Primo Water Corporation
Q4 2012 Earnings Call Transcript

Published: 19 Mar 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the Primo Water Corporation Fourth Quarter 2012 Financial Results Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Katie Turner. Ma'am, you may begin.

[Katie M. Turner:]

Thank you. Good afternoon, and welcome to Primo Water's fourth quarter fiscal year 2012 earnings conference call. On the call with me today are Billy Prim, President and Chief Executive Officer; Mark Castaneda, Chief Financial Officer; and Matt Sheehan, Chief Operating Officer. By now, everyone should have access to the release which went out this afternoon at approximately 4

[Billy D. Prim:]

Thank you, Katie, and thank you for joining us on the call. I'm going to start out with a few comments on where we are with our renewed focus on our core business, and then introduce you to Matt Sheehan, who will go a little deeper in our initiatives to drive operational excellence. Then Mark will give you our fourth quarter and full-year 2012 recap and our outlook for 2013. As we discussed with you last quarter, we discontinued the Flavorstation Sparkling business to focus on our core Water and Dispenser business. We are pleased to report that we can already see the improvement in our results from this strategic move. In the fourth quarter alone, water revenue increased from $13.9 million to $15 million or 8.2%. Total gross profit increased to $4.9 million versus $3.8 million last year, a 27% increase. SG&A decreased to $4.1 million from $5 million last year. And the result -- as a result of this performance, we generated $1.1 million in adjusted EBITDA, up from a loss of $800,000 last year. To reiterate, our water revenue increased, our gross margin dollars increased, our SG&A went down. And as a result, this improved EBITDA. This is the triple play we hope to continue achieving with our renewed focus on our core competencies in 2013. Our core business of water and dispensers continues to grow, and our customer base includes a world-class group of retailers. This best-of-breed retail group had a fourth quarter same-store sale increase of 21% in the U.S. exchange unit volume. As we will further focus all of our attention on our core business, we believe the benefits will continue and that we can grow our adjusted EBITDA more than 65% in 2013. Mark will discuss our full outlook of 2013 in a few minutes. Growing our EBITDA should provide us with financial flexibility to recapitalize our balance sheet and produce cash flow from operations to support future growth. For 2012, we generated positive cash flow from operations of $5.9 million versus a negative $8.2 million in the prior year. This represents a $14-million improvement in cash flow from operations last year. To explain what is driving the growth of 21% same-store sales in the U.S. Exchange business, you have to look no farther than our dispenser sell-through at retail. Sell-through units of dispensers to consumers grew at retail, up 28% to 92,000 units in the fourth quarter. We also improved the gross margins in both our Water and Dispenser business in the fourth quarter compared to prior year. Water gross margin improved to 30.9% from 27% and dispensers improved to 4.1% from 1.3%. In Q4 of 2011, we did have a large channel fill [ph] for new dispenser retail locations. As we've experienced in the past, this type of event distorts the sell-in revenue of dispensers comparison this quarter versus last year. We, however, continue to focus on the retail sell-thru which represents the number of consumers who are buying our dispensers, of which a percentage attach, and continue to buy exclusively Primo Water. That continues to drive growth but we may be subject, from time to time, of these spikes in the channel fill [ph]. We've also taken steps to clean up our balance sheet to start 2013. We have written down our Flavorstation assets and taken a one-time noncash charge of the goodwill on our balance sheet. Now what should you look for in the future? I believe it's the same results we realized in Q4, including water revenue growth, gross profit expansion, operating income growth and decreases in SG&A. All of these should drive significant growth in EBITDA. As part of this renewed focus on our core business, we brought in a world-class operator, Matt Sheehan, to be our Chief Operating Officer. Matt came to us from Redbox, where he helped build a high growth, consumer-focused organization with a metric-driven culture. Additionally, Redbox has many similarities to our Water business. I would now like to introduce Matt Sheehan, our Chief Operating Officer.

[Matt Sheehan:]

Thank you, Billy. First, I am pleased to be part of the Primo team, as I see an opportunity to build a significant business in an area that I believe is poised for tremendous long-term growth. I'd like to cover 2 areas

[Mark Castaneda:]

Thanks, Matt. I'm going to briefly review our fourth quarter and full-year financial results and then go into some details. Due to changes in our strategy for the Flavorstation business, we began to report the business as a discontinued operation during the third quarter. In accordance with GAAP, we adjusted prior periods to reflect the change in reporting to allow meaningful comparisons between the 2 years. Additionally, to help investors understand our operating results, we do provide certain non-GAAP financial measures, including adjusted EBITDA, which I'll discuss further in a few moments. Overall, as Billy mentioned, we continue to experience improved trends in sales, gross margins and SG&A leverage across our core businesses. Total sales for the year increased 10% to $91.5 million, and in the Q4, we're consistent at about $21 million. Drilling into the top line. Our core Water business revenues increased 7% for the year and 8% during the fourth quarter, compared to the prior year. Our Exchange revenue increased 15% for the full year, compared to the prior year, while our Exchange locations were down 4%, which highlights a strong same-store sales growth during 2012. As Billy mentioned, this growth was driven by growth in our dispenser unit sales. For 2012, our Refill sales were down 3%, primarily as a result of lower empty bottle sales as consumers appear to be stretching their bottle investment. Dispenser segment sales increased 22% for the year to $29 million. Dispenser units sold into the channel increased 5.5% to 373,000 units and the average selling price, or ASP, increased about 15% as a result of price increases and mix changes to higher-priced units. Dispenser unit sell-through to consumers increased 36% for the year, compared to the prior year, and on a basis of 17% increase in locations reflecting solid same-store growth. Our net loss per share from continuing operations on a GAAP basis was $3.93 per share for 2012, which was significantly impacted by noncash impairment charges of $82 million or $3.46 per share. This noncash charge is the result of adjusting our book value with our stock price. Despite a third-party cash flow valuation that supports a significantly higher book value, the company took charges to present a more conservative balance sheet that closer aligns with the stock price. I do want to highlight that the charges do not impact bank covenants, financing of the business or cash flow in the business. Additionally, as Billy mentioned, the cash generated in our continuing business improved by $14 million, generating cash flow from operations of $5.9 million for 2012 and a breakeven free cash flow from continuing operations. Continuing onto our balance sheet, the balance sheet was reclassified to reflect the assets and liabilities related to our discontinued operations as assets or liabilities of disposal group. Our current ratio has improved from 0.9 at the end of 2011 to 1.2 at the end of 2012 as a result of refinancing our debt with long-term facilities. Our accounts receivable decreased by $2.5 million, as a result of improved DSO, which improved to 42 days from 52 days in the prior year. Turning to our outlook for 2013. We expect full year 2013 sales to increase 2% to 4% or in the range of $93.3 million to $95.2 million and full-year adjusted EBITDA in the range of $9.2 million to $9.4 million, which represents over a 65% improvement. We expect Water segment revenue to increase 5% to 7% to $65.8 million to $67.1 million. For the first quarter of 2013, we expect total sales to increase 4% to 6% or in the range of $20.4 million to $20.8 million, and adjusted EBITDA to increase 25% to 30% to the range of $1.5 million to $1.6 million. We expect capital expenditures to range between $5 million and $6 million. From a cash flow perspective, with $9 million plus in EBITDA, we expect $2 million -- $2.5 million in cash interest and using the midpoint of CapEx of $5.5 million, results in $1 million plus of free cash flow, plus the proceeds of Flavorstation inventory which is expected to be a couple million dollars. We do believe we have sufficient debt capacity to continue to invest in growth for our business. We believe we can continue to improve our operating results and refinance our existing debt with lower cost of capital within the next 12 months. This concludes our financial review. Now I'd like to turn the call over to Bill.

[Billy D. Prim:]

Thanks, Mark. In closing, we remain focused on growing our core Water and Dispenser business. We believe, based on positive industry trends and the success of our Water business to date, that we will continue to gain share in the water market. Our management team believes we have the strategies in place to grow our business long term. Going forward, we believe we can continue to add appliance households which would help lead to continued reoccurring water sales. Thanks for your participation today. Operator, we will now open up the call to questions.

[Operator:]

[Operator Instructions] We have a question from Andy Wolf from BB&T.

[Andrew P. Wolf:]

A couple questions. One is the Exchange business really took off here in the fourth quarter for same stores. And could you give us some color around that? Was it Wal-Mart? Was the business really strong at Wal-Mart? Was there something in there that is exceptional? Or is that sort of what -- the trend you're anticipating? It doesn't look like it's what's baked in your guidance, but that would be helpful. And then I guess for Matt, if you're looking to -- it sounds like get -- if the water is not selling in certain locations, get it out of there and move it to where it might sell, but I just -- if you have a corporate agreement with a big chain, I just wonder, if how doable that is? Or if you're going to have to renegotiate terms of some of these deals.

[Billy D. Prim:]

Yes. Andy, a couple things. We have had strong Exchange same-store sales growth. And I don't know if you can point it to one thing. I'd say, a couple things of note. Number one, there was some Hurricane Sandy in there. So that affected it, but that's a small percentage of our locations, but it did have some impact. Secondly, as you will note, our locations are down but our units are way up. We have repositioned assets and we'll -- you will see us doing more of that. So we're going to reposition assets to higher volume stores. Now we won't do that if a retailer doesn't agree that we should reposition an asset. But we did have a higher volume store count in Q4 than we had in previous quarters, because we have taken out some lower-volume locations. The third thing and the impact that you're going to continue to see, we have placed a lot of dispensers in homes. Our surveys show that 25% of those use exclusively Primo Water. So those dispensers are adding up because we have now have a lot of locations at Lowe's, in Wal-Mart, in Kroger that sell dispensers and water in the same location. We're starting to see the benefits of that.

[Mark Castaneda:]

And, Andy, just a little bit to add on to that, some more color on that hurricane. Those stores that did get some hurricane volume, we actually saw a lot of that stick. So we've added consumers -- consumers went out and bought a cooler because they were out of water or they didn't have a way to get water, and they're sticking to it. So those stores are continuing to have really strong comps.

[Andrew P. Wolf:]

Okay. And then the differential with the Exchange sales being higher than the revenue, does that explain the buying trend? Mark, you mentioned people were buying less of the 5-gallon carboys? Or is it -- or is this price discounting?

[Mark Castaneda:]

No. There was no discounting of price, it was mostly the Refill business was down on bottle side -- bottle sales.

[Billy D. Prim:]

Andy, a couple things that we're seeing in the Water business that I would note that you need to see. Number one, because our locations are more mature, we get more exchange transactions and less IPs. That means the mix in the Exchange business, the price per unit, is lower because you have more exchange transactions. In the Refill business, what we did see -- Refill volumes of water are flat. However, the consumer is not buying as many empty bottles. So our empty bottles were down. And I don't know if that's a reflection of the economy or we're looking at it but they're stretching their dollars on empty bottles and are not buying as many empty bottles at this time. They're refilling their old bottles at the same rate.

[Andrew P. Wolf:]

Okay. And lastly, whether it's attachment -- these attachment strategies or whether it's from the hurricane or selling a watercooler, could you just flush out a little, is that promotional? Is that -- you talked in the past about tie-ins and so forth, but what is going to be the approach for the year on that?

[Billy D. Prim:]

I think you're going to see us continue working the attachment rate. We are in discussion with various retailers about ways that we can work together to promote that, how can we attach that dispenser and make sure that consumer leaves there with Primo Water in their market basket. And we -- that's our marketing plan and that's what we plan to do. The difference in our marketing plan this year versus last year though, last year, although dispensers were considered a big part of that marketing plan, we lost money in the Dispenser business. That's not going to happen anymore. You're going to see dispensers be a profitable marketing tool that we use to continue to attach water to.

[Operator:]

I would like to turn the conference back over to Mr. Billy Prim for closing remarks.

[Billy D. Prim:]

Okay. Thank you, operator. And thank you -- I'd like to thank all of our employees, regional operators and refill service providers for their efforts in our growth and continued executional improvement. We continue to execute on our core strategies of growing locations to 50,000 to 60,000 retail points of distribution, increase households through our dispenser sales and improve our operating results to achieve profitability and lowering our cost of capital. We appreciate your interest and thank you to your -- for your support. We look forward to providing you with an update on our business progress next quarter. Thanks.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect at this time.