Advantage Solutions Inc. Q2 FY2025 Earnings Call

Greetings, and welcome to the Advantage Solutions Second Quarter 2025 Earnings Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce Ruben Mella, Vice President of Investor Relations. Thank you, and Ruben, you may begin.

Thank you, operator. Welcome to Advantage Solutions' Second Quarter 2025 Earnings Conference Call. Dave Peacock, Chief Executive Officer; and Chris Growe, Chief Financial Officer, are on the call today. Dave and Chris will provide the prepared remarks, after which, 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. Actual outcomes and results could differ materially due to several factors, including those described in the company's annual report on Form 10-K filed with the SEC. All forward-looking statements are qualified in their entirety by such factors. Our remarks today include certain non-GAAP financial measures, which are reconciled to the most comparable GAAP measure in our earnings release. As a reminder, unless otherwise stated, the financial results discussed today will be from continuing operations and revenues will exclude pass-through costs. And now I would like to turn the call over to Dave Peacock.

Thanks, Ruben. Good morning, everyone. Thank you for joining us. Before we get started, I want to thank our teammates for their continued commitment to successfully serving our clients who continue to navigate ongoing market uncertainty. Our second quarter revenues of $736 million and adjusted EBITDA of $86 million were down 2% and 4%, respectively, from the prior year. Our performance was in line with our internal plan, and we are pleased with the sequential improvement in the business relative to the first quarter. We made solid progress toward resolving the first quarter staffing shortfall, enabling both our experiential and retailer services teams to increase execution volume. This operational improvement contributed to year-over-year adjusted EBITDA growth across both segments. As of July, staffing has largely returned to desired levels for the second half of the year, and we are confident in our ability to continue to recruit and retain personnel to meet client demand. Our financial results continue to be impacted by a client loss in branded services last year, which accounted for the entirety of the company's EBITDA decline. Additionally, we continue to invest behind our transformation initiatives, which weighed on profitability in the quarter. Both of these items will be mostly lapped on a year-over-year basis starting in Q3. Given our scale, serving over 4,000 clients and retail stores operating in over 90% of ZIP codes, we have a unique perspective on the U.S. consumer. In recent months, we surveyed thousands of shoppers alongside a broad cross-section of our CPG and retailer clients to gain a deeper understanding of the evolving macroeconomic environment. While consumer health remains pressured and value-seeking behaviors remain prevalent, our findings revealed several actionable insights. Specifically, our merchandising supply chain, product sampling, and private brand development services are essential offerings to help clients in this environment and optimize their return on investment. Retailers tell us that they lose nearly 40% of potential sales when a product is not carried or is out of stock. Our merchandising teams deliver a strong ROI for CPGs and retailers by ensuring that products are properly placed and advertised at the right price points, in-store signage is optimized, and that there is an ample supply of products on shelf and on display. Nearly 65% of retailers told us that their supply chains are evolving in response to trade disruptions. As part of our end-to-end retail services, we provide a full suite of logistics services that help clients diversify their sourcing and deliver products to the store shelves consistently and efficiently. Finally, 85% of retailers in our survey are prioritizing private brands to address channel shifting and shopper preferences. Our market-leading private brand advisory and execution business called Daymon offers end-to-end capabilities with access to over 6,000 supplier partners and leading private brand design capabilities, having won over 30 awards this year for best-in-class work. These are just a few examples of tailwinds and parts of our service portfolio that are driving a healthy new business pipeline. We are engaging with prospective clients and demonstrating our value proposition to generate attractive returns. We are encouraged by the success to date renewing existing relationships and securing new service wins as we continue to work through a longer-than-normal sales cycle. For example, we recently helped the client AGI with their transition from exclusively direct-to-consumer to a national entry into retail. We partnered with them for a retail launch earlier this summer through our branded services brokerage team while also supporting them with an aggressive sampling program through our experiential team. The results have exceeded expectations, positioning AGI for future success at retail. This shows how we can leverage the different parts of our business to drive sales for our clients. Turning to our segments and beginning with branded services. Clients continue to prioritize cost optimization as they adapt their supply chains, manage elevated input costs, and respond to evolving channel shifts. This has resulted in more insourcing of select services, a reduction in order volume, and a pullback in sales and marketing investments. These headwinds have mostly impacted our brokerage and omni-commerce marketing offerings in the first half of the year, while demand for our merchandising and supply chain services has remained steady. As we enter the second half, we expect sequential improvement for our branded services as we lap client exits and losses incurred in the first half, the materialization of new business wins, and streamlined operations as our transformation-enabled technology and analytics advancements drive faster and more efficient processes in this area. Within experiential services, the recovery from the staffing shortfall in Q1 led to a year-over-year increase in events executed in the quarter. Events per day grew approximately 1% and were up 5%, excluding the loss of a client last year who chose not to sample in-store any longer. The demand for sampling and other experiential projects remains favorable for the second half of the year, particularly for our largest clients. This typical seasonality favors the second half, and we are optimistic as some of our centralized labor management efforts are beginning to help us drive talent attraction and retention. In retailer services, recovery in staffing levels and improved project activity led to growth in the quarter. Retailers are continuing to seek our merchandising services at increasing levels due to their supply shortages and the efficiency we bring in a more variable work environment. While staffing levels support our plan for the second half of the year, we will face a difficult prior year comparison and unfavorable project timing in Q3, but expect a more favorable comparison in the fourth quarter. We continue to invest in delivering a higher ROI and service level for our CPG clients and retail customers. We remain on track to complete the implementation of our data architecture and system foundation by 2026. These projects are helping us deliver value today to our clients. We are delivering category insights and intelligence at an accelerated rate to unlock growth opportunities through our data-powered dashboards, deploying image recognition technology for more than 1,000 brokerage clients across 800-plus subcategories. This will help our in-store and sales teams work faster and with more accuracy as they leverage better insights in distribution and product assortment decisions. Specifically, we are integrating retail point-of-sale, shopper panel, geodemographic data as well as our proprietary in-store execution data to help our teams identify distribution opportunities, competitive gaps, and monitor innovation performance in almost real time. This helps clients maximize outcomes and allows retailers to meet shifts in shopper behavior. In addition, our account managers can now evaluate promotional performance at a highly granular level, helping CPG companies maximize their return on trade spend and drive higher ROI per dollar. As we look to the future, we're advancing the development of our new Pulse system, an AI-enabled end-to-end decision engine designed to elevate the speed, precision, and impact of commercial decision-making across sales and merchandising. This next-generation platform will seamlessly integrate our data intelligence, including unique retail data with dynamic real-time capabilities, augmenting our team's ability to anticipate demand, prioritize actions, and drive efficiency across client workflows. Shifting to our people and processes, we are continuing to invest behind the implementation of a centralized labor management model that we expect will be operational starting in early 2026, and Workday's human capital management system will be available in 2027. This new strategy for centralized labor management is designed to yield benefits in 3 areas. First is labor utilization. We remain committed to achieving at least a 30% lift in available hours for teammates. The number one concern our teammates have when I speak to them is the inability to get enough hours with us. More available hours will increase retention and productivity with a more tenured staff. The second is improving teammate experience, which we expect will create a win-win scenario for our teammates and clients as we drive retention even higher. This has manifested in the speed of our application-to-hire process all the way to route scheduling. Third is efficiency. We are investing in technology enablers to drive improved teammate and customer engagement. One example is the deployment of AI-assisted staffing across our retail customers. The pilot program underway is validating these objectives as teammate utilization and retention rates continue to outpace non-pilot market performance. We remain on track to continue scaling and refining the pilot program to support the broad-scale rollout of the centralized labor model throughout the second half of 2025 and early 2026. Taking current market conditions into account alongside our investment and operational execution plans, we are reaffirming our 2025 guidance, projecting revenue and adjusted EBITDA to be flat to down low single digits compared to the prior year. The confidence in our outlook comes from favorable demand signals for experiential and retail merchandising services, as well as expectations for sequentially improving trends in branded services. The majority of our business is well positioned to partner with clients as we deploy our enhanced capabilities to strengthen our value proposition in other areas. We also expect a reduction in the year-over-year shared service costs in the second half of the year, supported by savings derived from leveraging the IT system upgrades. As Chris will discuss in more detail, we expect cash generation in the back half of this year to be above normalized levels, excluding the unique year-end payroll timing shift from January to December, as we transition from the heavier part of the transformation investment to the acceleration phase and continuous improvement. Our business is designed for efficient and consistent cash generation, and we expect to return to our typical net free cash flow conversion rate of at least 25% of adjusted EBITDA next year and beyond, as our transformation improves our services and modernizes our processes for more consistent and efficient results. I'll now pass it over to Chris for more details on our performance and guidance.

Thank you, Dave, and welcome to all of you joining the call today. I will review our second quarter 2025 performance by segment, discuss our cash flow and capital structure, and expand on Dave's guidance commentary. In Branded Services, we generated $257 million of revenues and $34 million of adjusted EBITDA, down 10% and 21% on a year-over-year basis, respectively. This segment continues to experience challenges, namely within brokerage and omni-commerce marketing, which we are working expeditiously to address. While some of the declines are business-specific, including the aforementioned client loss from last year, which accounted for more than 1/3 of the segment EBITDA decline, we also continue to combat a difficult macroeconomic backdrop. In experiential services, we generated $249 million of revenues and $26 million of adjusted EBITDA, up 6% and 14% on a year-over-year basis, respectively. The recovery in staffing levels enabled our teams to execute more events in the quarter. Events per day increased by 1% versus the prior year and were up 5%, excluding the client loss last year. Execution rates were approximately 93% on greater volume. As a result, margins returned to expected levels, expanding by approximately 80 basis points year-over-year to 10.4%. In Retailer Services, on a year-over-year basis, revenues were down slightly to $231 million and adjusted EBITDA grew 8% to $26 million. Merchandising activity increased in the quarter due to improved staffing levels and an uptick in project activity, including a pull forward from the third quarter and diligence in pricing to manage rising labor costs. Partially offsetting these items was softness in advisory and agency work, where we were impacted by the continued unfavorable channel mix. I would note that for both experiential and retailer services, higher shared service costs and a higher allocation of those dollars weighed on profit growth in the quarter. Moving to balance sheet and cash flow, we ended the quarter with $103 million of cash on hand, reflective of a heavier use of working capital in the first half of the year. As a result, we did not repurchase debt or shares in the quarter. We received $22.5 million in proceeds on July 31 related to the first of 2 deferred purchase price installments for June Group. With cash on hand, these proceeds, expectations for stronger cash generation in the second half of the year, and approximately $400 million available on the untapped revolving credit facility, we have ample liquidity to operate the business in the current macroeconomic climate, while investing for growth and opportunistically paying down debt. Our net leverage ratio was approximately 4.6x of adjusted EBITDA, including our operations. We expect this level to taper over the balance of the year. Turning to cash generation, we ended the quarter at approximately 70 days of sales outstanding, a 1-day improvement from the first quarter as cash collections began to recover after the cutover to the new ERP system. The vast majority of the company is now on the new system, and we expect DSOs to decrease in the second half of the year. CapEx in the quarter was $2 million due to the timing of transformation investments and a significant undercapitalization of labor. We now expect CapEx to end the year in the range of $50 million to $60 million below our original guidance. Adjusted unlevered free cash flow was $57 million, and the conversion rate was 66%, driven by the lower-than-expected CapEx. As Dave highlighted, we are maintaining our full-year guidance and expect shared service costs to decline year-over-year in the second half of the year. Headcount has decreased by approximately 8% in Finance and IT since the end of last year due to the use of automation and technology to streamline back-office functions. We also expect restructuring and reorganization costs for the full year to decline by roughly 50% compared to 2024. Branded services will remain under pressure, but we anticipate that the top line will start moving towards stabilization by the end of this year and into early 2026. From a seasonality perspective, the second half of the year is the peak season for Experiential and Retailer Services. As Dave mentioned, Retailer Services faces a difficult third quarter due to project timing and year-over-year discrete comparison factors, but we do expect a favorable comparison in the fourth quarter. Full year adjusted EBITDA margin should be mostly in line with the prior year during this period of transformation investment. We continue to expect 2025 adjusted unlevered free cash flow to be over 50% of adjusted EBITDA. Cash generation is expected to improve in Q3 and Q4 from an artificially low level in the first half of this year. Excluding the approximately $45 million year-end payroll timing shift into 2025, we anticipate adjusted unlevered free cash flow conversion of roughly 100%, and net free cash flow conversion exceeding 30% in the second half of the year. We are targeting a net free cash flow conversion rate of at least 25% next year and beyond, turning more in line with the performance in 2023 before the strategic investment in the transformation. Interest expense remains in the range of $140 million to $150 million, assuming no additional debt repurchases. Thank you for your time. I will now turn it back over to Dave.

Thanks, Chris. We believe our expertise and range of services positions us well to navigate the current macroeconomic environment with resilience and agility. At the same time, we will continue to make progress towards completing the strategic initiatives that will enable Advantage to reach its full potential as a technology-driven industry-leading service provider and generate meaningful cash flow for our shareholders. Operator, we are now ready for the Q&A session.

Our first question is from Faiza Alwy of Deutsche Bank.

I wanted to ask about branded services and the investment reductions that you talked about that are impacting the brokerage and omni-commerce marketing services. I'm curious, are you seeing that across the board? Or is that specific to a particular type of customer, whether it's large versus small or a particular category? And then, like, are there signs of that improving because you talked about stabilization by the end of the year. So just curious if that's driven by something else, whether it's new business, or are you expecting these market headwinds to improve?

This is Dave. I appreciate the question. So I'd say the reductions that we referenced really depend on the client and their situation within the marketplace. So it's not a pattern that we recognize across all our clients, nor is it even category specific. It's almost company specific, but you are seeing that, I'd say a little more so on the marketing side, which is obviously a smaller piece of our business than on the sales agency side. It has been reported pretty broadly that you're seeing some pullback in marketing to consumers. But as we get into the second half, we were lapping the client loss referenced in the first half that we largely are going to be passed as we get into the third quarter. There's a little bit of economics there in July. And then we've got wins that we've got plant wins that could be smaller. But when you add them up, they're meaningful, that should help us with sequential growth as we get into the second half.

Understood. You mentioned the new workforce system, which is expected to be available in the second half. Could you elaborate on the benefits you're anticipating? Specifically, what impact might this have on the EBITDA margin? Furthermore, regarding the transformation costs, are we nearing the end of those expenses? Please clarify where we currently stand in the cycle concerning both the costs and the realization of benefits from implementing these new systems.

Sure. Absolutely. And that's kind of two questions, which is good because I can tackle them both. And I'll start with the latter first. So on transformation costs, we are. We're seeing pretty significant reductions in restructuring costs and one-time costs that would be helped against EBITDA. In fact, year-to-date, we're about half of the level that we were this time last year, and we're going to see continued decline as you go through the year. We also had lower shared service costs in the second half of this year than in the first half of this year as we kind of lap the increases that we saw last year, and we're starting to see some ramp down as it relates to transformation costs. It doesn't mean we're not investing in our business. There are still specific initiatives we're investing in and labor is one of them. Improving our labor utilization and improving the teammate experience has been a priority for us. We outlined in the prepared remarks what we're thinking about there. One example of where we're seeing benefit of an overall system improvement with our labor approach. And some of it is system-based, meaning technology, and some of it is just improved process and workflow. We had a net reduction in overall hires in the first quarter of about 1,500 people, and we had a net hire in the second quarter of 1,400. So it's almost a 3,000-person swing, if you will, from the first quarter to the second quarter, driven by shorter time from application to hire and better sales and operations demand signals so that we are hiring the appropriate amount of personnel for the work required. We track really closely what's called the application of higher funnel and where we may have gaps, because along that path, you can lose potential teammates. Therefore, we've been much more rigorous with our workforce operations team in tracking that funnel to have a higher percentage of folks that make it through and ultimately get onboarded into the company. We feel really good about both the pilot that's been ongoing, where we've been sharing labor across geographies versus being banner-specific, but also just in the improvement in workflows within our workforce operations.

If I can just add to that. Faiza, we did get to a point where throughout the quarter, we improved on the hiring front. I think we entered the second half in a good place. What I want to note is that I think this manifests itself, especially in the retailer segment, where we get better staffing levels overall, which puts us in a good position to be able to take on some incremental project work, which can be very beneficial for us. Then also stronger execution in experiential, not only execution of rate, but also the ability to handle more demos. We've seen really good demand signals that put us in a good place to be able to accommodate those, and that should benefit our Experiential segment, particularly in the second half of the year.

All right. Great. And then just one last question on cash flow. You're discussing slightly improved cash flow conversion. Is this mainly due to reduced CapEx? I know you mentioned the timing of projects, but are we moving some CapEx to next year? Could you provide more details on what's causing the lower CapEx this year?

Yes. So obviously, we did take the CapEx down a little bit, about $15 million at the midpoint. That would therefore be a little bit of a benefit to cash flow. But the real benefit is coming from the improved Days Sales Outstanding (DSO), which we saw at the beginning of this quarter, we'll see really take hold in Q3 and especially across Q4. Also, the lower restructuring costs year-over-year are a big factor for the second half of the year. You've got a stronger EBITDA top to bottom, a stronger EBITDA contribution, less CapEx, and better working capital. Working capital becomes a source of benefit for the company in the second half of the year, along with the lower restructuring costs. So all those things contribute to the better cash flow performance for the second half of the year. I will say it's in line with what we expected with what we indicated last quarter. It's coming through as expected.

Our next question is coming from Greg Parrish with Morgan Stanley.

Congrats on the results. I want to discuss branded EBITDA as we head into the second half. To meet our guidance, we needed to see some improvement there, right? How did we manage that last year? In the last quarter, there was a client loss that affected the decline. So, if we take that into account, can you explain how the other two-thirds will improve in the second half? What are the main drivers we should anticipate?

Yes. This is Dave. We see a few things, Greg. We talked about it a minute ago, just wins in the business. Number one, we see a little bit of seasonality where you've got orders, which is how we're paid through a commission-based business from a revenue standpoint, increasing as you get into the back half of the year with things like holidays, especially the categories that most represent our client base when you think of things like food and personal care. So those are two of the big drivers. We've also obviously been able to manage our cost to serve. We talked about our new Pulse program, which we're really excited about because it's giving us greater fidelity in the decision-making that we have within the business. If you think about a sales business, you're assessing information to take action to improve an outcome effectively. We are getting faster signals as it relates to brand performance, especially those things that are kind of the root cause drivers of market share growth or decline. This allows us to capitalize on those more quickly. But it also leverages expansive data and analytics in an automated way, making it a bit more efficient as well. So that combination puts us in a position to see some growth as we get into the second half.

Great. Very helpful. I'm starting to come back to the CapEx point, but I mean the $2 million was a little bit surprising. So I guess, I mean does that slow down your completion of some of the technology investments that you're doing? I'm just trying to better understand here.

I think it appears that there has been a lower performance than we anticipated this quarter, and much of this is due to timing. We have adjusted our overall guidance downward by $15 million at the midpoint, indicating reduced overall spending. However, we anticipate that the second half of the year will involve increased spending, primarily driven by IT projects. We have provided clarity on these projects, and as I mentioned previously, if we can delay the timing of our payments, we will take advantage of that opportunity. There has been some progress in this area. We also noted the underutilization of capitalized labor, which we are managing appropriately, leading to higher operational expenses rather than capital expenditures. We are putting a lot of effort into this, as effective planning around our projects is vital to ensure timely completion. If we fall behind, it can impact operational expenses. Some elements may have shifted to 2026, but ultimately, we expect a more efficient delivery of the capital products we anticipate for the year.

Okay. That's helpful, too. And then maybe just lastly from me. On the wage front, could you give us an update? I mean, obviously, you kind of reversed some of the headwinds you had in the first quarter on labor availability, but just on the wage front, can you provide a market perspective?

Yes. We have seen pretty consistent wage inflation throughout the year, about what we expected in that 3% range overall, and we've been able to manage that quite well. I'd also say that in the quarter, our pricing nearly offset our labor inflation. I felt good about that progress we made on getting some price increases through to help offset the higher labor costs that are coming through in the economy today in our business. I think for the second half of the year, I expect that same consistency. We don't have a lot of incremental regulatory type changes occurring, so I feel like we're in a pretty good place to offset labor cost inflation with pricing.

Our next question is coming from Joseph Vafi with Canaccord Genuity.

Well, Johnson here for Joe. Could you drill down a bit on resolving that staffing shortfall in July? Any insights on the demand signals that give confidence in those levels being more sustainable through the rest of the year? Then, could you drill down in the retail services and how we should think of that staffing uplift against maybe more difficult Q3 comps from a project timing perspective?

Yes. We do have that staffing shortfall in July. The trajectory of our workforce operations and talent acquisition continues at pace even as we move into July. When we talk about the project timing, it's literally just that. We referenced that some of these projects that may have occurred in Q3 might be shifting more into Q4, which is why you'll see a little shortfall in Q3 versus prior years, but a much better Q4 and we have visibility to that. On the demand signal front, we're seeing strong demand for demos and in the experiential space such that we're better able to meet that demand and achieve higher levels of execution rates because of the strength of our hiring and talent acquisition and overall retention plans. We feel very good about the Sales and Operations Planning (S&OP) process with our retailer group, flexing that force as needed based on project timing. Many of these projects occur in the third quarter and going into early fourth. As you get into holiday periods, retailers look to have less third-party labor in the stores, which is normal seasonality. However, in the retailer space, just due to timing, you're going to have a little less project work in the third quarter, but we know that gets compensated for in the fourth quarter.

There are no further questions at this time. I want to turn the call back over to Dave Peacock for closing comments.

Thank you, Janice. We will be attending the Canaccord Growth Conference on August 12 next week in Boston with a webcast of a fireside chat at noon Eastern Time. We hope to see you there. And again, thank you for joining us today.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.