Advantage Solutions Inc. (NASDAQ:ADV) Q4 2023 Earnings Call Transcript
Advantage Solutions Inc. (NASDAQ:ADV) Q4 2023 Earnings Call Transcript February 29, 2024
Advantage Solutions Inc. reports earnings inline with expectations. Reported EPS is $0.14 EPS, expectations were $0.14. Advantage Solutions Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings and welcome to the Advantage Solutions Fourth Quarter and Full Year 2023 Earnings Call. At this time all participants are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder this conference is being recorded. It's now my pleasure to introduce, Ruben Mella, Vice President of Investor Relations. Thank you, Ruben. You may begin.
Ruben Mella: Thank you, operator, and thank you, everyone, for joining us on Advantage Solutions' fourth quarter and full year 2023 earnings conference call. On the call with me today are Dave Peacock, Chief Executive Officer; Chris Growe, Chief Financial Officer; and Sean Choksi, Senior Vice President of Strategy and M&A. Dave and Chris will provide their 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. These statements are based upon 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 several 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 contain certain non-GAAP financial measures. Our earnings release issued early today presents reconciliations of these non-GAAP financial measures to the most comparable GAAP measure. This call is being webcast and a recording will also be available on the company's Investor Relations website. We will reference a presentation during the prepared remarks also available on the Events and Presentations section of the IR website. And now I'd like to turn the call over to Advantage's CEO, Dave Peacock.
Dave Peacock: Thanks Ruben, good morning, everyone and thank you for joining us. 2023 marks an important year for Advantage Solutions as we began to execute a strategy to maximize our full potential as a partner of choice to consumer brands and retailers and drive long-term profitable growth. At the same time, we remain focused on meeting the needs of our clients and keeping our promise to shareholders by exceeding our adjusted EBITDA guidance in 2023. We were especially pleased to deliver year-over-year adjusted EBITDA growth and margin expansion in the fourth quarter. Our success in 2023 centers on our teammates across the enterprise who share a hard for service and a relentless dedication to winning together each day, on behalf of the leadership team I thank them for their efforts.
I want to take a few minutes to review some of our significant actions to date to enhance value for everyone we touch including our shareholders. We believe these accomplishments will help fortify the long-range plan to create a more unified company with enhanced operational efficiencies through streamlined processes, strategic rigor, agility and improved capabilities. In January, we expanded our executive leadership team and welcomed Brian McRoskey as Chief Growth Officer. Brian joined Advantage after 17 years with Bain where he collaborated with executives in the consumer packaged goods industry to solve their toughest strategic challenges. He will be pivotal in shaping our growth strategy, identifying new business opportunities and driving organizational excellence.
We have renewed a service provider agreement with a large multinational retailer and as an expansion of our existing relationship Advantage will also now be their exclusive experiential partner, conducting all sampling and demo events across its many US stores. Our leading capabilities with in-store and digital sampling offerings will help us as we convert more shoppers into buyers as we expand our relationship with this long-standing customer. We executed contracts with several significant customers to continue providing services for them in late 23 and into 2024, demonstrating our long-standing relationships. One example is with a large US retailer specializing in trend for general merchandise. This will mark the 12th year of our exclusive partnership supporting this retailer's beauty category both in-store and online to provide shoppers with more engaging experience.
We feel good about the momentum heading into 2024, more than 95% of our key enterprise clients re-upped with us this year with the majority adding new services and many enhancing their respective annual spending. For example, we signed an agreement to leverage the broad range of services, we provide with one of the leading global food, health and beauty CPG companies, where we expanded our scope and are launching key pilot programs, over the course of the year. We also entered into two new agreements, with third-party technology companies to help optimize back office costs in the coming years, reduce complexity and enhance the suite of capabilities we offer clients. The first with Genpact, a global leader in business and technology services, gives us access to their expertise in advanced AI powered technology and automation, which complements our client management capabilities, and connectivity across the consumer goods and retail industries.
Separately, we are modernizing our IT support services in collaboration, with an award-winning provider of business services, Tata Consultancy Services. TCS is known for its expertise in digital technologies, innovation and commitment to delivering customer value. They will transform and modernize our IT services to benefit the team, clients and customers. We have also completed several divestitures and continue to evaluate opportunities to simplify our operations further, so we can focus more resources on our core businesses and enable growth. In January, we sold our collection of businesses serving the Foodservice industry, most notably Waypoint to Prospect Hill Growth Partners. The Foodservice businesses were combined with key impact sales and systems, as a part of that sale.
Advantage receives a total gross proceeds of approximately $100 million, representing mostly cash and an ongoing 7.5% stake in the new entity, Action [ph] Foodservice. The sales further streamlines our portfolio, enables us to partner and core adjacent categories and helps us delever our balance sheet. We've also taken steps to optimize our European joint venture. We reduced our majority stake in Advantage, Smollan Limited, a joint venture with Smollan group to a minority stake of 49.6%, in exchange for cash and other considerations. This transaction will ultimately simplify our reporting and help Advantage reduce back-office complexities and expenses, while allowing us to continue our constructive partnership, with the Smollan group. Finally, last October, we sold Atlas Technology Group to Crisp, which will empower CPG brands, with better data and serve as the data acquisition technology platform for Advantage clients.
With its cloud-based data-sharing platform, we will collaborate with Crisp to offer clients, sophisticated supply chain analytics, with an expanded retail footprint. All of these transactions, from our recent divestitures to new collaborations, with world-class providers, will make Advantage stronger, more nimble, more competitive and better enable us to drive our brand clients and retail customers' businesses. We have a record of success with client relationships that have lasted for decades. In fact, among our top 100 clients, the average relationship duration is north of 15 years, with over 90% retention over time. This track record of client retention and these recent divestitures and collaborations, serve as the foundation that will allow us to focus our efforts and reinvest in enhancing our capabilities, from talent to technology.
As a critical accountability lever, our enhanced processes and platforms will enable us to strengthen relationships and be our clients' strategic partner of choice. We know our long-term success is tied to the people we employ, and the talent we develop. That's why, we're committed to putting people first and building an environment of belonging, where our teams can work and win together. Recently Newsweek recognize Advantage, as one of America's greatest workplaces for Diversity in 2024. We are creating a culture that attracts top talent and remains committed to improving retention across our business. We hired over 2,800 net new employees in 2023, supporting continued improvements in our in-store merchandising and demonstration businesses.
We continue to prioritize reducing turnover across our enterprise, with significant improvements with our part-time employees, over the year. Most notably, the year-over-year turnover rate improved in the fourth quarter by approximately 10%, in our sampling and demonstration business and approximately 20% in our retailer merchandising business. We are pleased with these improving trends, as Advantage employs tens of thousands of teammates, most of whom are on the frontlines with consumers. Our transformation roadmap is based on a comprehensive understanding of the macro environment, market trends and competitive landscape. Nearly, every major trend we're seeing in the market today, aligns with the services and expertise, we offer to our customers.
Put simply, with our position at the intersection of brands and retailers, and brick and mortar and e-commerce, we believe we have an unparalleled understanding, of the challenges and opportunities, our clients and customers face. That means, we can provide strategic services and solutions faster, more efficiently and in many cases better than they can themselves. Our depth of experience, agility and speed, can help offset some of the headwinds their businesses face while identifying new paths to growth. Here some of the trends we are seeing today and advising our clients and customers on. First, from retailers, we see an appetite for innovation and a growing desire to expand private brands with encouraging indicators for the food and personal care industry.
This bodes well for our private brands business which continues to serve as a key partner to dozens of retailers. Second, with broader inflation reverting to more normal levels. Pricing in the food category stabilizing, encouraging more typical shopping patterns. In 2024, we expect to focus for CPGs and retailers on unit volume growth, given the declines in most categories in 2023. And we are seeing early signs of this with innovation and SKU count increases. Our Q1 2024 advantage Outlook Survey of nearly 100 retailers and CPG manufacturers indicates that almost 80% of manufacturers are planning for unit growth, listing innovation and expanded distribution as top drivers. Our retail merchandising team support both innovation and distribution growth through their unparalleled capabilities and capturing opportunities at retail.
Retailers on the other hand are less optimistic. Just 44% are planning for unit volume growth. They're relying on promotions and the expansion of private brands as the drivers. In fact, 60% of retailers in our survey named private brands as one of their top three strategies to deliver value to their shoppers over the next six months and promotions are on the rise. Last year almost 30% of units sold at retail were on promotion, a number that's risen each year since 2020 but remains below pre-pandemic levels. Next we continue to see food away from home pricing outpace food-at-home, given the different cost dynamics and competitive aspects of retail and restaurants. This trend will likely continue and serve as a tailwind for growth in retail food sales.
Finally, US consumers appear incredibly resilient. However, there is persistent uncertainty in growing pockets of financially strained shoppers. A return of student loan repayments and high interest rates are expected to continue impacting this segment of the US consumers. Manufacturers and retailers are recognizing the need to cater to two distinct sets of consumers at the same time while managing costs. Two-thirds of manufacturers and retailers surveyed indicate they're satisfied with current staffing levels and plan no meaningful changes over the next 12 months. This requires retailers to scrutinize their shelf sets to meet different consumer needs in different stores and we are able to help them execute more strategic planograms in store through our retailer services team.
Let me conclude by stating we are excited about the opportunities ahead in 2024. As we ramp up activities to execute our strategy for growth acceleration. We also expect revenue and adjusted EBITDA growth. Excluding the in-year impact of the completed divestitures. We are steadfast in our mission to generate demand for consumers brands and retailers, converting shoppers into buyers in every way they shop. Advantage is uniquely positioned at the intersection of CPG brands and retailers, physical retail and e-commerce and national and private brands. We leverage leading capabilities, spanning the path to purchase that are essential and sticky no matter the market conditions and cultivate enduring relationships across the national retail ecosystem, serving as a strategic consultant and delivering customized solutions fuel growth.
We know that when end to end demand generation is done right, shoppers turn into buyers. With that I'll turn it over to Chris for more on our financial performance and outlook.
Chris Growe: Thank you, Dave. Our recent divestitures and new collaborations underscore the discipline of our talented team in transforming our business. I remain excited about what is to come for Advantage, with 2023 service a strong baseline for the expected growth. You've seen our financial results, so allow me to highlight four insights into our performance. First, our team has delivered an improved adjusted EBITDA performance in 2023, especially in the fourth quarter. Adjusted EBITDA was $424 million for the year and $115 million in the fourth quarter. Excluding foreign exchange and divestitures, the year-over-year change was a decline of 1.7% in 2023, an increase of 4.4% in the fourth quarter. The growth driver came from the marketing segment due to the continued recovery of in-store sampling and demonstrations.
As a reminder, advantages in most of the largest US grocery and big box retailers and many choose Advantage as their exclusive in-store sampling and experiential marketing provider. In-store event counts increased 21% year-over-year in 2023, which represented approximately 79% of 2019 total pre-pandemic sampling volume. In the fourth quarter, event counts reached 83% of 2019 levels, representing nearly 11,000 events per day. We expect 2024 to showcase continued sequential recovery of accounts. In a recent retailer study, 91% of shoppers said sampling a product influenced their first decision and approximately two-thirds reported making repeat purchases of that item. Second, we implemented pricing initiatives in both segments helped offset the majority of the $120 million of wage and benefit inflation incurred in 2023.
These pricing actions represented more than one-third of the revenue growth over the course of the year excluding FX and divestitures. We feel good about continued pricing actions and the wraparound benefit they will produce in 2024 relative to tapering inflation. Third, the actions taken to simplify the business had an impact on our comparable financial performance. For context, the in-year 2023 impact from completed divestitures on revenue and adjusted EBITDA, including the deconsolidation of our European joint venture was approximately $532 million and $17 million respectively. We are actively exploring additional opportunities in 2024 to focus efforts on our core capabilities even further. Finally, partially offsetting the benefits to our performance was a decline in activity due to budget cuts from a large customer, the intentional exit of a client and the aforementioned inflationary cost pressures.
These offsets and the divestitures explain the reported revenue adjusted EBITDA and margin year-over-year decline in the sales segment in the quarter and for the full year. Moving to our balance sheet. We continue to prioritize opportunities to reduce the net leverage ratio in a higher interest rate environment. For the fourth quarter, our net debt to adjusted EBITDA was approximately 4.2x relative to the 4.5x at the beginning of 2023. Our long-term objective is to reduce the net leverage ratio from current levels to below 3.5x. We continue to emphasize working capital management, which allowed us to convert approximately 101% of adjusted EBITDA to adjusted unlevered free cash flow for 2023. In line with the prior quarter, our debt profile remains healthy and we have no meaningful maturities in the next three years.
During the quarter, we voluntarily repurchased approximately $57 million in a combination of term loans and secured notes at an attractive discount and will continue to monitor opportunities to deploy capital that deleverages the balance sheet while generating a favorable rate of return. As of December 31, our total funded debt outstanding was approximately $1.9 billion with nearly 89% of that debt hedged or at a fixed interest rate. Turning to our outlook for this year. We remain pleased by the deliberate steps to improve our financial discipline, combined with a steady economic backdrop. As such, we are planning for low single-digit growth in revenues and adjusted EBITDA after considering the impacts of the completed divestitures. We currently expect adjusted EBITDA performance to be weighted towards the second half of the year due to accelerated investments in technology and talent in the first half.
Our guidance contemplates the continued realization of pricing, which we believe can help offset persistent wage inflation which is currently running at a low to mid single-digit rate. We expect to grow in-store sampling and demonstration events as we recover toward pre-pandemic levels in 2019. We continue to assess our portfolio to ensure we leverage our core strengths for profitable growth. To that end, we've chosen to exit two client relationships in the first quarter. These client exits will weigh on revenues and have a more muted impact on adjusted EBITDA throughout 2024 and for the avoidance of doubt incorporated into our outlook for the year. As a reminder, our operational scale is unmatched with more than 3,500 CPG brand clients across over 15 trade channels.
We support nearly 100,000 stores allowing us to evaluate retailer needs and effectively enable them to address their priorities. Despite the benefits of this breadth of offering, there are times in which we view client exits as necessary and economically attractive for us to achieve our long-term strategic goals. Our guidance also considers the completed divestitures in 2023 and year-to-date. However, our guidance does not include the impact of additional divestitures that may be contemplated simplify the business further. Share repurchases remain part of our capital structure strategy, mainly to offset employee incentive related dilution, and to take advantage of what we believe is an undervalued stock price. In 2023, we repurchased approximately 2 million shares for $6.4 million and traded a small foreign asset for over 2 million incremental shares in the fourth quarter.
We've repurchased more than 2.5 million shares so far in 2024. 2024 will be the beginning of a three-year period of investment to modernize, differentiate, and transform the organization. Under our new shared services model, we plan to build technology platforms for data modernization, cloud-based capabilities, including AI, and other tools to improve operating efficiencies. A significant portion of the planned investment is to upgrade old systems to enable enterprise-wide operations compared to the siloed way we operated in the past and migrate our information to the cloud. The largest of those initiatives will be an ERP upgrade as our current system is approaching the end of its useful life. We expect to complete the implementation sometime in 2026, and we believe the upgrade is necessary to ensure that we deliver best-in-class service to our clients.
Once complete, we expect a fully integrated modern system to simplify internal operations and improve our responsiveness to our clients. We believe the system upgrade will result in a DSO reduction, along with cost savings and business efficiencies, by 2026. In terms of upfront financial considerations, we expect to spend approximately $160 million to $170 million of CapEx related to all of these technology initiatives through 2026. As a result, we expect CapEx this year to be $90 million to $110 million, compared to the $46 million spent in 2023. This represents enhanced spend related to the aforementioned ERP program, other IT initiatives including the data modernization and AI capabilities, retail execution platforms, the GenPact and TCS outlays, and ramp-up related to our new sampling demonstration account.
We expect capital expenditures to taper in 2025 and return to historical levels in 2026 as project-related IT spending diminishes. The total investment for the ERP project is estimated to be $70 million to $80 million, split 75-25 between capital and operating expenses, the majority of which will occur as one-time expenses. This investment will be phased in over the next three years, with over 40% of total spend occurring in 2024. The investments and actions we plan to take will not only heighten CapEx in the near-term, but also have OpEx and one-time expense implications, likely resulting in unfavorable comparisons to last year for net income and EPS. For the avoidance of doubt, our adjusted EBITDA guidance does contemplate these investments.
Despite these significant capital outlays, which we view to be critical to our business, we expect to make significant progress to our long-term net leverage target over the course of 2024 and 2025. We are looking forward to an exciting year in 2024. As a reminder, we plan to report financial results with our three new segments, experiential, branded, and retailer services on our next quarterly earnings. Thank you for your time. I'll now turn it back over to Dave.
Dave Peacock: Thanks, Chris. The people of Advantage have done tremendous work growing the company to what it is today. Our teammates wake up daily focusing on serving the brands we represent and retailers where they work while enriching lives in our communities. It's our job to enable their efforts and help them realize their personal and professional goals, critical steps to becoming the employer of choice we endeavor to be. But we are always proud to celebrate our strengths and successes. We remain unsatisfied. That healthy tension creates the energy and momentum we need to realize a better future for Advantage Solutions. We will now take your questions. Operator?
Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Greg Parrish with Morgan Stanley. Please proceed with your question.
See also 15 Highest Paying Countries for Chefs and 14 Countries with Low Humidity You Can Retire To.
To continue reading the Q&A session, please click here.
