Primo Water Corporation
Q3 2015 Earnings Call Transcript

Published: 29 Oct 2015

[Operator:]

Good day, ladies and gentlemen. Welcome to the Primo Water Third Quarter 2015 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 follow at that time. [Operator Instructions] As a reminder, this conference call maybe recorded. I would now like to turn the conference over to Hunter Wells of ICR. You may begin.

[Hunter Wells:]

Good afternoon, and welcome to Primo Water third quarter 2015 earnings conference call. On the call with me today are Billy Prim, Chairman and Chief Executive Officer, Matt Sheehan, President and Chief Operating Officer and Mark Castaneda, Chief Financial Officer. By now, everyone should have access to the release that went out this afternoon at approximately 4

[Billy Prim:]

Thank you, Hunter. Good afternoon everyone. Thank you for joining us today to review our third quarter result. I will begin today's call by providing a few highlights on our results and initiatives. Then Matt will update us on our strategies. Finally, Mark will review our financial performance and outlook. At Primo our mission is inspiring healthier homes through better water. We provide an economical, healthy and convenient beverage that continues to resonate with consumers. Our business continues to be supported by favorable trends as consumers increasingly choose bulk water in their home as an alternative to sugar filled sodas and sports drinks [ph]. These trends and our operational efficiencies have helped us continue to achieve strong financial results. In the third quarter, our momentum has continued with all financial results exceeding our increased guidance. In the third quarter, our net sales increased to $33.9 million, up 28% compared to the prior year period. Water and Dispenser segment sales were up an impressive 30% and 25%, respectively, compared to last year. U.S. exchange sales were driven by same-store sales unit growth of 11.6% in the quarter as well as additional new locations. Dispenser sell-through to consumers was a record 144,000 in the quarter, an increase of 10% over prior year. In the third quarter, we continued to benefit from increased operational efficiencies and profitable expansion as we leverage the recent growth of our core water business as shown by adjusted EBITDA increase of 31% to $5.2 million. Mark will discuss our results and our outlook for the remainder of 2015 later on today's call. The consumer trends coupled with our increased retail locations, same-store sales growth and our reoccurring business model has us well-positioned for future growth and success. We are very pleased with our third quarter and year-to-date results. We ended the third quarter with approximately 25,700 retail locations and continue to believe can grow this number to 50,000 to 60,000 over the next several years. We remain focused on delivering on our growth targets as we had more households with our dispenser sales, which in turn will create further growth in our water business. With that overview, I will turn it over to Matt.

[Matt Sheehan:]

Thank you, Billy. I will now provide an update on our key strategies that continue to drive our results. These strategies remain constant for us and span operational excellence, consumer and retailer marketing, as well as solid management practices. First, grow household penetration of dispensers. The dispenser business in the Razor of a model and continues to grow. In the quarter, the sell-through of our dispensers increased were record 144,000 units, up 10% versus the prior year. This confirms more and more household are entering category and providing a strong indicator of future water sales. As a reminder, we sell these dispensers at low margins is one of our key marketing initiatives to gain future water households. Second, improved connectivity, we believe the record sell-through of dispensers in the quarter will drive the increase in our water business. We have several marketing programs such as coupons, bundled promotions and others that we believe tie dispenser customers to our water, helping to drive the strong same-store unit growth in exchange. We are unique and now we offer our retail partners and consumers a full portfolio brand with the Razor and the Razorblade. Third, increased retail outlets, as dispenser sales drive new households and future water sales, the team has focused on new dispenser locations. We are excited that during the quarter we added approximately 1,000 new locations, primarily dispenser locations bringing our total retail installations to approximately 25,700. A strong same-store sales growth in exchange and record consumer dispenser volume gives us and retailers confidence as we roll out locations. Fourth, drive unit economics. Driving unit economics comes from decreased operating cost, increased revenue as well as decreased capital investment in new locations. As As it relates to decreased cost and capital investment, we continue to see the benefits of several initiatives. Equipment and model [ph] sourcing, distribution leverage, court, quality production of dispensers and many more, these cost initiatives and results continue to improve the leverage in our business and allow our team to focus on growth, driving more volume through a more profitable system. As it relates to growth, we are on the heels of a deepen commitment to consumer research and brand work over last year. With that foundation, we continue to reshape our digital approach, refresh our in-store branding and execute several of the tests that we believe will drive consumer engagement and revenue. We have begun to see positive results from our testing and currently expanding those tests. For example, we have seen strong revenue impact from new signage our refill kiosk that places more emphasis on the compelling price value proposition. We have ongoing analysis related to equipment placement and stores cross-marketing and many others. We will be expanding these tests based on the results. Fifth, highly engaged teams, the consistency of our results would not be possible without a strong team that is highly focused on our corporate vision as well as our financial and operational targets. Our disciplined balance scorecard approach helps our strong team execute on the plans. We firmly believe this approach continue to drive the financial results we deliver each quarter and gives us clear visibility into our company. We, again, have the highest percentage of our employees achieving their personal and team-based targets. Last, but not least our sixth strategy is, deliver values and we continue to be proud of our team and confident in the very foundation of our business. Overall, we are poised and focused on delivering on a long-term mission and vision. I will now turn the call over to Mark to review our financial results and future outlook.

[Mark Castaneda:]

Thanks. I will review our financial results in more detail. To help investors understand our operating results, we do provide adjusted EBITDA, which is a non-GAAP financial measure. Overall, we are very pleased with our financial results for the quarter. We exceeded the high-end of our growth expectations for both, sales and adjusted EBITDA. As Billy mentioned, sales for the third quarter grew 28% to $33.9 million, driven by the growth in both, the Water and the Dispensers segments. Looking deeper at our top-line results, Water segment sales increased 30% to $24.5 million, primarily due to the addition of retail locations in the past year and the U.S. exchange same-store unit growth of 11.6%. This is an acceleration in same-store sales growth from the 8.7% we experienced in Q2, but [ph] the stronger top-line growth we expected. We believe this growth is an additional confirmation that our solutions resonate with consumers as they search for healthcare beverage alternatives. In our Dispensers segment, sales increased 25% to $9.4 million. This growth was driven by stronger than expected consumer purchases of dispensers at retail, which increased 10% over the prior year to a record of 144,000 units. This also represents an acceleration of growth in the second quarter, which was up 3.8%. We continue to believe that increased water dispenser penetration leads to higher margin recurring water sales. Overall, gross margin percentage was 28.1% compared to 28.8% in the prior year as a result of changes in our sales mix. Next, we continue to see leverage in our business model as SG&A as a percentage of sales decreased 100 basis points to 12.7% compared to 13.7% in the prior year, excluding non-cash stock compensation. Due to the current and expected strong results, non-cash performance-based stock compensation increased in the quarter. Interest expense for the quarter decreased 8.6% to $491,000 due to paying down $6.5 million in debt over the last 12 months. Adjusted EBITDA increased 31% to $5.2 million from $4 million in the prior year, which was ahead of our guidance driven by accelerating top-line growth. On a GAAP basis net income was $1.3 million, resulting in earnings per share of $0.05 compared to $0.01 in the prior year. Through three quarters, we generated free cash flow $4.5 million, driven by cash flow from operations of $10 million, which increased over three-fold over the prior year. Continuing onto our balance sheet, we paid down our revolving credit facility $1 million during the quarter, leaving a balance of $1 million outstanding. Our outstanding revolving credit debt is down from $4 million at the beginning of the year and $7.5 million in the prior year. Our total leverage ratio decreased to 1.3 times from 2.4 times a year ago. Turning to our outlook, as a result of our strong year-to-date results, we are raising our 2015 outlook. We now expect sales to be in a range of $125 million $226 million, up from our previous guidance of $122.8 million to $124.8 million. We are also raising our adjusted EBITDA to a range of $16.8 million to $17.2 million, up from our previous guidance of $15.8 to $16.8 million. Consistent with prior years, we tighten up our guidance ranges as the year progresses. I will now turn the call over to Billy for closing remarks.

[Billy Prim:]

Thanks Mark. I am proud of progress we have made this year and even more excited with the growth opportunities that lie ahead of us. Our team has worked extremely hard over the last several years to build a solid foundation and create a platform for growth that is not easily replicated. Our Razor-Razorblade business strategy generates reoccurring demand for our purified water through the sale of our innovative dispensers. Looking ahead, we expect to continue to benefit from increased efficiencies within our core water business, but we also believe in our growth prospects. Today, our foundation is stronger than ever before. We are at the point where we can truly improve our processes, drive greater leverage across our business model and in turn enhance long-term shareholder value. This concludes our prepared remarks; we are now ready for questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Matt Blazei of Lake Street Capital. Your line is now open. Matt, Blazei, your line is now open.

[Matt Blazei:]

I am sorry. Hey, guys. Sorry about that.

[Billy Prim:]

You guys are doing a tremendous job on the same-store sales front, really impressive, but when do you see yourself start to increasing the retail locations?

[Matt Sheehan:]

Hey, Matt. This is Matt Sheehan. Thanks for the question. Again, in this quarter, we did have a nice increase in locations of 1,000. As we mentioned, those are primarily dispenser locations, which frankly we are excited about as that drives household penetrations and we believe will lead to future water locations.

[Matt Blazei:]

I know you talk about 40,000 or 50,000 locations over the next few years is that something that we will see here over the next one, two, three quarters in terms of starting to see some acceleration on that side?

[Mark Castaneda:]

It is a long-term goal for us; Matt, but we are working hard to continually increase locations.

[Matt Blazei:]

Yes, because your same-store numbers are fantastic, but definitely, we would like to see some retail growth too.

[Billy Prim:]

I think Matt, what you will see is, locations come in chunks just like this quarter we get a 1,000. They really do and I think our pipeline is strong and I think you will see some large chunks as we go forward.

[Matt Blazei:]

Perfect. Thank you, guys.

[Operator:]

Thank you. Our next question comes from the line of Reed Anderson of Northland Securities. Your line is now open.

[Reed Anderson:]

Great. Thanks for taking my questions. I would also add my congratulations it is getting boringly good goods, so that is great. A couple of questions, Matt, we talked last time about some of the tests you are doing and you touched on again here in your prepared remarks. It sounds like from that example you gave a lot of these test really are just kind of - they do not really involve a lot of cost or incremental cost. It is more just kind of tweak and the approach. Example you give is that fair or there are some where you are doing a little bit more investment to get more on the sale side?

[Matt Sheehan:]

Reed, great question, we take a fairly scientific method to testing, so most of the initial tests are very low costs, fairly straightforward to execute and we are even being selective as it relates to those tests, so the first round of those tests are fairly expensive. Then we only scale them if they make sense and we see return on them, so it is pretty scientific the way will expand tests, if that helps.

[Reed Anderson:]

Any chance that some of these tests could become more broadly rolled out by year-end or you are still kind of thinking it is quarters more than months to figure it out?

[Matt Sheehan:]

We feel pretty good about - over the next few quarters, we will be taking some of the tests from a small test to expanding test to potentially larger national rollouts.

[Reed Anderson:]

Okay. That is good. Then, Billy or Mark, just one kind of broader high-level question, I mean you had a fantastic year and you really have even better momentum than I would have thought heading into the end of year. Obviously, you are going to cycle some tough increases, but you are still are going to grow well. Is there anything despite that would make you feel like you still can grow EBITDA at a really healthy rate and expand margins next year or is that still feel like it is intact?

[Billy Prim:]

We feel good about that. We have got a lot of momentum. We do think there is still the ability to expand margins and we feel like that our growth rate and EBITDA will equal or exceed our long-term goals.

[Reed Anderson:]

That is great. Well, best of luck, guys and I will let somebody else jump in. Thanks.

[Operator:]

Thank you. [Operator Instructions] I am showing no further questions at this time.

[Billy Prim:]

Okay. Thank you, folks. We do appreciate your interest in Primo and appreciate your participation in today's call. The progress we have made today could not have been accomplished without the efforts of our employees, service providers and retail partners and we sincerely thank them for their continued dedication. We look forward to providing you an update on our business progress next quarter. Have a good evening.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Have a great day everyone.