Q3 2021 Primo Water Corp (MISSISSAUGA) Earnings Call
Pardon me. Please stand by your conference will begin in about two minutes.
[music].
Good morning, My name is Pam and I'll be your conference operator today at this time I'd like to welcome everyone to the Primo water corporations third quarter 2021 results conference call all lines, you've been placed on mute to prevent any background noise. After the speaker's remarks, there'll 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 two.
You I'll now turn the conference over to John Cottle, Vice President of Investor Relations. Please go ahead welcome.
Welcome to premium water corporations third quarter of 2021 earnings Conference call. All participants are currently and listen only mode. This.
This call will end no later than 11 o'clock am eastern time, the call is being webcast live a pretty most website at www dot Primo watercourse dot com and it 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.
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I am 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 watercourse 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 J will discuss our third quarter financial performance in greater detail and offer outlet 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 will now turn the call over to talk.
Thank you John and good morning, everyone.
Before we review our performance for the quarter, an update on progress against strategic initiatives I wanted to welcome both Kate Kotarski and Jeff Johnson to the team.
Kate has joined as our Chief operating officer, and with the experienced in both sales and operational strategy, Kate will strengthen our management team and drive innovation accelerate growth and propel operational excellence, although a differentiate it what are your way platform yes.
<unk> joins our team is senior Vice President Global operational Excellence and service optimization jet.
<unk> leadership in a logistics and transportation industry will be leveraged enhanced 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 a pure play water offering as demand for our products and services continue to increase during the quarter.
Our global cooler quick 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 costs 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 costs, especially feel.
As J 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 announced earlier today or plan to exit the North American single use retail bottled water business, primarily one gallon two and a half gallon in case tap water as part of our overall strategy to increase profitability and further reduce our environmental footprint.
This adds it will take place over the next several quarters and does not include our large format exchange refill and dispensing businesses.
Nor are mountain Valley brand, which sells products primarily in glass bottles.
They 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 111 million.
Driven by higher operating costs.
The operational challenges we face during the quarter were largely the result of an increase in COVID-19 infections across our workforce.
We did not forecast nor expect that 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 a route sales representatives missing work.
Where possible we deployed a series of tactics to services, many routes as possible, including hiring temporary labor increasing over time and had managers and corporate staff going into the field supporting ground operations.
These route openings and our efforts to fill the opening short term resulted in a higher cost of service.
Our teams at 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 Ah 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 to 29 million and growing.
The residential opportunity for increased sales of three five gallon returnable water remains a top priority as the category has two to three times the market potential versus today's installed base.
We are focused on increasing household penetration through execution of a razor razor blade 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 dispensers sell through sales of roughly 1 million units.
60% of respondents are new to the category.
Of those likely to become a future dispenser household research indicates they're sourcing preference is 45% for water direct.
30% prefer water exchange and 25% prefer our water refill.
We should continue to capture at least our fair share of this growth as 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 tags implemented in January.
We are 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 as category will improve our profitability enable us to provide more focus on a razor razor blade revenue model enlightened our environmental footprint.
Our progress in ESG improvement is ongoing within.
Within the last year, we achieved carbon neutrality in our use water operations European water business as it remains carbon neutral for the last 10 years.
December 2020, we became the first company to certify a spring water source under the alliance will water stewardship standards and added a second in January.
We expect to certify two additional locations before the end of 2021 and.
And remain committed to achieving carbon neutrality across our global water operations by the end of this year.
In addition, we welcome more cash Ya as a vice president of ESG.
Is an accomplished ESG professional with a 20 year track record of success and leading ESG programs for global organizations.
Our year to date results, coupled with our confidence in our pure play a water model have driven our decision to maintain our full year adjusted EBITDA outlook between 390 and $400 million.
We expect to grow organically by approximately 6%.
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 into 2021.
I'd like to turn the call over to Jazz review, our third quarter financial results in greater detail.
Thank you Tom and good morning, everyone.
<unk> with a 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.
The games were largely driven by growth in our water direct and exchange businesses, partially offset by declines in our water resale and water dispenser channels.
Adjusted EBITDA decreased 4% to $106 million compared to $111 million as comp discussed the decrease was driven by higher operational costs related to COVID-19.
<unk> and driver availability during the Delta peak, along with the increased demand for products and services from residential consumers and be to be customers challenged are normal high levels of service.
We were also adversely impacted by the effects of Hurricane Ida in September.
Losing 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 cost for 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 and water dispenser channels.
Revenue from our residential consumers grew by 2% during the quarter in North America for can be to be 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 the 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 and 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 you to be 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 toward 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 the customer may.
The key highlight and the rest of the World segment is the measure of organic cooler ads in the quarter.
When coupled with improved retention rates, we're beginning to see the benefits from our ongoing efforts to improve operating performance in this region.
As we have discussed and passed 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 and the rest of the World segment decreased 10% to $23 million as government subsidized furloughed 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 total liquidity position of $266 million.
Our net leverage ratio is three seven times and.
And as we will discuss in greater detail to our in our upcoming Investor Day, we are now targeting and net leverage ratio of less than $2 five times by 2024.
Look into 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're.
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 consistent primarily a one gallon two and a half gallon in case pack water.
The plant does not affect our large format exchange refill and dispenser businesses or or 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 cash taxes 60.
$68 million with interest as well as capital expenditures of around $150 million.
Ah 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 one half future free cash flow.
Trying 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 a share repurchase program and.
And earlier this week, our board of directors authorized a quarterly dividend of six per common share. The dividend is payable in cash on December 3rd 2021 to shareholders of record at the close of business on November 23rd 2021.
With respect to M&A, we've maintained our disciplined approach and have been focused on accelerating the robust pipeline of tuck and opportunities in front of us.
During the quarter, we announced the acquisition averse to our in Oregon Health water, So, Pennsylvania and to get fresh business in Poland and remain on track to achieve 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 days scheduled for November 17th 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 one time 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 2.5 times by 2024, I will now turn the call back to top thanks.
Thanks Jay.
We remain focused on executing a differentiated what are your 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 towards by building a more diverse e-commerce solutions and improving the customer experience through flawless delivery.
We will continue to execute against a razor razor blade model with growth and a number of dispensers sold driving top line growth through the sale of water products.
In Europe, where 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 are predictable and reliable top line growth, while protecting our efficiency improvements and maintaining are highly variable cost structure.
Identifying and executing highly accretive tuck in acquisitions across North America and Europe.
In seeking new ways to further enhance our standing as an ESG and sustainability leader.
Supporting our initiatives or more structural and dramatic tailwind driving consumers towards healthy hydration solutions.
The 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.
Have water as the primary drinking source is expected to continue to decline for the foreseeable future.
As J noted, we expect our consolidated fourth quarter revenue to be between 540, and $550 million and four hour adjusted EBITDA to be between 108 and $118 million.
For full year 2021, we are forecasting revenue growth of approximately 6% and.
And are maintaining our adjusted EBITDA forecasts 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% for mid Q3.
We expect to see sustained strength from awarded direct in exchange residential customer base, an improvement from our water direct <unk> customer base as we progress through the fourth quarter and into next year.
We will also maintaining a strong pipeline of tuck in emanate 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 17th at nine Am 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 a multiyear forecast for high single digit organic revenue growth.
Continued execution of $40 million to $60 million of highly accretive pumpkin annually.
Enhanced EBITDA margins of 40 to 60 basis points per year.
In addition to the one time 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.
In net leverage of less than 2.5 times by 2024 as well.
Once again I'd like to thank the preamble water associates across the business for their tireless efforts to serve our customers and.
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 lines for questions.
Thank you ladies and gentlemen, we will now begin the question and answer session. Since you have a question. Please press star followed by one on your Touchtone phone you will hear three time prompt acknowledging your request and your questions will be pulled any already received should you wish to define pulling process. Please press the star followed by two and if you're using a speaker.
Phone please lift your handset before pressing any keys. Your first question comes from Kevin.
Wendy with Jeffries. Please go ahead.
Great. Thanks, good morning, everyone.
Good morning, Kevin.
Two questions for me if I may 1st on the quarter and then 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 Cavett progress during the quarter. What you saw on October in terms of some of these costs, improving particularly around labor and availability that gives you comfort on the on the guidance for the year and then I'll follow up with a long term guidance. Thanks.
Sure Kevin This is Tom.
And then.
Middle of the quarter I think late July early August we begin experiencing spike from the Delta Barry.
An order of magnitude would be roughly 10% to 15% of <unk> sales associates were infected and.
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 positive. This sideline for at least two weeks.
And of course this didn't happen randomly one in each building it happens in buckets.
Give you an example of Denver, Colorado I have something like 20 route seven routes we are open.
So we don't have the available workforce, obviously, we don't carry that kind of incremental head counts to cover. So we scrambled and then that then put us behind on our ability to effectively serve as a customer we missed customers. We missed revenue and then we encourage the incremental cost of temporary labor, which are not properly trained.
We encouraged lots of overtime, which is short term is not long term long term a good solution.
And then we flew people in from all over all used used J as an example, J was on a route in Denver.
To help out as an example, so we we put everybody.
Saleable.
Address the openings.
As we move through September the cases began to drop and we we in October as an example, current cases are 80% lower than what they were at the peak. So we've now begun to return to a more normal operations.
And therefore, we beginning to see more normal operating cost as we were not flying people over and we'll probably service and our customers.
So that hopefully that gives you a flavor for the impact of the variance obviously, we wouldn't have broadcast 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. As you look at September Standalone. We we were at 11% revenue growth EBITDA growth, 12%. So you can see as we came out of it or to even it wasn't flight back to where it should be but it showed up on our <unk>.
Else in September and frankly continued on in October.
Got it. Thank you both and then just if I could follow up on the long term guidance and I know you will be spending more time on this at the analysts do so I think we can appreciate that but maybe just for purposes of this call spend 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.
Walks with that across your business and geographies.
And then the margin outlook is also encouraging.
Maybe just talk about the key factors driving yet how that compares I think historically, particularly on the H O D side, it's been 10 to 20 basis points of margin improvement and now you are looking for 40 to 60 across the business. So.
So quite a step up in pretty encouraging and the cost environment were a lot of companies are obviously struggling.
So I think that'd be helpful. And then sorry for being a bit for both of you, but just the last one I think would also be helpful for folks just looking at the EBITDA guidance now looking at the 2024 and incorporating your new leverage targeted two and two five times, maybe talk about uses of free cash flow, particularly around share buybacks.
Because you provided the commentary around the to tuck in talking deals. So I think we can.
Assume reasonable levels of Capex et cetera, but just trying to get a better feel for what you're thinking about them. 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 Guy's mental pass it on.
Okay.
Let me start with the top line in your face.
China Kevin.
We might answer some but not all how how about.
That's entirely fair entirely fair. Thank you guys.
Let me give you my perspective on high single digit growth. So we have been delivering in articulating approximately 6% organic growth.
When we exit the retail business that number will move to 7% and it's.
A high degree of confidence because we've been delivering that number.
You also know that we recently hired caged Kotarski and Jeff Johnson and there is two pronged is 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.
Enhanced improve our operational efficiency of course, the operation to give us that step up and EBITDA margin enhance.
So that's really the high level.
Approach of why we think it's down and of course, we're going to have to invest in growth and so 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 those single digits and on the leverage that you asked it really has some should we have a 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 there is paying off that debt, but it's predominantly it's the leverage of the increased EBITDA that.
Drops or.
Leverage ratio versus EBITDA down so that is how we're getting to below two and a half times by 2024 on the leverage.
Okay I'll pass it on.
Some questions off line. Thank you for the time guys are good luck I appreciate it.
Thanks, Kevin.
Your next question comes from Derek Lazard with TB Securities. Please go ahead.
Yes.
Good morning, gentlemen, how are you doing.
Web Derek how are Ya.
Maybe I just wanted to hit on the.
I guess, what what segment.
All right, let me just rephrase that cause.
Again, thanks for giving us the revenue impact from from the <unk> 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 of that business.
Yeah. So that's the retail question shift yet so so first off if you look on our on our <unk>.
<unk> segment reporting it's other water.
Really the other water is just retail water and it's located in North America and Israel is.
Where as in Israel, we have the number one premium retail brand.
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. Some previously it basically.
Nope.
Zero EBITDA are basically zero EBIT of business that we've run for fixed costs 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.
I'm not sure of calm 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 are from our overall product.
<unk>.
So so that's the key part of it and the last thing.
No I'll get a inflation question at one point, so might as well knock it out the biggest inflationary pressures.
C. As part of this business to where we have resident that we're buying we have free trip, we're shifting and you know 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 the commodity type movement and then you have to put the pricing through the large retailers, which as we all know takes much longer than our ability to take.
Price and across her other $2.7 million most customers.
That's very helpful. J, Thanks for that and maybe just one last one for me.
In terms of the the Delta very impact I was just wondering how it impacted you guys in terms of quit rates are short term quit rates and maybe a customer service complaints.
Yes, so we would have obviously not service to a normal level, which would drive incremental costs to the call Center.
We deployed.
Every available human.
To us.
To solve for that.
Encouragingly is our customers can be very forgiving when we reach fund to them that we're taking efforts to address the issue evidenced by that reduction in the pool quit right. So that 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 and use and what was it pretty wild six or eight weeks.
Okay. Thanks for that guys.
Yeah Derek.
Including the CFO knocking on your door with a five gallon jug.
Thanking him for being a customer.
Would have like to see that.
[laughter].
It's priceless.
Yeah.
[laughter].
Your next question comes from John It's in parallel with CIBC. Please go ahead.
Good morning, everyone.
Mourning mourning.
I also hope to see a picture of J driving a truck.
After day coming up.
You didn't give me a full truck. They just gave me a van is all day when all they would trust me with John.
Trying to limit the down side.
Fair enough.
I wanted to ask about the dispenser business and I know, there's 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.
So we've seen significant inflation and 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 sector.
The.
Current levels of Ocean freight has abated, a little but there is still meaningfully higher than a year ago, albeit bettering Q3, and moving into the queue for then.
Q2, and early Q3.
We have.
Had delays and 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 weren't given a window when they expired at the end of 2020 parents have been in place since the first of the year we.
We now have the ability to request exemption from those terror that process ends on or about December 1st and then.
We'll wait 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 that expensive business to get back in shape and continue to grow.
And even though it was choppy I think will still sell something on the order of 800000 cool is this year.
Wood said still plenty of new users to the category that will serve as hopefully with our water direct exchanging rebuilt in the one point you didn't mention we did see last year some inventory loading retailers as they received these headwinds come so technically when you look at the $1 million. We show sold last year, there was a little bit of.
Pull forward of purchasing by the retailers so that that's given us a little bit of headwind on a year over year comparison Michelle also.
Okay. That's that's helpful. Thanks, and then my follow ups on the ESG side, and I think you're making really tangible efforts in progress on this front in the investment community, probably or should be well aware of it but I am wondering about it at the customer level and are there ways that you're making customers aware of the effort to you're taking in the <unk>.
Fits and ultimately can that bring in more customers or do you view it as a retention tool there is I'd like to get your thoughts on the ESG efforts from the from the consumer's perspective.
Yes, I think it's a good point, John we need to be better communicated so I'll call. The three Rs rebuild 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 you'll see us move further down that path in 2022, and then frankly the exited the retail business gives us the opportunity to re engage in open neck.
Communication with the customer, which once we're completely out of this call at midyear twenty-two you'll see is kicked up that communication.
Got it okay. That's helpful. Thank you very much.
Some.
Your next question comes from Andrea Tech area with J P. Morgan. Please go ahead.
Thank you good morning, and hope you and your logistics team are well now and he does that with a lot of respect I guess the stock has a little bit.
[laughter].
[laughter].
Pronounced that he received in Florida.
So.
Well, let me not get all the glory he was out in the market too.
Oh here you go.
[laughter]. 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.
EBITDA margin for the fourth quarter kind of implies 20 to 21 and a half so.
It's a big step from the prior year and could be even above the three quarter training level, which.
We think it's probably the highest ever so why do you think is striving to step hopping profitability, especially as I guess, you think labour in third party.
I also kind of takes you know.
Continues to be elevated.
Is that I mean, obviously to retain water business accent is not into I just hadn't made next year, but there are some improvement that in the mix as your carryover so anything we should be.
Any additional pricing a lag.
Yes, Hi, Andrea there we'll.
We'll get a full quarter benefit of pricey.
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 J reference September revenue up 11%. We are enjoying good demand for our products into October which will also give us the the leverage from the volume.
Down to the EBITDA much.
Okay now that that's.
That makes him a fan.
And everything falling into the quarter, which by the way, it's pretty unique for everyone else can cpg's. 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 price and because our average customer Bill is 50 Bucks. We don't we don't have the large large retailers that.
Have the ability to RFP and that gives us the ability to take price and we're we're taking it.
Mhm, Yeah, perfect Tactical sound right. Thank you so much.
Thanks Andrea.
Your next question comes from Nick Modi with RBC capital markets. Please go ahead.
Hey, guys. My name is Philippa he didn't sleep a follower for.
Nick.
One quick question on the label or issues you.
You've mentioned clearly things of getting getting better and already kind of returned to normal, but if you think a bit a bit longer term about the potential of 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 is that something that you are thinking about longer term on the labor front.
Yes.
Terms of the route Labor force.
We have taken appropriate steps market by market.
In terms of what are 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's a particular issue, but overall, we think we're in a pretty good spot in terms of our ability to fill in keep bill those routes.
Subject to no future variance.
That causes these spikes and then the other biggest area for us as in our call center. So we have competitively wages in our Lakeland facility.
And frankly, the entire team is focused on retention right.
Alright. So part of this is once you can attracted 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. So onboard people appropriately and to make them feel part of the team so that they will stay with us.
Got it that makes sense.
And on these two from maybe you could give some metrics how the exit of the North America.
Bottled water business helps improve the issue profile of your company from under Michelle standpoint.
And 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 J, you would've read last quarter, we invested in a company called simple.
Simple is a refill vending machine that will then.
Containers of one metre or less so we actually believe it will be a single use replacement.
We're currently invested only started in the UK, 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 on at ESG.
You look we are primary product it's about the most environmentally since two packaging me can use pick.
Pick it back up we sanitize. It we were used up to 50 times. So that is it but when you look at our portfolio. It was this one way small part of our business, but we were still utilize them over $400 million single use containers and that's going to go away. So you look at greenhouse gas by the end of this year, we will be.
Carbon neutral globally and work from carbon credits, but working on reducing the amount of greenhouse gas we generate for our routes. We are a member of alliance a water stewardship and we are really focused on on really taken care of the aquifer and water sources. This will get us through the same place on packaging because this 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. Thanks.
Thanks, guys.
Thanks, Thank you drove.
Your next question comes from Jack delay with Canaccord Genuity. Please go ahead.
Yes, Hi, guys correct on Ah Hey, guys. Congrats on the strong quarter and obviously, a good guide near and long term.
Thanks Derek.
So one of the things I wanted to talk about was just just the acquisition. So you mentioned that you're going to continue to focus on the $40 million to $60 million and tuck in can you just talk about what you're seeing in terms of multiple that I know you guys have kind of given a range in the past or 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 two and a half may and these might be three and a half million dollars. If you will maybe a little bit bigger than that.
So it's a little bit more scale.
You'll see.
A number in North America.
Early and 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 is a good runway.
And as we've said the $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 there.
There are a few bigger ones out there, we'll wait and see how they develop over time.
Okay.
And then I guess, you're switching gears a little bit you guys. You mentioned some cost inflation you are seeing in terms of labor in terms of shipping.
Wondering what you're seeing just in terms of.
Packaging I guess on the plastic side I mean is it something that you.
You can pretty easily price price through the past the price owner or how are you doing.
Yes, it's a good question if you think about our business excluding this retail business.
That there is a little bit of inflation and the cost of either a polycarbonate or a five gallon container, but because we use them 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 <unk>.
Less stress by cost inflation residents fuel.
As it relates to package.
Okay, we'll buy any car gated will buy a lot less shrink wrap all that will be some hidden benefits that are environmentally friendly not just the plastic bottle.
Yeah that makes sense.
Okay. Then the last one for me just in terms of the the residential.
Business in Europe, I know, it's still early days, but you referenced at 24% year over year growth how.
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 site. We've stood up what's in 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 scenario that we need to develop over time.
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.
Now under 21.
Okay, great. Thank you very much.
Thanks Derek.
Your next question comes from Daniel Moore with CJR Securities. Please go ahead.
More than a damn Hello, Dan good good morning, Tom J, 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 business, how does that star.
Starting to come back through the quarter in early into Q4. Thanks.
Yeah, I think that that business has really essentially flattened out in terms of return. So are operating approach now is this is the new normal.
And firms remember that customer base for us is more large commercial larger offices. It has a balance of work from home and when European businesses reopened. So it has been slow to recover and has been frankly pretty static filled by the last month.
Hence the reason why are 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.
Capital allocation front, good color and 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. Thanks.
Okay.
I think you answered your own question on on the share buyback it was opportunistic and on the dips. We we did buy up a good portion of our sought 1.8 million shares the quarter so that.
That was the purpose.
We went through the majority of what was once been allocated to the board so that 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 if needed but in the interim our goal is to grow the business grow EBIT and I talked earlier about the deleveraging that one naturally happened with the organic growth we're.
Targeting over the next three years.
Alright, looking forward to the Investor day, Thanks for the color.
Thanks, Thanks, Dan.
Your next question comes from have all.
No channels with Raymond James Please go ahead.
Thanks for taking my question.
Let me.
On on Europe as well.
Cases in Europe in contrast to the U S.
Are up close to 50% in the last 30 days in UK, Germany, and I think particularly eastern Europe are really in our fourth or fifth waves now.
Is that having the analogous impact on your route.
Operations that you discussed visa visa United States, a little bit earlier.
I think the way to think about it since it 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.
Of folks it got infected.
And.
The walls and we track it every week by market. So, we know where where people have been negatively impacted in and.
And we just don't see it on that side.
Okay good to hear.
Simple you you mentioned in the original simple announcement that you would be deploying their mini kiosks across your European asset base and also bringing it across.
The Atlantic to North America.
Do you have a 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 inactive 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 approves it into continent, if you will based.
Based on the last year.
Year.
So that's active in process.
Right now.
And that will dictate when we can actually plugged them in and turned to mine.
But we would expect to deploy some before the year is out in 22.
Got it thank.
Thank you very much guys congrats.
Thank you I appreciate it.
Your next question comes from George G Mat with Scotiabank. Please go ahead.
Hello, George George Hi, guys morning, I'll talk a little bit about pricing, maybe she can possible quantum of the price increases that we took for.
For the Q3 quarter and maybe looking at your longer term.
Augur rhythm of high single digits does that we're going to be a third of that or do you expect me to be partisan maybe.
Maybe being a little bit higher than what we historically Jacob.
In the quarter, we had 6% increase in pricing water directed more to direct an 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 at peace of how many customers we get in their contribution from a volume perspective will we've been very disciplined on regular price increases.
So that will be important for us to our growth story.
Customer retention is 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.
If you look at that part of our business that Tom talked about 10% of the quarter.
About.
Little over 1% was customer growth little over 2% was was volume growth and then the 6% with pricing backgrounds up to the 10%.
We feel with with investment behind growth, we can increase the amount of growth from customers.
Consumption will continue to grow and I think we are demonstrated the ability to take price within our customer base. So those are still the the three problems we're focused on.
Okay great.
You're so Israel wishes and more mute.
More jurisdictions.
Just wondering what did you see in there in terms of volume per customer has that I got it all increases have been stable in the last couple of months.
Yeah, the business has been quite stable and growing.
Our the retail side of our business is J referenced where the number one brand in your country. So.
We are seeing increased volume and consumption there are home and office or awarded the rent business has been quite solid and experience pretty significant growth.
In this calendar year.
And they are returned from Covid has been different than others right in terms of timing, so they've been back a little bit longer.
Although they did have a little bit of spike. It was short lived compared to what we saw with the Delta air in the us.
Okay. Just one last one if I may seem to the.
The cadence of of Multan him and he 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 be be maintain and maybe you 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 sixties, where we've probably done a 30 or 40 million dollar larger type tuck in I mean mountain Valley would be an example of it and that's what put us at the higher end to the extent, we continue to to do the.
Set averaged two and a half 3 million, maybe some bigger some little I think the range has the right to go but we do continue to look for a large scale once 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 talk about 40 to 60 is the right way to look at it.
Okay. Thanks for asking.
Thanks, George you take care.
There are no further questions at this time. Please proceed.
This concludes premiums third quarter results call. Thank you all for attending.
Ladies and gentlemen, this conclude your conference call for today, we thank you for participating and ask that you. Please disconnect your lines have a great day.