Primo Water Corporation
Q4 2017 Earnings Call Transcript

Published: 7 Mar 2018

[Operator:]

Good day, ladies and gentlemen, and thank you for your patience. You’ve joined Primo Water’s Fourth Quarter 2017 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to turn the call over to your host, Miss Katie Turner, Investor Relations. Ma'am, you may begin.

[Katie Turner:]

Thank you. Good afternoon, and welcome to Primo Water's Fourth Quarter 2017 Earnings Conference Call. On the call with me today are Matt Sheehan, Chief Executive Officer and David Mills, Chief Financial Officer. By now everyone should have access to the release that went out this afternoon at approximately 4

[Matt Sheehan:]

Thanks Katie. Good afternoon, everyone, and thank you for joining us today to review our fourth quarter and an update on our business. I am excited to review our quarterly results, the progress our team has made and the momentum we have built as 2018 is already successfully underway. We continued to drive executional focus around our purpose of inspiring help realize through better water. Additionally, average industry trends continue to provide a tailwind alongside Primo’s highly valuable retail solution in the increased focus on health, paired with an increased concern on tap water, quality drives consumer’s need for solutions. I will start the call with a high-level review of our results, more about our shift to a growth mindset, and then David will walk you through detailed financial results of 2017 and an update to our guidance for 2018. I am pleased to report that we again delivered against our financial guidance, which we raised significantly throughout 2017. In addition, the momentum gained during Q4 is leading us to raise our guidance for 2018, which we’ll cover in a bit. For Q4, sales increased 69% to $68.3 million and adjusted EBITDA increased 104% to $12.9 million. For full-year 2017, sales more than doubled to $286.1 million and adjusted EBITDA increased 127% to $54.7 million. A few notable insights into the results; first, U.S. exchange posted a 6.1% same-store unit growth, our 23rd consecutive quarter over 6%. Second, we executed a large Black Friday promotion that delivered significant awareness for the category, dispenser unit sell through and most importantly, high conductivity to our water solutions. With those highlights in mind, I’m excited to jump into the initial progress that will allow us to change the growth trajectory of our business. As we have said in the past, all of our initiatives are focused on five key strategies; first, grow household penetration, second, improve conductivity of our dispensers and our water, third, increase same-store sales, fourth, drive unit economics, fifth, bolster highly engaged teams. Before getting into these initiatives and update that support each strategy, two important notes. First, one change in the strategies; a switch from locations to same-store sales, in an environment with further retail compression expected, we are turning our attention to productivity on a provocation basis. We have reported strong same-store sales growth and exchange and sell-through in dispensers since inception of our business. This consistent performance is due to the strength of our business model and product solutions. As we begin to focus on growth initiatives, this is the core metric for our business. Lastly, as it relates to the patient income, the way to get retailers to add our product to more locations and to continually grow in the existing locations you have. Further, we will continue to proactively redeploy assets from underperforming locations which may impact location count or bolster EBITDA. All in, we believe our focus on store productivity will drive growth in our business and will actually help us increase locations in the long run. Second, we have a vigorous testing platform that ensures we deliver results. We are not focused on short-term gains in the business, but rather long term activities that will continue to shape the tipping point in this category. It is important to reiterate the scientific and often patient approach we take to testing any idea across our business. When we do deploy up scale, it is because of the testing protocol we have in place which provide assurance that the initiative will be an effective use of capital. In general, we run test through three phases. Phase 1, this phase typically consists of pockets of 10 to 50 locations and lasts anywhere from 3 to 6 months. We compare test results to their expected results when balanced against the control location group. This allows us to see the results largely in isolation, versus the noise factors and performance. We can also move quickly without needing to distract the broader organization. Most importantly, if a test fails, it occurs fast in a low cost manner. We judge the results of these tests in terms of lift versus expectations as well as predetermined IRR hurdles. The IRR of a test on this small-scale should only improve when sourcing and deploying at full scale. If a test is successful in phase 1, we then move to phase 2 or expand location count and intent of the test. The location count here would typically involve between 100 and 500 locations and as representative of the profile of our retailers and consumers nationwide. Because this phase requires incremental time to phase 1, we like to see a continuation if not in acceleration of results as well as the preparation of how to deploy upscale assuming success. We are also working on improved sourcing in anticipation of scale. Based on results, we will then make a determination if these tests are worthy of a larger rollout which takes us to phase 3. For items that reach Phase 3, our attention shifts to a full-scale rollup determining the timing and number of locations. With that testing protocol in mind, I’ll update you on progress as it relates to our key strategies. We view our first and second strategies of growing household penetration and improving conductivity as a packaged solution. We are the market leader in dispenser sales and we are enhancing our focus on connecting those sales to either of our water solutions. Packaging these strategies can create inflection point in the growth rate of our high margin water businesses. That said, after testing all of the different pieces previously, we executed our largest promotion ever on Black Friday with Walmart, combining a strong solution of increased awareness, decreased retail pricing of the dispenser and connectivity drivers linking the dispenser to our water. Let me first explain how this worked and then I’ll discuss the results. The promotion included high visibility placement in a Black Friday circular, advertising a significant reduction of the everyday $99 price point dispenser to a price of only $74 during the promotion. Additionally, in-store consumers were presented with an instant redeemable coupon for free 5 gallon ball of exchange water on the outside of the dispenser packaging, driving an immediate call to action. The alignment in combination of these three important drivers led to an incredibly successful year-end event at Walmart, for which we continue to see positive impacts in our water business. Led by the Black Friday promotion, we experienced record sell through to end consumers of 178,000 units in Q4, an increase of 40,000 units from the same period last year. This promotion drove nearly half of the incremental units, and also drove a significant increase in attachment rates. Keep in mind, this promotion was highlighted over just one weekend; however, we continue to see the impact on water and will provide a more detailed update on the Q1 call. Having proven the power of this promotion, we are working with retailers as well as e-commerce platforms to execute similar conductivity programs in 2018. As we have said in the past, we believe that pairing our innovative and stylish dispensers at reduced retail pricing or driving connectivity to our high margin water is a winning solution for consumers, retailers and Primo. In addition to Black Friday, our dispenser team has been hard at work over the past year developing a product roadmap. We will launch three products in 2018, a pet dispenser, an electronic pump and an improved hTRIO allowing consumers to use K-Cup beverage technology within a water dispenser. For the first time we have marketing launch plans for these products. In fact, our pet dispenser just went live on March 1, so please go to our website to check it out as we are excited about a new product formed from our research. We will provide additional updates on the products throughout 2018. Moving on from our first two strategies, we have a lot of updates to share as we work to drive increase same-store sales. We have clear market share distance between our businesses in a competition, with 75% market share in dispensers and 90% in water. We are simply the best water solution for the home, creating habit-forming activities to drive a healthier lifestyle and increased water consumption. In fact, recent studies have shown that families with a dispenser drink 25% to 30% more water. While we are number one in our categories, there’s a larger addressable consumer market that we believe we can appeal to in thought-provoking ways. We are troubled by the continued decline of municipal tap water quality throughout the United States and Canada. Related to that, we’ve begun a crusade as a challenger organization helping elevate the conversion and conversation around water quality. We are months into a challenger brand approach focused against tap water. This approach not only support our Primo way but is helping to crystallize our focus, our culture, our strategies and certainly our brand. For example, you will soon see the tap challenge that we have been doing internally and are beginning to rollout across social platforms. These activities among others help consumers think differently about their home water consumption. Please visit the site, read up on the leadership we are bringing to the category and do not hesitate to share pictures from your fossils at home. More important than anything, we ask you to study your tap water carefully before drinking it. As an example of this strategy, we are rolling out retail signage in dispenser packaging that calls out the quality of tap water. We call this our CV joints, in-store signage platform which is now in phase 3 and being deployed across Walmart in the first half of the year. This messaging directly highlights the challenges of tap water along with the quality of our water and presents compelling visuals for consumers to aid in their switch to Primo solutions. In addition although in-store marketing tests include video screens currently in phase 2, which highlight the purification process of our refill equipment. We believe these screens will help lower the intimidation barrier, increase awareness on the value of refill solution and drive same-store sales. We also have significantly increased our efforts on influencer marketing, retail marketing and social media. Starting from relatively zero presence a year ago, you can follow our story on all major social platforms, as we recently hired a content director to lead our digital efforts. We have also recently added an e-commerce lead to help drive connected dispenser unit sales. Lastly, on pricing. As we have explained, we began testing our price increase in the coin-based refill locations in Q4. Having just concluded the full analysis of the test, we have decided to scale this price increase across the majority of our coin-based locations during 2018. That said a few details to share. First, price changes will not occur at every location as pricing at some locations is already optimized based on our current market intelligence. Second, like many price increases in CPG, we do expect some compression of volume; however, our testing shows and we expect that decrease to be more than offset by the dollar increase. Our testing protocol determines that optimal results occurred with price increase set at nickel increments. We will monitor consumer reaction which may require further pricing optimization both up or down. Third, while we recognize the positive financial impact this could have, we want to be very clear this is not a binary switch deployed across our network or in any financial model. We do not look at pricing as a one-time decision, but instead look at pricing as an ongoing optimization process. Lastly, our revised guidance does not include any upside from this price increase. We will know more by our Q1 call on timing, magnitude, and when indoor pricing may be considered as part of the overall strategy. Moving to our last strategy of driving unit economics, there’s a lot of effort being put towards decreasing our cost to serve. We are investing in technology that we believe will not only make us more efficient, but will improve the consumer experience as well. First, we remove the credit card and e-payment technology test in our refill business into phase 2. This test is underway at roughly 400 locations and will update you on progress and move forward plan next quarter. Second, after now running the combined refill business for over a year, we are finding further opportunities to drive shareholder value. First, we are currently installing road net routing software as well as new handheld technology, while we are also reviewing warehouse and inventory management software platforms to drive spending efficiencies. Our team is working hard to take our business to the next level, with our results progress and insights in mind, the confidence and visibility in our business has only increased. We closed 2017 with great results and strong momentum heading into 2018. With that, I’ll turn the call over to David to cover our financial results.

[David Mills:]

Thanks, Matt and good afternoon everyone. This afternoon, I’ll review our financial results and discuss our outlook for the first quarter and full year of 2018. I will then turn the call back over to Matt, for closing remarks. First off, to help investors understand our operating results, we do provide adjusted EBITDA which is a non-GAAP financial measure; reconciliation is included in our earnings press release issued this afternoon and available on our website. Turning to our results, we are very pleased with the fourth quarter and full-year results which met our increased guidance for both sales and adjusted EBITDA. On the top line, sales for the fourth quarter grew over 69% to $68.3 million, driven by growth in our two water segments. Dispenser segment sales for the quarter were down just under 5% to $10.1 million. This decrease is primarily a result of retailers planning for Black Friday promotional activities which we believe pulled sales forward into the third quarter. As we have discussed in the past, dispenser sales can be impacted by the timing of retailers orders, but have a minimal impact on adjusted EBITDA. That said, we saw a record consumer demand of our dispensers at sell through was 178,000 units in the quarter. This demand represented growth of 39% over the last two years. Refill segment sales increased over 200% to $41.4 million, primarily the result of the Glacier acquisition that occurred in December of 2016. Exchange segment sales for the quarter increased 2% to $16.8 million. As we mentioned in our third quarter call, we believe the two hurricanes in August and September of 2017 pulled sales forward into the third quarter as consumers’ pre-purchased water in anticipation of the storms. Additionally, as Matt discussed, the Black Friday dispenser and water promotion included instantly redeemable coupons for a free 5 gallon bottle of our exchange water with the purchase of a dispenser. We believe this strategic investment will drive new households and future growth in our exchange segment. We continue to see strong U.S. exchange same-store sales unit growth, which was 6.1% for the quarter, and was the 23rd consecutive quarter of growth over 6%. Turning to gross margins, overall for the quarter, the gross margin percentage was 28.7% compared to 28.6% in the prior year quarter. As we look at the gross margin details, dispenser gross margins for the quarter were 10.9% compared to 11.3% in the prior year quarter, primarily due to the increased promotional activities as well as product mix. Gross margins for the quarter in our refill segment decreased to 31.9% from 39% in the prior quarter. The decrease in gross margin percent is due to the Glacier acquisition, as the glacier refill business has a lower gross margin percentage than our historical refill business. The Glacier sales are the amount collected from the end consumers, primarily through our coin-operated machines and the cost of goods sold includes the commission paid to the retailers. Exchange gross margins for the quarter increased slightly to 31.4% from 31.3% in the prior year quarter. Next, SG&A cost for the quarter, decreased to $8 million from $11.7 million, primarily due to a decrease in non-cash stock compensation expense. As a percent of sales, SG&A excluding non-cash stock compensation decreased for the quarter to 10% from 13.1% in the fourth quarter of 2016. Overall, we continue to display the ability to leverage our costs as we grow the business. Moving down the income statement, interest expense for the quarter was $5.1 million compared to $4.6 million in the fourth quarter of the prior year. Before we look at net earnings, I would like to point out that the results for the quarter include a non-cash income tax benefit of $4 million. The benefit was driven primarily by the revaluation of our U.S. deferred tax liabilities as a result of the tax Reform Act passed in December 2017. As you know, we have significant net operating losses which should keep us from paying federal income taxes for many years. Any other impact from the new tax law should be minor. On a GAAP basis for the quarter, net income was $3 million or $0.09 per share compared to a net loss of $11.7 million or $0.39 per share in the prior year. For the fourth quarter, adjusted EBITDA more than doubled to $12.9 million or 19% of sales from $6.3 million or 15.7% of sales. Turning to the balance sheet, we ended the year with $5.6 million in cash. Our senior leverage ratio at the end of 2017 was approximately 3.3 times which is down from 3.7 times at the end of 2016. Overall, total net leverage when factoring in cash was 4.9 times compared to 5.4 times a year ago. We believe we are on track to reduce leverage going forward approximately one turn a year through the growth in EBITDA and pay down of debt. Given the positive results of the Black Friday promotion and other marketing initiatives, in the first quarter of 2018, we now expect sales in the range of $66.5 million to $69.5 million and adjusted EBITDA in the range of $11.5 million to $12 million. Looking at a full year, we are increasing our guidance for both sales and adjusted EBITDA. We now expect full-year sales to be in the range of $298 million to $302 million, up from the previous guidance of $291 million to $300 million. For adjusted EBITDA we now expect a full-year to be in the range of $61 million to $63 million, up from $60 million to $62 million. We continue to evaluate our approach to the allocation of capital as we increase our focus on marketing initiatives that will drive organic growth primarily through increase same-store sales, as well as new location and dispenser innovation, we intent to balance these investments in organic growth with complementary acquisitions along with our strategy to deleverage the balance sheet. With that, I will now turn the call over to Matt for closing remarks.

[Matt Sheehan:]

Thanks, David. We believe our results and our progress say a host of things about our business. First, we are good at predicting our business, but do so conservatively as we drive activities against our long-term growth strategy and not short-term quarterly results. Secondly, this record quarter and year in dispensers is hinting at the tipping point we have been pointing towards in the past. Third, after years of testing we have found a promotional formula that works well for the long term. We have an extremely loyal consumer base and knowing their long-term value allows us to balance consumer acquisition costs with our retail partners. We will always invest in new consumer acquisition as this is a considered purchase given the long term benefit to the business. Fourth, our exchange business continues to provide stay and impressive same-store sales comps. However unlike most CPG businesses who report same-store sales across a portfolio of products. Our quarterly unit strength is based on the performance of a single item. Fifth, this team can deliver. While many businesses miss the majority of the value creation they project at the announcement of an M&A transaction we over delivered. 2017 was mostly about operational integration and it provides us a business platform we can further enhance. Operational integration had to come first to service consumers and retailers. We can now shift focus to marketing and pricing strategies that drive financial results on top of an optimized platform. Lastly, our strategy has been intentional, create great products and gain massive distribution then turned marketing. With our 46,000 points of distribution we have convenient scale to leverage our marketing spent. As we increase our marketing budget and paired with our testing philosophy we have the capacity for high returns on incremental marketing dollars. Stepping back after this year, I'm tremendously proud of our team and distribution partners that help to make Primo integral part of U.S. and Canadian families seeking a healthier lifestyle to better water. With that, I’d like to open the line for questions. Operator?

[Operator:]

Thank you, sir. [Operator Instructions] Our first question comes from the line of Mike Petusky of Barrington Research. Your line is open.

[Mike Petusky:]

Hi, guys. Good evening. Congrats. Lots of good stuff going on.

[Matt Sheehan:]

Thanks, Mike.

[Mike Petusky:]

I guess, first question and maybe this for Matt. You described that the price increase for Refill seems to be working, you’re going to take it to scale and then it's essentially set in coin-based location, so forgive my ignorance on this, but how many of those that you actually have?

[Matt Sheehan:]

We have about 17,500 coin-based locations of the total 24.5 roughly location. So it's a majority of our locations for sure.

[Mike Petusky:]

And are they mostly the Glacier ones?

[Matt Sheehan:]

They're all Glacier, Mike, we did not have an outdoor [ph] solution part of the deal, so any in all outdoor locations are Glacier.

[Mike Petusky:]

And then the -- you said nickel increments, are there locations where you can take that up by two nickel or was it mostly nickels where you’re actually will raise price?

[Matt Sheehan:]

This phase was a nickel. As we said, we want to optimize market-by-market down the road. So there could be further opportunities, but right now what we’re doing is, just doing a standard nickel, where we are going to change which again we said is it’s not everywhere but it's going to be a nickel.

[Mike Petusky:]

Okay. Fantastic. And then, I just want to better understand the success you have with the Black Friday promotion. So is that something that you would repeat every quarter or like how often might you do what you did on Black Friday to essentially kind of prime the pump and increase connectivity between those who buy dispensers and then start buying water, it was like how often you roll something like this out?

[Matt Sheehan:]

Yes, Mike. Great question. So, Black Friday is a big deal as you know for retailers, so they put a lot of awareness behind Black Friday. So we were part of the larger awareness. So we think that’s an important engine for us and retailers don’t necessarily put that kind of awareness out all the time. So for now we’re working with retailers to understand what their promotional cycles are including Black Friday so that we can play with those cycles and then obviously we do our part to offer some compelling no value to the consumers as well. So we will certainly try to increase that. We’re talking to Walmart and others right now because of the success we had with Black Friday to see what 2018 looks like, but we’re certainly do our best to repeat if not increase the amount of time to do a promotion with that.

[Mike Petusky:]

Right. So like, Matt, intuitively what seem to me, isn’t really worked well. Black Friday there might be a couple of two, three or other days that might also work on it, means that a fair way to sort of think about it even if nothing in writing at this point?

[Matt Sheehan:]

Yes. I think that’s a fair way to look at it.

[Mike Petusky:]

Okay. Fine. And then just last question from me and I’ll let other people get on. In terms of the digital effort I’ve definitely been reading with interest some of the content you put on your Facebook site which I think has been good, particularly highlighting some the tap water challenges and some of the health benefits of drinking water. What have you guys seen from that or if it's anecdotal I mean, what are you hearing around from the early, and I know it's very early but from your early digital effort? Thanks.

[Matt Sheehan:]

Yes. It’s a great question. Engagements been really high, so we’re watching all of the key digital and social metrics and they’ve been – we’ve seen high engagement, we think and we know the story resonates a lot of our customers are our parents and they’re really being discerning about what they put in their homes for food and beverage. So it’s resonating really well and frankly while a lot of us know there are concerns of tap. There’s a lot of families who don't understand fully that there's things like nitrates and arsenic and lead in the water, so we've heard nothing but things like, go get him, keeping telling the story and so we’re going to be keep doing it. We care deeply of making sure people are aware and allowing them to make their own choice, but we think we have a duty to keep telling the story. Engagement support and feedback frankly Mike has been really strong so far.

[Mike Petusky:]

All right. Make sense. Thanks guys. Appreciate it.

[Matt Sheehan:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Mike Grondahl of Northland Securities. Your line is open.

[Mike Grondahl:]

Thanks guys. Congratulations on the successful promotion in price increases. It’s great to see that progress.

[Matt Sheehan:]

Thanks Mike.

[Mike Grondahl:]

First, on the price increase, can you give some details around that? It’s clearly not going to be all of the Glacier locations, but if you were the handicap, do you think it's 50% of them 70% of them 90% of them, what's a rough guide that you're sort of targeting?

[Matt Sheehan:]

We’re not sharing that number now, Mike, not to be cagey about it just because the test we just finished analyzing was positive or else we would be giving different news about us not moving for the pricing. The results were good positive. It's eventually kind of go in, but we have not fully summarize or detail about exactly how broad or deep this will be. So we just past the decision point and now we’re analyzing how deep that might go. We are sure it won't be everywhere that analysis is clear just because there are some very well optimize market today. So can't give you a number yet.

[Mike Grondahl:]

Got it. What did you think of the results compared to what your gut was telling you? I mean, I know you didn't have data ahead of time, but on a scale of 10 were the results barely there or were they just blatantly obvious. How would you handicap them?

[Matt Sheehan:]

I think they were inline our confidence going in that at times we will lose some – we will see some compression in volume, but we will more than make that up with per gallon revenue. So I don’t think it was far off our expectations, but again we tested in multiple regions and we saw some different sensitivities if you will, generally it was support. So try to give a handicap, but I don't think it was all that far off our expectations.

[Mike Grondahl:]

Got it. And then when you were talking about the Black Friday promotion and its success you kind of inferred that there be a couple in 2018. You also mentioned e-commerce, what were you getting at with sorting e-commerce promotion?

[Matt Sheehan:]

Just the fact that we have not focused ever on e-commerce, Mike’s question minute ago was more digital and social marketing and that’s where we’re leaning in on. But we haven’t really leaned on yet is e-commerce, so moving dispensers at a much better clip on places like Walmart.com and Lowes.com and on Amazon, that takes a decent amount of afford and expertise which we’re bringing in hose now as it relates to higher description, the type of products you put out there, the line up you offer. So, its really leaning into that. Here’s what we believe. We believe that there is a lot of room for growth with the dispensers online. Many of those same retailers have in-store sell water. So we just generally believe and putting some resources against selling more dispensers on line.

[Mike Grondahl:]

Got it. And then lastly, any update. It sounds like the strategy shifting away from locations, but Kmart Home Office Depot closings or any of the Walmart add in the fourth quarter?

[Matt Sheehan:]

Yes. I mean, we – for the year we were gross to just about 2000 ads. I think we were net for the year about 400 down and in most of that is that Kmart Office Depot. So that's why we’re saying that’s not necessarily going to drive the model in the future. We are still going after locations. We have folks like Walmart and others who when we find space or they open stores we will grow. We’re calling on a lot of customers where we have small penetration with. So location is certainly part of the strategy. But frankly with a lot of experience so that the bear if we really want to grow locations we have to put even more pressure on productivity per location and that’s going to continue to grow our business., while make us even more attractive for retailers. So, we’re – our sales team is out there knocking on doors certainly selling, while they’re also armed with same-store sales toolkit to grow the business. And now, I think its position positioning us much better with retailers because we’re not going and saying, could we have more locations only we’re going and saying, hey, these three ideas we want to help you grow your current business and we think it's become more attractive to all of your locations. So we’re putting pressure where we believe its right. It will help us grow locations in the near and long-term, but really same-store sales is that the higher focus today.

[Mike Grondahl:]

Got it. Great. Congrats again. Thanks guys.

[Matt Sheehan:]

Thanks, Mike.

[Operator:]

Thank you. Our next question comes from the line of Kara Anderson of B. Riley Company. Your line is open.

[Kara Anderson:]

Hi. Good afternoon.

[Matt Sheehan:]

Hi. Kara.

[Mark Castaneda:]

Hi, Kara.

[Kara Anderson:]

Help us understand the swings you’re seeing in the gross margin. Is that all volume based on the refill side? And then second to that do you seen opportunity to renegotiate the commissions paid to the return particular at Glacier?

[David Mills:]

Hey, Kara. This is David. Good question. On refill margins, we talked in the past the fixed – there basically a fixed cost structure in that business. So they’ll fluctuate as volumes fluctuate as volumes fluctuate in the business. So you saw on Q3, margins were 33% or so. This quarter down in the 32% range, so its all volume-based based on the fixed cost structure of that business as. Going forward as we drive efficiency in the model and as we focus on same-store sales we could see expansion in refill margins into 2018 as we drive more volumes through -- productivity to the location. As far as looking at commission structures we’re always looking to optimize our refill contracts either through commission structure, renegotiations and then things along those lines, pricing will impact that somewhat as well.

[Kara Anderson:]

Great. And then it sounds like integration with Glacier’s really complete. Are there any cost synergies left to be realized this year or even next year?

[Matt Sheehan:]

Yes. We talk last call, majority the way through all the synergy savings in through 2017 there was a little bit left primarily in the supply chain, purchasing efficiencies and we’ll see those in the first half of 2018. So, yes, we’re pretty well set. We’ll annualize probably the 6 million to 7 million, maybe little bit more in 2018. They’ll have the efficiencies for driving this year.

[Kara Anderson:]

Great. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Amit Sharma of BMO Capital Partners. Your question pleased.

[Amit Sharma:]

Hi. Good evening to everyone.

[Matt Sheehan:]

Amit, how are you?

[Amit Sharma:]

Thanks. Matt, on the last comment about same-store sales, are you changing your incentive structure for your sales force as well as you’re asking them to focus more on same-stores versus location?

[Matt Sheehan:]

And that’s good question. I don’t think we’re changing the incentive structure per se, what we are changing is we’re weighting same-store sales a bit more. So if that ties in your question then I’d say, yes. Again locations are still a core piece of their scorecards if you will and more balanced scorecard shop, everybody has a page [ph] of metrics that drives their bonus at the end of the year. So I’d say we’re weighting same-store sales up a bit which again will drive our business and growth. So from that perspective I’d say, yes, slightly, but its not that location are totally coming off.

[Amit Sharma:]

Got it. And David alluded to that a little bit, but I just want to hear from you. If you focus more on same-store sales not necessarily in 2018, but 2018, 2019, what's the impact that we should be watching out for? Is it mainly the margin impact or is it had some impact on your growth expectations as well?

[Matt Sheehan:]

So, you’re asking if the same-store sales impact focus what that will do financially?

[Amit Sharma:]

Right.

[Matt Sheehan:]

Yes. So one, I think there will be some programs was been some capital owned. We been open over the last couple years that if we can do something like video screens, credit card readers things like that it will take some capital. So we will be investing capital, you'll see a bit there where we think the midterm returns are pretty good for that. We should see if we’re right on this we should see comps go up. And in some cases depends on marketing expenses. We could see some slight margin. It’s early that we do everything on a payback model Amit, so if we do spent a little this quarter we think we’re going to get back over the future quarters. So I think to see some in capital, we could see some slight decrease probably by segments and marketing when any program will hit. But our plan would be that our comps continue to drive which I think will carry the whole business.

[Amit Sharma:]

And then is there a way to think about IRR on the video screen in e-card readers that you will be deploying?

[Matt Sheehan:]

Yes. We look at everything from our 30% IRR over a few years call it three-year period. We’re looking at 30% IRR or better. And some of the tests have shown well above that. Some tests we have have not reach yet. So we’ve put those tests down and we’ll keep moving forward. But that’s a good hurdles for us which is a good return on that and that’s continue line, we’ll see. We think we can have some tests that well above that, but that’s why we’re testing.

[Amit Sharma:]

David, do you have CapEx guidance for us for 2018?

[David Mills:]

CapEx guidance for 2018 is in the – I think $20 million range, about 50% of that’s for growth CapEx and 50% for maintenance CapEx. As I mentioned, that will fluctuate up and down as we make investments in any kind of marketing initiative we roll out, but the that's that the ballpark for 2018.

[Amit Sharma:]

But you are including some capital spending for the video screen in e-card readers, is that correct?

[Matt Sheehan:]

That’s correct. That’s part of our growth in CapEx.

[Amit Sharma:]

Okay. That’s all I have. Thanks so much.

[Operator:]

Thank you. Our next question comes from the line of Mark Argento of Lake Street Capital. Your question pleased.

[Mark Argento:]

Hi. Good afternoon, guys. Just a couple of quick ones. First on maybe you talk a little bit more of the new products. It sounds like you’re pretty excited about some of the new dispensers you’re rolling out and then just dovetailing with that, the Black Friday promotions, can you talk a little bit about -- you getting some support other than just circular activity from the retailers, are they taking in or helping out with any of the promotional activities on the price reductions on the dispensers or the water coupons?

[Matt Sheehan:]

Yes, Mark, thanks. This is Matt. Let me take the second one first if you don’t mind on Black Friday, we’ll stick with that. So to be clear, we kicked in here was really coupons. The majority of the discount if not all of the discounts is coming from the retailers. We’ve been talking for years and that’s really important, we’ve been talking for years about our strategy which is low margin on the dispenser and get the recurring revenue and retailers are starting to understand that and see how to help invest. So to be frank we didn’t have to put you’ll see in the dispenser margins. They didn't fluctuate too much that they pitched in the majority on the cost of – on the price of the dispenser we kick in on the coupon or too happy to do and then collectively put some a bit more maturity in the stories and then kicked in some on awareness. So it was fairly mutual because they get the same benefit we do over recurring revenue customer. Does that help you there?

[Mark Argento:]

Yes. Very helpful.

[Matt Sheehan:]

Great. On the first question, really excited, we started to build about 14 months ago a product development team and we first did a lot of research not only on product development research but also to core customer research and led us to three products this year. The first of the pet dispenser, so lot of research pointed to large families really care about hydration and there was one big variable there and a lot of them -- those with pet scored really high on our research. And today we talked a lot of consumers and they just don't have a great solution frankly with their pets to drink water. We've actually seen in some home studies people taking case pack and pouring it into the dog bowl, and we just think that is not a great solution for whole bunch of reason. Our team went to it and designed a really good functioning product, that looks good, that’s going to fit great in home. So that’s we’re really excited about that. It’s already online today. The next one is a E-pump, so we have for years had a plastic non-mechanical hand pump on we been selling in a lot of stores and one of a pieces of research said that would be -- it would be better if that was powered. And so with a USB wall charger you can power this thing up and it's really easy if you don't have enough room in the home for a full size dispenser you can put this E-pump right on top of our bottle water one of our [Indiscernible] water and use it there. And then lastly, last year we were testing of slight testing and slight launch of our product called hTRIO which is a K-Cup technology embedded in our water dispenser and we’ve upgraded that and we’ll be launching that in the last part of the year. So we really have a product launch by quarter. Q1 and Q2 is pet dispenser and Q3 is the E-pump and Q4 is the hTRIO and we think we have a lot of research behind that. We’re already working on 19 plans. So frankly for the first time we have a team focus on this and starting to build the real development plan which we’re frankly really excited about.

[Mark Argento:]

It’s helpful. And then just lastly in terms of the promotional schedule I know last year you guys moved it more into the summer months which seem to be successful. Are you anticipating that to be summer cadence this year in terms of two more dollars spend with the retailers and over summer months where consumptions were higher?

[Matt Sheehan:]

Yes. Definitely we’re going to put it the promotional dollars in the big season. Frankly Black Friday is typically not the biggest water season of the year. It works really well, so we’re going to be creative and continue to try some things but when it comes to the big ones we’ll spending with the seasonality really support their promotion.

[Mark Argento:]

Great. Thanks guys.

[Matt Sheehan:]

Thanks Mark.

[Operator:]

Thank you. At this time, I like to turn the call back over to Mr. Sheehan for any closing remarks.

[Matt Sheehan:]

Thank you for your participation on today’s call and interest in Primo Water. Have good evening.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day.