Primo Water Corporation Q1 2023 Earnings Call
Thank you.
[music].
Good morning, ladies and gentlemen, and welcome to the Primo Water Corporation Q1, 2023 results conference call.
Knowing the presentation, we will conduct a question and answer session.
If at any time during this call you require immediate assistance. Please press star zero for the operator.
This call is being recorded today Thursday may the force 2023.
I'd now like to turn the conference over to John <unk>, Vice President of Investor Relations. Please go ahead Sir.
Welcome to Primo Water Corporation first quarter 2023 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 Primo water's website at 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 quarry.
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 Primo water Corp Dot com.
Hi, I'm accompanied by Tom Harrington Primo waters, Chief Executive Officer, and David <unk>, Chief Financial Officer.
As part of this conference call. We have included a deck online at Primo water Corp. Dot com that was designed to assist you throughout our discussion.
We'll start today's call by providing a high level review of the first quarter and our progress on Primo water's strategic initiatives then David will review our segment level performance and we'll discuss our first quarter performance in greater detail and offer our outlook for the full year 2023 before handing the call back to Tom.
Provides a long term view ahead of Q&A.
One corporate housekeeping matter before we get started as you probably saw our 2023 annual and special meeting of Shareowners was reschedule and will be held on May 31 2023 the.
The company will mail, a revised proxy statement to all Primo water shareowners in the coming days.
We encourage you to read these materials carefully and.
He previously submitted proxies will be discarded and the shareowners will need to resubmit their boats.
With that I will now turn the call over to Tom.
Thank you John and good morning, everyone.
Before I dive into the results for our first quarter I'd.
I'd like to take a moment to update you on the proxy contest.
We are pleased to have reached a constructive resolution with Legion.
We're excited to welcome to our board Derek Louis and Lori market.
Two executives in sales and marketing expertise at leading consumer products and beverage companies.
We look forward to benefiting from their insight and perspective.
I also want to welcome Eric Foss, who joined our board in March.
Eric brings decades of experience as a chairman.
An executive officer of leading route based businesses in beverage companies with a proven track record of expanding scale, improving margins and driving consistent earnings growth.
Welcome to the team Eric.
The addition of these new directors to our board.
Compliments, our board of directors skills and experiences and are in keeping with our commitment to increase the gender and racial diversity of our board of directors.
I want to thank Stephen Halperin.
We announced last year was going to retire at this annual meeting after 32 years of dedicated service Eric.
Eric Rosenfeld and Greg Monaghan are also retiring from our board.
<unk> 15 years of dedicated service.
We'll certainly miss their contributions valued counsel guidance and leadership.
Finally.
I want to thank our team of Primo water associates for a job very well done during the quarter.
We're avoiding the external distraction and for remaining focused on our customers.
Their ongoing commitment.
Execution positions the company for <unk>.
Continued success in 2023 and beyond.
Let's move on to the first quarter results.
In Q1, we delivered normalized FX neutral revenue growth of 12%.
Adjusted EBITDA growth of 8%.
Increased adjusted EBITDA margin by 70 basis points to 17, 4%.
Sell through of approximately 215000 water dispensers.
And continued distributions of capital to shareholders through our dividend of approximately $13 million.
For Q1 2023, excluding the impact of foreign exchange normalized revenue increased 12%.
Normalized revenue excludes the exited North America single use bottled water retail business and our exited business in Russia.
Reported revenue for the first quarter of 2022 includes $26 $6 million of revenue associated with a single use business.
And $2 $8 million of revenue associated with our Russia business.
Our schedule is included in our supplemental deck.
Adjusted EBITDA increased $7 million.
To $95 million, an increase of 8%.
Excluding the impact of foreign exchange adjusted EBITDA grew 9%.
We continue to deliver increased revenue.
Adjusted EBITDA growth and adjusted EBITDA margin expansion.
Consolidated revenue increased 4% to $547 million.
Revenue growth was driven by resilient consumer demand.
Increased water dispenser unit sell through of approximately to 115000.
Solid revenue growth awarded direct in exchange of 11%.
Driven by both pricing and volume.
Strong revenue growth of water refill infiltration of 21% and.
In global water direct customer retention of a <unk>.
84%, which remained consistent with last quarter.
Adjusted EBITDA in the first quarter increased 8%.
To $95 million supported by higher volume increased pricing and effective expense management.
Pleased with the adjusted EBITDA expansion in the face of continuing inflation.
We successfully offset the impact of higher labor fuel and freight expense of approximately $15 million in the quarter.
And expanded the margin percentage to 17, 4% up 70 basis points versus prior year.
As a reminder, our second and third quarter adjusted EBITDA margins are generally higher because of seasonality in our business.
As you know we offer a range of products through a razor razor blade business model, where the rental or sale of water dispensers create high margin recurring revenue generated from our water solutions.
We saw an increase in the level of sell through an award of dispenser business.
Approximately 215000 units in the quarter.
Higher retail prices reflected the continued impact of tariffs imposed on imports from China.
Consumers continued to purchase new Primo water dispensers and demand remains strong.
What a dispenser sell through represents the unit sold by brick and mortar and e-commerce retailers to the end consumer.
This is an important metric for the company because these water dispenser sales drives connectivity to our water solutions.
<unk> and recurring higher margin revenue.
The sell through units are a leading indicator of the future organic growth of our water solutions.
As expected the sell in.
What we sold directly to retailers for Q1 continued to be impacted by efforts to right size inventories that will increase during 2022 supply chain challenges.
Our consolidated water direct and exchange business.
<unk> experienced strong top line momentum during the quarter.
With 11% revenue growth through 9% pricing actions.
<unk> volume growth and 84% customer retention award of direct and 99% retention and water exchange.
During Q2, we will expand our mobile App my water plus two.
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And continue the update the App based on real time customer feedback.
Our digital focus in 2023 remain centered on new water customer acquisition.
Through Costco awarded Dot Com, that's one example.
What a dispenser sales and connectivity to our water solutions.
In Q4 of last year, we talked about being awarded a five year contract to be Costco as exclusive service provider for large format bottled water delivery services direct Costco consumer and business members.
We're pleased with the rollout of this program and we are increasing the number and frequency of in store activities at Costco location to capture the full benefit of this relationship.
We expect this program to drive increased customer growth as we build out the program across the U S.
The growth of about water refill infiltration business continues to accelerate with an increase in revenue of 21% in the quarter.
Driven by price increases primarily on outdoor refill stations and improved refill station uptime and service levels.
Our water rebuilt business is one of our water youre way platforms, where consumers refill their own empty, one gallon or multi gallon primo water bottle at any one of our 23500 plus self service refill stations.
Customers in this business are counted as the retail locations of our refill stations and not the consumers' physically using the rig fuel stations.
We maintain high refill station retention and there is tremendous potential for continued volume growth across the category.
Water refill targets, a value conscious consumer and provide similar margins to our other water offering.
This is another positive aspect of our business transformation initiated by the acquisition of legacy Primo that provides a diverse platform.
Our water services for all consumers.
Customer resiliency related to the higher pricing action across our water solutions has been minimal as we track this through a combination of metrics, including call center activity customer retention and customer growth.
Our balance between our demand and pricing continues to be extremely positive.
It's important that we attract quality customers that will remain with our services long term.
We're highly focused on attracting the right customer not just to add a customer for the sake of growing customer counts.
I would like to talk for a moment about operating efficiencies.
The ability to serve our customers in the most efficient manner possible is a critical driver of both our short and long term profitability.
Our automated route optimization.
In North America continues to yield deficiencies.
We will extend the use of <unk> into a refill and filtration business later in 2023 to capture efficiencies and improve service levels that this tool can deliver.
In addition to capturing cost efficiencies the reduction in mile which supports our commitments to reductions in greenhouse gas emissions.
A key service metrics, we focus on is on time in full or <unk>.
<unk> simply put.
Is did we delivered to the customer on the day at the approximate time and with all the products they requested.
In North America in Q1 was 95%.
Another tool, we use as our predictive staffing model, which continues to be refined and produces outstanding results. During the quarter, we improved our targeted staffing levels to 100% of route delivery positions filled.
We continue to believe that our incremental investments in our people and the use of our predictive staffing model will enable us to deliver our 2023 targets and beyond.
Last month.
We published our 2021 supplement to our 2020 ESG report.
I'm pleased with the progress reflected in the latest update.
Some of our notable accomplishments described in our supplemental report include.
Achieve carbon neutral certification via the carbon neutral protocol, while dancing clean drinking water infrastructure and vulnerable communities.
Achieved all stated dei targets.
We placed over 9000 megawatt hours with energy certificate attributes.
Announced the strategic exit of the North America, a single use bottle water retail business that produced over 400 million HD p/e plastic containers annually.
Reducing the equivalent of 50000 metric tons of Cotwo.
And reduced our global greenhouse emissions by 20% over 2020.
We expect to publish our 2022 ESG report later this quarter.
As we shared last quarter for the full year 2023, we expect revenue to be between two three and 235 billion.
With normalized revenue growth in a range of 6% to 8%.
We expect full year 2023, adjusted EBITDA to be between $450 million and $470 million.
Both financial guidance items exclude any tuck ins, we might complete throughout 2023.
For the second quarter of 2023.
We expect revenue between 575 and $595 million.
And adjusted EBITDA of between 113 and $123 million.
Primo water is well positioned to achieve our long term growth targets.
We benefit from long term tailwind <unk>.
Including a favorable shift in consumer demand towards health and wellness and.
And concerns with aging global water infrastructure.
We continue to invest in our digital platforms to enhance the customer experience and a new innovations for our water dispensers to support connectivity to our water solutions.
We have a compelling financial profile, which we continue to enhance through debt reduction and opportunistic share repurchases and increases to our quarterly dividend.
With continued efficiency improvements that will expand our route capacity and increase on time and in full delivery.
We will continue to drive further adjusted EBITDA margin expansion, leading to increased returns on invested capital.
Finally, I will reiterate that our strategy is working.
Confidence in our ability to deliver our 2023 guidance.
I'll now turn the call over to our CFO , David Haas to review, our first quarter financial results in greater detail David.
Thank you Tom and good morning, everyone.
Starting with our first quarter results consolidated revenue increased 4% to $547 million.
Compared to $526 million.
Excluding the impact of foreign exchange normalized revenue increased 12% for the quarter.
Adjusted EBITDA grew 8% to $95 million, which.
Resent 70 basis points of margin expansion.
Excluding the impact of foreign exchange adjusted EBITDA grew 9%.
The effect of price increases volume growth and strong demand increased profitability.
Turning to our segment level performance for the quarter.
North American revenue increased 4% to $412 million compared to $397 million.
Excluding the impact of foreign exchange normalized revenue increased 12%.
Organic revenue grew by 11% and water direct and water exchange, which included 10% price or mix and 1% volume growth adjusts.
Adjusted EBITDA in North America increased 7% to $85 million.
In our Europe segment revenue increased by 8% to $69 million, excluding the impact of foreign exchange.
Change normalized revenue increased 20% with growth in our residential customer base and BW volume as Europeans continue their return to the office.
Adjusted EBITDA in the Europe segment increased 61% to $14 million.
Excluding the impact of foreign exchange adjusted EBITDA increased by 69%.
Turning to our Q2 and full year outlook, we expect consolidated revenue from continuing operations for the second quarter to be between $575 million and $595 million and that our second quarter adjusted EBITDA will be in the range of $113 million to $123 million.
For the full year 2023, we are reaffirming our guidance with revenue projected to be between $2 3 billion and $2 three 5 billion.
With normalized revenue growth in the range of 6% to 8%.
We still expect full year 2023, adjusted EBITDA to be between $450 million and $470 million.
Our 2023 Capex consists of 7% of revenue plus an incremental $30 million for a total of approximately $200 million.
As a reminder, we determined that during 2023 and 2024, we will invest an incremental $30 million per year as opposed to the $50 million noted in our November 2021 Investor day.
This decision is based upon our confidence and run rate performance that enables us to reduce the investment dollars and deliver the 2023 and 2020 for outlook.
Key initiatives to be funded from our Capex plan include driving digital growth, leaving dispenser innovation building a more environmentally friendly fleet.
Stalling more efficient water production lines, which will reduce water usage and increased productivity and driving growth in refill infiltration with refreshed signage and branding of our existing units the.
The development of our on the go units and new filtration innovation.
We expect to return to our normalized total capex spend of approximately 7% of revenue in 2025.
For 2023, we expect interest expense of approximately 70% to $75 million.
We currently expect $20 million to $25 million of cash taxes due to the utilization of net operating losses or Nols in 2022 related to the properties, we sold last year.
While we are limited in the amount of Nols, we can utilize each year, we do have Nols available in 2023 and 2024.
Adjusted free cash flow is expected to increase to approximately $130 million in 2023, which includes the assumption that we monetize several properties.
This is a significant step up from last year's adjusted free cash flow of $85 million and is primarily driven by increased earnings and reduced supply chain impacts on our working capital.
$130 million contemplate increased cash taxes for potential property sales.
Could result in higher free cash flow, depending on the timing and outcome of these property transaction. We expect further increases in our free cash flow in 2024.
As we mentioned during our Q4 call. We continue to explore opportunities to monetize properties that have realized significant appreciation in value. We plan to use the net proceeds of these property sales to fund components of our capital allocation plan, including among other things debt reduction and our.
<unk> share repurchase program.
As part of the opportunistic share repurchase program during 2022, we repurchased approximately $24 million during the first quarter, we repurchased another $17 million, bringing the total.
Total to $41 million.
Of the one year $100 million opportunistic share repurchase program, which began last August .
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 value for our shareholders.
We remain focused on achieving our adjusted net leverage ratio target of below three times by the end of 2023 and a less than two five times by the end of 2024.
As a reminder, our current debt maturities are in 2028, and 2029 and we therefore have no reason or benefit to refinance any of our debt and are pleased with our current debt structure.
Guarding our tuck in M&A for <unk>.
2023, we expect to invest $20 million to $30 million as we focus on our organic growth as well as take a patient approach due to macroeconomic factors that might weigh more on smaller operators.
Yesterday, our board of directors authorized a quarterly dividend of <unk> <unk> per common share, which represents a 14% increase over last year's quarterly dividend rate or.
Our performance reinforces our confidence in our ability to deliver sustained organic revenue growth supported by recent gains and new points of distribution in our exchange business geographic expansion of the Costco in store events, resulting in an increase in the number of events in North America, and our water direct business.
As well as the improved performance of our refill business.
These gains are a result of our commitment to improve the customer experience through.
<unk> increased service levels and continuing investments in the digital experience customer satisfaction and operating efficiencies IMAX.
I am excited about the opportunities that we have in front of us.
We continue to execute our strategy and are making solid progress in our transformational journey, we have the right plan and the right team to win.
Our customers associates and shareholders can all share in our success as consumers migrate towards healthy hydration solutions I will now turn the call back to Tom.
Thanks, David.
This quarter marked the three year anniversary of our acquisition of legacy Primo and the sale of our coffee and tea.
And I think it is important to take a moment and reflect on what our team has been able to accomplish.
During its ongoing transformation from a former caught and legacy <unk> businesses to the new Primo water.
We leveraged our highly variable cost structure to rightsize, our businesses to adapt to the economic environment.
And a consumer base that shifted to more in home consumption.
We increased our revenue and earnings to improve scale reach and better execution.
In the last five years, we've expanded adjusted EBITDA margins from cut 13%.
To Primo water's 2022, 19%.
We've returned capital to our shareholders through a steadily increasing dividend.
And opportunistic share repurchases.
We successfully integrated tuck in acquisitions in our water direct businesses.
<unk> expanded our global footprint.
We increased our understanding commitment and capabilities and ESG.
We've been able to reduce our impact on the environment.
Becoming carbon neutral and eliminating single use plastics from our North American retail operations.
We've assembled a strong team and are excited to share our progress as we continue to realize benefits.
Embracing sustainability as a core strategic pillar of our business.
Prior to the pandemic approximately half of our customers and even more in Europe , where businesses.
Many of which closed for much of 2020 and 2021.
Further hurdles included high inflation.
Fluctuating foreign currencies.
Tight labor markets, 25% tariffs awarded dispenses manufactured in China, and global supply chain constraints.
Our strategy is clearly working.
And we're pleased with our past accomplishments and we're even more excited about our future.
Well one of the only pure play water platform and benefit from a large and growing revenue base.
Our high single digit long term growth targets.
Given by the connectivity of water dispensers to our water solutions with supporting consumer tailwind.
To include focus on health and wellness.
And concerned with aging global water infrastructure.
We have a healthy balance sheet.
Compelling long term growth outlook.
And an attractive margin profile.
We believe we will generate adjusted EBITDA approaching $530 million with margins of approximately 21%.
And an adjusted ROIC of 12% by the end of 2024.
Once again.
Like to thank the Primo water associates across the business for their tireless efforts to serve our customers.
Before we open the call to questions I, just want to remind everyone again that this call is to discuss our Q1 results and outlook, we will not be taking any questions about our settlement with Legion.
I encourage those of you who are interested to visit our website to review our proxy materials.
With that I'll 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 Sir.
Ladies and gentlemen, we will now begin the question and answer session.
If you would like to ask a question. Please press star followed by the number one on your telephone keypad.
If your question has been answered and you would like to withdraw from the queue. Please press star followed by the number too.
And if you are using a speaker phone please lift the handset before pressing any key.
One moment. Please for your first question.
Your first question will come from Derek Lessard TD Cowen. Please go ahead.
Yes, good morning, everybody and congratulations on the great quarter.
Thanks, Derek good morning.
And just maybe on that and how this ties into your outlook you either.
Either beat or came in at the high end of your of your guidance.
However, you didn't raise your full year guide maybe.
Maybe it seems like maybe you're erring on the conservative side, but maybe if you could just add some context and your overall thoughts behind that.
Yeah, Derrick look where we're pleased with the quarter right I would say solid start to the year.
We're confident in our current guidance and our ability to deliver on that but I think it's early and I think theres a lot going on in the external market and it's appropriate for us.
To be prudent in terms of our forecast then and stick to our knitting.
Accomplish our targets and delivered a full year guide and see how the next quarter or so develop.
Okay, that's fair and maybe.
One for me is I think it's the first time that we are hearing you guys talk about in detail about free cash flow. So thanks for that just maybe David if you could maybe walk us through again, how you got to the $130 million and as.
As well as the decision and the importance that you are placing on oxi cash flow.
Yeah. Thanks, Derrick so it's always been an important metric for us we really think this year with much of the COVID-19 disruptions behind us and the recovery of the customer base, including the consumption of our European side of the customer base.
Allows us more clarity.
From a metric again that we've always found important.
And it allows us to start to showcase the platform. We have is a transformed company.
So in general as kind of the.
The scrip suggested.
Walking down from our midpoint of guidance.
Removing approximately 200 million for the Capex.
The interest is relatively spoken for on our senior note with obviously some of that variability coming in our cash flow alone.
Cash taxes would be the most variable again affiliated with the properties as discussed and how there could be additional upside depending on timing and.
In transaction value there and.
And again on the working capital side, which would have been not necessarily overtly covered.
We tend to reserve a few million dollars there as our AR balances.
Tend to grow.
While the collection of that doesn't change the IRR balances naturally grow as pricing starts to go into the customer.
Cement pricing activities.
I think that would give you a pretty good line of sight of how at this point $130 million is that starting value for our viewpoint of the year.
At this time I also think that.
Clearly last year was impacted by supply chain.
And.
The Q2 Q3 inventory adjustments that we made so we thought it important to demystify that and <unk>.
Connect the dots on free cash flow post 2022 supply chain challenges.
Hello.
Your next question will come from Andrea Teixeira at J P. Morgan. Please go ahead.
Hi, good morning, Thank you operator.
So my question is on the cadence of the quarter and the guidance reiteration. Despite a strong start of the year. It seems like most of customer names that we cover January started off strong and then the trends moderated a touch softer March. So I was wondering if you can comment how you progressed and then the trends into April .
And then related to that with the strong performance in the first quarter and above and high end of our above at an above high end of range.
With the second quarter, probably a little bit softer.
And then the street was anticipated.
<unk> sorry.
And we today this fiscal year. So can you kind of like flattish kind of like think about how you are budgeting I understand it's beginning of the year, but just to see how conservative you are and then as a follow up can you talk about volume and price mix components for the water direct business.
This quarter I mean, any any data on customer additions churn and how we see this progressing for fiscal 'twenty three.
Okay Andrea Thank you.
Quite a question, but let me, let me try and dissect that.
Let's start with Florida direct.
Price and volume so what addressed on our company was up on a revenue basis, 11%, 9% from price 2% from volume.
So we're pleased with that performance you may remember that we have.
Last quarter talked about the cadence of our revenue growth in 2023.
And that we anticipate anticipated higher revenue growth from price as we lap the actions that we took in 2022.
And that as Costco built.
And we rolled that program across the U S. Through the course of the year that we'd see more volume growth coming from new customer growth and of course consumption growth in the installed base on the Costco side.
Net the North American side of the story, we are benefiting from both price and volume in Europe .
And that is we took as you may recall, we took more aggressive pricing actions later in Europe , and we saw some of that manifest in Q4, but clearly manifested in Q1.
And then we also are enjoying more consistent return to work, it's still a tailwind for us right because we're not back to pre pandemic levels, but we saw good volume growth from our European operations in the first quarter.
In terms of the cadence we're confident in our 2023 guidance, we think theres a lot going on in the market and we think it's appropriate for us to be prudent to let the next quarter or so play out.
For all external inputs on our business.
Yes, no I get that but I think they are.
Two questions that were announced or to one is the churn I mean, we all appreciate that you know you had the volume, but I think as as obviously investors appreciate in their investment process to see how the Chinese progressing.
Really a breakdown on how many additions and how many people got out with a price increase in particular in Europe .
And then.
I mean in an environment where.
Your stock is down as much as it is and obviously.
Investors are not happy with.
There's a level of conservatism or what you've been willing to disclose.
Yes, I'm not going to I'm, not going to react to the first hour by hour and a half hour of the market reaction. This morning.
So the stock price.
All right.
We've delivered rock solid numbers that beat what we said it would be and we remain confident in our performance in 2023.
Churn in the script.
Articulated what a direct churn at 84% excuse me customer retention at 84%, which is consistent with prior quarters and.
And we're not seeing any meaningful changes in the number of customers and are out.
Based on pricing and we've shared in the past that we think it's pretty elastic.
And I think the best manifest manifestation of that.
The resiliency of our customer base is 11% revenue growth from our water direct business, which is a combination of largely price, but also with that 2% volume performance.
And I can't speak to our markets anybody's reaction to are we overly conservative or not I think there are many others that are frankly being prudent in terms of their views.
What the next 90 180 days halt.
Can you help with just the cadence of somewhat but things that are happening now in April .
Yes, because all you said.
This is positive and that's why.
I think we all puzzle.
We don't see.
Any material changes to April compared to our first quarter results.
Which is obviously supports our view for the full year performance and it's fundamental and are expected to performance in the second quarter, So pretty consistent performance as we move from the third period to the fourth period.
So we're pleased with where we are.
Thank you.
Thanks Andrea.
Your next question will come from Dan Moore at CJS. Please go ahead.
Hi, Good morning, it's Pete Lukas for Dan.
In your prepared remarks, you mentioned that you were pleased with the rollout of the Booth program at Costco and I think in Q&A, you said look for that to increase your volumes historically, you've added about a quarter of your customers through that program can you just talk a little bit more about what you expect it to look like in the second half and how long you would.
<unk> any outsize growth to be sustainable there.
Yes, good morning Pete.
As you think about the booth rollout program and have been.
Most weekends and then sequential so.
So we would expect good growth.
More customers and the volume associated with those customers in Q2, it will expand obviously to get large in Q3 as you build more and more customers as a result.
Of that program.
It will be much stronger in Q4, and frankly at some tailwind as we move into 2024, because we'll benefit in Q1 next year of 100% of the benefit of the rollout of the customer program.
It has historically been about 25% of the new customer adds as we disclose we haven't disclosed how much more will be but it will be a higher percentage of new customer adds in 2023, and as I said earlier, what Youll see is our revenue growth will shift.
As we move through the course of the year as we benefit from more customers as a result of that of that Booth program.
Very helpful. Thanks.
You talked a bunch about Europe , improving pricing and return to work there just in the bigger picture. How do you look at Europe now compared to how you did three to four years ago and do you think it continues to remain a drag on growth for the next several quarters, just given all the macro uncertainty.
Yes.
Obviously, it was negatively impacted meaningfully during a pandemic.
You may recall, Pete that customer base was something on the order of 90% commercial.
So the pandemic and closed offices had a pretty significant impact on that business, while we're not back to pre pandemic levels that has now begun a tailwind as Europeans return to work.
We are pleased with the volume recovery.
We're pleased with the customer retention, because we have pushed through pricing and I think the adjusted EBITDA performance for Europe was was significantly higher than a year ago.
And I think Thats and I don't have the number at the top of my head, it's pretty big number. So we're confident that that business will continue to recover and produce meaningfully higher EBIT adjusted EBITDA margins for us on a go forward basis.
Very helpful. Thanks, I'll jump back in the queue.
Thanks Pete.
Your next question will come from Garik <unk> at Canaccord Genuity. Please go ahead.
Yes, hi, good morning, guys.
Good morning Derik.
Yes.
Wondering how you guys are where youre seeing the big buckets of inflation across the business.
And are you confident that you can continue to price appropriately for this.
Or is the 9% pricing growth that you implemented does that are you comfortable with that for the next few quarters.
Yes, so our three big components are labor fuel and freight.
Obviously ocean freight has mitigated right. So that's that is no longer the headwind than it was last year and thats associated with all of the supply chain and partially largely dispenser transportation from China.
So that is not a headwind today.
Thankfully.
Fuel is resistant right I've shared this in the past diesel fuel is spend more resistant in terms of price changes than unleaded.
So we still face that.
And then labor the labor cost are really a flop over from last year right and the actions that we took we did manage to cover the $16 million and sells incremental cost in the quarter.
And we think we have the pricing actions in place to continue to cover the inflation cost and if necessary. We will take further actions based on.
How things evolve over the next quarter or two.
And I think the best way to think about it is we covered the significant change its last year I think it was $84 million of inflationary cost in 'twenty two.
And we took the actions in real time to keep pace with that and still managed to increase our EBITDA margins in 'twenty two versus 21. So I think we have the right rigor.
And the execution capabilities to cover.
Yes, Okay. That's helpful.
And then I guess just.
Given the challenging.
Consumer spending environment.
That we're in or that we're entering are you like are you seeing a shift with consumers shifting perhaps more towards the refill business I know it outperformed the water direct is it a function of consumers trading down and then can you just give us some color on the margin differential between water direct refill if any.
Yes, I will.
Take the first part of that and give the second part of that to David.
We've been very focused on improving our service execution on refill.
And our uptime number on refill today as an example is higher than 98% that wasn't always that way we've talked about that in the past. We also took a price increase on our refill machines in.
Essentially basically executed beginning Q3, and Q4 and we're seeing the benefit of that.
And we're not seeing any customer resistance at this point the volumes that recovering so we're quite pleased.
So our growth is from price action and refill as opposed to any known to us anyway migration of consumers down trading from many of our other services.
And I think that what supports that as price and volume growth and award of direct business Great performance in our exchange business and the continued stickiness of our customer base. So we think it's price and execution on refill thats driving it.
And then the margin question, David I don't know if you can help with that one yes on the margin side.
Fairly agnostic to our other services.
Obviously being that on a percent basis, so on a percent basis, they're agnostic on a dollar basis just from sheer difference of what consumers are what revenues, we generate on a per unit basis, you would get different gross profit dollars, but on a margin basis, we're agnostic and thats exactly why we love the diversity of the services were.
As the consumers.
Performs on all three.
We are able to sort of generate equivalent profits across the business I'd say the one nice distinction about the refill filtration team is.
Compensation differences between our water direct RSR as in this side of the house, where we're able to keep more of the upside to a performing business there.
Obviously on the water direct side largely the compensation is commission driven.
So I think again, it's a nice diversity platform for us in terms of consumer choice.
Spreads across all three and we're able to make equivalent profits.
Okay, Great. That's helpful. Thank you.
Thanks Derek.
Your next question comes from John Zang Parle at CIBC.
Go ahead.
Thank you good morning.
Good morning, John .
I wanted to start on maybe Europe , plus rest of world.
I'd like to get a sense of where EBITDA is in dollars from these regions versus 2019 really is trying to get a sense of how much more ground. There is to cover to get that business back to where it was.
Yes, so on for the Q.
On ebay.
EBITDA would have been.
About $14 million.
For Europe .
And on the other side.
We have our corporate costs and other activities in there and so we'd have to do some work to bridge that back for everyone but.
The continuation there is again the resumption of in office and returned to work.
And our company beginning concerted effort to shift customer acquisitions balance into residential to provide more of that diversification that we enjoyed in the U S.
Today.
Sort of in our future, but again on the balance there Europe has recovered nicely is showing meaningful signs of getting back to sort of pre <unk> levels.
And I think that's what we're really pleased with the team.
And really not seeing any disruption in customer opinion customer churn.
Again seems pretty status quo being able to tolerate sort of the actions we've taken across price.
Yes, okay.
And then maybe we can move to.
Labor expenses I Wonder if you can quantify the percentage increase in labor costs, you saw in Q1 versus some of the past couple of quarters. I know this is noisy because of fee.
The compensation structure that you just referenced David but is there a way you can quantify.
The inflation, you're seeing in labor versus the past year, So yeah I want to say.
We haven't gone down the path of peeling out labor as a subset.
We've shared last year something on the order of 10% to 11% inflation cost labor fuel and freight.
And in this quarter that $84 million was something on the order of seven 5%. So it is lower.
And hopefully the future forecast of.
As we move through potentially benefit from that as that happens in coming quarters, but we havent peeled out each sub piece of that at this point John .
Okay.
Thank you very much.
Thanks, John .
Ladies and gentlemen, once again, if you would like to ask a question. Please press star one now.
Your next question will come from Kevin Grundy Jefferies. Please go ahead.
Hey, good morning, everyone.
Good morning, Kevin.
Question, probably for David just to come back to the free cash flow.
So I thought at least Directionally, there is going to be some improvement in inventory days. This year, just kind of given where you finished with some of the retailer Destocking last year.
And that May indeed be the case, but it doesn't sound like it's going to be enough to sort of drive working capital improvement if I sort of like tumble through the numbers. It seems like working cap is going to be like a $30 million drag on free cash flow. This year, maybe just spend a moment on.
On that piece is just the working capital piece and why it seemingly is going to be a drag this year.
Yes, we would peg the working capital drag closer to probably 20, Kevin and I think the Delta there is really conservatism around trying to understand the full tax liabilities of some of the property monetization. So if those come true.
Understanding sort of the bridge there that would be the difference of Youre trying to use I think that full 30 plus million dollars of bridge down why 130 would be the answer and again I think we're saying probably closer to 20, and we're reserving kind of 10, plus et cetera for excess potential cash tax again properties have not been.
Monetize to date Theyre in our potential future and we're sort of being cautious to not give out of free cash flow guide that we'd have to walk back just as we pay additional or incremental taxes on those properties again, we won't know the exact timing and value until every property sort of in the hopper has been officially.
And finally monetize with the various jurisdictional sort of cash taxes that come with that so I think.
That number would be accurate in your head, but we're kind of again, putting more of that balance after $20 million towards the tax side.
Okay, and then how about longer term.
With respect to free cash flow is it sort of appropriate to ground. The street at any sort of like free cash flow conversion number how are you thinking about that how do you want us to Orient the market.
I think part of it Kevin we'd be grounded in our previous communications on Capex right.
So we've said we'll spend.
The 7% plus $30 million this year, which gets to roughly $200 million. We have a similar 7%, obviously revenue will be higher but the $30 million incremental next year and then in 2025, our plan is to eliminate the $30 million.
So that $30 million essentially drops right. So if you said how do I think about it that's for sure how I think about it narrowly.
From there.
So hopefully that gives you some context of the next three years.
Right and I just want to go back and just touch on David's working capital just for a second a real change in any working capital. This year, because we've made we're making progress on the inventory side of your question is really about growth in <unk>.
Located what higher revenue so that's naturally going to go up.
Really drives that Delta just narrowly working capital, we're making good progress on on the other challenges that we experienced in 2022.
Point of clarity.
Okay, Alright, very good I can pass it on thanks for the color guys I appreciate it.
Thanks, Kevin appreciate it.
There are no further questions. So I will turn the conference back to John Connolly for any closing remarks.
Thanks, Michelle This concludes Primo water's first quarter results call. Thank you all for attending.
Ladies and gentlemen, this does conclude your conference call for this morning Primo we'd like to thank you all for participating and we ask that you. Please disconnect your lines.
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