Yahoo Finance

Christopher Growe

Thank you, Dave, and welcome to all of you joining the call today. I will tick through our first quarter 2025 performance by segment, discuss our cash flow and capital structure and reinforce Dave's guidance commentary.
In Branded services, we generated $257 million of revenues and $28 million of adjusted EBITDA, down 9% and 19% on a year-over-year basis, respectively. Results were driven by the aforementioned intentional client exits and client loss, partially offset by continued cost discipline. Additionally, we continue to see challenges from CPG spending pullbacks most notably in our omni-commerce marketing business. In Experiential services, we generated $221 million of revenues and $12 million of adjusted EBITDA, down 1% and 28% on a year-over-year basis, respectively. We experienced the ongoing impact from last year's customer loss as well as the headwinds from staffing issues, as Dave mentioned earlier. Demand for our services in this segment remains healthy as exemplified by 3% year-over-year growth in events per day excluding the client loss on execution rates of approximately 93%.
In retailer services, we generated $218 million of revenues and $18 million of adjusted EBITDA, down 3% and 7% on a year-over-year basis, respectively. This segment was impacted by staffing challenges as well as softness in our agency business. We are starting to see dollars flow into advisory services and feel good about our staffing recovery efforts.
Moving to the balance sheet and cash flow. In the first quarter, we continued our capital discipline and made progress opportunistically reducing our debt levels. We voluntarily repurchased $20 million of debt and $1 million of shares at attractive levels. Our net leverage this year was approximately 4.4x adjusted EBITDA, including discontinued operations, higher than year-end 2024 as expected. Our new ERP system rollout in Q1 went smoothly overall, but resulted in a use of cash as we anticipated. We ended the quarter at approximately 70 days of sales outstanding, up from 61 days at the end of 2024 due to the system implementation. This was more than expected, and our team is quickly addressing this and other minor inefficiencies. In fact, we already see improvements to reporting, forecasting and transaction management in Q2 which gives us confidence that DSOs will come down meaningfully in the back half of 2025.
Most notably in the first quarter, we reduced restructuring and reorganization costs by $16 million on a year-over-year basis. and $10 million on a quarter-to-quarter basis. We're optimistic that these costs will continue to be lower over the balance of the year as we move along our transformation journey. We ended the quarter with $121 million of cash on hand. We view the current debt and equity trading levels as attractive opportunities for value creation with our excess cash. As Dave highlighted, we are lowering our guidance to reflect the current market environment. I will focus my comments on the quarterly weighting and performance and touch on balance sheet and cash flow guidance.
As expected, seasonality this year is exacerbated by a few discrete items. These items include retailer inventory destocking trends, weather pattern, fewer working days and a late Easter, all impacting Q1 and as well as less transformation expense and known business wins reinforcing in the back half of the year. We are also proactively implementing cost reduction programs across the company. Consequently, we continue to believe that this year will be more back half weighted relative to 2024.
Turning to cash flow in 2025. We continue to expect adjusted unlevered free cash flow to be over 50% of adjusted EBITDA. With the potential for upside from improved working capital management as we more fully utilize our new systems and build back from our ERP implementation earlier in the year. We continue to expect interest expense to be $140 million to $150 million and CapEx to be $65 million to $75 million in the year. Depending on how the macroeconomic environment evolves, we will selectively consider adjusting our discretionary CapEx spend. We plan to use balance sheet cash to reinvest in the business and opportunistically reduce debt, subject to market conditions in order to track towards our long-term target of less than 3.5x. We would also note that from a liquidity perspective, we ended the quarter with an untapped revolving credit facility of nearly $400 million. we feel confident in our liquidity position and ability to manage the macroeconomic climate.
Thank you for your time. I will now turn it back over to Dave.

David Peacock

Thanks, Chris. Despite the challenging quarter and volatile operating backdrop, I remain pleased with our team's efforts and transformation progress. We are committed to investing behind our strategic initiatives and look forward to being the best equipped service provider for our clients and customers. while generating meaningful cash flow for our shareholders once we emerge from our transformation.
Operator, we are now ready for questions.

Question and Answer Session

Operator

(Operator Instructions) Joseph Vafi with Canaccord.

Joseph Vafi

Thanks for the opportunity to ask a couple of questions. I thought we'd first maybe check in on the macro here, we're kind of halfway through the second quarter, any kind of notable changes that you're seeing kind of real time versus kind of the Q1 print?
And then secondly, if we could maybe drill down a little bit on some of the labor challenges in kind of more specifically, certain geos or areas of the country and kind of a little more detail on the progress to get those fixed.

David Peacock

Joe, thanks. This is Dave. Let me probably answer both questions with the same information. We put a task force together pretty quickly and actually had anticipated a little kind of bumpiness relative to labor in the first quarter as we were making some changes both in some of our event managers and our experiential business, but also on our talent acquisitions team in both some in process and some in leadership. And the good news is there's yielding from that work. Already in this quarter, we're seeing much better hiring rates, if you will. And some of the anomalies that we saw in certain regions and certain geographies are starting to smooth out a bit. And wherever we see dispersion relative to our ability to acquire talent in a certain geography. We've got, I think, a nimble enough and agile enough team now to go address it pretty quickly. And we've always had in our business.
I mean if you look at our business, you've had kind of better or worse hiring in different areas. It was a little more exaggerated in the first quarter. But safe to say that we feel very good about how things are playing out in the second quarter and it's important to note as well is that those businesses that are most exposed to labor that we have, actually have more seasonality in second and third quarter. So we have an ability to make up more ground to the degree we can continue this hiring pace.

Christopher Growe

Joe, I might add a comment there. For example, on experiential our execution rate in the first quarter was around 93%. And that -- so that's an improved rate. We're seeing that in a good place. However, it's just not where we thought it should be or where it could be. as Dave mentioned, due to some of the hiring constraints there. So I think we see that improve in Q2, not only the higher but then the kind of knock-on effect for execution, we should see a much stronger performance, especially in experiential.

Operator

William Reuter with Bank of America.

Unidentified Participant

I have to -- so the first -- the issues with staffing in the previous question, you mentioned event managers talent acquisition. You said some in process and some in leadership -- have there been meaningful increases in your labor costs that have allowed your staffing levels to improve over the last month or 2? Was that part of the problem? And what types of labor inflation are you seeing?

David Peacock

Thanks for the question. We are not seeing, what I would call, differentiated labor costs from first quarter to second quarter necessarily. We're seeing labor cost inflation in line with the macro market for high-volume talent. A lot of that is a byproduct of regulatory minimum wage laws in select states. And then obviously, you get some markets that are more competitive and have been for a long time. One example might be like the Southeast of the U.S. But yes, from quarter 1 to quarter 2, we're not seeing a real difference. And it wasn't our wages that was the issue. I think it was a little bit on our side relative to our talent acquisition strategy.
And some of the changes we were making. And like I said, we signaled the soft first quarter in the fourth quarter call, 3 or 4 months ago. And part of that was knowing kind of we're going to go into this quarter a little bit of risk on the labor side. But the good news is the initiatives that we've put underway are really starting to take hold.

Unidentified Participant

Got it. And then in terms of the debt reduction in the quarter, -- did you repurchase term loan? Or was it bonds? And I guess, how are you thinking about that? You mentioned something about kind of like a balanced approach, I think, in the capital allocation discussion at the end of the prepared remarks. But just thoughts on debt reduction versus share repurchases?

David Peacock

Yes, we are -- we did repurchase some debt in the quarter. Obviously, we have a narrow window to do that. And I think going forward, as you know, we're in a year, which we're not going to generate a lot of incremental cash. We are focused on our -- on balancing the cash we have available to use that to repurchase debt. So I think it -- what I'd just say is we're going to be balanced around debt and cash. And I think we'll be kind of focused on making sure we utilize our cash appropriately for that.

Unidentified Participant

Okay. And was it the term loan or the bonds that you repaid or repurchased in the quarter?

David Peacock

We repurchased the bonds.

Operator

Faiza Alwy with Deutsche Bank.

Faiza Alwy

I wanted to ask about -- you mentioned the macro impact. And you alluded to Chances. So curious if you could talk about what you're seeing there and whether you're starting to see increased business as it relates to private label. And then maybe on the brand side or I don't know, maybe it impacts all segments, but what are you seeing? Are there specific categories where you've seen a change in consumer or retailer or manufacturer the demand?

David Peacock

Yes. It's a good question and an important one. So one, we all see that consumer sentiment is, I think, the lowest it's been in 12 years. and consumer sentiment is affecting their shopping behavior. You saw retail sales that were below expectation. For instance, in February, March, they rebounded, but they were on large ticket items largely and we deal with fast-moving consumer goods. So with kind of limited discretionary spend, we're seeing in certain categories where consumers may fear tariffs or fear inflation or there's even some cases, somewhat exaggerated inflation in the media. They'll start buying up they're stocking up in those categories.
And that just affects overall movement of goods across all categories. You've had retailers destocking a bit in other words, reducing inventory. And again, that goes back to depending on the category. In the categories where we operate being fast-moving consumer goods, you would see a little bit of destocking there even though you may find other categories like electronics or large durables, that there was actually more inventory just trying to get ahead of tariffs.
So part of that is how they're leveraging their overall working capital and their inventory dollars. As it relates to our business, the macro that we've seen is that reduction in orders because we're a commission-based business and much of our branded services area. And then -- on the private label side, you do see an increase in shift in the private label in the macro when you look at the IRI or I'm sorry, the data. But we are exposed more to regional grocery and a lot of that private label growth is occurring with larger retailers, mass merge, club stores. We do have some exposure to, but not as much exposure as you have to the grocery channel and some other channels like that.
So I'd say on the other side, when you look at the macro and the reason we gave kind of broader guidance as it relates to our revised outlook is we do provide services that are really necessary for retailers and consumer products companies. And we can help them navigate this difficult time. And so the discussions we're having with a lot of our clients and customers are just around that. With uncertainty in the market, can we provide some level of certainty whether that's in an expense line item or in a specific service to help them navigate and manage the unexpected. And so we can do that with our supply chain services as you referenced, some of our private label advisory for retailers and then some of the merchandising work as a lot of consumer products companies and retailers are looking at SKU rationalization, vetting create work for our teams.
So we gave a little bit of a broader outlook, just range out as far as outcomes for the year because it really is unknown how the consumer and then thereby the CPGs and the retailers are going to behave. But we do see some opportunity to leverage our services and where they intersect with the specific needs of the consumer segment right now.

Christopher Growe

I can add a little bit of color here just in relation to just a couple of things quickly. We did see in our -- in retailer inventories, about a 1.5 point drag on orders in the first quarter. We have the benefit of some data from both our retailer and our branded services segment that allowed us to get a pretty good read on that. And just an item just to give you some perspective for what we're seeing across the business. And then just to follow on Dave's comment in this environment, private label supply chain as a service. There's -- these are services that are a nice level offset or balance to some of the leadership might be seeing on the retailer inventory destocking side. So we are seeing some improvement there and some nice growth there. And then underneath that, of course, I would just say we're seeing some good demand signals on the experiential side, for example, where we're seeing good demand, we'll just get the execution up, get the hiring up, we've got the kind of demand there to -- if we can get the hiring up to achieve that.

Faiza Alwy

All right. Great. That's very helpful. And then just on the guided software, just given where we came in, in the first quarter, -- just help us with a little bit of the quarterly phasing because my impression is that we should be expecting a much stronger EBITDA growth in the back half. And I think you've talked about that as being more sort of new business related. So just give us an update on that in terms of how you're expecting the year to play out from here?

David Peacock

Yes. So obviously, a little softer first quarter here overall. But a couple of things that come to mind in relation to that. So I think about the seasonality factor, we'll be a little more exaggerated first half, second half. There's 1 phenomenon we talked about last quarter, as we talked about our outlook for the year, which was a much heavier level of shared service cost increases year-over-year in the first half. A lot of that's driven by IT in our new systems, and that is -- that persists, if I can say it that way. Obviously, with a little softer revenue in the first quarter, those costs are not changed. So as a result, it did weigh on Q1. Those do come down or actually come down in the second half of the year, and we should be in a much better place in that regard and should allow for stronger growth.
Yes, I just want to also add, at the same time, Faiza, we are going through a pretty aggressive look at our cost structure here. And I think there's some cost reduction programs and ideas we have to push through the business that we're executing now. that I think will be very helpful for the second half as well. So a little more exaggerated first half, second half. And then you're going to see the lower shared service costs and the cost reduction programs really play out in the second half of the year.

Faiza Alwy

And then maybe just last one. Just with all of the tech transformation that you're going through -- like how are you ensuring that there is no execution issues that come from it. We've often come across situations where as you go through this IP implementation that issue. So just curious how you're managing through that.

David Peacock

This is Dave. The team 1 has been really well organized and has done a great job, especially with our ERP implementation, obviously, bring in a top-tier systems integrator -- so we're leveraging all the external resources as well as having, what I'd say, expertise within our business and experience having done this before, and frankly, more complex businesses. When you do something like this and you undergo this effort, in the manufacturing environment, which I've lived through in my past or a retail environment where you've got stop ledgers and vast lung data and all kinds of things. inventory across thousands and thousands of SKUs.
There's a lot of risk. In our business, while it's never simple, it's a little bit easier and a little less risk. Where you're seeing it manifest is on the cash flow side, which we know is short term because it has to do with billing cycles and how we're able to actually use a system that's actually going to help us compress our time to invoice and improve our DSOs over time. But you see that hiccup in the first quarter or 2 when you're implementing.
And then as it relates to visibility, I can tell you that the visibility we'll have within a granular level of our business is going to be much greater than where we've been with disparate systems. And we're already seeing the benefits of faster and richer data. So what used to take several hours for our team and FP&A to run a full run of our financials now can take minutes. And all these things will come with efficiencies over time. And then I'd also want to add that as we're implementing these new systems, and I'd say there's really kind of think about it in a few ways, there's foundational systems like our which was finished last year, our ERP and then our human capital management system, which will project kicks off in the second half of this year, it's a smaller effort but an important 1 for our people.
And then we've got our cloud migration and the data lake that we've constructed that will enable us to perform all kinds of AI use cases and then leverage the speed of data. These will come with efficiencies in the overall business, some of which Chris just mentioned that we're trying to pull forward as we look to realize cost benefits this year. And then as we implement new more modern systems over the next 2 to 3 years will actually be shutting down systems that will save us the expense that we've added to our P&L relative to newer systems. So you've got the benefit of ultimately having older systems being decommissioned, effectively paying the price for the new systems and then ultimately, the efficiencies within the business come to streamline operations and better data visibility.

Operator

William Reuter with Bank of America.

Unidentified Participant

Just a couple of follow-ups. The first, is there any way to figure out what the impact of staffing shortages would have been on EBITDA in the first quarter had you had sufficient labor?

David Peacock

Yes. I mean I think if you look at the first quarter and I look at our execution rates, for example, across our retailer and experiential segment, I would just say the vast majority -- actually probably more than the decline in EBITDA is associated with the staffing shortages. So when I think about other cost pressures or other items that are affecting those segments. I think the main driver of the weakness in decline in profitability was related to the staffing shortages.

Unidentified Participant

Got it. And then secondarily, -- is the destocking that you had previously -- or you saw, I think you mentioned a 1.5% increase headwind in the first quarter. Are you continuing to see destocking into the second quarter? Or is that largely complete?

David Peacock

I know that it certainly got better as the quarter went on, but I want to just say, I've not seen like April data yet, for example, to say that it stopped or is not occurring. I just want to also add that we saw this a year ago in the first quarter, and it went even lower this quarter -- this first quarter of '25. So I think what we're seeing is just a tighter lock on inventory by the retailers that is causing the year-over-year effect. My point then would be that it's unlikely we're going to see that continue at certainly the same rate in Q2, but I just have not seen the data yet to validate that.

Christopher Growe

Yes. The other thing to think about William is you've got an Easter shift, which was pretty substantial. -- and that can play a part in a retailer and how they stop especially fastening consumer goods that have a much more efficient supply chain and they tend to carry less inventory overall. So theoretically, you should see more of a pushing out of that volume by -- with consumer demand in April and then shipments starting to kind of catch up again.

Unidentified Participant

Got it. And then a last 1 for me. And this kind of a big picture question. Branded services, the breakdown of consumer products versus food companies, is there kind of a rough estimate you could give me on how that breaks down.

David Peacock

And you said food versus like beverage, household products is what you're getting at?

Unidentified Participant

Well, I was thinking more like food consumables that I think would have largely more consistent demand versus I'm sure there's consumer products in there as well that -- and when I say consumer products, I'm thinking about, I don't know, batteries or nonconsumables of that nature.

David Peacock

Yes. I mean the vast majority of our portfolio is going to be in the food and look all Personal Care. It's 70% food. And then we've got a very strong presence within the personal care and household goods segments as well. So we're not as exposed to things like electronics or kind of these other consumer -- obviously, not apparel and things like that. It's much more fast moving consumer goods.

Operator

There are no further questions at this time. I want to turn the call back over to Dave Peacock for closing remarks.

David Peacock

Yes. We thank everybody for joining the call, and we appreciate your attention and your questions, and we look forward to connecting with you for second quarter.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.