Good morning, and welcome to the Advantage Solutions First 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 Kimberly Esterkin, Investor Relations for Advantage. Please go ahead.

Thank you, operator, and thank you, everyone, for joining us on Advantage Solutions' First 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 measure. This call is being webcast, and a recording of this call will also be available on the website. And now I'd like to turn the call over to Advantage's CEO, Dave Peacock.

Thanks, Kimberly. Good morning, everyone, and thank you for joining us. I am pleased to be able to report a strong start to the year for Advantage Solutions, including stronger-than-expected revenue and adjusted EBITDA performance for the business. I'll provide more color on our performance and our outlook in a few minutes. I want to start by thanking everyone on the Advantage team for their hard work this past quarter. In my first 100 days at Advantage, I've spent considerable time in the market, connecting with many of our stakeholders. I've been consistently impressed by the caliber of our talented teams, their heart for service, and their unwavering commitment to delivering results, which is evident in the feedback I've heard from clients and customers, the new business we're winning, and our solid performance for the quarter. Specifically, our revenue and adjusted EBITDA were ahead of our plan and that stronger business performance, along with a focus on working capital led to an improved free cash flow performance as well. Together with our newly formed executive leadership team, we've been assessing our services, capabilities and potential. We're setting the stage for a long-range business plan that will position Advantage for long-term profitable growth. We'll share this plan in the coming months. Advantage is uniquely positioned at the intersection of brands and retailers with extensive reach and breadth of services that span the entire path to purchase. Our operational scale is unmatched with nearly 4,000 clients spanning 17 channels of trade in most of the largest U.S. grocery retailers regarding Advantage as their exclusive in-store experiential partner. It's a competitive position that gives us critical insights and a strategic perspective to both inform and help achieve our client's goals, including how best to play and where to pivot to optimize performance. In…

Thank you, Dave. I'm excited to be here on the other side of these calls as CFO of Advantage. I look forward to working with you, Dave and the rest of the team in establishing a consistent and enduring level of growth for the company. I believe there's a tremendous amount of value to unlock for all stakeholders. And although it is early days, my conviction in this business is high and has only grown in my short time here. I am joining Advantage after over 25 years in sell-side research, most recently at Stifel, and I believe that experience and familiarity with the consumer and retail sector will serve me well in this position and at Advantage more holistically. I have the great benefit of working with the entire finance team who are aiding me in my assimilation into the organization and getting me positioned quickly to succeed in this role. Now let's get into the performance for the quarter. On a consolidated basis, first quarter revenues grew 10.6% year-over-year to total $1 billion. Excluding unfavorable foreign exchange rates, revenue increased by 12.1%. First quarter adjusted EBITDA declined 4.8% year-over-year to $92 million. Sales segment revenues of $613 million increased 3.6% year-over-year. Sales segment adjusted EBITDA of $66 million declined 3.5% year-over-year. Top line growth is driven by growth in retail merchandising services in our European joint venture, along with success in our pricing initiatives. The decline in adjusted EBITDA in the sales segment is largely a result of the continued inflationary pressures and mix shift toward lower margin business services as we discussed on prior earnings calls. Market segment revenues of $399 million were up 23.5% year-over-year. This growth was driven primarily by the continued return of our in-store sampling and demonstration services to higher event counts as…

Thanks, Chris. We are just getting started and have a lot of work to do. We do not believe that one quarter define success, but we're pleased with our start. I am confident in the leaders in our company, both new and legacy, who are uncovering and capitalizing on the opportunity every day both for our own operations and for our clients and customers. We have tens of thousands of associates who are a powerful force for consumer and retail businesses and the passion and commitment that I've seen in market visits gives me incredible optimism and confidence in our future. We will now take your questions. Operator?

[Operator Instructions]. The first question is from Faiza Alwy of Deutsche Bank.

Congrats, Chris. Nice to hear you on the other side. I guess I wanted to start first around pricing. Can you talk about where you are in the cycle right now? Where are the specific areas, where you're getting better pricing from customers? And how should we think about that for the rest of the year?

This is Dave Peacock. Thanks for the question. Pricing is going well. We're seeing some success in multiple areas of our business right now. I think there's a strong recognition of the labor inflation that we obviously experienced over the last year plus. And while labor inflation is moderating a bit from maybe a year ago, we were obviously still experiencing it. Everybody saw the information from the government just a few weeks ago. But we feel good about the pricing outlook for our business. We've seen it in both those areas of our business that service retailers more directly as well as those on the consumer packaged goods side. There's a strong demand for retail activity, if you will, both funded from consumer products companies with all the innovation coming and a strong desire to leverage off-shelf merchandising. And we also see it in our retail-funded area where we do a lot of resets directly on behalf of retailers as they are working in more private label products as well as some of the innovations coming from their branded product partners.

Understood it. And then, Dave, I know you've been spending a lot of time with your customers. Talk a bit -- you touched on this in some of your comments, but give us a bit more color in terms of what you're hearing from your customers? What are they looking for from you? And I believe you mentioned some new business wins within the sales segment. So maybe talk about what are some of the areas where you're gaining some traction in these new business wins.

No, absolutely. And think of -- our customers kind of broken in two, as we had to mention the branded consumer products companies and retailers. You obviously are seeing the branded consumer products side, a strong move back into innovation, a lot of new items coming to market. The innovation engines are back on with many of our clients, which is great to see. And as I mentioned, we actually just had a survey with our manufacturers and CPG companies. And the kind of top tool that they're using to drive performance at retail right now is off-shelf merchandising and positioning, which serves well our retail merchandising segment. We're hearing a lot of optimism about just, I think, the year from our CPG partners. From the retail side, you're obviously seeing, in many cases, units down overall, and you are seeing private label outpacing the growth of branded products, but both so from a dollar standpoint, growing well. Well, what you hear a lot in the media obviously right now about looming recession or concern over the debt ceiling, I think, so far, what we're hearing is cautious optimism as it relates to the consumer. Obviously, the labor markets being constrained can be challenging for us, but the more funds in the consumer pockets is going to continue to drive, I think, continued visits and spending in-stores. So pretty -- I'd say cautiously optimistic is the feedback. I've been in 40 client meetings over the last few months in person, actually 3 just in the last 6 days. And we've had great discussions around where they see the business going. And as I said, I think there's cautious optimism for this year, and you've obviously been tracking some of the reports that have come out for the first quarter for many companies.

Great. And then just last one, if I may. Give us a sense on how you're thinking about free cash flow conversion for the year. It sounds like you had some good conversion this quarter because of working capital developments. So just help us a bit in terms of how we should think about that for the course of the year.

Faiza, it's Chris Growe. And great to speak to you from this side. This is where I get involved, right? So unlevered free cash flow was quite strong in the quarter. It's really going to be a driving force for the rest of the year. We saw really good working capital improvement through the quarter. I would just say while we're pleased with the first quarter, it's our intent to keep driving improvements in free cash flow. I would -- obviously, working capital improvements are our focus, but one of the best drivers of free cash flow is profit growth. So that's our key here, our goal. So the main driver of the working capital improvement was better receivables and better DSOs. And some of this was the year-over-year comparison and some of it was our work internally to do that. So to accomplish that, we have financially stable, large and midsized customers. Cash cycles are stable overall. So it's [indiscernible] performance in the quarter and it should continue throughout the year.

The next question is from Greg Parrish from Morgan Stanley.

Welcome to Chris as well. I just wanted to circle back on pricing real quick. I think you called out pricing realization in both segments. I guess, how was that versus your initial plan? Are you kind of -- are you ahead of schedule at this point or behind? And then also sort of in terms of guidance and it's sort of related, but how much more pricing do you have to execute on in order to achieve your guidance?

I'd say we're effectively on plan and realizing the pricing we expected coming into the year. Obviously, we need to see how things unfold as we move through the year because the timing of our contracts and when they're renewed, vary. But so far, we're on schedule.

Okay. Fair enough. And then I wanted to talk about capital allocation. Prior management sort of shifted its focus towards debt paydown. Now that you're sort of both in your seat, can you confirm that it's your focus too? And then previously, you were looking at potential asset sales or something in the quarter, if you could maybe confirm what that asset was that would be helpful. And then are you looking at further divestitures. So I guess, broadly, can you give your sort of high-level capital allocation philosophy and then also sort of a near-term plan to execute on it.

Yes. I mean our capital allocation policy is to reduce our debt. So that really hasn't changed. I'll let Chris expound a bit more on the recent divestiture. But we're obviously, as a new management team, assessing the portfolio and looking to determine both fit strategically, but also value, if you will, in the market and what can position us well as it relates to achieving our goal of paying down debt and also just our kind of internal -- what merits internal resource allocation in the form of both funding and people, as it relates to the divisions of our company. So we're going through a pretty rigorous review. I mentioned in my comments about a plan that will come forward. I don't want to oversell that in the sense that we're going to release some 50-page document to the world, but we will probably talk a little more in detail in the coming months about how we specifically expect to get our leverage ratio in a much better place.

Yes. I'll just add on that, Dave. Greg, I look forward to working with you. Let me start with the divestiture. We can't offer specifics on that. The best way I can say it, it's less than 3% of revenue and EBITDA. So it is a non-core business. It was a third-party e-commerce reseller, and we divested that business and we're now out of that business overall. And in terms of debt repayment, I think as Dave said, that's our focus now, right? So in the quarter, we had our gross debt, our net debt, and our net debt-to-EBITDA all went down sequentially, and that's driven by a slight reduction in debt overall as well as an increase in cash. We did buy back a small amount of debt in the quarter, and we're going to continue to focus on our balance sheet in general and improving our balance sheet. That's in our kind of top list of priorities for the year. Just to add one other point here, 84% of our debt is fixed or hedged. We had this recent collar we put in place on another $300 million of debt. And that allows us to control any upside in rates and actually allows us to capture the downside in rates from here. So I like the improved kind of fixed nature of our balance sheet.

Greg, one more thing too on that. I do want to reinforce when the business necessitates it or we see opportunities to invest in the business, we will. And that can be in the technology area, that may be in areas in support of our demonstration business as it comes back and grows. So I do want to reinforce that. We will invest in our business because we do see the opportunities for growth. But we obviously are also prioritizing debt repayment.

Okay. Great. That's all very helpful. I appreciate the color. And then lastly for me, just maybe if you could give us an update on labor availability, wages. Obviously, labor numbers last week, it's still very hot and tight out there, but I don't know if you -- maybe there's no change, but I just want to kind of get an update on what you're seeing.

I think I'd say it's shifting a bit. You're right. If you look at labor participation rates dipped a bit kind of month-over-month. And you obviously saw the numbers as it relates to unemployment and job creation. We had 900 net new hires in the quarter. So we've had 3 consecutive quarters of net new hires and continue to see success in that area. And what I like seeing is our new Chief Digital Officer and our new Chief of HR partnering and finding better ways and quicker ways. And this also is included in our workforce management group to get people from kind of hire to enroll, if you will. One of the things that we've seen, and I saw this when I was working in grocery retail, the quicker you can get people through, what I call the hiring funnel, the more success you're going to have both in attracting candidates, but also keeping them longer term because you just make it less difficult to join the company. So that's one of our focus areas, and it's paying off right now as we're seeing much better recruiting efforts. And we are seeing a little bit of a reduction in turnover as well. So we're starting to see some stickiness with the current labor force.

The next question is from Jason English of Goldman Sachs.

Congrats, Chris, on the new role. I must apologize in advance. I'm juggling 4 different earnings calls this morning. I missed much of your prepared remarks. So I apologize if I ask you something redundant. But it's great to hear the progress on the labor front that you just mentioned. I'm curious if we could delve in deeper on the progress on the pricing front. There's a lot of chatter in the industry right now about increased tension between manufacturers and brokers with manufacturers, not just pushing back on price but actually trying to get commission dollars down and threatening polling businesses, et cetera. I'm curious if you think those concerns are sensationalized? If you're actually seeing it play out? And how the interplay between the interactions and negotiated price between your manufacturing clients and yourself is progressing?

Thanks, Jason. Yes, I mentioned and you may not have heard it, but I've been in 40 client meetings in person over the last couple of months, and I've not experienced what you referenced and the minor actions with our clients. Clearly, there's always sort of a push and pull as it relates to pricing at any time, whether it's an inflationary period or a deflationary period. But yes, I've not experienced that sort of tension, if you will. That said, I mean, at the end of the day, we actually have a responsibility as well to make sure that we're delivering our services more efficiently. And one of the things we're doing more and more as we speak with our clients, and I want to reiterate, you really have in CPG companies, but retailers as well, there's a lot of what we do on behalf of and for the retailers directly. And we're talking a lot about the results and what are the desired results and what are their objectives and what are we trying to achieve and getting less into sort of the, if you will, the how many bodies are -- because at the end of the day, if we can be more efficient in what we do, whether that's through technology or just better process controls within the functions and tasks we perform, it takes some pressure off that pricing side. But thus far, we've had, I think, very good and reasonable discussions with both our CPG and retailer partners as it relates to pricing.

Okay. That's good to hear. And in terms of sampling, I see the progress you're showing on your slides, and it's good to see the continued progress there. Still well below 2019 levels. How much of that is labor constraints and how much of that is lost demand, meaning some of these manufacturers, they're spending a lot more in retail media and in other commitments. They pulled back the sampling, maybe they discovered they didn't need it. Are we at a rebase level in your view?

No. I'd say a lot of it is with labor constraint. And just, as I mentioned earlier, getting the net hires up. Any time you have an innovation environment like we have now, in the survey we just performed with our CPG partners over 90% are enhancing their innovation efforts. And the 1/3 -- over 1/3 have said they're aggressively pursuing innovation. That plus private label growth can -- those can both lead to increased demand for sampling. So it's really what I'd say, focus for us is sort of an execution rate and our ability to bring people in and get them trained. And as we say, from hire to cart, shorten that time period so that we get people in and get these jobs filled because the demand is there.

This concludes our question-and-answer session. I would like to turn the conference back over to Dave Peacock for closing remarks.

Thank you. No, I can't reiterate enough that we're very pleased with the quarter. We don't obviously declare victory after 1 quarter. We've got a lot of work to do. The team is very committed. We're uncovering opportunities every day to both improve the services we provide to our clients and customers and enhancing the employee experience within our orientation. We have to remember that the associate experience is critical to our success because we're a people-based business, a people-powered business, and we remain focused on that. We thank you for your time, and we look forward to speaking to you again.

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