Primo Water Corporation
Q1 2017 Earnings Call Transcript

Published: 10 May 2017

[Operator:]

Good day, ladies and gentlemen and thank you for standing by. Welcome to Primo Water First Quarter 2017 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] [Audio Dip] conference is being recorded. I would now like to hand the floor over to Katie Turner for opening remarks. Please go ahead ma’am.

[Katie Turner:]

[Audio Dip] Primo Water's website at www.primowater.com. This call is being webcast and a replay will be available on the company's website. Before we begin, we'd like to remind everyone that prepared remarks contain forward-looking statements including financial guidance [Audio Dip] additional forward-looking statements in response to your questions. The forward-looking statements should be considered [Audio Dip] Prim?

[Billy Prim:]

Thank you, Katie. Thanks. I am afraid we are having technical difficulties from the host phone which seems to be breaking up from my end of the conversation. I hope that everyone can hear me okay. Good afternoon, everyone, and thank you for joining us today to review our results for the first quarter of 2017. We are excited about our start to the year and [Audio Dip] congratulating Matt on his new role as CEO which will take effect on June 1 as I transition to an Executive Chairman role. The Board of Directors and I have been working on a succession plan for some time and have confidence that Matt has the experience and skills to continue the growth and operational excellence to take Primo to even greater heights. Matt has been a key driver of our strategy and success over the last five years and I look forward to his leadership of the company. As Executive Chairman, my involvement in the business will be through industry relation, senior leadership development and long-term strategy. I am proud of our accomplishments over the past five years of our growing [Audio Dip] Going forward, our team remains committed to the execution of our strategic growth objectives. Primo is better positioned as the market leader with compelling [Audio Dip] scales and a dedicated team of executives to take us [Audio Dip] highlights of the quarter and finally provide an update on the progress against our key strategies. We are a purpose-driven organization committed to inspiring healthier lives through better water. Consumer beverage trends continue to support that purpose and consumers continue to choose healthier beverages over sugary alternatives. Water is now most consumed beverage per capita in the United States and continues to grow as the choice for consumers.

[Mark Castaneda:]

Hey, Matt. This is Mark. What I am hearing is that lot of people have not heard the first part of Billy’s remarks. And I think Billy if you could start over again? It sounds like it’s working now.

[Matt Sheehan:]

Okay, she can start over. Thanks Mark.

[Billy Prim:]

Okay, thank you and thank you everyone. I apologize that the host phone seems to be having some difficulties, but I will start over. And thank you, and good afternoon everyone. And thank you for joining us today to review our results for the first quarter of 2017. We are excited about our start to the year and pleased with our results for the quarter. In regards to the Glacier integration, we are ahead of plan and expect to receive greater synergies in 2017 than originally expected. As a result, we are increasing our full year adjusted EBITDA guidance. Matt will provide greater – will provide more detail on our results, strategies and integration status, and then Mark will provide more detail with our updated guidance. [Audio Dip] has been a key driver of our strategy and success over the last five years and I look forward to his leadership of the company. As Executive Chairman, my involvement in the business will be through industry relations, senior leadership development and long-term strategy. I am proud of our accomplishments over the past five years of our growing our top-line over 50% plus increasing adjusted EBITDA by 4.4 times. This resulted in a significant increase in shareholder value of over 700% or about seven times greater than the overall market during that period. Additionally, with our recent acquisition of Glacier Water, we expect to double our revenues in 2017 and with synergies expecting even greater improvement in our adjusted EBITDA and cash flows. Going forward, our team remains committed to the execution of our strategic growth objectives. Primo is better positioned as the market leader with compelling brands, product offerings, scale and a dedicated team of associates to take us to the next level of growth. We will continue to increase household penetration across North America and in turn drive long-term value creation for our shareholders. With that, I will turn the call over to Matt.

[Matt Sheehan:]

Thank you, Billy. First off, I am honored to accept the CEO role and continue to lead our team to grow this business, increase EBITDA and use our free cash flow to delever and increase shareholder value. With that in mind, I will discuss the consumer market, highlights of the quarter and finally provide an update on the progress against our new strategy. We are a purpose-driven organization committed to inspiring healthier lives through better water. Consumer beverage trends continue to support that purpose and consumers continue to choose healthier beverages over sugary alternatives. Water is now the most consumed beverage per capita in the United States and continues to grow as the choice for consumers. Health and wellness trends continue to be a top driver for bottled products. In addition, concerns over tap water are driving consumers to look for long-term bottle water solutions. Just last week, the Wall Street Journal reported that lead levels in tap water in Pittsburgh and other major cities exceeds government standards. That only when the project to work and see water infrastructure across hundreds of millions of dollars but would also phased in over ten year period. Consumers are aware of issues like these and can’t with the health of their families over a ten year period. We believe that increased consumer awareness of these issues fuels growth in the bottled water category. Consumers are searching to provide healthier and/or safer beverages to their families and we have the solution with over 40,000 locations offering [Audio Dip] And intangible assets. As you are aware, purchase accounting maybe adjusted during the first year following the acquisition as a result of changes in estimates. Our accounts receivable DSO decreased to 23 from 31 days at December 31, as a result of improved collections as well as the addition of the Glacier business that carries lower receivables compared to the revenue because of the business model selling directly to the consumer. Additionally, our inventories increased by $0.5 million due to seasonal needs. Turning to our outlook, we continue to expect full year revenue of $280 million to $285 million. For adjusted EBITDA, based upon synergies being ahead of schedule, we are increasing our guidance for the full year and now expect adjusted EBITDA of $53 million to $55 million up from $52 million to $54 million. For the second quarter, we expect revenues of $72 million to $75 million and adjusted EBITDA of $12.8 million to $14.3 million. In summary, our first quarter EBITDA results were at the high end of our plans despite the shift in Dispenser revenue. This illustrates the high quality of our Water segment revenues. Additionally, we are confident in raising our guidance to reflect the positive synergy results, increased promotional activity in consumer trends that we see for our business. I will now turn the call over to Billy for closing remarks.

[Billy Prim:]

Thanks, Mark. We are very pleased with the efforts our team has solid results, while making major changes to the service infrastructure of the business. We believe the macro and broader consumer trend will continue to fuel future growth in Dispenser household and increased usage of Primo water. Additionally, the combined businesses at Primo and Glacier have resulted in a stronger foundation for our business and submission opportunities for value creation. As we look to the future, we are operating from a position of strength and remain confident that our positive momentum will continue to build throughout the year. As always, we appreciate the hard work and dedication of our employees, service providers and retail partners and remain committed to our purpose of empowering healthier lives through better water. Before I turn it over to the operator, I want to apologize for the technical difficulties on the audio and say that, we will make sure that a properly recorded call will be posted on our website as soon as possible. So everyone can listen to the full script. With that, I will open up the lines for questions. Operator?

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Mike Petusky from Barrington Research.

[Mike Petusky:]

Hey, good afternoon guys. So, I definitely participated in the technical difficulty. So, I want to ask a couple questions, I was unsure were answered, but I didn’t quite catch. So, the Dispenser revenue, I heard later that – you are talking about a shift, but I didn’t actually ever catch what the actual shift was or what the description of that was?

[Billy Prim:]

Hey, Mike, again, sorry for the technical issues. But, Dispenser shifts, we traditionally, for the last two years have promoted heavily in Q1 and working what we chose we wanted to shift that promotional spend to frankly a more effective time in the year in our peak season which is June 3. So, last year, what you saw was some broke in Q1 because of our promotions and all we frankly did was moved that into Q2, Q3 seen a lot of promotional spend first, we think it’s going to be a lot more effective, but does that makes sense?

[Mike Petusky:]

Yes, yes, okay. And then, later on you referred to – it seems that like you are referring to marketing efforts, was that essentially what you are talking about? Or were there marketing efforts outside of that that are incremental kind of going forward?

[Billy Prim:]

Yes, I mean, that was an example of that, I highlighted that over the last couple of years, we’ve been mentioning the test and we’ve been putting into the market. The promotions are - I think a good example of that we are even testing across several retailers the right way to test Dispensers, bundle with water and so forth. Based on that testing over the last year or two, that’s what you are going to see roll all across the year. Lastly, with the more promotions across our retailer base by far than we have in the past, we feel really good about the shipped water might have impacted us than we want, because that Dispenser shift is one of the marketing test that we’ve been testing in water now.

[Mike Petusky:]

Okay, and then, and I am jumping around here, but in terms of the synergies, coming more quickly than you guys had anticipated, is there any chance of synergies, the ultimate synergies, this transaction will end up bigger or will they kind of end up sort of in the same modest figure you are getting there quicker?

[Billy Prim:]

Right now, we are just targeting on the speed. So, we believe that the long-term projections are going to be close to what we said, but we are working harder to advance those and that’s what we are sharing now. But we will continue to update you each quarter as we progress.

[Mike Petusky:]

Okay. And just two more quick ones. Did you guys give a location count for the quarter or where you guys are?

[Billy Prim:]

We ended the quarter with 468, so flat locations. We added actually about 500 locations. We are also being thought about 500 seller stores are closing. So we effectively traded off poor performing Wal-Mart’s and Office Depots for higher performing stores at Wal-Mart and some others.

[Mark Castaneda:]

Yes, Mike, this is Mark. If I sort of looking back to that, so, part of its – and not a third was that we do continue to see, as all do and resolve some compression and store closures, we experienced and likely will of it more some low performing locations store close, we found behind it, but we feel very good that we are talking about eight channels and the home improvement mass grocery and we continue to install a good amount of Wal-Mart. So when you trade-off and came out with locations for some new Wal-Mart locations, that has happened to us in the past and we are okay with that strategy. We believe that consumers will find our water fairly quickly after one store closes. So we do expect frankly some of that closure to continue as everybody is leaving for a reason. We do believe that we are partnered though and our product is very sticky with consumers. So they will go find it.

[Mike Petusky:]

Okay. Just a last one. Did you guys break out kind of your water versus the Glacier contribution for the quarter?

[Matt Sheehan:]

We did not break that out, because the retail businesses have been combined now. So, now we just have one retail business as opposed to two separate businesses.

[Mike Petusky:]

Okay, okay, that’s all I’ve got for now. Thanks.

[Mark Castaneda:]

Thanks, Mike.

[Operator:]

Thank you. And our next question comes from the line of Mike Grondahl from Northland Securities.

[Mike Grondahl:]

Hey, thanks guys and thanks for taking my questions. Is the nature of your promotions this summer changing at all, anything you make new difference?

[Matt Sheehan:]

Hey, Mike. Thanks for the question. I think, as it has been what we’ve been testing for a while and across the retailer base, they will look and feel differently. So, you’ll have a range of strictly promotional type on Dispensers. We will also do some bundling where you will get the Dispensers and a free bottle of water, things like that. So, across the retailer to make sure, that definitely have different types of promotions. That makes sense?

[Mike Grondahl:]

Yes, it does. And then, any update on your revenue synergies, kind of the thought process there or any potential price increases?

[Matt Sheehan:]

Mike, another good question. It’s still pretty early, I think for us, again, our focus, as we have said probably seen in the integration work they done. That’s been a lot of work. We want to make sure that above that all that went smooth. As we’ve said in the past, we do believe there is some opportunity over the next year or two or three from a revenue perspective. But we are just getting into some of those now and we will update you through future quarters.

[Mike Grondahl:]

Got it. Hey, may be a quick one for Mark. Do you have the gross margin on just the Water business and just the Dispenser business separately?

[Mark Castaneda:]

Yes, so, the gross margin on the Water business was 32.1 and the gross margin on the Dispenser business was 11.5.

[Mike Grondahl:]

Okay, great, thanks a lot guys.

[Matt Sheehan:]

Thanks, Mike.

[Operator:]

Thank you. And our next question comes from the line of Amit Sharma from BMO Capital Markets.

[Amit Sharma:]

Hi, good afternoon everyone.

[Matt Sheehan:]

Hi.

[Amit Sharma:]

Hi, Billy, good luck for the next phase of your career and really congratulations on the new role.

[Billy Prim:]

Thank you.

[Amit Sharma:]

Just one quick question on the model and then maybe little bit more strategic. The water sales from – in the refill segment were a little bit lighter than we were for the quarter. Although it looks like you fully got to sell in line any ramp up in that or as you switch over to the combined business, anything happened in the quarter especially on the refill side of the business?

[Billy Prim:]

I would start out and I’ll turn it over to Mark. I would point people that our EBITDA is at the high end of our expectation. So, our refill sales and our water sales were at or above our expectations for the quarter, it was really just a shift in dispensers. And as you know and others that are familiar with the dipping effect, Dispenser sales are the sell-in is a little lumpy, but it doesn’t really affect our earnings power.

[Amit Sharma:]

Okay, okay, that’s fair. And then, Matt, as you would take the new role, I mean, and fully understand I mean, you’ve been the part of the change for a while. Most people when they come in the role, there is an opportunity to have a fresh look at many things. So as you look at your slate over the next 12 months, 18 months, whichever timeframe you feel comfortable, talk about what some top agenda for you, maybe where we should expect some sort of shift or changes in the strategy?

[Matt Sheehan:]

Yes, it’s a great question and I will say that, we collectively, Billy, Mark and I have been working on the – what we call the Primo way which is our purpose, our vision, our values, our strategies for years now, I think, my approach frankly is a very smooth transition. I am not a new person to this business and I guess a key focus is, make sure integration goes really well this year, that’s going to be the most important thing for us and then continue to look and test and grow the business. So, again, as we believe that there is a lot of room for growth in the business and 95% of American homes do not have a Dispenser. But I don’t think you will see any immediate reactions or as I said internally in with last year, we are going to – we are very focused on commission research in front of ourselves and our colleagues is frankly our retailers and we are going to stay focused on that. We will continue to test some marketing ideas to continue to push for new locations with retailers. All that is going to stay fairly consistent.

[Amit Sharma:]

Got it. And just on those growth agendas that you mentioned. So the two that are on top for me, one is, the household penetration that you touched on, right. I mean, if you look at the Dispenser sell-through, it is sort of 75,000 household. Are all dispensers are new additions and as you say that 95% of the US households don’t have, what’s the right number from a target perspective, if you can talk about that? And the second is International opportunity for you guys. I mean, you are primarily in North America and US business at this time, but if you think about Canada and Mexico, especially Mexico given the lack of high quality tap water there. Are those seen as an opportunity maybe not in the near term or longer term?

[Matt Sheehan:]

Yes, two, again great questions and I talk about household penetration for a minute, keep in mind for that to offset water collectively has less than 5% penetration. So that’s not just offset as home and office and deliver that is a much bigger piece of the pie than we have at retail. With that said, we believe that even a couple point – percentage points, I am talking about 5%, is on lot of growth for us and that’s what we are going to try to accomplish. To put an actual number a target out there, we will have that. We are going to continue to try to improve that, but a very small percentage increase and there is a lot of business for us. And that’s what we are trying to do. We will continue to push promotions and things like that that help it the easier for consumers to engage and keep in mind, we have a large breadth of dispenser everything from our $10 pump. It goes on top of a bottle all the way up to $279 dispenser that does hot and cold beverages. So we are going to continue offer that breadth and that will help all types of different families across the board and make them they engage in our products. But, again a very small increase in household penetration is fairly big influence for us. Secondly, international, we agree, we think that there could be some international opportunity. We try to be very laser-focused on what we have here in US and Canada. Again we’ve gone back to that 95% number, but we certainly have got calls and thinking broader long-term about where our solutions can fit. So if you do believe that there could be some fit long-term, but again it could be direct about it kind of stay fairly focused on what we have here in the US and Canada for the time now.

[Amit Sharma:]

Got it. That’s all for us. Thank you so much.

[Billy Prim:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Kara Anderson with B. Riley & Company.

[Kara Anderson:]

Hi, good afternoon.

[Matt Sheehan:]

Hey, Kara.

[Kara Anderson:]

So, I know, we’ve already talked about this extensively, but I am just trying to wrap my head around the delay in shipments. It sounds like you are sort of tying that to a push out in spending into Q2 and Q3. And so, particularly I am wondering, when that decision was made, and really what happened in the last two weeks following your Q4 print that caused revenue to come in below the bottom end of your guidance range, and if you could comment that that’d be great.

[Mark Castaneda:]

Yes, Kara, a couple of points there. One is, keep in mind, we’ve not just us but retailers make that – make some of that shift. And as so, the pie is rolling. So throughout the quarter, you will see that move. So, it happened across the quarter even into the last part of the quarter, they moved it into Q2 and Q3. So, retailers are saying, I wonder why you should be doing this in Q1. Let’s move this into May, June and deeper. So, that will not only change the sell-through, but it will also change the sell-in if they could delay some of those shipments as retailers don’t want to be hanging on to that inventory very long and we’ve reduced our – through our supply chain time. So, our supply and so, the gap is not all that long. So, that’s where you will see some of the shifts happen when you shift sell through the sell-in will actually shift.

[Kara Anderson:]

And have you recouped sort of those – that delay? I mean, are we expecting what you didn’t get in Q1 to come in Q2?

[Mark Castaneda:]

We do believe we are going to make that across the quarters.

[Kara Anderson:]

Okay. And then, I am wondering if you can comment on your outlook for 2018. It sounds like some of the cost synergies are coming in quicker and maybe shifting out of 2018. So if you could provide an update at all with respect to previous [Audio Dip]

[Operator:]

Ms. Anderson, can you hear me?

[Kara Anderson:]

Yes, I can.

[Operator:]

Okay, please resume with your question. We had an audio cut out again.

[Kara Anderson:]

Okay. And, can you guys hear me?

[Billy Prim:]

Hey, Kara, we are here. Can you hear us okay?

[Kara Anderson:]

Okay. Yes, again. I don’t know if you heard my question. So I’ll just repeat it. It sounds like some of the cost synergies are shifting from 2018 into 2017 with respect to the Glacier Water acquisition. So I am wondering if you can comment at all on your 2018 outlook and if there is any update there?

[Matt Sheehan:]

We are not updating our 2018 guidance. So, at this point, again, we are focused on some of the overall synergies coming faster, but at the time we are not updating the 2018 guidance.

[Billy Prim:]

Yes, I don’t think that there is anything from, if you could say, from 2018 it’s going to track from what we believe EBITDA could be in 2018. Obviously, we said these synergies have come in over three years. So, we are just trying to pull them forward as fast as we can. But we are not ready to update 2018 guidance, I guess, would be the best way to put it.

[Kara Anderson:]

Thank you. That’s it for me.

[Operator:]

Thank you. And our final question for today comes from the line of Mark Argento from Lake Street Capital. Please go ahead sir.

[Mark Argento:]

Yes, hi, good afternoon. Just a quick one. In terms of just overall sales trends at retail on the Water business, obviously with the consolidated numbers, makes a little more difficult to see, in aggregate it looks like it was right, but any kind of same-store sales numbers or anything you guys could point us to give us a feel for that retail takeaway of the water products?

[Matt Sheehan:]

Hey, again, what points you again, the refill business as we consolidate, we are still [Audio Dip]

[Operator:]

Please stand by. We seem to have lost audio again. I think we are back now. Could you please resume with your answer sir?

[Matt Sheehan:]

Sure, Mark, can you hear us, okay?

[Mark Argento:]

Yes, I can hear you now.

[Matt Sheehan:]

Again, really sorry about this for like it keeps cutting in out. So, on the same-store sales we are saying, what we are focused on the exchange business up from in it again good same-store sales with 6.1%. We’ve been comping that business for a long time. We continue that growth to continue as we just tack on maybe answer before, is continuing to push dispensers increase household penetration. We feel pretty good about exchange sell-through growth continuing. Where we are really digging in into the refill business and going to post-integration about focused on how we continually grow that business as well.

[Operator:]

Thank you. And Mark Argento, does that concludes your questions? He may have swept away or he may be finished with his questions. I’ll hand things back to Billy Prim for closing comments.

[Billy Prim:]

Again, we apologize for the technical difficulties. But we do thank you for your participation today and your interest in Primo Water. And again, we will record a clear version of this entire process and it will be posted on our website as quick as possible. Thank you and have a good evening.

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may now log off and disconnect. Everyone have a great day.