Good afternoon, and welcome to Advantage Solutions' third quarter 2021 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 Dan Riff, Chief Investor Relations and Strategy Officer for Advantage. Thank you. You may begin.
Thank you, operator. Thank you everyone for joining us on Advantage Solutions' 2021 third quarter earnings conference call. On the call with me today are Tanya Domier, Chief Executive Officer, Brian Stevens, Chief Financial Officer and Chief Operating Officer, Jill Griffin, President and Chief Commercial Officer, and Dan Morrison, our Senior Vice President of Finance and Operations. 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 risks and uncertainties that could differ materially from actual events and those described in the forward-looking statements. Forward-looking statements are based on the company's current expectations and are subject to inherent uncertainties, risks, and assumptions 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 sections titled Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations, 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 any forward-looking statement, except as required by law. Please note, management's remarks today will highlight certain non-GAAP financial measures. Our earnings release issued earlier today presents reconciliations of these non-GAAP financial measures to the most comparable GAAP numbers, which can be found on the investors section of our website at https://advantagesolutions.net. The company has also prepared presentation slides, which are posted on Advantage's investor relations website. You may wanna refer to the slides during today's call.
This call is being webcast, and a recording of this call will also be available on our website. Now, I'd like to turn the call over to Tanya Domier.
Thanks, Dan. Good afternoon, everyone. As I did on our first few calls, I'm gonna start by framing the Advantage Solutions business. We're the leading provider of outsourced sales and marketing solutions to consumer goods companies and retailers. We have a strong platform of competitively advantaged services like headquarter sales, retail merchandising, in-store sampling, digital commerce, and shopper marketing. For brands and retailers of all sizes, our job is to help them get the right products on the shelf, whether it's physical or digital, and into the hands of consumers however they shop. Creating value on this platform is simple, but it's not easy. At the most fundamental level, we're a trusted partner and problem solver, we help our clients sell more while spending less, we operate very efficiently, providing fuel for growth, we reinvest in attractive returns, both organically and through tech and acquisitions.
As we deliver value, our platform compounds over time, growing profits at more than 2.5x the pace of the S&P. I'm so grateful to our associates for the work that they do in the office and in the field, and I wanna take this opportunity to publicly thank them. They're providing essential high return services, helping consumer goods companies and retailers navigate out of this pandemic better, cheaper and faster. Once I conclude my remarks, I'll turn things over to Brian to discuss our financial results, and then after that, we'll open the call for questions. I'll jump right into today's update. As we look ahead, Advantage remains well positioned in a very dynamic operating environment. Demand for our essential services remains high as we help our partners navigate through unprecedented change in both brick and mortar and e-commerce.
We're investing to stand up tens of thousands of associates in a still choppy labor market to help our clients and customers navigate uncharted waters and solve unprecedented challenges every single day. We're being disciplined in realizing price to offset wage inflation in our most labor-intensive services with more to come on that later. Times like this with lots of change, as I've mentioned before, are when our compounding platform really shines. In fact, there may not be a better time to be a low-cost scaled provider of essential services that extend all the way to the shelf. I'm very proud of our team. They're helping our brand and our retail partners work through near-record inflation, supply and demand imbalances, fragile global supply chains, and a rapidly shifting marketing mix.
The path ahead may not be smooth in our markets, but we've got an amazing team and services deployed to win over the long term. Drilling down a bit, we had healthy performance in our third quarter in the face of a dynamic and difficult operating environment, and this steady delivery year to date gives us the confidence to affirm our upwardly revised 2021 adjusted EBITDA guidance of $520 million-$530 million. We continue to see recovery in services most impacted by COVID, particularly in-store sampling, where events were up approximately 13% from the second quarter of this year.
Elevated at-home demand continues to benefit our sales segment, supported by steady volume and rising price trends relative to pre-COVID levels. Our higher growth and higher margin digital services continue to deliver strong results, annualizing to nearly a quarter of our profits and providing a strong set of solutions to brands and partners in an omni-channel world post-COVID. As we bring sampling back to stores and we scale further in retail merchandising, we're standing up tens of thousands of new associates. This requires a significant investment in our talent and our workforce that will continue as we return to full operation over the coming quarters. In addition to our workforce investment, we're also investing through the P&L in service innovation and a unique trade promotion optimization offering. We're completing tuck-in acquisitions that add capabilities at attractive returns.
We have a robust pipeline of new business opportunities as we come out of the pandemic, and we're being disciplined about taking price in a majority of our businesses that are most impacted by wage inflation with hikes of mid- to high-single digits. We're not yet back to normal, but we're navigating the path to a new normal quite well. Turning to an update on our financial performance. Here are some highlights from the recently completed third quarter. The business continues to deliver solid financials as the world reopens and we work through what we hope are the final innings of the pandemic. Revenue continued to recover nicely in the quarter, growing 18% year-over-year as in-store sampling continues to build back in our marketing segment.
As we anticipated, adjusted EBITDA declined modestly, down 2% year-over-year on continued upfront investment in recruiting to build back our workforce in COVID-impacted operations, mix-related declines, and workforce investments in the Sales segment. Touching quickly on the segment, revenue growth remains strong in our Sales segment, up 10% year-over-year, driven by healthy rebounds in the COVID-impacted international business and growth in retail merchandising services. Offsetting some of our growth, we had modest declines in headquarters sales revenue. It's worth noting, however, that while headquarters services are moderating from COVID peaks, they do remain above 2019 pre-COVID levels. The Sales segment did see a forecasted year-over-year EBITDA decline down 7%.
This was driven primarily by upfront costs to ramp new business wins, lower margin revenue mix from the type of work that we've won, and continued investment in our merchandising workforce. To elaborate on the mix component, the expected declines in headquarters services against last year's elevated COVID levels came at high decremental margin, while the addition of retail merchandising and international revenue came at lower incremental margins. Moving to our marketing segment, the revenue rebound continued up over 37% versus 2020 as the steady return of in-store product demonstration at our largest sampling client delighted consumers and our digital services continued to have significant adoption. Marketing also saw solid EBITDA growth in the quarter, up 12% year-over-year.
This was primarily driven by healthy growth in digital, offsetting significant investment in some of our in-store sampling services to acquire and onboard talent, offsetting some supply chain challenges with single-serve sample availability, and the roll-off of high margin prior year COVID-related services for retailers when sampling was dormant. As we sit here today with just over a half a quarter to go in the 2021 calendar year, in the sales segment, we continue to see solid consumption patterns in the sales segment as baseline volume remains elevated from pre-COVID levels. We expect this to continue to some degree with hybrid working as a trend, but expect that volumes will continue to normalize further as more people go back to work and school in the coming quarters. We're also seeing consumer goods supply chain struggle, hurting some clients' ability to get products to stores.
Offsetting these headwinds, we're helping manufacturers navigate a more dynamic pricing environment to offset commodity and wage inflation. The CPG pricing tailwind directly benefits our headquarters sales business, whose commissions grow with client business. In the marketing segment, in-store product demonstration and sampling continue to receive strong support in our rollout, and shoppers are very pleased to see the events that they've missed. Brands are eager to bring innovation and product news to market and demand for events continues to grow. As we've noted, standing up teams of tens of thousands of trained associates, something that we're uniquely good at, doesn't happen overnight, and it's complex and costly, particularly in today's tough talent market. We continue to invest to recruit and to train and to retain, particularly in the in-store sampling services that we're bringing back to life.
We expect that this will continue through the balance of 2021 and into next year. As you can see, our full year guidance anticipates a solid inflection in Q4 performance, both against depressed prior year comps and a Q3 that was squeezed a bit by mix drag and temporary reinvestment. Key drivers of our expected robust Q4 are healthy pricing trends in our headquarters sales services, continued outperformance in digital services and solutions, flow through of pricing to offset wage inflation, and steady recovery in sampling as we continue to staff up there to absorb our fixed costs and recruiting investments. On the COVID front, we're watching things very closely. We continue to expect the pandemic disruption to subside as the state of health improves, but we remain nimble and prepared for a wider than normal range of outcomes.
As noted earlier, we are affirming our 2021 adjusted EBITDA guidance of $520 million-$530 million. As many of you know, we plan cautiously and execute relentlessly. Given solid organic performance and tuck-in acquisitions year to date, we're comfortable in our outlook with just a few weeks to go, and believe we're positioned well to deliver against this range in a wide set of macro scenarios, ably navigating meaningful inflation and labor and supply chain disruptions that no one could have forecasted. Before I turn it over to Brian for more details on the financials, I do wanna highlight the share repurchase authorization we communicated in a separate release after the close today. We continue to believe our heavily discounted share price is meaningfully disconnected from our stable fundamentals and healthy outlook.
Given that, we'll be opportunistic in buying back the business that we know best, our own. The $100 million authorization will be utilized when two basic conditions are met. Shares trade at a meaningful discount to our conservative estimate of intrinsic value, and share repurchase compares favorably to alternative uses of capital deployment, including our highly value accretive M&A program. With that, I'll turn it over to Brian.
Thank you, Tanya, and good afternoon, everyone. It's great to be speaking with you. Tanya touched on the third quarter highlights, so I'm gonna share a little bit more color at the segment level and speak again to our full year guidance. As Tanya mentioned earlier, we grew revenue 18% year-over-year in the third quarter to $929 million, primarily driven by the marketing segment, as in-store sampling continued its return to operation in the quarter. As expected, adjusted EBITDA declined slightly 2% year-over-year to $134 million, primarily driven by anticipated decline in the sales segment, which resulted from some moderation in headquarters sales service relative to last year's elevated COVID levels.
Also contributing to the decline, as Tanya mentioned earlier, is the ongoing investment we are making to stand up very large labor forces to bring COVID-impacted franchises back to full operation and to scale into healthy market share gains in our retail merchandising services. Turning to our segments. Sales segment revenues grew 10% year-over-year to $597 million. Retail merchandising services and the recovery of the COVID-impacted international business drove most of this growth. Sales segment adjusted EBITDA was $95 million, down year-over-year from lower margin revenue mix, including the anticipated moderation in the headquarter sales services and investment in our workforce. Marketing segment revenues were up 37% year-over-year to $332 million. This represents the second consecutive quarter of growth following the pandemic-impacted quarters -39% and -31%.
Adjusted EBITDA in marketing was up 12% year-over-year to $39 million, driven primarily by continued strength in our digital business and in-store sampling return to operation, more than offsetting upfront investment to build back our workforce to support sampling return to operations. Turning to overall margins. Third quarter adjusted EBITDA margin came in at 14.4%, down 300 basis points from the elevated COVID-19 levels in 2020. The expected year-over-year margin dip was primarily attributable to two factors. First, normalizing revenue mix as a lower margin service continued to recover from COVID. Second, upfront investment to stand up labor in our in-store sampling and retail merchandising services. As recent pricing moves to offset wage inflation flow through and rising sampling volumes absorb more fixed costs and investment expense, we expect this headwind to ease. Turning now to full-year 2021 outlook.
As Tanya noted, we are comfortable with our fiscal year 2021 adjusted EBITDA range of $520 million-$530 million. Some items to keep in mind with just a few weeks to go in the year. Q4 will have continued investment in recruiting, training, and retaining talent in labor-intensive services, particularly as we bring large operations like in-store sampling back to full operations and scale up further in retail merchandising. Sampling and demonstrations should continue to ramp steadily, subject to labor supply returning to market and the supply chains being able to deliver sample products. At-home demand has remained elevated above pre-COVID levels, even with the return to in-person learning and hybrid work. Our pipeline of high return M&A opportunities is robust. We've closed a handful of deals and have more we expect to close over the coming quarters.
We will continue to pursue pricing to offset wage inflation in our labor-intensive services, engaging receptive partners in dialogue about the need for speed and recruiting strong talent in this market. We continue to make room for a moderate amount of medium-term investments through the P&L this year, betting on strong organic growth ideas and projects from our talented leaders, and these will pay off in 2022 and beyond. Summing all this up, we had a solid first three quarters. We've got some investment to bring in large workforce back into operations and some unknowns in the home stretch of the year.
We've scrubbed the forecast pretty relentlessly and remain confident about the strong finish to the year that delivers the annual guidance we shared. Now turning to some balance sheet items. As Tanya indicated, our net debt to EBITDA finished the quarter approximately 3.9x in line with Q2 levels. Free cash flows should ramp up in Q4 and into 2022. As noted in last quarter, we now have no meaningful maturities in the next 4+ years. Also note, on October 28, 2021, the company successfully repriced its $1.3 billion first lien term loan down by 75 basis points to a 5.25% interest rate. Annually projected interest savings are roughly $10 million or $7 million after tax and will be realized annually for the remaining 6 years until maturity.
At the end of Q3, our total funded debt outstanding was down to approximately $2.1 billion. A summary of our debt and equity capitalization can be found on slide eight, in the supplementary slides for Q3 results that posted on our investor relations website. With that, I'll turn it back over to Tanya.
We're enthusiastic about 2021 and beyond here at Advantage. We believe in the power of our business model of delivering need-to-have services for brands and retailers, and we do it better, cheaper and faster than they can do it themselves. We will continue to focus on helping our clients emerge from unprecedented disruption and change. We will continue to deliver both cost efficiency and sales efficiencies to clients, which is real growth. This is how we serve existing clients well and generate new business wins. We're winning with tuck-in acquisitions and stepped up reinvestment through the P&L, bringing technology-enabled services to meet our client needs. Dan, any closing thoughts before we open it up to Q&A?
Thanks, Tanya. I'll don my fundamental investor hat again to wrap us up. Advantage is an essential provider of sticky sales and marketing services with a proven history of healthy organic growth and returns on capital, an admirable track record of navigating unprecedented disruption during COVID, and a compelling case that we'll emerge stronger post-pandemic. In this baffling and bifurcated market, our compounding fundamentals trade hands at well under 10x EBITDA. For perspective, that share price implies no growth ever again. This flawed assumption, in my view, represents an opportunity for fellow long-term investors. As Tanya noted, we're expressing confidence in our own risk reward with our first ever share repurchase program, authorizing an investment in the asset we know best, ourselves. As the fog clears, we plan to grow liquidity, escape from broader SPAC skepticism, and move past endless alarmist labor market headlines.
With time, patience and fundamental value delivery, we expect to close our discount to the consumer goods and markets we serve and the services businesses we could be comped against. Each turn of equity value that accrues is worth more than 20% to our total fair value. Bottom line, I like the asymmetry here and encourage folks to dig a bit deeper and reach out to us to discuss ADV. With that, I'd now like to ask the operator to open the call for questions.
We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question today comes from Toni Kaplan with Morgan Stanley. Please go ahead.
Thanks so much. Tanya, you talked about a couple of the different factors that are impacting you, the challenging staffing environment which we're seeing across, you know, a number of our business services companies as well as the supply chain issues. Is there a way to frame how much demand that you haven't been able to meet because of any of these factors?
That's a great question, Toni, and I would just start, you know, with the backdrop of acknowledging what you said. It's certainly a dynamic labor environment right now, and we expect investment in labor to continue through the balance of this year and into next. Demand definitely exceeds supply. We're not reporting on the demand versus the supply, but I'll tell you that the investments that you see are most heavily weighted towards the upfront recruiting as we stand up our large demo workforce and we grow quickly in retail and merchandising, where there's been a lot of demand. I think it's really a testament to the fact that these services are need to have, and that's been proven throughout COVID. The investments that you've seen and will continue to see are critical. You're gonna see sampling and demo continue to trend back towards pre-COVID levels.
You know, as we noted, supply and demand is something that we're dealing with every day. We're racing to staff the robust demand, and you'll see each platform continue to roll back over time. As we talked about, you'll see the disciplined way that we're working to get our workers back. We've not been immune from wage inflation as you can imagine. We all see it in the headlines. To offset this, we've been very disciplined in taking price increases in a majority of our businesses, most impacted by wage inflation with hikes of mid to high single digits and more to come as needed.
The reason that I share this with you is because, as you can imagine, that's helping us to meet that demand more quickly because we've been working in partnership with brands and retailers to be able to take price to increase wages to get our workers back and out there servicing the customers and the shoppers. Again, it's a testament to what we've been saying all along. These are value-added services they need to have, not nice to have. I think it really illustrates the value of our model, which is that clients are relying on our capabilities and the scale to deliver critical services efficiently. It's not easy for anybody, but we have great expertise in recruiting, training, and retaining talent.
Great. Then related, you know, you made a sort of a high level of investment in third quarter, which you had talked about previously, and so, definitely expected. Just talk about, you know, how you're thinking about the level of investment in 4Q relative to 3Q.
The shape of the year is unfolding about as we forecasted and as we tried to signal with each of these calls. There are puts and takes, but we're reaching the endpoint that we've committed to. Q4 is shaping up to finish the year nicely just a few weeks to go, and we feel very good about our ability to land the year in our adjusted EBITDA range. You know, two factors really drive Q4's inflection. First, our business is generally higher, as you can imagine, in Q4 because of holidays. Second, our business is ramping further in Q4 as our COVID impacted businesses work their way back towards full operation.
Q4 will also show continued flow through of disciplined price hikes that I mentioned to offset wage inflation and some lift from healthy CPG trade pricing trends that we've all seen that are aiding our headquarters sales commissions.
Terrific. Thanks so much.
Thank you, Toni.
Our next question comes from Jason English with Goldman Sachs. Please go ahead.
Hey, guys. Thanks for slotting me in. I've got a few questions. You know, Tanya, let's pull out a thread of that last comment you just made, that the price increases are aiding your headquarters sales. Why exactly are headquarters sales down? I don't really fully appreciate it given that we've got so much price in the system. Demand remains elevated. What was the transitory boost last year that's now falling away?
Well, there was definitely elevated demand. We still see elevated demand versus 2019, but certainly not when pantry loading was occurring. You know, you mentioned supply chain and that does create some short-term noise. It's hard for us to sell what's not available, but that's reflected in our outlook and we expect it to work itself out. Again, supply chain is another great example of where short-term pain creates long-term gain for our business, and we're working with clients to help figure those problems out. We've proven ourselves to be a trusted and essential partners to our clients, and we're continuing to do that. We don't have an immediate solve for supply chain, and that does affect flow through to headquarters commissions. We are working tirelessly to ensure that everything that's available gets presented flawlessly on the shelf, whether it's physical or virtual.
There's never been a higher premium on flawless execution all the way to the shelf. You know, you see that again by people being willing to pay more for it. We think that's really what we've learned again and reinforced through COVID and this long period, which is these services are need to have.
Tanya, we seem to have passed the pantry load phase. Grocery store sales are up. CPG company reported sales are up. I still can't tie it all out in terms of why your commission stream on what seems to be a growing revenue pool is shrinking. Have you suffered commission compression or have you lost some headquarter sales accounts?
No. We have not seen any compression in our headquarter margins since, you know, the last few years as we talked about. The last time that we really saw that was consolidation. It's really not a compression issue. Some of what you may be seeing, though, is some of the supply chain issues affect us more than they do the broader CPG community because we don't have headquarters or headquarter commissions at the largest accounts. Oftentimes it's the Tier 2 and Tier 3 accounts where the cuts happen in supply chain. That's likely the disconnect that you're seeing in overall CPG and the Advantage headquarter business.
Got it. That makes more sense. Thank you for filling in the gaps there. Pivoting to the marketing side of the business. I know you've mentioned about sort of the appetite to bring sampling back and progress there, but I'm looking at your slide 4, and man, we're just creeping. We're barely sort of creeping higher. I asked this on a recent call you guys did, like, an educational call, but we've gone kind of two years now without sampling, and business is humming for all the major manufacturers and for Costco. Is it reasonable to assume that we're not gonna get all the way back to 100%, that they've found that they can live without some of this costly sampling activity?
I don't think that's the case at all. We're actually seeing the opposite. As we talked about, the demand is greater than the supply. I would just say again, you know, we can't overemphasize enough the build that it is to stand up tens of thousands of people. You're seeing steady progress. That's exactly what we expected, and we still expect progress towards pre-COVID levels. We expect continued improvement in Q4 versus Q3, just like we saw in Q3 versus Q2. Given a tough labor environment, some of the rebuild is likely to push into the early part of next year. There was always a fuse on how long it would take to stand up these businesses. It's burning a little slower than we probably would have guessed, as people have come back to work more slowly than we expected after stimulus ended.
The good news is, though, contrary to, you know, what you asked about earlier, the demand for the services from brands and from retailers and from consumers remains very strong.
That's good. That's good to hear. One more question then I don't wanna be too much of a call hog, so I'll pass it on. I think Brian, in comments about, like, fourth quarter, said flow-through of pricing to offset wage inflation will build. I was hoping you could give us sort of an update on that. Where do you stand in terms of wage inflation? Like, what, how is it hitting your P&L overall? And then, of course, where do you stand on that offset in terms of your ability to push through pricing to pass it on?
Yeah. Well, as you can imagine, we've had a number of those conversations with our both brand partners and in our largest labor businesses. We've taken price in a majority of our businesses that are most impacted by wage inflation. On average, those price hikes are in the mid to single digit range. They're gonna flow through at different times because the conversations happened at different times. Our pricing progress matches up well with our CPG clients in terms of the ground that we've covered and the magnitude of pricing that we've worked through in partnership with brands and with retailers.
Got it. Okay. I've got many more questions, but I'm gonna pass it on and get back in the queue.
Okay. Thank you, Jason.
There being no further questions, this will conclude our question and answer session. I would like to turn the conference back over to Tanya Domier for any closing remarks.
Thank you, everybody, for your questions and your support. We look forward to the one-offs. Jason, I know we have a scheduled session with you, so hopefully you'll have all those questions ready. To everyone else, all of our partners on the call, please get your questions ready, and we look forward to all of our follow-up sessions with you. Thanks so much.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.