Advantage Solutions Inc. Q3 2025 earnings call

Thank you, Operator. Welcome to Advantage Solutions third 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 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. Actual outcomes and results could differ materially due to 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 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.

I would like to turn the call over to Dave Peacock.

Thanks, Vic. Good morning, everyone, and thank you for joining us. Before we begin, I want to acknowledge the continued focus and dedication of our teammates. You are Advantage, and your commitment to delivering for our clients and customers, especially as they navigate a complex consumer environment, remains central to our success. Starting with our third quarter results, revenues of $781 million were down 2.6% versus prior year. Adjusted EBITDA was $99.6 million, a decline of 1.4% versus prior year, a sequential improvement from the second quarter. This was the result of a strong performance in our experiential segment, where demand remains robust. This partially offsets softer trends in Branded Services and anticipated declines in retailer services due, in part, to timing shifts.

We generated strong cash flow driven by our marked improvement in working capital, resulting in adjusted unlevered free cash flow of $98 million, or nearly 100% of EBITDA. As a result of the strong cash flow generation, we ended the quarter with over $200 million in cash, including the proceeds from the sale of our 7.5% equity stake in Acxion Foodservice. During the quarter, we leveraged the benefits of our structurally diversified platforms, pulling levers in real time across our high-volume labor business and retailer and experiential. We meaningfully increased hiring activity to meet growing customer demand, enabling the business to execute more events in in-store retail work, which drove strong incremental margins.

Our ability to respond to rapidly changing dynamics with the right data, systems, and talent provides resilience in the near term, while longer-term, we remain well-positioned for an improving environment across our network businesses, primarily in Branded Services. As we move into the acceleration phase of our IT transformation and modernization effort, having implemented our new ERP and enterprise data infrastructure, with phase one of our SAP and our Oracle EPM environment in place, we are beginning to leverage these systems to drive efficiency gains, improve workforce optimization, increase cash flow, accelerate data integration, and sharpen visibility into performance. These actions enable us to operate as a truly inside-driven organization, even as we continue the remaining phases of our SAP and Workday implementations over the next 15 months.

We remain committed to establishing a leading data architecture and system foundation to yield operational savings and better data-driven services for our clients and customers. 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 our commercial decision-making across sales and merchandising. This next-generation platform will seamlessly integrate Advantage's data intelligence, including unique retail data with dynamic, real-time capabilities, augmenting our team's ability to anticipate demand, prioritize actions, and drive efficiency and effectiveness across client workflows. At the same time, we are deepening key strategic partnerships that enhance our technology capabilities and operational reach, most recently through our expanded collaboration with Instacart.

By combining their live in-store audit capabilities with Advantage's retail execution network, we are building an alert-based retail model that allows CPG brands to quickly identify and correct on-shelf availability, pricing, and display issues in real time. This approach leverages Instacart's network of more than 600,000 shoppers, alongside our execution expertise, to reduce out-of-stocks, improve compliance, and drive stronger ROI for our customers. We close over six million distribution voids and out-of-stocks each year, and this new partnership will enable us to do more of this and do it faster than anyone in the industry. The early results of our 200-store pilot have been encouraging, and the partnership will scale into additional markets in 2026. The partnership reinforces our commitment to data-driven execution and technology-enabled growth.

We also continue to roll out our centralized labor model, which we believe will significantly strengthen our high-volume labor businesses in our retailer and experiential segments over time through increased utilization, which will drive higher retention and ultimately stronger execution for clients and customers. We see this as providing some benefit in the fourth quarter with acceleration in 2026. Our teams remain laser-focused on the fundamentals, deepening customer relationships, elevating our technology platform, and driving better labor utilization in our highest-volume service lines. These actions are helping us operate with more consistency and improved execution in the market, which leads to a better experience for our customers. Turning to a review of our segments, we are adapting as we continue to operate in a dynamic macro environment. Inflationary pressures and a cautious consumer continue to curb demand.

Last quarter, we noted that higher-income shoppers remained more resilient while value-oriented consumers were becoming more selective, and we saw the trend persist in the third quarter. Accordingly, CPG companies and retailers alike are remaining increasingly cautious and sharply focused on stronger ROI on every dollar deployed. Our platform, with its ability to drive efficient execution, informed decisions with data, and improved commercial outcomes, positions us well to help our customers compete and win. In Branded Services, we faced uncertain market conditions as tariffs, channel shifts, and a softening growth environment continued to influence spending. While the decline in revenues and EBITDA eased sequentially, the business continued to face headwinds. The result was a reduction in commission-based revenues through scope and customer retention that was not fully offset by new customer wins and growth in incremental services within our existing client base.

While the environment remains challenging, we continue to focus on investing back into this business, strengthening our value proposition, and pursuing customers that can benefit from our core offerings both near and long term. We expect Branded Services revenues and EBITDA to remain under pressure. However, we are encouraged with a larger pipeline of new business opportunities as we close out the year. Turning to experiential services, we had a very strong quarter with solid growth in revenues and EBITDA. Demand for events continued to rise, and we responded with increased staffing levels, resulting in higher revenues and incremental margin. Demo event volume grew strongly in the quarter, up 7% on an underlying basis, and execution reached 91%. We continue to see strong demand signals in this business, and we expect improving execution in the fourth quarter as we enhance our talent acquisition processes even more.

Retailer services was down year over year in revenues and EBITDA. As we indicated in our last earnings call, this reflected a difficult year-over-year comparison and a shift in the timing of some project activity out of the third quarter. We also experienced a negative impact from ongoing channel shift toward club and mass stores, as well as some pressure from more cautious retailer spending. We remained focused on the controllables, as staffing levels and execution rates continued to improve through the quarter, enabling stronger coverage and an ability to satisfy demand for projects. We view these staffing improvements, along with the healthy project pipeline, as leading indicators of stabilization and recovery and are well-positioned for improving revenues and EBITDA in the fourth quarter and beyond.

While consumer behavior remains challenging, effective execution, transformation-enabled technology, a solid project pipeline, and accelerating customer demand give us confidence in the long-term trajectory of the business. Our diversified business model, which includes high-volume labor businesses, creates operating leverage and the disciplined execution. We can redeploy teams and flex staffing to meet customer demand, creating outsized incremental margin growth in the business. We also continue to improve our productivity through AI initiatives, which are accelerating efficiencies in our back office, as well as sales tools and data analysis, while engaging with vendors to build platforms and applications at scale. Taking into account our expectations for the fourth quarter, we are reiterating our revenue growth guidance of flat to down low single digits for the year.

We are updating our EBITDA guidance for the year to include the Acxion Foodservice divestiture, as well as the challenging macro environment especially affecting our Branded Services segment, and now expect mid-single-digit decline. We continue to expect unlevered free cash flow to be greater than 50% of EBITDA. We are encouraged by this strong cash flow performance despite the negative impact from a timing shift of our payroll period weighing on the working capital in the fourth quarter. We expect cash flow generation to remain strong, driven by continued working capital improvements, lower CapEx, and benefits from our labor and efficiency initiatives. Our business is built to generate consistent cash flow, and as the transformation investments taper and our modernization work takes hold, we continue to expect strong cash conversion going forward.

We are confident in the trajectory of the business and are taking the right long-term actions to strengthen our position and restore growth. We continue to focus on disciplined execution while improving our systems, technology, and labor capabilities. 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 third quarter 2025 performance by segment, discuss our cash flow and capital structure, and expand on Dave's guidance commentary. In Branded Services, we generated $258 million of revenues and $42 million of adjusted EBITDA, down 9% and 15% on a year-over-year basis, respectively. This segment continues to experience challenges, namely within the sales brokerage business, which we are working expeditiously to address, as well as our omnicommerce marketing business. The softer growth environment for consumer packaged goods companies has weighed on our organic growth performance, and we continue to see some pressure around insourcing, which has been a headwind to growth. However, we took cost actions earlier in the year to improve our efficiency.

We maintain a robust pipeline of new business opportunities, offering confidence in our ability to move towards stabilization in 2026. In experiential services, we generated $274 million of revenues and $35 million of adjusted EBITDA, up 8% and 52% on a year-over-year basis, respectively. Solid execution and the continued improvement in staffing levels enabled our teams to execute more events in the quarter. We were able to pull operational levers during the quarter to accommodate growing demand that was again ahead of our expectations. Events per day increased by 7% versus the prior year on an underlying basis, and we see momentum accelerating into the fourth quarter. Execution rates were approximately 91%, and given strong fixed cost leverage, we saw EBITDA margin improvement of 370 basis points year-over-year and up strongly on a sequential basis.

We are beginning to roll out our centralized labor model for part of our experiential business, with the goal of further improving our efficiency, which will also support a better teammate experience as our teammates access an opportunity to garner more hours in the store. In retailer services, we generated $249 million of revenues and $23 million adjusted EBITDA, down 6% and 22% on a year-over-year basis, respectively. As expected, we faced a challenging comparison to the prior year period, and results were impacted by project activity timing. Additionally, advisory and agency work were impacted by channel mix. We are developing more bespoke services to increase our value add to retailers and focusing on expanding our services beyond the grocery store to other retail outlets. We maintain a strong and growing pipeline of new business opportunities in this segment.

Across the businesses, shared service costs were down year-over-year in the quarter, which benefited profitability in all segments and reflects the stabilization of costs we expect to continue. Moving to the balance sheet and cash flow, we ended the quarter with $201 million in cash on hand, a notable increase from $103 million in the second quarter, driven by the improvement in working capital, namely DSOs, and the benefit of the $19 million in proceeds from the sale of our stake in Acxion Foodservice, as well as the $22.5 million in proceeds in July related to the first of two deferred purchase price installments for June Group. We did not repurchase debt or shares in the quarter. Our net leverage ratio was 4.4x adjusted EBITDA, which is down from the second quarter, and we expected to hold at this level in the fourth quarter.

With cash on hand, expectations for stronger cash generation going forward, and approximately $450 million available on our undrawn 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. Turning to cash generation, we ended the quarter at approximately 62 days of sales outstanding, an eight-day improvement from the second quarter, as cash collections continue to recover after the transition to our new ERP system. Optimizing DSOs has been a big focus for the organization, and we continue to make progress in reducing DSOs as we move forward into 2026, which will contribute to additional cash flow. CapEx was $11 million in the quarter.

We now expect full-year CapEx in the range of $45 million-$55 million, moderately below our previous guidance due to the timing of projects occurring this year and continued efficiency in our spending. Adjusted unlevered free cash flow was $98 million in the quarter, and the conversion rate was nearly 100%, driven by the stronger working capital performance as well as lower-than-expected CapEx. In addition, we made progress on transforming and optimizing our portfolio. During the quarter, we monetized our 7.5% stake in Acxion Foodservice for $19 million in cash proceeds. This divestiture helped streamline our portfolio and boost our liquidity position. We will continue to capitalize on similar opportunities that make strategic sense going forward.

As Dave highlighted, our revenue guidance is unchanged, but we are adjusting our full-year EBITDA guidance due to the divestiture of our stake in Acxion Foodservice, as well as the more challenging macro environment. We remain encouraged by the sequential progress in 2025. After a challenging first quarter to start the year, we have seen a steady improvement in our operating performance, which has supported a strong revenue and EBITDA trend for the business. As indicated by our full-year guidance, we expect a stable growth trend in revenue and EBITDA in the second half of the year, supported by strong execution across our labor-related businesses. The diversity and resilience of our business model supports this improved business performance and provides confidence in our path forward. As Dave mentioned, we continue to expect 2025 adjusted unlevered free cash flow to be above 50% of adjusted EBITDA.

We lowered our CapEx spending outlook slightly again this quarter to a range of $45 million-$55 million, which will aid unlevered free cash flow growth for the year. Our expectation for interest expense remains in the range of $140 million-$150 million, assuming no additional debt repurchases. Robust cash generation is expected to continue in the fourth quarter. Excluding a $45 million year-end payroll shift into 2025 due to timing, we anticipate adjusted unlevered free cash flow conversion close to 100% and net free cash flow conversion of approximately 30% in the second half. We continue to expect our restructuring and reorganization expenses to be about half the level of the prior year, which is contributing to our stronger net free cash flow performance in the second half and the year.

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 if our transformation improves our services and modernizes our processes for more consistent and efficient results. Thank you for your time. I will now turn it back over to Dave.

Thanks, Chris. We believe our expertise and range of services position us well to navigate the current macroeconomic environment with resilience and agility. We continue to execute with discipline and advance the foundational work of the company. We are making measurable progress in improving our systems and workforce efficiency, strengthening the backbone of our operations and competitive positioning. At the same time, we continue to make progress toward 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 a Q&A session.