Q1 2022 Primo Water Corp Earnings Call
Good morning, My name is Pam and I will be your conference operator today at this time I would like to welcome everyone to the Primo Water Corporation first quarter 2022 earnings conference call all.
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 would like to withdraw your question. Please press Star then the number two thank you I'd now like to turn the conference call over to Mr. John Cahill, Vice President of Investor Relations. Please go ahead.
Ed.
Welcome to Primo Water Corporation first quarter 2022 earnings Conference call. All participants are currently in listen only mode.
This call will end no later than 11, a M eastern time.
Call is being webcast live on <unk> website at Www Dot Primo water Corp, Dot com and will be available for playback. There 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 caution.
Scenario 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.
Early reports on Form 10-Q, and other filings with securities regulators.
The company's actual performance could differ materially from these statements and the company undertakes no duty to update these forward looking statements, except as expressly required by applicable law.
A reconciliation of any non-GAAP financial measures discussed during the call with the most comparable measures in accordance with GAAP. When the data is capable of being estimated is included in the company's first quarter earnings announcement released earlier this morning or on the Investor Relations section of the company's website at Www Dot Primo water.
Dot com.
I'm accompanied by Tom Harrington previous Chief Executive Officer, and Jay Wells pretty 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 first quarter and our progress on pre most strategic initiatives then Jay will review our segment level performance and we'll discuss our first quarter performance in greater detail and offer our outlook for the second quarter and full year 2022 before handing the call back to Tom.
To provide a long term view ahead of Q&A.
With that I will now turn the call over to Tom.
Thank you John and good morning, everyone.
I am quite pleased with the start to 2022 and our Q1 results.
As the impact of the pandemic begins to wane and we adapt to the current inflationary environment we.
We remain confident in our ability to deliver on both our short term and long term outlook.
I'm, especially proud of the efforts of the team and pleased with everyone's continued commitment to safety customer satisfaction and growth as our teams have once again responded to the challenges presented by the unprecedented cost inflation.
<unk> in Ukraine.
In the first quarter, we achieved double digit revenue growth driven by strong customer demand.
Typically in a water direct and exchange businesses and continue to deliver robust growth on mountain Valley America's premium spring and sparkling water brand or <unk>.
Mobile water directly exchange customer base increased four 5% to $2 3 million for the quarter.
This was an increase of 100000 customers versus Q1 of 2021.
Through organic customer additions.
Customer base acquisition to our tuck in strategy.
And improve customer retention rates, which increased to 86, 5%.
As I mentioned last quarter, the three and five gallon bottle of water category growth opportunity.
Is estimated to be as large as an incremental 29 million U S households.
<unk> continues to increase based on tailwind, including growing consumer demand for environmentally responsible products.
The shift away from sugary sweetened beverages and.
And well documented concerns with tap water quality.
The residential opportunities to increase sales of three and five gallon returnable bottle water remains a top priority as the category has significant growth potential for now our perspective.
We remain focused on increasing household penetration through our execution of a razor razor blade model.
While the water dispensers segment declined during Q1.
All of us have higher retail price points and less promotional activity driven by tariffs and the elevated cost of ocean freight sell through volume of more than 190000 dispensers to consumers.
Note that in a two 4% sequential increase in the first quarter versus Q4 of 2021.
Ocean freight costs moderate we expect to see a return to growth in our dispenser business through increased promotional activity and the benefit of new customer distribution wins and the increased penetration from our existing customer base. As an example, we recently gained new dispenser business.
Costco with shipments beginning in Q tips.
We continued to experience elevated costs driven by inflation across several operating expense categories, including labor fuel and freight.
To address the higher cost of approximately 10% during the quarter, we implemented two pricing actions and first in January and the second in March each in response to higher than forecasted inflationary cost at that point in time.
Currently we believe that the pricing actions, we have executed well cover the higher costs.
The benefits of these pricing actions are expected to be realized in Q2.
Despite the cost headwinds, we continue to invest in the customer experience evidenced by organic customer growth and improve customer retention rates.
Crude pricing.
Demand for our products and the improvement in customer retention gives us confidence.
2022 guidance.
Our long term 2020 outlook of high single digit organic revenue growth and adjusted EBITDA approaching $525 million.
In Q1 consolidated revenue increased 10% to $526 million and adjusted EBITDA increased 15% to $88 million again, driven by higher demand for our products and improved pricing and volume led by our water direct.
And exchange businesses.
Consolidated revenue, excluding the retail single use plastic business in North America grew 13%.
$500 million.
And on an FX neutral basis overall revenue was up 14%.
Consolidated organic revenue was up by double digits as we experienced a gain of 12% for the quarter.
As referenced earlier the award of Dispensers segment declined because of higher retail price points and less promotional activity driven by tariffs and the spike in ocean freight costs experienced during the quarter.
As ocean freight container rates moderate we expect to return to growth in our dispenser business.
As I mentioned in the past what a dispenser sales provide a key point for consumers to enter the bottled water category, where we can capitalize on our recurring razor razor blade revenue.
The recurring purchase behavior generates organic quarter sales as part of our what our go to market strategies. As a reminder, our internal research indicates that approximately 60% of respondents surveyed are new to the water category.
45% prefer awarded direct.
30% per barrel water exchange and 25% retail.
We should continue to gain our fair share of this growth as a razor razor blade model remains one of our strategic advantage.
You will likely remember that our b to B channel experienced some softness in December and January .
Resulting from reduced foot traffic.
A clear demonstration of what some call the January slone as illustrated in the chart of mobility data included in our supplemental presentation on page eight titled visits to retail and recreation locations.
It shows a decline in foot traffic or roughly 20% in the December January timeframe.
As we suspected the timing corresponds with increased rates of the omicron variant here in the U S.
Fortunately, we have seen these visits to retail start to rebound as the effects of beyond the crime variant had E and we continue to work diligently to meet the current levels of demand.
We have added an analysis of our North American BTB customer base on page nine of the supplemental presentation deck.
Provides a view of the diverse mix of our <unk> customer base importantly, it shows that we have no appreciable customer concentration water direct business.
A recap of our growth drivers on slide 10 demonstrates growth in several key areas customer count increases on water direct and exchange consistent gains in the average selling price of our three and five gallon bottles are premium mountain valley revenue in E Commerce.
We continue to invest in route operation to improve our service metrics enhancing the customer experience.
We are near our targeted staffing levels and are currently staff more than 98% and route delivery in the U S.
We believe the long term benefits and proving the customer experience and.
An increasing customer intention outweigh any short term investments.
As it relates to our ethics and ESG, we remain focused on elevating our position on environmental responsibility and finding new way honor our commitment to protect the environment provide quality drinking water and manage sustainability.
Later this quarter, we plan to publish our first environmental social and governance report.
The report represents the next step on our ESG journey.
We've been working on formalizing, our priorities and governance structure, establishing initial targets and enhancing the collection of our data from across our company.
As part of our ESG strategy last November we announced the planned exit of the single use bottled water retail business in North America.
We remain on pace to completely exit this category by the end of the second quarter, eliminating approximately 400 million bottles from the ecosystem.
This is a major step in enhancing our ability to focus on a more environmentally friendly returnable bottle of water.
Our three and five gallon returnable bottles provide an attractive alternative to combat the challenge of plastic waste.
On their re usability and Recyclability.
Over the last few months, we've been asked about our business exposure to the war in Ukraine as well.
Well as our business in Russia.
In 2021, our business in Russia recorded approximately $14 million of revenue and approximately $3 million of adjusted EBITDA.
We have decided to exit Russia and expect to complete this exit over the course of the next 60 to 90 days.
As we work to exit our business in Russia, we will continue to supply water to the humanitarian and NGL efforts in eastern Poland as they manage the influx of Ukrainian citizens displaced from their homeland.
I would like to extend my appreciation to those associates of ours in Poland and in other European countries as several of our associates are hosting refugees from Ukraine in their own homes.
<unk> family proud of the help they are providing in these very difficult times.
Our thoughts are with the people of Ukraine.
We hope for a speedy end to the conflict.
I'd like to now turn the call over to Jay to review, our first quarter results in greater detail.
Thank you Tom and good morning, everyone.
Starting with our first quarter consolidated results consolidated revenue increased 10% to $526 million.
Compared to $478 million.
Excluding the impact of foreign exchange and the exit of our North American single use plastic bottle water retail business revenue increased by 14%.
These gains were largely driven by growth in our water direct exchange businesses.
We saw a rebound from the effects of reduced foot traffic and the omnicom variant, which cause EBIT volume suffer in December and early January .
<unk> rebound has continued into our second quarter.
Organic revenue growth was 12% for the quarter.
Adjusted EBIT grew 15% to $88 million.
As Tom discussed the effects of pricing actions volume growth and strong demand drove profitability.
During the quarter, we made substantial progress in achieving full staffing levels and now have more than 98% of our route delivery position sales. We are confident that the incremental investments we are making in our people will enable us to deliver on our target of 9% to 10% revenue growth for the year.
The increased staffing costs were accompanied by continued inflationary cost pressures in other areas of our business. The major buckets of higher costs include a materials associated with our seem to be exited North America single use bottled water business Ocean freight transportation.
Labor.
The additional pricing actions taken in the first quarter have offset these increased costs and we have captured enough price to offset the cost increases that we've seen to date.
Turning to our segment level performance for the quarter, North America revenue increased 9% to $397 million.
Compared to $366 million.
Excluding the impact of foreign exchange and the exit of the single use plastic bottled water retail business revenue increased by 13% driven by growth in our water direct and exchange businesses.
Organic revenue growth was 11% driven by a 3% increase from volume and a 11% increase from price mix within our water direct and exchange businesses.
Adjusted EBITDA in North America increased 15% to $79 million.
Turning to our rest of World segment revenue increased by 14% to $129 million.
Excluding the impact of foreign exchange revenue increased by 18%.
All channels and the rest of the World segment showed increases demonstrating the benefit of our multi country multi channel model.
The increase was driven by growth in both residential <unk> customers.
We are pleased with the performance of our rest of the world business, which is beginning to recover from the pandemic and commercial businesses are beginning to return to work.
Adjusted EBITDA in the rest of the World segment increased 8% to $16 million as the benefit of higher revenues from Europeans returning to work was partially offset by investments in sales and marketing for residential customers in Europe to further diversify our customer base and better balanced customer mix.
Turning to our Q2 and full year outlook.
Revenue was strong in Q1 and is off to a good start in Q2 with strong customer demand and price increases to offset increased costs.
With respect to adjusted EBITDA inflation has resulted in cost increases and labor fuel and.
In materials.
We are confident we can take price to offset these cost increases, but it may result in short term windows of cost headwinds and.
In addition, we are focusing on long term growth and laying the foundation for future growth.
This requires us to invest in that foundation this year.
Finally, the exit of the business in Russia, It's a onetime headwind as we lap $14 million of revenue and $3 million of adjusted EBITDA from this business.
With that said and based on the information we have available to us as of today.
Consolidated revenue from continuing operations to be between $540 million and $560 million.
And our second quarter, adjusted EBITDA will be in the range of $100 million to $110 million.
For the full year of 2022 organic revenue growth is projected to be 70% to 8% and overall revenue growth is expected to be 9% to 10%.
Adjusted for the exit of the North American single use detailed water business.
We expect 2022, adjusted EBITDA to between 410 and $420 million.
As Tom mentioned, the exit of the North American single use retail water business continues to move quickly.
In 2021 these products accounted for revenue of approximately $142 million.
We now expect the 2022 revenue of this product line to be about $40 million with minimal effect on adjusted EBITDA.
We still expect exit this category by the end of the second quarter.
For the year, we also expect around $10 million of cash taxes $60 million of interest expense as well as capital expenditures of approximately $200 million.
The capital expenditure figures include incremental spending.
<unk> during our Investor Day last November which is being used to support our growth outlook and EBITDA margin expansion.
Key initiatives being funded by a multiyear incremental capex include driving digital growth and leading dispenser innovations such as the rollout of an update to our mobile App my water plus and plans to execute a global E Commerce web shop, both of which will grow our customer base.
Leading dispenser and refill innovation, creating differentiation in our products and offerings.
Investment in delivery vehicles to reduce emissions and to support sustainable fleet management.
Investment in new spring sources, including Mountain Valley support increased customer demand and future growth.
Installation of water production equipment that supports our ESG strategy reduces water usage and increases efficiencies in places like Los Angeles and Calgary <unk>.
<unk> and leading software solutions to support supply chain and logistics operational excellence.
These initiatives and investments to support our 2024 outlook, which includes revenue and adjusted EBITDA growth as well as EBITDA margin expansion.
As we announced yesterday, our board of directors authorized a quarterly dividend of seven <unk>.
Per common share.
As discussed during our November Investor day, our growth outlook and increased free cash flow generation and fund our growth as well as an increase in our annual dividends.
Our path to our multiyear dividend step up includes an increase in our quarterly dividend per share by <unk> <unk>.
In 2020 to another in 2023 and another in 2020 for the.
The increase in the dividend, we returned over $6 million incremental dollars to shareholders in 2022.
Other aspects of capital deployment include continuing our tuck in M&A for.
Our 2022, we continue to target $40 million to $60 million of tuck ins and remain focused on executing the robust pipeline of tuck in opportunities in front of us.
Our long term organic growth outlook has not changed we remain confident in our outlook for 2024, we are forecasting high single digit percentage organic revenue growth.
Targeted annualized adjusted EBITDA approaching $525 million.
Adjusted EBITDA margins of 21% to 22%.
Adjusted EPS of $1 10 to $1 20 per share.
Net leverage of less than two five times.
And ROIC greater than 12%.
I will now turn the call back to Tom.
Thanks Jay.
Looking ahead, we remain focused on executing our differentiated what are your way platform.
We will leverage our pure play water model to drive revenue growth, 9% to 10% in 2022 adjusting for the exit of the North American single use plastic retail water business and including the revenue from the tuck in acquisitions made during 2021.
Organic revenue growth is expected to be in the range of 7% to 8%.
We continue to prioritize the customer experience on all things digital and we remain focused in understanding the new customer journey by leveraging data to segment, our audiences to provide the right content and products to them, our current and future customers will be empowered to fully embraced or what are your way strategy.
In the new format with the ability to manage their accounts on the go easy.
Easily obtaining primo products whenever wherever and however, they want them.
We're also on pace to launch a new direct to consumer E. Commerce destination. Later this year with new features that enhance the purchasing experience and will accelerate our dispenser sales.
Our initiatives set the tone for our commitment to digital acceleration to provide the best solutions to our customers.
We will continue to execute our razor razor blade model with growth in the number of dispensers salt driving top line growth through sale waterfront.
Interest levels for the launch of our new alkaline water brand premium plus had been very encouraging.
<unk> plus alkaline water complements our existing portfolio and is a growing trend globally.
<unk> plus alkaline water has a ph level of nine five at the time of bottling is sold and three gallon bottles and is currently available for award of direct customers.
In certain U S geographies.
We have a pipeline that could lead to incremental distribution of more than 1000 premium plus exchange rate. Please.
Our efforts are paying off in other areas such as retail we've partnered with a major retailer to install up to 1000 additional refill machines at net new locations in 2022 and 2023.
Supporting our initiatives are more structural and semantic tailwind that are driving consumers towards healthy hydration solutions.
The growth in the health and wellness category continues to support our prospects of gaining share of the broader beverage category.
In addition to.
The perception of the declining quality of municipal tap water is well documented.
It supports the growth of our products and services.
Tap water as the primary drinking source is expected to continue to decline in all parts of the world for the foreseeable future.
As Jay noted, we expect our consolidated second quarter revenue to be between $540 and $560 million.
And for our adjusted EBITDA to be between 101 hundred $10 million.
For full year 2022, we continue to forecast revenue growth of 9% to 10% adjusting for the exit of the North America single use retail bottled water business and including the revenue from the tuck in acquisitions made during 2021.
As we continue to see the improving demand in both the residential and <unk> sectors as consumers and workers are increasingly on mobility.
We are forecasting our adjusted EBITDA.
<unk> 410 and $420 million.
We're also maintaining a strong pipeline of M&A targets, which we expect to execute during the remainder of the year.
Once again I'd like to think that Primo water associates across the business.
Their tireless efforts to serve our customers with that.
I will 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 purpose. Thank you.
Operator, please open the line for questions.
Thank you ladies and gentlemen, we will now begin the question and answer session. If you have a question. Please press star followed by one on your Touchtone phone, you'll hear three ton prompt 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>.
Are you using a speaker phone please lift your handset before pressing any one moment for your first question.
Your first question comes from Kevin Grundy with Jefferies. Please go ahead.
Great. Thanks, Good morning, everyone and congrats on the strong results.
Thanks again to pick up.
Hey, Good morning, Tom Good morning, Jay I wanted to pick up on your outlook for the year and then shift the pricing of it if I could so first just with respect to the outlook, maybe just comment on your decision to maintain.
Your revenue and EBITDA guidance for the year. Despite the strong first quarter and what appears to be a solid start to the second.
Yes clearly.
Pleased with the first quarter.
Revenue growth EBITDA growth margin expansion so.
It's a rock solid beginning and we see that carrying into Q2.
But it's early.
So we'd like to get the next little bit under under our Windsor fleet will be fully make any decisions about where the guidance would go and I also think it's important to note that while we announced the exit of Russia, we're not changing our guidance to affect for the.
Short term headwind of $14 million 3 million in EBITDA. So we'll continue to deliver our guidance.
Despite that decision.
So that's where we sit but the business to your point is off to a terrific start with quite pleased with it.
And it has continued into April and I guess, we won't be the first couple of days of May.
Okay very good I think that makes sense.
And then just pivoting to pricing I think the comment was you took pricing in January and in March.
Just a couple of questions or a couple of areas, maybe you could touch on the magnitude of the price increase.
Relative to CPI, which is currently in the eight 5% area year over year observations on elasticity, so far seemingly so far so good although early at least with the first round given the results.
And then just broadly.
On the ability to take additional pricing.
To the inflationary environment worsen from here. So thanks for that guys I'll pass it on.
Yes, Thanks, Kevin I'll take a piece of that and then I'll flip it over to J S.
The best measure for US is our retention rate and we're seeing good stickiness on our customers.
Across award of direct and exchange business that.
86, 5% of that number correct.
Good growth versus prior year and that says that our investments in service.
Our ability to be 98, 5% SaaS on routes of delivery.
Which is the best place we've been in.
Good golly.
Before any variant, which frankly is very important to us that we're properly staffed so that we can deliver on our commitment to the customer and you are sticking with us.
And then in terms of if you look at our growth I guess the best indicator.
Indication is double digit revenue growth.
Both residential and b to be pretty much everywhere, we do business.
Which we think is a pretty solid sign that pricing is sticking.
Customers are sticky, which gives us confidence that.
We're in a good spot as we move forward J any color you want to add I think I talked a little bit on my prepared remarks, you look at North America.
Water direct exchange up 17% quarter of that 11% is related to price. So that will give you. The magnitude when you talk about the two price increases we have different levers to pull on our price increase so I would say earlier in the quarter, we took pricing on certain products later.
<unk> increased our delivery fee our ESP as we saw diesel prices continue to rise during the quarter. So.
Even though we took two tranches they were on different line items of our billing different times.
Okay very good guys. Thank you good luck.
Yeah, Thanks, guys I appreciate it.
Your next question comes from Andrea Teixeira with Jpmorgan. Please go ahead.
Hi, good morning, everyone and earthquake.
The success and congrats on the quarter.
My question is more related to how you were seeing price elasticity it looks like.
It's probably early to tell but wondering if you can parse out.
Marcia against with banks show and in that vein. If you are seeing.
If youre seeing anything as you as you point out like in the quarter.
To date <unk> had.
Very good improvement if you can kind of give us a little bit of a yes or no.
The difference between.
Coming back and some of the commercial clients so <unk>.
Again, I think so and what are you seeing their quarter today.
Yes.
Good morning by the way. Thank you I had a couple of questions embedded Darrin, let me take that.
Got it that you went to North America, our PDP businesses growing at a faster rate in terms of that rather than the residential both double digits.
And then if you went to Europe to about the same in terms of growth.
In excess of call. It mid single digit mid double digits in terms of growth. So we're quite pleased.
The pricing has gone through and remember our delivery and energy surcharges are generally pegged at a price of fuel.
So it covers us from from those.
Volatility in that area. Hence the reason that we took another initiative in March once we saw the price of oil spike at the beginning.
The Ukraine conflict.
And on different pricing keep in mind, our average customer Bill 50, $55, whether you're a small business or whether you are a residential so very similar.
The structure is very similar volume in consumption.
And the same type of billing structure. So we're taking pricing we're taking it across our entire customer base in North America are not just focused on residential our BDC and we are we see good volume in both the revenue and vote and good retention growing so so not seen any elasticity issues the pricing.
And I think one important point.
Our current staffing levels and route operations at 98, essentially fully staff.
Is a significant difference from where we were a year ago before delta.
Alright.
So I think we're in the best possible position any event anything comes forward that staff Dom ahead of it we have much better planning tools in place we've learned a ton from last year. So that gives us confidence that we can.
We continue to deliver our customers, which frankly enables our pricing.
Yes.
With pricing.
Alright.
Right. If I can just follow up a little bit on that quarter to date.
And Thats all alleging that you have a tough comp on an organic basis. I think you were up 12% last year total company.
Is that something you're trying to win your commentary about like tracking well in the quarter.
Is that higher than what you are.
Cheese was at 10% in the first quarter or.
Are we should be cognizant of what's happening I mean, the comparison is inorganic.
Yes, I think we're it's cycling as you looked at last year rock solid Q1 last year or so so so very good performance on a year over year basis.
Recycling a good performance in Q2 of a year ago.
So we like our current positioning, but I'm a third of the way through the quarter. So.
I don't want to get too far ahead of myself here.
We're confident.
We'll deliver against our commitments and we will see how it turns out but right now we're in a very good question.
Great. Thank you so much I'll pass it on basketball luck.
Thanks, Andy appreciate it.
Okay.
Our next question comes from Derek Lessard with TD Securities. Please go ahead.
Yes, good morning, everyone.
Echo where it can be.
Good morning, and congrats on the quarter just.
I was just going back to some of the EBITDA adjustments that you made in the quarter it looks like.
Big jump in integration expense, just curious if that was.
It's a bigger quarter in terms of tuck ins for you guys.
Yes go ahead.
I would say.
Youre really seeing the final type of severance costs related to the overall acquisitions larger acquisitions. We have done you are seeing some related to sip well over in Belgium, where we did complete that right at the end of the year, but I would say as we wrapped up our <unk>.
Synergy capture it's now that we're eliminating some subdual staffing and youre seeing the cost of that money for I would say, so we have a little bit more of that through the year, but I would say you're seeing the final costs associated with the larger acquisitions we've done.
Okay. Thanks for that Jay and I guess 111 more for me and it sounds like just wondering how you guys are thinking about the balance between rich.
The return to office and maybe more.
More permanent working from home schedules, but it sounds to me like you're agnostic either way.
That is correct.
So.
We took it on the chin as everybody knows when we went through the pandemic on our promotional business and we've benefited from work from home and residential good news is our <unk>.
As people have begun to work from home our residential business continues to grow.
Retention continues to improve.
We have that mid double digit growth in commercial in Europe , which is.
Real sign of the work from home and we're seeing similar if not better numbers in North America. So we're quite pleased of the current balance.
Between the channels as as the world.
Makes it last changes lets open to what the balance of work from home or work in the office will be so we think we're really well positioned our business today is roughly 10 times customer count 50 50.
That has a patent law water direct businesses.
Residential excuse me and the other half is commercial so we have good balance.
And we have good double digit growth.
So what we really like where we're at.
Okay.
Maybe just a follow up to that where are you in terms of the initiatives.
Europe to sort of.
Improve that mix.
So we had last year, we articulated good residential growth.
Continue to have good residential despite the war.
Good growth in our European business.
We're seeing continued growth in that residential business will continue to enhance our website we've.
We've opened a number of e-commerce shops, which is important because thats, where we will sell dispensers.
Which is the gateway to water services. So we're quite pleased with where we are.
We are making enhancement.
We refreshed our mobile App in North America, we will be extending that into Europe sometime in 2022, and we are consolidating and investing in new sites in Europe and a couple of those we rolled out in the last month or so.
So all of those components of the plan are coming together and we think we will over time continue to derisk.
And get better mix in our customer base in Europe .
Okay. Thanks for that and good luck for the rest of the year gentlemen.
Thanks, Eric I appreciate it.
Your next question comes from George <unk> with Scotiabank. Please go ahead.
Good morning, this is bombing calling on George's behalf congrats on the quarter.
Hey, good morning can you.
Yeah.
Can you talk a little bit about.
Like expectation going forward in Europe during the war and also how does the volume compares to pre pandemic level at the moment.
Hi.
Just the first half of that question would you mind repeating it faded a little bit.
Yes.
Volumes in Europe .
Given the uncertainties.
Going forward, yes.
Yes, okay. So.
We don't have any direct business in Ukraine.
We do have good sized businesses that as everyone is aware of Poland, and Hungary, and those businesses are performing quite nicely.
Despite of.
The disruption so we're pleased with with how those businesses perform if you look at it over a two year basis back to pre pandemic.
Revenue was growing.
Higher slab prices two years ago.
Our commercial business in Europe is still a little <unk> a little.
But aggregate is that a steady increase offset by our stated objective of growing the residential business. So that's coming to fruition the way we would've hoped.
So we're quite pleased with that but in aggregate it is happening in Europe .
We also benefit from the small work from home and that's why you see our commercial business is beginning to perform better we expect that frankly will continue.
I mean, you look at you are seeing more and more countries return to work right now over in Europe .
That's how we are having mid teens growth in our commercial business over in Europe , and if you look at versus two years ago I would say just that part of the commercial looses Europe were down mid single digits only at this point in time, we're at the worst part of it.
We're down 40%. So we are seeing we're seeing a very good return for that part of the business as things start to normalize over in Europe .
Also on the last call you mentioned right sizing our purchases in Europe , you are raising floor for less programs to end. There can you talk about the opportunity there as well.
Well, we finished some of our right sizing in 2021, Jay referenced there's some Emma.
M&A work desk that we chatted about with Derik that we're finalizing so we think we're largely in the structure we won largely.
And really we are now beginning to focus on some investments in SG&A, obviously to focus on growth in things like the residential business and the appropriate service levels.
This returns to growth in Europe after.
Two challenging year and.
And the only other thing you might be referring to is we are centralizing our back office function.
To Barcelona in Europe , because historically this has been a very decentralized back office business over in Europe .
We're making very good progress we haven't stand it up and we're well along the way up phase why don't we have a second phase to some smaller countries from a movement later on this year, but the back shop consolidation Europe has moved along and progressing very well.
Very helpful guys. Thanks.
Thank you for your question My apologies. Your next question comes from Daniel Moore with CJS Securities. Please go ahead.
Good morning. Thank you. Thank you good morning, Tom Good morning, Jay.
Price cost coverage was obviously really good in the quarter. Despite significant inflationary pressures was there any measurable impacts on EBITDA in the quarter, just given the lag in timing between inflation and when you took price.
Right.
I think we've exhibited in the past that we're pretty nimble.
If you went back to the beginning of the pandemic.
The cost structure, we reacted to pricing so that second price increase in March.
Was.
Pretty close to when the if that's happened but.
There might've been a little bit of a lag there and then certainly as we mentioned in our prepared comments.
To get full realization of those efforts in Q2.
On a year over year that deliveries will be higher obviously.
I think net net net you look at our pricing actions. They were made to offset cost increases. So net net net I wouldn't expect that incremental.
Costs are pricing to benefit our bottom line, it's really to offset the cost pressures we've seen.
Got it very helpful.
And then maybe just talk about working capital for the expectations for the remainder of the year and how it relates to free cash flow.
What your thoughts are there.
If you look at our free cash flow statement, you will see we do have elevated inventory levels that we're carrying right now and that was the decision we made to make sure we bought early.
Stocked up on dispensers, we want to make sure. We are pushing just sensor sales side as our razors. So we've made that knowing decision to buy forward. Some of the inventory we're going to buy later on in the year and I would I would expect that to continue through the year, we want to make sure we're going to push dispenser sales part this year I wanted to make sure we have the inventory in stock.
So I would say that's the one pressure you will see if you look at our statement of cash burn and I would see where bleed it down at the end of the year, but throughout the year, we're going to make sure. We have we have to expense because thats a key focus to really push the rates are so we can sell more razor blades at the same dose.
It makes sense.
Lastly, as it looked like M&A activity was still a little light I know you reiterated your target.
Guidance for color on the cadence of potential tuck ins as we look to the rest of the year. Thanks.
Our target remains $40 million to $60 million, we did on number of.
Executed number at the end of last year.
So we always wanted to digest those right.
We don't just show up in <unk> that we got a little bit of work to do.
So we're focused on the ones we did at the end of the year, but we are confident that we have a solid pipeline will get between 40 and $60 million as the year progresses.
For sure.
Very good I appreciate the color.
Thanks, Dan appreciate it.
Your next question comes from Steve Powers with Deutsche Bank. Please go ahead.
Hey, thanks.
Hey, I was hoping if you could just maybe expand on any challenges or maybe relative success stories in this environment just around associate recruitment.
Tension.
And wage inflation on top of all the other cost inflation, we've spoken about just how youre thinking about those dynamics.
Labor dynamics going forward over the balance of over the balance of the year. Thank you.
We spent.
Better part of let's call it.
The arrival of the Delta the variance through the end of the year very focused on the associate experience part of our strategic plan.
That is focused on one retention.
So that we properly onboard people. So we get them trained properly and then they can get into position to take care of our customers.
We've made good progress because we reference we're at 98, 5% or 100% staffed on routes.
And we're generally staff across the company doesn't mean every town in the market, but we are pretty well staffed and very focus yes. It's been wage inflation you called out as one of the one of the outcomes and part of our inflation, we have adjusted wages to ensure we attract the right people and now that we.
Our staff are challenges and bulk guests I don't want to quote a challenge it keep the ones. We got so that we can continue to make progress on growing the top of the business and properly servicing the customers.
Ultimately closer to the bottom line.
I would say one.
Good thing we implemented as we got into the end of last year and roll into this year is for Rsr's. Our drivers we've implemented a predictive hiring model now that we're not waiting for the seats to the MTA anymore to hire the person. We're looking at historic trends modeling out where we see the openings will come up based on those trends and we are hiring.
Ahead of it so that's really what's given us the ability to get our all of our positions full at this point in time.
Really well executed predictive hiring model.
Alright, Thank you very much.
Thanks, Steve.
Your next question comes from John <unk> with CIBC. Please go ahead.
Good morning, John and good morning, everyone.
Yeah.
Good morning.
If I can ask one more on.
Good morning, if I can ask one more on pricing elasticity.
Did you see any change in retention rates or customer sign up on the March price increase versus the January price increase and is there any divergence by channel, whether it's residential b to b or even e-commerce.
We're not seeing any meaningful changes.
Customer sign ups or retention cross lets call. It inside what are direct so we're quite pleased with that.
Lee will follow that through our call center, but we're pleased with.
Where we are from a retention perspective, as we move from Q1 to Q2.
Which is for US one of the best indicators. So we're not seeing a flurry of calls about delivery fee, we're not seeing a flurry of.
Losses of customers, we're not seeing that.
The ability to find people signing up.
So we think that we're in a pretty good spot as it relates to that and frankly. It is also an outcome of the investments. We've made on these associate experience and retention is an outcome of enhancements. We've made on digital it's going to be a benefit of the mobile apps.
Things, we do are enhancing the customer experience.
And to Jay's earlier point, if we do all of those things better.
And we do them right.
Mental five or six bucks, a month or bill.
It's not closing people asleep.
And of course, there's other benefits to us in terms of tailwind is about healthy hydration and People's desire for high quality drinking water and then we give it to you anyway you want.
Okay. That's helpful. Thanks, and then my follow up is on the organic growth you listed 11, 5% year over year I'm not sure. If you Havent handy, but in case you do can you share the pro forma number from Q1 last year. It was it was noisy versus Q1, 'twenty I get around minus seven are minus eight I just want.
See if you have that available.
Alright.
Sorry, John I can follow up with you on that one I don't have last year's number handy right now is that what you're asking but slipped Q1 last year's number was.
Yes, that's fine we can follow up later.
Yes that was a full pandemic.
Exactly yes.
I know we were we were lapping.
Q1, 2019 with no pandemic could we were still well in the pandemic of Q1, so a negative number does sound right, but off the top of my head John I don't have that one handy, but we can follow up with you on that.
Okay understood. That's all for me thanks very much.
Thanks, John .
Your next question comes from Derek <unk> with Canaccord Genuity. Please go ahead.
Yeah, Hi, good morning, everybody.
Can I have just one or two questions. One can you sort of rank order. Your your business lines by margin I mean, it kind of sounds like based on the commentary on this call and then as well in the press release that the water direct tends to carry a higher margin than the other business lines.
And Youre talking EBITDA margin right.
Alright, Eric our gross.
But if you can walk it down to EBITDA that'd be that'd be better.
Yet even as a little bit.
But it is a little bit, but let's start with gross margin in our work at that I'll work it down from there because gross margins very high.
<unk>.
If you look at water direct and let's exclude depreciation because of that.
That's how I like to look at it.
Yes, you are in the high 70%.
Touching 80 at some quarters on our water direct so definitely.
Strong margin when you compare it versus our other lines.
They're much smaller lines, you look at our filtration business.
We're not manufacturing or selling a project. So it all products. So it also has good gross margin, but down in SG&A is where we have our routes.
Send it on that depreciation because were amortized unit so.
We have a very good gross margin.
Any lines of our businesses the retail business that we've talked about our exiting very low gross margin our coffee business thats out in other since we're selling coffee again, a lower margin business, but very happy with our water directors. It does run.
That high 70% gross margin.
And then the one standout as our dispenser business.
And the reserve as we wanted to get the.
That dispenser in consumers' hands.
So that we can benefit from the sales of water products, whether it's in what a direct quarter exchange quarter retail.
So that would be the one outlier in terms of growth.
And frankly, EBITDA, because we want to sell it and get them in your home.
The lowest possible price because they will 45% of them have got uncomfortable ward of direct 30% go to exchange and 25% of go to a retail business.
And thats, the proverbial Holy Grail right ratio.
Yes, Okay that makes sense and one more sorry.
Little late to the call just wondering if you have.
Have any update or perhaps you already gave it just on the tariff reimbursement that you mentioned last quarter I believe it was around $8 million on the capex side and $5 million on the Cogs side.
Yes.
We don't forecast it so.
It's in the hands of others. So.
It comes it comes but it's nowhere in any of our current guidance or forecasted performance.
We will let the U S government make their ultimate decision on where that turns out.
Okay got it thank you very much.
Thanks, Eric Thanks, Derek appreciate it.
Mr. <unk> there are no further questions at this time. Please proceed.
Thank you Pam.
<unk> first 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.