Good afternoon and welcome to Advantage Solutions Third Quarter 2022 Earnings Conference 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 for Advantage. Thank you. You may begin.

Thank you, operator. Thank you, everyone, for joining us on Advantage Solutions 2022 third 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 statements, whether as a result of new information, future events or otherwise, except as required by law. Please note that 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 the slides during today's call. This call is being webcast and a recording of the call is also available on the website. And now I'd like to turn the call over to Advantage's CEO, Jill Griffin.

Thanks, Lasse. Good afternoon, everyone. Thank you for joining us today on our 2022 third quarter results conference call. I'd like to begin by providing commentary on some of the trends that we are seeing across our businesses along with key highlights from the third quarter. Brian will then provide additional details on our third quarter financial performance as well as an update on our full year outlook. Before we begin, I'd 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 service our clients. Amid an incredibly difficult operating backdrop, I am exceptionally proud of our team's achievements and their efforts are commendable. Our associates are providing essential high-return services, helping consumer packaged goods companies and retailers navigate the current environment better, cheaper and faster. Our talented team is a true source of competitive advantage for our company. With that, let's start with a few key observations from this past quarter regarding the exceptionally challenging business environment that is being driven by the limited availability of labor, continued wage inflation and other macroeconomic conditions. Starting first with labor availability. It remains very difficult for large employers like Advantage to find and retain talent to meet the demand for our must-have services. Insufficient labor availability has impacted both our sampling and demonstration business as well as our retail merchandising business. While our previous forecast anticipated the labor market improving in the second half of 2022, trends have actually gotten worse as the year progressed. In both the absolute and relative to our expectations. To this point, key indicators, including labor participation rates remain at historically low levels. In addition, inflation related to cost to serve has continued to remain elevated throughout the second half of…

Thank you, Jill and thank you, everyone, for joining the call. Jill discussed our third quarter highlights, so I'll provide a bit more color on our segment level results and our full year guidance. Beginning with our sales segment. Third quarter sales segment revenue of $646 million increased 8% year-on-year. Sales segment adjusted EBITDA of $76 million declined 20% year-on-year. Revenue improvement was driven by strength in low-margin businesses, such as retail and merchandising services, partially offset by a decrease in third-party selling and retail services. A decline in adjusted EBITDA is largely a result of investment in wage and technology and higher costs from inflationary pressures. Marketing segment revenue of $405 million were up 22% year-on-year. Marketing segment adjusted EBITDA of $42 million was up 9% year-on-year due primarily to higher in-store sampling and demonstration volumes following the return to in-store events, partially offset by wage and inflationary pressures. In aggregate, adjusted EBITDA margins came in at 11.3%, down 315 basis points year-over-year, reflecting a decline of 416 basis points in the sales segment and 123 basis points in the marketing segment. The lower margin is due to a revenue mix shift, reflecting an increase in the lower margin revenue, primarily driven by increase in our in-store sampling and demonstration businesses and single-source retail merchandising services, coupled with inflationary pressure driving higher expenses in such areas as labor and medical benefits. Moving on to discuss some balance sheet items. Our net debt to adjusted EBITDA finished in the third quarter approximately 4.2 times. Despite the inflationary environment and the continued cost pressure, we continue to expect free cash flow to ramp throughout the balance of the year with growth expected to continue in the fourth quarter. For the full year, we anticipate free cash flow conversion of approximately 15%…

We will now begin the question-and-answer session. [Operator instructions] And the first question will be from Jason English with Goldman Sachs.

A few quick questions. First, on what's happening in the here and now. I understand that it's taking longer for things to return to normalcy, particularly given the labor environment. But historically, you've generated roughly 2/3 of your earnings or EBITDA in the first 3 quarters and 1/3 in the fourth quarter. So just based on kind of run rate of where you're at already this year, forgetting about incremental improvement, history suggests you should be earning $480 million of EBITDA this year, or roughly $144 million in the fourth quarter. But you're seeing 4Q is actually going backwards and will instead be closer to something around 115 or so. So what's causing the backward move? Like what are the incremental pressure points they're building and making the business worse in 4Q than what you've been tracking to pass so far this year?

You are right that historic seasonality in our business should have us keeping our numbers. However, as we're going through the year, as we've mentioned, the labor market is getting more difficult, not better which is not what we planned. And wages are continuing to increase. They are not yet stabilizing. And while we are continuing to take price and we feel very successful in those efforts, there is still a lag and there will continue to be this cycle as wages continue to increase, where there's a lag between the wages and pricing. And most notably, I would say the change is due to the macroeconomic environment becoming more challenged and this is affecting how consumers make spending decisions, it's affecting how our retailers and our suppliers are making decisions. And we are seeing a slowdown in some of our new and expanded engagements. And as we mentioned, a push out of some of those engagements to future periods as everybody braces for what's happening in the macro economy. And that, I would say, is most notably the new that you're asking about.

Got it. That's helpful. Now looking forward, I'm not asking you for guidance for next year. I know it's preliminary but you gave us some pieces on free cash flow. You talked about the CARES Act, the earn-out, the working capital burden, all of which have pressured your free cash flow conversion ratio for the year. I think you mentioned that you expect to eventually to get back to a more normalized free cash flow conversion of 30% to 40% as a percentage of EBITDA. Is there any reason to believe that you can't get back there next year?

I think we do believe that there is reason to believe that we can get back there next year. I think that when you look at some of the events that happened this year and specifically, you talked about the CARES Act, that's a perfect example. Paying $25 million this year of deferrals, we won't have any payments next year. I think another example of that is that we paid out significantly larger earn-outs than normal this year and we can already estimate our earn-outs for next year and it's going to be significantly lower than what we'd expect for payments next year. Now we are going to have still some ramp-up costs associated with demo continuing to build next year but it's not going to be anywhere near what we had this year. So, I think those 3 things alone give us reason to think that our cash flow conversion could be more in line with the normalized level next year.

Maybe low end, maybe a bit below, fair?

Fair.

Okay. Last question. Jill, a lot of these issues that are affecting the business are clearly out of our control. You can't control labor build, you can't control labor rates, obviously. But there are things you can control like the cost structure of the business. Is there more you can do on that front? First, remind us like what have you done? Because I know you've already done a lot. Have you realized the full impact of that this year? Or will there be spillover benefits on actions you've already taken? And are there more actions you can take to tighten the belt and right size your cost structure in the face of all this external cost pressure?

Yes. So yes, we have been taking actions. Yes, we are going to continue to realize the benefits of the actions we've already taken. And yes, there's more we can do. So let me bring a little bit of context to those answers. Let's just go to hiring. Since that is so critical. We are business very focused on labor. And we've been talking about the TA, the talent acquisition software that we implemented to drive efficiencies and to drive cost out of the system. And what we're seeing now is that year-over-year, our speed to higher is up 40%. And that is a partial year of implementation of this talent acquisition software as one of the positives. We are making progress with that software and our net hires. But there's an improvement significantly over Q2 and Q3. And I would say that we historically operate as a very lean team. Our job in the industry is to do the work better, faster, cheaper. We are wired that way. We have an internal lean team that ensures that we are operating efficiently across the company and you can bet that team is very busy in ensuring that all of the restructuring that we are doing, the centralization of our labor teams, the optimization of the utilization of our workforce so that we are getting more work out of each individual associates, are all actions that we have taken and that we're continuing to evolve into and that will produce more benefit in '23. I'm going to also say, although it's not directly your question, we are pleased with the momentum that we are building in pricing to recoup these cost increases. And while, of course, there will continue to be a lag until there is a stabilization effect in the marketplace, we are continuing to have those discussions. We're continuing to be successful. Our clients and customers understand the dynamic and we're encouraged by, again, both our ability to get more efficient and to take costs out of the system as well as where you said it's out of our control and we cannot to then be able to test that in pricing.

That's really helpful. One comment and then I'll pass it on. I certainly applaud the capital allocation decision. I think that's the right move. And with that, I'm done, I'll pass on the next one.

And our next question will be from Toni Kaplan from Morgan Stanley.

I wanted to ask about the event count. It sort of stagnated around sort of this mid 60% of 2019 levels. How should we think about the recovery going forward? Is the limiting factor still labor? Or is demand there not recovering like I would have thought, I guess?

Thanks, Toni. Yes, the way to think about that is this is a labor availability issue. This is not a demand issue. We are still very encouraged by the demand to be outpacing our supply and particularly in the demonstration business recovery. And we are filling that demand as fast as we possibly can with labor improvements. And we absolutely project that to continue. I understand your point why was the increase from Q2 to Q3, not more. And that is, again, not a demand issue that is this increasingly difficult labor environment that we did not predict to be increasingly difficult.

That makes sense. And also just wanted to ask about sort of on the cost side, your ability to pass through costs. I know with marketing and commissions, I think you have some ability to do that. I think maybe merchandising, there's maybe a bit of a lag and impact from mixed. I guess, just trying to understand if anything has changed with regard to the ability to pass on some of the increased costs?

No. There has not been a change. It is this ongoing cycle. So you're recalling it correctly that in our marketing business, we've been able to recover, or take those price increases faster to cover the cost than we can in our merchandising business, where there is somewhat of a lag between when we can realize the price increase and when we have to incur the increased cost. So that dynamic is exactly the same. And it is just now an ongoing cycle because, again, the labor market isn't getting better as we had hoped and predicted. It is continuing to be difficult. And in a few periods recently has been worse. So we just predict that this cycle of cost and price will continue until there is stabilization and you are recalling it correctly and it has not changed.

And the next question will be from Faiza Alwy from Deutsche Bank.

I wanted to follow up on the demand question and wanted a little bit more perspective around what you're seeing? What's the CPG environment like? Because it just intuitively, it just feels like, yes, your services might be need to have and your CPG customers want these services but it also seems like they wanted at a certain price. So I'm curious, there are supply chain challenges, certainly, so give us a little bit more perspective on the demand and sort of where we are in that cycle.

So yes, suppliers and retailers are, of course, under pressure. And despite the pressure, our services are not must have and so they need our services and they are therefore willing to invest in our services. I will just go specifically to demo since you're asking about the demand, I think, tied to my answer. And because our demonstration activities are absolutely fundamental to our retailer partners, in-store experience and their go-to-market strategy, our retailers worked with us and with the suppliers to ensure that there is investment in these activities. And that certainly sustains the demand for our services to a place where we are very optimistic about the recovery. We just have to get the labor.

And can you give us a bit more perspective on maybe quantify if you can. It sounds like you're having to put through wage increases. Can you quantify some of that, whether it's on a year-over-year basis or sequentially? Like how much are your costs going up by? And what type of pricing are you expecting?

Yes, I think that's a great question. I think if you look at the overall average for the year, it's roughly about 7.5% as far as the wage increases. The one thing that I would say is that it's on a declining scale when you look year-over-year which gives us indication that we're going to I think, have momentum going into next year. And then as far as the pricing and what we've been able to pass along, again, we touched on it earlier, the commission rate largely has offset some of the increases that we've had in wage. The demonstration businesses, we have partnered with the retailers and have and continue to have those discussions and they've been very productive. It's the one on the retail services, whether they're manufactured retailer-driven that usually have a lag time to it. And those have been successful and they continue to be successful. It's just unfortunately, they do have a lag because we need to show the actual increases that we've had in wages and we have been able to cover those increases when we've had those discussions. But until the labor market stabilizes to Jill's point earlier, we're still going to be in a catch-up mode from that perspective.

And then just wanted to talk about the investments that you had highlighted earlier in the year. So, I heard you talking about cost savings as well? And my impression was that some of these investments were maybe more discretionary. So just walk us through like, has anything changed with respect to those investments?

So when we started the year, we talked about 3 different categories of investments which were in ways and talent, innovation and renovation. And in some of our earlier converse past that point but earlier than now, we have been evolving that strategy as the market became more difficult than anticipated. And we had absolutely deliberately backed off some of the innovation in favor of more investment in talent and wage for all the reasons that we've been discussing and continuing to also invest in renovation which is specifically around the talent acquisition software example that I just gave. So, I think when you're talking about some of the more discretionary items, I would say those would be in the bucket of innovation and we have been much more careful, methodical, deliberate and pull back on some of those while we focus on talent and wage and renovation. And some of those innovations, though, continue because they're absolutely critical to helping our suppliers and our retailers navigate in particular, some of the data-centric supply chain services that we've been building. Those are critically needed today. So, we're investing very selectively in things that are needed right now.

And then if I may, just last question. You mentioned some new business that I think you said was delayed. Is that really just because of the labor environment? What's driving that?

So what we're seeing in certain cases is because of this very challenging macroeconomic environment that is impacting the consumer and is then also impacting our retailers and brands. In some cases, our current clients and customers are delaying some of the projects that we otherwise anticipated and, in some cases, some of the new engagements that we anticipated have not come through. And we believe that's a reflection of a general more cautionary approach to the current environment by all of the participants.

Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Jill Griffin for any closing remarks.

Thank you, operator. Well, while market conditions remain very dynamic as we have discussed and labor remains extremely difficult, as we've discussed, our core competency of managing a large labor force is in very high demand by our customers. I want to again sincerely thank all of our Advantage associates for their hard work, ingenuity, collaboration and determinedness in serving our clients and customers and shoppers as we all navigate this ongoing volatility. I am so proud of the progress our teams are making towards rebuilding our workforce amidst to this challenging backdrop. And not only are we steadily recovering, albeit not nearly as fast as we would like. We are making the right strategic decisions to move Advantage's business forward for the longer term as well. Operational redesign, you've heard, technology enhancement, efficiency savings, pricing actions. These items are not only enabling us to weather this current environment but these are also the key building blocks for our future. Our clients continue to rely upon us to help them navigate the evolving e-commerce and brick-and-mortar channels at scale. Our ability to manage a very large labor force enables us to provide our services better, faster and more efficiently than our customers could do so by themselves and that is important right now, as exemplified by our quarter-over-quarter improvement throughout the year despite this worsening market. I remain very confident in our business model and the efforts of our entire enterprise to push this company forward. Thank you for your time this afternoon. We look forward to sharing our progress with you on our fourth quarter call in March.

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