Primo Brands Corporation Class A

Good morning, ladies and gentlemen, and welcome to the Primo Water Corporation Q1 2023 results conference call. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded today, Thursday, May the 4th, 2023. I would now like to turn the conference over to John Caudill, Vice President of Investor Relations. Please go ahead, sir.

Welcome to Primo Water Corporation's first quarter 2023 earnings conference call. All participants are currently in listen-only mode. This call will end no later than 11 a.m. Eastern time. The call is being webcast live on Primo Water's website at primowatercorp.com and will be available for playback there for two weeks. This conference call contains forward-looking statements, including statements concerning the company's future financial and operational performance. These statements should be considered in connection with cautionary statements and disclaimers contained in the safe harbor statements in this morning's earnings press release and the company's annual report on Form 10-K and quarterly reports on Form 10-Q and other filings with securities regulators. The company's actual performance could differ materially from these statements, and the company undertakes no duty to update these forward-looking statements except as expressly required by applicable law. A reconciliation of any non-GAAP financial measures discussed during the call with the most comparable measures in accordance with GAAP when the data is capable of being estimated is included in the company's first quarter earnings announcement released earlier this morning or on the investor relations section of the company's website at primawatercorp.com. I am accompanied by Tom Harrington, Prima Water's Chief Executive Officer, and David Hess, Chief Financial Officer. As part of this conference call, we have included a deck online at primawatercorp.com that was designed to assist you throughout our discussion. Tom will start today's call by providing a high-level review of the first quarter and our progress on Prima Water's strategic initiatives. Then David will review our segment-level performance and we'll discuss our first quarter performance in greater detail and offer our outlook for the full year 2023 before handing the call back to Tom to provide a long-term view ahead of Q&A. One corporate housekeeping matter before we get started. As you probably saw, our 2023 annual and special meeting of share owners was rescheduled and will be held on May 31st, 2023. The company will mail a revised proxy statement to all Prima Water share owners in the coming days. We encourage you to read these materials carefully. Any previously submitted proxies will be discarded, and the share owners will need to resubmit their votes. With that, I will now turn the call over to Tom.

Thank you, John, and good morning, everyone. Before I dive into the results for our first quarter, I'd like to take a moment to update you on the proxy contest. We are pleased to have reached a constructive resolution with Legion. We are excited to welcome to our board, Derek Lewis and Laurie Marcus, two executives with sales and marketing expertise at leading consumer products and beverage companies. We look forward to benefiting from their insight and perspective. I also want to welcome Eric Floss, who joined our board in March. Eric brings decades of experience as a chairman, CEO, and executive officer of leading route-based businesses and beverage companies, with a proven track record of expanding scale, improving margin, and driving consistent earnings growth. Welcome to the team, Eric. The addition of these new directors to our board compliments our board of directors' skills and experiences and are in keeping with our commitment to increase the gender and racial diversity of our board of directors. I want to thank Stephen Halperin who we announced last year was going to retire at this annual meeting after 32 years of dedicated service. Eric Rosenfeld and Greg Monahan are also retiring from our board after 15 years of dedicated service. We will certainly miss their contributions, valued counsel, guidance, and leadership. Finally, I want to thank our team of Primo Water Associates for a job very well done during a quarter. for avoiding the external distractions, and for remaining focused on our customers. Their ongoing commitment and execution positions the company for continued success in 2023 and beyond. Let's move on to the first quarter results. In Q1, we delivered normalized FX neutral revenue growth of 12%, adjusted EBITDA growth of 8%, increased adjusted EBITDA margin by 70 basis points to 17.4%, sell-through of approximately 215,000 water dispensers, and continued distributions of capital to shareholders through our dividend of approximately $13 million. For Q1 2023, excluding the impact of foreign exchange, normalized revenue increased 12%. Normalized revenue excludes the exited North America single-use bottled water retail business and our exited business in Russia. Reported revenue for the first quarter of 2022 includes $26.6 million of revenue associated with our single-use business and $2.8 million of revenue associated with our Russia business. A schedule is included in our supplemental debt. adjusted EBITDA increased $7 million to $95 million, an increase of 8%. Excluding the impact of foreign exchange, adjusted EBITDA grew 9%. We continue to deliver increased revenue, adjusted EBITDA growth, and adjusted EBITDA margin expansion. Consolidated revenue increased 4% to $547 million. Revenue growth, was driven by resilient consumer demand, increased water dispenser unit sell-through of approximately 215,000, solid revenue growth in water direct in exchange of 11%, driven by both pricing and volume, strong revenue growth in water refill and filtration of 21%, and global water direct customer retention of approximately 84%, which remained consistent with last quarter. Adjusted EBITDA in the first quarter increased 8% to $95 million, supported by higher volume, increased pricing, and effective expense management. We're pleased with the adjusted EBITDA expansion in the face of continuing inflation. We successfully offset the impact of higher labor, fuel, and freight expense of approximately $15 million in the quarter. and expanded the margin percentage to 17.4%, up 70 basis points versus prior year. As a reminder, our second and third quarter adjusted EBITDA margins are generally higher because of seasonality in our business. As you know, we offer a range of products through a razor razor blade business model, with a rental or sale of water dispensers, creates high margin recurring revenue generated from our water solution. We saw an increase in a level of sell through an awarded dispenser business to approximately 215,000 units in a quarter. Higher retail prices reflected the continued impact of tariffs imposed on import from China. Consumers continued to purchase new Primo water dispensers and demand remained strong. Water dispenser sell-through represents the units sold by brick-and-mortar and e-commerce retailers to the end consumer. This is an important metric for the company because these water dispenser sales drive connectivity to our water solutions, resulting in recurring higher margin revenue. The sell-through units are a leading indicator of the future organic growth of our water solutions. As expected, the sell-in or what we sold directly to retailers for Q1 continued to be impacted by efforts to right-size inventories that were increased during 2022 supply chain challenges. Our consolidated water direct and exchange business continued to experience strong top-line momentum during the quarter with 11% revenue growth through 9% pricing action, 2% volume growth, and 84% customer retention in WaterDirect, and 99% retention in WaterExchange. During Q2, we will expand our mobile app, MyWaterPlus, to Poland and Israel, and continue to update the app based on real-time customer feedback. Our digital focus in 2023 remains centered on new water customer acquisition, through CostcoWater.com as one example, water dispenser sales, and connectivity to our water solutions. In Q4 of last year, we talked about being awarded a five-year contract to be Costco's exclusive service provider for large format bottled water delivery services direct to Costco consumer and business members. We're pleased with the rollout of this program, and we are increasing the number and frequency of in-store activities at Costco location to capture the full benefit of this relationship. We expect this program to drive increased customer growth as we build out the program across the U.S. The growth of our water refill and filtration business continues to accelerate with an increase in revenue of 21% in the quarter, driven by price increases primarily on outdoor refill stations and improved refill station uptime and service levels. Our water refill business is one of our water your way platforms where consumers refill their own empty one gallon or multi-gallon Primo water bottle at any one of our 23,500 plus self-service refill stations. Customers in this business are counted as the retail locations of our refill station and not the consumers physically using the refill station. We maintain high refill station retention and there is tremendous potential for continued volume growth across the category. Water refill targets a value-conscious consumer and provides similar margins to our other water offerings. This is another positive aspect of our business transformation, initiated by the acquisition of Legacy Primo, that provides a diverse platform of water services for all consumers. Customer resiliency related to the higher pricing action across our water solution has been minimal as we track this through a combination of metrics, including call center activity, customer retention, and customer growth. The balance between our demand and pricing continues to be extremely positive. It's important that we attract quality customers that will remain with our services long term. We're highly focused on attracting the right customer not just to add a customer for the sake of growing customer count. I would like to talk for a moment about operating efficiency. The ability to serve our customers in the most efficient manner possible is a critical driver of both our short and long-term profitability. Our automated route optimization, or ARO, in North America continues to yield efficiencies. We will extend the use of ARO into our refill and filtration business later in 2023 to capture efficiencies and improve service levels that this tool can deliver. In addition to capturing cost efficiencies, the reduction in mileage supports our commitments to reduction in greenhouse gas emissions. A key service metric we focus on is on-time in full, or OTIF. Simply put, is did we deliver to the customer on the day at the approximate time and with all the products they requested? OTIF in North America in Q1 was 95%. Another tool we use is our predictive staffing model, which continues to be refined and produces outstanding results. During the quarter, we improved our targeted staffing levels to 100% of route delivery positions filled. We continue to believe that our incremental investments in our people and the use of our predictive staffing model will enable us to deliver our 2023 targets and beyond. Last month, we published a 2021 supplement to our 2020 ESG report. I'm pleased with the progress reflected in the latest update. Some of our notable accomplishments described in our supplemental report include Achieved carbon neutral certification via the carbon neutral protocol while advancing clean drinking water infrastructure in vulnerable communities. Achieved all stated DEI targets. Replaced over 9,000 megawatt hours with energy certificate attributes. Powering our European operations with 100% certified renewable energy certificates. announced the strategic exit of the North America single-use bottled water retail business that produced over 400 million HDPE plastic containers annually, reducing the equivalent of 50,000 metric tons of CO2, and reduced our global greenhouse emissions by 20% over 2020. We expect to publish our 2022 ESG report later this quarter. As we shared last quarter, for the full year 2023, we expect revenue to be between $2.3 and $2.35 billion, with normalized revenue growth in a range of 6% to 8%. We expect full year 2023 adjusted EBITDA to be between $450 million and $470 million. Both financial guidance items exclude any tuck-in we might complete throughout 2023. For the second quarter of 2023, we expect revenue between $575 and $595 million, and adjusted EBITDA of between $113 and $123 million. Primo Water is well-positioned to achieve our long-term growth target. We benefit from long-term tailwinds, including a favorable shift in consumer demand toward health and wellness and concerns with aging global water infrastructure. We continue to invest in our digital platforms to enhance the customer experience and in new innovations for our water dispensers to support connectivity to our water solutions. We have a compelling financial profile, which we continue to enhance through debt reduction, opportunistic share repurchases and increases to our quarterly dividends. With continued efficiency improvements that expand our route capacity and increase on-time and in-fold delivery, we will continue to drive further adjusted EBITDA margin expansion, leading to increased returns on invested capital. Finally, I will reiterate that our strategy is working. We're confident in our ability to deliver our 2023 guidance. I'll now turn the call over to our CFO, David Haas, to review our first quarter financial results in greater detail. David?