Good morning. My name is Pam and I will be your conference operator today. In the meantime, I would like to welcome everyone to Primo Water Corporation’s Q3 2022 conference call. All lines have been disabled to prevent any background noise. The speakers will be followed by a question and answer session. [Operator's instructions] Thank you.
I would now like to give the floor to Mr. John Kathol, Vice President of Investor Relations. please continue.
Welcome to Primo Water Corporation’s Q3 2022 conference call. All members are currently in listen-only mode. This call will end no later than 11:00 AM ET. The conference call will be streamed live on the Primo website at www.primowatercorp.com and will remain there for two weeks. This conference call contains forward-looking statements, including statements about the company’s future financial and operating results. These statements should be compared with the cautionary statements and disclaimers contained in the Safe Harbor Statement in this morning’s P&L press release and the cautionary statements in the company’s Form 10-K annual report and Form 10 quarterly reports. -Q and other securities documents. Regulators Please take this into account with the disclaimer. The company’s actual results could differ materially from these statements, and the company undertakes no obligation to update these forward-looking statements, except as expressly required by applicable law.
A reconciliation of any non-GAAP financial ratios discussed during the conference call to the most comparable GAAP ratios, when the data can be estimated, is included in the company’s third-quarter earnings report earlier this morning or in the Investor Relations section. » corporate website www.primowatercorp.com. With me are Tom Harrington, CEO of Primo, and Jay Wells, CFO of Primo. As part of this conference call, we are offering an online platform at www.primowatercorp.com to assist you in our discussions. Tom will begin today’s call with an overview of the third quarter and our progress on Primo’s strategic plan. Then Jay will review our segment level performance, and we’ll discuss our third quarter performance in greater detail and offer our outlook on the fourth quarter and full year 2022 before handing the call back to Tom to provide a long-term view ahead of Q&A. Then Jay will review our segment level third performance, and we’ll discuss our quarter performance in greater detail and offer our outlook on the fourth quarter and full year 2022 before handing the call back to Tom to provide a long-term view ahead of Q&A . Jay will then analyze our segment performance and we will discuss our third quarter results in more detail and offer our guidance for the fourth quarter and all of 2022 before calling Tom back to provide a long-term perspective before answering questions. . Jay will then analyze our segment performance and we will discuss our third quarter results in more detail and provide our guidance for the fourth quarter and all of 2022 before calling Tom back for a Q&A. provided earlier.
Thank you John and good morning everyone. I am pleased with the results of the quarter and thank all Primo employees for their continued contribution to the success of the company. In particular, I would like to mention our Chief Financial Officer Jay Wells, who announced his retirement on April 1st. I thank Jay for his dedication and valuable contributions during his time at Primo. Primo has a strong financial team and Jay has been instrumental in improving financial and operational performance. I am very grateful that Jay will remain with Primo until his retirement to facilitate a smooth leadership transition and wish him all the best in retirement. Thanks Jay. We continued to operate on our differentiated Water Your Way platform, and despite near-record inflation, we delivered strong organic revenue and adjusted EBITDA growth in the third quarter. Our investment philosophy remains intact with a portfolio of advanced water solutions across multiple channels and geographies, strong consumer tailwinds and a recession-resistant revenue base. Continued investment in our digital platform, expanding the ability to connect water cooler sales to our water solutions, and continually optimizing our route-based operations provide a solid foundation to achieve our long-term growth goals.
In the third quarter, we delivered strong revenue and adjusted EBITDA growth. As a result, we raise our full-year 2022 revenue forecast to $2.22-2.24 billion, which corresponds to normalized revenue growth from 13% to 14%. Organic revenue grew 14-15% and adjusted EBITDA ranged from $415 million to $425 million. Consolidated revenue rose 6% to $585 million in the third quarter. 15% organic revenue growth. Excluding the impact of foreign exchange and the exit of the North America single use bottled water business, revenue grew 18% driven by continued consumer demand, increased dispenser sell-through, ongoing M&A tuck-in acquisitions, improved service metrics, increased revenue per route and increased OTIF or on-time and in-full delivery execution, continued volume growth in Water Direct and Exchange and a stabilized customer base and refill as well as improved customer experience, including benefits from our updated mobile app. Excluding the impact of foreign exchange and the exit of the North America single use bottled water business, revenue grew 18% driven by continued consumer demand, increased dispenser sell-through, ongoing M&A tuck-in acquisitions, improved service metrics, increased revenue per route and increased OTIF or on-time and in-full delivery execution, continued volume growth in Water Direct and Exchange and a stabilized customer base and refill as well as improved customer experience, including benefits from our updated mobile app. Excluding currency effects and exiting the disposable bottled water business in North America, revenue grew 18% driven by continued consumer demand, increased dispenser sales, ongoing M&A deals, improved location performance, unit growth products. and an increase in OTIF or on-time and complete delivery, continued volume growth in Water Direct and Exchange, and a stabilized customer base and replenishment, and improved customer experience, including the benefits of our updated mobile app. Excluding foreign exchange effects and exiting the disposable bottled water business in North America, revenue increased 18% driven by continued consumer demand, increased sales of water dispensers, continued mergers and acquisitions, improved service record, increased revenue from the OTIF or On- time. and Full Delivery Execution, continued growth of Water Direct and Exchange, stable customer base and replenishment, and improved customer experience, including the benefits of our revamped mobile app.
Adjusted EBITDA rose 10% to $117 million in the third quarter as higher volumes, higher prices and efficient cost management more than offset the impact of inflation. Adjusted EBITDA margin for the quarter was 20%, up 80 basis points year-on-year. In the Global Water Direct business, our customer base grew to around 2.3 million in the third quarter. Through a combination of organic customer influx, customer acquisition, and our integration strategy, growth was 3.6% year-over-year, while customer retention was flat on previous quarters. Our Water Direct and Exchange divisions continued to post strong revenue growth, with 17% organic revenue growth driven by improved customer satisfaction, increased delivery frequency and higher inventory levels. We benefited from an increase in the number of water exchange points by the end of the third quarter and an improved link between water exchange and dispenser sales.
Our water replenishment and filtration business continued to perform better. Organic revenue increased 11% QoQ due to higher garden machine prices, increased machine uptime and higher levels of water filtration services. Customer trends remain positive with respect to price elasticity. There are very few customer reviews associated with higher prices as we track this through a combination of metrics such as call center activity, customer retention and customer growth. Our water cooler business continued to improve in the third quarter, with revenue up 47% and retailers selling over 270,000 water coolers. We continue to see volume growth driven by increased promotional activity, product distribution and penetration into our existing customer base. We are combining Primo Water Coupons with our water cooler sales to incentivize water service related water cooler sales, a key enabler for future organic growth.
Regarding water dispensers, US Customs and Border Protection recently reclassified hot and cold water dispensers and filtered water dispensers. From November 6, 2022, dispensers and filters will no longer be subject to a 25% duty, but will be subject to a 2.7% duty. This price reduction applies to the vast majority of Primo’s imported products and will allow us to adjust the average selling price of our dispensers sold to retail and e-commerce customers. We expect an increase in the number of water connections to accelerate the sale of water heaters through lower cost of goods and subsequent price reductions. The cost of goods will decline in 2023 as new inventory moves through the supply chain. We will benefit from lower capital costs associated with water dispensers leased to customers in our Direct Water Supply and Water Filtration divisions.
In terms of numbers, we are pleased with the progress made on our investment in the My Water+ mobile app, which currently has a 4.9 rating on iOS and Android platforms, a direct result of our recent update. Since the end of 2021, our Google Online reputation score has increased by 63% and our Google My Business score has increased by 46%. These rankings are a significant improvement over previous quarters and reinforce our confidence in our digital and customer engagement initiatives. We will continue to invest in providing our customers with best-in-class digital solutions. Now that we have re-platformed much of our digital e-commerce site, we will now turn our attention to redesigning our water.com website to further enhance its performance through a combination of internal and external resources. See slides 9 and 10 in the Supplementary Materials for more details.
In 2022, like many other companies, we will face significant increases in labor, fuel, freight and other operating costs, which were fully offset by our pricing actions in the third quarter. The Primo team has done a great job to offset this increase by continuing to improve the customer experience. As discussed last quarter, the North American automatic route optimization tool, ARO, sorts routes into the most efficient routes possible, thereby maximizing the time route sales reps spend with customers, increasing revenue generated from route commission time, freeing up route processing capacity for future organic growth and minimization of time spent behind the wheel. ARO remains a key operational initiative. For example, in September we were operating 23 more routes per day than in August, with no increase in total miles driven, a direct result of the hard work of the implementation team.
In addition, our annual revenue per site in North America is up nearly 22% year over year. These efforts are an important part of offsetting rising costs while improving operational efficiency and customer service, and allow us to increase delivery frequency to support our efforts to grow our water exchange business. Going forward, we select external consultants to support our growth algorithm and improve the operational efficiency of our route-based platform. For the full year of 2022, revenue is expected to increase from $2.22 billion to $2.24 billion, with a normal revenue growth rate of 13% to 14%, adjusted for the exit from the disposable bottled water retail business in North America. We expect full-year 2022 Adjusted EBITDA to be in the range of $415 million to $425 million.
We have been awarded a five-year contract to become Costco’s exclusive supplier of bottled water directly to consumers and corporate members. This increase in activity and the increase in water replacement sites support our organic growth forecast through 2024. We have a strong balance sheet, solid margins and are on our way to long-term revenue and profit growth. We maintain our 2024 revenue guidance with strong single-digit annual organic revenue growth and raise our 2024 Adjusted EBITDA guidance to approximately $530 million, with an Adjusted EBITDA margin of approximately 21%.
Based on our performance in operational, digital and customer improvements, we will reduce our incremental capital investment from $150 million to $110 million between 2022 and 2024. Specifically, this is a reduction from $50 million in 2023 and 2024 to about $30 million in 2023 and 2024. This decision is based on our confidence in our performance, which allows us to reduce our investment while still meeting our 2024 guidance. In closing, let me reiterate that our strategy is working. We are confident in our ability to meet our 2022 forecast and realize our long-term forecast for 2024.
I will now hand over to our Chief Financial Officer Jay Wells for a more detailed review of our third quarter financial results.
Thank you Tom and good morning everyone. Let’s start with the results of the third quarter. Consolidated revenue rose 6% to $585 million from $551 million. Consolidated organic revenue, which excludes foreign exchange effects and adjusted for the closure of the disposable bottled water retail business in North America, increased 15% in the quarter. Adjusted EBITDA rose 10 percent to $117 million. FX-free, adjusted EBITDA increased by 14%, representing an 80 basis point increase in margins. As Tom said, the impact of rising prices, rising volumes and high demand led to an increase in profitability.
During the quarter, we maintained our target staffing levels and achieved more than 98% of physician sales by route delivery. We believe that additional investment in our people and the use of our predictive workforce models will enable us to achieve our goals for all of 2022 and beyond.
In terms of our segment performance for the quarter, North America revenue increased from $413 million to [inaudible] to $407 million.
Organic revenue increased by 18%. Organic growth was driven by 17% organic growth in the Water Direct and Water Exchange segments, including 11% price mix and 6% volume growth.
In our European segment, revenue increased by 6% to $71 million. Organic revenue grew 15% excluding foreign exchange effects, driven by our Water Direct business, the growth of our residential customer base and B2B volumes as Europeans return to the office.
Adjusted EBITDA in Europe increased 8 percent to $16 million. Excluding foreign exchange effects, adjusted EBITDA increased by 29%.
In terms of our guidance for the fourth quarter and the full year, based on the information we have to date, we expect fourth quarter consolidated revenue from continuing operations to be in the range of $540 million to $560 million, our fourth quarter adjusted EBITDA quarter will range from $102 million to $112 million.
Full-year 2022 revenue is expected to be slightly higher than previously forecast, in the range of $2.22 billion to $2.24 billion, with normalized revenue growth of 13% to 14%, adjusted for exit from Northern Disposable Bottled Water Retail . US business
We continue to expect full-year 2022 Adjusted EBITDA to be in the range of $415 million to $425 million. We expect cash taxes to be approximately US$10 million, interest expenses to be approximately US$60 million and capital expenditures to be approximately US$200 million.
Our 2022 results reinforce our confidence in our ability to deliver consistent organic revenue growth. Maintaining our organic growth prospects, we have recently acquired new distribution points in our Exchange business, the geographic expansion of our Costco store events has resulted in a significant increase in North America and our Water Direct business, and the volume of our events has improved the performance of our Refill business. . These successes are the result of our commitment to improve the customer experience through service enhancements and investments in digital technologies.
We maintain our 2024 revenue guidance with strong single-digit annual organic revenue growth and raise our 2024 Adjusted EBITDA guidance to approximately $530 million. In 2022, like many other companies, we will face significant increases in labor costs fuel, freight and other operating costs, but we have successfully offset this through pricing and efficiency initiatives. While we successfully offset these costs with higher prices to offset the adverse effects of inflation, this affected our adjusted EBITDA margin as the increase in revenue from this pricing was more than offset by higher costs. Our 2024 Adjusted EBITDA margin is expected to be approximately 21%, taking into account the impact of our additional inflation-adjusted pricing.
We previously announced our intention to invest an additional $150 million in capital expenditures to support organic top-line growth and increase our adjusted EBITDA margin. We have decided to reduce this additional investment from US$50 million per year to approximately US$30 million per year during 2023 and 2024.
Going back to our normalized total capex for 2025 of around 7% of revenue. As Tom mentioned, this decision was based on our confidence in our performance numbers, allowing us to reduce our investment while still meeting our 2024 guidance. As we mentioned last quarter, we are exploring the sale of several properties in California that have seen significant appreciation. The level of interest remains high and we are working with stakeholders to move the process forward.
In addition, we remain focused on reducing leverage to below 3x by 2023 and below 2.5x by the end of 2024. As a reminder, our current debt maturities are in 2027 and 2028, so we are currently are not forced to refinance any of our debts and we are satisfied with the current debt structure.
Our outlook for 2024 supports our planned multi-year dividend increase program that will add $36 million to shareholders by 2024, as well as the $100 million opportunistic share buyback program announced last quarter. This is based on our previously announced additional investment plan to drive revenue and profit growth.
On August 9, 2022, our board of directors approved a $100 million opportunistic share buyback program that began on August 15. During the quarter, we bought back about 800,000 shares for about $11 million. The buyback program reflects the Board’s confidence in our future performance and continued long-term cash flow generation, and demonstrates our continued commitment to creating fundamental value for our shareholders. Yesterday our board of directors approved a quarterly dividend of $0.07 per common share – our growth outlook can fund our growth and annual dividend increase. As a reminder, our multi-year dividend plan includes a $0.01/share quarterly dividend increase in 2022, 2023, and 2024.
The increase in the dividend will return over $6 million incremental dollars to shareholders in 2022 and $36 million by the end of 2024. Remaining area of capital deployment includes our tuck-in M&A. The increase in the dividend will return over $6 million incremental dollars to shareholders in 2022 and $36 million by the end of 2024. Remaining area of capital deployment includes our tuck-in M&A. The dividend increase will return more than $6 million in additional dollars to shareholders in 2022 and $36 million by the end of 2024. The remaining capital allocation area includes our mergers and acquisitions. The dividend increase will return more than $6 million in additional capital to shareholders in 2022 and $36 million by the end of 2024. Other areas of capital allocation include our mergers and acquisitions. By 2022, we expect to be close to the lower end of our $40-60 million target. I’m forwarding the call to Tom now.
Thanks Jay. We are satisfied with the past year and look to the future with optimism. We think Primo Water’s investment thesis is consistent. We are the only fully open pure water consumer platform for national and local brands in North America and Europe, a predictable recession-resistant income base where we meet home and shop consumers and attractive high-profile personalities. organic growth goal, with water dispenser sales linked to one of our water services, a key driver for future organic growth. As part of our broader ESG initiatives, we continue to focus on meeting our water conservation targets by 2030, supported by several enabling factors such as increased consumer awareness of health and well-being and aging water infrastructure.
I want to reiterate that we have become a stronger and more economical business than ever before. Over the past few years, we have made significant progress by focusing on our core competencies as a clean water company. It is important to understand that we are a different company today, which is a direct result of our strategic decision to exit the soft drinks and coffee business and acquire traditional premium businesses.
As a result, we have a strong balance sheet, strong long-term growth prospects and very attractive margins, which rose to 20% in the last quarter. Despite quarterly seasonality in Adjusted EBITDA margins, we view this achievement as an important milestone towards our 2024 Adjusted EBITDA margin target.
Our long-term prospects for organic revenue growth are strong. We remain confident in our 2024 outlook as we forecast strong single digit annual organic revenue growth and our updated 2024 guidance raises adjusted EBITDA to approximately $530 million based on our strong performance in 2022, adjusted margin EBITDA is around 21%, adjusted EPS is between $1.10 and $1.20, net leverage is below 2.5x, and ROIC is above 12%.
Looking ahead, as we continue to leverage our differentiated water platform and focus on a few key priorities, we will leverage our clean water model to increase normalized revenue from $540 million to $560 million in the fourth quarter. We’re going to have 14% to 15% organic revenue growth. We continue to use our razor/razor blade model, with growth in the number of dispensers sold driving revenue growth and revenue growth rewarding connectivity. The Primo team continues to deliver results.
Once again, I would like to thank the Primo Water staff across the company for their tireless efforts to serve our customers. With that, I’ll turn the call back over to Jon for Q&A. With that, I’ll turn the call back over to Jon for Q&A. With that, I’m forwarding the call to John for questions and answers. With that, I’m forwarding the call to John for questions and answers.
Thanks, Tom. During the Q&A, to ensure we can hear from as many of you as possible, we would ask for a limit of one question and one follow-up per person. During the Q&A, to ensure we can hear from as many of you as possible, we would ask for a limit of one question and one follow-up per person. During Q&A, so that we can hear from as many of you as possible, we ask that you limit yourself to one question and one follow-up response per person. During the Q&A session, so that we can hear from as many people as possible, we ask that each person be limited to one question and one follow-up answer. Thank you. Operator, please open the problem line.
Thank you. Ladies and gentlemen, we are starting a Q&A session. [Operator Instructions] Your first question comes from Nick Modi of RBC Capital Markets. please continue.
Good morning Tom. So, Tom, if you can provide a little more information about the Costco announcement, I think this is a very important opportunity. So maybe any other colors you provide will help.
Yes. Obviously, thanks to our sales team who have worked successfully with Costco to expand our long-term relationship, and to our frontline teammates who have provided the level of service that Costco can provide us, this will always work. relationship end 2027. The best part is that there are two very important parts here. This supports our long-term growth prospects. As a result, an increase in the number of new customers who will benefit from these relationships helps maintain a single-digit growth story. At the same time, it will also help us leverage our routes and customer density, which will increase our ability to achieve an EBITDA margin of 21% as these customers come out on top in our existing customer base.
So once it’s actually a home run, it’s a doppelgänger, but look at it as a doppelgänger because it gives us an organic customer growth advantage that will drive long-term traffic volumes, and because of route density. using our route infrastructure.
Another good point: We haven’t shared this before, but we’re also the exclusive distributor of Costco dispensers in stores. So, if you’re thinking about what we call connected fountains, I’m offering water now through our in-store events and also selling fountains so we can connect COSCO members to one of our services doing both: selling dispensers , service has been discontinued, so this is a very significant increase for 2023 and beyond.
The link we made was that I would do Taiwan because that’s not a Costco issue, but I mentioned in our script that we’re actually getting a good chunk of new exchange business and adding seats for existing customers. This is important because it also does two things: it supports organic growth, and over the next few years we will see accelerated growth in return. But it will also improve our route density, which will help us achieve our 2024 Adjusted EBITDA margin target of approximately 21%.
A very useful color. Tom, I’m sure someone is thinking about this right now, but obviously, historically, during the downturn, or at least the last downturn, these particular businesses have been under some pressure. Can you talk about how this time is different? How has your operating model changed today compared to the business you were in during the last recession?
Yes, I think there are several different market conditions, Nick, of course, the benefit of the management team that worked in Europe in 2008, 2009 and 2010 helps. I think our experience and execution during the pandemic when we eliminated 18% to 20% of the SG&A cost, speaks to the variable nature of our business. I think our experience and execution during the pandemic when we eliminated 18% to 20% of the SG&A cost, speaks to the variable nature of our business. I think our experience and performance during the pandemic, when we eliminated 18% to 20% of general and administrative costs, speaks to the fluid nature of our business.我认为我们在大流行期间消除了18% 到20% 的SG&A 成本时的经验和执行，说明了我们业务的可变性。我认为我们在大流行期间消除了18% 到20% 的SG&A I think our experience and performance during the pandemic, when we eliminated 18% to 20% of our general and administrative expenses, speaks to the volatility of our business. This way, during the falloff, we have enough memory to properly tune the structure to what’s happening in the top row.
But another key differentiator for us was the benefit of a connected water dispenser and clean water, which we didn’t consider when we first went around. So I sell water dispensers, consumers can choose the water service, and our water service covers the socio-economic scale. So, if you think about the typical direct water user, their higher income will probably weather the storm better, and then we have a water top-up business that we didn’t have in 2007 and 2008, which is a costly decision. the mind is dedicated to high-quality drinking water. Recession or not, these are real tailwinds, but we’re giving people options in case they’re stressed. You can get an exchange at a lower price or at a better price, but not more directly. You forfeit the benefits of my male and female door visits, or you can fill it yourself at the actual price when you top it up. So we think it really allows us to definitely resist in this way. Frankly, I think that the results in the third quarter show how resilient we are today.
Good morning Tom. Perhaps if I was going to go further, I would start with a margin figure, which is strong given the inflationary pressure in the foreign exchange market. So just a few questions. I wonder if you understand the impact of these two points on margins, I think in the future we should take 20% as a new base level?
I will answer the second question first and then I will pass the first part of your question to Jay. I think you can look at 20% like it’s about 21% on our journey. This is a great sign that we have a clear place and execution route to get there. You must understand that there is some seasonality in EBITDA margin on a quarterly basis. So I would say that this is the first major milestone. This is at least as far as I can remember, the highest level we’ve ever been, and it’s an indicator of where we’re going to be. This does not mean that Q1 will be there. I’m not saying it’s not guidance, but there will be quarterly changes when we reach a consensus of 21%.
Post time: Dec-07-2022