Primo Water Corporation

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.

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.

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.