Primo Water Corporation

Good morning. My name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to the Primo Water Corporation's fourth 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, then the number two. I would now like to turn the call over to John Cottle, Vice President of Investor Relations. Please go ahead.

Welcome to Primo Water Corporation's fourth 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 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 fourth quarter earnings announcement, released earlier this morning or on the investor relations section of the company's website at PrimoWaterCorp.com. I am accompanied by Tom Harrington, Primo's Chief Executive Officer, and David Haas, Primo's Chief Financial Officer. As part of this conference call, we have included a deck online at PrimoWaterCorp.com that was designed to assist you throughout our discussion. Tom will start today's call by providing a high-level review of full year 2022 and the fourth quarter and our progress on Primo's strategic initiatives. Then David will review our segment level performance and we'll discuss our fourth quarter performance in greater detail and offer our outlook for the first quarter and full year 2023 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. In 2022, We delivered normalized FX neutral revenue growth of 16%, adjusted EBITDA growth of 11%, increased adjusted EBITDA margin by 70 basis points to 19%, sales of approximately 1 million water dispenser, the Razor in our Razor to Razorblade model, and increased return of funds to shareholders through the higher dividend and the Opportunistic Share Repurchase Program, partially funded by the sale of two properties in California. I am pleased with the performance during the fourth quarter and for full year 2022, and want to thank all the Primo Associates for their contributions to the company's ongoing success. We remain confident in our ability to deliver our 2023 and 2024 outlook. I welcome David Haas to his first earnings call as our recently appointed Chief Financial Officer. David has been a key member of the Primo team for several years, most recently as Chief Strategy Officer. As the key architect of our corporate strategy, David has a deep understanding of our business segments. He has hit the ground running with our team of seasoned accounting, treasury, and finance professionals that are assisting him in the transition. As part of this transition, our outgoing CFO, Jay Wells, will work with David to ensure a seamless transition. As I mentioned last quarter, I'd like to once again thank Jay for his dedicated service to Primo Water, and we wish him the best as he approaches his retirement. Our growth outlook is on track with a portfolio of leading water solutions across multiple channels and geographies, strong consumer tailwinds in the aging global water infrastructure, as well as a compelling financial profile. Continued investment in our digital platforms and increased connectivity of water dispensers to our water solutions provides a solid foundation to achieve our growth targets. For the full year of 2022, Excluding the impact of foreign exchange, normalized revenue increased 16%. Normalized revenue excludes the exited North American single-use bottled water retail business and our exited business in Russia. Adjusted EBITDA increased $40 million to $420 million, an increase of 11%. Moving to the fourth quarter. We delivered the trifecta of strong revenue, adjusted EBITDA growth, and adjusted EBITDA margin expansion in a quarter. Consolidated revenue increased 3% to $533 million, which included FX headwinds. Normalized revenue, excluding the impact of foreign exchange, grew by a healthy 14%. Driven by resilient consumer demand, increased dispenser sell-through, solid volume growth in water direct and exchange, strong revenue growth in water refill and filtration, consistent growth of our premium water brand Mountain Valley, execution of our M&A tuck-in acquisition strategy, and consistent customer retention. Adjusted EBITDA in the fourth quarter increased 9% to $107 million, supported by higher volume, increased pricing, and effective expense management that offset the impact of inflation. Adjusted EBITDA margin for the quarter was up 110 basis points to 20.1%. Although there is seasonality in our quarterly results, this was the second quarter in a row with an adjusted EBITDA margin equal to or greater than 20%. We are especially pleased with the adjusted EBITDA margin expansion in the face of record inflation. We successfully offset the impact of labor, fuel, and freight and expanded the margin percentage, a job well done by the PRIMO team that positions us for continued success in 2023 and beyond. We execute a razor and razor blade business strategy where the rental or sale of dispensers helps create high margin recurring revenue generated from our water solutions. We saw an increase in the level of sell-through in our water dispenser business to approximately 280,000 units in the quarter and approximately 1 million units in 2022. These dispenser sales drove connectivity to our water solutions. Water dispenser sell-through represents the units sold by brick and mortar and e-commerce retailers to the end consumer. Sell-through volume in the quarter was 50% higher than Q4 of 2021. Our Black Friday promotions exceeded our and our retail partners' expectations. Although higher retail prices reflected the impact of the tariff, consumers continued to purchase dispensers as part of their health and wellness journey. The sell-through units are a leading indicator of the future organic growth of our water solutions. The sell-in, or what we sold directly to retailers for Q4, was negatively impacted by retailers' efforts to right-size their inventories that were increased during 2022 supply chain challenges. We expect the right-sizing of retail inventory to extend into 2023 and the result in lower dispenser revenue for Primo as it did in Q4. However, it has little to no impact on water dispenser sell-through, recurring revenue in our water businesses, nor our adjusted EBITDA. Our water direct and exchange business continue to experience strong top line momentum during the quarter with 13% revenue growth through pricing actions, volume growth, and improved customer satisfaction enabled by increased delivery frequencies. Customer retention importantly remained consistent with prior quarters. We were awarded a five-year contract to be Costco's exclusive service provider for large format bottled water delivery services directed to Costco consumer and business members. In 2023, we will increase the number and frequency of in-store activities at Costco stores. Increased customer growth from these events will ramp up through the year as we build out the program across more and more of the U.S. Our water refill and filtration business continues to accelerate its growth with an increase in revenue of 14% in the quarter as a result of price increases on outdoor machines, improved machine uptime, and improve service levels in water filtration. Our water refill business is one of our water platforms where consumers who purchase the water dispenser connects to one of our water services. Regarding price elasticity, customer trends remain consistent with prior quarters. 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. From a digital perspective, we continue to see positive responses from the update of our mobile app, MyWater Plus, and its ease of use for our customers. Our digital focus in 2023 is centered on new water customer acquisitions through CostcoWater.com as one example, water dispenser sales, and connectivity to our water solutions. We continue to invest in best in class digital solutions for our customers. We are redesigning our website water.com through a combination of internal and external resources to further enhance the effectiveness of this site. These marketing investments are helping us build a larger base of long-term high value customers. During 2022, We face significant cost inflation across labor, fuel, and freight, as well as other input costs, which totaled approximately $74 million. As I mentioned earlier, we fully offset these headwinds through our pricing and efficiency actions during the year and increased our adjusted EBITDA margin percentage. The Primo team has done an outstanding job offsetting these increases while continuing to improve the customer experience. The automated route optimization tool, ARO, in North America continues to yield efficiencies. The tool sequences routes for the most efficient path possible, which maximizes the time route sales representatives spend with customers, unlocks route capacity to handle future organic growth, and minimizes fuel consumption. As volumes increase through the year, we added routes at a more efficient level. a 13% improvement in productivity when comparing 2022 to pre-pandemic 2019, and a record all-time high efficiency. ARO remains a key operating initiative. Our 2022 revenue per stop in North America increased nearly 24% compared to last year. Our ARO tool has helped us offset cost increases while improving the customer experience and enabling us to increase delivery frequency in support of our efforts to grow our water exchange business. During 2022, we made meaningful improvements in our ESG story. We're implementing the reporting systems that provide investment grade reporting, detailing our progress on our journey to ESG leadership. We will be updating our sustainability reports for 2021 and 2022 by mid-year. Our upcoming report will highlight improvements in data reporting and our reduction efforts, which have resulted in carbon emissions reductions of nearly 20%. We source our water from a combination of municipal on-site well and spring sources across our footprint. Of the 81 sources we use, 37% are company owned. Our approach to sourcing enables us to ensure adequate supply and to meet varying consumer water preferences. From a governance perspective, in identifying new candidates, our board will consider the mix of director characteristics and diverse experiences, perspectives, and skills appropriate for the company. Over the course of the past five years, we've refreshed our board with five new directors. As we shared last month at the ICR conference, for the full year 2023, we expect revenue to increase to between $2.3 and $2.35 billion, with normalized revenue growth in the range of 6% to 8%. we expect full year 2023 adjusted EBITDA to be between $450 and $470 million. Both of these financial guidance items exclude any material tuck-ins we might complete throughout 2023. For the first quarter of 2023, we expect revenue between $520 and $540 million in adjusted EBITDA of between $90 million and $95 million. Finally, I will reiterate that our strategy is working. We are confident in our ability to deliver our 2023 guidance as well as our longer-term outlook. I will now turn the call over to our CFO, David Haas, to review our fourth quarter financial results in greater detail. David?