This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk01: Good morning my name is Pam and I will be your conference operator today. At this time I would like to welcome everyone to the Prima Water Corporation's first quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer session. If you'd like to ask a question during this time simply press star then the number one on your telephone keypad. If you would like to withdraw your question please press star then the number two. Thank you I'd now like to turn the conference call over to Mr. John Cottle, Vice President of Investor Relations. Please go ahead.
spk14: Welcome to Primo Water Corporation's first quarter 2022 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's website at www.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 www.primowatercorp.com. I am accompanied by Tom Harrington, Primo's Chief Executive Officer, and Jay Wells, Primo's Chief Financial Officer. As part of this conference call, we have included a deck online at www.primowatercorp.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 Primo's strategic initiatives. Then Jay will review our segment-level performance and we'll discuss our first quarter performance in greater detail and offer our outlook for the second quarter and full year 2022 before handing the call back to Tom to provide a long-term view ahead of Q&A. With that, I will now turn the call over to Tom.
spk11: Thank you, John, and good morning, everyone. I am quite pleased with the start to 2022 and our Q1 results. As the impact of the pandemic begins to wane, and we adapt to the current inflationary environment, we remain confident in our ability to deliver on both our short-term and long-term outlook. I'm especially proud of the efforts of the team and pleased with everyone's continued commitment to safety, customer satisfaction, and growth as our teams have once again responded to the challenges presented by the unprecedented cost inflation and the war in Ukraine. In the first quarter, We achieved double-digit revenue growth driven by strong customer demand, particularly in our water direct and exchange businesses, and continue to deliver robust growth on Mountain Valley, America's premium spring and sparkling water brand. Our global water direct and exchange customer base increased 4.5% to 2.3 million for the quarter. This was an increase of 100,000 customers versus Q1 of 2021, through organic customer additions, customer-based acquisitions through our tuck-in strategy, and improved customer retention rates, which increased to 86.5%. As I mentioned last quarter, the three- and five-gallon bottled water category growth opportunity is estimated to be as large as an incremental 29 million U.S. households and continues to increase based on tailwinds including growing consumer demand for environmentally responsible products, the shift away from sugary sweetened beverages, and well-documented concerns with tap water quality. The residential opportunity for increased sales of three and five gallon return of bottled water remains a top priority as the category has significant growth potential from our perspective. We remain focused on increasing household penetration through our execution of our razor, razor blade model. While the water dispenser segment declined during Q1 because of higher retail price points and less promotional activity, driven by tariffs and the elevated cost of ocean freight, sell-through volume of more than 190,000 dispensers to consumers resulted in a 2.4% sequential increase in the first quarter versus Q4 of 2021. As ocean freight costs moderate, we expect to see a return to growth in our dispenser business through increased promotional activity and the benefit of new customer distribution wins and the increased penetration from our existing customer base. As an example, we recently gained new dispenser business at Costco with shipments beginning in Q2. We continue to experience elevated costs driven by inflation across several operating expense categories, including labor, fuel, and freight. To address the higher cost of approximately 10% during the quarter, we implemented two pricing actions, the first in January and the second in March, each in response to higher than forecast inflationary costs at that point in time. we believe that the pricing actions we have executed will cover the higher costs. The full benefits of these pricing actions are expected to be realized in Q2. Despite the cost hindrance, we continue to invest in the customer experience, evidenced by organic customer growth and improved customer retention rates. Improved pricing, continued demand for our products, and the improvement in customer retention gives us confidence in our 2022 guidance and our long-term 2024 outlook of high single-digit organic revenue growth and adjusted EBITDA approaching $525 million. In Q1, consolidated revenue increased 10% to $526 million, and adjusted EBITDA increased 15% to $88 million. driven by higher demand for our products and improved pricing and volume, led by our water direct and exchange businesses. Consolidated revenue, excluding the retail single-use plastic business in North America, grew 13% to $500 million. And on an FX neutral basis, overall revenue was up 14%. Consolidated organic revenue, was up by double digits as we experienced a gain of 12% for the quarter. As referenced earlier, the water dispenser segment declined because of higher retail price points and less promotional activity driven by tariffs and the spike in ocean freight costs experienced during the quarter. As ocean freight container rates moderate, we expect a return to growth in our dispenser business. As I mentioned in the past, Water dispenser sales provide a key point for consumers to enter the bottled water category where we can capitalize on our recurring razor blade revenue model. The recurring purchase behavior generates organic water sales as part of our water go-to-market strategies. As a reminder, our internal research indicates that approximately 60% of respondents surveyed are new to the water category, 45% prefer water direct, 30% prefer water exchange and 25% prefer water refill. We should continue to gain our fair share of this growth as our razor razor blade model remains one of our strategic advantages. You will likely remember that our B2B channel experienced some softness in December and January resulting from reduced foot traffic. A clear demonstration of what some call the January swoon is illustrated in the chart of mobility data included in our supplemental presentation on page eight, titled Visits to Retail and Recreational Locations. It shows a decline in foot traffic of roughly 20% in the December-January timeframe. As we suspected, the timing corresponds with increased rates of the Omicron variant here in the U.S. Fortunately, we have seen these visits to retail start to rebound as the effects of the Omicron variant have eased and we continue to work diligently to meet the current levels of demand. We've added an analysis of our North American B2B customer base on page nine of the supplemental presentation deck that provides a view of the diverse mix of our B2B customer base. Importantly, it shows that we have no appreciable customer concentration in our water direct business. A recap of our growth drivers on slide 10 demonstrates growth in several key areas. Customer count increases on water direct and exchange, consistent gains in the average selling price of our three- and five-gallon bottles, our premium Mountain Valley revenue, and e-commerce revenue. We continue to invest in route operations to improve our service metrics, enhancing the customer experience. We are near our targeted staffing levels, and are currently staffed more than 98% in route delivery in the U.S. We believe the long-term benefits of improving the customer experience and increasing customer retention outweigh any short-term investments. As it relates to our efforts in ESG, we remain focused on elevating our position on environmental responsibility and finding new ways to honor our commitment to protect the environment, provide quality drinking water, and manage sustainability. Later this quarter, we plan to publish our first environmental, social, and governance report. The report represents the next step on our ESG journey. We've been working on formalizing our priorities and governance structure, establishing initial targets, and enhancing the collection of our data from across our company. As part of our ESG strategy, last November we announced the planned exit of the single-use bottled water retail business in North America. We remain on pace to completely exit this category by the end of the second quarter, eliminating approximately 400 million bottles from the ecosystem. This is a major step in enhancing our ability to focus on a more environmentally friendly, returnable bottled water business. Our three and five gallon returnable bottles provide an attractive alternative to combat the challenge of plastic waste based on their reusability and recyclability. Over the last few months, we've been asked about our business exposure to the war in Ukraine, as well as our business in Russia. In 2021, our business in Russia recorded approximately $14 million of revenue and approximately $3 million of adjusted EBITDA. We have decided to exit Russia and expect to complete this exit over the course of the next 60 to 90 days. As we work to exit our business in Russia, we will continue to supply water to the humanitarian and NGO efforts in eastern Poland as they manage the influx of Ukrainian citizens displaced from their homeland. I would like to extend my appreciation to those associates of ours in Poland and in other European countries, as several of our associates are hosting refugees from Ukraine in their own homes. And we're profoundly proud of the help they are providing in these very difficult times. Our thoughts are with the people of Ukraine, and we hope for a speedy end to the conflict. I'd like to now turn the call over to Jay to review our first quarter results in greater detail.
spk02: Thank you, Tom, and good morning, everyone. Starting with our first quarter consolidated results. Consolidated revenue increased 10% to $526 million compared to $478 million. Excluding the impact of foreign exchange and the exit of our North American single-use plastic bottled water retail business, revenue increased by 14%. These gains were largely driven by growth in our water direct and exchange businesses. As we saw a rebound from the effect of reduced foot traffic and the Omnicron variant, which caused B2B volume to suffer in December and early January. Rebound has continued into our second quarter. Total organic revenue growth was 12% for the quarter. Adjusted EBITDA grew 15% to $88 million. As Tom discussed, the effects of pricing actions, volume growth, and strong demand drove profitability. During the quarter, we've made substantial progress in achieving full staffing levels and now have more than 98% of our route delivery positions filled. We are confident that the incremental investments we are making in our people will enable us to deliver on our target of 9% to 10% revenue growth for the year. The increased staffing costs were accompanied by continued inflationary cost pressures in other areas of our business. The major buckets of higher costs included materials associated with our soon-to-be-exited North American single-use bottled water business, ocean freight, transportation, and labor. The additional pricing actions taken in the first quarter have offset these increased costs, and we have captured enough price to offset the cost increases that we have seen to date. Turning to our segment level performance for the quarter, North America revenue increased 9% to $397 million compared to $366 million. Excluding the impact of foreign exchange and the exit of the single-use plastic bottled water retail business, revenue increased by 13% driven by growth in our water direct and exchange businesses. Organic revenue growth was 11% driven by a 3% increase from volume and an 11% increase from price mix within our water direct and exchange businesses. Adjusted EBITDA in North America increased 15% to $79 million. Turning to our rest of the world segment, revenue increased by 14% to $129 million, excluding the impact of foreign exchange, revenue increased by 18%. All channels in the rest of the world segment showed increases, demonstrating the benefit of our multi-country, multi-channel model. The increase was driven by growth in both residential and B2B customers. We are pleased with the performance of our rest of the world business, which is beginning to recover from the pandemic, and commercial businesses are beginning to return to work. Adjacent EBITDA and the rest of the world segment increased 8% to $16 million as the benefit of higher revenues from Europeans returning to work was partially offset by investments in sales and marketing for residential customers in Europe to further diversify our customer base and better balance the customer mix. Turning to our Q2 and full year outlook, revenue was strong in Q1 and is off to a good start in Q2 with strong customer demand and price increases to offset increased costs. With respect to adjusted EBITDA, inflation is resulting in cost increases in labor, fuel, freight, and materials. We are confident we can take price to offset these cost increases, but it may result in short-term windows of cost headwinds. In addition, we are focusing on long-term growth and laying the foundation for future growth. This requires us to invest in that foundation this year. Finally, the exit of the business in Russia creates a one-time headwind as we last $14 million of revenue and $3 million of adjusted EBITDA from this business. With that said, and based on the information we have available to us as of today, we expect consolidated revenue from continuing operations to be between $540 million and $560 million. and that our second quarter adjusted EBITDA will be in the range of $100 million to $110 million. For the full year 2022, organic revenue growth is projected to be 7% to 8%, and overall revenue growth is expected to be 9% to 10%. Adjusted for the exit of the North American single-use retail water business, we expect 2022 adjusted EBITDA to between 410 and $420 million. As Tom mentioned, the exit of the North American single-use retail water business continues to move quickly. In 2021, these products accounted for revenue of approximately $142 million. We now expect the 2022 revenue of this product line to be about $40 million with minimal effect on adjusted EBITDA. We still expect to exit this category by the end of the second quarter. For the year, we also expect around $10 million of cash taxes, $50 million of interest expense, as well as capital expenditures of approximately $200 million. The capital expenditure figures include incremental spending, as we discussed during our investor day last November, which is being used to support our growth outlook and EBITDA margin expansion. Key initiatives being funded by our multi-year incremental CapEx include driving digital growth and leading dispenser innovations, such as the rollout of an update to our mobile app, My Water Plus, and plans to execute a global e-commerce web shop, both of which will grow our customer base. Leading dispenser and refill innovation, creating differentiation in our product and offerings. Investment in delivery vehicles to reduce emissions and to support sustainable fleet management. Investment in new spring sources, including Mountain Valley, to support increased customer demand and future growth. Installation of water production equipment that supports our ESG strategy reduces water usage and increases efficiencies in places like Los Angeles and Calgary. Investment in leading software solutions to support supply chain and logistics operational excellence. These initiatives and investments will support our 2024 outlook, which includes revenue and adjusted EBITDA growth, as well as EBITDA margin expansion. As we announced yesterday, our Board of Directors authorized a quarterly dividend of 7 cents per common share. As discussed during our November Investor Day, our growth outlook and increased free cash flow generation can fund our growth, as well as an increase in our annual dividends. Our path to a multi-year dividend step-up includes an increase in our quarterly dividend per share by one cent in 2022, another in 2023, and another in 2024. The increase in the dividend will return over $6 million incremental dollars to shareholders in 2022. Other aspects of capital deployment include continuing our tuck in M&As. For 2022, we continue to target $40 to $60 million of tuck-ins and remain focused on executing the robust pipeline of tuck-in opportunities in front of us. Our long-term organic growth outlook has not changed. We remain confident in our outlook for 2024. We are forecasting high single-digit percentage organic revenue growth, targeted annualized adjusted EBITDA approaching $525 million, Adjusted EBITDA margins of 21 to 22%. Adjusted EPS of $1.10 to $1.20 per share. Net leverage of less than 2.5 times. And ROIC greater than 12%. I will now turn the call back to Tom.
spk05: Thanks, Jay.
spk11: Looking ahead, we remain focused on executing on differentiated Water Your Way platforms. We will leverage our pure play water model to drive revenue growth 9 to 10% in 2022, adjusting for the exit of the North American single-use plastic retail water business and including the revenue from the tuck-in acquisitions made during 2021. Organic revenue growth is expected to be in the range of 7 to 8%. We continue to prioritize the customer experience on all things digital, And we remain focused in understanding the new customer journey by leveraging data to segment our audiences to provide the right content and products to them. Our current and future customers will be empowered to fully embrace our Water Your Way strategy in a new format with the ability to manage their accounts on the go, easily obtaining Primo products whenever, wherever, and however they want them. We're also on pace to launch our new direct-to-consumer e-commerce destination later this year with new features that enhance the purchasing experience and will accelerate our dispenser sales. Our initiative sets the tone for our commitment to digital acceleration to provide the best solutions to our customers. We will continue to execute our Razor Razorblade model with growth in the number of dispensers sold, driving top-line growth through the sale of water products. Interest levels for the launch of our new alkaline water brand, Primo Plus, have been very encouraging. Primo Plus alkaline water complements our existing portfolio and is a growing trend globally. Primo Plus alkaline water has a pH level of 9.5 at the time of bottling, is sold in three-gallon bottles, and is currently available for water direct customers in certain U.S. geographies. We have a pipeline that could lead to incremental distribution of more than 1,000 Prima Plus exchange rack places. Our efforts are paying off in other areas such as refills. We've partnered with a major retailer to install up to 1,000 additional refill machines at net new locations in 2022 and 2023. Supporting our initiatives are more structural and thematic tailwinds. that are driving consumers toward healthy hydration solutions. The growth in the health and wellness category continues to support our prospects of gaining share of the broader beverage category. In addition, the perception of the declining quality of municipal tap water is well documented, which supports the growth of our products and services. Tap water as a primary drinking source is expected to continue to decline in all parts of the world for the foreseeable future. As Jay noted, we expect our consolidated second quarter revenue to be between $540 and $560 million, and for our adjusted EBITDA to be between $100 and $110 million. For full year 2022, we continue to forecast revenue growth of 9% to 10%, adjusting for the exit of the North America single-use retail bottled water business and including the revenue from the tuck-in acquisitions made during 2021 as we continue to see the improving demand of both the residential and B2B sectors as consumers and workers are increasing their mobility. We are forecasting our adjusted EBITDA to between $410 and $420 million. We're also maintaining a strong pipeline of M&A targets which we expect to execute during the remainder of the year. Once again, I'd like to thank the Primo Water Associates across the business for their tireless efforts to serve our customers. With that, I will turn the call back over to John to move us to Q&A. Thanks, Tom.
spk14: 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. Thank you. Operator, please open the line for questions.
spk01: Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press star followed by one on your touchtone phone. You will hear a three-tone prompt acknowledging your request and your questions will be pulled in the order they are received. Should you wish to decline from the pulling process, please press star followed by two. And if you're using a speakerphone, please lift your handset before pressing any keys. One moment for your first question. Your first question comes from Kevin Grundy with Jefferies. Please go ahead.
spk07: Great. Thanks. Morning, everyone, and congrats on the strong results. Hey, morning, Tom. Morning, Jay. I wanted to pick up on your outlook for the year and then shift the pricing if I could. So first, just with respect to the outlook, maybe just comment on your decision to maintain your revenue and EBITDA guidance for the year despite the strong first quarter and what appears to be a solid start to the second?
spk11: Yeah, clearly we're pleased with the first quarter. Revenue growth, EBITDA growth, margin expansion. So it's a rock solid beginning and we see that carrying into Q2. But it's early. So we'd like to get the next little bit under under our wings, if we will, before we make any decisions about where the guidance would go. And I also think it's important to note that while we announce the exit of Russia, we're not changing our guidance to effect for the short-term headwind of 14 million and 3 million and even us. So we'll continue to deliver our guidance, you know, in spite or despite that decision. So that's where we sit. But, you know, the business, to your point, is off to a terrific start. We're quite pleased with it. And it has continued into April, and I guess we won't be the first couple of days of May.
spk07: Okay. Very good. I think that makes sense. And then just pivoting to pricing, Jay, I think the comment was you took pricing in January and in March. So just a couple questions or a couple areas maybe you could touch on. The magnitude of the price increase relative to CPI, which is currently in the 8.5% area year-over-year. observations on elasticity so far seemingly so far so good although early at least with the first round given the results um and then just broadly you know the view on the ability to take additional pricing um should the inflationary environment worsen from here so thanks for that guys i'll pass it on yeah thanks kevin i'll take a piece of that and then i'll flip it over to jeff you know the best measure for us is our retention rate and we're seeing good stickiness on our customers in both
spk11: across a water direct and exchange business at 86.5% if I have the number correct. So it's a good growth versus prior year. And that says that our investments in service, our ability to be 98.5% staff on route delivery, which is the best place we've been in, good golly, since before any variant. which frankly is very important to us that we're properly staffed so that we can deliver on our commitments to the customer and they're sticking with us. Then in terms of, you know, if you look at our growth, I guess the best indication is double-digit revenue growth on both residential and B2B pretty much everywhere we do business, which we think is a pretty solid sign that pricing is sticking, customers are sticking, which gives us confidence that We're in a good spot as we move forward. Jay, any color you want to add?
spk02: I think, you know, I talked a little bit on my prepared remarks. If you look at North America, you know, water direct exchange up 17% in the quarter. Of that, 11% is related to pricing. So that will give you the magnitude. When you talk about the two price increases, you know, we have different levers to pull on our price increases. I'd say earlier in the quarter, we took pricing on certain products. Later, we more increased our delivery fee, our ESV, as we saw diesel prices continue to rise during the quarter. So, you know, even though we took two tranches, they were on different line items of our bill and different products.
spk05: Okay. Very good, guys. Thank you. Good luck. Yeah. Thanks, Kevin. Appreciate it.
spk01: Your next question comes from Andrea Teixeira with J.P. Morgan. Please go ahead.
spk00: Hi, good morning, everyone, and echoing the success and congrats on the quarter. My question is more related to how you're seeing price elasticity. It looks as if it's probably early to tell, but wondering if you can parse out commercial against residential. And on that vein, if you're seeing anything, as you point out, like in the quarter, Quarter to date, you've had, you know, very good improvement. If you can kind of give us a little bit of, you know, a difference between coming back in some of the commercial clients or even B2B against residential and what you're seeing there quarter to date. Thank you.
spk11: Yes. So there's a good morning, by the way. Thank you, Andrea. There's a couple of questions embedded there. And let me take a shot at that. If you went to North America, Iraq, B2B businesses growing at a faster rate in terms of residential, both double-digit. And then if you went to Europe, they're about the same in terms of growth, both in excess of, you know, call it mid-single-digit, mid-double-digit in terms of growth. So we're quite pleased the pricing has gone through. And remember, our delivery and energy surcharges are generally pegged at a price of fuel. So it covers us from those the volatility in that area, hence the reason that we took another initiative in March once we saw the price of oil spike at the beginning of the Ukraine conflict.
spk02: And on different prices, keep in mind, our average customer bill, $50, $55, whether you're a small business or whether you're a residential. So very similar billing structures, very similar volume and consumption. and the same type of billing structure. So we're taking pricing, we're taking it across our entire customer base in North America here, not just focused on residential or B2B. And we've seen good volume in both, good revenue in both, and good retention growing in both. So not seeing any elasticity issues with the pricing we take.
spk11: And I think one important point is, Our current staffing levels and route operations at 98, you know, essentially fully staffed, is a significant difference from where we were a year ago before Delta, right? So I think we're in the best possible position. In the event anything comes forward that I'm staffed, I'm ahead of it, we have much better planning tools in place, we learned a ton from last year, so that gives us confidence that we can, you know, continue to deliver our customers which frankly enables our pricing.
spk00: Right. If I can just follow up a little bit on the quarter to date and acknowledging that you have a tough company on an organic basis. I think you were up 12% last year, total company. Is that something you were trying to, when your commentary about like, you know, tracking well in the quarter, is that, higher than what you were able to achieve with the 10% in the first quarter, or we should be cognizant of what's happened? I mean, the comparisons in organic.
spk11: Yeah, I think we're cycling, if you looked at last year, rock solid Q1 last year. So very good performance on a year-over-year basis. We're cycling a good performance in Q2 of a year ago. So we like our current positioning. But, you know, I'm a third of the way through the quarter. So I don't want to get too far ahead of myself here. And we're confident. We'll deliver against our commitment. And we'll see how it turns out. But right now, we're in a very good position.
spk00: Great. Thank you so much. I'll pass it on. Best of luck.
spk11: Thanks, Andy. Appreciate it.
spk01: Your next question comes from Derek Lessard with TD Securities. Please go ahead.
spk13: Yeah, good morning, everyone. Morning, and congrats on the quarter. I'm just going back to some of the EBITDA adjustments that you made in the quarter. It looks like a big jump in integration expense. Just curious if that was just a bigger quarter in terms of tuck-ins for you guys.
spk05: Yeah, go ahead.
spk02: Now, I would say you're really seeing the final type of severance costs related to, you know, the overall acquisitions, the larger acquisitions we have done. You are seeing some related to SIFWEL over in Belgium, where we, you know, we did complete that right at the end of the year. But I would say, you know, as we've wrapped up our synergy capture, it's now that we're eliminating some dual acquisitions. staffing and you're seeing the cost of that running through, I would say. So we have a little bit more of that through the year, but I would say you're seeing the final cost associated with the larger acquisitions we've done.
spk13: Okay. Thanks for that, Jay. And I guess one more for me, and it sounds like, you know, I was wondering how you guys are thinking about the balance between return to office and maybe, you know, more permanent working from home. schedules, but it sounds to me like you're agnostic either way.
spk11: That is correct. So, you know, we took it on the chin, as everybody knows, when we went through the pandemic on our commercial business, and we benefited from work from home and residential. Good news is, as people have begun to work from home, our residential business continues to grow. Retention continues to improve, and You know, we have that mid-double-digit growth in commercial in Europe, which is a real sign of the work from home. And we're seeing similar, if not better, numbers in North America. So we're quite pleased of the current balance between the channels as the world, you know, makes its last changes, let's hope, into what the balance of work from home and work in the office will be. So we think we're really well-positioned. Our business today is roughly, in terms of customer count, 50-50. So, about half of our water direct business is residential and the other half is commercial. So, we have good balance and we have good double digit growth in both. So, we really like where we're at.
spk13: Okay. And maybe just a follow up to that. Where are you in terms of the initiatives in Europe to sort of, you know, improve that mix?
spk11: Right, so we had last year we articulated good residential growth. We continue to have good residential, despite the war, good growth in our European business. We're seeing continued growth in that residential business. We continue to enhance our website. We've opened a number of e-commerce shops, which is important because that's where we will sell dispensers. you know, which is the gateway to water services. So we're quite pleased with where we are. We are making enhancements. You know, we refreshed our mobile app in North America. We'll be extending that app into Europe sometime in 2022. And we are consolidating and investing in new sites in Europe. And a couple of those we rolled out in the last month or so. So all those components of the plan are coming together. And we think we will, over time, continue to de-risk and get better mix in our customer base in Europe.
spk13: Okay. Thanks for that. And good luck for the rest of the year, gentlemen.
spk05: Thanks, Eric. Appreciate it.
spk01: Your next question comes from George Dumet with Scotiabank. Please go ahead.
spk03: Good morning. This is Bahamin calling on George's behalf. Congrats on the quarter. Can you talk a little bit about, like, expectation going forward in Europe during the war? And also, how does the volume compare to pre-pandemic level at the moment?
spk05: I missed the first half of that question. Do you mind repeating it? It faded a little bit.
spk03: Yeah, the volumes in Europe given uncertainties. Going forward.
spk11: Yeah. So, yeah. Okay. So we don't have any direct business in Ukraine. We do have good sized businesses, as everyone is aware, in Poland and Hungary. And those businesses are performing quite nicely despite all of the disruption. So we're pleased with how those businesses perform. If you look on an over two year basis, come back to pre-pandemic, our revenue is growing, it's higher, if I have it right, versus two years ago. Our commercial business in Europe is still a little down, but aggregate has increased offset by our stated objective of growing the residential business. So that's coming to fruition in a way we would have hoped. So we're quite pleased with what's in aggregate is happening in Europe. We also benefit from, you know, there's more work from home, and that's why you see our commercial business beginning to perform better. We expect that, frankly, will continue.
spk02: I mean, you look at, you are seeing more and more countries return to work right now over in Europe. That's how we are having mid-teens growth in our commercial business over in Europe. And if you look at versus two years ago, I'd say, you know, just that part of the commercial business in Europe, we're down mid-single digits only at this point in time. where at the worst part of the pandemic, we were down 40%. So we're seeing a very good return to that part of the business as things start to normalize over in Europe.
spk03: All right. Also, on the last call, you mentioned right-sizing opportunities in Europe. You are waiting for furlough programs to end there. Can you talk about the opportunity there as well?
spk11: finish some of our right-sizing in 2021. As Jay referenced, there's some M&A work that we chatted about with Derek that we were finalizing. So we think we're largely in the structure we want, largely. And really, we're now beginning to focus on some investments in SG&A, obviously, to focus on growth in things like the residential business and the appropriate service levels as our business returns to growth in Europe after you know, too challenging here.
spk02: And the only other thing you might be referring to is we are centralized in our back office function to Barcelona in Europe because historically this has been a very decentralized back office business over here. And we're making very good progress. We haven't stand it up and we're well along the way of phase one. We have a second phase in smaller countries and we'll move in later on this year. But the back shop consolidation in Europe has moved along and progressed very well.
spk05: Very helpful. Thanks.
spk01: Your next question. My apologies. Your next question comes from Daniel Moore with CJS Securities. Please go ahead. Thank you.
spk09: Thank you. Good morning, Tom. Morning, Jay. Price-cost coverage is obviously really good in the quarter despite significant inflationary pressures. Was there any measurable impacts on EBITDA in the quarter, just given the lag in timing between inflation and when you took price?
spk11: You know, I think we've exhibited in the past that we're pretty nimble. And, you know, if you went back to the beginning of the pandemic and adjustments we made to the cost structure, we reacted to pricing. So that second price increase in March, you know, was. pretty close to when the impact happened but there might have been a little bit of a lag there and then you know certainly as we mentioned in our prepared comments we expect to get full realization of those efforts in q2 because you know in a year-over-year that that delivery in esp will be higher obviously yeah but i i think net net net you look at our pricing actions they were made to offset cost increases so net net net i wouldn't expect that incremental
spk02: our pricing to benefit our bottom line. It's really to offset the cost pressures we've seen.
spk09: Got it. Very helpful. And then maybe just talk about working capital for the expectations for the remainder of the year and how it relates to free cash flow, what your thoughts are there.
spk02: If you look at our free cash flow statement, you will see we do have elevated inventory levels that we're carrying right now. And that was the decision we made to make sure we bought early and stocked up on dispensers. We want to make sure, you know, we are pushing dispenser sales. That is our razor. So we've made the knowing decision to buy forward some of the inventory we're going to buy later on in the year. And I would expect that to continue through the year. We want to make sure we're going to push dispenser sales hard this year. We want to make sure we have inventory in stock. So I would say that's the one. pressure you will see if you look at our statement cash flow that I would see. We'll bleed it then at the end of the year, but throughout the year we're going to make sure we have the dispense because that's a key focus to really push the razor so we can sell more razor blades as the saying goes.
spk09: Makes sense. Maybe last is, it looked like M&A activity was still a little light, but I know you reiterated your target. Any guidance or color on the cadence of potential tuck-ins as we look at the rest of the year? Thanks.
spk11: Well, you know, our target remains 40 to 60 million. We did a number of, we executed a number at the end of last year. So we always want to digest those, right? So that, you know, we don't just show up and do them on Tuesday. We've got a little bit of work to do. So we're focused on the ones we did at the end of the year. But we're confident that we have a solid pipeline. We'll get between 40 and 60 million as the year progresses for sure.
spk05: Very good. I appreciate the call. Thanks, Ben. Appreciate it.
spk01: Your next question comes from Steve Powers with Doches. Please go ahead.
spk08: Hey, thanks. Hey, I was hoping if you could just maybe expand on any challenges or maybe relative success stories in this environment just around associate recruitment, retention, and wage inflation on top of all the other cost inflation we've spoken about, and just how you're thinking about those dynamics, the sort of labor dynamics going forward over the balance of the year. Thank you.
spk11: Yeah, we spent, you know, the better part of, you know, let's call it from, you know, the arrival of the Delta variant through the end of the year, very focused on the associated experience as part of our strategic plan. that is focused on one retention. So do we properly onboard people? Do we get them trained properly? And then they can get into position to take care of our customers. We've made good progress because, you know, as we referenced, we're 98.5 or 100% staffed on routes. And we're generally staffed across the company. It doesn't mean every town in the market, but we're pretty well staffed and very focused. Yes, there's been wage inflation. We've called that as, you know, one of the outcomes and part of our inflation. We have adjusted wages to ensure we attract the right people. And now that we're staffed, our challenge is in focus. I don't want to call it a challenge. It's keep the ones we got so that we can continue to make progress on growing the top of the business and properly servicing the customers that, you know, ultimately closer to the bottom line.
spk02: I would say one Good thing we implemented as we got to the end of last year and rolling into this year is for our RSRs, our drivers, we've implemented a predictive hiring model now that, you know, we're not waiting for the seat to be empty anymore to hire the person. We're looking at historic trends, modeling out where we see the openings will come up based on those trends, and we're hiring ahead of it. So that's really what's given us the ability to get all of our positions full at this point in time in the
spk05: is a really well-executed predictive hiring model. Great. Thank you very much. Thanks, Steve.
spk01: Your next question comes from John Zamparo with CIBC. Please go ahead.
spk05: Morning, John.
spk01: Thanks.
spk05: Good morning, everyone.
spk12: Morning. If I can ask one more on pricing and elasticity. Did you see any change in retention rates or customer sign-up on the March price increase versus the January price increase, and is there any divergence by channel, whether it's residential B2B or even e-commerce?
spk11: We're not seeing any meaningful changes to customer sign-ups or retention across what's called inside water direct, so we're quite pleased with that. We obviously will follow that through our call center, but we're pleased with where we are from a retention perspective as we move from Q1 to Q2, which is for us one of the best indicators. So we're not seeing a flurry of calls about, you know, delivery fee. We're not seeing a flurry of losses of customers. We're not seeing resistance on people signing up. So we think that we're in a pretty good spot that relates to that. And frankly, it is also an outcome of investments. We've made on the associate experience and retention. It's an outcome of enhancements we've made on digital. It's going to be a benefit of the mobile app. So all the other things we do are enhancing the customer experience. And to Jay's earlier point, if we do all those things better and we do them right for the incremental five or six bucks a month or a bill, it's not causing people to flee. And of course, you know, there's other benefits to us. in terms of tailwinds about healthy hydration and people's desire for high quality drinking water.
spk05: And we give it to you any way you want. Okay, that's helpful. Thanks.
spk12: And then my follow-up is on the organic growth. You listed 11.5% year over year. I'm not sure if you have it handy, but in case you do, can you share the proforma number from Q1 last year? It was noisy versus Q1 20. I get around minus 7 or minus 8. I just wanted to see if you have that available.
spk02: I am sorry, John. I can follow up with you on that one. I don't have last year's number handy right now. Is that what you're asking, what Q1 last year's number was?
spk12: Yeah, that's fine. We can follow up later.
spk11: Yeah, that was full pandemic, no pandemic. Yeah, exactly.
spk02: Yeah, so that's – I know we were laughing, you know, Q1 2019 – with no pandemic and we were still well in the pandemic of q1 so yeah a negative number does sound right but off the top of my head john i don't have that one handy but we can follow up okay understood that's all for me thanks very much thanks john your next question comes from derek delay with canaccord genuity please go ahead yeah hi good morning everybody can i i've got uh just one quite well two questions one can you
spk10: sort of rank order your your business lines by margin i mean it kind of sounds like based on the commentary on this call and then as well in the press release that the water direct tends to carry a higher margin than the other business lines and you're talking ebitda march right right derek or gross uh if you can walk it down to ebitda that'd be that'd be better yeah even is a little bit
spk02: Even as a little bit, but now let's start with gross margin and I'll work it down. I'll work it down from there because gross margin is very identifiable. I mean, you look at water direct and let's exclude depreciation because that's how I like to look at it. Yeah, you're in the high 70%, you know, touching 80 at some quarters on our water direct basis. So definitely, you know, a strong margin. When you compare it versus our other lines, you know, they're much smaller lines. You look at our filtration business, you know, we're not manufacturing or selling our products. So it also has good gross margin, but down in SG&A is where we have our routes. You know, you spend it on that or in depreciation because we're amortized units. So, you know, we have a very good gross margin on many lines of our businesses. The retail business that we've talked about that we're exiting, very low gross margin. Our coffee business, that's down. And other, such as selling coffee, again, a lower margin business. But, you know, very happy with our water direct business. It does run, like I said, high 70% type gross margin.
spk11: And, you know, the one standout is our dispenser business, the Razor. And the Razor is we want to get that dispenser in consumer's hands. so that we can benefit from the sales of water products, whether it's in water direct, water exchange, water refill. So that would be the one outlier in terms of gross, and frankly, EBITDA, because we want to sell it and get them in your homes at the lowest possible price, because they will, you know, 45% of them are going to come to water direct, 30% will go to exchange, and 25% will go to our refill business. And that's the proverbial holy grail, right? Raise it, raise it, boys.
spk10: Yeah, okay. That makes sense. And one more, sir. I was a little late to the call. Just I'm wondering if you have any update or perhaps you already gave it just on the tariff reimbursement that you mentioned last quarter. I believe it was around $8 million on the CAPEX side and $5 million on the COG side.
spk11: Yeah, we don't forecast it. It's in the hands of others. So if it comes, it comes. But it's nowhere in any of our current guidance or forecasted performance. we'll let the U.S. government make their ultimate decision on where that turns out.
spk10: Okay, got it. Thank you very much.
spk05: Thanks, Derek. Thanks, Derek. Appreciate it.
spk01: Mr. Cottle, there are no further questions at this time. Please proceed.
spk04: Thank you, Pam. This concludes Primo's first quarter results call. Thank you all for attending.
spk01: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.
Disclaimer