Yahoo Finance Primo Water Corporation (NYSE:PRMW) Q1 2024 Earnings Call Transcript
Primo Water Corporation (NYSE:PRMW) Q1 2024 Earnings Call Transcript May 9, 2024
Primo Water Corporation beats earnings expectations. Reported EPS is $0.1901, expectations were $0.14. 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 First Quarter 2024 Earnings Conference Call. [Operator Instructions] Thank you. 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 first quarter 2024 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 first quarter earnings announcement released earlier this morning or on the Investor Relations section of the company's website at primowatercorp.com. In addition to slides accompanying today's webcast to assist you throughout our discussion, we have included a copy of the presentation in a supplemental earnings deck on our website. I am accompanied by Robbert Rietbroek, Primo Water's Chief Executive Officer; and 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 very pleased with our performance in the first quarter where we showed strength across the business and organization, with balanced and broad-based growth across all channels. Total revenue of $452 million increased 9.6%, consisting of volume growth of 5.1% and pricing growth of 4.5%. Revenue gains were driven by organic growth of 8.3% demonstrating the health of our consumer and category, as well as our leadership position across our portfolio. Adjusted EBITDA was $94 million, up 24% versus the prior year. And the resulting adjusted EBITDA margin was 20.8%, which gives us confidence in our full year margin expansion. Both revenue and adjusted EBITDA exceeded the high end of our guidance issued last quarter.
David will discuss more with the details of the quarter in a moment, but the results are direct reflection of our associates and their commitment to our customers. We remain frontline focused with a clear eye to growing the business profitably. I would like to publicly recognize and thank them for embracing our must-win priorities and for their dedication. From a macro perspective, our consumer demand is strong. Persistent concerns of inflation and high interest rates have not slowed demand for our products, and we continue to see the growth potential as a pure-play water company in the large, highly fragmented and growing North America water category. As consumers continue to prioritize healthier lifestyles, we offer high-quality drinking water solutions to meet the consumer wherever, whenever, and however they choose to hydrate.
Our split between residential and commercial customer base remains approximately 50-50, ensuring a healthy balance of revenue sources. When you look at the broader beverage category, we are pleased that we are growing revenue in both volume and price. This contrasts with beverage companies where growth has been driven by pricing with moderate or declining volume. Recently, you may have been hearing more about external contaminants and their impact on the U.S. tap water supply, especially when sourced from surface water. Given an expensive and sometimes aging water infrastructure, many municipal solutions are likely years away from meaningful change. Our large-format bulk water products provide an immediate path to ensuring high-quality drinking water for consumers.
The ongoing discussion about contaminants and the quality of the North American drinking water supply will likely make consumers more discerning in their hydration choices, presenting a clear opportunity for our water solutions. With that, let's discuss the specific progress of each of our must-win priorities that I identified last quarter. The first must-win is to provide a superior customer experience, with the goal to yield net organic growth and units or gallons consumed across our water portfolio. We are focused on acquiring and maintaining high-value customers in driving annual gallon growth, starts with the sale of water dispensers at retail, which drives our portfolio of water solutions, including Water Direct, Exchange, Refill and Filtration.
We have begun enhancing many aspects of our consumer touch points in order to improve their experience. An important step is expanding our coverage in our Customer Experience Center where we are digitizing and empowering the center with a customer-centric approach. In Q1, we meaningfully increased the number of hours and days that we interacted with our valued customers through voice, social, and chat and focused on our quality of service and rapid request resolution. Within our water.com website, we created more than 180 branch pages, with unique content and descriptions for improved search engine optimization and customer review interactions. Our mobile version called My Water+ has been upgraded with Spanish language capability with plans for an updated user interface experience and several more upgrades to come in the balance of the year.
We take great pride in our brand portfolio that includes 14 regional and national brands. These brands offer a variety of price tiers and water source types, whether it's Sparkletts on the West Coast, Crystal Springs in the East or Mountain Valley and Primo throughout the country, our consumers can expect high-quality and great-tasting water, sourced from one of our 70 domestic water sources. Consumers can select our products from multiple price tiers from a value price of $0.50 per gallon for water sold at a refill station, all the way up to our super premium Mountain Valley Spring water delivered in multi-format glass bottles direct to their door or sold at retail and at various on-premise locations. Our increased focus on Mountain Valley, which I spoke about last quarter, is delivering results.
During the first quarter, we increased our Mountain Valley retail revenue by approximately 57% over the prior year by expanding our glass production capacity. We have launched a convenient 9-pack single-serve aluminum bottle at Whole Foods stores throughout the country, and will begin shipping this product to our water direct customers later this month. Mountain Valley is already the number one brand of spring water sold in the natural foods channel and is now available in more than 12,000 stores in the US, including conventional retail stores. We continue to see high levels of demand for our 5-gallon, 2.5 gallon retail and on-premise multiserve and single-user glass products. 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 through one of our retail partners with our exchange locations or refill stations. We have an offering to meet each of our customers' needs and budget for what we call Water Your Way. The concept of partnering stretches across all aspects of our business, including associates, suppliers, customers and current and potential shareowners. Starts with our associates. I am proud of the work they do, and their commitment shows in every aspect of their efforts. Providing a safe environment is job one and is necessary for our associates to thrive. Additionally, we are investing in improvements that include work place, upgrades in offices, locker rooms, break room areas, parking lots and production and distribution areas.
Our associates live in the communities we serve and are passionate about the products and services we provide, and I want them to exhibit the pride in their company as they represent us in the community. As we conduct periodic surveys of our associates, we are noticing a positive shift in the culture and engagement, culminating with an improvement in retention rates. Community involvement includes providing support in times of need, like we did during the recent Texas wildfires. We embrace our partnerships and have been able to deepen our relationships as we span across all types of retail, including mass merchandisers, club stores, DIY and e-commerce with top-tier retailers like Walmart, Costco Home Depot Lowes and other prominent grocery chains throughout North America.
I've had the opportunity to meet with several of these world-class retailers in top-to-top meetings. And I found a strong desire on their part to drive more traffic to their stores with our exchange and refill stations and Mountain Valley spring water. During the first quarter, we were able to secure additional display racks within certain retail stores to support capacity in our exchange channel. Our focus on filling white space void and increasing capacity and in-stocks is having a noticeable effect by driving double-digit revenue growth as well as unit volume growth across the retail space. I have also been meeting with key members of our vendor community. As another area for growth, we see an opportunity to evolve our relationships with vendors from transactional to strategic partnerships, and to help deliver innovation in our product offering.
David and I had more than 50 interactions with investors and analysts in the first quarter. It has been enlightening and educational. These themes included positive feedback regarding our growth algorithm, the sale of our European assets, an appreciation for our strong balance sheet and low leverage and how we plan to deploy capital in the coming quarters. I'd like to personally thank the investor base for the level of engagement as sustaining, deepening and enriching these partnerships means, we can win for the long haul. The third must win is operational excellence. Specifically, ensuring that we have an optimized, organizational structure and operating systems to guarantee our associates' safety and well-being, delivering the highest quality products and service, and scale efficiently as we continue to grow organically and through acquisitions.
During the first quarter, we began implementing some six and seven-day delivery schedules as we prepare to head into our traditionally busy period of this summer. We were able to maintain our on-time in full rate of 93% in our water direct channel for the first quarter. Our refill channel had machine uptime of 97%, ensuring product availability for our customer base. Throughout our operations, we are driving integrated business processes. Successful implementation will provide technology enabled solutions to increase customer satisfaction and reduce overall costs. The latest example of our technology upgrade is the current rollout of a new fleet transportation management system, as part of what we call automatic route optimization 2.0, which is driving even more efficiencies in Water Direct and exchange.
During the first quarter, we increased our revenue per route by 8% and units per ounce per day by 5%, an indication of improved asset utilization, route density and volume and pricing improvements. The same principles are now being employed in the optimization of our refill routes, enabling us to extract more value from our team of technicians and service providers. We are focused on strategic CapEx investments that deliver high returns. The installation of the new high-efficiency production lines continues, and we expect our Ephrata, Pennsylvania production line to be complete in the second quarter in our Chicago facility later this year. The performances of the high-efficiency line installations are driving a reduction of water waste at the filler and can nearly double the output capacity of the bottling line.
Advancements in robotics can be utilized to assist some of the more strenuous aspects of our plant and distribution functions, freeing up our associates to focus on the quality aspects of their roles, and quality remains at the forefront of what we do. The team remains 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 remain committed to delivering the annual run rate savings of $20 million by year-end 2024. From a sustainability perspective, we strive to source and process responsibly to protect the planet we inhabit. We will continue to implement an environment strategy that is focused on sourcing water responsibly, converting our fleet to more eco-friendly propane, reusing, refilling and recycling of our plastic bottles and increasing the use of glass and aluminum is part of our product offering.
We offer high-quality healthy hydration solutions whether you're at home, work or on the go with water delivery, exchange and refill in our large-format returnable, reusable and refillable package that is 100% recyclable at the end of its life. I intend for us to remain a leader in this space, and I am proud of the results and improvements that will be contained in our 2023 sustainability report, which is expected later this quarter. I hope you can understand why I'm excited about the growth potential in front of us. We have a clear plan to deliver success with a good balance of volume and pricing. Our unique combination of associates, assets and resources are capable of delivering results that benefit all or stakeholders. Before I turn the call over to David to review our financial results in greater detail and provide our second quarter and full year 2024 outlook, I would like to once again thank all our Primo Water associates for their support and contribution to the excellent performance of the business.
With that, I'll turn the call over to David.
David Hass: Thanks, Robert. As a reminder, at the end of the year, we disposed of the majority of our international assets, and thus, our financial results discussed today are for continuing operations only. At no point, will we cover discontinued operations unless otherwise noted. The first quarter results of our continuing operations included revenue increasing 9.6% to $452 million, adjusted EBITDA increasing 24% to $94 million, with adjusted EBITDA margins of 20.8%, all metrics exceeded the high end of our most recent guidance. Within the 9.6% revenue growth, approximately 8.3% or approximately $34 million came from organic activity with the balance 1.3% or approximately $5.5 million coming from inorganic or acquired sources.
Primo Water's definition of inorganic contribution includes any tuck-in businesses that were closed less than 12 months ago. After 12 months, any acquired business becomes part of our normal contribution base. Separately, the 9.6% revenue growth irrespective of organic or acquired means can be split into approximately 5.1% related to volume activity and approximately 4.5% related to pricing activity. Volume contribution in this case, comes from both new customer additions or additional gallons consumed from existing customers or retail locations in our exchange or refill businesses, where actual customer counts are not directly known. Volume activity in the quarter was strong across all of our water services, indicating strength in our bulk-oriented offering as well as the complementary nature of our different price tiers.
We believe that volume across our water services will continue to be a primary indicator of business health versus overall customer accounts. We have expanded our channel disclosure to break out the price and volume splits for each of the channels versus prior year. A table of the results is included within our supplemental earnings deck. You will notice that volume gains occurred across each of the channels and price improved, except for the welcome price decline in water dispensers. Within our channels, we had strong revenue growth of 9% in Water Direct and Exchange and an 11% increase in our water refill and infiltration channel. The other water channel, which is primarily the retail and on-premise portion of Mountain Valley premium spring water was up 57%.
The water dispenser business, representing the sell-in of our units to the retailer grew 32%, driven by 57% from volume, offsetting expected lower wholesale prices as the tariff elimination works through our pricing architecture. Unit dispenser sell-in during the first quarter was highlighted by the performance of several of our largest retailers in the club, DIY and mass merchandising channels, the excess inventory created during the supply chain challenges of a couple of years ago is now largely behind us. The sell-in was driven by pricing rollbacks, return to shelf of dispenser SKUs and effective merchandising at the store level. Water dispenser sell-through was approximately 222,000 units in the quarter, up approximately 3%. As a reminder, our razor and 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 with 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 US government was initiated. We have recorded the refunds in the same manner as the original transactions. For the first quarter, we received $2.6 million. Approximately $214,000 is reflected in year-end adjusted EBITDA related to water dispensers sold to retail, $2.1 million is related to the water dispensers that we rent as CapEx, with the residual value and approximately $250,000 related to interest income or tariff balance paid to Primo Water.
When including last year's payment, cumulatively through the first quarter of 2024, we have received approximately $10.8 million. As we look further into the operational metrics and as Robert mentioned earlier, 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 Q1 of 2023 and revenue per route increased more than 8% compared to Q1 of 2023. Our scale and leverage continues to improve as we service more customers with higher volume per route.
Additionally, Water Direct customer retention increased to approximately 85% slightly higher than at the end of last year and versus the year ago period. Shifting to our balance sheet and cash flows. Our net leverage ratio at the end of the first quarter on a trailing 12-month basis stood at approximately 2.0 times our adjusted EBITDA for continuing operations. This is on par with our year-end figure. Similarly, our liquidity remains strong with approximately $498 million of cash on the balance sheet, approximately $525 million when taking into account the cash within our discontinued operations, and a fully unused cash flow revolver. In the quarter, we generated approximately $4.7 million of interest income, slightly offset by cash aid for unused revolver fees and other expenses on a full year basis well will be a net interest expense there we are quite pleased with low interest rate carried on our single use and our ability to generate interest income in today’s yield environment.
Our adjusted free cash results for the first totaled $28.4 million a year-over-year improvement of $39.4 million. The improvement was primarily driven by an increased earnings of our continuing operations business, reduced net interest expense, improved working capital, lower capital expenditures and the one-time gain of incremental cash proceeds in the quarter. Once again, as I transition into our 2024 outlook any forward guidance will be strictly for continuing operations. Discontinued operations will not be covered. To help bridge our 2024 guidance, a table of 2023's financial results for continuing operations by quarter has been provided in the appendix of our supplemental earnings slides. We are forecasting second quarter revenue guidance to be between $472 million and $482 million.
We expect Q2 adjusted EBITDA to be between $103 million and $111 million, with an implied adjusted EBITDA margin of 22.4%. The 22.4% adjusted EBITDA margin represents a 60 basis point improvement from the year ago period. For the full year 2024 forecast of continuing operations, we are increasing our revenue projection to be between $1.855 billion and $1.885 billion, with revenue growth at the midpoint of 5.5%. Similarly, we are increasing our full year 2024 adjusted EBITDA to be between $410 million and $430 million, with an implied adjusted EBITDA margin of 22.5% at the midpoint. The increase in guidance contemplates both the benefit from the strong start in Q1 as well as some balance of year benefit from our business optimization program.
The initial contribution from early cost reduction activities is approximately $2 million balance of year 2024 and approximately $4 million on a 2025 run rate basis. Neither guidance figure includes Water Direct tuck-in acquisitions that may occur across the balance of the year. We are forecasting 2024 CapEx guidance of approximately 7% of our revenue guidance range plus an incremental $22.5 million of strategic FX. We expect to return to 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 upgrading technology platforms, accelerating dispenser innovation, and continuing 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 US net operating losses, or NOLs, of which we have approximately 46 million US NOLs available for 2024. We expect the amount of NOLs available to be approximately $16 million in 2025 and $10 million per year in 2026 through 2029. For the full year 2024, we expect net cash interest expense 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. 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 still expect M&A tuck-ins to be toward the higher end of historical ranges during 2024. 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 from continuing operations of between $175 million and $185 million in 2024. A $5 million increase at the midpoint can be attributed to the free cash flow conversion of our increased adjusted EBITDA guidance along with the tariff amounts received during the quarter. This outlook continues to target 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, for the remaining balance of the business optimization program, we remain confident in achieving the $20 million improvement. Second, the remaining benefits from additional tariff refunds outside of the amounts mentioned and received during the quarter due to the uncertain timing of the government refund process. Third, the sale of discontinued operations, which includes Aimia Foods in the United Kingdom, our water business in Israel and our water and coffee businesses in the United Kingdom and Portugal. As previously communicated, these businesses will remain in discontinued operations until they are sold. They are being actively marketed and have received interest from several parties. With respect to our share repurchase program, we repurchased $9 million of common stock in the first quarter.
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, our improved financial profile and flexibility along with a compelling long-term growth outlook are a strong foundation for continued success. With that, I will turn the call back over to Jon for Q&A.
Jon Kathol: Thanks, David. 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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