Yahoo Finance Primo Water Corporation (NYSE:PRMW) Q4 2023 Earnings Call Transcript
Primo Water Corporation (NYSE:PRMW) Q4 2023 Earnings Call Transcript February 22, 2024
Primo Water Corporation misses on earnings expectations. Reported EPS is $0.12 EPS, expectations were $0.18. Primo Water Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Primo Water Corporation's Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] I'll now turn the call over to Jon Kathol, Vice President, Investor Relations. Please go ahead.
Jon Kathol: Welcome to Primo Water Corporation's fourth quarter 2023 earnings conference call. All participants are currently in listen-only mode. The call is being webcast live on Primo Water's website at primowatercorp.com and will be available there for playback. This conference call contains forward-looking statements, including statements concerning the company's future financial and operational performance. These statements should be considered in connection with cautionary statements and disclaimers contained in the safe harbor statements in this morning's earnings press release and the company's annual report on Form 10-K and quarterly reports on Form 10-Q and other filings with securities regulators. The company's actual performance could differ materially from these statements, and the company undertakes no duty to update these forward-looking statements, except as expressly required by applicable law.
A reconciliation of any non-GAAP financial measures discussed during the call with the most comparable measures in accordance with GAAP when the data is capable of being estimated, is included in the company's fourth-quarter earnings announcement released earlier this morning and on the Investor Relations section of the company's website at primowatercorp.com. We have also included a deck on our website that was designed to assist you throughout our discussion. I am accompanied by Robbert Rietbroek, Primo Water's Chief Executive Officer; David Hass, Chief Financial Officer. With that, I will now turn the call over to Robert.
Robbert Rietbroek: Thank you, John, and good morning, everyone. I'm excited to speak to you today as the new CEO of Primo Water and to be a part of what I believe is the premier and only publicly traded pure-play water company. I joined Primo Water in January of this year, bringing more than 25 years of leadership experience at Fortune 200 consumer goods companies, including PepsiCo, Kimberly-Clark, and Procter & Gamble. For the past five years, I served as Senior Vice President and General Manager of Quaker Foods North America, a reporting segment of PepsiCo. The team has been tremendous in their welcome and the pride of Primo Water is abundantly evident. I would like to extend a personal thank you to all our associates as well as our Board for their warm hospitality and openness.
I would also like to thank my predecessor, Tom Harrington for his efforts and guidance as a dedicated leader of Primo Water, including CEO for the last five years. He should be recognized for delivering strong 2023 results, and we wish him all the best in his well-deserved retirement. With that, let's shift gears to the topics for today's call. I'll provide some initial observations from our ongoing onboarding, including where we have strength as well as high-impact opportunities. After that, David will cover the highlights of our recently completed transaction. Then he will review our financial performance in greater detail and outline our 2024 outlook. Then I'll be back to share my priorities or what I call our must wins, which have been developed to capture embedded opportunity and further enable profitable growth delivery.
We'll then open it up to your questions. Since arriving seven weeks ago, I've spent quality time with our valued associates and customers. I have also connected with members of the financial community in addition to reviewing last year's perception study. I look forward to hearing for more of you in the next several days and in the coming months as we begin to attend investor conferences and events. I'm of the opinion that Primo Water is set up for growth as I've had the opportunity to learn more about our company's assets, resources, and practices across five broad areas. Specifically, one of our associates; two, the scale and breadth of our offerings; three, our brands, for our water stewardship practices and sustainability; and five, our production and distribution capabilities.
These observations support the ability to fulfill our growth potential as a pure-play water company in the large, highly fragmented, and growing North American water markets. First, let's talk about our associates. They're passionate about what we do. They're embedded in our communities and live where we serve our customers. In the last seven weeks, I've met with numerous associates while visiting branches and distribution facilities in some of our largest markets in California, Texas, Georgia, and Florida. I observed firsthand that our associates take the idea of serving the customer to a level which I believe sets us apart in the marketplace. Continuing to empower our associates will be critical to providing superior service to our customer base across our water offerings.
Second, our constantly expanding scale and breadth in North America is quite impressive. Leveraging our geographically diverse footprint, we can serve customers at an individual delivery address in our Water Direct business or work with leading retail partners to provide direct-to-retail distribution. This allows Primo Water to supply a broad array of water solutions efficiently. I believe we can use our scale to drive a higher level of operating rigor that will allow us to further differentiate us in the highly fragmented marketplace. Starting with our water dispensers, our Water Your Way platform corrects customers to our hydration solutions by either renting a dispenser directly from us or buying online or at one of our 10,900 water dispenser retail locations.
Both are means to drive recurring consumption of water, whether it's through our Water Direct, exchange or refill channels, we have over 1.5 million Water Direct customers, 17,500 water exchange locations 3,500 water refill stations, and over 12,000 locations that sell our Mountain Valley premium spring water. Additionally, we service more than 100,000 customers in our growing water filtration business. These services in aggregate sold more than 1 billion gallons of water last year. With the total addressable market of nearly 29 million North American households, we have an opportunity for additional organic growth in both residential and commercial channels. We support our ongoing marketing and customer recruitment efforts to direct-to-consumer connections with our websites, mobile apps, and partnerships with major club stores, retailers, and prominent grocery stores.
We target quality customers through in-store events, customer referrals, and old-fashioned door-knocking. In addition to organic growth, M&A is a key part of our DNA and integral to our long-term strategy. My initial impression is that our ability to successfully integrate synergistic acquisitions as a core competency. Our research indicates that customers acquired through M&A have high retention rates because they understand the benefits of our services and have accepted hydration solutions as an important part of their lifestyle. Third, as a career consumer goods leader, I recognize our portfolio of brands have a long history in legacy. In fact, it's one of the reasons for my interest in coming to lead Primo Water. Our portfolio of 14 brands include some of America's most long-standing and beloved beverage brands.
Dating as far back as 1871 with Mountain Valley, 1888 with Hinkley Springs, and 1925 with Sparkletts. These brands are shining examples of water products that benefit the health and wellness of our customers. I believe we have the potential to be even more impactful with the right combination of customer marketing, communication, and connectivity. We own amazing assets like water.com, agua.com, our mobile MyWater+ app, and other brand and domain names with direct-to-consumer and retail access that enables a connection with our consumers. Fourth, a truly unique aspect of our company is our commitment to sustainability, ESG, and being good stewards of the environment. I love our company's commitment to accountability. For example, reducing plastic in the environment.
One of our bottles replaces as many as 1,500 single-use plastic bottles from entering the waste stream. By reusing and recycling our large-format bottles, we can help close the loop on plastic waste. By sourcing and processing responsibly, we aim to protect the planet we inhabit. To achieve this, we are implementing an environmental strategy that is focused on three priorities: First, reducing climate change impacts through greenhouse gas emissions management; second, sourcing water responsibly; and third, integrating circular economy principles in our business models. We thank all our associates for their continued hard work and dedication and our investors for their ongoing support as we continue our sustainability journey. The fifth area of observation relates to the footprint of our manufacturing and supply chain operations, which put us within reach of the majority of population in North America.
The vast network has grown significantly over the years through a combination of organic and inorganic growth. While our expansive production and distribution network sets us apart in terms of our ability to meet our customers' needs. I see opportunity to optimize this footprint to improve operating efficiencies, better serve our existing customers, and reach new customers across North America. This includes investing in physical production assets, distribution capabilities, and technology suites to support more efficient planning. Let me discuss each of these in a bit more detail. First, we continue to upgrade and automate our production facilities, further ensuring the safety and well-being of our associates and delivering enhanced growth and efficiency over the long term through manufacturing best practices.
I recently had the opportunity to see this technology in action at our largest bottling facility located in Los Angeles. This new bottling line is remarkable. It nearly doubles the production, reduces waste, and improves the safety for our associates through robotics. We will have six of these lines installed at various locations by the end of this year. Second, fleet enhancements and upgrades are an important part of what we do. We are in a continual state of recycling out the oldest portion of our delivery fleet and replacing them with new environmentally friendly or propane-powered vehicles and benefiting from improved efficiency and lower repair and maintenance costs from this transition and increasing our own primary fleets. Third, to embed digitization efforts throughout the organization, we are leveraging artificial intelligence and data analytics in areas like forecasting as part of our planning processes for production and sales and operational planning, also known as S&OP, utilizing tools like salesforce.com and Tagetik, we can take real-time information and do things like employing precision marketing to generate customer contacts as part of improving the overall customer experience.
These tools are part of a broader effort that will allow us to reduce cost, increase working capital efficiency, and improve our return on invested capital. I hope you can understand why I'm excited about the growth potential in front of us. We have a unique combination of associates, assets, and resources that are capable of delivering results that benefit all our stakeholders. I will now turn the call over to David to review our financial results in greater detail and provide our 2024 outlook. And once again, I would like to thank all our Primo Water associates for their support and contribution to the excellent performance of the business.
David Hass: Thanks, Robert. On behalf of all Primo Water Associates, I would like to welcome you to the team. As you likely saw last quarter, we announced the sale of a significant portion of our international businesses. I am pleased to report that the sale of these assets closed as expected on December 29 of last year. Highlights of the completed European transaction include $575 million gross proceeds in an all-cash purchase price, which represents an attractive premium valuation multiple of approximately 11x trailing 12-month Q2 adjusted EBITDA for the business. Upon closing the transaction, earlier this quarter, we repaid the outstanding balance of our cash flow revolver of $132 million, resulting in a net leverage ratio of approximately 2.1x adjusted EBITDA.
Longer term, we expect our net leverage ratio to remain under 2.5x. After the repayment of the cash flow revolver, we have $508 million on our balance sheet and $283 million of availability under our revolver with the balance of the $350 million revolver, supporting standby letters of credit. Additionally, the Board authorized an incremental $25 million on top of the previous $50 million share repurchase program for an aggregate authorization of $75 million. This deal is the first of several transactions that will occur in 2024 as we execute our plan to sell the remainder of the international businesses, which includes EMEA Foods in the United Kingdom, our water business in Israel, and our water and coffee businesses in the United Kingdom and Portugal.
At the completion of the transaction to sell our European businesses, we have begun the pivot from a global enterprise of more than 2.2 million water-direct customers to a North American-focused business that includes a water-direct customer base of over $1.5 million. As a reminder, on a go-forward basis, these businesses will remain in discontinued operations, and for 2024, will be actively reported as such until they are sold. I will now transition from the sale of our European business and into our Q4 and full-year 2023 results. To provide clarity to our investor base, in addition to the exhibits in the press release, which specifically address the new or go-forward Primo Water results, we are providing a breakdown of the combined performance for both continuing and discontinued operations in aggregate.
Beginning on Slide 6, I would like to provide a quick highlight of three key financial achievements before going into greater detail on our financial performance and our 2024 guidance. In 2023, on a combined basis, we delivered revenue of $2.35 billion, adjusted EBITDA of $477 million, and adjusted free cash flow of $184 million, with all three results exceeding our most recent guidance. For each financial item, the presentation helps break out the results between continuing and discontinued operations. First, we are very pleased with the overall combined financial performance, including record results with our adjusted EBITDA margin and significant improvement year-over-year in our adjusted free cash flow generation. Second, within our continuing operations, we have a much stronger financial profile for future success and remain excited about our focus going forward solely within North America.
And last, to provide clarity on the financial profile of the remaining businesses held for sale within discontinued operations, their aggregate full-year 2023 revenue was approximately $333 million with adjusted EBITDA of approximately $34 million. With that, let me transition into the financial performance for both the fourth quarter and full year 2023 in a bit more detail. The fourth quarter results of our combined continuing and discontinued operations included revenue increasing 10% to $585 million, adjusted EBITDA increasing 11% to $119 million, with adjusted EBITDA margins of 20.4%. The fourth quarter results of our continuing operations, which align with our go-forward businesses, included normalized revenue increasing 8% to $439 million, adjusted EBITDA increasing 7% to $95 million, and adjusted EBITDA margin of 21.6%.
For the full year 2023, the results of our combined continuing and discontinued operations included revenue increasing 6% to $2.35 billion, adjusted EBITDA increasing 13% to $477 million, and adjusted EBITDA margins of 20.3%. Excluding the impact of foreign exchange, normalized revenue increased 8% for the year. Normalized revenue excludes the exit from the single-use retail bottled water business in North America and the exit of our business in Russia. Combined adjusted free cash flow was $184 million. For the full year 2023, the results of our continuing operations included revenue increasing 5% to $1.8 billion, adjusted EBITDA increasing 11% to $381 million with adjusted EBITDA margins of 21.5%. Excluding the impact of foreign exchange, normalized revenue increased 8% for the year, driven by a 7% increase in price and a 1% increase in volume.
Within continued operations, we had strong revenue growth of 8% in the Water Direct and Exchange and an 18% increase in our water refill and filtration channel. This offset the expected revenue decline in our Water Dispenser business related primarily to lower wholesale prices due to the elimination of tariffs with dispenser unit sales relatively steady on a year-over-year basis. During 2023, our water dispenser sell-through was approximately 1 million units with 264,000 units selling through in Q4. Our razor blade business model includes two approaches of selling the razor, the rental of water dispensers to residential and commercial customers in our Water Direct business and the sale of water dispensers through retail partners and online.
Both approaches enable growth in Water Solutions and contribute to our predictable and recurring revenue growth. We have been particularly focused on growth within our brick-and-mortar retail partners, where we have greater visibility into the connectivity to our water solutions and where the connectivity is higher than through e-commerce. As discussed in previous calls, our water dispenser category was previously under a 25% import tariff but was reclassified last year and a refund process from the U.S. government was initiated. We have recorded the refunds in the same manner as the original transactions. Through the end of 2023, we have received approximately $8.2 million of tariff refunds. Of the $8.2 million, approximately $4.5 million is reflected in year-end adjusted EBITDA related to the water dispensers sold to retail, $3.1 million is related to the water dispensers that we rent as CapEx with the residual value, and approximately $587,000 related to interest income for the tariff balance paid to Primo Water.
Through year-end, approximately $8.2 million is reflected in our adjusted free cash flow that we will discuss in a moment. As we look further into the operational metrics, our commitment to improving the customer experience continues to result in improved on-time in full or OTIF rates. The ability to serve our customers in the most efficient manner possible, is a critical driver of both our short and long-term profitability and our automated route optimization ARO tool continues to yield efficiencies. In North America, units per route per day increased approximately 5% compared to Q4 of 2022 and revenue per route increased more than 8% compared to Q4 of 2022. Our scale and leverage are becoming more evident as we service more customers with higher volume per route.
Additionally, North America Water Direct customer retention increased to approximately 85%, slightly higher than last quarter in the fourth quarter of 2022. The -- as part of our ongoing efforts to optimize our operating network, at the end of the fourth quarter, we sold our Irvine, California property, which did not have any active distribution or business activity. This sale generated $21 million in net cash proceeds in 2023. The proceeds further bolster our cash on balance sheet and is available for capital deployment. Taxes on the sale of this property will be due in 2024 and are reflected in our 2024 cash tax estimates. Shifting to adjusted free cash flow. Our combined continuing and discontinued operations for 2023 full year totaled $184 million, outpacing our previous guidance of $160 million, driven by increased earnings, improved working capital, incremental tariff receipts and lower capital expenditures.
Within the combined adjusted free cash flow of $184 million, continuing operations contributed approximately $158 million and discontinued operations was $26 million. We will discuss our 2024 adjusted free cash flow outlook in a moment. As I transition into our 2024 outlook, as a reminder, any forward guidance will be strictly for continuing operations or what we refer to as the new Primo Water. Discontinued operations will not be covered to help bridge our 2024 guidance, a table of 2023's financial results by quarter has been provided in the appendix of our supplemental earnings slides. We are forecasting first-quarter revenue guidance for continuing operations to be between $435 million and $445 million. We expect Q1 adjusted EBITDA for continuing operations to be between $85 million and $91 million with an implied adjusted EBITDA margin of 20%.
The 20% adjusted EBITDA margin represents a 170 basis point improvement from the year-ago period. For the full-year 2024 forecast of continuing operations, revenue is projected to be between $1.84 billion and $1.88 billion, with revenue growth in the range of 4% to 6%. We expect full-year 2024 adjusted EBITDA to be between $402 million and $422 million with an implied adjusted EBITDA margin of 22.2% at the midpoint. Neither guidance figure includes water-direct tuck-in acquisitions that may occur across the year. We are forecasting 2024 CapEx guidance of approximately 7% of our revenue guidance range, plus an incremental $22.5 million of strategic CapEx. As a reminder, 2024 is the last year of our previously announced strategic growth investment program and the $22.5 million represents the North American amount within our previously communicated $30 million for 2024.
We expect to return our total CapEx spend of approximately 7% of revenue in 2025. Key initiatives to be funded from our 2024 CapEx plan include installing high-efficiency water production lines, reducing waste and increasing productivity, building a more environmentally friendly fleet, and expanding our private fleet to improve the efficiency of our product distribution, driving organic growth through digitization, accelerating dispenser innovation and driving growth in refill and filtration with refreshed signage and branding of our existing units. Full-year 2024 cash taxes are expected to be approximately $30 million to $40 million. This anticipates utilization of U.S. net operating losses or net NOLs, of which we have approximately 46 million U.S. NOLs available for 2024.
We expect the amount of NOLs available to be approximately $16 million in '25 and $10 million per year in 2026 through 2029. For the full-year 2024, we expect cash interest of approximately $30 million to $50 million -- our interest expense is tied to our two senior note debt facilities with very low-interest rates of approximately 4.2% with maturity dates of 2028 and 2029. The year-over-year reduction in our interest expense is primarily from two items: first, no contemplated usage of our cash flow revolver in 2024, which on a year-over-year basis is a reduction of approximately $13 million in interest expense, which will be offset by unused withdrawal fees and second, our ability to earn interest income on the proceeds we received from our European sales.
We do not currently anticipate drawing on our cash flow revolver. Additionally, we will take steps to maximize the interest income yield throughout 2024 but could experience reduced income opportunities if market available rates decline related to any macro Fed or bank rate environment decisions. We currently expect M&A tuck-ins to be toward the higher end of historical ranges during 2024. Our cash flow and balance sheet enable us to simultaneously return value to shareholders through regular quarterly dividends and opportunistic share repurchases while continuing to invest in internal and external opportunities that will further strengthen our operations and drive long-term growth. Combining all of these factors, along with the core health and cash generation capacity of our business model, we are forecasting adjusted free cash flow of between $170 million and $180 million in 2024.
This figure represents adjusted free cash flow solely from our continuing operations. This outlook also targets our commitment to replace the adjusted free cash flow that was tied to the assets sold and those held for sale in our discontinued operations. The following three items have not been included in our 2024 guidance due to the uncertainty and timing with each discrete outcome. First, benefits from the previously announced business optimization program, targeting $20 million improvement on a run rate basis by the ending of 2024; second, benefits from additional tariff refunds due to the uncertain timing of the government refund process; third, the sale of discontinued operations, which will be reflected independently from our continuing operations.
With respect to our share repurchase program, we repurchased $21 million of common stock across 2023. Share repurchases from our increased authorization will continue across 2024. And Additionally, yesterday, our Board of Directors authorized a quarterly dividend of $0.09 per common share, a 13% increase over last year, which continues our path to the multiyear dividend step-up with an increase in our quarterly dividend per share of $0.01 for the third consecutive year. In closing, we are very pleased with the financial performance and the future prospects of the continuing operations of Primo Water. And with that, I will now turn the call back to Robert.
Robbert Rietbroek: Thanks, David. With that, let me now preview our must-win priorities. Over the next several quarters, we will provide an overview of the specific initiatives that support each of these focus areas and the progress we're making to deliver on our goals. The first must-win is to provide a superior customer experience with the goal to yield net organic customer base growth and units consumed across our water solutions. We will focus on increasing the number of high-value customers and driving annual unit growth of our gallons and delivered hydration solutions. I realize that in order for us to reach our full potential, we must have a consistent path toward increasing our net organic base. Activities to deliver this include delivering a frictionless end-to-end customer experience, where it is easy to do business with us.
We will be enhancing many aspects of consumer touch points in order to improve the customer experience, including upgrading our water.com website to a one-stop shop where you can learn, shop, and buy within our water solutions. We will be providing consistent enhancements to our MyWater+ app, the mobile version of water.com, and digitizing and empowering our customer experience center with embedded voice, chat and social capabilities with a 24/7 customer-centric approach. The second must-win is to be the preferred water solutions partner. We meet the end consumer across numerous channels like direct-to-consumer delivery or to one of our retail partners with our exchange locations or refill stations. We have an offering to meet each of our customers' needs and budgets or what we call Water Your Way.
Simply put, we want Primo Water to be their preferred water solutions partner. We embrace our partnerships with top-tier retailers like Walmart, Costco, Home Depot, Lowe's, and other prominent grocery chains throughout North America. These relationships present an opportunity to joint business planning to increase both our presence as well as increased household penetration and resulting volume all creating meaningful connectivity across our portfolio. The concept of partnering stretches across all aspects of our business, including associates, suppliers and customers. Sustaining and enriching these partnerships means we can win for the long haul. I've seen this successfully done in other companies, and I see the same opportunity here. The third must win is operational excellence, specifically ensuring that we have the ideal organizational structure and operating system to guarantee our associates' safety and well-being, delivering the highest quality product and service and scale efficiently as we continue to grow organically and through acquisitions.
The Primo Water team is focused on delivering the previously announced business optimization program that will enhance not only our productivity but also lower our overall cost to serve, while continuing to offer customers an exceptional experience. We have a clear plan, and we remain committed to delivering the annual run rate savings of $20 million by year-end 2024. In closing, our improved financial profile and flexibility along with a compelling long-term growth outlook are a strong foundation for continued success. We are deeply focused on our must wins and embracing the renewed energy in the organization. With that, I'll turn the call back over to Jon for Q&A.
Jon Kathol: Thanks, Robert. During the Q&A, to ensure we can hear from as many of you as possible, we would ask for a limit of one question and one follow-up per person. Thank you. Operator, please open the line for questions.
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