Dear Advantage shareholders,
2021 certainly tested our mettle — and the Advantage team proved its resilience. We started the year with high hopes for a return to normalcy and instead got Delta, Omicron, a seismic disruption in labor markets, the highest inflation in five decades and stretched and strained supply chains.
In the face of these uncontrollables, we delivered on our commitments to our owners and finished 2021 strong. I’m so proud of how well our team navigated the tumult. We demonstrated again that we’re a trusted partner and problem solver — delivering value for brands and retailers where it counts, all the way to the shelf.
As we look ahead, we still see a wide range of outcomes for how much we all consume at home, which channels we buy in and the mix of sales and marketing tactics that will emerge post-COVID. Regardless of how all this unfolds, we know we have the capabilities, team and culture to navigate an uncertain future and emerge stronger. To stay successful, we will carry on with practical, client-driven innovation and a healthy dissatisfaction with the status quo.
As we continue to build the business on your behalf, we will remain laser-focused on our mission to create sustainable shareholder value for you over time. After over 30 years as a private company, we still very much think of our owners as partners in the business. Our goal is to provide you with a realistic assessment of our business opportunities and challenges. Our team takes great pride and responsibility in the trust you’ve placed in us to be good stewards of your capital. We look forward to having you as part of the Advantage family for many years.
In this letter, I’ll review how Advantage creates value. Then I’ll discuss the progress we made in 2021 and highlight some of our key priorities for 2022 and beyond.
Now, to the main event.
HOW DO WE CREATE VALUE?
As an Advantage shareholder, you own a stake in a leading provider of outsourced sales and marketing solutions to consumer goods companies and retailers. Our data- and technology-driven services — which include headquarter sales, retail merchandising, in-store and online sampling, digital commerce, omnichannel marketing, retail media and others — help brands and retailers of all sizes get products into the hands of consumers, wherever they shop. As a trusted partner and problem solver, we help our clients sell more while spending less.
Creating value on this platform is simple, but not easy. At the most fundamental level:
- We sit at the nexus of consumer goods companies and retailers. A trusted partner to both.
- We help make clients more effective. And more efficient.
- We win by providing best-in-class service every day. And by innovating on a nimble operating platform.
- We drive productivity to provide fuel for reinvestment and growth.
Simply put, we are built to do it better, cheaper and faster. At our leading scale, this stable model yields solid Adjusted EBITDA margins, which we convert into abundant free cash flow. We then reinvest that free cash flow at very attractive incremental returns and drive growth by selling more asset-light core services to our existing clients, recruiting new clients and entering adjacent spaces where we have the right to win, further widening our competitive moat.
Our expertise and scale have compounded over decades, built on differentiated business systems, talent, relationships and technology. We listen, learn and invest in capabilities that allow us to meet the evolving needs of brands and retailers — solving existing problems better and new problems quickly to navigate change in an increasingly omnichannel world. This, in turn, helps us compound our relationships with clients. Over time, our clients assess which functions to own and which to outsource. As a trusted partner, we capture an outsized share of that outsourcing. By layering on new solutions as we go, we add rich data and insights atop a scaled team and seek to expand returns on capital.
Our broad and deep collection of digital services and solutions — collectively approaching 20% of our revenue — are a great example of these principles in action. Many years ago, we set out to replicate the core functional expertise built over decades by managing brands in brick-and-mortar channels and extend that service to online channels. While many of the principles are the same in selling, merchandising and marketing consumer goods across channels, the tools and tactics to drive winning outcomes for clients are slightly different. As we’ve mastered and scaled our digital expertise, we’ve served a robust e-commerce end market with higher margin and higher return solutions for brands and retailers.
With this in mind, how do we measure value creation at Advantage?
HOW WE’LL MEASURE PERFORMANCE
We are a team who wants to win and knows how to win for clients and shareholders. We believe the primary measure of our success will be the sustainable long-term value we create for shareholders over time (on a per share basis). While not a perfect measure, we believe long-term total shareholder returns is a reasonable system for keeping score. This reflects our belief that public equity markets “get it right” and reflect intrinsic business value reasonably well over time. We’re confident, however, that if we do our jobs well and compound the intrinsic value of our business by executing well and investing wisely, our stock performance should be aligned in the long run.
2021 — ANOTHER YEAR LIKE NO OTHER
As I noted in my opening, 2021 was not a “normalizing” post-COVID year. Trends continued stronger for longer in COVID-aided businesses. And rebounds were slower in COVID-impacted businesses.
Many “rules” that have historically defined consumer packaged goods as a relatively stable, predictable end market were tossed out the window last year. Consumer purchase decisions were dictated as much by shelf availability as brand preference or price point. Supply chain hiccups stymied efforts to revive innovation pipelines. And shifting service mix, elevated recruiting costs and rising wages meant we converted less of our revenue growth to Adjusted EBITDA gains.
In the end, we met our commitments and delivered the Adjusted EBITDA we targeted. We underestimated a number of headwinds — labor market disruption, inflation and supply chain unrest. And as we rallied “all hands on deck” to deliver for clients, we weren’t able to pause, catch our breath and make needed moves early enough to fend off building pressure. Thankfully, late 2021 and early 2022 gave us that chance to look back and look ahead — with deep, thoughtful analyses that will guide our plan for future value creation.
That leads me to my next topic.
WHAT THE FUTURE MAY HOLD: 2022 AND BEYOND
We believe our future is bright at Advantage. We’ve reinforced client relationships and trust and fortified our solutions with practical, timely innovations. The value proposition supporting demand for our critical services remains as strong as ever. We’ve built leading market share and competitive advantages in key businesses across our sales and marketing segments. Our platform gives us endless opportunity to evolve and grow.
Advantage continues to help brands and retailers navigate record inflation, supply chain constraints and shifts in consumer demand channels and marketing mix. We’ve also taken a deep dive into our historical drivers of value creation, done a thoughtful analysis of the challenges and opportunities emerging post-COVID and had a humbling reality check as we evaluated structural shifts in the labor market. The result is a decision to guide our Adjusted EBITDA outlook for 2022 to a level that creates room for continued uncertainty in dynamic labor markets and supply chains and provides room to opportunistically reinvest — in innovation, in renovation and in talent.
- In innovation, we will invest in data intelligence, growth channels/verticals like drug and beauty, and key marketing opportunities like retail media. Investments in innovation will deploy capital to accelerate growth in higher margin, higher return franchises most likely to thrive post-COVID with our most talented entrepreneurs.
- In renovation, we will step up recruiting investment, explore centralizing and outsourcing more back office infrastructure and deploy technology to help enable our most labor-intensive businesses like retail merchandising and demo/sampling. Investments will speed recruitment, boost retention and enhance labor productivity in our most COVID-impacted businesses.
- In talent, we will invest in wage hikes that we will only partially recover in price and begin to develop and deploy an Advantage Academy to provide a management career path for our full-time hourly associates.
Our commitment to you is to make decisions and build the business with long-term value creation principles in mind — always letting clients’ needs serve as the true north that guides our actions and investment. By being good stewards of our clients' businesses and our owners' capital, the results should take care of themselves over time.
While this is the last annual letter I’ll write as chief executive officer of Advantage before passing the baton to the next generation of amazing leadership at the company and transitioning to the executive chair role, I couldn’t be more excited for the company’s future. I cannot think of a better person to write the next chapter of the Advantage story than Jill Griffin, my successor as CEO and long-time partner in building the business. With Jill at the helm, I know I am leaving the business in better and more capable hands and am confident that under her leadership the best is yet to come for Advantage!
As I mentioned in my farewell note to associates (link here), it’s been my honor and privilege to work at Advantage for the past 32 years. This is a special company with special people. I am grateful to have had the amazing opportunity to build, learn and lead with so many great partners.
We thank you for your investment and continued support.
This communication contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about us, our future performance, our business, our beliefs and our management’s assumptions. In addition, we, or others on our behalf, may make forward-looking statements in press releases, written statements or our communications and discussions with investors and analysts in the normal course of business through meetings, webcasts, phone calls and conference calls. Such words as “expect,” “anticipate,” “outlook,” “could,” “target,” “project,” “intend,” “plan,” “believe,” “seek,” “estimate,” “should,” “may,” “assume” and “continue” as well as variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and they involve certain risks, uncertainties and assumptions that are difficult to predict, including those more fully described in our most recent annual report on Form 10-K and any subsequent periodic reports on Form 10-Q and current reports on Form 8-K. We have based our forward-looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made. We caution you that actual outcomes and results may differ materially from what is expressed, implied or forecasted by our forward-looking statements. Except as required under the federal securities laws and the rules and regulations of the SEC, we do not have any intention or obligation to update publicly any forward-looking statements contained in this document, whether as a result of new information, future events, changes in assumptions or otherwise.
Reconciliation of GAAP to Non-GAAP Financial Measures
This communication references certain financial measures not presented in accordance with generally accepted accounting principles (“GAAP”), including Adjusted EBITDA. These are not measures of financial performance calculated in accordance with GAAP and may exclude items that are significant in understanding and assessing Advantage’s financial results. Therefore, the measures are in addition to, and not a substitute for or superior to, measures of financial performance prepared in accordance with GAAP, and should not be considered in isolation or as an alternative to net income, cash flows from operations or other measures of profitability, liquidity or performance under GAAP. You should be aware that Advantage’s presentation of these measures may not be comparable to similarly titled measures used by other companies.
Advantage believes these non-GAAP measures provide useful information to management and investors regarding certain financial and business trends relating to Advantage’s results of operations. Advantage believes that the use of Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing Advantage’s financial measures with other similar companies, many of which present similar non-GAAP financial measures to investors. Non-GAAP financial measures are subject to inherent limitations as they reflect the exercise of judgments by management about which expense and income are excluded or included in determining these non-GAAP financial measures. Additionally, other companies may calculate non-GAAP measures differently, or may use other measures to calculate their financial performance, and therefore Advantage’s non-GAAP measures may not be directly comparable to similarly titled measures of other companies.
Adjusted EBITDA means net income (loss) before (i) interest expense, net, (ii) provision for (benefit from) income taxes, (iii) depreciation, (iv) impairment of goodwill and indefinite-lived assets, (v) amortization of intangible assets, (vi) equity based compensation of Karman Topco L.P. and Advantage’s private equity sponsors’ management fee, (vii) change in fair value of warrant liability, (viii) stock-based compensation expense, (ix) fair value adjustments of contingent consideration related to acquisitions, (x) acquisition-related expenses, (xi) costs associated with COVID-19, net of benefits received, (xii) EBITDA for economic interests in investments, (xiii) restructuring expenses, (xiv) litigation expenses, (xv) (Recovery from) loss on Take 5, (xvi) costs associated with the Take 5 Matter and (xvii) other adjustments that management believes are helpful in evaluating our operating performance.