into the performance for the quarter. On a consolidated basis, second quarter revenue grew 5.7% year-over-year to total $1 billion. Excluding unfavorable foreign exchange rates and acquisitions and divestitures, revenues increased by 7.7%. Second quarter adjusted EBITDA declined 3.8% year-over-year to $104 million. Sales segment revenues of $600 million decreased 0.7% year-over-year, but were up 1.8% excluding foreign exchange and acquisitions and divestitures. Sales segment adjusted EBITDA of $64 million declined 11.3% year-over-year. The revenue decline was driven by our completed divestiture and intentional client exit, partially offset by growth in retail and merchandising services, success in our pricing initiatives, and growth in our European joint venture. The decline in adjusted EBITDA in the sales segment is largely a result of mix shift toward lower-margin business services, as we discussed on prior earnings calls, inflationary pressures, and the completed divestiture. Marketing segment revenues of $437 million were up 16% year-over-year and up 17.1% excluding foreign exchange and acquisitions and divestitures. This growth was primarily driven by the continued return of our in-store sampling and demonstration services to higher event counts, as well as pricing realization in this business, with digital services starting to show signs of stabilization. Marketing segment adjusted EBITDA of $41 million was up 10.8% year-over-year, driven largely by the aforementioned return to sampling and demonstration events and pricing realization. In the aggregate, the adjusted EBITDA margin came in at 10%, down 100 basis points year-over-year, marking an improvement in trajectory from Q1's approximately 150-basis-point year-over-year compression. Let's move on to discuss some balance sheet items. Our net debt to adjusted EBITDA finished the second quarter at approximately 4.3 times. We will continue to explore opportunities to delever our balance sheet and reduce our leverage ratio over time. For the second quarter, we achieved adjusted unlevered free cash flow conversion of approximately 114% of adjusted EBITDA, reflecting continued emphasis on optimizing working capital. In line with the prior quarter, our debt profile remains healthy with no meaningful maturities in the next four years. At the end of the second quarter, our total funded debt outstanding continued to be approximately $2 billion. We've doubled down on our initiatives to stabilize our balance sheet and protect against future interest rate risk. During the quarter, we voluntarily repurchased $52 million of floating rate debt at an attractive discount and we'll continue to monitor opportunities to deploy capital that deleverages the balance sheet while generating a favorable rate of return. As of June, approximately 85% of our debt is hedged or at a fixed interest rate. A summary of our debt and equity capitalization can be found on Slide five in the supplementary slides for the second quarter results posted on the Investors section of our website. Turning to our outlook. For the full year 2023, we are reconfirming adjusted EBITDA in the range of $400 million to $420 million. Our guidance contemplates the continued realization of pricing, growth of in-store sampling and demonstration events, as well as the divestiture that closed early in the second quarter and the accelerated investments behind technology and talent. We remain diligent with regards to revenue management, our cost structure, and our cash generation as we continue to strengthen our financial discipline to help fuel growth. Thank you for your time. I'll now turn it back to Dave.

Thanks, Chris. We're pleased with the progress, but continue to acknowledge that there remains a lot of work to be done. I am confident in the leaders of our company, both new and legacy, who continue to work towards enhancing our people-powered culture, optimizing our operations, and serving our brand and retail partners. The people of Advantage have done tremendous work growing the company to what it is today. We have more than 75,000 associates who wake up every day with a focus on serving on behalf of the brands we represent and for the retailers where they work. It's our job to enable their efforts and to help them also realize their personal goals so that we become the employer of choice for them and others. Our collective success requires us to have a workforce that reflects the communities where we live and work. We are committed to improving representation and belonging through our diversity and inclusion efforts as we also bring more fresh perspectives to how we deliver innovative solutions for our brand and retail partners. With the passion and commitment to growth that I see on a daily basis, I'm confident in the company we're continuing to build as we pave the path to sustainable long-term growth. We'll now take your questions.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Greg Parrish with Morgan Stanley. Please go ahead.

Great. Good morning and congratulations on the results. I just want to talk about margin, clearly, some improvement from the first quarter to the second quarter here. So, is this level here the right way to think about the back half? And I know you talked about continued realization of pricing. So, does some of that come through? Does the second half get a little bit better? And then, this is way too early, understandably, but I just wanted to potentially talk about 2024 and margin level. I don't know if you have any thoughts there. That would be helpful too.

Thank you, Greg. This is Dave. We were very pleased with our second quarter results and want to recognize our team for their excellent work. You're right that we observed some margin improvement and better pricing flow. Year-to-date, pricing has accounted for just under one-third of our organic growth, and we expect to see further pricing improvements in the second half. We anticipate margins to improve slightly in the latter half of the year due to various factors, including revenue, pricing, and the overall performance mix within the business. Regarding 2024, it is still early, and while I've been here for six months, many team members, including Chris, are relatively new. We want to ensure we have complete visibility and understanding of the business before providing any guidance for 2024.

Great. And then sort of a similar question on cadence first half, second half. Thinking about the free cash flow conversion, again strong in the first half, how do we think about that in the second half? Do some of that reverse a little bit?

Yes, as we analyze unlevered free cash flow, we anticipate it will likely maintain a strong level, approximately 65% or more on a sustainable basis. While we might see a slight decrease in the second half, it could still perform well. The team has done an excellent job, and I want to recognize Chris and his team for their innovative approaches to increasing cash generation from our business activities. As we continue to utilize all available strategies, we remain optimistic about the second half.

And just to add to that, Greg, Dave expressed it well. In the second half, we discussed investments, particularly significant ones in technology. We should keep this in mind as we consider our outlook for the latter part of the year and its impact on our cash conversion. Simultaneously, there is a strong internal focus on working capital. If we can continue to make progress in this area, I hope we can perform slightly better than expected. However, I believe that maintaining over 65% is a solid target, as we reached nearly 100% in the first half of the year, largely driven by working capital. I aim to sustain that progress, and if we do, I hope we can generate even more cash in the second half of the year.

Okay, great. I have one more question. Do you have any updates on your strategic review and the assets you’re considering? Specifically, I’d like to know about the marketing side, particularly the sampling business and its relevance. I understand there was a clear rationale for acquiring Daymon as a preferred provider for a large retailer. Given the current opportunities to reduce debt, can you explain why the sampling business is a good fit with sales?

No, Greg. Appreciate that. Yeah, I think as we get into our November meeting, we'll talk a little bit about where we're headed from a strategic standpoint and then even more so as we get into early next year. I'd like to let our actions speak for us and our results, more importantly. And so you can see already and again, it's very early for the team where we're focused and how we're trying to bring discipline around cash generation and paying down debt and getting our balance sheet in a good spot. And we're very pleased with the results thus far. Now the sampling or demonstration business, it's interesting. It's a good business in the sense that there is a certain level of consistency and demand for that type of service, especially when you see 98% plus of manufacturers really dialing up innovation and some of those are doing so in a significant way, and you're finding retailers more receptive to innovation. And you compound that with the fact that you're seeing private label grow at about half a share point if you will in total store. Private labels are often in many retailers part of what you're sampling. So we've seen consistency in demand and it's a business for us that from a kind of working capital or cash flow standpoint is also a good one. But that's as far as I'm going to go as it relates to talking about anything related to our strategic review, but we remain bullish on the demonstration business and see opportunity both for growth and a little bit of better margin realization.

All right. Very helpful. Congrats on the results. Happy Friday.

Thank you.

Thank you. Our next question comes from the line of Jason English with Goldman Sachs. Please go ahead.

Hey, guys. Hey, sorry for the delay. Good morning, everyone. Thank you for having me in for the question. A couple of quick questions. You mentioned that retailers are still facing really tight labor conditions. Are you still facing really tight labor conditions? And does this remain a gating factor in terms of how quickly you can recover your sampling business?

We're experiencing a persistently tight labor market, but we've also seen strong net new hires. We're now over 75,000 team members, and we've gradually rebuilt this over the past year. Our turnover has decreased by 10%, which is significant for us. The ability to retain employees is crucial, especially considering that some of our businesses faced long shutdown periods during the pandemic. The positive news is that we have a solid track record of retaining employees and we aim to build on that. We have numerous talent management initiatives in place to offer team members opportunities for advancement within the company, which is essential for retention. However, I want to be clear that the labor market remains competitive. Recently, the unemployment rate dropped to 3.5%, and the US added over 200,000 jobs according to today’s report. It’s a situation that requires attention, but we're happy with our current retention rates.

Okay. So on the marketing and the sampling side, are you back to Brighton? Should we take the run rate you have here and say this is a reasonable run rate going forward, you're back to the level of sampling that the markets come to with you're able to supply the sampling there's no real further ramp on that one?

No. We think there's still a gap to close. And part of it's a combination of factors. Some of it is supply-based as far as the supply chains and product availability, especially when you're dealing with new or innovative items. Some of it is personnel. And so we continue, especially in regional pockets if you will. Southeast is a little tighter as it relates to labor than a lot of other parts of the country as an example. And then some obviously is just some of our customers getting those programs back even still post-COVID and going within their stores as they assess their strategy going forward. So there's a number of factors, but we do see continued growth and gap closing as it relates to event count.

Jason, just to add to that, we're a little less than 80% of where we were in 2019. And I think we're going to continue to see each quarter just a sequential improvement sort of a few percentage points and just keep plotting our way back to that 2019 level, and evidence so far this year would indicate that each month we're seeing that sequentially improve. So I think that should continue.

Thank you, Chris, for the numbers; they are always helpful. I have two more questions. It's encouraging to see you stabilize your margins. I understand that your goal is not just to stabilize but to restore margins, which seems necessary for further pricing actions needed to address ongoing labor inflation and to recover what you fell behind on. Given the broader inflationary environment and the fact that retailers are becoming less receptive to price increases because they perceive the cost pressures as not widespread, I suspect manufacturers may not remain as disciplined in resisting these pressures. How is this affecting your pricing ability this year and moving forward? How does this changing environment impact your pricing power?

As I previously mentioned, nearly one-third of our organic growth year-to-date has been attributed to price increases. We need to engage in discussions about labor inflation, and I feel those conversations have been productive. We view our retailer and CPG customers as partners, and they refer to us in that way as well. In this partnership, we must acknowledge the cost increases we are facing. At the same time, we need to emphasize the value we provide in relation to what we offer. For instance, we are seeing significant innovation and growth in private-label products, an area where we have strong expertise from our legacy Daymon side, and we recognize opportunities in that space. Additionally, the merchandising work we are doing for retailers, such as store resets, is in higher demand due to increased interest in making changes between these reset periods. The growth in innovation also requires resets, which indicates strong demand for our services. When demand is present alongside genuine cost pressures, it typically allows for productive conversations about pricing.

Okay. That makes sense regarding the cut-ins and merchandise interest with CPG companies and innovation. On the sales side, you operate a commission-based business. Looking at the branded landscape, volumes have been quite weak, and we will soon reach a point where pricing might be minimal or even negative for some categories. This situation seems to present a negative outlook for the commission part of your business. What is your perspective on that? Also, could you remind us how significant that component is in relation to your overall sales segment?

Yeah. Commission side to be as much as about 25%. So we've got other contracts in place that are not commission-based. And look you obviously have to negotiate those commission rates as well in light of the activities we're performing in the market and the same inflationary pressures that we're facing. So we still have some opportunities there. And from an aggregate as you zoom out what we do and the services we provide from a total of someone's cost of goods sold can be pretty small. And so when you look at their margins for instance some of the pricing actions probably have pretty minimal impact. But yes, we are seeing volumes the same thing you're seeing, Jason, in the market slip for a lot of the manufacturers and the desire to get increased traffic and increased volume. And I think that increased volume leads to a lot more out-of-aisle merchandising opportunities, which plays into one of our strengths as well as what we do both for CPGs and for retailers. So it does create more demand for what we're doing and an opportunity to continue to grow our business.

Understood. Thanks, guys. Thank you for your time. I'll pass it on.

Thanks, Jason.

Thank you. As there are no further questions, I would now hand the conference over to Dave Peacock, Chief Executive Officer for closing comments.

Thanks a lot, guys. Look, it was a quarter that we're pleased with. At the same time, we're never satisfied with our results. So we remain committed to focusing on those things that can get us to getting a balance sheet where we're much more in a stronger position relative to our debt. And look the future for our business is bright. We've talked about some of the things through the Q&A that we feel are helping drive demand and create some tailwinds. So we remain optimistic and again really appreciative of the great work our team did in the last three months.

Thank you. The conference of Advantage Solutions has now concluded. Thank you for your participation. You may now disconnect your lines.