Primo Water Corporation (PRMW) on Q4 2021 Results - Earnings Call Transcript

Operator: Good morning. My name is Pam, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Primo Water Corporation's Fourth Quarter and Fiscal Year 2021 Earnings Conference Call. I would now like to turn the conference over to Mr. Jon Kathol, Vice President of Investor Relations. Please go ahead. Jon Kathol: Welcome to Primo Water Corporation's fourth quarter 2021 earnings conference call. All participants are currently in listen-only mode. This call will end no later than 11:00 AM 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 2 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 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 full year and fourth quarter earnings announcement released earlier this morning or on the Investor Relations section of the Company's website at www.primowatercorp.com. I am accompanied by Tom Harrington, Primo's Chief Executive Officer, and Jay Wells, Primo's Chief Financial Officer. As part of this conference call, we have included a deck online at www.primowatercorp.com that was designed to assist you throughout our discussion. Tom will start today's call by providing a high-level review of the fourth quarter and our progress on Primo's strategic initiatives. Then, Jay will review our segment level performance and will discuss our fourth quarter performance in greater detail and offer our outlook on the first quarter and the full-year 2022 before handing the call back to Tom to provide a long-term view ahead of Q&A. With that, I'll now turn the call over to Tom. Thomas Harrington: Thank you, Jon, and Good morning, everyone. Before I review our performance for Q4, I want to share how proud I am of the efforts of the team and pleased with everyone's continued commitment to safety and customer service as our teams have once again responded to the challenges presented by the pandemic. Our teams remained focused on inspiring healthier lives by providing Water Your Way. Turning to the fourth quarter. We achieved higher revenue driven by strong customer demand, particularly in our Water Direct and Exchange businesses and implemented several pricing actions. We continue to deliver growth on Mountain Valley, America's premium spring and sparkling water brand. Our water customer base increased organically, and our customer retention rates improved. We did experience challenges like most companies where inflationary cost pressures dominated the landscape. To address the higher costs, we implemented a series of pricing actions across our customer base. These pricing actions were insufficient to fully offset higher than forecasted costs for raw materials in our North American single-use plastic bottled water business, ocean freight container rates and tariffs incurred during the quarter. And as a result, further pricing actions have been implemented in Q1, which should allow us to offset costs with pricing. Despite the cost headwinds, we continued to invest in the customer experience, which resulted in improved service levels and higher customer retention rates. Our global customer retention rate improved by 60 basis points to 86.4% compared to the prior year, which compares favorably to other subscription-based companies. As Jay will outline later in his remarks, the combination of the improved pricing, continued demand for our products and services and improvement in customer retention gives us confidence in guiding to our full year 2022 adjusted EBITDA of between $410 million and $420 million. During the quarter, revenue increased 7% to $518 million and adjusted EBITDA increased 5% to $98 million after normalizing for this 53rd week in 2020, driven by higher demand for our products and services and improved pricing led by our Water Direct and Exchange businesses. Water Direct and Exchange grew 7%, even as B2B customer volume was softer than forecasted due to a slower B2B recovery which we attribute to the effect of Omicron variant of COVID later in the quarter. The Water Dispenser segment declined as a result of higher retail price points and less promotional activity, driven by tariffs and the substantial increase in ocean freight experienced during the quarter. We expected to see relief from the tariff in the fourth quarter as well as a refund. Unfortunately, that did not happen. Despite these headwinds, we sold approximately 900,000 dispensers in 2021 and are optimistic regarding the potential for tariff relief and refund of last year's tariffs at some point in 2022. Ocean freight container rate have begun to stabilize. And we believe these costs will more over time, which we expect to support our return to growth in our dispenser business. Our water dispenser sales provide an important entry point for consumers to enter the water category, where we can capitalize on our Recurring Razor-Razorblade revenue model. The attractiveness of recurring purchase behavior is the ability to continually generate order sales as part of our Customer for Life strategy. As a reminder, our internal research indicates that approximately 60% of respondents surveyed are new to the water category. Of those likely to become a future dispenser customer, research indicates their water purchasing preference as 45% for Water Direct, 30% for exchange and 25% preferred water refill. We should continue to capture our fair share of this growth as a Razor-Razorblade model remains one of our strategic advantages. Turning to operating expenses. Overall profitability was adversely affected by higher operating costs during the quarter. As I mentioned earlier, the impact of higher costs outpaced our internal forecast. After averaging roughly a 4% increase in costs over the first 3 quarters of the year, we saw input costs increased more than 9% in the fourth quarter when compared to the prior year in the U.S. To address the higher costs, we implemented a series of pricing actions across our customer base. These pricing actions were insufficient to fully offset higher than forecasted cost during the quarter and further pricing actions have been implemented in Q1, which should allow us to offset costs with pricing. As we worked our way through the fourth quarter, we started to see an increase in the number of COVID cases across our operations. Similar to the Delta variant in the third quarter, we saw hundreds of routes affected by Omicron. Fortunately, COVID case rates appeared to have peaked and have dropped significantly as we move through Q1. We continue to work diligently to meet the current levels of demand, especially in our North America Water Direct and Exchange businesses. Despite these challenges, we were able to improve our service metrics as we worked our way through the quarter. The improvement of the customer experience and the push to get closer to full staffing levels were a key focus as a result of conscious investment choices during the quarter. Although these actions cost more in the short term, we believe the long-term benefits of improving the customer experience will outweigh the short-term cost supported by our continued improvement in customer retention rates. Globally, our water customer base grew 2% to nearly 2.3 million customers in 2021. As I mentioned last quarter, the addressable 3 and 5-gallon water category of U.S. residential households alone is estimated to be between $22 million to $25 million and continues to grow. The residential opportunity for increased sales of 3 and 5-gallon returnable water remains a top priority, as the category has 2 to 3x the market potential versus today's installed base. And we are focused on increasing household penetration through execution of our Razor-Razorblade model. As it relates to our efforts in ESG, we remained focused on elevating our position on environmental responsibility and finding new ways to honor our commitment to protect the environment, provide quality drinking water and managed sustainability. In December, we achieved carbon neutrality across our global operations. Major projects funded as a part of our carbon offset strategy include funding water infrastructure improvements in Sub-Saharan Africa, repairing and drilling new boreholes in small rural communities. By providing clean water, communities no longer need to purify water through boiling. This alleviates pressure on local forest, the predominant source of firewood and reduces greenhouse gas emissions. We've also funded water filtration improvements in Guatemala. Waterborne disease has been identified as a national priority in Guatemala, given the high incidence of disease and chronic malnutrition. This project distributes water filters and stoves that enable access to clean water and improve cooking conditions by increasing fuel efficiency and reducing harmful indoor air pollution. It is the first gold standard water treatment or cook stove project in the country. The project so far has benefited over 500,000 people. In December, in 2020, we became the first company to certify a spring water source under the Alliance for Water Stewardship standards and certified 3 additional spring water sources in 2021. And we will continue to transition more trucks within our fleet away from diesel-powered vehicles to more environmentally friendly propane powered vehicles. During our Q3 earnings call and again at our Investor Day, we discussed the next phase of our transformation as a pure-play water company and leader in ESG. And now that we've begun the process of exiting the small format single-use bottled water retail business in North America. Although it is a relatively small part of our overall business, exiting this category will make us a higher margin and more environmentally friendly business. The increasing effect of one-way single-use plastic bottles in our landfills and waterways have driven us to focus on a more environmentally friendly returnable bottle business. Our 3-gallon and 5-gallon bottle provides an attractive alternative to combat this challenge. Adjusting for the exit of the category, we expect revenue growth in 2022 of 9% to 10%. In addition, during 2022, we expect to achieve our targeted $40 million to $60 million range of M&A tuck-ins. And as I mentioned earlier, our pure-play water model gives us the confidence to set our full year adjusted EBITDA outlook between $410 million and $420 million. I'd like to turn the call over to Jay to review our fourth quarter and full year financial results in greater detail. Jay Wells: Thank you, Tom, and Good morning, everyone. Starting with our fourth quarter consolidated results. Revenue increased 3% to $518 million compared to $505 million. Excluding the impact of foreign exchange and the 53rd week, revenue increased by 6%. The gains were largely driven by growth in our Water Direct and Exchange businesses, partially offset by declines in our water refill and water dispenser businesses. Adjusted EBITDA was flat to last year at $98 million. Excluding the effect of the 53rd week in the prior year, adjusted EBITDA was up 5% in the quarter. As Tom discussed, the effect of higher cost, coupled with softer B2B volume drove lower-than-expected profitability. In the later stages of the quarter, we saw the effects of the Omicron variant, which caused B2B volume to come in lower than expected. The higher COVID rates also affected our route drivers and caused us to increase spending to deliver our goods and services to customers. These costs, along with a push to get to full staffing levels were partially offset by increased pricing taken during the fourth quarter. The major buckets of higher costs include material costs associated with our North America single-use water retail business, Ocean Freight and labor. As Tom mentioned, we had forecasted and priced for higher costs. However, these costs came in considerably higher than expected. The additional pricing taken in the fourth quarter and again in the first quarter should allow us to now offset these increased costs. Turning to our segment level performance for the quarter. North America revenue increased 1% to $387 million compared to $385 million. Excluding the impact of foreign exchange and the 53rd week, revenue increased by 6%, driven by growth in our Water Direct and Exchange businesses, partially offset by lower revenue from our water refill and water dispenser businesses. Adjusted EBITDA in North America increased 4% to $85 million. Excluding the impact of the 53rd week, adjusted EBITDA was up 10% in the quarter. Turning to our Rest of World segment. Revenue increased by 9% to $131 million. Excluding the impact of foreign exchange and the 53rd week, revenue increased by 9%. The increase was driven by growth in residential customers with revenue from residential customers being up 15%. Revenue from B2B customers up 5% for the quarter as the performance of our Water Direct B2B customer base remains tied to the relative level of the return to office in each of the countries we serve. We continue to work towards an efficient and low-cost rollout of our products and services for residential customers in Europe to further diversify our customer base and better balance the customer mix. Adjusted EBITDA in the Rest of World segment decreased 9% to $20 million as government subsidized furlough programs are ending in many European markets. And we're investing in sales and marketing to drive volume and revenue growth. Turning to our liquidity position and balance sheet. We ended the quarter with a cash balance of $128 million and available net borrowing capacity on our cash flow revolver of $80 million for a combined total liquidity position of $208 million. Our net leverage ratio is 3.8x. And as a reminder, we are now targeting a net leverage ratio of less than 2.5x by 2024. Looking to the first quarter, based on the information we have available to us as of today, we currently expect consolidated revenue from continuing operations to be between $510 million and $530 million. We also expect that our first quarter adjusted EBITDA will be in the range of $80 million to $90 million. For the full year 2022, organic revenue growth is projected to be 7% to 8% and overall revenue growth is projected to be 9% to 10% adjusted for the exit of the North America single-use retail water business and including the revenue from the tuck-in acquisitions made during 2021. As Tom mentioned, the exit of the North America single-use retail water business is moving quickly. In 2021, these products accounted for revenue of approximately $142 million. We now expect that 2022 revenue for this product line to be about $40 million, with minimal effect on adjusted EBITDA. We still expect to be out of this category by midyear. We are forecasting our annual adjusted EBITDA to be between $410 million and $420 million. We also expect around $10 million of cash taxes, $60 million of interest as well as capital expenditures of approximately $200 million. The capital expenditure figures include incremental spending as we discussed during our recent Investor Day, which is being used to support our growth outlook and EBITDA margin expansion. The multiyear incremental spending will begin in 2022 and will show returns in subsequent years. Key initiatives to be funded from the incremental CapEx include driving digital growth, leading dispenser innovation, building a more environmentally friendly delivery and service suite, installing more efficient water production lines, which will reduce water usage and increased productivity and driving growth in refill with Sipple on-the-go units and new filtration innovations like BVO. Earlier this week, our Board of Directors authorized a quarterly dividend of $0.07 per common share. This dividend represents a 17% increase over previous quarterly dividends. As discussed during our November Investor Day, our growth outlook and increased free cash flow generation can fund our growth and an increase in our annual dividend. Our path to a multiyear dividend step-up includes an increase in our quarterly dividend per share by $0.01 in 2022, another in 2023 and another in 2024. Other aspects of capital deployment include continuing our tuck-in M&A. During the fourth quarter, we announced the acquisition of Clear Mountain Refreshment Services in Little Rock, Arkansas, water event, which operates 5 locations in the Dallas-Fort Worth Metroplex and the purchase of SipWell in Belgium. The addition of SipWell makes Primo the leading provider of sustainable drinking water solutions in Belgium, expanding the Primo footprint and furthering our vision of providing sustainable water solutions whenever, wherever and however our customers want them. For 2022, we are again targeting $40 million to $60 million of tuck-ins and remain focused on executing the robust pipeline of tuck-in opportunities in front of us. Our long-term organic growth outlook has not changed. In terms of our outlook, for 2024, we are forecasting high single-digit organic revenue growth, targeted annualized adjusted EBITDA approaching $525 million, adjusted EBITDA margins of 21% to 22%, adjusted earnings per share of $1.10 to $1.20 per share, net leverage of less than 2.5x and return on invested capital greater than 12%. I will now turn the call back to Tom. Thomas Harrington: Thanks, Jay. Looking ahead, we remain focused on executing our differentiated Water Your Way platform. And we will leverage our pure-play water model to drive revenue growth of 9% to 10% in 2022, adjusting for the exit of the North America single-use plastic retail water business and including the revenue from the tuck-in acquisitions made during 2021. We will continue to enhance the customer experience by building out more diverse e-commerce solutions and improving the customer experience through flawless delivery execution. We have 2 important global initiatives that we believe will make a difference in customer experience and revenue. The new refreshed North America mobile app will be launching in the second quarter with an easier experience for our customers and most importantly, with new features that provide easy access for support with more channels such as live chat. The second initiative is the launch of a global direct-to-consumer web shop later this year. That will accelerate our dispenser sales and introduce an on-demand approach for all things water. By taking a global approach and the launch of these 2 digital platforms, we see efficiencies in developmental costs, accelerated learning and further enhancing our Primo branded global platform. We will continue to execute our Razor-Razorblade model with growth in the number of dispensers sold, driving top line growth through the sale of water products. And earlier this month, we announced the launch of a new alkaline water brand, Primo Plus. Primo Plus alkaline water will complement our existing portfolio as alkaline water is a growing trend globally. Primo Plus alkaline water has a pH level of 9.5 at the time of bottling and is an ideal hydration solution sold in 3-gallon bottles. It is currently available for Water Direct customers in limited U.S. geographies. And we'll be expanding to select grocery and retail locations through our water exchange program during 2022. Supporting our growth are more structural and thematic tailwinds that are driving consumers toward healthy hydration solutions. The growth in the health and wellness category continues to support our prospects of gaining share of the broader beverage category. COVID and its variants continued to elevate the health and wellness conversation and consumers are increasingly conscious of their overall health and wellbeing. In addition, the perception of the declining quality of municipal tap water is well documented, which supports the growth of our products and services. Tap water, as the primary drinking source is expected to continue to decline in all parts of the world for the foreseeable future. As Jay noted, we expect our consolidated first quarter revenue to be between $510 million and $530 million and for our adjusted EBITDA to be between $80 million and $90 million. For full year 2022, we're forecasting revenue growth of 9% to 10%, adjusting for the exit of the North America single-use retail water business and including the revenue from the tuck-in acquisitions made during 2021 and are forecasting our adjusted EBITDA to be between $410 million and $420 million. We continue to see the elevated demand in the residential sector as the return to work aspect of the B2B sector has once again been delayed with the emergence of the Omicron variant of COVID. Fortunately, COVID case rates appeared to have peaked and have dropped significantly as we move through Q1. We're also maintaining a strong pipeline of M&A targets, which we expect to execute during the remainder of the year. Once again, I'd like to thank the Primo Water associates across the business for their tireless efforts to serve our customers. With that, I'll turn the call back over to Jon to move us to 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: Your first question comes from Derek Lessard with TD Securities. Derek Lessard: I hope you're all well. I'm very good, thanks. You guys held your Investor Day last November, which in these times feels like a really long time ago now. But if I go back to that period, you sounded really confident almost excited in the outlook. So I guess my question really is, do you think that these results in anyway temper or impact that longer 2024 outlook that you have? Thomas Harrington: Yes, Derek, this is Tom. The short answer is no. If you look over the last 2 quarters, the Delta variant and the Omicron variant have provided us with unexpected short-term headwinds. The company, we decided to continue to invest in service because we think that's in long-term best interest of everyone, our customers and our stakeholders. So we chose to keep that investment and try and service through these; I'll call them anomalies, I hope. So they have not been our friend. I'm actually more bullish today than I was back in Investor Day. We still have positive tailwinds. Consumers are going to look for our brands. They're going to look for our products. They are going to look for our services more in the future than they have in the past. So we think that's a positive place for the company to be. We continue to grow our market share. We continue to grow our profitability. I'm confident in over the last few years. As you know, Derek, this is the first time I've said 9% to 10% growth. So we've become a growth company, and we're confident in our ability to achieve those numbers. We also continue to make appropriate investments. We're investing in assets to improve efficiency and effectiveness. We continue to invest in CX. We'll continue to make investments in ESG, which we believe matters and will become a tailwind for us. And we have the capital structure to continue to accelerate growth and execute against our tuck-ins. So as I said, I'm more confident about what our outlook is for '24 than I was when we did this in November. Omicron has not been my friend, neither was Delta, but that's now in our rearview mirror, I hope. Derek Lessard: And just maybe one follow-up for me, and that's very helpful. Again, as it relates to everything that you do consider transitory for Omicron inflation and supply chain. Just wondering how these pressures have been trending almost now that we're 2/3 the way through Q1? Thomas Harrington: Well, I'll pass it to Jay, but we're forecasting assumes status quo. We didn't anticipate Omicron in Q4. It created challenges that we've articulated to us from the labor perspective servicing our customers. It also had a negative impact on the B2B commercial volume recovery that frankly, we didn't anticipate that we'd get another spike. So, Jay, anything to add? Jay Wells: Yes. The other thing that Tom didn't mention was within the forecast and guidance that we provided, it was the end of tariffs on our water dispensers that we're importing from China. If you look at last year, we spent about $13 million in tariffs. Now keep in mind, $8 million was in CapEx. Those are the coolers that we buy to lease to our customers and about $5 million was in COGS, those are our resell coolers. Within my 4 cash flows getting that refunded. So that's on me, that's part of the miss. I assure you it's not in my current guidance either because the government has moved slow. We're still optimistic we're going to get it back. So I view that now as upside on my forecast and guidance versus the risk I had when I expected it last quarter. So that's one on the shame on me, it's like forecasting, let's put it that way and the same with recovery. We were trending really good on recovery from COVID. We thought that trend would continue, and it didn't. It actually reversed a bit in Q4. So those are the 2 of the main things that -- assumptions in my forecast that weren't accurate. And again, I'm not going to forecast a significant recovery throughout this year. I'll take it as it comes. But I would view that more as opportunity than risk if it doesn't come. Thomas Harrington: And then, the key points on the tariffs, if we get it terrific, but we're not creating a hurdle for ourselves here. Operator: Your next question comes from Nick Modi with RBC Capital Markets. Filippo Falorni: This is Filippo Falorni, on for Nick. So first, on the cost front, can you remind us after the exit of the North America single-use business, how much of your cost is in commodities and what are the biggest commodity exposures for your business? And then, more broadly, in terms of cost inflation, I guess, what are you assuming for 2022 in terms of year-over-year cost inflation? Thomas Harrington: Yes. I'll take a piece of that, -- this is Tom and then to give it to Jay. On our retail bottle water business, the commodity issue was resin for the high-density polyethylene bottles also impacted us on corrugated, the box shrink wrap, so you name it. All of the components of that business, which I'm happily on schedule to exit in the next 2 months were negatively impacted by cost inflation. Jay, do you have some numbers there? Jay Wells: Yes. No. I mean, if you really look at year-over-year, main cost buckets that we said were up 9% versus a trend of 4% to 5%. I'd say almost half the buckets were the first items that Tom mentioned. And it was material costs for thankfully, the single-use plastic retail business that we're exiting. So that's one of the many reasons we are getting out of that business. I would say when you look at the other half of it was really 2 tranches. It was ocean freight and tariffs. And then it was labor. I mean we are going to see having to give our folks higher raises. Also, please keep in mind, our RSRs, especially in North America, are predominantly commission-based. So as we take price, we are going to pay more in commissions. So part of it -- we get the majority of it, be sure. But we will see labor. So I would say, assuming we are and we will be by midyear, fully out of the retail business discussed, that will take the main material cost type inflation. Tom and I already talked tariffs. We are seeing ocean freight start to moderate and improve a bit as we go into this year. So that's the other cost that I look at. And then the last is really labor. We're a delivery company. We have our RSRs delivering, providing our customers' good service. And we want to make sure we provide our customers best service we can. So retaining and developing those associates is key as part of our associate experience that we focus on. Thomas Harrington: And while we anticipated inflation rolling into Q4. We didn't anticipate it, it frankly would be 2x. And we had taken pricing across the customer base based on what we saw when we were in Q3 and executed that at the end of August. We've taken another action that has been implemented during January based on the realities of what we saw in Q4. So we got the 2x and then we've taken the action to address it go forward. Filippo Falorni: Got it. That makes sense. That's very helpful. And then, I guess, you commented a bit on taking another action, like would you feel like you're in a good position now? Would you consider incremental actions if the commodity or the cost environment versus the elevator? Thomas Harrington: Yes. So we think we've covered as we sit here today. As you can imagine, we're, like many other companies, we are watching costs like a hawk. And if we're required to act, we will. The good news is our customer retention rates continue to improve, which is partially because of our decision to not cut those costs and focus on the customer experience, which is ultimately the key driver of our success, our 9% to 10% growth and our ability and confidence in the multiyear 2024 outlook. Operator: Your next question comes from Daniel Moore with CJS Securities. Daniel Moore: Maybe focus on the go forward of the -- great color by the way in terms of the impact of the tariffs, that helps clarify things quite a bit. In terms of the growth expectation, 8% to 9% organic, how much of that is volume and how much of that is price roughly, given all the price you've had to and been able to take? Thomas Harrington: Yes. Just a point of clarity, and then I'll pass it over to Jay. Our organic, I believe it's 7% to 8%. And then, yes, no worry, just so we're clear. The 9% to 10% have the exit of that retail just and then the benefits of some tuck-ins, so just to be clear. So Jay, some color? Jay Wells: No. I mean, we've talked about it before. And Tom mentioned it on the call that our water customer base is up 2%. That is driving the growth. And a key focus is continue on the customer experience, improved ads, reduced our quit rate. So customers are generating a very good part of that. I would say when you look on the volume side on top of that I think you heard a little bit of a tone. I think we've moved a little bit on a conservative side on the B2B side to more run current trends. But we're continuing to sit within our forecast to be very bullish on the residential side. So the residential side should continue to drive about another 1-plus percent on volume. And then, commercial will give us an upside if we don't have another variant of COVID and then pricing would be the remainder of it Dan. Thomas Harrington: The other piece I'd add is last year, '21, we sold approximately 900,000 dispensers. They create what we call water-only customers, which is a terrific customer, largely residential as the ocean freights have begun to, I won't say normalized, but ease. And hopefully, we have a resolution on the tariffs. So we expect to accelerate that dispenser business, which will give us growth in that customer base that buys 3 and 5-gallon containers from us. So that's part of the growth story. People love our brands. And we're just finding different ways to give them more to their way. Daniel Moore: Helpful. And clearly, impressive customer retention in the face of that -- those multiple price increases. The growth in terms of rest of world versus North America, you just gave us some inkling. But you expect to continue to drive retail penetration in rest of world? And what are the kind of relative growth rates embedded in the guide? Thomas Harrington: Yes. I think that we were quite pleased in 2021 with our residential performance in the rest of world. It is unfortunately as if Delta and Omicron, their spike in North America, there were more than 2 spikes depending on the country you're in, in Europe. But we think that the markets are accelerating their return, if you will, and easing mass guidance, offset by whatever happens in the Ukraine, right? So we think we're in a good spot. We're confident about our ability to grow the residential business. We will develop the solution that we call Sipple on the go, which we think is a real solution to grow our revenue and volume in the continent will go there first later in 2022. Jay Wells: Yes. I'm very excited on the quarter. I mean 5% residential growth, our 15% residential growth, 5% B2B growth. I mean, that is great. As we've talked before, Europe has been a flattish to declining business. So through all of the efforts we're making, we've turned the top line to growth. Now we did have some bottom line pressures, and we will, as we lap the furlough programs, as we get the employees back in. And then only then can you right-size the organization because you cannot right-size organizations while individuals are on furlough programs. So be assured that we'll adjust our cost base to the right level. But the exciting part is that type of top line growth out of Europe is something we did not see when we diligenced even many years ago and we haven't seen since we bought them. So I think Europe's in a very good space going forward. Thomas Harrington: It's become a tailwind. Jay Wells: Yes. Daniel Moore: All right. And the tariffs, if you did get them back would be a -- up to a $13 million potential benefit? Or is that the right way to think about it? Jay Wells: Yes, remember $8 million was CapEx. So if we get that back, that's not an EBITDA benefit. But $5 million did go through COGS as a cost of goods sold at the dispensers that we sell in retail that would be a benefit flowing through. Operator: Your next question comes from John Zamparo with CIBC. John Zamparo: I wanted to follow-up on revenue in the quarter, and I appreciate the commentary so far. You mentioned some headwinds from Omicron of course. But can you add some color, particularly on the Refill and Filtration segment and the other segment? It seems like you saw some softness in those. I wonder if that was impacted by Omicron or the furlough programs you're talking about? I know there was a customer loss on the refill side. But any commentary you can add on those 2 segments would be helpful. Thomas Harrington: Yes. I think on refill, there's a couple of things that have -- were a headwind in the quarter. And there is a direct correlation to Omicron and/or the Delta Variant, frankly at the end of Q3. And it has to get to retail store traffic, right? So if foot traffic is down in retail, then the number of customers that pass our outdoor refill machine will be lower and the number of customers that go through the aisle for the indoor machines is lower. So naturally, we're going to be negatively impacted from a revenue perspective. So we're cautiously optimistic. But we're not baking in any -- we're taking the appropriate approach that says we're going to take steady state in terms of those businesses as opposed to expecting that it gets better because, which was a bit of our problem in Q4, thinking that Delta was good, things look great and then Omicron hit us again. And then, filtration was also going to be related to Omicron if you think about traffic and how many commercial opportunities don't exist today, partially because of work from home. So as that business segment is still either in decline or not yet stable because of the variant, our ability to attract new customers has negatively impacted short term, which has a direct impact on the top line. Jay Wells: Yes. And I think you mentioned other water also. John, you're going to see that decline in North America. That's the exit of our single-use plastic water business. So that is what that decline that you see in the other was. Thomas Harrington: And that decline faster than we anticipated than most our announcement, which gets us out of the business. Jay Wells: I mean that business, as I mentioned, was $142 million last year. It's going to be $40 million this year, about $20 million each quarter. On revenue since we're on it, we posted a supplemental deck on our website. And if you look at Slide 23, that'll give you a good view of our quarterly revenue last year then it minuses out. The revenue associated with this single-use plastic water business that we're exiting. And then, it's really 9% to 10% growth on that number each quarter. And then, I'd add another $20 million in Q1 and a $20 million in Q2 to add back a little bit of revenue we will still have in that channel for the front half of this year. So that's how we look at it, but it really is -- it's the exit of the retail business we've discussed. John Zamparo: That's very helpful. And then, my follow-up is on the CapEx guidance of $200 million. Just thinking about the Investor Day or maybe it was Q3. But I think you said 7% of sales is the rough guide and then $50 million of additional projects to be spread over the next 3 years. If you do that math, you get a bit below the $200 million. So I'm wondering have you front-loaded some of those projects? Does the $200 million now reflect paying the tariffs or the CapEx portion of it? Any other color there you can have would be helpful. Thomas Harrington: I'll give you kind of the way I think about the phasing is that we will make investments in 2022, both on efficiency projects as well as growth projects, but we won't see that benefit until later on. And as you think about frankly '23 and '24, so you have to execute those projects and do work in plants and build the Sipple machine networks globally. So we'll make those investments this year. We'll see future benefit in '23 and '24. And the CapEx, Jay, I'll flip to you on. Jay Wells: I think the difference you're trying to work too is probably the tariffs that I referred to. And if it goes way up, we would get closer to the number you referenced -- not the refund, but just the pure -- in your CapEx on dispensers, that's probably the difference. That's above and beyond the 7% of revenue. But when that goes away, we'll get back to about 7%. So I would say that the tariffs on the dispensers that we went to our customers, that CapEx is really probably the difference that you're looking for. Operator: Your next question comes from Derek Dley with Canaccord. Derek Dley: So just on the price increase that you expect, Jay, did I hear you correct, it's going to be about 5% to 6% for 2022? Jay Wells: I think you're roughly correct if you think and you look at inflationary numbers right now, and you ignored what happened in Q4, that's not far off of inflation, and that's what we're pricing to cover the cost increase plus a little bit more. So you've got it about right, Derek. Derek Dley: Okay. And how does that compared to the price increase that you took in Q4? Jay Wells: Well, it's kind of more of a combined that I'm doing the rollover benefit on the full year and what we've taken. And just point of information, we have taken it. It's gone through. It's gone to our customers. So it's in place. We pocketed that. And keep in mind we're still going to do our regular pricing on top of that too. This was more just acceleration of certain others. So it's a combination of rollover benefit, the pricing that we took right at the end of January or being of February and then our normal pricing that we take throughout the year, gets you to that number, Derek. Derek Dley: Okay. Got it. That's helpful. And then, maybe, Tom, just your comment on freight. Can you quantify that a little bit for us? I get it's still elevated, but normalizing. But how does that compared to what you've seen over the last 2 quarters? Thomas Harrington: Yes. So I'll give you a couple of numbers to put it in context. I paid as high as 25,000 a container. And pre all this, it would be something closer to 5,000 if you went back to before the spike. So that's the order of magnitude of the change. And we paid down under 20,000 or less now, right? So it's beginning to work its way closer to 15,000 and 25,000. We haven't built all of that benefit in because we needed to be more than 10 containers of trend, right? So as Jay said it before, you can accuse me of being conservative. I'm just being thoughtful about -- I don't want to make a tariff mistake again, and I'm complicit with Jay on that. So we want to make sure that it's trendable and bankable, right? So that's really how we think about it. Now you may also ask its still, if you're in Long Beach, I think the last numbers I looked at was 80 days. But we've built that into our demand plan. So we think we have the appropriate flow of assets. So it doesn't impact our ability to acquire customers. But the pricing offsets it. And we've baked in that 80 days into that demand planning model, which frankly, last year was a catch-up, right? You went from whatever it was, less than 30 to 80 practically overnight. So all that's now we kind of modeled into our go-forward operating plans. Derek Dley: That's great. And then, just -- can you just maybe talk about the business that's coming through your website and your e-commerce business? How has that been growing over the last year? And can you provide like what percentage of revenue it represents? Thomas Harrington: I can do some of that. Let's go with Europe, right? So you remember we stood up websites if you go back in May of 2020. We now have websites up in all markets in the rest of world. And it led to something on the order of 25,000 plus net new customers on the residential side in Europe, right which was a positive tailwind for us as we dealt with the high percentage of our customer base in Europe that was commercial business. So that has worked quite nicely. Our residential mix is higher in North America. We are generating more customers from digital. We're rolling out a new app in North America early Q2, which we also will -- we expect to help us drive customers. And we are building in process of global, call e-commerce web shops, Derek that will enable us to accelerate dispenser sales through this dispenser and water sales through this platform as we go forward. We haven't stood them up everywhere. We're still in the learning stages. But we are selling dispensers and we actually sell water on those sites. So we think it will be a good component of that ultimately 9% -- 9% to 10% growth model. Operator: Your next question comes from Andrea Teixeira with J.P. Morgan. Andrea Teixeira: I wanted to just follow-up on the organic growth guidance. And on the commentary about the 1% volume guide for residential embedded in the total top-line growth. And I'm a bit surprised maybe I'm understanding it the wrong way. You added 900,000 new dispensers sold last year. I'm not sure if it's more exchange related and not -- and within the Razor-Razorblade model that those drugs are going to there that will be accounted for in these residential customers. And so, in other words, are you being just conservative because of the tough comparisons for residential? Or you're assuming that reopening the commentary about commercial customers that you're being more conservative on those and/or the frequency of purchases? And related to that, what we saw in the fourth quarter, as we enter the first quarter, did the Omicron impact subside during the beginning of the year? Was there any major customer that you lost during these logistics issues and perhaps comment also on the churn rate after you took pricing? Thomas Harrington: Okay, Andrea. I may take these backwards, right? So customer churn and our retention in Q4 was 60 basis points better, 86.4%. And our 2021 pricing was initiated implemented, let's call it, September 1. So that number did not spike. It's part of our investment with the route associates in terms of servicing the customer investments in our call center to make sure that we gave continued service despite the Delta and Omicron variants. So that's a pretty good indicator for us that we're getting the price we need. And we see it flowed through and we haven't chased off customers. We're not seeing any material change early in Q1. In terms of where we are with the Omicron, it's like other things I've read is the number of cases has dropped off markedly. But in October and at the end of the quarter, we had some discussions, it was comp really probably too bullish about how that turned out and Delta became Omicron. So yes, I would be conservative about that. We're expecting steady state, no meaningful positive from that benefit of let's hope, another variant. On the dispensers, the way to think about it is we get customer acquisitions in Water Direct from people who rent coolers from us, and you can relate that to Jay's comments about the $8 million in CapEx. And then, we separately sell 900,000 coolers through a number of large retailers and through e-commerce. And in our script, we talked about roughly 45% of the customers who bought roughly 60% of the customers who buy dispensers new to the category I think it's the number, we can validate that. And 45% presented and prefer Water Direct, 25% preferred exchange and 30% preferred refill. And then, we get our fair share of that in terms of our market share. So we would expect those water dispenser purchases to come into our family of products, brands and products, either in direct, in exchange or in refill. And that would be -- that was really around the water only that I talked about, and that's how we categorized them. And they would be part of our growth story largely residential. I think I got all 3 Andrea, but I'm not sure. Andrea Teixeira: No, this is super helpful. Yes. No, absolutely. But just double clicking on that, the 1% that you're assuming for residential in 2022, how did that number compares? How much did you grow in volume for residential consumers in 2021 and in 2020, if you can give us that kind of progression of household penetration and growth? Jay Wells: I don't have that number at hand, my apologies. But let me just give you kind of repeat what I said earlier. It might have been missed a little bit. So we mentioned that our customer base within water is up 2%. So we're bringing that tailwind in Tom has talked about our retention rates improving, our focus on the customer experience, bringing that. So that will give us that organic growth. Then what we see in volume growth is another 1 plus maybe getting up to 2%, and that's really being led by residential. And that's pretty typical, pretty standard. Let's ignore the unusual fluctuations during a pandemic, but that's normal. What we're not factoring in is much more recovery on the commercial side, not to say that it's not going to be there. But I'm just not going to include in my forecast because I'm not going to forecast COVID recovery anymore. And then, the remaining is really the price increases that we're taking. Operator: Your next question comes from Graham Price with Raymond James. Graham Price: You previously gave the color around the revenue outlook for the single-use divestiture asset. Just wanted to double check that $40 million. Does that assume that the asset would be divested maybe sometime next quarter? And then, I was also wondering on the impact of that divestiture on margins and profitability in your 2022 outlook. Thomas Harrington: Yes. So it's our expectation that we will be completely out of this business by the end of Q2. And then, Jay has referenced the numbers that it was $142 million in prior year. We expect roughly $40 million this year, which is an update to Investor Day because we've exited. It's begun to exit a little bit quicker than we originally expected. And then, on the margin, Jay, would you get some insight on? Jay Wells: And again, I did add specifically for these types of questions. I did add a slide to our supplemental deck. It's in the appendix, Slide 23. And it does show our revenue by quarter last year minusing out the benefit of this specific. So you can see it runs about somewhere in the 30s every quarter to get to the $142 million. Then, how I'm modeling that my projection. What we've got left kind of feel like we have kind of like what I'm doing with the depreciation on these assets, you see a little spike in depreciation. I'm kind of like to straight lining the $40 million out until the end of Q2. So $20 million this current quarter, $20 million next on top of the growth we get off of the net numbers shown on Slide 23. Does that make sense? Graham Price: That does, that does, thank you for that. And then, just a quick housekeeping follow-up, saw a spike in D&A expense for 4Q. Jay Wells: Yes, I just tried to answer that question as part of the prior because I know you probably would have that question too. So yes, what you're really seeing, once we decided to get out of the business by the end of Q2, every asset within this business under the GAAP accounting rules, you accelerate the depreciation and you depreciate or anything amortize it over the remaining term. So you're seeing the accelerated D&A associated with the business that we're exiting. Operator: There are no further questions at this time. Please proceed. Jon Kathol: This concludes Primo's fourth quarter results call. Thank you all for attending. Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.
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