Primo Water Corporation

Good morning, my name is Chris 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 2023 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 1 on your telephone keypad. If you would like to withdraw your question, please press star, followed by 2. Thank you. I'll now turn the call over to John Cottle, Vice President, Investor Relations. Please go ahead.

Welcome to Prima Water Corporation's third 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 Prima Water's website at primawatercorp.com and will be available there for playback. 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 the 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 PrimaWaterCorp.com. We have also included a deck on our website that was designed to assist you throughout our discussion. I am accompanied by Tom Harrington, PrimaWater's Chief Executive Officer, and David Haas, Chief Financial Officer. Tom will start today's call by providing a high-level summary of the transaction announced earlier this morning, followed by a review of the third quarter and our progress on Prima water strategic initiatives. Then David will review our segment level performance and we'll discuss our third 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. With that, I will now turn the call over to Tom.

Thank you, John, and good morning, everyone. Before I cover the exciting news announced earlier today, and the strong results the team delivered in the third quarter. I'd like to share that our associates, customers, suppliers, and the citizens of Israel have been and remain in our thoughts and prayers. Our associates in Israel have shown an incredible commitment to our customers, each other, and their communities in the face of a horrific situation by continuing to supply bottled water to the citizens of Israel and I want to thank them for their tremendous efforts. Now on to today's news. As we announced that we have agreed to sell a significant portion of our international businesses to Culligan International. This deal is the first of several transactions that will occur in 2024 as we are executing strategic alternatives for the remainder of the international businesses. which includes IMEA Foods in the United Kingdom, as well as our water and coffee businesses in the United Kingdom, Portugal, and Israel, and expect to finalize these in 2024. We believe this deal unlocks significant value for Primo Water shareholders. The transaction was the result of a proactive board-led process that resulted in an agreement that offers an attractive premium valuation for the businesses sold. It enables us to focus on the North American market where we have leadership, scale, and a significant addressable customer opportunity. The proceeds will be used to drive organic growth, reduce leverage, accelerate water direct tuck-ins, pursue opportunities in water adjacencies, and return capital to shareholders via share repurchases. Highlights of the transaction include up to $575 million all cash purchase price for a significant portion of our international businesses, unlocking substantial share owner value. An attractive premium valuation multiple of approximately 11 times trailing 12 months Q2 adjusted EBITDA. Upon closing the transaction, we intend to repay the outstanding balance of our cash flow revolver with a long-term goal of sustaining net leverage under 2.5 times adjusted EBITDA. In addition, upon closing, the Board plans to authorize an incremental $25 million share repurchase program. To be clear, the existing $50 million authorization approved in August of 2023, remains in place until closing and will be increased to an aggregate authorization of $75 million post-closing. The remaining international businesses are expected to generate additional cash as they are sold in the upcoming year. This transaction marks another major milestone in our transformation as a company. Following the completion of the transaction and the divestiture of the remaining international businesses, the simplified pro forma Primo Water will have greater focus on our pure play North American water businesses with scale and operational focus. An improved financial profile, accelerating the achievement of several previously announced 2024 targets by approximately one year. the means to execute highly synergistic tuck-ins, as well as the ability to pursue adjacent water services and high growth categories. Our capital allocation priorities will align with our opportunities for growth and will be able to support a full suite of options to drive value. We will be able to drive organic customer growth, digital initiatives, and customer retention activities and our capital investments will be focused in high-impact, profit-generating projects. We will reduce leverage, giving us increased flexibility to pursue the growth opportunities. We will fund M&A through tuck-ins as well as new and potential revenue streams. And we will support the return of capital to shareholders via share repurchases. Upon closing, we will have a North American-based company that aligns with our brand strengths, a leaner, more focused associate base, a balance sheet that has lower leverage, the power to increase organic growth, greater earnings power, and a company poised to execute M&A at an accelerated pace. We anticipate releasing next year's guidance in conjunction with our 2023 year-end earnings in February 2024. I would like to thank all of the Primo awarded teams for their contributions to the excellent performance of the business and delivering another quarter of strong revenue and earnings results and generating record adjusted EBITDA margins. In Q3, we delivered consolidated revenue growth of 6%, adjusted EBITDA growth of 21%, adjusted EBITDA margin of a record 22.7%, a 270 basis point increase versus the prior year, adjusted free cash flow of $102 million, and sell-through of approximately 252,000 water dispensers. For the third quarter, consolidated revenue increased 6% to $622 million, compared to $585 million. Excluding the impact of foreign exchange, revenue increased 6% for the quarter. Adjusted EBITDA increased $24 million to $141 million, an increase of 21%. Excluding the impact of foreign exchange, adjusted EBITDA grew 19%. In short, we delivered increased revenue, adjusted EBITDA growth, adjusted EBITDA margin expansion, and significant free cash flow. Revenue growth was driven by strong revenue growth in water direct and exchange of 7%, double-digit revenue growth in water refill and filtration of 19%, increased revenue growth in our European operations of 4%, excluding the impact of foreign exchange, and global water direct customer retention of approximately 86%, a slight increase from last quarter. 2023 growth in customers is expected to reflect a combination of organic customer growth as well as the execution of our tuck-in strategy. As a reminder, our tuck-in acquisitions are a core component of our customer growth plans. These customers have strong retention rates, generally synergize within 90 days, and enhance route density resulting in increased adjusted EBITDA dollars and margins in the markets were executed. Our Razor-Razorblade business model includes two approaches. The rental of water dispenses direct to residential and commercial customers and the sale of water dispenses through retail partners. Both approaches enable growth in water solutions and contribute to our predictable and recurring revenue growth. In Q3, we had water dispensers sell through of approximately 252,000 units on pace with our target of 1 million water dispensers sold through for the year. In 2023, we are particularly focused on growth with our brick and mortar retail partners where we have greater visibility into the connectivity to our water solutions and where the connectivity is dramatically higher than through e-commerce. Our consolidated water direct and exchange business continued to experience strong top line momentum during the quarter with 7% revenue growth driven by pricing and 86% customer retention in water direct. Our water refill and filtration business continues to exhibit strong growth with revenue increasing 19% in a quarter. The growth was driven by pricing, consistent service levels, and machine uptime at our refill stations. We have a high refill station retention rate, and we are expecting continued revenue and profit growth in this category. Water refill targets a value-conscious consumer and provides similar margins to our other water offerings, which provides a diverse platform of water solutions for all consumers. We are pleased to report that our commitment to improving the customer experience has resulted in improved operational metrics, digital experience, and customer satisfaction. As a reminder, a key service metric we focus on is on-time info, or OTIF. OTIF, simply put, is did we deliver to the customer on the scheduled day and with all the products they requested. OTIF in North America in Q3 increased when compared to Q3 of 2022. The ability to serve our customers in the most efficient manner possible is a critical driver of both our short and long-term profitability. Units per route per day increased approximately 4% compared to Q3 of 2022, and revenue per route increased 7% compared to Q3 of 2022. Our scale and leverage are becoming more evident as we service more customers with higher volume per route. Route density and revenue per route have never been higher, and as a result, we're able to post record adjusted EBITDA margins of 22.7% across the entire company and North American margins of 25.7%. Relative to ESG, Last month, we received the results of the Sustainalytics Gap Analysis Report. We were able to significantly improve our overall risk score related to ESG factors and received a strong corporate governance score. Our strength in ESG, coupled with our ownership of water rights and access to water sources, as well as our expansive distribution network, sets us apart in terms of our ability to meet our customers' needs whenever wherever and however they want. We have an economic moat that is not easily replicated and sets us up for sustained success. Looking ahead, we are reaffirming our full year 2023 revenue guidance to be between $2.32 and $2.36 billion, with revenue growth in a range of 7% to 9%. and full year 2023 adjusted EBITDA to be between $460 and $480 million, while understanding the current challenges in Israel. Our disruptions to date have been relatively minor, and we continue to monitor the situation closely. We've made significant strides with respect to adjusted free cash flow generation through a combination of increased earnings and improved working capital. We expect an increase in full-year 2023 annual adjusted free cash flow to $160 million, a $10 million increase versus prior guidance. We anticipate releasing next year's guidance in conjunction with our 2023 year-end earnings in February of 2024. I'll now turn the call over to our CFO, David Haas, to review our third quarter financial results in greater detail.