Q3 2021 Primo Water Corp (MISSISSAUGA) Earnings Call
Please standby your conference will begin in about two minutes.
[music].
Good morning, My name is Pam and I will be your conference operator today.
This time I would like to welcome everyone to the Primo Water Corporation third quarter 2021 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' 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'd like to withdraw your question.
Please press Star then the number to you. Thank you I'll now turn the conference over to John <unk>, Vice President of Investor Relations. Please go ahead.
Welcome to Primo Water Corporation third quarter 2021 earnings Conference call. All participants are currently in listen only mode.
This call will end no later than 11 o'clock a M. Eastern time the call is being webcast live on <unk> website at Www Dot Primo water Corp, Dot com and will be available for a 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 Dot Primo water.
Corp Dot com.
I'm accompanied by Tom Harrington pre most chief Executive Officer, and Jay Wells pre most chief Financial Officer as part of this conference call. We have included a deck online at Www Dot Primo water Corp. Dot 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 the strategic initiatives, then Jay will discuss our third quarter financial performance in greater detail and offer our outlook for the fourth quarter and full year 2021 before handing the call back to Tom to provide a long term view ahead of Q&A.
Hey.
With that I'll now turn the call over to Tom.
Thank you John and good morning, everyone.
Before we review our performance for the quarter, an update on our progress against strategic initiatives I wanted to welcome both Kate Kotowski and Jeff Johnson to the team.
Keith has joined as our Chief operating officer.
And what's the experience in both sales and operational strategy, Kate will strengthen our management team and drive innovation accelerate growth and propel operational excellence, although a differentiated woody away platform.
<unk> joins our team as senior Vice President Global operational Excellence and service optimization Jeff.
Jeff's leadership in our logistics and transportation industry will be leveraged to enhance margins and improve our return on invested capital.
We welcome both Kate and Jeff to the team.
Our third quarter financial results demonstrated the strength of our pure play water offering as demand for our products and services continued to increase during the quarter.
Our global cooler quit rate improved by 240 basis points compared to prior year and.
And the increased demand has continued through the month of October.
As we previously communicated.
We have implemented a series of pricing actions to address current inflationary cost across the entirety of our customer base.
And we continue to benefit from the energy surcharge and delivery fees that mitigate the increases in energy related cost, especially feel.
As Jay will outline later in his remarks, we remain comfortable with our full year adjusted EBITDA guidance of between 390 and $400 million.
As we continue to transform our business we.
We announced earlier today, our plan to exit the North American single use retail bottled water business, primarily one go in two and a half gallon in case pack water as part of our overall strategy to increase profitability and further reduce our environmental footprint.
This exit will take place over the next several quarters and does not include a large format exchange refill and dispenser businesses, nor our mountain Valley brand, which sells products primarily in glass bottles.
Jay will cover the modeling effects of this decision later in his remarks.
During the quarter revenue increased 6% to $551 million compared to 518 million, 5%, excluding the impact of foreign exchange and adjusted EBITDA decreased 4% to $106 million.
Compared to a $111 million driven by higher operating costs.
The operational challenges we faced during the quarter were largely a result of an increase in COVID-19 infections across all workloads.
We did not forecast nor expect hundreds of route drivers would be adversely impacted by COVID-19.
This created operating pressures as we worked tirelessly to fill the short term openings caused by our route sales representatives missing work.
Where possible we deployed a series of tactics to services many routes as possible.
<unk> hiring temporary labor, increasing over time and had managers and corporate staff going into the field supporting ground operations.
These route openings.
If it's to fill the opening short term resulted in a higher cost of service.
Our teams have once again responded to the challenges presented by the pandemic and I'm proud of the efforts of the team and pleased with everyone's commitment to safety and customer service.
As we exited the quarter, we started to see a decline in the number of Covid cases across our operation that has continued through October and are returning to normal service levels and expected operating costs as we work hard to meet the current levels of elevated demand, especially in our North America water direct.
In exchange business.
Globally.
Our customer base grew to nearly $2 7 million in the third quarter.
As I mentioned last quarter, the addressable three and five gallon water market of U S. Residential households alone is estimated to be between $22 million to $29 million and growing.
The residential opportunity for increased sales of three and five gallon returnable water remains a top priority as the category has two to three times the market potential where it is today is installed base.
We are focused on increasing household penetration through execution of a razor razorblade model.
Our water dispenser sales provide an important entry point to access these households, and capitalize on our for our recurring razor razor blade revenue model.
The attractiveness of the recurring purchase behavior is the ability to continually generate sales as part of our customer for life strategy.
Our internal research indicates that among last year's North American dispenser sell through sales of roughly 1 million units.
60% of respondents are new to the category.
Are those likely to become a future dispenser household research indicates their sourcing preference at 45% for water direct.
30% prefer what exchange and 25% preferred water refill.
We should continue to capture at least our fair share of this growth.
Our for our model remains one of our strategic advantages.
While Q3 dispenser sales were negatively impacted by the extraordinary costs for ocean freight as well as the burden of tariff implemented in January.
We're hopeful that we will gain an exemption from the tariffs imposed as we move through Q4 and into 2022 and that ocean freight costs moderate overtime.
As it relates to our efforts in ESG, we remain focused on elevating our position on environmental issues and finding new ways to honor our commitment to clean water and sustainability.
That is why earlier today, we announced our intention to exit the category of single use plastic bottle of water sold in retail channels in North America.
We expect that exiting this category will improve our profitability and enable us to provide more focus on a razor razor blade revenue model and lighten our environmental footprint.
Our progress in ESG improvement is ongoing.
Within the last year, we achieved carbon neutrality in our U S water operations in our European water business has remained carbon neutral for the last 10 years.
In December 2020, we became the first company to certify a spring water source under the alliance for water stewardship standards and added a second in January.
We expect to certify to additional locations before the end of 2021.
And remain committed to achieving carbon neutrality across our global water operations by the end of this year.
In addition, we welcome <unk> as our vice President of ESG.
He is an accomplished ESG professional with a 20 year track record of success in leading ESG programs for global organizations.
Our year to date results, coupled with our confidence in a pure play water model has driven our decision to maintain our full year adjusted EBITDA outlook between 390 and $400 million.
We expect to grow organically by approximately 6%.
Plus some additional revenue from our tuck in M&A strategy.
We remain on track to achieve the higher end of our targeted $40 million to $60 million range of M&A tuck ins in 2021.
I'd like to turn the call over to Jay to review, our third quarter financial results in greater detail.
Thank you Tom and good morning, everyone.
Starting with our third quarter consolidated results revenue increased 6% to $551 million.
Compared to $518 million.
Excluding the impact of foreign exchange revenue increased by 5%.
The gains were largely driven by growth in our water direct and exchange businesses, partially offset by declines in our water refill and water dispenser channels.
Adjusted EBITDA decreased 4% to $106 million.
Compared to $111 million as Tom discussed the decrease was driven by higher operational costs related to COVID-19, our staff and driver availability during the Delta peak, along with the increased demand for products and services from residential consumers and <unk> customers challenged our norm.
High levels of service.
We were also adversely impacted by the effects of Hurricane Ida in September.
And as much as a week of operations in Louisiana, and smaller outages as the storm track up the East coast.
Fortunately all of our associates are safe and operations have fully resumed.
These costs were partially offset by increased pricing and the benefit from continued operating leverage improvements.
Turning to our segment level performance for the quarter in North America revenue increased 5% to $413 million compared to $393 million.
The increase was driven by strong volume and increased pricing in our water direct business, partially offset by lower revenue from our water refill dispenser channels.
Revenue from our residential consumers grew by 2% during the quarter in North America <unk> revenue was up 12% as we are seeing steady progress on the lifting of restrictions across the channel.
Adjusted EBITDA in North America decreased 3% to $88 million due to the operational challenges I just discussed importantly, we exited the quarter in better shape and are now closer to achieving our service level targets.
Turning to our rest of World segment revenue increased by 11% to $138 million, excluding the impact of foreign exchange revenue increased by 7%.
The increase was driven by growth in residential consumers with revenue from residential consumers being up 24%.
Revenue from <unk> customers was flat for the quarter as the performance of our water direct need of the customer base remains tied to the relative level of the return to the office in each of the countries we serve.
We continue to work towards an efficient and low cost rollout of our products and services for residential consumption in Europe to further diversify our customer base and better balanced customer mix.
A key highlight in the rest of the World segment as the measure of organic cooler adds in the quarter when.
When coupled with improved retention rates, we are beginning to see the benefits from our ongoing efforts to improve operating performance in this region.
As we have discussed in past quarters, we believe that our existing footprint and knowledge of the water services market in Europe leaves us in a great position to capture the revenue opportunities we've identified.
Adjusted EBITDA in the rest of the World segment decreased 10% to $23 million as government subsidized furlough programs are ending in many European markets.
Turning to our liquidity position and balance sheet, we ended the quarter with a cash balance of $125 million and available net borrowing capacity on our cash flow revolver of $141 million for a combined.
<unk> total liquidity position of $266 million.
Our net leverage ratio is three seven times and as we will discuss in greater detail during our upcoming Investor day. We are now targeting a net leverage ratio of less than two five times by 2024.
Looking to the fourth quarter based on the information we have available to us as of today. We currently expect consolidated revenue from continuing operations to be between $540 million and $550 million.
We also expect that fourth quarter, adjusted EBITDA will be in the range of $108 million to $118 million.
As part of our overall strategy to increase profitability and further reduce our environmental footprint. This morning, we announced the plan to exit our North American single use retail bottled water category consisted primarily of one gallon two and a half gallon and case pack water.
The plan does not affect our large format exchange refill and dispenser businesses.
Our mountain Valley brand, which sells products primarily in glass bottles.
On an annualized basis. These products have accounted for revenue of approximately $140 million.
After exiting these product lines, we expect that our overall adjusted EBITDA margin will improve by roughly 100 basis points.
We expect most of the effects to begin in 2022, and we do not expect the cost from exiting these businesses to be material.
For the full year 2021 revenue is still projected to grow organically by approximately 6% and we are maintaining our outlook for adjusted EBITDA to be between 390 and $400 million.
We also expect around $10 million of cash taxes.
$68 million of interest as well as capital expenditures of around $150 million.
Our capex figures reflect an increase versus our previous forecast of $135 million, primarily because of the higher cost of ocean freight and tariffs for our dispensers.
We do expect these factors to abate at some point, which will enhance future free cash flow.
Turning to other aspects of capital deployment, we purchased approximately $1 8 million shares for $29 million during the third quarter as part of our $50 million share repurchase program and.
And earlier this week, our board of directors authorized a quarterly dividend of <unk> <unk> per common share. The dividend is payable in cash on December 3rd 2021 to shareowners of record at the close of business on November 23 2021.
With respect to M&A, we have maintained our disciplined approach and have been focused on accelerating the robust pipeline of tuck in opportunities in front of us.
During the quarter, we announced the acquisition averse to our Oregon health waters for Pennsylvania and to get fresh business in Poland.
We remain on track to achieve the higher end of our targeted $40 million to $60 million of tuck ins this year.
In terms of our growth outlook after 2021.
We are looking forward to our Investor day is scheduled for November 17, when we will provide details behind our forecast for high single digit organic revenue growth.
Continued execution of $40 million to $60 million of highly accretive tuck ins annually.
Enhanced EBITDA margins of 40 to 60 basis points per year. In addition to the onetime benefit of approximately 100 basis points from our planned exit of the single use retail bottled water business.
Targeted annualized adjusted EBITDA in excess of $500 million by 2024, and net leverage of less than two five times by 2024, I will now turn the call back to Tom. Thanks.
Thanks Jay.
We remain focused on executing our differentiated water you're way platform.
And we will leverage our pure play water model to drive organic growth by approximately 6% in 2021.
We will continue to enhance the customer experience to improving customer facing tools by building out a more diverse e-commerce solutions and improving the customer experience through flawless delivery.
We will continue to execute against our razor razor blade model with growth in a number of dispenser sold driving topline growth through the sale of water products.
In Europe, we are accelerating our water refill water exchange and water dispenser businesses to diversify our customer base and capture growing demand in the residential market.
Additional focus areas include leveraging our predictable and reliable top line growth, while protecting our efficiency improvements and maintaining our highly variable cost structure.
Identifying and executing highly accretive tuck in acquisitions across North America and Europe.
Seeking new ways to further enhance our standing as an ESG and sustainability leader.
Supporting our initiatives are more structural and thematic tailwind that are driving consumers towards healthy hydration solutions.
Growth in health and wellness category continues to support our prospects of gaining share of the broader beverage category.
Covid continues to elevate to help them wellness conversation and consumers are increasingly conscious of their overall health and wellbeing.
In addition.
The perception of the declining quality of municipal tap water is well documented which supports the growth of our products and services.
Tap water as the primary drinking source is expected to continue to decline for the foreseeable future.
As Jay noted, we expect our consolidated fourth quarter revenue to be between 540 and $550 million and four our adjusted EBITDA to be between 108 and $118 million.
For full year 2021, we are forecasting revenue growth of approximately 6% and are maintaining our adjusted EBITDA forecast to be between 390 and $400 million.
We continue to see the elevated demand while our staffing has begun to return to normal with Covid cases reduced by approximately 80% from mid Q3.
We expect to see sustained strength from award of direct and exchange residential customer base and improvement from our award of direct <unk> customer base as we progress through the fourth quarter and into next year.
We're also maintaining a strong pipeline of tuck in M&A candidates, which we expect to execute during the remainder of this year.
Lastly, as a reminder, we are hosting a virtual analyst and Investor day on November 17 at nine a M. Eastern standard time, and hope you will join us.
Registration instructions are located on the Investor Relations section of our website.
At the Investor Day, we will provide details behind our multiyear forecast for high single digit organic revenue growth.
Continued execution of $40 million to $60 million of highly accretive tuck in annually.
Enhanced EBITDA margins of 40% to 60 basis points per year.
In addition to the onetime benefit of approximately 100 basis points from our planned exit of the single use retail bottled water business.
Targeted annualized adjusted EBITDA more than $500 million by 2024.
And net leverage of less than two five times by 2024 as well.
Once again I'd like to think that Primo water associates across the business for their tireless efforts to serve our customers.
And with that I'll turn the call back over to John to move us to Q&A.
Thanks, Tom.
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.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by one on your Touchtone phone, you'll hear three ton problem acknowledging your request and your questions will be pulled in the order. They are received should you wish to decline from the polling process. Please press star followed by <unk>.
Thank you speaker phone please lift your handset before pressing any keys. Your first question comes from Kevin.
Randy <unk> with Jefferies. Please go ahead.
Great. Thanks, good morning, everyone.
Good morning, Kevin.
Two questions for me if I may 1st on the quarter and then a follow up on the long term guidance. So first.
I think it would be helpful. Just maybe spend a little bit more time on some of the pain points from a cost perspective around labor and route inefficiencies.
From the pandemic how that progressed during the quarter. What you saw in October in terms of some of these costs, improving particularly around labor and availability that gives you comfort on the guidance for the year and then I'll follow up with the long term guidance.
Sure Kevin This is Tom.
And then.
Middle of the quarter I think late July early August we began experiencing a spike from the Delta.
In order of magnitude would be roughly 10% to 15% of our route sales associates were infected.
And if you think about that there is a couple of days before they get tested whether or not feeling well then they get tested they're positive they're sideline for at least two weeks.
Of course, this didn't happen ratably one in each building happens in buckets.
I'll give you an example, Denver, Colorado I have something like 20 routes.
Evan routes were opened.
So we don't have the available workforce.
We don't carry that kind of incremental head count to cover so we scrambled and then that then put us behind on our ability to effectively service the customer we missed customers. We missed revenue and then we incurred the incremental cost of temporary labor, which are not properly trained.
We incurred lots of overtime, which is short term is not long time long term a good solution.
And then we flew people in from all the I'll use use J as an example, Jay was on a route in Denver.
To help out as an example, so we we put everybody available.
Dress the openings.
As we move through September the cases began to drop and we.
In October as an example, current cases, 80% lower than what they were at the peak. So we've now begun to return to more normal operations.
And therefore, we are beginning to see more normal operating cost as we we're not flying people all over and we will probably servicing our customers.
So hopefully that gives you a flavor for the impact of the variant obviously, we wouldnt have forecast that.
And happily in October it's behind Us.
We're pretty much back to normal at this point in time and you could even see it in our September results.
If you look at September stand alone.
We're at 11% revenue growth EBITDA growth of 12%. So you can see as we came out of the quarter, even it wasn't quite back to where it should be but it showed up in our results in September and frankly continued on into October.
Got it thank you both.
And then just if I could follow up on the long term guidance.
No.
We'll be spending more time on this at the analyst day. So I think we can appreciate that but maybe just for purposes of this call spin a little bit of time on the high single digit organic sales growth guidance, which is great. Maybe just talk broadly about how you see the building blocks for that across your business and geographies.
And then the margin outlook is also encouraging maybe.
Maybe just talk about the key factors driving it.
That compares I think historically, particularly on the HMD side, it's been 10 to 20 basis points of margin improvement and now you're looking for 40 to 60 across the business.
So quite a step up in pretty encouraging in the cost environment, where a lot of companies are obviously struggling.
So I think that'd be helpful and then sorry for being a bit verbose here, but just the last one I think would also be helpful. For folks just looking at the EBITDA guidance now looking out to 2024 and incorporating your new leverage target of two and two five times, maybe talk about uses of free cash flow, particularly around share buybacks.
You provided the commentary around the tuck in tuck in deals. So I think we can.
Assume reasonable levels of Capex, etcetera, but just trying to get a better feel for what youre thinking about it and what's included in the multiyear outlook around buybacks just to kind of make the math work here I think would be helpful. So thanks for all that guys and then I'll pass it on.
Okay.
Let me start with the top line you basically.
Kevin.
We might answer some but not all of that.
That's entirely fair entirely fair. Thank you guys.
And they give you my perspective on high single digit growth. So we have been delivering in articulating.
<unk>, 6% organic growth.
When we exit the retail business that number will move to 7%.
High degree of confidence because we've been delivering that number.
You also know that we recently hired Kate Catouse ski and Jeff Johnson and Theres two pronged as we're scaling up so that we can make real investments in future growth around digital Kate has some experience there and then to your question about EBITDA margin expansion, we think that Jeff will help.
Us enhance improve.
Our operational efficiency across the operation to give us that step up in EBITDA margin enhancement.
So thats really the high level.
Our approach and why we think it's Darren of course, we're going to have to invest in growth.
We've invested in the mobile App and some of the websites, we're going to have to accelerate that investment to push it to the higher end of that.
Single digits.
On the leverage that you asked it really is a function we have.
Small amount of debt that we can repay on our cash flow revolver, some financing leases, but we don't have a vast amount of debt. So there is paying off that debt, but it's predominantly it's the leverage of the increased EBITDA that drops our.
Leverage ratio versus EBITDA down so that is how we're getting to below two five times by 2024 on the leverage.
Okay I'll pass it on.
Let's take some questions offline. Thank you for the time guys and good luck I appreciate it.
Thanks, Kevin.
Your next question comes from Derek Lessard with TD Securities. Please go ahead.
Yes, Hi, Eric.
Gentlemen are you doing.
Well Derek how are you doing.
Maybe I just wanted to hit on the.
I guess what segment sorry, let me just rephrase that.
Again, thanks for giving us the revenue impact from the exiting of those business I was just wondering maybe if you could break it down a little bit further.
And a couple of areas, which segment do we find those revenues and number two what's the split I guess between North America and the rest of the world and thirdly, when do you expect to be fully exited that business.
Yes, so thats the retail question shift yet so so first off if you look on our on our <unk>.
<unk> segment reporting its other water okay.
And really the other water is just retail water and its located in North America and Israel.
Where is in Israel, we have the number one premium retail brands.
So it's a very good very profitable brand here when you look at the business that we're exiting it's about $140 million.
That was my prepared remarks.
And we've talked about this business.
Previously it basically.
No.
Zero EBITDA are basically zero EBITDA business that we've run for fixed cost leverage.
So that's the EBITDA effect and it really is just removing.
Basically zero EBIT type revenues, what's improving our margin.
A couple of other points on that.
Not sure Tom said in his prepared remarks, but this will eliminate 400 million single plastic bottles that were selling from our portfolio with us working with the retailers to replace it with our exchange machines with our refill machines. So it's really an effort to remove single use plastics from our from our overall product line.
So that's the key part of it and the last thing I know.
I will get a inflation question at one point, some Microsoft knock it out the biggest inflationary pressures we've seen.
Part of this business to where we have resin that we're buying we have freight that we're shifting and we've seen about $6 million of inflationary type headwinds within this business on top of everything this year. So it will also be.
Eliminated a part of business that does have the commodity type movement and then you have to put some pricing through the large retailers, which as we all know it takes much longer than our ability to take.
Pricing across our other $2 $7 million on those customers.
That's very helpful. Jay Thanks for that and maybe just one last one for me.
In terms of the the Delta impact I was just wondering how it impacted you guys in terms of quit rates are short term quick rates and maybe customer service complaints.
Yes, so we would have obviously not service to our normal level.
Which would drive incremental cost to the call center, we deployed.
Every available human.
To us.
To solve for that.
Encouragingly as our customers can be very forgiving when we respond to them that we are taking efforts to address the issue and evidenced by that reduction in the pool quit rate.
The 240 basis points lower than the same time, a year ago is indicative that we still made good progress retaining the customers and we responded appropriately or as best we could in east and what was a pretty wild six or eight weeks.
Okay. Thanks for that guys.
Yes.
Including the CFO knocking on your door with a five gallon jug.
Banking them for being a customer.
I'd like to see that.
Yeah.
The price list.
Your next question comes from John Zaro with CIBC. Please go ahead.
Good morning, good morning, everyone.
Good morning.
I also hope to see a picture of J driving a truck.
Yesterday coming out.
I didn't give me a full truck. They just gave me a van is all day when all they would transfer with John.
Trying to limit the downside.
Fair enough.
I wanted to ask about the dispenser business and I know theres going to be noise quarter to quarter and it seems like tariffs have an impact here, but it's the second consecutive quarter. We've seen a decline is there anything you can add on this business.
Well you have a couple of things that have happened, obviously like everybody else freight costs are higher right. So we've seen significant inflation in the cost of the freight to get it here, which leads to price increases.
Which take us a while obviously to flush through because this is the retail segment.
The current levels of Ocean freight has abated, a little but there is still meaningfully higher than a year ago, albeit better than Q3.
Moving into Q4 then.
In Q2 and early Q3.
We have.
Had delays in the timing of those shipments, but right now we're in a pretty good position from an inventory perspective. So my team has done a very good job managing when they get here. So that we believe will open in 2022 and very good position.
As it relates to tariffs.
We werent given a window when they expired at the end of 2020.
Tariffs have been in place since the first of the year.
We now have the ability to request exemption from those tariffs that process ends on or about December 1st and then.
We will await government decision.
When we went through this process the first time and I want to say 2016, we ultimately received the exemption. So we're cautiously optimistic, but we'll have to wait and see.
Once that comes back then we would expect that the dispenser business to get back in shape and continue to grow and.
And even though it was choppy I think will still sell something on the order of 800000 caused this year.
Which says still plenty of new users to the category that will serve as hopefully with our water direct exchange and refill business and the one point you Didnt mentioned, we did see last year, some inventory loading by retailers as they receive these headwinds come so.
When you look at the $1 million, we show sold last year, there was a little bit.
Pull forward of purchasing by the retailers. So that's given us a little bit of headwind on a year over year comparison. This year also.
Okay. That's that's helpful. Thanks, and then my follow ups on the ESG side, and I think youre, making really tangible efforts and progress on this front and the investment community is probably you should be well aware of it but I'm wondering about it at the customer level and are there ways that you are making customers aware of the efforts, you're taking and the bench.
And ultimately can that bring in more customers or do you view it as a retention tool just would like to get your thoughts on the ESG efforts from the consumer's perspective, yes.
Yes.
It's a good point, John we need to be better communicators.
The three Rs refill reuse recycle and that's the real benefit of our large format bottles.
And it should become a bigger part of our marketing customer consumer communication and I think youll see us move further down that path in 2022, and then frankly exited the retail business gives us the opportunity to re engage in open next.
Communication with the customer, which once we're completely out of this call. It mid year 2002, Youll see is kicked up that communication.
Got it okay. That's helpful. Thank you very much.
So.
Your next question comes from Andrea Teixeira with Jpmorgan. Please go ahead.
Thank you good morning, and hope you and your logistics team are well now.
Does there was a lot of the respect I guess the stock has been little.
Yeah.
Alright.
Yeah.
We're proud that he was sleep in Florida.
Got it.
Uh huh.
We market all the glory he was out in the market too.
So here you go.
So my question is on I think you alluded to but I just want to make sure that we got all the pieces together so.
Your EBITDA margin for the fourth quarter kind of implies 'twenty to 'twenty, one and a half so.
It's a big step from the prior year and could be even above the three quarter trainee level, which.
It's probably the highest ever.
Why do you think is driving the step up in profitability, especially as I guess, you think labor and third party freight.
So kind of takes.
<unk> continues to be elevated.
Is that I mean, obviously the retail water business exit is not into mid next year, but there is some improvement in the mix of carryover. So anything we should be fine.
Any additional pricing lag.
Yes, Andrea there.
We'll get a full quarter benefit of pricing.
So we were very aggressive took pricing in Q3, but it wasn't in for the totality of Q3, it will be in for the totality of Q4.
Across pretty much all of our customer base. So we will get the benefit of that and then Jay referenced September revenue up 11%. We are enjoying good demand for our products into October which will also give us the leverage from the volume.
Down to the EBITDA margin.
Okay, No that's fair.
That makes a lot of sense.
And everything falling into the quarter, which by the way, it's pretty unique for everyone else in CPG. So that's that's impressive.
Thank you.
Benefit of having a very diverse customer base, where we have said, we do have the ability to take pricing because our average customer billings 50 Bucks.
Don't have the large large retailers that.
Have the ability to RFP and that gives us the ability to take pricing.
Thank you.
Mhm, yeah, perfect direct to consumer thank you so much.
Thanks Andrea.
Your next question comes from Nik Modi with RBC capital markets. Please go ahead.
Hey, guys wanted to Philly profile, Hey, this is Filippo <unk>.
Nick.
One quick question on the label or issues.
You've mentioned clearly things are getting they are getting better and already kind of returned to normal, but if you think a bit of a longer term about the potential longer term impacts from COVID-19 have you seen any.
Have you seen any difficulties finding employees.
Given the rise of the gig economy, and having more options for for people to find alternative jobs.
That something that youre thinking about longer term on the labor front.
Yes in terms of the route Labor force.
We have taken appropriate steps market by market in.
In terms of what our starting wages are.
And that has always been baked into our expectations and we don't see huge challenges that doesn't mean, there isn't a town somewhere in North America, where there is a particular issue, but overall, we think we're in a pretty good spot in terms of our ability to fill and keep fill those routes subs.
Subject to no future variance.
Causes these spikes.
Then in the other biggest area for US is in our call center. So we have competitively wages in our Lakeland facility.
And frankly, the entire team is focused on retention.
Right. So part of this is once you can attract people when we get them what are we doing all the right things to keep them and it's a pretty big focus of the company.
On board people appropriately and to make them feel part of the team so that they will stay with us.
Got it that makes sense.
And yes on the East you from maybe you could give some metrics how the exit of the North America.
Bottled water business helps improve the ESG profile of your company from an emission standpoint.
Longer term you've made a lot of progress on the topic.
What other initiatives are you thinking about going forward.
So there is I'll give you one of the other initiatives and then I'll hand.
The larger retail question over to Jay you would've read last quarter, we invested in a company called simple.
Simple is a refill vending machine that will then containers.
Containers of one meter or less so we actually believe it will be a single use replacement.
We're currently invested only started in the U K, we have global rights for that it will be part of our growth story over the course of the next three years, because we think it is a real environmentally friendly solution with pretty good growth potential.
And when you look at ESG.
Look we our primary product is about the most environmentally since two packaging we can use.
Pick it back up with Sanitizers, we were using up to 50 times. So yes.
But when you look at our portfolio. It was one way small part of our business, but we were still utilizing over $400 million single use containers and thats going to go away. So you look at greenhouse gas by the end of this year, we will be carbon neutral globally and work through carbon credits, but working on reducing the amount of greenhouse.
<unk>, we generate for our routes will remember of alliance a water stewardship and we are really focused on really taking care of the aquifer and water sources. This will get us to the same place on packaging because its one way package was the one area that didn't meet our strategy. So you really look at the E part of ESG.
This was really the final step we needed to really be on.
Every one of those three categories really moving in the right direction as a company.
Great makes sense. Thanks.
Thanks, guys.
Thank you. Thank you Joe.
Your next question comes from Derek <unk> with Canaccord Genuity. Please go ahead.
Yeah, Hi, guys. Congrats on a hey, guys. Congrats on a strong quarter and obviously, a good guide near and long term.
Thanks, Derrick so one of the things I wanted to talk about was just just the acquisitions that you mentioned that youre going to continue to focus on the $40 million to $60 million in tuck ins can you just talk about what youre seeing in terms of multiple and I know you guys have kind of given a range in the past there are the multiples still in that range on the private side and is there.
Anything larger or maybe medium sized out there and finally will these be predominantly focused in the U S.
Generally speaking the multiples are about the same as historically.
The size of the ones, we're doing might be a little bit bigger than average. So I think our average over the years like $2 5 million needs might be $3 5 million. If you will maybe a little bit bigger than that.
So there's a little bit more scale.
Youll see.
A number in North America.
Early.
Get fresh was a good size acquisition in Poland. So we've got some work to do to make sure that we integrate that business properly that was something on the order of 20000 customers if I remember correctly.
We think there's a good runway.
And hence we've said $40 million to $60 million. So we think there's still plenty in our sweet spot. If you will at reasonable multiples historically and then thereafter.
There are a few bigger ones out there, we'll wait and see how they develop over time.
Okay.
Okay.
Sure.
And then I guess, just switching gears a little bit.
You mentioned some cost inflation youre seeing in terms of labor in terms of shipping.
Wondering what youre seeing just in terms of.
Packaging I guess on the plastic side I mean is this something that you.
You can pretty easily price price through a pass the price on or how are you doing.
Yes. It is.
Good question, if you think about our business excluding this retail business.
That there is a little bit of inflation in the cost of these.
Neither of polycarbonate are <unk> five gallon container, but because we use some 50 times, it's really not a very large impact.
And that becomes the largest material that we buy frankly at the end of the day, so as we exit retail will be less.
Less stressed by cost inflation resin and fuel.
As it relates to packaging.
Okay, well by any corrugated will buy a lot less shrink wrap all of that will be some hidden benefits that are environmentally friendly not just the plastic bottle.
Yes that makes sense.
Okay. Then last one for me just in terms of the residential.
Business in Europe, I know, it's still early days, but you referenced that 24% year over year growth.
How are you.
Viewing the performance of that business in the early days and is it still sort of located in a select group of larger cities.
Yes, we are quite pleased with the performance of the residential business, where now I think the last night, we've stood up within Russia, and we're quite pleased with the early days in Russia, We would have sites now up across Europe.
So everyone has a basic.
Transactional side, it's an area that we need to develop over time, it's one of those growth areas as we enhance the digital experience, but we are quite pleased with the growth.
It tends to be a little bit more eastern Europe at this point.
But we're very happy with where we think this where this can grow and it's had pretty significant growth in calendar 'twenty one.
Okay, great. Thank you very much.
Thanks Derek.
Your next question comes from Daniel Moore with CJS Securities. Please go ahead.
Good morning, Dan Hello, Dan Good good morning, Tom and Jay you've covered a lot of ground. So maybe just talk a little bit about the cadence of the reopening in Europe on the commercial side of the business how does that.
Starting to come back through the quarter and early into Q4. Thanks.
Yes, I think that that business has really essentially flattened out in terms of return. So our operating approach now is this is the new normal.
And firms remember that that customer base for us as more large commercial larger offices, it's a balance of work from home and land European businesses reopened. So it has been slow to recover and has been frankly pretty static over the last months.
Hence the reason why our focusing growth on residential becomes more important as one we diversify the customer base, but as those consumers are spending as much time at home that this is an important point for us to drive growth across the continent overtime.
Perfect and then lastly on the capital allocation front good color I appreciate it.
This quarter indicate a little bit of a desire to step up for continued to step up on the share repurchase front or just being opportunistic and number two the leverage ratio.
Simple math, so pretty straightforward, but does that preclude you from exploring larger strategic M&A or is that just just assuming it doesn't happen.
No.
Thank you answered your own question on the share buyback it was opportunistic and on the dips.
We did buy up a good portion of our stock in $2 8 million shares in the quarter. So.
That was the purpose.
We went through.
The majority of what was what's been allocated to us from the board so.
That covers that and on the balance sheet. We do have a we do have a good balance sheet, we have the ability to do larger scale transactions.
Needed, but in the interim our goal is to grow the business grow EBIT and I talked earlier about the deleveraging that will naturally happen with the organic growth we're targeting over the next three years.
Alright, I'm looking forward to the Investor day, Thanks for the color.
Thanks Pam.
Your next question comes from Pavel <unk>.
<unk> with Raymond James Please go ahead.
Thanks for taking my question.
Let me.
Zooming in on Europe as well.
Cases in Europe in contrast to the U S are up close to 50% in the last 30 days and U K, Germany, and I think particularly eastern Europe are really in a fourth or fifth ways now.
Is that having the analogous impact on your <unk>.
Operations that you discussed visa E. The United States, a little bit earlier.
I think the way to think about it since it is the fourth or fifth wave, it's pretty normal course, right. So we don't have the impact on route operation or on the associates in Europe that we've experienced in North America.
So we haven't had a big spike.
Folks that got impacted.
And <unk>.
The malls and we track it every week by market. So, we know where where people have been negatively impacted and.
And we just don't see it on that side.
Okay good to hear.
Simple Hugh you mentioned in the original simple announcement that you would be deploying there.
There are many kiosks across your European asset base and also bringing it across.
The Atlantic to North America.
Timetable in mind for deploying this technology across your asset base.
Yeah, I'll tell you exactly where we are today is finding the appropriate manufacturing in North America.
And Europe, so that we can scale.
Right. So we are in active discussions with solutions.
So that's kind of we have the technology now we have to scale. It I don't want to ship it around the world. So I'd rather produce it in the continent, if you will.
Based on the last year.
Year.
So thats active in process.
Right now.
And that will dictate when we can actually plug them in and turn to mind.
But we would expect to deploy some before the year is out in 'twenty two.
Got it thank.
Thank you very much guys congrats.
Thank you I appreciate it.
Your next question comes from George do you met with Scotiabank. Please go ahead.
Hello, George George Hi, guys. Good morning.
I want to talk a little bit about pricing, maybe it's possible quantum of the price increases that we took after the Q3 quarter and maybe looking at your longer term.
Aggregate them up high single digits is that we're going to be a third of that or do you expect maybe pricing.
Maybe being a little bit higher than what we've historically taken.
In the quarter, we had 6% increase in pricing water directed more to direct and exchange the bulk of our business. So we're quite pleased with that.
And then we expect that to continue obviously as we've implemented this the longer term algorithm is.
It's always going to be a piece of how many customers we get in their contribution from a volume perspective.
Been very disciplined on regular price increases.
So that will be part and parcel to our growth story.
Customer retention as a part of our growth story, so it's not just bringing new ones in but keeping the ones you have.
Which are quite valuable to us I mean, if you look at that part of our business that Tom talked about 10% in the quarter.
About.
Little over 1% was customer growth little over 2% was was volume growth in the 6% with pricing that rounds up to the 10%.
We feel with investment behind growth, we can increase the amount of growth from customers.
Consumption will continue to grow and I think we are demonstrating the ability to take price within our customer base. So those are still the three pronged we're focused on.
Okay great.
Figures of Israel, which has been more immune.
Most of our jurisdictions just wondering what have you seen there.
In terms of volume per customer has that has that at all increases have been stable in the last couple of months.
Yes, the business has been quite stable and growing.
Our the retail side of our business as Jay referenced we're the number one brand in the country. So.
We are seeing increased volume in consumption there are home and office awarded direct business its been quite solid and experienced pretty significant growth.
In this calendar year.
And they have returned from Covid has been different than others in terms of timing, so they've been back a little bit longer.
Although they did have a little bit of a spike it was short lived compared to what we saw with the delta here in the U S.
Okay. Just one last one if I may it seems that the cadence.
Bolt on M&A has been.
Well above kind of a 40 to 60 at least on a run rate basis.
Lately.
I'm just wondering if that's something that you guys can maybe maintain and maybe end up having a higher contribution if you look at it from a 12 month period.
I mean, George I mean, the key is if you look at the years will be gone above the 60 is where we've probably done a 30 or $40 million larger type tuck in mountain Valley would be an example of it and that's what put us at the higher end to the extent, we continue to do that Tom.
Tom said averaged 253 million, maybe some bigger some little I think the range is the right to go but we do continue to look for.
Larger scale ones not I'm not talking strategics, but the 30 40 50 million those will obviously get us above the range, but if we continue with the average that we talked about 40 to 60 is the right way to look at it.
Okay. Thanks for answers guys. Good luck.
Thanks, George take care.
There are no further questions at this time. Please proceed.
This concludes pretty most third quarter results call. Thank you all for attending.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines have a great day.