Primo Water Corporation
Q4 2014 Earnings Call Transcript
Published:
- Operator:
- Good day, ladies and gentlemen. Thank you for standing by and welcome to the Primo Water Fourth Quarter and Fiscal 2014 Earnings 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 is being recorded. I’d now like to turn the conference to our host Ms. Katie Turner.
- Katie Turner:
- Good afternoon, and welcome to Primo Water's fourth quarter and fiscal 2014 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, Katie. Good afternoon, everyone, and thank you for joining us today to review our fourth quarter and fiscal 2014 performance. I’ll begin today by providing a few comments on our overall business. Then Matt will discuss our operational initiatives in more detail. Finally, Mark, will review our financial results and outlook for 2015. I’m very pleased to report that Primo generated very strong record results for the quarter and the year, in which we saw significant top line and adjusted EBITDA growth. These results exceeded the high-end of our guidance, which we consistently raised each quarter in 2014. I want to thank our Primo team for their hard work and dedication as we executed on our 2014 strategic initiatives, scale, household penetration, growth, refinancing and efficiency. To provide some additional detail, in 2014 we added 2,500 water locations, transitioned a majority of our exchange distribution network, vertically integrated over half of our U.S refill service network, rolled out new technologies for our refill locations, and finally refinanced our debt. Importantly, these efforts helped our Q4 revenue grow more than 50% and our adjusted EBITDA grow more than 73%. We are very pleased with our finish to 2014 and the momentum we have heading into ’15. Now I’ll focus on our financial progress and success in 2014 in more detail. Revenues for 2014 increased approximately 17% to a record $106 million, driven by growth in both the water and dispenser segment. Our continued focus and commitment to delivering on our strategic initiatives enabled us to improve the fundamentals of our consolidated business. Gross margin increased 120 basis points to 26.2% for the year. Our adjusted EBITDA in ’14 significantly outpaced our sales growth. We generated a 43% increase in adjusted EBITDA to $13 million. These results illustrate the steps we’ve taken to better position our business for profitable growth today and into the future. Our operational and financial improvements in 2014 will service key building blocks for Primo’s growth in ’15 and beyond. Our team is now focused on our mission, which is inspiring healthier homes through better water. Supporting this mission are the following six key strategies. Grow household penetration of dispensers, improved connectivity, increased retail outlets, drive unit economics, develop highly engaged teams and finally live our values. Matt will expand on these strategies in his remarks. In 2014, we completed Phase 1 of the DS transition. We are now focused on Phase 2 in which we’re transitioning prior DS Service legacy customers over to Primo. We remain on track to complete this Phase ahead of our two-year transition plan with an estimated completion of mid 2015. In addition, we plan on investing in marketing and -- we plan on further investing in marketing initiatives that will increase our brand awareness and support future growth. We will continue to leverage on our core business to improve our operating efficiencies. As a result of our strong Q4 performance and these initiatives, we’re raising our outlook for 2015. Due to favorable health and wellness trend, we’ve increased confidence in our business. Just a few weeks ago, the USDA announced new recommendations for the reduced consumption of sugar in an effort to help improve wide spread obesity, noting that soda consumption by children is of particular concern. I’m proud to lead an organization that provides a healthy zero calorie and refreshing beverage option. We believe that these wellness trends are accelerating as evidenced by our U.S exchange same-store unit growth of 11% for the year. We ended the year with 24,600 retail distribution points and a plan to grow to 50,000 to 60,000 locations. This will expand our brand exposure and convenience for consumers. In summary, we’re very pleased with our 2014 performance. These results give us confidence in our outlook for another year of solid growth in 2015. Our team remains focused on improving and growing our business and I believe we’re strongly positioned for future growth and opportunities for long-term success. With that overview, I’ll turn it over to Matt.
- Matt Sheehan:
- Thank you, Billy. As planned, we ended 2014 in a significantly improved position based on our teams focused and measured approach over the last two years. We laid out clear goals and executed on them at 2014. Before expanding on our approach in ’15 and beyond, which Billy began to lay out, I’d like to share some of the key improvements and achievements of our team. I’m very proud of the focus and dedication, not just to stick with our plan, but to consistently deliver results. It takes a special team and culture to both reenergize and grow our Company. We’ve done what we’ve said we would do, which gives us confidence for the future. Here are just a few key achievements. First, in year two of using a balanced score card approach, we’ve increased our visibility from the key leading indicators that drive change. Each person in our Company has a set of goals and all those goals as we say ladder up to drive the financial results. Second, we leveraged our exchange network to drive long-term cost reductions, added gross margin and prepared us for future growth. Third, we began to grow the business again in terms of locations and our story [ph] to retailers is becoming more important, given the trend that Billy spoke about. Fourth, in our refill business, the team rolled out the telemetry and CORT projects now largely complete. Both have increased service levels, increased gross margin through lower operating costs, and generated stronger partnerships with retailers. In time, we expect these changes to further drive our business as our machines will be better functioning and better maintained, essentially making the business more appealing to customers. Based on the success of our CORT program in the U.S., the team is currently rolling this out in our Canada refill business in the first half of 2015. Fifth, we continue to improve our dispenser segment. Consumer demand for our dispensers has increased throughout the year with approximately a 7% increase in dispenser sell-through for the year. We believe this is a result of our ability to offer quality units, improving our supply chain and improving our inventory visibility, which is leading to higher in-stock rates and sell-through. It was a year of tremendous change which the team welcomed and executed. These changes have led to a healthy foundation upon which to grow. This leads to our long-term plan, which is two key components that Billy mentioned, our mission and our strategies. I’d like to go into a bit deeper into those strategies and it will be the foundation for our business moving forward. First, growing household penetration of dispensers. The dispenser business is the razor of our model and what we call the market maker of our bulk water [ph] business. We have both tremendous market share in this growth business and while we sell these dispensers at little margin, we do so to gain water households. We will continue to both grow and improve our offering of dispensers. We offer both consumers and retailers the largest selection and best quality dispensers in the market. Second, improved connectivity. Based on the household penetration strategy, we want to ensure that though dispenser consumers connect [indiscernible]. Being the only provider which offers both exchange and refill, offering the same-store that sell dispensers, we see the value of our offering. Third, increased retail outlets. After shedding some non-performing stores in 2013, we began to grow our location base in ’14. With a strong CORT business, industry growth trends, and a full portfolio for retailers, we’ve a compelling story that we believe will lead to new locations in 2015 and beyond. There are location opportunities not only with our large current clients, but with some very large retailers that we’ve little to know business with today. We have invested in improved service levels, sales, and retailer customer service that will allow us to expand. Fourth, drive unit economics. By looking at the factors that drive both our segment performance and those factors that drive store level performance, we’re improving our ability to both select locations as well as drive revenue. Having just begun our marketing focus in 2014, we will continue to test and learn across several different consumer fronts. We expect these tests to continue at an increased rate and we believe that it will increase our unit economics. Fifth, highly engaged teams. It is important to us that we have a culture of strong engagement and commitment to our mission. We are now measuring the overall health of our culture and frankly the effectiveness of our leaders. We have a good strong team across the board and we want to make sure they have a good place to work, proud of what they do and have all the tools and support necessary to hit their goals. Last, but not least, our sixth strategy is to live our values. We believe that at the core of any strong business, our set of values that along with good business sense drive decisions and attract and retain talent. Overall, we have a strong CORT business, a strong team, a roadmap for the future and an ability to measure our progress. We are confident in the business and are proud of our accomplishments thus far. Now, I’ll turn the call over to Mark to review our financial results.
- Mark Castaneda:
- Thanks, Matt. I’ll now review our financial results in more detail. To help investors understand our operating results, we do provide certain non-GAAP financial measures including adjusted EBITDA and pro forma fully taxed earnings. Overall, we’re very pleased with our financial results for the quarter, which exceeded the high-end of our growth expectations for revenues and adjusted EBITDA. Sales for the fourth quarter grew 52% to a record $29.6 million, driven by improvements in water segment sales, and a more than doubling of our dispenser segment sales. Looking deeper at our top line results, water segment sales increased 29% to $19.5 million, primarily due to the addition of new retail customers and U.S exchange same-store unit growth of approximately 11%. In our dispenser segment, sales increased 2.3x to $10.1 million, primarily due to timing of shipments to replenish retailer inventory. As a reminder, our dispenser segment can be lumpy based on the timing of orders by our major retail customers. However, this revenue has limited impact on our EBITDA. As we mentioned last quarter, shipments of some of these retail customers were delayed in the third quarter to the fourth quarter. We continue to believe that increased water dispenser penetration will lead to further increases in a recurring, higher margin water sales. Gross margin dollars increased approximately 45%, primarily due to increased sales. Consolidated gross margin percent decreased to 24.8% in the fourth quarter compared to 26% in the prior year due to a higher mix of lower margin dispenser sales. As a percent of sales, the dispenser segment increased to 34% compared to 22% last year. Gross margin in our water segment increased 260 basis points to 33.9% driven by lower supply chain costs. Next, we saw an increase in overall SG&A expenses, primarily attributed to a noncash stock compensation charge of $2.6 million during the fourth quarter for performance based compensation that was triggered by our strong performance. Excluding the non-cash compensation charge SG&A as a percent of sales decreased to 13.4% compared to 16.5% in the prior year. Turning to the year, we had record sales and adjusted EBITDA both which succeeded the high end of our estimates. Revenues increased 17% or $106 million and adjusted EBITDA increased 43% to $13 million. The increase in sales was driven by both water and dispenser segments. Our water segment sales were $71.3 million up approximately 12% over the prior year, primarily due to U.S. exchange same-store sales growth of 11%, and the addition of 2500 water locations added during the year. Dispenser segment sales increased approximately 28% to $35 million, bringing retailer inventories back to normal levels. Dispenser sales to end consumers increased approximately 7% over the prior year. As I mentioned previously we had higher non-cash stock compensation cost due to performance based awards, which lead to higher SG&A for the year of $19 million. Excluding the non-cash compensation, SG&A for the year as a percent of sales decreased to 14.1% compared to the prior year of 15.3%. Moving down the income statement, I will discuss the quarter and full year numbers. Interest expense for the quarter decreased 50% to $0.5 million primarily due to lower volume rates under the new credit facility which we added in June 2014. For the year interest expense increased to $6.3 million compared to $4.4 million in 2013. The increase is due to $2.8 million in charges associated refinancing of our prior credit facilities. For the quarter, our net loss from continuing operations was about $3.5 million or $0.14 per share compared to a loss of $2.8 million or $0.12 per share in the prior year. On a comparable pro forma fully taxed basis, we reported earnings from continuing operations of around $200,000 or a penny per share compared to a loss of $1.2 million or $0.05 per share for the prior year. For the year our net loss from continuing operations was $13.1 million or $0.54 per share compared to a loss of $8.8 million or $0.37 per share in the prior year. On a comparable pro forma fully taxed basis, net loss from continuing operations was $0.03 per share compared to a loss of $0.18 for the prior year. The pro forma adjustments are for non-recurring charges and non-cash compensation. Continuing on to our balance sheet, our DSO improved to 33 days from 36 days in the prior year as we continue to focus on our collection processes. Our total leverage ratio decreased to 1.9 from 2.7 times in the prior year. Our cash flow from operations increased 27% primarily due to EBITDA improvements, and our net CapEx was about flat at $7.2 million resulting in free cash flow. Turning to our outlook, due to our very strong Q4 results, we are raising our 2015 outlook. We now expect net sales to be in the range of $113 million to $117 million up from $111 million to $115 million, and adjusted EBITDA of $14.4 million to $15.7 million up from $14.2 million to $15.5 million. Today we are also introducing guidance for the first quarter of 2015. We expect net sales of $26.7 million to $27.7 million and adjusted EBITDA of $3 million to $3.2 million. I will now turn the call over to Billy for closing remarks.
- Billy Prim:
- Thanks, Mark. We ended 2014 with strong momentum and I could not be more excited about our future. Our foundation is solid and there are significant opportunities ahead of us to grow our business towards the increased distribution of our water services and water dispensers. At Primo, we are inspiring healthier homes through better water. This concludes our prepared remarks. Operator, we are now ready to take questions.
- Operator:
- Certainly. [Operator Instructions] And our first question comes from Kara Anderson from B. Riley & Company. Please go ahead.
- Kara Anderson:
- Hi, guys. Thanks for taking my questions. First, let me start off with dispensers, you saw a fairly large dispenser number in the quarter. You said that was part due to the late orders from Q3, but can this impact sales in the coming quarters? Is it possible retailers can say that their inventory is full and further delay for orders from here on out?
- Mark Castaneda:
- Yes, Kara, this is Mark. Well, we don’t think it be a delay of future orders, but it will cause again some of that lumpiness. There will be a lighter Q1 in sales for dispensers.
- Kara Anderson:
- Okay. And then in terms of brand awareness, what are you doing today to increase brand awareness and what are your plans into the increased marketing investment that Billy spoke about?
- Billy Prim:
- Yes, I’ll let Matt give some specifics on that.
- Matt Sheehan:
- And Kara, great question. It is one of our focuses here. First, as mentioned before we’re trying to understand our consumers as deep as we can before we start a lot of initiatives, and then the initiatives are going to stretch across a few areas. One, in-store signage, we have a great amount of locations as we know and we are in front of a lot of Americans and Canadians every single day. And then we also have to start some online presence which frankly we haven’t done yet to date. So we see both our in-store presence and our online presence as great opportunities for us backed by strong consumer knowledge and insights.
- Kara Anderson:
- And then on the refill side, I know you focused operationally with CORT and telemetry and that seems to be doing well. What are you doing as of today or what do you think needs to be done to grow that business, if I understand its been pretty flat and there really hasn’t been much dedicated to it.
- Matt Sheehan:
- Yes, Kara another great question. We to your point have focused on gross margins in the business and that’s where we are seeing some health. We strongly believe that there’s good value proposition in that business given our price points and overall value prop to the consumer, given the trends that Billy talked of before. We’re just in the beginning phases of again [ph] to my last answer understanding that consumer and then making sure that we message and communicate to them better. But we do have a lot of belief in our value proposition that, that will help to grow over time.
- Kara Anderson:
- Great. Thank you.
- Operator:
- Our next question comes from Joshua Reilly of Northland Securities. Please go ahead.
- Joshua Reilly:
- Hey, guys congrats on the nice Q4.
- Billy Prim:
- Thanks.
- Joshua Reilly:
- So my first question is, with the lower supply chain cost that you talk about, was that a result of the DS waters relationship or is there something else driving that?
- Billy Prim:
- Yes, Joshua, the DS relationship did help that. There are several other things that we’ve done to our supply chain that have impacted these numbers. That’s everything from the way we order bottles to the way we service our refill machines using technology to reduce cost. So it’s not just a one trick thing. We have looked at our supply chain across the board and have continued to make improvements and we believe there’s more to come.
- Joshua Reilly:
- Okay. And then, on the Home Depot business, are you first of all in all of the Home Depot’s at this point? And secondly, is there the -- an opportunity to expand the refill business in the Home Depot at some point as well?
- Billy Prim:
- The Home Depot business, all the locations that DS had for that customer, we have now transitioned. They didn’t have -- some locations don’t have exchange water. We have not taken our refill business to home improvement in either one of the change that’s part of the things in the research that we’re doing on that consumer to see are there ways to expand the offering and to new channels, and we’ll be looking at that in the future.
- Joshua Reilly:
- Okay. Thank you.
- Operator:
- Our next question comes from Matt Blazei from Lake Street Capital. Please go ahead.
- Matt Blazei:
- Hey, guys, great quarter. A couple of points I may have missed. What was your dispenser sell through for the quarter?
- Mark Castaneda:
- The dispenser sell through for the quarter was up around 1% for the quarter and about 6% for the year. Q4 has typically been a smaller quarter for our sell-through.
- Matt Blazei:
- Got it. And I guess the retailers must feel that the year is going to start up pretty well.
- Billy Prim:
- [Indiscernible] moving up some inventory.
- Matt Blazei:
- Yes, you also with your same -- your same-store growth in the quarter on water?
- Billy Prim:
- Yes, same-store growth was 11%.
- Matt Blazei:
- Was 11%. Can you help me understand, I’m just trying to figure out the 38% growth in water with the 11% same-store for the quarter?
- Billy Prim:
- So, some of those were additional new locations. So same-store if we kept our location flat, would be up total revenue of about 11%. Because we added more locations, that’s why the revenue grew faster than the same-store.
- Matt Blazei:
- And I saw you did add 1000 stores in the quarter. Were any of those the DS waters locations yet?
- Billy Prim:
- Yes, we actually added about 1800 water locations during the quarter.
- Matt Blazei:
- And were those DS water locations or …?
- Billy Prim:
- Yes, those were primarily.
- Matt Blazei:
- I see. So that leaves you about 1200 locations left in this -- in year’15?
- Billy Prim:
- Well, for the full-year we’ve added about 2500 total locations which is, again it’s partially DS and partially other locations. So it’s around -- just around 1000 locations left.
- Matt Blazei:
- I see. Interesting. So that’s why you’re obviously ahead of plan?
- Billy Prim:
- Yes, we are.
- Matt Blazei:
- All right. I think that’s the questions I had. Thank you guys very much.
- Billy Prim:
- Thanks.
- Operator:
- [Operator Instructions] And our next question comes from Mike Petusky from Barrington Research. Please go ahead.
- Michael Petusky:
- Hi guys. Couple of my questions were asked and answered, but I guess in terms of there was a statement earlier about Q1 dispenser lighter, I mean, is that -- intuitively would seem like it would be lighter sequentially, but do you expect it actually to be down versus last year’s first quarter?
- Billy Prim:
- No, we don’t expect it to be down versus last year, but it’s not the same growth rate obviously we have this past quarter.
- Michael Petusky:
- Okay. All right. And then, I just wanted to confirm, you guys -- essentially the Phase 2 of the customer transition will be done by June 30, by the end of the second quarter, is that right?
- Billy Prim:
- That’s what we currently expect, yes.
- Michael Petusky:
- Okay. All right. That’s all I’ve got. Thanks.
- Billy Prim:
- Thanks.
- Operator:
- There are no further questions at this time. I’d like to turn it back to Billy Prim, for closing remarks. End of Q&A
- Billy Prim:
- Thank you. We appreciate your interest in Primo and appreciate your participation on today’s call. The progress we have made cannot have been done and accomplished without the efforts of our employees, regional operators, distributors, refill service providers, manufacturing partners, and retail partners, and I sincerely thank them for their continued dedication. We look forward to providing you with an update on our business progress in the next quarter. Thanks.
- Operator:
- Ladies and gentlemen, that does conclude today’s conference. Thank you for your attendance. You may now disconnect.
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