ADV Q3 2026 earnings call transcript, November 4, 2026

Dave Peacock, Chief Executive Officer, and Chris Grohe, 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, So let's see. Let's see.

They 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 reimbursable expenses. And now, I would like to turn the call over to Chief Executive Officer Dave Peacock.

Thanks, Operator. Good morning and thank you for joining us. I want to begin by thanking our teammates for their hard work over the past several years.

We had a better tariff refund in the quarter, but underlying trends were strong. Our priorities remain unchanged. Staffing alignment and consistency, superior execution, and better operating discipline are all areas of focus as we invest in our capabilities. In branded services, performance has not met our expectations and we are taking action to change the trajectory of this business. But we are seeing strong growth in our business from our top clients. We continue to feel the effects of client losses and some ongoing pullback in smaller clients through the regional

and we expected continued growth in 2027. Looking ahead, we expect the branded services performance to improve sequentially in the fourth quarter, and we still expect the segment to move towards stabilization in 2027. To better service our customers long term, today we are announcing a new restructuring plan. Our technology and AI investments have given us better tools to deliver on customer expectations, simplify our organizational structure, and operate more effectively and effectively While these changes are improving our service levels, they have also enabled us to streamline our cost structure to match the shape and trajectory of our business. Our traditionally lower margin labor services continue to show durable demand and growth as packaged goods producers and retailers find increasing value in our team's ability to both enable growth at retail and activate shoppers. Conversely, some of our formerly higher margin network businesses where we serve as an intermediary between parties for sales or marketing services are seeing persistent cyclical declines. This mixed shift is a result of a long-term change in demand. And as such, the cost structure and processes that supported our historical mix are no longer properly aligned with the businesses we have today. As a result, we are undertaking a restructuring of the organization, which is a critical second phase of transformation of our business.

Leveraging previous investments, we are evolving our organization to better align with customer needs and improve our service levels. We have identified and begun implementing restructuring actions designed to reduce layers and bureaucracy and bring our cost structure in line with current business opportunities. The resulting structure is being set in motion in the fourth quarter. We'll continue into two. and is estimated to yield approximately $25 million of annualized savings net of investment with plans for over $5 million in additional net savings over time. Importantly, the two layers of our organization closest to clients and customers are not affected. by these actions and we do not expect any disruption to how we serve them. In fact, we are growing our employee headcount and enhancing our talent levels throughout 2026 across client facing roles. As an organization, we have been focused on transformation to improve our client service and employee experience, especially with our IT investments and AI use cases. As we move toward the end of our IT platform overhaul, we have remained disciplined and consistently evaluating the long-term return on each investment. Every investment should accomplish one of two objectives. It should either enhance the level of service we can provide our customers or improve the experience our teammates have working at Advantage. Chris will discuss more about our specific technology platforms.

Our current restructuring will create a more efficient organization that delivers better client service, reduces friction for our teammates, and more effectively converts revenue growth into margin expansion. Earnings growth and cash generation. Our top 25 clients are collectively showing strong growth. However, we have opportunities to better support brands in local markets or regions. Our new structure addresses this by transitioning I think that's interesting. to four regions and implementing P&L ownership for our regional leaders. We're doing this while bolstering our teams serving larger national accounts, making us the only agency with both a strong national and regional footprint and the only true national sales and execution agency for fresh brands at retail. Fresh category. And we're positioned to capitalize on this with our tenured and talented team. Turning to the macro environment, our business is increasingly concentrated around leading food retailers that continue to grow and take market share. Our labor and execution. Services support growth for these best in class retailers, providing resilience in our revenue outlook. As we have done in the past, we conducted surveys of our customers in the third quarter to assess the operating environment. We leverage this critical data. to help both our manufacturing clients and retail customers grow and take market share. While affordability continues to dominate the narrative in the industry, our surveys show that the shopping experience is becoming a critical differentiator at retail.

Ease of shopping ranks first as a determining factor of retailer choice ahead of price and promotions. HOPE ATLOWERS supports our shelf space planning and reset business as retailers look to dynamically assort their shelves to reduce out of stocks and make the shopping experience easier. Understanding the mission behind a shopper's trip and delivering the experience they expect is critical to becoming a retailer or brand of choice. Our experiential services, which range from sampling to assisted selling to brand activation, enable us to help retailers capitalize on this trend as shoppers look to discover new products when they shop in brick and mortar stores. The key takeaway from these surveys is that retailers and manufacturers are working to serve these discerning shoppers and are focusing more on the shopping experience than ever before and advantages there to serve them in this journey. Consumers also continue to be value seeking and our Damon private brand business leads representation of contract manufacturers in this segment of the market. We partner. closely with retailers to help them tailor their private brand programs and can bring scale and speed to innovation with more than 35,000 global contract manufacturing relationships. Turning to our outlook, we are reiterating our full year revenue and adjusted EBITDA guidance. The business is broadly performing in line with our prior expectations, but uncertainty has increased from the impact of rising energy prices and interest rates on consumer spending.

We believe our diversified portfolio allows us to successfully navigate this challenging environment. In conclusion, we are encouraged by trends in experiential services and retailer services, and we understand the work required in branded services to improve our service levels and performance. We believe the actions underway will create a more agile and more durable advantage. I will now turn it over to Chris for more detail on our financial performance. Thank you, Dave, and welcome to everyone joining us.

today. I will review our third quarter performance by segment, discuss our cash flow and capital structure, and provide additional detail on our outlook. Unless otherwise noted, the year-over-year comparisons I will discuss on a pro forma basis, excluding divestors. In the third quarter, businesses we have divested represented a year-over-year headwind of approximately $5 million to revenues and approximately $3 million to adjusted EBITDA. And for 2026, we still expect divestors to represent a year-over-year headwind of approximately $20 million to revenues and over $10 million to adjusted EBITDA. Starting with Experiential Services, we generated $306 million of revenue and $35 million of adjusted EBITDA, up 12% and 0.5% and 0.5% and 0.5% and 0.5% and 0.5% and 0.5% and 0.5% and 0.5% year over year, respectively. Results reflect continued strong demand, higher event volumes, and solid execution. Profit growth was dampened due to a tough comparison and our proactive decision to invest. Rest in wages, recruiting, and staffing to support higher demand and sustain execution. Pricing actions began to take effect during the quarter and should provide increasing margin support as we move forward. Looking ahead, we expect double-digit revenue and adjusted EBITDA growth and margin expansion for both the fourth quarter and the full year. Turning to branded services, we generated $225 million of revenue and $18 million of adjusted EBITDA growth.

EBITDA down 11% and 55% year-over-year, respectively. Performance remained under pressure from client losses and unfavorable business mix. Declines in higher-margin headquarters sales and agencies were partially offset by strong growth in supply chain revenue. Encouragingly, new business wins improved during the quarter and demand. project work in branded retail grew. As Dave discussed, we are taking meaningful action to align the cost structure with the current revenue base and mix, and we expect sequential margin improvement in the fourth quarter, with a more meaningful path toward revenue and margin stabilization in 2027. Finally, for our retailer services segment, we generated $251 million dollars. of revenue and $32 million of adjusted EBITDA up 1% and 43% year over year respectively. Results included a small benefit from tariff refunds related to goods we source for retail clients. Excluding the benefit of tariff refunds, adjusted EBITDA would have been up over 30%. Performance was supported by growth in SAS, including pricing, project activity, and new business wins, as well as solid results at our Damon private label business. Staffing remains an important focus as we align labor with customer demand and become more agile in reacting to changes in the market. Moving forward, we note that we are going up against a more difficult comparison in the fourth quarter. Despite quarter to quarter volatility, we currently estimate roughly flat revenue and adjusted EBITDA growth for the year in this segment.

Our shared service costs were up modestly year over year in the third quarter. Reversing some of the favorability we experienced during the first half. But those costs remain down year to date compared to last year. We have seen lower medical costs than anticipated this year after two years of increases well ahead of expectations, which is encouraging. At the same time, we continue to manage costs closely across the shared services and are taking advantage. of AI and automation opportunities. As part of our restructuring activity, we are also taking targeted action to reduce redundant shared service costs and other costs not providing the value originally anticipated. We are also being more discerning about IT projects, which should help lower our costs as well as support lower capex in the future. Turning to Workday, as the project progressed, the cost of the rollout anticipated financial and operational benefits no longer delivered an adequate return. As Dave mentioned, every investment should either enhance the level of service we provide or improve the teammate experience. Starting the project reveals several opportunities to streamline boundary systems, improve processes, and leverage new AI technology to enhance workflows without the cost and transition risk of a large system implementation. We have paused the workday implementation while we re-evaluated scope, design, and timing against current business.

In the interim, we will continue to operate on our existing human capital platform, pursue targeted upgrades, and leverage AI to deliver comparable functionality at a lower cost with reduced transition risk. This approach also frees capacity to streamline, improve, and reduce duplication across our other technology systems. Importantly, this decision reduces our 2026 capital spending expectations, supporting our updated CapEx range of $40 million to $45 million. And this should result in lower future capital and opportunities.

We currently expect capital expenditures in 2027 to be in a range of $35 million to $40 million. And we will provide an update in early 2027 once we solidify our spending plans. Moving beyond Workday, we are beginning the second phase of our transformation, focused on simplifying the organization and resetting the cost structure. As Dave mentioned, the program represents approximately $25 million of annualized cost savings starting in the fourth quarter. With plans for at least $5 million in additional savings over time, we continue to assess the opportunity for expanding those savings by addressing spending programs, IT projects, and other areas. The majority of the near-term actions... associated with the restructuring will occur in the fourth quarter, with the broader restructuring extending into 2027. Most of the operating cost actions are weighted to branded services and select support functions. The program extends beyond role reductions to include organizational delayering, consolidation of support structures, reductions in vendor and third-party... ...spend, real estate optimization, and lower discretionary costs. We are implementing these actions thoughtfully, recognizing the impact on colleagues while protecting and investing in the two layers of resources closest to our clients. We expect to incur restructuring and reorganization costs related to this work starting in the fourth quarter. We estimate those costs will total $7 million...

to $10 million, with the majority incurred in the fourth quarter and some extending into 2027. We'll provide more detail as we progress with our plans. The financial objective of the restructuring is to align costs with the current revenue base. And business mix and improve incremental margins on future growth. We remain laser focused on improving cash generation and managing working capital. DSOs are right at 60 days in the quarter, down from the second quarter. And we remain on a path to approximately 55 days by year-end. We continue to focus on collections and disciplined cash management to achieve this outlook. This diligent focus on working capital management helps support strong adjusted unlevered free cash flow in the quarter, which reached $99 million.

Cost and working capital management. Restructuring and workday-related cash costs will affect reported cash flow, but they should be distinguished from the underlying operating cash generation of the business. Moving to the balance sheet and capital allocation, we ended the quarter with approximately $131 million of cash on our balance sheet. Net leverage ended the quarter at approximately 4.6 times. Our priorities remain maintaining appropriate liquidity and reducing debt. We do not anticipate share repurchases beyond activity intended to offset dilution. And both cash and free cash flow will continue to be directed primarily toward debt reduction. Finally, turning to our outlook, we are reiterating our full year revenue. And adjusted EBITDA guidance. We continue to expect revenue growth of flat to up low single digits with adjusted EBITDA flat to down mid single digits versus the prior year. We are also reiterating our adjusted unlevered free cash flow guidance of 250 million. dollars to 275 million dollars and net free cash flow at 25 percent of EBITDA before related debt financing costs. We also expect lower interest expense and capex as noted. Key factors influencing our outlook include continued strength and experiential demand and execution, retail project timing and second-half project ramps, and the pace of restructuring in branded services. As Dave noted, uncertainty in the market has increased and our guidance allows for a relatively wide range of outcomes in the fourth quarter.

As we enter 2027, our focus is on completing the second phase of our transformation, realizing the associated savings, and positioning the business for better earnings flow through as revenue grows. Thank you for your time. I will now turn it back over to Dave.

Thanks, Chris. The third quarter reinforced the strength of our growth initiatives and the benefits of our diversified offerings, while also solidifying where we need to sharpen our focus and improve our execution. The restructuring we announced reflects our- our approach of always investing to improve our client service where returns are also compelling. We will execute these actions thoughtfully in an effort to improve how we serve our customers and reduce friction for our teammates. We believe this work will position the advantage as the- the best service provider to consumer retail while converting growth into stronger margins and cash flow generation over time. I want to thank everyone for joining us today. Operator, we are now ready for questions.

We will now begin the question and answer session. Please limit yourself to one question and one follow up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star. One again, we ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster.

Your first question comes from the line of Luke Morrison with Canaccord Genuity. Luke, your line is now open.

Yeah, thanks, Luke. You know, I think a couple things are important. You know, we said it and I prepared in Mark's, but our restructuring was first designed to improve the service level to our clients. It came with savings because one of the things that we have seen and experienced is we just had too many layers and frankly, bureaucracy was getting in our way to serving clients effectively. So we didn't touch the first two layers that touch customers and clients. We've actually invested in growth in client placing roles, but we eliminate. It's a management that's going to come with savings. So there was there was there were reductions, but also reinvestment in the plan. I think it's going to put us in a much better spot as a business overall, because we now have dedicated focus with. strong leadership. And then you've got also a regional.

four regions now with general managers that have full P and L ownership and ownership of the functions from business development to sales execution to client service level, you know, so, you know, in the. In the past, we've had some of those functions centralized and we put some of that back into the region so they can be more nimble and more accountable for the for the results when you look at branded services overall, we do see some green shoots, you know, we talk. about supply chain as a service, which tends to be a lower margin business but highly in demand as we listen to a lot of our clients and if you're listening to any of the CPG earnings calls, there's a lot of discussion around challenges and supply chain and we can help. clients with that especially because we have an understanding of the shelf dynamics as well and what's actually needed in store. And then we're very optimistic about our retail merchandising business. You know, this is a business. That where we basically go out to stores and either improve the execution or even sell in incremental merchandising of products on behalf of our CPG clients. This is both helps the retailers who are seeing more challenges and. Getting labor in store, but this is a business that operates at a slightly higher margin than the overall average of the branded services segment. And it's where more and more of our pipeline and growth is coming from as it relates to new business opportunities. So.

I think you start seeing stabilization stabilization as you get to 27 and and then I think this retail merchandising business and, you know, I'd say an improving regional, especially headquarters selling business. Gets this business back on track. Super helpful. And then maybe Chris, one for you, you know, the Workday implementation has been paused, but now. You have this Phase 2 program running into 2027. Just how should we be thinking about the path to stronger free cash flow conversion from EVA DAWs, that transformation work matures from here? Yes, they're obviously related in a way. Let me say that way that way, Luke. But I would just say that maybe taking each of the pieces here. I'm going to think about Workday. For right now, it's pause. We're going to work through that program. That manifests itself. We said, I think, in my prepared remarks in less capex in the short term, there is a charge we'll take this quarter as well. I still think that our charges kind of restructuring charges for the year will be around what we had said before, around that thirty five million dollar level, maybe a little bit above that. I think you're going to see about seven to ten million dollars related to restructuring actions overall to achieve this thirty million dollars plus in savings. So given what we've realized to date in charges, given we expect from the new. program, it still puts us, I think, in line with what we had said to you before, do some actions, you know, kind of linger to next year?

Certainly that's possible, but I still think we're going to have a lower level of restructuring charges next year, and the outcome of that would be better cash flow at this. At the same time, we talked about CapEx, and CapEx is a little lower this year, and we indicated that, you know, in that kind of $35-plus million level next year, so it's going to be down as well in 2027. That, too, will help cash flow. So I think there's still some, even though we've got some changes going on here, if I can say it that way, I think you're still going to see the, you know, kind of support there for stronger free cash flow growth in 2027. Yeah. Okay. Thank you. Your next question.

Question comes from the line of Greg Parish with Morgan Stanley. Greg, your line is now open.

Hey, good morning guys. Congrats on the result. Maybe I'd like to thinking. Hey guys, just thinking about fourth quarter here. I mean, how should we think about the cadence relative to the results you just put up? Revenue up one, EBITDA down 12 organically on year over year. Like, you know, how do we roll? Back forward to fourth quarter, your guidance range sort of allows for a lot of flexibility. It does. And we've been deliberate, as you can imagine, we thought a lot about that. Just there's a number of moving parts that that. You know, cause us to want to keep that a little bit wider range going into the fourth quarter. I think the wider range allows for varying outcomes. And we're in the middle of restructuring our brand and services business. We did indicate that would get better in the fourth quarter. We also indicated that you'd see double digit revenue. And EBITDA growth and experiential. And we said there would be margin expansion there. We also indicated that retailer was going to be a little more challenged in the fourth quarter. Just, you know, we've seen some volatility quarter to quarter in the project work. And we have a tough comp for the prior year. So we've given, you know, some of the elements. If you will, Greg, I think we're going to kind of leave it at that from that standpoint to give, you know, your indication there for the fourth quarter. Yeah, Greg, let me build on what Chris said. One thing to think about is, especially when he talks about retailer, but it applies to some other spots in our business.

It gets down to being awarded projects and then staffing and having that timing aligned. So sometimes your projects will span, you know, December through February or December through March. And so, you know, to the degree you can get staffed up and running. You can realize some of that earlier or some of that may bleed into the following year because a lot of retailers especially have different fiscal years than the calendar fiscal. So that's driving some of this as well. Yep. Okay. Appreciate the color that you were able to give. So on this cost savings program, it seems that the savings are all operating, it seems like. And then, I mean, will any of these savings be reinvested or do you expect most, if not all, to sort of flow through to the bottom line? The savings that we report in both 25 are net. So, this relates to how.

There are reinvestments that were already contemplated. They obviously don't include kind of one-time costs, but they were net because we did make some reinvestments in frontline roles, in client-facing roles, and just even in caliber of talent.

Okay, that's helpful, caller. And then maybe just one last one for me. So this tariff refund, I mean, I think you can kind of back into it. on the color you gave. I don't remember seeing this before. I mean, is this the first quarter that you've seen this flow through? And is this is there any expected future flow through this? Or is this one time? Yeah, I would just say that you've seen, you know, like every CPG company has had this as well. We have a smaller business within our retailer services segment that does, you know, first, I'll call it for short periods of time holds will hold inventory, but it purchases product. for some retailers. And that business, therefore, experienced the negative effect of the tariffs last year. And then this year gets the obviously the benefit from that. There's been some refunds coming through as a result of the. Changes in those programs. So that did come through. Yes, you can do the math on that. And it was not a huge contributor, but it did contribute to our profit in the in the third quarter. OK, so maybe maybe a little bit more modest. Impacted fourth quarter and then limited next year. Yeah, sorry, Greg. You asked about going forward. I would not expect much going forward. I think most of that's already been realized. So I think we're there for, you know, again, I would think we're always trying to look for more, of course, but I think there's.

Most of our refunds that we've applied for have all been returned already, and they're here in the third quarter. Okay. Okay. Perfect. Okay. Thanks, guys. Appreciate the call. Sure.

There are no further questions at this time. I will now turn the call back. To David Peacock for closing remarks. We want to thank everybody for joining and we look forward to connecting with this group next quarter. Thank you. This concludes today's teleconference. You may now disconnect your line. At this time, thank you for participating.