All right. All right. We're going to keep going here at the Canaccord 45th Annual Growth Conference. I'm Joe Vafi, one of the equity research analysts here. We're pleased to have with us up next the team from Advantage Solutions, Dave Peacock, who is CEO, Chris Growe, who is the CFO sitting over here. Advantage is a somewhat unique play in the public market setting, providing key services into CPG, grocery retail industries, and does so as a market leader in its segments. Even as something of an industry juggernaut in its markets, Advantage is still on its own journey to generate more shareholder value. Almost three years ago, Dave and Chris came to Advantage with a strategy to refocus the company on some of its core markets after what had previously been a period of active PE-sponsored consolidation.
Here to talk more about Advantage with us is Dave. Thanks for being here with us today.
Of course, Joe.
Great. Why don't we just start off and maybe you just introduce Advantage to those here in the audience that may not know it, in your own words, the value prop you're bringing to your customers?
Absolutely. We are in the business of driving sales for less. We sit between thousands of consumer products companies and manufacturers and hundreds and hundreds of retailers. We perform services ranging from literally selling on behalf of the CPGs or representing them if they're contract manufacturers to retailers. We do retail merchandising for both CPGs and retailers, and we're the leading experiential marketing agency in the country.
Great. You just came off your Q2 numbers, I believe, a week ago. I know there were some positive highlights. The stock acted pretty well off of that. You reiterated your guidance for the year. Maybe drill down just a little bit into what you saw in the quarter and what you're seeing here in your end markets a little bit.
Yeah, I think, one, we saw a sequential improvement from the first quarter. We had a difficult first quarter, like a lot of companies that are in our sector. I think what you saw with the consumer sector overall is a difficult first quarter in adjusting to a lot of the uncertainty that introduced into the market. Ultimately, one, the market improved a bit because some of the things that were contemplated didn't roll through, some of the tariffs, what have you. I think companies figured out a little bit how to manage it in that uncertain time. We're no different. I think the other thing that we really saw some real improvement, we have a large labor business, 70 million labor hours, over 60,000 frontline personnel.
We had some challenges in just, you know, hiring talent and getting our business staffed in the first quarter. All of that was improved in the second quarter where execution rates were quite high.
Great. You've also not only focused on your go-to-market, but you've been on a transformational journey on an operational side internally. Maybe you update the audience here on what you've been doing, the progress to date, and what the benefits that you're expecting to generate on those efforts over the next year or two.
Yeah, absolutely. For the last year and a half, we've embarked on a transformation journey where we resegmented our business to be more focused based on customer. We sold off businesses where we didn't feel we had a right to win and focused our portfolio and really unified the company into more of an interconnected service platform across the consumer sector. We also improved our data and analytics business, or our data analytics capabilities, and became much more tech-enabled. That ranges all over our company from how our sales force actually sells and the information and data that we provide them real-time and the speed at which we provide it to how we're scheduling teammates using AI in the marketplace more efficiently and in a way that is driving better retention. We also wanted to bring the efficiency into our business.
We have consolidated our shared services in our back office and invested in our technology infrastructure and our ERP. We're implementing Workday as we go into 2026, for instance, all the foundational systems that enable you to just better manage your business with more efficiency.
Sure. CPG, and I guess to a certain degree, retail or grocery retail can be extremely data-driven, right? I know you're building a big data lake. With your size and scale, the introduction of AI with a lot of the investments you're making, it does feel like you have an opportunity to really drive more value for your customers, even extend the product and service offerings you have for them. Just curious to hear what perhaps you're thinking about as the next evolution of your service offering using these data and some of these tools.
No, I think it's a good question. AI use cases stem from a robust data set that's segregated appropriately. That's where our data lake comes into play. That data lake is, you know, industry-leading, especially in the industry we're in, and exceeds the capabilities of many of our clients. We ingest enormous amounts of data, as you can imagine, syndicated data, client data, in-store execution data, and are able to take that and really leverage it to just make better decisions in the marketplace, whether it's in the deployment of labor in support of our clients or in selling on their behalf and making sure that the assortments for their retailers are optimized for, you know, maximum movement within their categories. We have found really, really great outcomes so far. We talked about in the quarter that our CapEx was lower than people expected. This is just an example.
The CapEx for the year will be lower. Part of that is because we've been able to bring AI into the development of our IT and deployment. None of this would have occurred if we had not made the investments that we made last year and earlier this year.
That's great. I know you mentioned your very large workforce. Is it 300? How big is it?
Our workforce, we have about 66,000 teammates right now, but about, call it low or high 50s, call it 58,000, 60,000 frontline. They're working indoors.
Right. 58,000- 60,000 employees. I know you've been working on utilization and employee efficiency and the like. Maybe you could kind of, because it feels, I mean, that's your biggest cost bucket, right?
Right.
Sure, right. Perhaps, I mean, we kind of talk about some of the things you've done to put more efficiency into the labor force and what is on the table moving forward. I mean, theoretically, AI could also help on this side of the business too.
Oh, absolutely. It already is. One of the challenges when I go out to the market and I talk to our teammates and ask, what are the difficulties in working in Advantage ? They say, I can't get enough hours. We're changing our model to be very banner or store specific and being more geographic, where you could work in multiple locations. To do that, you've got to be able to schedule appropriately and understand, OK, where's the demand for hours and how does that match with the availability of hours? That's where we're leveraging AI to do that in a much more efficient way. That should, and is driving, as we see in a pilot, higher retention. Higher retention means lower talent acquisition costs, a more tenured and experienced workforce, so you get greater productivity in the work that you're doing.
That's just one example of how we're able to take technology and AI, but it's also in the tasks that they're doing in store. Many times on the retailer side, they're merchandising, and we've got a team that's optimizing assortment within various sections of the store. That obviously is improved and can be done much faster with AI as far as combing through reams and reams of sales data to come back and recommend exactly which items should be located where for optimal movement.
That's great. Your third segment, experiential, is the newest segment, I would say, in a certain sense, but it's also a little bit more of a growth engine for the business right now. Maybe kind of describe the experiential in a little more detail, some of the demand drivers around it, and how that's growing right now.
Right. Experiential is largely sampling in store, but can include some activities for brand activation outside the store. We're seeing both sides of that business grow. You're finding more and more companies looking to engage with consumers more directly, whether that's outside the store or in the store. In the store, with all the innovation that's been coming into the market over the last several years, that really increased post-COVID. During COVID, there was a slowdown in new product development and what have you. That is a big demand driver for sampling, number one. Number two, you're seeing a lot of private label growth within the market. Private label growth is a great opportunity for people to sample those products so that they understand that there's not, you know, any diminution relative to the national brand. We're seeing those two things as big growth drivers.
The demand signals remain strong and continue to be strong through this year. What we saw in the second quarter versus the first quarter was the ability to meet that demand more closely with the supply of labor. We feel very confident as we go into the back half of this year that we'll continue to see growth in the experiential sector.
Got it. Would you say that experiential still has, I mean, I think versus some of your other services, you could say it's still somewhat underpenetrated? I know pre-COVID, you had a good business pretty much rebounded, I think, now to about where it was, so you're kind of back to that growth trajectory. Could this business be 30% bigger in, I don't know, seven or eight years, do you think?
I think there's no reason it can't continue to grow at a robust pace, meaning ahead of the overall consumer sector and maybe realize growth like you described. Part of it, too, is a lot of retailers recognize that they need to have a strong e-commerce business. They need to have the right assortment to attract the customer they're seeking. They have to create an experience in the store. Shoppers are shopping. It can't just be aisles and aisles of product and no real experience. They're looking for, shoppers are, that is, or consumers, something unique. We know, and all our clients know, that the conversion of sample to acquisition is very strong. People who sample typically buy, and then their loyalty rate is higher than the average consumer. You get that kind of lifetime value then of purchases.
I can see that part of our business continuing to grow for a long time.
If you think of CPG brands or others, do you think enough of them are doing this or have a sampling strategy at this point?
Yeah, I mean, it's a combination. We'll work on behalf of CPGs and sample on their behalf, but it's also the retailers. You've got joint business plans that are being developed between CPG manufacturers and retailers, and the different tools and tactics that are negotiated are, you know, pricing and price offs, retail media network investments, but sampling. It's a part of that negotiation. We have thousands and thousands of CPG clients that are sampling either directly through us or as a byproduct of a joint business plan that's worked on with the retailer.
Right. I mean, you guys have a big footprint. Are there any, I mean, if there's a roadmap to maybe some further product extensions or new markets that may make sense over time, or expanding beyond kind of pure grocery retail and other retailers, maybe some of those growth plans or ideas to potentially expand the TAM over time.
That's right. There's a healthy TAM right now in our industry because what we do for retailers is really what I'll call sort of more variable episodic tasks in store. Retailers are struggling to get personnel like anybody else. We know we can execute those episodic tasks more efficiently than kind of the regular store personnel, so we're seeing growth drivers there. The same on our brand and business, we know that there's a strong total addressable market because there's market share we can pick up. Also, there's no shortage of new companies coming into the market with new products and looking for representation and selling. Yes, we've got a concerted effort around growing, especially some of the merchandising work we do and reset work that we do in grocery and sort of your typical food channels with other types of retailers.
Great. I know you also have some joint ventures out there. I mean, I always ask you this question, Dave. It feels like you've got a big employee base. You've got brands out there. You can be a big extension of a lot of these brands, not just in a fee-for-service model, but in a business partnership.
Right. Correct. We've explored that a little bit, especially emerging brands. We've got great partners. For instance, we partner with L.A. Libations, who is a leader in the development of emerging brands, primarily in the beverage space. What we've done for them is help them scale more quickly. They had a small retail merchandising group, but we can scale that very quickly, doing so in some of the leading retailers around the country. Other partnerships, we're leveraging some data from companies like Instacart and have for a while. They've got a robust data set that's part of the data that we ingest into our data lake. Those are just a couple of examples of how we can partner with others, but basically use their capabilities to apply to what we do.
Sure. Maybe we'll switch gears and kind of dig into the finances and numbers a little bit. Lots of investment on the IT side. Sounds like the CapEx requirements are a little bit less this year. Maybe kind of dig into what the benefits are a year or two years from now from those IT and business process investments in terms of maybe margin and/or cash flow.
Yeah, and I'll speak to it in cash flow. We've been, I mentioned, embarking upon a transformation. Our transformation investment, especially on the technology side, where it's a little more capital intense, begins to trail off as we work to the back half of this year. We've already talked about next year, we envision our CapEx to be close to what historical levels have been, maybe slightly above, but not much. We've had transformation expenses in our adjusted EBITDA that will be half this year of what they were last year, and they will be half next year of what they were this year. They're continuing to come down. We actually see, because of the IT investments we've made, that our ongoing CapEx will likely be kind of beyond 2026, below historic levels.
As I always say, if you buy a new car, you shouldn't have to take it in for maintenance for the first few years. We've got a lot of new systems that we're leveraging against our business. We've retired about 100 of, so about 25% of our legacy systems. We will by the end of this year. One of the things that is really important is you bring on new systems, you should be able to take out boundary systems because what you've acquired is more modern and can handle more than what your previous ERP system, for instance, could. As you retire those systems, it's lower maintenance costs, lower overall IT expense. On the cash flow side, the new ERP system we brought in will help us get to lower DSOs. In our business, we're asset light. DSOs really drive our working capital.
We saw them climb in the first half of this year as we implemented SAP. We had all the issues that everybody knowingly goes into when they implement SAP with invoicing, cash application, et cetera, and have a clear view on the back half of this year. As we get into 2026, continued decline in DSOs, which will help on the working capital side.
Great. I think for everyone's benefit, I mean, when you took over at Advantage , previously it was a PE -backed consolidation platform. You inherited a lot of systems, right?
We did.
From a lot of acquisitions.
Three times the average company, right.
It doesn't feel like there was a ton of integration going on previously.
Yeah. I think part of that too is, you know, there was a lot of that. I came in in 2023 and a lot had gone on during COVID where it just was really challenging to do. Part of that was just timing. We've got a great technology team led by Francesco Tinto, who's our CIO and was very experienced. He was CIO for Kraft. He was CIO at Walgreens. He's brought great capabilities in our company that's really helping us transform how we do what we do.
Nice. Nice. Better cash flows coming. I think one of the main catalysts for ADV stock is a de-levering.
Correct.
Right? Because you did inherit some leverage when you came in, right? Maybe kind of tell people where you are, where you are on, you know, now and what that journey looks like over time, and, you know, how you're prioritizing cash flow and debt repayment versus, you know, maybe an M&A a little bit. Maybe other shareholder value creation efforts.
Right. Debt repayment is the priority use of cash right now. We're at half in that debt level that we were in 2019, and we've seen a $400 million reduction in debt since Chris and I and some others came into the business, some through divestitures, some just through operating cash flow. We mentioned the first half of this year very knowingly, kind of what was going to happen with our cash flow as we're implementing an ERP. We also have confidence on the second half. As we look at the second half, if we normalize for the timing of payroll, because we do have some shift in payroll timing, we should be about 30% net free cash flow yield in the second half of this year, and then 25% or more as you get into 2026 and beyond.
We feel good about the ability to generate cash, especially with a more optimized and tech-enabled business.
Right. I think you're right. How many turns of net debt are you now, and is there a goal that you think is a better steady state goal over time?
Yeah, we're at about 4.5x, call it right now. We want to be and have said publicly that we'd like to be under 3.5x . We knew because we were down closer to 4x as you finished 2024, we knew that was going to climb up a bit with the implementation of the ERP. We fully anticipate that coming back. With the cash generation of the business, being able to see that come down fairly rapidly.
If you got to 3.5x , would you keep going from there, do you think? Or would?
Yeah, I mean, I think you get, you know, if you get below 3.5x, then you have to kind of assess and, you know, do you continue, you know, you reevaluate your use of capital a little bit or you do start looking at other options like share repurchase, dividend, M&A, as you mentioned. I think a lot more things come to mind that you could consider, but you want to still manage your overall leverage as well.
Right. We're going to run out of time here soon. I've got a couple more. Are there any questions from the audience or the group?
[audio distortion] Do you think that list is committed? Just being free, sort of not looking into SaaS tech that is integrated, that you would expand in the future or like staying within kind of the in-store side experience?
I don't know that SaaS tech is our objective. I'm not saying it couldn't occur as we develop capabilities to manage our core business that could be transferable to other businesses. It's not the priority, but I could certainly see it as a potential outcome. You mentioned Atlas, that was a situation where we divested to a party who's now a partner with us and more scaled in the business and part of, again, the data set that we ingest and then actually take and utilize when we combine multiple data sets to just improve the fidelity of the work we do.
Good. We're kind of about out of time, but you know, any other closing thoughts?
No, I think, look, we feel optimistic about meeting our guidance, as we stated in our quarterly call. Our pipeline has really improved, Q1 to Q2, and we feel very strong about the pipeline we have. We recognize the uncertainty in the consumer market, but we believe that we'll be generating cash in the second half and be able to fulfill on our objectives.
Great. Advantage Solutions, market leader in some very resilient and defensive industries with some company-specific catalysts on the way. Dave, thanks for being with us.
All right. Thank you. Appreciate you all.