Primo Water Corporation (PRMW) on Q1 2021 Results - Earnings Call Transcript
Operator: Good morning. My name is Felicia, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Primo Water Corporation First Quarter 2021 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. 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 2021 earnings conference call. All participants are currently in listen-only mode. This call will end no later than 11:00 a.m. Eastern Time. The call is being webcast live on Primo's website at www.primowatercorp.com and will be available for a playback there for two weeks. 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. Tom Harrington: Thank you, Jon, and good morning, everyone. This morning, we reported a solid start to 2021 as our financial results were at the high end of our expectations on both revenue and adjusted EBITDA. Our revenue of $478 million grew 1% compared to last year and adjusted EBITDA increased 8% to $76 million. Our strong results are impressive given that we were cycling the effects of pantry-loading that we experienced during the early days of the pandemic. A large portion of our revenue decline was from our non-core coffee service business. Our pure-play water businesses performed well. And once again, validates our strategy to focus on water solutions. During the quarter, the extreme winter weather events in February created a brief but challenging operating environment in several markets. I'm incredibly proud and appreciative of the way our teams in these markets responded, continuing to deliver healthy hydration solutions directly to the front door of our customers during a real emergency. Our commitment to providing customers with high quality water whenever, wherever, and however they want it, remains at the center of who we are. Jay Wells: Thank you, Tom, and good morning, everyone. Starting with our first quarter consolidated results. Revenue increased 1% to $478 million, compared to $474 million. The increase is due to the legacy Primo acquisition, increased demand for products and services from residential customers and at-home consumers, as well as foreign exchange, partially offset by lower revenue from coffee services and our Water Direct commercial customer base, both in our North America and rest of the world segments. Global revenue from residential customers and at-home consumers grew 25%, and global revenue from commercial customers declined by 23% in the quarter. A major portion of the commercial decline was from our office coffee services business, which was down roughly 50%. On a pro forma basis, global revenue decreased by 7% driven by lapping last year’s surge of volume caused by pantry-loading and the effect of lower volume in our commercial channel. Adjusted EBITDA increased 8% to $76 million compared to $70 million, the increase was driven by demand for products and services from residential customers and at-home consumers, continued operating leverage improvement, the legacy Primo acquisition and ongoing synergy realization, our adjusted EBITDA margin increased by 110 basis points to 15.9%, on a pro forma basis, adjusted EBITDA margins improved by 80 basis points, while total adjusted EBITDA was down slightly by 2% versus Q1 2020. Tom Harrington: Thanks Jay. Moving forward, we are focused on executing our differentiated Water Your Way platform in our key focus areas to drive the success of the business. Our priority has always been and will continue to be the health and safety of all of our associates, customers and suppliers. We will leverage our pure-play water model to drive organic revenue growth by approximately 5%. We will continue to enhance the customer experience to improving customer facing tools and building out a more diverse e-commerce solution. We are improving on My Water+ mobile app and e-commerce sites, developing meaningful relationships with new online retailers, engaging customers with new and exciting promotions and implementing rewards programs. We're developing new customer acquisition strategies to diversify our acquisition channels, further reduce our cooler quit rate and improve customer retention. In Europe, we are accelerating our Water Refill, Water Exchange and Water Dispenser businesses to diversify our customer base and capture growing demand in a residential market. Last month, we began to introduce dispenser sales in Europe. Although these sales are off of a very small base, initial excitement levels are high. Our existing presence and leadership position in Europe makes the rollout of these products and services relatively low cost. These efforts are well underway and we expect to see the benefits as the year progresses. Additional focused areas include protecting our efficiency improvements and leveraging our highly variable cost structure, remaining focused on the identified synergy actions related to the legacy Primo acquisition, identifying and executing highly accretive tuck-in acquisitions across North America and Europe, and seeking new ways to further improve our standing as an ESG and sustainability leader, including our new goal of achieving carbon neutrality in our global operations before this year is up. As Jay noted, we expect our consolidated second quarter revenue to be between $490 million and $510 million, and for our adjusted EBITDA to be between $90 million and $95 million. For full year 2021, we are forecasting revenue growth of approximately 5% and for adjusted EBITDA to be in the range of $380 million to $390 million. We expect to see a sustained strength from our Water Direct residential customer base and in other at-home channels and improvement from our Water Direct commercial customer base as we progress throughout the year. With that, I'll turn the call back to Jon to move us to the Q&A. Jon Kathol: Thanks, Tom, 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. Operator: And your first question comes from the line of Kevin Grundy of Jefferies. Kevin Grundy: Great. Thanks, and good morning everyone. Tom Harrington: Good morning, Kevin. Kevin Grundy: Hey, two questions for me, first on guidance and then second on capital deployment. So first with respect to the guidance that you maintain your revenue outlook took up by your EBITDA outlook, which is encouraging. It sounded like there'll be some incremental benefit from tuck-in M&A. Can you just talk about maybe some of the other factors driving your improved earnings outlook? Tom Harrington: Yes. Partially it would be the uncertainty about the first quarter. So we did do better than we expected, which gives us confidence as we move through the year. We're also encouraged by the early results in April, so just fortifies, if you will, strengthens our confidence in delivering against that commitment. Your comment on tuck-ins is also worthy of note. If you think about it, we've historically done $40 million to $60 million over the course of a year. So when we say we pulled them forward, we would still hit the high end of the range, but frankly do it in nine months or less, right, because we haven't done anything to-date. Kevin Grundy: Understood. Yes, I was going to pick up on that too. Just more broadly though with respect to accelerating tuck-in M&A and then with the buyback announcement, just to put a finer point on this, is it fair to say there is likely a longer-term timeline with respect to larger scale M&A? Because I asked that in the context, I think there was some ambiguity around the Nestle deal post the acquisition there from One Rock and Metropoulos that maybe there was some potential that there would still be some opportunity there. I suspect that that is not likely, if you given – particularly given your commentary around accelerated M&A, and then the buyback announcement. If you could just confirm that and then relatedly maybe just talk about the cadence of tuck-in M&A and buybacks in your outlook, and then I'll pass it on. Thanks. Tom Harrington: I'll take the first one and then Jay cover the backend. The former ReadyRefresh business, BlueTriton, continues to make strategic sense. But frankly, it's a nice to have, not a must have for us. And we of course will maintain our financial discipline. But the good news is there are good things happening in our company, we have a robust tuck-in pipeline of $40 million to $60 million, Jay can talk about the cadence. We approved the share repurchase of $50 million, which is a way to return capital to our shareholders. We're continuing our dividend, we're going to invest in CapEx, and we believe as customer – as countries come out of the lockdown, that we'll see a nice rebound on commercial, I'll give you one example, in the month of April in Israel, small 5% of our business overall, we enjoyed 60% top line growth and they're open. So, that gives us real confidence in how our business complete. So we're focused on what we do, which is get that 5% top line, manage our cost, enjoy the benefit of the returning as lockdowns change over time. Jay Wells: Yes. And on cadence of tuck-ins, it's definitely going to be back half of the year weighted, we've got a very good pipeline going now, but it takes time to get through due diligence and finalizing the deal. So wouldn't expect to close any thing if much, first half of the year, it will really be the second half of the year. And with regards to the guidance we give, I really don't include tuck-ins in my guidance until the acquisitions are completed. So my guidance currently does not include the benefit of any tuck-ins. Kevin Grundy: Okay. Very good. Thank you guys. Good luck. Tom Harrington: Thank you. Operator: Your next question comes from the line of John Zamparo of CIBC. John Zamparo: Good morning, everyone. Tom Harrington: Good morning, John. John Zamparo: I wanted to start with customer behavior and I would like to get your thoughts on whether you think the additional residential customers you've added over the last call 12 to 14 months can be sticky in a post pandemic environment, I appreciate the color on Israel, that's interesting. But you also referenced the slightly higher quit rate, but just would like to get your thoughts on any insights you have on customer stickiness for the longer-term. Tom Harrington: Yes. If you look at our quit rate, it was 19.8% versus, like, 19.6% something. So it's really flat on a year-over-year basis. We're not seeing any behavior differences in terms of how customer – residential customers perform post-pandemic and frankly pre-pandemic, other than our investments in customer service and the app and all the delivery side of our business has generally made customers stickier. And then on the commercial side, it really comes down to when do they reopen, right? So we see the small business reopening, but Jay's point, there are still restrictions on how many people can sit in a barbershop, how many people can sit in the dentist’s shop, so while they're open, the consumption is a little bit lower. So that to us is tailwinds that should help us go forward. So we're pretty pleased with where the residential and the commercial customer bases sit today. And frankly, April only improves… Jay Wells: John, you look at April, that's one thing I'm sure we're going to get asked the question on. North America Water Direct and Exchange is up a little over 13% in April, and that's with the residential being up a little over 4% and commercial as more normalized is up, plus 25%. If you look at Europe, which is also normalizing, I mean, our Europe business is up over 30%. And if you look at Israel, that has fully reopened, April was up more than 60%. So we are seeing residential now that we've done lapping Q1, going into April and our residential growing up 4% to 5%, that’s showing we're maintaining our customers and growing that business and the commercial reopenings are starting to show and our volume now that we've – we're done lapping Q1. John Zamparo: Okay. That's very helpful. Thank you for that. And then my follow-up is on the e-commerce side. I'm curious what you can disclose here either on percentage growth or percentage of total sales, but we just appreciate any more color on the e-commerce side of the business, whether internally or through your distribution partners? Thanks. Tom Harrington: Yes. That business today is small. So we could double the business and frankly it would be very little impact on us. But importantly, and we referenced this in our last call. We've made some investments on digital leadership, so we're upping our game on all things digital, which will manifest itself in our existing sites, be it water.com or sparkletts.com, as an example, but it will also extend into our legacy Primo e-commerce transactional sites, which is a way for us to sell more dispensers. So we're bullish about where it goes, but we have to build all the capabilities to take advantage of this and scale it. And we'll scale it, frankly, both in North America and across our Eden business in Europe and Israel. John Zamparo: Okay. Understood. Thank you very much. Tom Harrington: Thanks, John. Operator: Your next question comes from the line of Daniel Moore of CJS Securities. Tom Harrington: Good morning, Dan. Jay Wells: Hello, Dan. Daniel Moore: Good morning, Jay; good morning, Tom. Thanks for taking the questions. Maybe just a little bit more color in the Europe. It sounds like you would maybe describe it at least as having stabilized in terms of the commercial business. Talk about the green shoots you're seeing there and sort of sequential growth month-to-month, you mentioned year-over-year, but just any more color there would be helpful. Tom Harrington: Yes. So if you go back, in the first part of January it was challenging because it was a spike in Europe, post the Christmas and New Year's holiday. So – and then it recovered and then there was because of some growth in cases you saw a little bit more lockdowns. March appears to have stabilized, we're pleased with where we are in April, but year-over-year comp of course it was bleak last year as you'll recall. And right now that's pretty encouraging, because that's coming out of the Easter holiday in Europe, right? So we didn't see meaningfully different lockdowns. So we think the business, and we see it by country, it's recovering country-by-country, they're all a little bit different, Eastern Europe is performing a wee bit better than Western Europe. And we know that over the course of the next quarters that we'll expect to grow our business in Europe, based on the experience of last year. Israel, it's true that's been the single biggest change, right? But they're open, right? So it really depends on how quickly people open, take it to California, right? So if California opens on June 15, it really depends on how they define open, but that on the North American site gives us some optimism about how the commercial business will perform here in the states. Jay Wells: And on rolling out our 4-R model to Europe, we're progressing really well, in April, we started selling dispensers in Europe early stages, but that is good that we've begun it. Exchange locations, last quarter talked about rolling out in the Baltics and Russia, and we filled in some gaps and now have right around 1,000 units out in market there. We're seeing encouraging traffic and conversion of our e-commerce websites in Europe. So overall, you asked the sequential trend, we're still not seeing anything dramatic year-over-year growing 30%-plus is key, but we're seeing the right trends start to take root over in Europe. Daniel Moore: Perfect. And one more. You were very clear in your comments as it related to the ReadyRefresh assets. It's greatly appreciated. If the stars were to align at some point, how much due diligence would you have left to do, in other words, how quickly could a deal come together? Jay Wells: Dan, I think we've provided all the comments that we want on this topic. We're really excited how our business is performing and everything we have in front of us. And I think we've commented all we want to do on that opportunity. Daniel Moore: Okay. Lastly, just your ability to attract the necessary labor and drivers without much inflation, if the recovery accelerates more than expected? I appreciate the color. Tom Harrington: Yes. In terms of labor, there are pockets that are more challenging than others. We have a fully developed talent acquisition team that are focused on the hot spots. And they were less impactful today in Europe, but certainly in the U.S. we have those pockets, and we're taking the appropriate steps to pay the correct wages to attract. And to Jay's point, we're taking pricing activities to make sure we cover the cost of inflation. So we think that we have the right actions, tactics in place so that we can continue to provide customers a service they expect. Daniel Moore: Perfect, thanks again. Appreciate it. Tom Harrington: Thanks Dan. Operator: Your next question comes from the line of Derek Dley of Canaccord Genuity. Derek Dley: Hi, guys. Tom Harrington: Hello, Derek. Derek Dley: Good morning. Just one quick one for me, as most of them have been answered. But with the sort of shift back to some commercial volumes coming back online here in quite a strong way, are there any other incremental costs, I guess, outside of labor that you would need to add in marketing with something? You guys mentioned you were going to have a bigger push on the commercial side, pre-COVID? Tom Harrington: Yes, there's a couple of points here. So let's talk about the route operations and the customer delivery. We have certain expectations in terms of productivity, and you'll recall last year we took actions to downsize very quickly. We'll put those back slowly so that we maintain productivity levels that we enjoyed when we took the actions last year. That's a key driver of our cost structure. We have said and we will continue to build our investment on sales and marketing. So as the markets open, there's going to be an opportunity, and we'll make investments back into sales and marketing appropriately. Particularly, if you think about the marketing side and as we invest and build out this digital platform, we're going to need to invest some resources there, all around communicating to customers Water Your Way at the appropriate price for new customer acquisition cost. Derek Dley: Great, thank you very much. Tom Harrington: Thanks Derek. Operator: And your next question comes from the line of Andrea Teixeira of JPMorgan. Tom Harrington: Hello, Andrea. Andrea Teixeira: Thank you. Good morning. Hi. Jay Wells: Good morning. Andrea Teixeira: Good morning. I just wanted to follow up a little bit on the guidance. So I appreciate you raised – obviously, your synergies have been coming in better than anticipated and faster. So again, on the top line I obviously understand the level of uncertainty of course, for the commercial business, but it seems as if April has been coming in strong. So help us understand how to bridge, like, the commercial against the residential. Residential continues to be keeping its momentum. So is that just to see how the second half is going to play out before it's too early to say and that's the reason why you kept your 5% top line growth? Help us bridge that. Jay Wells: There's a couple, both top line and bottom line. Let me see if I can answer that question. Keep in mind, as part of our full year guidance, it is also lapping Q1, which we were lapping the pantry-loading. Both Tom and I have talked a lot about that. So that's pushing down our full year average. I think if you look at our guidance for Q2, we've guided about 10% growth as we are lapping the largest amount of shutdowns, lockdowns that happened last year. So when you look at the average of very complex first half of the year, we think 5% top line growth is important. And you look at the EBITDA side, we are basically within our forecast, which shows roughly, if you take the middle of the range, $20 million of EBITDA growth. You could say $10 million is synergies and $10 million is true growth. And the pantry-loading that we saw probably took, I mentioned it last quarter, I mentioned it again this quarter, high-single-digit EBITDA type effect. So when you add that on, over all, I think we're very happy with both where our top line and bottom line guidance as well at the same time, as Tom just mentioned, spending more behind sales and marketing to make sure we continue the organic growth we're talking about. Andrea Teixeira: That's wonderful. And then on the announcement to put back the buyback program, reenact it, like, relative to your priorities, obviously, understand the transformation M&A that we discussed before would be a top priority, and then tuck-in and then buybacks? Is that the way we should be thinking? Tom Harrington: I think if you think about 2021, we were cautious about tuck-ins coming out of 2020 because we didn't have clarity about how the world would develop. So we're going to take that $40 million to $60 million, as we said earlier, you'll see that in the back half, which is a fulsome opportunity for us in terms of how much we can actually execute. So I wouldn't want to spend much higher than that over, let's call it, a six-month period, frankly. So we want to make sure that we do all the things we're supposed to do to properly onboard new customers. Jay Wells: And you look at our liquidity position for the year, the free cash flow we're going to generate, even after spending at the high end of our tuck-in range, we have the extra cash to look to do opportunistic share buyback programs and that's where we're going to deploy our excess cash that we're going to generate this year. Andrea Teixeira: Perfect. That’s all. I’ll pass it on. Thank you. Tom Harrington: Thank you. Operator: Your next question comes from the line of Pavel Molchanov of Raymond James. Tom Harrington: Good morning, Pavel. Pavel Molchanov: Good morning. Thanks for taking my question. I wanted to follow-up on M&A. You obviously have a pretty diverse geographic footprint, and you can either add additional assets in existing areas of operation or potentially going into a brand-new geography, especially in Europe. Do you have a preference for either one as you allocate that tuck-in capital? Tom Harrington: There's a couple of ways to think about it. Some will be driven by local market execution. So do we have the right team in place that can handle whatever size acquisition that is? We certainly prioritize returns first, right? So the best returns go to the front of our list. But if you look – so we'll have several in the U.S. We also will have some in Europe. And we will extend to, hopefully, adjacent geographies. So it's very easy for us to then hop the border, particularly in Europe, as an example. So we're looking at opportunities in the Eastern European-ish market, in real time. Pavel Molchanov: Understood. Let me also follow up on the comment about kind of reopening lockdowns easing. At least in North America, the one exception to that is Canada, with Ontario, Quebec, Alberta, a couple of other provinces in pretty harsh lockdowns at the moment. Are you noticing any worsening in those markets in the March/April time frame? Tom Harrington: No, it's actually been better, a little bit, right? So it's still in the, to your point, pretty much full lockdown. But we're beginning to see some green shoots on residential customer base. So we're also making some investments there. And that would go back, if you go back to the beginning of no-contact delivery and how consumers value that. So we're seeing some of that in Canada. But we expect Canada will be slower based on the timing of when they all get – go through the vaccination process, if they choose to. Pavel Molchanov: Understood. Thank you very much. Tom Harrington: Thank you. Operator: And your next question comes from the line of Carla Casella of JPMorgan. Tom Harrington: Good morning. Jay Wells: Good morning. Carla Casella: Hi, sorry about that. Tom Harrington: No problem. Carla Casella: Good morning to you. You've done the recent capital structure transaction with the bond issue. Anything on your plate in terms of further capital structure? You mentioned the buybacks, but anything on the debt side? Jay Wells: We are now very happy with our capital structure. Our debt both the euro and the U.S. tranche, are all long maturity at good rates. So that is what we're looking to do. We have a little bit drawn down on our cash flow revolver, and we'll use that off and on to do tuck-ins, operate the business and that will move up and down a little bit. But on the senior notes, no plans to do anything more. Carla Casella: Okay. And then also on your cost of goods sold and input costs, can you give us a bit of a breakout of your components of COGS, how much of it is related to the resin or raw material costs versus labor versus transportation? Tom Harrington: Our new-bottle purchases, which is a big component, are capitalized and they're capitalized because we get 50 trips and they last for quite a long time. So it's not in cost of goods. And if you think about 50 trips on the price of a bottle, it's really de minimis in terms of its impact to us in terms of any resin changes. And you will remember we also have energy surcharge and delivery fees that help offset energy cost changes and general inflation. So we've managed to avoid – we've implemented that policy, and it's worked quite nicely for us to insulate those swings. Carla Casella: Okay, great. Thank you. Tom Harrington: You’re welcome. Operator: And there are no further questions at this time. I'll turn the call back over to Mr. Kathol. Jon Kathol: This concludes Primo’s first quarter results call. Thank you all for attending. Operator: And you may now disconnect at this time.PRMW Ratings Summary
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Primo Water Corporation’s Upcoming Q3 Results Preview
RBC Capital analysts provided their outlook on Primo Water Corporation (NYSE:PRMW) ahead of the upcoming Q3 results, expecting net sales of $580 million (vs. Street’s $582 million) and EBITDA of $115.2 million (vs. Street’s $117.3 million).
The analysts believe underlying topline momentum remains solid, but higher FX headwinds (particularly on the euro) are likely to put pressure on EBITDA results. Thus, while the analysts expect topline in the middle to the higher end of the company’s guidance ranges, they model EBITDA towards the lower end of the ranges.
Given higher FX headwinds, offsetting solid underlying trends, the analysts expect the company to reiterate its 2022 guidance, which includes: (1) revenues of $2.204-2.243 billion, and (2) adjusted EBITDA of $415-$425 million.
What to Expect From Primo Water Corporation’s Q4 Results?
Analysts at Deutsche Bank provided their outlook on Primo Water Corporation (NYSE:PRMW) ahead of the company’s Q4 results, expected to be reported on Feb 24.
According to the analysts, the company’s share price decline of around 17% since its investor day in mid-November is a result of persistent inflationary headwinds and deteriorating operating conditions from disruption caused by the Omicron variant in late November/December.
While October trends began the quarter strong from a top-line perspective, the analysts believe that renewed COVID-19 infections in late November into December likely weighed on the company's ability to fully service consumer demand.
The analysts expect higher costs from inflationary headwinds both in COGS (resins/packaging; shipping; manufacturing overheads) and in SG&A (outbound shipping, temporary labor, incentives) pose a downside risk to management's Q4 EBITDA guidance and to consensus estimates.
