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 Primo Water Corporation's third 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 would 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 followed by two. Thank you. I'd now like to turn the conference call over to Mr. John Caudill, Vice President of Investor Relations. Please go ahead.

Welcome to Primo Water Corporation's third 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 third quarter earnings announcement released earlier this morning or on the investor relations section of the company's website at www.primawatercorp.com. I am accompanied by Tom Harrington, Primo's Chief Executive Officer, and Jay Wells, Primo's Chief Financial Officer. As a 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 third quarter and our progress on Primo's strategic initiatives. 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. With that, I will now turn the call over to Tom.

Thank you, John, and good morning, everyone. I'm pleased with the results of the quarter, and I'm thankful to all Primo associates for their ongoing contribution to the company's success. In particular, I'd like to call out Jay Wells, our CFO, who announced his retirement effective April 1st. I thank Jay for his dedication and valuable contributions during his tenure at Primo. Primo has a strong finance team, and Jay has played a significant role in helping drive financial and operational improvements. I am deeply appreciative that Jay will remain with Primo until his retirement date to help facilitate a smooth leadership transition and wish him all the best in his retirement. Thank you, Jay. We continue to execute 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 thesis remains intact with a portfolio of leading water solutions across multiple channels and geographies, strong consumer tailwinds, and a recession resistant revenue base. The continued investment in our digital platforms, increased connectivity of dispenser sales to our water solutions, and ongoing optimization of our route-based operations provide a solid foundation to achieve our long-term growth targets. In the third quarter, we delivered strong revenue and adjusted EBITDA growth. As a result, we are increasing our full year 2022 guidance on revenue to be between $2.22 and $2.24 billion, with normalized revenue growth of 13% to 14%. Organic revenue growth of 14% to 15%, and adjusted EBITDA to be between $415 and $425 million. Third quarter consolidated revenue increased 6% to $585 million. Organic revenue growth was 15%. 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 he stabilized customer base and refill, as well as improved customer experience, including benefits from our updated mobile app. Adjusted EBITDA in the third quarter increased 10% to $117 million, supported by higher volume, increased pricing and effective expense management that offset the impact of inflation. Adjusted EBITDA margin for the quarter was 20%, 80 basis points higher than the prior year. In the global water direct business, our customer base increased to approximately 2.3 million for the third quarter. This was a 3.6% increase compared to the prior year through a combination of organic customer additions, customer-based acquisitions to our tuck-in strategy, while customer retention remained consistent with prior quarters. Our water direct and exchange business continues to experience strong top-line momentum with 17% organic revenue growth to improve customer satisfaction, enabled by increased delivery frequencies and higher in-stock levels. We benefited from increased points of distribution in water exchange late in Q3 and improved water exchange connectivity with dispenser cells. Our water refill and filtration business continues to show improved performance. organic revenue increased by 11% in the quarter as a result of price increases in outdoor machines, improved machine uptime, and improved service levels in water filtration. Relative to price elasticity, customer trends remain positive. Customer feedback related to the higher pricing has been minimal as we track this through a combination of metrics, including call center activity, customer retention, and customer growth. Our water dispenser business continued to improve through the third quarter as well, with revenue up 47% with retailer sell-through volume of more than 270,000 dispensers. We continue to see volume growth from increased promotional activity, increased product distribution and penetration across our existing customer base. We include coupons from Primo Water with the sale of our water dispensers to drive connectivity of dispenser sales to water services, which is a key driver of future organic growth. On the topic of dispensers, United States Customs and Border Protection recently reclassified hot and cold water dispensers and water filtration dispensers. Effective November 6, 2022, Dispensers and filtration units are no longer subject to a 25% tariff, instead a 2.7% tax. This reduction applies to the vast majority of Primo's imports and will allow us to adjust the average selling price of dispensers that we sell to our retail and e-commerce customers. As a result of the reduction in the cost of goods and subsequent price reductions, We expect to accelerate dispenser sell-through, which enables growth in water connectivity. The cost of goods reduction will be realized in 2023 as new inventory flows through the supply chain. We will benefit from a reduction in CapEx associated with the water dispensers that we rent to customers in the water direct and water filtration business. From a digital perspective, We are pleased with our progress from our investments in our mobile app, My Water Plus, which is currently rated at 4.9 on both the iOS and Android platforms, a direct result of our most recent updates. Our Google online reputation score has increased 63% since the end of 2021, and our Google My Business score has increased 46%. These ratings are a significant improvement from prior quarters and build our confidence on our digital and CX programs. We will continue to invest to provide a best-in-class digital solution for our customers. And since we have replatformed most of our digital e-commerce websites, we will now turn our attention to the redesign of our website, water.com, through a combination of internal and external resources to further enhance the effectiveness of this site. Please review slides 9 and 10 in the supplemental deck for more specifics. During 2022, like many others, we have faced significant cost inflation across labor, fuel, freight, and other input costs, which have been fully offset by our pricing actions through Q3. has done an outstanding job offsetting these increases while continuing to improve the customer experience. As discussed last quarter, the Automated Route Optimization Tool, ARO, in North America, sequences routes in the most efficient path possible, which maximizes the time route sales representatives will spend with customers, enhances commission earning time on routes, unlocks route capacity to handle future organic growth, and minimizes the time spent behind the wheel. ARO remains a key operating initiative. In September, for example, we operated 23 more routes per day compared to August, with no increase in total miles driven, a direct result of the team's efforts implementing the tool. Our year-to-date revenue per stop in North America has increased nearly 22% compared to last year. These efforts have been part and parcel to offset cost increases while improving operational efficiency and the customer experience and enabled us to increase delivery frequency in support of our efforts to grow our water exchange business. As we look to the future, We are in the process of selecting third-party consultants to support our growth algorithm and strengthen operating efficiencies across our route-based platforms. For the full year 2022, revenue is projected to increase to between $2.22 and $2.24 billion, with normalized revenue growth of 13% to 14%. adjusted for the exit of the single-use bottled water retail business in North America. We expect full year 2022 adjusted EBITDA to be between $415 and $425 million. We were awarded a five-year contract to be Costco's exclusive service provider for bottled water delivery services direct to consumer and business members. This increased activity and our growth in water exchange locations supports our 2024 organic growth outlook. We have a strong balance sheet, a compelling margin profile, and a path we are confident in for long-term top and bottom line growth. We are maintaining our revenue outlook for 2024 of high single-digit annual organic revenue growth And we are increasing our 2024 adjusted EBITDA outlook to approximately $530 million, with adjusted EBITDA margins of approximately 21%. Based on our performance in delivering operating, digital, and customer improvements, we are reducing our incremental capital investments from $150 million from 2022 through 2024 to $110 million. Specifically, this is a reduction from $50 million in 2023 and 2024 to approximately $30 million in 2023 and 2024. This decision is based upon our confidence in run rate performance that enables us to reduce the investment dollars and still deliver the 2024 outlook. Finally, I will reiterate that our strategy is working. We're confident in our ability to deliver our 2022 guidance and achieve our long-term 2024 outlook. I'll now turn the call over to our CFO, Jay Wells, to review our third quarter financial results in greater detail.