Q3 2022 Primo Water Corp Earnings Call
[music].
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's third quarter 2022 earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question. Please press star followed by two thank you.
Now I'd like to turn the conference call over to Mr. John <unk>, Vice President of Investor Relations. Please go ahead.
Welcome to Primo Water Corporation third 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 the call is being webcast live on <unk> website at Www Dot Primo water Corp, Dot com and will be available for 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 Primo water.
<unk> Dot com.
Hi, I'm accompanied by Tom Harrington pre most chief Executive Officer, and Jay Wells pretty most chief financial Officer.
As a part of this conference call. We have included a deck online at Www Dot Primo water for Dot com.
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 three most strategic initiatives then Jay will review our segment level performance and we'll discuss our third quarter performance in greater detail and offer our outlook on the fourth quarter and full year 2022 before handing the call back.
Provides a long term view of Q&A.
With that I will now turn the call over to Tom.
Thank you John and good morning, everyone.
I am pleased with the results of the quarter.
Thankful to all <unk> associates for their ongoing contribution to the company's success.
In particular, I'd like to call out Jay Wells, our CFO , who announced his retirement effective April <unk>.
Hi, Thanks, Jay for his dedication and valuable contributions during his tenure at Primo.
<unk> has a strong finance team and Jay has played a significant role in helping drive financial and operational improvements.
Deeply appreciative that Jay will remain with Braemar until his retirement date to help facilitate a smooth leadership transition.
Jim all the best in his retirement, thank you Jay.
We continue to execute our differentiated what are your way platform and despite near record inflation, we delivered strong organic revenue and adjusted EBITDA growth in the third quarter.
Our investment thesis remains intact with a portfolio of leading water solutions across multiple channels and geographies.
John consumer tailwind and a recession resistant revenue base.
The continued investment in our digital platforms increased connectivity of dispenser sales to our water solutions and the ongoing optimization of our route based operations provide a solid foundation to achieve our long term growth targets.
In the third quarter, we delivered strong revenue and adjusted EBITDA growth.
As a result, we are increasing our full year 2022 guidance on revenue to be between two two and $2 billion to $4 billion with normalized revenue growth of 13%.
14%.
Organic revenue growth of 14%, 15% and adjusted EBITDA to be between 415 $425 million.
Third quarter consolidated revenue increased 6% to $585 million.
Organic revenue growth was 15%.
Excluding the impact of foreign exchange and the exit of the North America single use bottled water business revenue grew 18% driven by continued consumer demand.
Increased dispenser sell through.
Ongoing M&A tuck in acquisitions improve service metrics increase revenue per rep, and increased <unk> or on time and in full delivery execution.
Continued volume growth in water direct and exchanged any stabilized customer base in refill as well as improved customer experience, including benefits from our updated mobile app.
Adjusted EBITDA in the third quarter increased 10% to $117 million.
Supported by higher volume increased pricing and effective expense management that offset the impact of inflation.
Adjusted EBITDA margin for the quarter was 20%.
80 basis points higher than the prior year.
In the Global award a direct business.
Customer base increased to approximately $2 3 million for the third quarter.
This was a three 6% increase compared to the prior year through a combination of organic customer additions.
Estimate based acquisitions to our tuck in strategy, while customer retention remained consistent with prior quarters.
Our water direct and exchange business continues to experience strong topline momentum with 17% organic revenue growth to improve customer satisfaction enabled by increased delivery frequency and higher in stock levels.
We benefited from increased points of distribution and more to exchange late in Q3.
And improve water exchange connectivity with dispenser.
Our water refill and filtration business continues to show improved performance organic revenue increased by 11% in the quarter as a result of price increases announced on machine improved machine uptime and improve service levels and water filtration.
Relative to price elasticity customer trends remain positive.
Customer feedback related to the higher pricing has been minimal as we track this through a combination of metrics, including call center activity customer retention and customer growth.
Our water and dispenser business continued to improve through the third quarter as well with revenue up 47% with retailers sell through volume of more than 270000 dispensers.
We continue to see volume growth from increased promotional activity increase.
Increased product distribution and penetration across our existing customer base we.
We include coupons, but primo water with the sale of our water dispensers to drive connectivity of dispenser sales toward our services, which is a key driver of future organic growth.
On the topic of dispenser, United States Customs and border protection recently, reclassified hot and cold water dispensers and water filtration dispenser.
Effective November six 2022.
Sensors and filtration units are no longer subject to a 25% tariff instead, a two 7% tax.
This reduction applies to the vast majority of Primo's imports and will allow us to adjust the average selling price of dispenser that we sell to our retail and e-commerce customers.
As a result of the reduction in the cost of goods and subsequent price reduction, we expect to accelerate dispenser sell tobacco, which enables growth and more of that connectivity.
The cost of goods reduction will be realized in 2023 as new inventory flows through the supply chain.
We will benefit from a reduction in capex associated with awarded the expenses that we rented customers in the award of direct and water filtration business.
From a digital perspective, we are pleased with our progress from our investments in our mobile App My water plus which is currently rated at $4 nine on both the iOS and Android platforms are a direct result of our most recent updates.
Our global online reputation score has increased 63% since the end of 2021.
And our Google My business score has increased 46%.
These ratings are a significant improvement from prior quarters and build our confidence on our digital and CX programs.
We will continue to invest to provide a best in class digital solution for our customers.
And since we have re platform most of our digital E Commerce website.
We will now turn our attention to the redesign of our website <unk> dot com to a combination of internal and external resources to further enhance the effectiveness of this site.
Please review slides nine and 10 in the supplemental deck for more specifics.
During 2022 like many others, we have faced significant cost inflation across labor fuel freight and other input costs, which have been fully offset by.
Our pricing actions through Q3.
The Primo team has done an outstanding job offsetting these increases while continuing to improve the customer experience.
As discussed last quarter, the automated route optimization tool.
In North America sequences routes in the most efficient path possible.
Which maximizes the time route sales representatives will spend with customers enhances commission, earning time on route.
Unlocks route capacity to handle future organic growth and minimizing the time spent behind the wheel.
<unk> remains a key operating initiatives.
In September for example, we operated 23 more routes per day compared to August with no increase in total miles driven a direct result of the team's efforts implementing the tool.
In addition, our year to date revenue per stop in North America has increased nearly 22% compared to last year.
These efforts have been important parcel to offset cost increases, while improving operational efficiency and the customer experience and enabled us to increase delivery frequency in support of our efforts to grow our water exchange business.
As we look to the future we are in the process of selecting third party consultants to support our growth algorithm and strengthen operating efficiencies across our route based platforms.
For the full year 2022 revenue is projected to increase to between $2 two two and 224 billion.
With normalized revenue growth of 13% to 14% adjusted.
Adjusted for the exit of the single use bottled water retail business in North America.
We expect full year 2022, adjusted EBITDA to be between $1 15 and $425 million.
We were awarded a five year contract to meet Costco's exclusive service provider for bottled water delivery services direct to consumer and business members. This increased activity and our growth in water exchange locations supports our 2020 for organic growth outlook.
We have a strong balance sheet.
Compelling margin profile and a path we are confident in our long term top and bottom line growth.
We are maintaining our revenue outlook for 2024 of high single digit annual organic revenue growth and we are.
Creasing, our 2024, our adjusted EBITDA outlook to approximately $530 million with adjusted EBITDA margins of approximately 21%.
Based on our performance and delivering operating digital and customer improvements, we are reducing our incremental capital investments from $150 million from 2022 through 2000 $24 million to $110 million.
<unk>. This is a reduction from $50 million in 2023, and 2024 to approximately $30 million in 2023 and 2024.
This decision is based upon our confidence in run rate performance and enables us to reduce the investment dollars and still deliver the 2020 for outlook.
Finally, I will reiterate that our strategy is working well.
We're confident in our ability to deliver on our 2022 guidance and achieve our long term 2020 outlook.
I'll now turn the call over to our CFO Jay Wells to review, our third quarter financial results in greater detail.
Thank you Tom and good morning, everyone.
Starting with our third quarter results consolidated revenue increased 6% to $585 million.
Compared to $551 million Consol.
Consolidated organic revenue, which excludes the impact of foreign exchange and adjusted for the exit of the single use bottled water resale business in North America increased 15% in the quarter.
Adjusted EBIT grew 10% to $117 million.
Adding the impact of foreign exchange adjusted EBITDA grew 14%, which represents 80 basis points of margin expansion.
As Tom discussed the effect of price increases volume growth and strong demand growth profitability.
During the quarter, we maintained targeted staffing levels and have more than 98%. Our route delivery position sales. We are confident that the incremental investments in our people and the use of our predictive staffing models will enable us to deliver our full year 2022 targets and beyond.
Turning to our segment level performance for the quarter North America revenue increased 8%.
Percent to $407 million.
Compared to $413 million.
Organic revenue increased 18%.
The organic increase was driven by 17% organic growth and water direct and water exchange, which included 11% price mix and 6% volume growth.
Adjusted EBITDA in North America increased 16% to $102 million.
In our Europe segment revenue increased by 6% to $71 million.
Organic revenue increased 15%, excluding the impact of foreign exchange driven by our water direct business with growth in our residential customer base and <unk> volume as Europeans returned to the office.
Adjusted EBITDA in the Europe segment increased 8% to $16 million, excluding the impact of foreign exchange adjusted EBIT increased by 29%.
Turning to our Q4 and full year outlook based.
Based on the information we have available to us as of today, we expect consolidated revenue from continuing operations for the fourth quarter to be between $540 million and $560 million.
And that our fourth quarter adjusted EBITDA will be in the range of $102 million to $112 million.
For the full year 2022 revenue is projected to be a little higher than previously forecast to between $2 2 billion.
And $2 billion to $4 billion.
With normalized revenue growth of 13% to 14% adjusted for the exit of a single use bottle water retail business in North America.
We still expect full year 2022, adjusted EBITDA to be between $415 million and $425 million.
We expect around $10 million of cash taxes $60 million of interest expense as well as capital expenditures of approximately $200 million.
Our 2022 performance reinforces our confidence in our ability to deliver sustained organic revenue growth <unk>.
Supporting the organic growth outlook, our recent gains and new points of distribution in our exchange business geographic.
Expansion of our Costco in store events, resulting in a substantial.
Increase in the number of events in North America, and our water direct business as.
As well as the improved performance of our refill business. These games are results of our commitment to improve the customer experience through increased service levels as well as investment in the digital experience.
We are maintaining our revenue outlook for 2024 up high single digit annual organic revenue growth and we are increasing our 2024 adjusted EBITDA outlook to approximately $530 million.
During 2022 like many others, we faced significant cost inflation in labor fuel freight and other costs and have successfully offset this impact through our pricing and efficiency initiatives.
While we have successfully offset these costs with price increases to eliminate the detrimental effects on inflation adjusted EBITDA margin was impacted as the increased revenue from this pricing is offset by increased costs.
Our 2024 adjusted EBITDA margin is now expected to be approximately 21% when accounting for the effect of our incremental pricing that has been dollar for dollar offset by inflation.
We previously shared our intent to invest an incremental $150 million in capex to support organic revenue growth and the expansion of our adjusted EBITDA March.
We have decided that during 2023 and 2024, we will reduce these incremental investments from $50 million per year to approximately $30 million per year.
Returning to our normalized total capex spend of approximately 7% of revenue in 2025.
Tom mentioned this decision is based upon our confidence and run rate performance that enables us to reduce the investment dollars and still deliver the 2024 outlooks.
As we mentioned last quarter, we are exploring an opportunity to sell a few parcels of real estate in California that has seen significant appreciation in value.
Interest levels remain high and we are working with interested parties to further the process.
In addition, we remain focused on reducing our leverage ratio to below three times in 2023 and to less than two five times by the end of 2024.
As a reminder, our current debt maturities are in 2027, and 2028 and we therefore have no pressure to refinance any of our debt at this time.
And are pleased with the current debt structure.
Our 2024 outlook supports our planned multiyear dividend step up that will return an incremental $36 million to shareholders through 2024, as well as the $100 million opportunistic share repurchase program announced last quarter.
This is on top of our previously announced plans for incremental investments, which will topline and bottomline growth.
On August nine 2022, our board of directors approved $100 million opportunistic share repurchase program, which commenced on August 15th.
During the quarter, we repurchased approximately 800000 shares for approximately $11 million.
The repurchase program reflects the board's confidence in our future performance and our continued long term cash flow generation and demonstrates our ongoing commitment to providing fundamental value for our shareholders.
Yesterday, our board of directors authorized a quarterly dividend of seven per common share our growth outlook can fund our growth as well as an increase in our annual dividend.
As a reminder, our path to our multi year dividend step up includes an increase in our quarterly dividend per share by <unk> in 2020 to another in 2023 and another in 2024.
The increase in the dividend, we'll return over $6 million incremental dollars to shareholders in 2022 and $36 million by the end of 2024.
The remaining area of capital deployment includes our tuck in M&A for 2022, we expect to be towards the lower end of our target of $40 million to $60 million I will now turn the call back to Tom. Thanks.
Thanks Jay.
We're pleased with our year to date results and are excited about our future.
We think the Primo water investment thesis is compelling.
Are the only public pure play consumer water platform in national and local brands in both North America and Europe .
<unk> bulk recession resistant revenue base, where we.
Meet consumers' work at home and in stores and attractive high single digit long term annual organic growth targets. We're dispenser sales connect one of our water services, which is a key driver of future organic growth.
With a continued emphasis on achieving our 2030 water conservation goals as part of our broader ESG program.
Supported by multiple favorable tailwind such as increased consumer attention to health and wellness and aging water infrastructure.
I want to reiterate we are a fundamentally stronger and more streamlined business than ever before we.
We have made significant strides over the past couple of years to focus on our core competency as a pure play water company.
It is important to understand that we are a different company today.
Results of our strategic decision to exit the soft trading coffee business and to acquire the legacy <unk> business.
As a result, we have a healthy balance sheet, a compelling long term growth outlook and an attractive margin profile that has risen to 20.
In the latest quarter.
Although there is seasonality to adjusted EBITDA margins on a quarterly basis, we recognize this achievement as a significant milestone on our path to our 2024 adjusted EBITDA margin target.
Our long term organic revenue growth outlook is compelling and.
And we remain confident in our outlook for 2024, as we forecast high single digit annual organic revenue growth.
An updated 2020 outlook to reflect increase in adjusted EBITDA to approximately $530 million based on our strong performance in 2022.
Adjusted EBITDA margins of approximately 21%.
Adjusted EPS of $1 10 to $1 20 per share.
Net leverage of less than two five times and ROIC.
Greater than 12%.
Looking ahead as we continue hitting our differentiated woody away platform and focusing on a few key.
Priority.
We will leverage our pure play water model to drive normalized revenue of $540 million to $560 million in the fourth quarter.
We will deliver organic revenue growth in the range of 14% to 15%.
We will continue to execute our razor razor blade model with growth in the number of dispenser sold driving top line and earnings growth to award a connectivity.
The Primo team continues to deliver results.
Once again I'd like to thank the Primo water associates across the business for their tireless efforts to serve our customers with that I will turn the call back over to John for Q&A.
Thanks, Tom during the Q&A to ensure we can hear from as many of you as possible. We would ask for a limit of one question and one follow up per person.
Thank you operator, please open the line for questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by one on your Touchtone phone, you'll hear three ton problem acknowledging your request and Youre 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>.
I think a speaker phone please lift your handset before pressing any one moment for your first question.
Your first question comes from Nik Modi with RBC capital markets. Please go ahead.
Thank you good morning, everyone.
Hey, congrats on the retirement.
Thank you. Thank you Sir good morning, Nick.
Good morning, Tom.
Maybe if you could just provide a little bit more context on the announcements regarding Costco, obviously pretty.
Pretty significant opportunity I would I would suppose so maybe any additional color you would provide would be helpful.
Yeah, obviously kudos to the to our sales team who.
Successfully work with Costco to extend what's been a long standing relationship and to the our teammates in the frontline that are providing the level of service to give us the confidence in awarding us. This.
Relationship that.
Runs through the end of 2027.
The best there is two parts here that is super important.
Support saw long term growth outlook.
Incremental new customers that will gain from this relationship helps support the high single digit growth story and at the same time. It also should will support us leverage our route and customer density, which enhances our ability to get to that 21% EBITDA margin as those customer.
Those come over and on top of our existing customer base. So it's.
It's a double once a actually a homerun, but think of as the double because it provides us the benefit.
Both organic customer growth, which will drive volume over the long haul and gives us leverage through the income statement because of route density on our route infrastructure. The other piece here that's that.
That's beneficial is and we haven't shared this previously but we are also the exclusive in store dispenser provider for cost Scott.
So if you think about what we referred to as connected dispenser I now have the water service through our in store events I also sell the dispensers. So that we really can connect that Costco member to one of our services by doing both.
Hello, dispenser offer that service.
So it's a pretty significant gain.
For 2023 and hopefully beyond.
Excellent.
Did reference, which is which is also a taiwan because it wasn't a costco question.
But I referenced in.
In our script, we did gain on.
A nice chunk of new exchange business.
With incremental locations in existing customer and that's important because it does two things. It supports the organic growth we will see accelerated growth in exchange as we move through the next couple of years, but it also is will benefit our route density which helps us achieve the two.
24 target out.
About 21% adjusted EBITDA margin.
Yes.
Very very helpful color and comment I'm sure someone thinking about right now, but obviously historically in downturns or at least the last downturn.
These particular businesses came under some duress and can you just talk about how this time is different and whats changed in the operating model today versus what youre dealing with in the last economic downturn across this business.
Yes, I think theres a couple of market conditions that are different Nick.
And certainly the benefit of the management team that operated in 2008, nine and 10.
Both here and in Europe is helpful.
I think our experience in execution during a pandemic one way.
Eliminated 80% to 20% of the SG&A cost.
Speaks to the variable nature of our business so that in the event of <unk>.
Downturn, we have the muscle memory.
To flex the structure appropriately to match whatever it may happen for the topline.
But the other key difference for us.
What is around the connected dispenser and the benefit of being a pure play water, which we were not in the first go around.
<unk> sell dispensers.
Consumers can pick a water service in all water services span the socioeconomic scale. So if you think about typical water direct customer theyre higher income.
Likely to weather a storm better and then we have the refill business, which we did not have in 2007, and 2008, which is a lower cost higher value solution for consumers, who in my mind are going to absolutely.
<unk> to high quality drinking water those are real tailwind in a recession or not but we give people optionality about in any event. They feel pressure you could get at that exchange, which is a little bit lower priced or better value than more direct you forego the benefit of my guys and gals go into your door or you can pull it up yourself that real value at <unk>.
So we think it really positions us to be.
<unk> resistant for sure through this and I think frankly Q3 performance as indication of how resented how resistant we are today.
Excellent. Thank you so much I'll pass along.
Thanks, Nick I appreciate it.
Your next question comes from Derek Lessard with TD Securities. Please go ahead.
Yeah, good morning, everybody.
And I Echo the congratulations to Joe on your well deserved retirement.
Good morning, good morning, Derek.
All right Tom.
Just maybe if I can hit on.
Start on the margin.
Performance was strong margin performance considering.
The inflationary cost pressures. So just a couple of questions. I was wondering if you have a sense of the impact of both.
The items on the margin and I guess going forward should we assume 20% as your new base level.
I'll take the second question first and then I'll give the first part of your question to Jay.
I think the way to look at the 20% is that at all.
Our journey to approximately 21% this is des.
Good indication that we have a clear line of sight and execution to get there. What you do have to understand is there is some seasonality to the EBITDA margin by quarter.
So I'd say, it's the first important milestone is at least as I recall the highest we've been at.
And that it's indicative of where we'll get to it doesn't mean that Q1 will be theyre not suggest that's not a guidance on that but there will be variations on quarter on our way to that consistent 21%.
And on the margin you look at the first three quarters of the year, we said that we have covered over $65 million in inflation with pricing.
If you annualize that you get above $80 million.
If you look at the math purely increasing the denominator by 80, but not increasing the numerator EBITDA.
That's what got us from 'twenty, one to 'twenty two so basically the mid point.
21, and a half to approximately 20, so that $80 million of pricing that was dollar for dollar offset inflation was probably right around 50 bps of EBIT margin.
Okay. That's super helpful. On the color one one last one for me is.
The FTC had a bit of an ominous tone last week with how you reported the revenue from exiting the single use retail goods.
Curious, if you're still able to maybe give details or some color around what your true core growth was excluding the access.
Yes.
We did get a comment from the FCC and we did have to change how we reported if you look at the footnote underneath the table.
In the press release, we do provide the detail that you can do the math based on that but then also in our prepared remarks.
We did talk about.
The numbers excluding the.
The North America single use bottled water business. So so hopefully between the tables or if you want to listen to the recording again, our look at the transcript we talk about it excluding them you can do the math looking at the table in the press release, but that was purely in response to the comment Jay can correct me, but.
I referenced in his script, 18% revenue growth, excluding FX and excluding the impact of single use retail.
Okay. That's helpful. Thank you.
Yes.
We did what we can basically based on the comment yes.
Yes.
Yeah, absolutely thanks, gentlemen.
Thanks, Eric.
Your next question comes from Andrew <unk> with Jpmorgan. Please go ahead.
Thank you good morning, everyone and extending my congrats as well to say thank you for all the help <unk>.
So I have a question in a more strategic one and then.
Kind of a follow up on on the guide for 'twenty four so first on the exchanges with few perhaps talking about demand trends in these businesses.
Through the quarter at the exit as well.
Just wondering if youre seeing.
Finally, this more price conscious consumers trade to these solutions, which obviously have a better value for them instead of buying case pack of water.
And in that sense can you actually use more marketing dollars to to communicate to them does value proposition.
I think you had mentioned before that you are beginning to see some trends improvement with better uptime.
I think that sponsors.
And there is also additional locations coming online on the part of the retailer. So if you can talk to us like a little bit of how you're expecting that to be embedded in your guidance for the fourth quarter and perhaps into next year and then the clarification that will come back.
Thanks, Andrea and good morning.
We're pleased with the performance of the.
Ill call the various hydration solutions, we saw water direct business what are their ex less exchanged continues.
We are attracting new customers. They are starting the service they impact us we have the ability to put both price and we have.
Very good volume growth.
I think the volume growth for Q3 was something like 6%.
So that's pretty indicative that business is in pretty good shape it will.
Main that way go forward for a couple of reasons, one the incremental benefit of the new Costco relationship, which will bring water direct customers.
The tailwind that naturally support our business and exchange the growth of locations than exchange, which just started to onboard at the end of Q3, so that will give us a positive tailwind.
<unk> expenses were up 47%. Most importantly, 270000 sold at retail in the quarter those customers, who bought a dispenser will come to one of our services could be water direct could be water exchange could be ported refill.
And then in the quarter, we've had the best quarter. We've had since we've owned legacy <unk> with 11% volume growth some water refill and exchange.
Which is a function of a little bit of price.
A lot more service.
Don't know how many consumers are shifting there.
And from a marketing prospect.
Perspective, we've got some work to do about refining the offers we put inside the dispenser that work is in process.
Is a very effective marketing tool to give new dispenser customers incentives to start one of our services.
And we're happy that they start H as we think about moving into.
If there is a recession.
That will hopefully have the visibility to see where the customers start and then make sure that we're very clear about the optionality.
Based on the value equation for each solution.
And on that I. Thank you.
Your business has proven to be more recession proof and I guess it would be helpful. If you can share.
Some of the data back in the days.
Of the GSE.
If that was the case and how it behaved.
And then my follow up question on that.
More on the data like your your guidance the $5 million bump that you got in your guidance that related to the tax.
To the tax rebates are going to have.
Yes, so two questions I'll take the first I'll give Jay the second if I go back.
2007 2008.
Things were a little bit different so you had the mortgage prices.
Right, which has did have an impact on residential we don't believe that same event is going to occur right.
Impacted us in places like California, Arizona, and Nevada, Florida, where there was a bigger impact on our mortgage mortgage prices. We as a company also took actions to better manage.
How much credit a customer could have we've continued that forward so that learning from those seven or eight is embedded in our business model. So we won't have to face that again, then I think importantly on page 20 in the supplemental deck gives you will look at the growth of bottled water category overall.
A multitude of events and the takeaway from that page is a resilient with the capital or frankly, so that this business manages to continue to grow and recover.
Different today is there is a real tailwind for us about the shift of healthy hydration. So even in a recession people are going to care about what they drink don't want their family trends.
And people care more today about water quality infrastructure than they did before.
So I think that further supports our ability to be recession proof based upon these these types of changes from 15 years ago.
And then I'll give the tariff question.
Yes.
If you look at the tariffs very good work starts from the 25% down to $2 seven it's going to take a bit for us to move the inventory through into next year.
And keep in mind, when you look at the tariff and how we buy dispensers I'd say half as capex, because the ramp to our water direct customers and about half are in cost of goods sold because thats what were selling at retail.
When you look at the reduction, but we're selling at retail.
Our goal is to lower average selling price because our goal is basically to sell.
Coolers at no profit and then have connectivity to a much higher margin water services.
And therefore, accelerating dispenser sales and water connectivity. So if you look at pre tariffs the opening price point or an introductory cooler was just below $100. So that's really the sweet point.
For coolers.
It is now a 125 to 130. So our goal is to as Ocean freight has gone down and it has gone down closer to pre pandemic levels when.
When we worked through our inventory, we will get to the lower tariff rates will be able to get that back to that price point add promotions sell even more dispensers bring more consumers into our products and then have increased connectivity to our our three highly profitable water services.
Okay.
So.
Yes.
If somebody had asked.
Where are we.
Are we taking the extra $5 million going from the 525 to the $5 30, and 2024 is that the tariff benefit the answer is no because any P&L benefit is going to be given back to consumer yes, yes, we invested in growth yes.
The costs are Capex, yes that will help us with Capex next year as we work through the Detroit, but for for the P&L benefit that's much more we're performing ahead of our plans for this year and it's flowing it through to the to the guidance in 2024.
Okay, That's fair I'll pass it on thank you.
Thanks Andrea.
Your next question comes from Dan Moore with CJS Securities. Please go ahead.
Hi, good morning.
For Dan Dan.
Okay.
So if you go to Howard.
Starting with I think you mentioned about $85 million of annual.
Annualized price increases if you kind of.
Look at the annualized number in.
I think you also said it was dollar for dollar just recouping the costs.
How much of that is.
Actual price versus surcharges that you ultimately could give back in do you have any commentary on sort of the.
The more recent.
Pull back or what Youre seeing in terms of a more recent pullback and.
Your some of your input costs.
On.
The.
Incremental let me just go back to $85 million you referenced was was the cost inflation not the pricing right and we did offset that $85 million.
Our our our current fee structure has only one very small component.
Thats tied directly to on highway diesel Thats, our energy surcharge. So so that one will go up and down with the price of diesel.
And it's on a 30 day lag and then we pass it up or down it will go down but it is a very small component.
The construct if you will importantly diesel actually has been the most challenging of fuel prices and terms.
Pull back from its high so that has not moved than the last time I read it was at a record spread unleaded and diesel.
Our delivery fees are related to a multitude of input costs and the amount and the timing of how it effect that is 100% at our discretion.
So there is no direct corollary for that.
So hopefully I think I've answered answer that piece in it I think the other part of them or how much was volume and how much were price into our fees I wanted to say it was 11% related to pricing activities, which would include fees and 6% volume growth that drives the overall growth in North America.
Just to give you some color about the construct there so theres lots of volume, which is important because it's not just price and offset inflation. We're also seeing organic volume growth.
Which is one of the key drivers of our future.
Great and then one quick one just on the European business.
Are you are you still seeing sequential gains and should we expect continued sequential gains just on the return to office.
Which would hopefully offset.
Macro concerns are headwinds are going on there and the business, yes, So I would I would say that our return to work.
Excuse me returned to office because they have been working.
Continues and that we've seen good growth in Europe .
Last quarter.
Revenues, 15%, yes.
On an FX neutral basis.
The euro is driving down it but if you look purely.
Local currency basis organic up 15%. So we're definitely seeing the benefit of it in for me more importantly, if you go on an FX neutral basis, adjusted EBITDA was up 28%. So so we're seeing the flow through to the bottom line and also in sea getting the leverage back that we lost at.
At the start of the pandemic CSC returned to office improved volumes and more importantly, if you exclude the FX.
We're seeing it come down our P&L and get the leverage we should be getting into that returning volume.
Perfect. Thanks very much.
Thank you.
Your next question comes from Johnson <unk> with CIBC. Please go ahead.
Good morning, Josh Good morning, Tom morning, Jay.
Good morning.
Good morning, I wanted to start with the Costco contract and you had a program in the past with Costco that didn't yield the profitability that you wanted I wonder what's what's different this time around do you expect these customers to be at a comparable margin to your existing customer base.
Yes, I remember that.
Look.
We learn from our mistakes.
This case, a couple of things have happened the pricing architecture is different than it was in 2016.
Our ability and execution and focus on the customer experience and I referenced in his script, what we call <unk> on time in full is higher today than it's ever been which gets to our ability to properly service our customers and we have a high degree of confidence that we can do that Costco.
Costco has seen our ability to improve service over the last three five years. So we're confident that between the current pricing architecture. The improvements we've made in the customer experience that will be able to properly handle the handle of the new customers and handle the new customers the right.
Way, which is really good service at the appropriate ROI.
Revenue and profit levels for the company high degree of confidence we can do that.
Understood. Thank you and then my follow up is on the deferred.
Incremental capex projects over 23, and 'twenty four should we think about that is deferring to future years or is it that you took a closer look at those and you didn't think you'd get the return.
Any other color there would be helpful.
Yes, it's a good question I'll flip that one over to Jay.
We said 50 for this year and then our initial plan was another $50 million in 2023, and another $50 million and 2020 for getting through this year seeing the returns we're getting on the growth returns on the efficiencies.
And really seeing where our trajectory as we feel that we only need to now spent $30 million in 2023.
$30 million in 2024.
Give us the investment we need and then as I said in my prepared remarks that incremental investment will basically go or not go away starting in 2025, and we'll get back to what our historic levels of 7% of revenue.
Being a capex, but.
Really as the momentum we're seeing our business. The performance. We're having we don't think we need that incremental $40 million of investment over the next two years and while we haven't provided specificity around 2025, we wanted to be clear about what capex, we werent going to spend 25 go forward, we will be in a conference in early June .
January well will provide much more color around.
Our views around 'twenty four 'twenty five.
Sure.
Great. That's all thanks very much.
Okay. Thanks, John .
Your next question comes from Kevin Grundy with Jefferies. Please go ahead.
Hey, good morning, guys.
Okay, Jacob others' sentiment.
On your well deserved retirement.
As well.
Let me start I won't Miss Sherry certain conference, where you 70 lobster on the beach, so that will be missed.
Youre always welcome Doug don't let your retirement.
Okay.
Two for me you guys first on pricing and then a follow up on just the monetization of real estate parcels. The first on pricing. This is simply is there an ability to lean in.
Bit more here than you have.
Including some of the pressures that youre seeing.
From an SG&A perspective, and I guess I asked that in the context of gross margin performance and I know, it's not all input costs offset by pricing, but it's been quite good right. The gross margins up 230 basis points.
Through the third quarter year over year, EBITDA margin was up 50 basis points and you guys call out the pressures that youre seeing from an SG&A perspective.
And we also know too that the consumers dealing with.
Disinflation nationally across categories that they shop, so the cross elasticity and quite here are also noteworthy so all of a bit of a for both question, but is there an opportunity for more youre potentially leaving money on the table by not by not taking more price in the current environment.
Yes, I think.
Couple of answers to your question I just wanted to give you the highlights and then I'll flip it to Jay I think one of the areas that may not be clear to many in the investment community is that.
Unlike others, maybe not all than let's call. It route based services.
Sure route distribution costs are in SG&A.
So the route operations to route salesmen the fleet the fuel that goes with that is recorded in SG&A, others might reported recorded above in cost of goods reflected in gross profit. So I wanted to call that out because it's not been as clear as it needs to be and we're going to work on that from a mess.
Digi perspective, and then naturally in that SG&A, you would see the input all the input costs and labor fuel and freight actually manifest itself. There. So part of our actions in aggregate is to cover it from the top all the way through SG&A down to adjusted EBITDA margin.
When you look at when you look at our Opex I mean, Tom said, it almost 50% of our Opex is our route operations and Thats, where youre seeing the wage inflation, that's really when youre, where youre seeing the fuel inflation. So that's the bulk of where the inflation does act.
And.
Unlike during the pandemic, we're actually now investing behind this part of the business, we're not cutting.
Being at 98% staffed on our routes and using our predictive hiring model is how we are at the record levels that Tom referenced so.
This is this is our routes. This is how we're servicing our customers. This is how we're dealing with the increased volumes. So it might seem inflated, but it's actually very good spend.
And on the pricing question I mean, we have been taking sufficient pricing to deliberate on our planned profitability to one grow but also cover the inflationary costs. We're monitoring our call center and we have not really seen any type of significant uptick on customer calls do you look at our retention.
It's holding steady so we think we're taking the right amount of price to deliver on our profitability offset the inflation, we have but one thing we've demonstrated with a very diverse customer base.
We have the ability to take price as needed we've taken what we think we can but if we need to we can take more and I think one of the other points.
I'll pile on.
As referenced in his script, but 22% increase in revenue per out that's an important number and unlike others in this space. The vast overwhelming majority of our route sales reps. The drivers are commissions, so as part of that 22% they get their share.
It also frankly as a tactic that's when we need to take more pricing the RSR benefits from that so good.
Service that they provide.
Also they get their piece of that price increase just supports this it's a flywheel where they RSR. It gets paid more give good service we can benefit from the price India, then we need to push it harder.
Yes.
That's helpful. One quick follow up any updates on the potential for additional real estate proceeds on some of these parcels that you've been taking a look at.
And I think the commentary from the prior call was that there could be potential for further opportunity there and the efforts were underway. So any sort of timeline and governance you could put around that I think would be helpful for folks and I'll pass it on thank you.
Thanks, Kevin.
I'll take that one.
We're currently working on the real estate sales that we have targeted we have started up our share repurchase a little earlier than we stated that because we have not received any proceeds as of yet but the process is moving on the model. We have identified and we wanted to be opportunistic that's why we leaned in and started buying stock before before that of that happened.
Keep in mind, we have we have 72 properties in the U S. So we are doing a full evaluation of a full study. So once we get through these current ones that have significantly appreciated in value in California. We will continue to do so and the other thing I want to point out also is it's not that we're exiting these areas were just.
Monetizing these.
Barry.
<unk> assets and finding a much more economic and more.
More correctly located place to set up these distribution centers.
Okay very good guys. Thank you good luck.
Thanks, Kevin.
Your next question comes from Pavel <unk> with Raymond James. Please go ahead.
Thanks for taking the question.
Your strategy as a consolidator or has a long history and obviously there is always some.
Nicole.
When M&A become more or less.
Attractive economically in that sort of quasi.
Recessionary environment I'm curious.
Are you noticing any differences in prospective deal valuations versus recent history.
Yeah right now.
We indicated we will be at the lower end of the range.
And really your question is.
We're going to be very patient at this moment.
Because it's our belief that our.
Our pipeline of list of targets will feel the weight and pressure of inflation frankly greater than we will.
And that was going to be very patient and diligent on that list to let those pressures.
Apply.
And we think it's a good strategy with all of the unknowns.
How all of those inputs input costs are going to affect those those relevant businesses. So we're being very judicious as we move through the next year or so and hope to take advantage of that in the out years. If you will pipeline is still there. We just believe slower playing them and is better.
I think I saw in your notes.
The ability to acquire water rights come up.
We are definitely looking at those as very valuable assets and lets just able to pick up some very good rates in France, and we will continue to do that also.
Okay up following up.
<unk> made an investment one of your few kind of venture type investments in simple hydration.
Patients this was about a year ago.
And an update on that and how the rollout in the U K is.
Taking place.
Yes, we have we are.
We had talked about the ability to build the supply chain for those assets now I'm happy to report that I would now have assets in North America that have assets in the continent in Europe . We are at the very early stages of identifying locations to place them and think about this as kind of the a b testing about where's the right location Maxim.
<unk> the volume and therefore, the return on that asset.
I was in London, two or three weeks ago, we have a couple of places throughout the tubes and Theres some very high volume units.
So you get to see it firsthand it's real it is single use replacement.
So I'm pleased that in this quarter for that we'll have most of those assets placed on location and begin to get the true learnings about what's the appropriate customer environment to place them and then it will be different in the U S than it is in Europe , which is fine by us, but that's exactly what we are we remain optimistic.
How this will play out over the course of the next couple of years.
Understood. Thank you guys.
Thanks, Bob.
There are no further questions at this time I would now like to turn the call back to Mr. Colo for any closing comments.
Thanks, Pam as Tom mentioned, we will be attending the ICR conference in Orlando, Florida on January nine, where we will review, our 2024 and 2025 outlook and plans for continued growth.
This concludes <unk> third quarter results call. Thank you all for attending.
Okay.
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.