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spk07: Good morning. My name is Joanna, 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 2024 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, press star, followed by two. Thank you. I'll now turn the call over to John Cattle, Vice President, Investor Relations. Please go ahead.
spk06: Welcome to Primo Water Corporation's first quarter 2024 earnings conference call. All participants are currently in listen-only mode. The call is being webcast live on Primo Water's website at primowatercorp.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 the 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 PrimaWaterCorp.com. In addition to slides accompanying today's webcast to assist you throughout our discussion, we have included a copy of the presentation in a supplemental earnings deck on our website. I am accompanied by Robert Reetbroek, PrimaWater's Chief Executive Officer, and David Haas, Chief Financial Officer. With that, I will now turn the call over to Robert.
spk10: Thank you, John, and good morning, everyone. I'm very pleased with our performance in the first quarter, where we showed strength across the business and organization, with balanced and broad-based growth across all channels. Total revenue of $452 million increased 9.6%, consisting of volume growth of 5.1% and pricing growth of 4.5%. Revenue gains were driven by organic growth of 8.3%, demonstrating the health of our consumer and category, as well as our leadership position across our portfolio. Adjusted EBITDA was $94 million, up 24% versus the prior year, and the resulting adjusted EBITDA margin was 20.8%, which gives us confidence in our full-year margin expansion. Both revenue and adjusted EBITDA exceeded the high end of our guidance issued last quarter. David will discuss more of the details of the quarter in a moment, but the results are a direct reflection of our associates and their commitment to our customers. We remain frontline focused with a clear eye to growing the business profitably. I would like to publicly recognize and thank them for embracing our must-win priorities and for their dedication. From a macro perspective, our consumer demand is strong. Persistent concerns of inflation and high interest rates have not slowed demand for our products, and we continue to see the growth potential as a pure play water company in the large, highly fragmented, and growing North America water category. As consumers continue to prioritize healthier lifestyles, we offer high-quality drinking water solutions to meet the consumer wherever, whenever, and however they choose to hydrate. Our split between residential and commercial customer base remains approximately 50-50, ensuring a healthy balance of revenue sources. When you look at the broader beverage category, we are pleased that we are growing revenue in both volume and price. This contrasts with beverage companies where growth has been driven by pricing with moderate or declining volume. Recently, you may have been hearing more about external contaminants and their impact on the US tap water supply, especially when sourced from surface water. Given an expansive and sometimes aging water infrastructure, many municipal solutions are likely years away from meaningful change. Our large format bulk water products provide an immediate path to ensuring high quality drinking water for consumers. The ongoing discussion about contaminants and the quality of the North American drinking water supply will likely make consumers more discerning in their hydration choices, presenting a clear opportunity for our water solutions. With that, Let's discuss the specific progress of each of our must-win priorities that I identified last quarter. The first must-win is to provide a superior customer experience with the goal to yield net organic growth and units or gallons consumed across our water portfolio. We are focused on acquiring and maintaining high-value customers and driving annual gallon growth. starts with the sale of water dispensers at retail, which drives our portfolio of water solutions, including water direct, exchange, refill, and filtration. We've begun enhancing many aspects of our consumer touchpoints in order to improve their experience. An important step is expanding our coverage in our customer experience center, where we are digitizing and empowering the center with a customer-centric approach. In Q1, we meaningfully increased the number of hours and days that we interacted with our valued customers through voice, social, and chat, and focused on our quality of service and rapid request resolution. Within our water.com website, we created more than 180 branch pages. with unique content and descriptions for improved search engine optimization and customer review interactions. Our mobile version called MyWater Plus has been upgraded with Spanish language capability with plans for an updated user interface experience and several more upgrades to come in the balance of the year. We take great pride in our brand portfolio that includes 14 regional and national brands. These brands offer a variety of price tiers and water source types. Whether it's Sparklets on the West Coast, Crystal Springs in the East, or Mountain Valley and Primo throughout the country, our consumers can expect high quality and great tasting water, sourced from one of our 70 domestic water sources. Consumers can select our products from multiple price tiers. from a value price of 50 cents per gallon for water sold at a refill station, all the way up to our super premium Mountain Valley spring water, delivered in multi-format glass bottles direct to their door, or sold at retail and at various on-premise locations. Our increased focus on Mountain Valley, which I spoke about last quarter, is delivering results. During the first quarter, we increased our Mountain Valley retail revenue by approximately 57% over the prior year by expanding our glass production capacity. We have launched a convenient 9-pack single-serve aluminum bottle at Whole Foods stores throughout the country, and we'll begin shipping this product to our water direct customers later this month. Mountain Valley is already the number one brand of spring water sold in the natural foods channel. and is now available in more than 12,000 stores in the U.S., including conventional retail stores. We continue to see high levels of demand for our five-gallon, two-and-a-half-gallon retail and on-premise multi-serve and single-user glass products. The second must-win is to be the preferred water solutions partner. We meet the end consumer across numerous channels like direct-to-consumer delivery or through one of our retail partners with our exchange locations or refill stations. We have an offering to meet each of our customers' needs and budget for what we call Water Your Way. The concept of partnering stretches across all aspects of our business, including associates, suppliers, customers, and current and potential share owners. Starts with our associates. I am proud of the work they do and their commitment shows in every aspect of their efforts. Providing a safe environment is job one and is necessary for our associates to thrive. Additionally, we are investing in improvements that include workplace upgrades in offices, locker rooms, break room areas, parking lots, and production and distribution areas. Our associates live in the communities we serve and are passionate about the products and services we provide, and I want them to exhibit the pride in their company as they represent us in the community. As we conduct periodic surveys of our associates, we are noticing a positive shift in the culture and engagement, culminating with an improvement in retention rates. Community involvement includes providing support in times of need, like we did during the recent Texas wildfires. We embrace our partnerships and have been able to deepen our relationships as we span across all types of retail, including mass merchandisers, club stores, DIY, and e-commerce with top tier retailers like Walmart, Costco, Home Depot, Lowe's, and other prominent grocery chains throughout North America. I've had the opportunity to meet with several of these world-class retailers in top-to-top meetings and I found a strong desire on their part to drive more traffic to their stores with our exchange and refill stations and Mountain Valley spring water during the first quarter we were able to secure additional display racks within certain retail stores to support capacity in our exchange channel our focus is on filling wide space voids and increasing capacity and in stocks is having a noticeable effect by driving double digit revenue growth as well as unit volume growth across the retail space. I have also been meeting with key members of our vendor community. As another area for growth, we've seen opportunity to evolve our relationships with vendors from transactional to strategic partnerships. and to help deliver innovation in our product offering. David and I had more than 50 interactions with investors and analysts in the first quarter. It has been enlightening and educational. These themes included positive feedback regarding our growth algorithm, the sale of our European assets, an appreciation for our strong balance sheet and low leverage, and how we plan to deploy capital in the coming quarters. I'd like to personally thank the investor base for the level of engagement as sustaining, deepening, and enriching these partnerships means we can win for the long haul. The third must-win is operational excellence, specifically ensuring that we have an optimized organizational structure and operating systems to guarantee our associates' safety and well-being delivering the highest quality products and service and scale efficiently as we continue to grow organically and through acquisitions. During the first quarter, we began implementing some six and seven day delivery schedules as we prepare to head into our traditionally busy period of the summer. We were able to maintain our on time in full rate of 93% in our water direct channel for the first quarter. Our refill channel had machine uptime of 97%, ensuring product availability for our customer base. Throughout our operations, we are driving integrated business processes. Successful implementation will provide technology enabled solutions to increase customer satisfaction and reduce overall costs. The latest example of our technology upgrade is the current rollout of a new fleet transportation management system as part of what we call Automatic Route Optimization 2.0, which is driving even more efficiencies in water direct and exchange. During the first quarter, we increased our revenue per route by 8%, and units per route per day by 5%, an indication of improved asset utilization, route density, and volume and pricing improvements. The same principles are now being employed in the optimization of our refill routes, enabling us to extract more value from our team of technicians and service providers. We are focused on strategic CapEx investments that deliver high returns. The installation of the new high-efficiency production lines continues, and we expect our Ephrata, Pennsylvania production line to be complete in the second quarter and our Chicago facility later this year. The performances of the high-efficiency line installations are driving a reduction of water waste at the filler and can nearly double the output capacity of the bottling line. Advancements in robotics can be utilized to assist some of the more strenuous aspects of our plant and distribution functions, freeing up our associates to focus on the quality aspects of their roles. And quality remains at the forefront of what we do. The team remains focused on delivering the previously announced business optimization program that will enhance not only our productivity, but also lower our overall cost to serve while continuing to offer customers an exceptional experience. We remain committed to delivering the annual run rate savings of $20 million by year end 2024. From a sustainability perspective, we strive to source and process responsibly to protect the planet we inhabit. We will continue to implement an environmental strategy that is focused on sourcing water responsibly, converting our fleets to more eco-friendly propane, reusing, refilling, and recycling of our plastic bottles, and increasing the use of glass and aluminum as part of our product offering. We offer high-quality, healthy hydration solutions whether you're at home, work, are on the go with water delivery, exchange, and refill in our large format returnable, reusable, and refillable package that is 100% recyclable at the end of its life. I intend for us to remain a leader in this space, and I am proud of the results and improvements that will be contained in our 2023 sustainability report. which is expected later this quarter. I hope you can understand why I'm excited about the growth potential in front of us. We have a clear plan to deliver success with a good balance of volume and pricing. Our unique combination of associates, assets, and resources are capable of delivering results that benefit all our stakeholders. Before I turn the call over to David, to review our financial results in greater detail and provide our second quarter and full year 2024 outlook. I would like to once again thank all our Primo Water Associates for their support and contribution to the excellent performance of the business. With that, I'll turn the call over to David.
spk05: Thanks, Robert. As a reminder, at the end of the year, we disposed of the majority of our international assets And thus, our financial results discussed today are for continuing operations only. At no point will we cover discontinued operations unless otherwise noted. The first quarter results of our continuing operations included revenue increasing 9.6% to $452 million, adjusted EBITDA increasing 24% to $94 million, with adjusted EBITDA margins of 20.8%. All metrics exceeded the high end of our most recent guidance. Within the 9.6% revenue growth, approximately 8.3%, or approximately $34 million, came from organic activity with the balance 1.3%, or approximately $5.5 million, coming from inorganic or acquired sources. PrimaWater's definition of inorganic contribution includes any tuck-in businesses that were closed less than 12 months ago. After 12 months, any acquired business becomes part of our normal contribution base. Separately, the 9.6% revenue growth, irrespective of organic or acquired means, can be split into approximately 5.1% related to volume activity and approximately 4.5% related to pricing activity. Volume contribution in this case comes from both new customer additions or additional gallons consumed from existing customers or retail locations in our exchange or refill businesses where actual customer counts are not directly known. Volume activity in the quarter was strong across all of our water services, indicating strength in our bulk-oriented offering as well as the complementary nature of our different price tiers. We believe that volume across our water services will continue to be a primary indicator of business health versus overall customer accounts. We have expanded our channel disclosure to break out the price and volume splits for each of the channels versus prior year. A table of the results is included within our supplemental earnings deck. You will notice that volume gains occurred across each of the channels and price improved except for the welcome price decline in water dispensers. Within our channels, we had strong revenue growth of 9% in water direct and exchange and an 11% increase in our water refill and filtration channel. The other water channel, which is primarily the retail and on-premise portion of Mountain Valley Premium Spring Water, was up 57%. The water dispenser business, representing the sell-in of our units to the retailer, grew 32%, driven by 57% from volume, offsetting expected lower wholesale prices as the tariff elimination works through our pricing architecture. Unit dispenser sell-in during the first quarter was highlighted by the performance of several of our largest retailers in the club, DIY, and mass merchandising channels. The excess inventory created during the supply chain challenges of a couple years ago is now largely behind us. The sell-in was driven by pricing rollbacks, returned a shelf of dispenser SKUs and effective merchandising at the store level. Water dispenser sell-through was approximately 222,000 units in the quarter, up approximately 3%. As a reminder, our razor and razor blade business model includes two approaches of selling the razor, the rental of water dispensers to residential and commercial customers in our water direct business, and the sale of water dispensers through retail partners and online. Both approaches enable growth in water solutions and contribute to our predictable and recurring revenue growth. We have been 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 higher than through e-commerce. As discussed in previous calls, our water dispenser category was previously under a 25% import tariff but was reclassified last year and a refund process from the U.S. government was initiated. We have recorded the refunds in the same manner as the original transactions. For the first quarter, we received $2.6 million. Approximately $214,000 is reflected in year-end adjusted EBITDA related to water dispensers sold to retail. $2.1 million is related to the water dispensers that we rent as CapEx. with the residual value and approximately $250,000 related to interest income or tariff balance paid to Prima Water. When including last year's payment, cumulatively through the first quarter of 2024, we have received approximately $10.8 million. As we look further into the operational metrics, and as Robert mentioned earlier, our commitment to improving the customer experience continues to result in improved on-time, in-full, or OTIF rates. The ability to serve our customers in the most efficient manner possible is a critical driver of both our short- and long-term profitability, and our automated route optimization, ARO, tool continues to yield efficiencies. In North America, units per route per day increased approximately 5% compared to Q1 of 2023, and revenue per route increased more than 8% compared to Q1 of 2023. Our scale and leverage continues to improve as we service more customers with higher volume per route. Additionally, Water Direct customer retention increased to approximately 85%, slightly higher than at the end of last year and versus the year-ago period. Shifting to our balance sheet and cash flows, our net leverage ratio at the end of the first quarter on a trailing 12-month basis, stood at approximately 2.0 times our adjusted EBITDA for continuing operations. This is on par with our year-end figure. Similarly, our liquidity remains strong with approximately $498 million of cash on the balance sheet, approximately $525 million when taking into account the cash within our discontinued operations, and a fully unused cash flow revolver. In the quarter, we generated approximately $4.7 million of interest income, slightly offset by cash paid for unused revolver fees and other expenses. On a full year basis, while we'll be a net interest expense payer, we are quite pleased with both the low interest rate carried on our senior notes and our ability to generate interest income in today's yield environment. Our adjusted free cash flow results for the first quarter totaled $28.4 million, a year over year improvement of $39.4 million. The improvement was primarily driven by an increased earnings of our continuing operations business, reduced net interest expense, improved working capital, lower capital expenditures, and the one-time gain of incremental tariff receipts in the quarter. Once again, as I transition into our 2024 outlook, Any forward guidance will be strictly for continuing operations. Discontinued operations will not be covered. To help bridge our 2024 guidance, a table of 2023's financial results for continuing operations by quarter has been provided in the appendix of our supplemental earnings slides. We are forecasting second quarter revenue guidance to be between $472 million and $482 million. We expect Q2 adjusted EBITDA to be between $103 million and $111 million, with an implied adjusted EBITDA margin of 22.4%. The 22.4% adjusted EBITDA margin represents a 60 basis point improvement from the year-ago period. For the full year 2024 forecast of continuing operations, we are increasing our revenue projection to be between $1.855 billion and $1.885 billion with revenue growth at the midpoint of 5.5%. Similarly, we are increasing our full year 2024 adjusted EBITDA to be between $410 million and $430 million with an implied adjusted EBITDA margin of 22.5% at the midpoint. The increase in guidance contemplates both the benefit from the strong start in Q1 as well as some balance of year benefit from our business optimization program. The initial contribution from early cost reduction activities is approximately $2 million balance of year 2024 and approximately $4 million on a 2025 run rate basis. Neither guidance figure includes water direct tuck-in acquisitions that may occur across the balance of the year. We are forecasting 2024 CapEx guidance of approximately 7% of our revenue guidance range plus an incremental $22.5 million of strategic CapEx. We expect to return to our total CapEx spend of approximately 7% of revenue in 2025. Key initiatives to be funded from our 2024 CapEx plan include installing high-efficiency water production lines, reducing waste, and increasing productivity, building a more environmentally friendly fleet, and expanding our private fleet, to improve the efficiency of our product distribution, driving organic growth through digitization, upgrading technology platforms, accelerating dispenser innovation, and continuing growth in refill and filtration with refreshed signage and branding of our existing units. Full year 2024 cash taxes are expected to be approximately $30 million to $40 million. This anticipates utilization of U.S. net operating losses, or NOLs, of which we have approximately 46 million U.S. NOLs available for 2024. We expect the amount of NOLs available to be approximately 16 million in 2025 and 10 million per year in 2026 through 2029. For the full year 2024, we expect net cash interest expense of approximately $30 million to $50 million. Our interest expense is tied to our two senior note debt facilities with very low interest rates of approximately 4.2% with maturity dates of 2028 and 2029. We do not currently anticipate drawing on our cash flow revolver. Additionally, we will take steps to maximize the interest income yield throughout 2024 but could experience reduced income opportunities if market available rates decline related to any macro fed or bank rate environment decisions. We still expect M&A tuck-ins to be toward the higher end of historical ranges during 2024. Combining all of these factors along with the core health and cash generation capacity of our business model, we are forecasting adjusted free cash flow from continuing operations of between $175 million and $185 million in 2024. The $5 million increase at the midpoint can be attributed to the free cash flow conversion of our increased adjusted EBITDA guidance along with the tariff amounts received during the quarter. This outlook continues to target our commitment to replace the adjusted free cash flow that was tied to the assets sold and those held for sale in our discontinued operations. The following three items have not been included in our 2024 guidance due to the uncertainty in timing with each discrete outcome. First, for the remaining balance of the business optimization program, we remain confident in achieving the $20 million improvement. Second, the remaining benefits from additional tariff refunds outside of the amounts mentioned and received during the quarter due to the uncertain timing of the government refund process. the sale of discontinued operations, which includes AMIA Foods in the United Kingdom, our water business in Israel, and our water and coffee businesses in the United Kingdom and Portugal. As previously communicated, these businesses will remain in discontinued operations until they are sold, they are being actively marketed, and have received interest from several parties. With respect to our share purchase program, we repurchased $9 million of common stock in the first quarter. Yesterday, our board of directors authorized a quarterly dividend of 9 cents per common share, a 13% increase over last year, which continues our path to the multi-year dividend step-up with an increase in our quarterly dividend per share of 1 cent for the third consecutive year. In closing, Our improved financial profile and flexibility, along with a compelling long-term growth outlook, are a strong foundation for continued success. With that, I will turn the call back over to John for Q&A. Thanks, David.
spk06: 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.
spk07: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. If you are using a speakerphone, please lift the handset before pressing any keys.
spk08: One moment, please, for your first question. This question comes from Nick Mody at RBC Capital Markets.
spk07: Please go ahead.
spk00: Yeah, thank you. Good morning, everyone. And really appreciate all the perspective on the quarter itself. But Robert, I was hoping we could take a step back, you know, this being your first full quarter as part of the organization. And if you kind of take an outside, quote unquote, outsider's perspective in terms of, you know, how you think about the quarter, you know, the evolution of what you've seen and, you know, what you've really been able to accomplish now that you've been in the seat for, you know, several months now. Thank you.
spk10: thanks nick thanks for the question yeah you know the way that i view the quarter is that we had very balanced growth and we had broad-based growth we had strength across the portfolio across pretty much all water channels and we reflected progress in both volume and pricing and when i look at the revenue we delivered nick it was it was up at a 9.6%, and it was driven both by volume and pricing. As David said, volumes up 5.1, price up 4.5. But importantly, we also had 8.3% organic growth, which is, you know, something we're starting to report now. I looked at the gross margin, and I think it's very healthy. It's up 160 basis points. We're now at 64.4%. And the underlying drivers of that is really a combination of pricing, volume, throughput, and operating efficiencies. So that was very reassuring and translated to a strong adjusted EBITDA as well. And margins at 20.8%, which are up 250 basis points. Again, driven by pricing, volume, but also a disciplined approach on our operating expenses and operating efficiencies. So I'm very pleased with the quarter. And if I look at, you know, the environment in which we're operating, we do obviously continue to see a challenging macro environment. But the good news is that different from some of the other companies that have moderate or declining volume, we were able to deliver growth on volume and pricing. So I feel good about that. And then with regards to the efficiencies, there's still efficiencies remaining. We could remain committed to the business optimization program. And with regards to the accomplishments, which was the last part of your question, I think we've made progress against our three must-win priorities. And those are really, the first one is to deliver superior customer service. The second one is to remain and be seen as the water solutions partner of choice with vendors, communities, retail partners, investors, and associates. And the third is really driving better operational excellence. And I feel like we've made progress in those areas. I can talk a bit more about that. But thanks for the question, Nick.
spk11: Excellent. Thanks. I'll pass it on.
spk08: Thank you.
spk07: The next question comes from Derek Lessard, an investor. Please go ahead.
spk02: Yeah, thanks. Thanks, everyone. And congratulations on another great quarter. I wanted to actually drill down a little bit more Robert, maybe on the Mountain Valley performance, maybe if you could just add some color around the supply and demand dynamic that you're seeing, maybe some of the performance metrics and where do you really think that you can take this thing?
spk10: Yeah, thank you very much for the question. The Mountain Valley brand, to remind everyone, is our most premium spring water brand. and it's bottled at the source in Hot Springs, Arkansas. The business was very strong. David talked about the 57% growth in the quarter in retail. We sell Mountain Valley both in direct water delivery as well as in retail. And we see on both sides that the demand in the market still outruns our supply. To address this, the team has been working hard to increase our spring water availability, which we've now quadrupled with the new spring source that is currently operational. And I personally went to visit two weeks ago to look at the spring source, to look at the land, to look at how it all operates, and it is working really well, and the water quality is outstanding. We've also had to add and continue to add glass bottling capacity. This is a key driver of our ability to meet demand. And in addition to that, we're launching single-serve and multi-pack aluminum. And we've actually launched this already into Whole Foods, and it's in distribution now in over 12,000 locations. So, Nat, this is a super premium product. It's priced and reflected, and we expect continued growth on this brand into the future and the near future.
spk02: Thanks for that. And I was curious of, do you have a target sort of revenue base for the business long term?
spk10: We don't give guidance specifically on the retail side of Mountain Valley, nor do we do on direct because it's embedded in the direct water delivery exchange delivery business. But we do see this is an underleveraged brand that has a lot of demand and can continue to grow into the near future and potentially in the long term as well. We have very high ambitions for this brand, and we will continue to work on capacity, availability to meet the increased demand in the market to make sure we're not behind the orders.
spk11: Awesome. Thanks for that, Robert. I'll read you.
spk07: Thank you. The next question comes from Andrea Teixeira at JPMorgan. Please go ahead.
spk01: Thank you. Good morning. I was hoping if you can talk a bit about how volumes trended through the quarter, if weather was by any means impactful through the exit or how we should be thinking as we look at the guidance rays, it seems like you're just flowing Q1, and is there anything that we should be aware of in terms of deceleration into Q2, or maybe any mixed impacts that we should be aware? And also, from a margin perspective, anything we should be aware of in terms of flowing through more business optimization, the impact that you had in margins, Anything that instructs you to be more conservative, or are you looking at things how they go and then adjusting the outlook as you see more visibility? Thank you.
spk05: Thanks, Andrea. I can take the majority of that. With regard to volume, what we're most impressed with is that it was broad-based across all channels, specifically within the quarter across our three periods there. The momentum essentially carried through from the end of 2023. When you start to look at our channels of water direct and exchange, significant health there both in the direct side as well as the exchange side where because of that demand and volume growth, as Robert mentioned, we've been adding racks and additional capacity to allow for our delivery frequencies to keep up with that demand. In the refill business, which is the lowest cost entry point for high quality water, now that we're fully through the price increase that we've taken both in outdoor and indoor, the volume has rebound and, you know, the consumer remains incredibly healthy there, especially as they compare that entry price of water to sort of other prefilled formats. When you start to look at margin and pacing, you are correct. Obviously, the guidance was the flow through of the beat. That's the approach we're continuing to take at this moment. As we look at the macro economy, as we look at our other peers, be it beverages or services, it seems to be, you know, those that have the brand affinity or the service affinity, you know, they continue to outperform. But you can obviously see signs where there are challenges. We remain completely confident in our delivery of guidance. We remain confident in delivery of our business optimization. And again, guidance, which now contemplates some of that savings, would be that margin increase that you've asked about. So, again, we remain measured, patient, and, you know, quite pleased, frankly, with the momentum and, you know, the team's contribution for the quarter.
spk01: And if I can squeeze, that's super helpful. If I can squeeze a little of attrition there, anything we can, as you said, like you also, I think, I believe, lapped on the direct business. in terms of pricing, any commentary on attrition or household penetration, anything we should be cognizant of or should be happy for, if you will, in terms of that attrition diminishing?
spk05: Yeah. So at this point, we have seen actually a small increase in our retention rate when measured at coolers or installed devices on a retention basis. I believe part of that is certainly attributable to the increased service levels by all route drivers, all experiences of better inventory, and a lot of the planning Robert has talked about and how he wanted to orient the team this year. That is then complemented with the fact that the service available at customer service, both in person through phone or digital means, is doing a better job of either solving the issue not necessarily in first call resolution, but resolution, or simply providing access to sort of talk through, you know, how we can, you know, retain that business if there are challenges. So, again, pricing as we are lapping that taken last year, again, retention remains higher by a few basis points, and that's a great indicator for us, again, in light of everything you might hear from either the other companies you cover or just general macro news.
spk12: That's super helpful. Thank you. Thank you.
spk07: The next question comes from Dan Moore at CJS Securities. Please go ahead.
spk04: Thank you. Good morning. Thanks for taking the questions, Robert and David. Maybe if you touched on this, I missed the first few minutes. Forgive me. With the direct OD business, are you seeing any meaningful differences in terms of organic growth and retention rates between resi and commercial? And how do you see the relative attractiveness of the opportunity set in each over the long term? Are you allocating similar investment in service marketing to each? How do we think about that?
spk05: Sure. So as Robert mentioned, generically our customers on a simple nominal value are about split evenly. Commercial customers would consume a little bit more than a residential just because they might be a waiting room or a break room for a commercial place of business. We are not seeing any meaningful change in their retention, or said differently, any quit behavior different in the environment today. Again, our sales activities on the web are agnostic to who you are as a resident or a commercial customer, but are sort of associate based that targets direct selling on the street You know, we'll predominantly focus on commercial-oriented customers, and that's really small business. Again, remember, the U.S. business is not large office towers, which that was the primary trait of our European operations. So we're very pleased with that small business focus driving customers. Again, remember, also in 2024, we have 12 months access to the Costco booth program. The sales team continues to do a great job of converting customers when we have a show. as well as through the online equivalents of the Costco signups. So, again, across the board, strong health, no trends in AR, no trends in bad debt that really signal sort of challenges at this point. And, again, because of the steps taken by Robert and the team with regard to the customer service and experience center, you know, if there are issues or payment challenges or things we need to talk about, we're more available now to talk through that, whereas previously less availability could have created customer friction, confusion, or potentially higher quits.
spk04: Really helpful. And a quick follow-up. Obviously, you've taken, you know, a significant amount of price over the last one to two years with, as you just described, you know, little noticeable impact on return retention rates remain really strong. You know, I realize you expect price to be a more modest contributor to growth going forward, but are there pockets, are there learnings that you've had or pockets of opportunity where you think you could go further over time without, you know, maybe scaring away or impacting those retention rates? Thanks again.
spk05: Yeah, absolutely. So if you would recall our original guidance, Robert and I communicated in February would have been about five percent midpoint revenue growth, you know, constituting three and a half, one and a half, three and a half price, which is mostly carry through from essentially seasoning from last year, one and a half on volume. As we move to five and a half percent at the midpoint, essentially we have no different opinion on pricing. And, you know, volume now is stepping up from one and a half to two. getting us to that sort of five and a half contribution. You know, maybe back to Andrea's question, certainly in the second half, that does indicate a softer second half, but that's no different than our original guide. So, it's not like we're changing perception of anything. That's just the original flighting and pacing of that guide. You know, and so again, we remain, you know, pleased and balanced. I think some of the learnings we would have is as long as we're continuing to stimulate the category, i.e., the ability to sign up customers across multiple channels, and more importantly, with regard to our razor and blade focus, if we're continuing to sell dispensers through from retail to homes and places of business, and you're seeing that reflection in volume in our water, that's a learning, that as long as we continue to simulate that demand, the next newest customer doesn't know what the price used to be. They know what the price is today. And that's really our benefit of continuing to drive our multi-pronged approach of direct delivery and retail-oriented offerings.
spk11: All right. Thank you again.
spk12: Thank you. The next question comes from John Sempero at CIBC.
spk07: Please go ahead.
spk14: Thank you. Good morning. I wanted to ask about the digital side of the business. And you provided some commentary in your prepared remarks. But anything you can share on the overall volume growth or customer growth that you're seeing that you can attribute to the digital side? And can you share any metrics about how this is impacting the customer experience, whether it's your complaints ratio or wait times? I know you've shared the retention rate overall, but I'm especially interested in the digital side of the business and the improvements you're making there.
spk10: Yeah, John, that's a very, I'm glad you're asking the question because we're spending a disproportionate amount of time and effort and investment on the number one must-win priority, which is to deliver exceptional customer service. And that obviously begins with our delivery to the home with the, you know, the on-time in full, which was at 93% against increased demand. We've also expanded from five to six and even seven-day deliveries. But then there's the interaction, to your point, with our company, which is evolving from what was historically mostly phone-based to more and more digital interactions. So through the My Water Plus app, which is available in the App Store on both Apple and Android, we have just introduced Spanish language. as a new capability, and we're about to, by the end of Q2, upgrade significantly the aesthetics and the interactivity of that app. And later on in the year, we intend to upgrade our water.com and agua.com websites with significantly enhanced content to learn about the category, but also to shop our category. It'll make it easier to order a dispenser online. It'll be easier to be a water only customer or sign up for a rental cooler. The combination of the improvements in our customer experience center, which is now available more hours and more days of the week and able to handle not only voice, but also chat and social. So we're starting to see all of those metrics that you're referring to increase specifically the use of chat. which is a replacement of voice is up significantly the, the ability for us, the response time and social is much faster and the response time overall, which we then translate to what we call save rate. So we track save rate every day. We have a specific tracker that shows us how many people sign up for the service, how many people we lost, usually through a move or maybe an experience that leads them to call our call center. So working on all these fronts, driving improved performance. We're not reporting out those metrics, but we're tracking those very, very actively with our management team.
spk14: Got it. Okay, that's helpful. Thank you for that. And then I wanted to move to the balance sheet. Any updated thoughts on long-term capital allocation? You've shared what your plans are for this year, but I'm more interested in the long-term. Given increasing free cash flow conversion, better expected EBITDA results, it sounds like you're still constructive on the ability to sell the discontinued operations. I mean, ultimately, I'm trying to wonder what's the right level of cash you need or want to hold in this business over the long term.
spk05: Yeah, thanks, John. So, you know, with regard to the asset sales, we mentioned, you know, in the prepared remarks, we are very close on two of them within, you know, likely this quarter and even potentially within this month of May. And we'll communicate that, obviously, openly and clearly on our next call. And we remain pleased with the monetization of those two pieces of the business in the markets. The other two remain active, remain in continued dialogue with both data preparation, buyer universe, representing, you know, those sort of interactions. So, again, we remain on pace there. Won't comment on value as we talked about at the sale of the first portion of the European business. That was too strategic. That was a, you know, continuous set of European countries that was highly valuable to that particular buyer. and an outsized multiple at that time. So, you know, again, we're not commenting on specific value for the future or next set of assets, but obviously it would be unlikely to be at that level. With regard to long-term use, you know, we remain committed to the right proportion of spending to drive the growth. Again, our guidance at this point contemplates 5.5% at the midpoint. You know, there are activities we can stimulate there with regard to new customer acquisitions that are not capitalized. You know, as we improve and work through things like the app and water.com, booth programs, which, you know, again, are traditional commissioned expenses. Those are all activities we're really proud of to drive the organic growth. I think back there was a previous question with regard to Mountain Valley. You know, at this point, we don't know how high it's high there. And so we're really trying to assess the best outcome for that business as it's a very rapid grower that we're continuing to keep pace with. So those would be allocations to spend against. With regard to dividend, share or purchase, we remain committed to the values we've communicated to date. As far as the net leverage ratio, obviously it ticked down a tenth to 2.0 times. As the cash will grow, either from further international sales or other means, you know, that will continue to deliver lower. And then we've talked about M&A on the purchasing or acquisition side. Again, we remain focused. We do not give guide with acquisitions in it. You do not want us trying to buy something to hit a guide with a particular tuck-in in any given quarter. So we remain patient there. We have a strong pipeline and expect to hear more activity as we progress through the year on some of that tuck-in behavior.
spk11: All right. Thank you very much. I'll pass it on. Thanks, John.
spk07: Thank you. The next question comes from Steve Powers at Deutsche Bank. Please go ahead.
spk03: Yes. Hey, thanks for the question. I wanted to talk about the route optimization efforts that you've had underway for some time now and the progress on that units per route per day metric as a symbolism of that has been pretty steady and impressive. I guess I'd love some perspective on what you think may be sort of the optimal level for that metric or a high watermark. We're kind of trying to understand where the ceiling may be in terms of how much more runway there is on further optimization?
spk10: Yeah, that's obviously core to our business is to continue to drive units and revenue per route per day. And we've obviously disclosed the 5% and 8% increase this quarter. And we're in the midst of the rollout of the Automatic Route Optimization Program 2.0. But we're also combining that with new schedules. So we were traditionally a five day a week route organization from Monday through Friday. We're currently implementing new schedules, some are four day, some are five day schedules that could start on Tuesday or Wednesday and allow us to deliver on a Saturday or a Sunday. The technology that sits at the heart of this work is enabling us to more efficiently build the driver routes um and you know as you know those include both residential uh commercial but also our retail partners with the exchange racks so there is a natural cap to that you know there's there's only so much uh capacity available on the truck but we are continuing to drive not only utilization on a daily basis, but on a weekly basis by expanding the use of our ranch assets and truck assets and production assets to a seven day a week schedule currently.
spk03: Okay, thanks for that. I guess the second question, if I could, you know, the Spencer sell-through rates, you know, we've talked about this in the past, but they've been hovering around, you know, that kind of, you know, a million, a million unit mark, um, on a trillion 12 month basis for, for some time. And clearly the, the, the retention rates are such that, you know, those, the incrementality of those, of the sales are, are, are, are high. But I guess, is there a, as you think about the progression of that metric, you know, how, you know, at what point do you, do you really need to start to see that metric start to grow again? Um, that trillion 12 month metric grow again in order to, to achieve your, your aspire to growth rates.
spk10: Yeah, we continue to see sales strong. This quarter, sell-through was up 3%, and we're continuing to forecast around a million dispenser sales this year. And what I would say is that about 650,000 of those usually are new users, and 350,000 of those are replacement with existing users. So every year, as we sell approximately a million And as I said, we're up 3% sell-through from retail to consumer this year to date. That's a new installed base that we can continue to serve over the years that follow. So we feel good about the trend. Our sell-through from ourselves to retail is significantly higher, but some of that is just replenishing the stock levels, and we see a sell-through rate at the 3% level.
spk11: Okay, very good. Thank you.
spk08: Thank you. The next question comes from Pavel from Raymond James.
spk07: Please go ahead.
spk09: Thanks for taking the question. Getting back to the M&A topic that was covered just a minute ago, as you look at the tuck-in opportunities, which parts of North America are the most relevant for you to, you know, either establish a presence or bolster an existing presence?
spk05: Yeah, thanks, Pavel. This is David. On the M&A side, again, we have a pretty diverse and wide reach with regard to our branch network. As we look to deals, we would love to be that precise. It tends to much more be the willingness or the succession planning of these generally entrepreneur or family oriented operators. And so we definitely will look to geographies to see where there are relevant opportunities, but that has to obviously then match with the willingness of a seller and the willingness of a seller at the right price. And so, you know, we do analytically look across the board. Our presence is pretty wide though, and we're pretty pleased with that. But again, unfortunately or fortunately, it has to match with willingness and sort of timing and patience of that seller.
spk09: Yep, understood. As you're kind of crafting the, you know, the strategy, you know, beyond 2024, Do you anticipate maintaining the progressive dividend policy that you've had for the last three years? Or should we assume that it levels off at the current rate?
spk05: Yeah, at this time, the dividend policy reflects the board's view and investor feedback that we've received to date. Obviously, we will have a different constitution of our balance sheet heading into 2025. I will yield to sort of decisions and collective thoughts of the board as we head into 2025 planning, allow that to be communicated in their direction, obviously. But, you know, we're quite pleased with the ability to return that money to share owners over the last three years. And then as our share repurchase program exists, that helps obviously reduce the share count, you know, reducing the notional exposure of the dividend flow itself. We'll yield to that as we head into 25, but, you know, very proud of what we've been able to do with regard to returns for share owners to date over the last three years.
spk11: Thanks very much. Thank you, Pavel.
spk08: Thank you.
spk07: The next question is a follow-up from Derek Lazard, an investor. Please go ahead.
spk02: Yeah, thanks for taking my follow-up. Again, the question pertains more as pointed to the ARO 2.0. Just curious what the 2.0 entails and how much of that was driving the route efficiency gains. Now, I think you did point to, you did talk, allude to increased delivery days, but just curious what the upside is from that, from the 2.0.
spk05: Yeah, great question. You know, essentially, a large part of it is associate feedback. So, we've now been out there for a period of time. Every day, you know, we're making hundreds of thousands of deliveries and we're getting route feedback, no different than what a Tesla would do with regard to its optimization, meaning what's going wrong with the route directions? What's going wrong with boundaries? What's going wrong with pinning a customer location? Why is it telling me to park here when the order needs to be delivered there? So it's a lot of feedback. It's listening to associates who are the ones doing the frontline work for us and for our shareholders every day. And so it's a lot more constitution around involving that feedback. It's not some massive technological change. It's just associate feedback providing a better outcome. Again, the six- and seven-day factors into that, but that's not the technological side that causes us to call it 2.0, if you will. Okay.
spk11: Thanks for that. Thank you, Darren.
spk08: Thank you. There are no further questions.
spk07: I will now turn the call back over for closing comments.
spk10: Thank you for attending today's call and for your continued interest in Primo Water. As I hope you can tell, our team is focused on driving sustainable growth. The path started is the right one to build on. And overall, we believe we have the tools to win. We have a lot of work ahead of us, and I, along with our team, are committed to taking Prima water to the next level.
spk12: Thank you ladies and gentlemen. This concludes your conference for today.
spk08: We thank you for participating and we ask that you please disconnect your lines.
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