Q2 2023 Primo Water Corporation Earnings Call
Is that EBITDA growth of 13%.
Adjusted EBITDA margin of 25%.
160 basis point overall increase versus the prior year.
Adjusted free cash flow of $41 million and sell through of approximately 251001 of the expense.
For Q2, 2023, consolidated revenue increased to 4% to $593 million compared.
Compared to $571 million.
Excluding the impact of foreign exchange normalized revenue increased 8% for the quarter.
Normalized revenue excludes the exit from the single use retail bottled water business in North America, and the exit of our business in Russia.
Adjusted EBITDA increased $14 million to $122 million, an increase of 13%.
Excluding the impact of foreign exchange adjusted EBITDA grew 12%.
We delivered increased revenue adjusted EBITDA growth and adjusted EBITDA margin expansion.
Revenue growth was driven by strong revenue growth in water direct in exchange of 7%.
Continued revenue growth in water refill infiltration of 18%.
Increased revenue growth in our European operations of 9%, excluding the impact of foreign exchange and global water direct customer retention of approximately 85%, which was consistent with last quarter.
Revenue growth in the quarter was driven by pricing actions, we believe that our investment in sales driven by Costco and our marketing initiatives along with tuck in acquisitions will create customer growth by the end of 2023.
The growth in customers is expected to reflect a combination of organic customer growth as well as the execution of our tuck in strategy.
As a reminder, our tuck in acquisitions are a core component of our customer growth plan. These customers has strong retention rates synergize within 90 days and enhanced route density, resulting in increased adjusted EBITDA dollars and margins in our markets were executed.
Who are razor razor blade business model, we had water dispenser sell through of approximately 251000 units in the quarter up 4% versus prior year.
Consumer demand remains resilient as the higher priced tariff related dispensers, continuing to work through our and our retail customer inventories.
Referring to slide seven of our supplemental deck, our trailing 12 month dispenser sell through remains greater than 1 million units sold.
As a reminder, water dispenser sell through represents the units sold by our retail customers to the end consumer and are a leading indicator of the future organic growth of our water solutions.
This is an important metric for the company because these water dispenser sales drive connectivity to our water solutions, resulting in recurring higher margin revenue.
Our consolidated water direct and exchange business continued to experience strong topline momentum during the quarter with 7% revenue growth driven by pricing and 85% customer retention and word of direct.
In Q2, we continue to enhance our mobile App in North America, with a biometric login and targeted messaging and offers.
The average active users of the App were approximately 500000, an increase of 5% versus the first quarter, while maintaining a $4 nine and $4 eight grading on Apple and Google stores, respectively.
Our digital focus in 2023 remain centered on new water direct customer acquisitions water dispenser sales and connectivity to our water solutions.
During the quarter, we hired a vice president of marketing for our North American business and look forward to his contributions leading our efforts to improve customer growth connectivity across our water services and further enhance the customer experience through new and more effective marketing initiatives.
We also implemented a new software solution medallion to engage directly with our customers in real time to solicit their feedback on our performance.
We intend to extend this solution to Europe and Israel later this year.
Our water refill and filtration business continues to exhibit steady growth with revenue increasing 18% in the quarter.
This growth is driven by pricing improved service levels and machine uptime at our refill stations.
We have a high refill station retention rate and we are expecting continued revenue and profit growth in this category.
Water refill targets a value conscious consumer and provide similar margins to our other award our offerings, which provides us a diverse platform award of services for all consumers.
Consistent with our plan to grow the customer base through a combination of organic growth and tuck in acquisition growth.
We are pleased to announce that during the quarter, we acquired a Diamond Springs company, which operates in Richmond, Virginia.
Acquisition adds density while further strengthening our footprint in the region.
Shifting to 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.
<unk> made a route optimization.
Tool continues to yield efficiencies.
We were able to increase revenue per route and units per route per day, while keeping route SG&A expense as a percentage of route revenue consistent with Q2 of last year.
We will extend the use of <unk> into a refill and filtration business later in 2023 to capture efficiencies and the improved service levels that this tool can deliver.
In addition to capturing cost efficiencies the reduction in myeloid supports our commitment to reductions in greenhouse gas emissions.
As part of our incremental Capex investment.
We increased the size of our private fleet tractors and trailers to reduce the cost and variability associated with the use of common carriers.
This fleet investment is specifically focused on the transportation of three and five gallon bottles from our production sites to our distribution centers.
In the Pacific Northwest for example, we invested $2 million in private fleet equipment, yielding a reduced cost of $1 $3 million on an annualized basis.
A key service metrics, we focus on is on time in full or <unk>.
Simply put is did we delivered to the customer on the scheduled day with all the products they requested.
<unk> in North America in Q2 is consistent with prior quarters.
During the quarter, we published our 2022 ESG or sustainability report.
Since publishing our inaugural report covering 2020, we have further integrated our ESG sustainability strategies across our global business and aligned our operations with our commitments.
We made significant progress towards our initiatives in 2022 and achieved new milestones as indicated in the report.
A couple of our long term 2030 targets include improving water efficiency by 20% and obtaining zero waste at 50% of our production facilities.
A copy of the report as included in Investor Relations section of our corporate website and we expect to continue to publishing an annual report going forward.
Given the strong performance in the first half of the year, we feel confident in increasing our annual revenue guidance to be between $2, three two and $2 $3 $6 billion with normalized revenue growth in a range of 7% to 9%.
We expect full year 2023, adjusted EBITDA to be between 468 and $480 million.
And an increase in annual adjusted free cash flow to $150 million.
I will now turn the call over to our CFO , David Haas to review, our second quarter financial results in greater detail.
Thank you Tom and good morning, everyone.
<unk> with our second quarter results.
Solidago revenue increased 4% to five.
$593 million <unk>.
Compared to $571 million.
Excluding the impact of foreign exchange normalized revenue increased 8% for the quarter.
Adjusted EBITDA grew 13% to $122 million, which represents a 160 basis points of margin expansion to 25%.
Excluding the impact of foreign exchange adjusted EBITDA grew 12%.
Turning to our segment level performance for the quarter.
North America revenue increased 3% to $451 million.
Compared to $437 million.
<unk> the impact of foreign exchange normalized revenue increased 7%.
Adjusted EBITDA in North America increased 10% to $107 million.
Adjusted EBITDA margins climbed 23, 7%, a 140 basis point improvement over last year.
In our Europe segment revenue increased by 12% to $78 million exclude.
Excluding the impact of foreign exchange normalized revenue increased 15% adjusted.
Adjusted EBITDA in the Europe segment increased 50% to $18 million, excluding the impact of foreign exchange adjusted EBITDA increased 44% adjusted EBITDA margins declined to 22, 8%, a 580 basis point improvement over last year.
Results of our European operations continued to show strong improvement and have returned to pre pandemic levels.
Our focus on improving route density increasing our scale, improving our operations and the benefits of Europeans returning to the office are taking hold.
Our team in Europe is executing their strategic plan and we expect to see further improvements as we move through the balance of the year.
Turning to our Q3 and full year outlook, we expect consolidated revenue from continuing operations for the third quarter to be between $612 million and $632 million and that our third quarter adjusted EBITDA will be in the range of $129 million to 100.
$39 million.
As Tom mentioned for the full year 2023, we are confident in increasing our guidance with revenue projected to be between $2 32, and $2 $3 6 billion with normalized revenue growth in the range of 7% to 9%.
Now expect full year 2023, adjusted EBITDA to be between $460 million and $480 million with an annual adjusted free cash flow of $150 million, an increase of $10 million compared to previous guidance.
Our increased adjusted EBITDA guidance is driven by the year to date performance that has come in ahead of our initial expectations as well as year to date tariff refunds of approximately $2 2 million that I will discuss in a moment the balance of our increased annual guidance is driven by our.
Confidence level for improved performance in the back half of the year as well as the expected contribution of our recent diamond spring Tuck in acquisition.
Our SG&A expenses in the second quarter reflect the impact of higher commission payments to our delivery drivers as a result of increased pricing.
The higher gross margins provided a net offset to the increased commission expense, providing higher adjusted EBITDA.
Our reported SG&A expenses in the second quarter also include several one time charges, including those related to the proxy challenge during the second quarter.
Without these onetime charges, our SG&A as a percent of sales would have been 52, 6% compared to the reported 53, 5%.
Year to date SG&A would have been <unk>.
53, 5% compared to the reported 54, 5%.
We expect our Q3 SG&A to decline as a percent of sales as we will benefit from the leverage and scale of higher volume due to seasonality.
We are maintaining our 2023 capex guidance of approximately $200 million.
Which is approximately 7% of revenue plus an incremental $30 million as a reminder, in 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, leading dispenser innovation building and more environmentally friendly fleet as well as investing in our private fleet, which will allow for a more efficient distribution of our products.
Installing more efficient water production lines, which will reduce water usage and increased productivity.
And driving growth in refill and filtration with refreshed refreshed signage and branding of our existing units the development of our on the go units and new filtration innovations.
We expect to return to our normalized total capex spend of approximately 7% of revenue in 2025.
For full year 2023, we continue to expect interest expense of approximately $70 million to $75 million.
The majority of our interest expense is tied to our two senior note debt facilities with very low interest rates of approximately 4% with maturity dates of 2028 and 2029.
The balance of our interest expense is tied to our cash flow revolver loan that we are actively managing lower with excess cash while rates remained at approximately 7%.
With the increase in our adjusted EBITDA guidance, we are moving our estimate for cash taxes towards the high end of our previously communicated range and currently expect approximately $25 million of cash taxes.
This anticipates utilization of U S net operating losses or Nols, while we are limited in the amount of Nols, we can utilize each year, we still have significant U S. Nols available and the balance of 2023 and 2024.
As a reminder, our water dispenser category was previously under a 25% import tariff burden by U S customs the.
The tariff impacted both the water dispensers that we rent as capex as well as the water dispensers, we sell with the increased costs reflected as cost of goods sold.
Our dispensers were reclassified in November of 2022 with recoveries of tariff funds available through a refund process.
We have recorded the refunds in the same manner of the original transactions through Q2, we have received approximately $4 million of tariff refunds.
Approximately $2 $2 million of the $4 million as reflected in year to date adjusted EBITDA related to the water dispensers sold to retail and the remaining $1 8 million is related to the water dispensers that we rent as capex.
The cumulative $4 million is reflected in our updated adjusted free cash flow guidance that we'll discuss in a moment.
While the refund progress is promising we.
Have not reflected any additional refund amounts and our updated guidance due to the uncertain timing of the refund process.
One key learning from the Investor perception study that we conducted was to be more transparent and clearly articulate expected outcomes, especially on the topic of adjusted free cash flow as.
As we look at our performance in the front half of the year, we are confident in our ability to raise our annual adjusted free cash flow guidance to $150 million, an increase of $10 million.
This is driven by our increased adjusted EBITDA outlook. The tariff refunds received to date slightly offset by the increase in our estimated cash taxes.
While the estimated property sales will generate additional taxes not contemplated in our $25 million cash tax estimate these would be onetime in nature and added back to our reported adjusted free cash flow metric.
We wanted to take time this quarter to clarify our adjusted free cash flow outlook and the changes since our last communication guidance on this metric.
We continue to make progress on the sale of properties the timing of our larger transactions is still estimated to occur in the second half of 2023 and have been the primary mechanism for funding our opportunistic share repurchase program as disclosed last year.
We did not complete any of these property sales during the quarter, we repurchased approximately $2 million worth of shares to date, we have repurchased approximately $43 million under the existing program.
We remain committed to achieving our targeted net leverage ratio of below three times by the end of 2023 and a targeted net leverage ratio of less than two five times by the end of 'twenty four.
This will occur through both our adjusted EBITDA performance as well as utilizing this year's property sales to reduce the borrowings on our cash flow revolver, while opportunistically repurchasing shares.
Our year to date tuck in M&A activity, along with the potential acquisitions for the back half of the year positions us to achieve our 2023 tuck in purchase guidance of 20 million to $30 million.
Acquisitions remain a complementary source of customer acquisition, whether we acquire organically or through the acquisition of the customer base of tuck ins. Both our means of scaling our customer base the cost per customer acquired through acquisition is typically similar to other means of acquisition. However.
The difference lies in the stickiness of the customers.
Customers acquired through tuck in acquisitions are already users of the service and understand the benefits and the annual cost of water direct service.
We remain committed to water tuck ins as a way to accelerate density in our operating regions and provide operating scale.
Our cash flow and balance sheet enable us to simultaneously return value to shareholders through regular quarterly dividends and opportunistic share repurchases, while continuing to invest in internal and external opportunities that will further strengthen our operations and drive long term growth.
<unk> of directors and the management team believe that repurchasing stock as an important part of our capital allocation strategy.
Yesterday, our board of directors authorized a new $50 million share repurchase program, which replaces the previously authorized share repurchase program that expires on August 14 2023.
Finally yesterday, our board of directors authorized a quarterly dividend of <unk> <unk> per common share, which continues our path to the multiyear dividend step up with an increase in our quarterly dividend per share of <unk> in 2022.
2023, and another in 2024, I will now turn the call back to Tom.
Thanks, David.
Our performance reinforces our confidence in our ability to deliver sustained growth.
Supported by strong revenue growth in our water direct exchange and refill businesses.
<unk> execution of our tuck in M&A strategy.
The improved performance of our European operations, and adjusted EBITDA margin expansion.
We're pleased to report that our commitment to improving the customer experience is paying off we have seen a significant increase in service levels that digital experience and customer satisfaction.
We are excited about the opportunities that lie ahead.
We're making solid progress and have the right plan and the right team in place to succeed.
We are one of the only pure play water platforms, and we benefited from a large and growing revenue base.
Our high single digit long term growth targets are driven by the connectivity avoided dispensers to our water solutions as well as consumer tailwind such as the focus on health and wellness and concerns about aging global water infrastructure.
We have a healthy balance sheet.
<unk> long term growth outlook and an attractive margin profile, we remain confident that we will generate adjusted EBITDA approaching $530 million with margins of approximately 21%.
And an adjusted ROIC of 12% by the end of 2020 for.
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.
Operator, please open the line for questions.
Thank you ladies and gentlemen should you have a question. Please press the star followed by the one on your Touchtone phone. If you would like to withdraw your question. Please press the star followed by the two if you're using.
Using a speaker phone please lift the handset before pressing any keys one moment. Please for your first question.
Your first question comes from Dan Moore from CJS Securities. Please go ahead.
Yes, hi, good morning, it's Pete Lukas for Dan.
Thank you did give us a lot of color on our free cash flow and do appreciate that just can you give us maybe a little more on the primary drivers that give you confidence in generating $350 million of implied cash cash flow from operations and how sustainable do you think that is going into 'twenty four.
Good morning, Pete This is Tom and I'll, let.
David handle that David.
Thanks Pete.
We understand the importance of predictable free cash flow, we wanted to thank the participants of the rebel perception study.
The study confirmed what we anticipated, which is being a little bit more transparent and support around the critical metric.
Cash flow and improving our messaging around it.
This quarter, we wanted to provide a bit more clarity there.
The 150 is a noticeable step up from last year, where we ended the year at $85 million and adjusted free cash flow.
It is also a $10 million increase from our prior guidance.
The prior quarter.
Primary reason there is the increased earnings power.
And the outlook that we've given.
Paired with some of the tariff refunds to date.
And then these gains are slightly offset with some estimated cash taxes for that increased operating income.
Income.
And we will continue to provide updates related to free cash flow pacing, including how we think about its long term potential in coming quarters.
Extremely helpful. Thank you.
And then you reiterated your 24 goal of adjusted EBITDA approaching $530 million next year, which implies about a 13% growth from the midpoint.
Can you talk about what gives you the confidence in driving stronger operating leverage next year.
Yes, if you just think about.
The performance this year.
And the Bill built building momentum coming out of 2022.
We see continued high single digit revenue growth, which is obviously a key driver.
We're quite pleased with the EBITDA margin of 25% in the quarter, which I think is all time high for us.
And you May recall, we achieved 20% adjusted EBITDA margins in both Q3 and Q4.
So that 160 basis points clears, our hurdle of what we'd said about the exit of the retail water business in America and got through expansion.
So that as you think about that track record now builds as we drive revenue and frankly, we continue to focus on our operations.
If you look at page 10.
In the supplemental deck. It's an example of one being responsive frankly to the early learnings from the perception study.
Providing more detail.
But this is where we see the benefit of a number of our investments and our focus on improving operations and routes matter and our performance on the outside it's been pretty solid over the recent quarters. So all of that helps build our confidence.
Further builds our confidence about our ability to deliver our 2024.
Extremely helpful. Thanks, I'll jump back in the queue.
Thanks Pete.
Your next question comes from Nik Modi from RBC capital markets. Please go ahead.
Yes. Thank you good morning, everyone.
Good morning, Jack.
Morning, Tom.
I know you guys don't provide this breakdown, but I was hoping you can provide some clarity around kind of price versus volume contribution.
And then just the broader question just would love to hear about the Costco lamp and the implications of having if you can provide any context around that thank you.
Yes, thanks, Nick.
Before I speak specifically to Cosco.
Clearly, we're pleased with our 8%.
Revenue growth in the quarter.
And the consistent revenue growth that we've produced over recent quarters.
So that is certainly a trend and to the earlier question is all about our confidence in our ability to drive top line revenue growth as we go forward into frankly, the end of this year and into 2000.
<unk>.
24.
You may recall in prior quarters, when we talked about revenue growth, we articulated that we expected that pricing would be the key driver key component of the revenue growth in first half of the year.
It turned out to be exactly the case.
We also shared that as we shifted to the back half of the year that we would expect to get more benefit as we built.
The relationship.
The number of roadshow events that we execute at Costco that still remains our expectation.
We will continue to.
Invest in growth that will include sales that will include marketing initiatives that will include digital investment and it's certainly going to include the customer experience.
We will execute our M&A tuck in plans as <unk>.
Evidenced by our closing on the Diamond Springs business in Richmond, Virginia.
We will achieve the debt pay down to under three by the end of 2023.
We remain focused on share repurchase and dividend.
Dividend policy will remain in place.
Specific to Cosco.
The business continues to ramp by ramp means we go over week the number of in store events that we execute and cost goes across the U S.
And that business as I have said in the past Nat gas you don't get a big Spike you get the benefit of week after week.
Building the relationship and the number of Costco members that enjoy our service so that number will build through Q3 and Q4 and we're confident currently in the pacing and pleased with the performance frankly of the teammates across the business that are executing.
Excellent Thanks, Tom.
Thanks, Nick.
Your next question comes from Andrea Teixeira from Jpmorgan. Please go ahead.
Thank you good morning.
I have several questions Mr. Cooper to the top question a clarification.
And I would say and just curious how far improved disclosure I appreciate that.
Number one how was the volume and price breakdown in particular, what are direct and price carryover.
I'm, assuming the price carryover has moderated at least from now so looking at your guidance how much are you embedding in there.
And of course I saw what you said that has driven the 7% was driven by.
7% sales growth was driven by by pricing, but I was wondering if in an organic basis.
Volumes were negative or just flat and if you can I understand the return.
<unk> was 85%, but just if you can give us an idea.
Your retention in the Americas than how the last Vista has been.
It has been evolving and review as well and then my clarification question. The lessons of gross margin I think David you called out the $4 million benefit on an.
And I understand it's a gross flows through gross margin for the tariff.
And you have a record high gross margin, which is obviously very welcome. So I'm thinking more how should we think about where gross margins will land in the future. Thank you.
Good morning Andrea.
That was up.
A good question, we're going to try and pick it apart here as best we can he has got a couple of arms and legs in there David you want to take the gross.
Margin question, Yes, let me address the tariff impact in gross margin first so.
$2 $2 million year to date would be in.
As the tariff money is coming back from the government.
Those tariff monies received.
Our affiliated or attributed to dispensers sold to retailers.
How that flows through the income statement as a reduction in cost of goods in that particular quarter.
So if I receive.
One dollar it basically reduces cost of goods sold on that segment.
That dollar then flows through as an improved and an improvement in EBITDA.
The balance or the $1 $8 million.
Does not flow through the P&L in that way because that portion of the tariff receipts is affiliated with the increased capex for the increased cost of those coolers, when we were importing them to rent.
And so that balance of money flows through other income.
And would not have been part of the expansion in gross profit.
So going forward, how we look at that is there are future tariff monies available, but it's always the irregular if you will cycle of how we receive them from the government. It's been in fits and starts this year. That's why we have not contemplated the additional monies were owed.
In our guide.
That's all.
The gross margin expansion as the largest contributor to the normalized EBITDA expansion.
101 hundred 60 points.
On a comparative basis to last year.
And would you think that is sustainable then right. So I just did a simple math that on excluding and obviously that does that $2 million is negligible.
Who would have the first half north of exceeds through the first half with like margin gross margin of close to 61.
How should investors think about that margin going forward.
Yes, we would still have obviously some shoulder seasons in Q1, and Q4 and peaks in Q2 and Q3 based on just throughput that goes through the system affiliated with higher consumption from customers.
But I think what youre seeing overall is a step up as we've now lapped the single use plastics drag on the gross margin youre seeing kind of what would a typical <unk>.
Company looked like on a go forward basis. So these are these are again you can exclude the 2 million Bucks.
Which is relatively negligible. This should give you a good perspective of how the flight and could look in a future year.
When there is not a little bit of tariff noise.
That's super helpful. Thank you.
And Tom I guess on the.
A bit on the the price against volume algorithm.
And how we should be thinking on a organic basis for the businesses.
It has been evolving.
Yes, I think.
It's important that we shared earlier our appreciation for the input.
From the shareholders and the rebel shareholders and sell side right on in terms of the.
The perception study.
We're frankly digesting all of that information because it is.
I guess fresh would be a good good word to use it.
<unk>.
Reviewing it in real time.
And what we've chosen to do.
Is to provide lots of clarity around free cash flow because normally as we inbound that data it rose to the top of the list of what shareholders and others have said this is really important for us that youll provide more clarity in disclosure and transparency around free cash flow.
So hence the reason we've spent a fair bit of time in our materials in the script trying to provide just that.
The second part that we wanted to get to was or is that page 10, I referenced earlier was around the route side of this business and one of the ways. How do you drive margins, how do you get leverage and Thats to demystify. This and we have frankly in the past provided pieces of this information.
<unk> and consistently and wanted to demystify that and provide that.
That being said.
We are pleased with high single digit revenue growth I've said.
In the past a couple of things I've said that our revenue.
Will come from <unk>.
Rice and volume.
Principally.
Installed customer base, new customers I've also said that we'll generally doesn't come in the same way on a year over year basis.
This year I've said in the first half of the year that the bulk of that top line revenue growth.
Specifically in water direct.
Was the reference point would come from pricing and that's what happened.
So we're frankly quite pleased because it delivered the numbers that we committed to and played out the way that we thought it would play out.
As we shifted in the second half of the year and we Havent disclosed.
The pieces of a little bit less a little bit of that ever.
But what we have said is that we would expect that there would be more contribution as a result of the Costco program.
And pricing.
We still believe that to be true we are still fully committed to that high single digit growth and obviously, the 232% to $3 $6 billion in revenue for the full year.
And tell me if I can just.
Yes.
We're going through that what are you just mentioned I need to disclose this quarter and you're just going to start disclosing on a quarterly basis, the customer counts I believe some fourth quarter and you did add 40000 customers I mean.
I think from a direct if I'm not mistaken so those would be the acquisition that you that you just announced.
And ask to US I guess, I mean, you're probably working through for the quarter.
Or how much of that it would be helpful. Just to know the 40000 new customers.
Were they basically mostly through the acquisition or were they organic.
There are a portion of that would certainly be through acquisition.
So thats the ending base, if you will related to the Diamond Springs acquisition in Virginia.
Alright, so that would certainly be part of it.
Also have benefit of ongoing retention.
As an example that that growth comes a lot of different ways. It comes from.
I can get customers through things like Costco sales initiatives I get customers through marketing and digital I shared in the script. How pleased we are that we've hired a new vice president of marketing and I look forward to.
His contributions.
Have a seat legs, yet right. So he is in that journey of learning, we get customers through acquisition and that M&A has long been a component part of how we add customers to our base over the long term.
It will be continue to be that and then certainly.
When I say customer experience the outcome of our customer experience investments as we extend the useful life, we extend the life of the customer and that is a component of our growth story. So all legs of that would be in that two to four O that.
We posted in the supplemental on the web.
Great. Thank you very much I'll pass now, yes, thanks, Andrew I appreciate it.
Yes.
Your next question comes from John <unk> from CIBC. Please go ahead.
Thank you good morning, Hello, Jon Good morning.
I wanted to ask about pricing as well and I would like to get your thoughts on your ability to pass through pricing in the second half and I. Appreciate the comments that more of your growth is going to come from customer adds, particularly through the Costco program, but the reason I ask this because we've seen different consumer companies talk about a more challenging period for pricing.
<unk> in the second half so do you plan to take incremental pricing or are you relying on the impact of prior price increases.
And I wonder how that might compare to the inflation, you're saying yes.
Yes, good question.
The way to think about our pricing in the back half of the year is.
Yes.
We take normal pricing on the installed customer base John North.
Normal course.
We have no plans to decrease that or increase that as we sit here today, so would be normal course pricing.
When a customer reaches their anniversary date, if you will of their original start date will put pricing through.
So theres no changes to any incremental <unk> or detriment to that so kind of a standard fare.
Delivery fees are that we did take a delivery fee in Q.
Two.
The wildcard for us and inflation is really around fuel.
So fuel had overall oil prices had mitigated in the early part of this year, although as Ive mentioned before diesel has been a little more resistant than other forms.
And we'll deal with that depending on where that price goes now.
I think oil price and the last will be I'll be wrong I Didnt look at it yesterday, but would have been the highest it's been in nine months, we will see how that manifest in the pump and if required we will act on delivery fee to adjust that if necessary, but as we sit here today, we're highly confident in our ability to deliver that top line in <unk>.
Our current construct and Youre right. It includes the fuel.
<unk> future benefit of as we build this costco basis for sure. So.
We're confident there we've had the ability although as <unk> seen over the last.
Number of quarters, our ability to drive through pricing.
And maintain.
The level of customer base, the stickiness of that customer base. So we're quite pleased with that.
And we don't see anything changing.
Where our company sits compared to others.
Okay. That's helpful. I appreciate that Tom and my follow up is on the use of Nols in the future and in the past you've said you can use these at a pretty reasonable rate in 'twenty three 'twenty, four but thats still drop off a bit in 'twenty five I'm trying I'm trying to figure out how we should think about that and if we should.
Think about it on a dollar basis for cash taxes are a percent because the rate on cash taxes. This year on pre tax income seems mid to high teens as a percentage and I wonder what do you think a reasonable level as in 2025 and beyond.
Yes.
David question [laughter]. Thanks, John Yeah, we're certainly looking at that as we've said before in the U S side, where we have majority of usable Nols due to the operating profit generation. We've got two years this year and next.
The $46 million range on the NOL value and then that drops in 2025 by about $30 million, so about $16 million Nols usable.
And so we're going through a lot of analysis there analysis, there jurisdictional leader.
In combination with where profits are starting to drive now and our European business.
We will be able to address that in future quarters, when we're able to comfortably address sort of a longer term outlook that would take guidance into 25. At this time, we are not commenting on it but I wanted to provide some color on at least the Nols schedule for the U S business, which is still the primary profit driver of the company.
Understood. That's helpful. Thank you very much.
Thanks, John .
Your next question comes from Derek Lessard from TD Securities. Please go ahead.
Good morning, this is Sharon standing, which Eric thanks for taking our questions and congrats on the strong results.
Thanks, Sheryl good morning.
Good morning.
So those are the questions are answered, but we have a couple more just on the residential side.
Would you be able to talk about.
The changes in residential consumer behavior, if there is any and what youre seeing so far in Q3.
Sure. This is David.
Continued to see.
Strong demand in both the.
<unk> water direct business again.
That is reflected in our future flooding of customer base attraction through Costco program.
On the water exchange side continued demand is frankly that has been there for a decade, plus and sees no sign of let up and largely thats why we attribute.
A lot of the dispenser sell through success in that immediate connectivity factor of I bought a dispenser a.
I have a trigger to do something with exchange or refill and I do that on.
On the resale side, something that's really playing out that ties back into some of the consumer elasticity question of a prior of a prior question. The refill side has taken the price increase extremely well.
This is the most value conscious consumer in our portfolio.
And we think a few factors are occurring there one it's still the most valuable way to get bulk water today, Yes, you do the work yourself, but you pay that discount to do the work.
You can go through that process, what we've seen here really happening, though is the on shelf price of one gallon pre filled in two and a half gallon pre filled as well as <unk>.
Basically non promotion prices for case pack.
Really gone higher due to both resin increases as well as just overall pricing decisions by those brands. So that puts refill in a very strong sweet spot.
A value based and attractive value for that consumer and I think you can see that in this quarter sort of increase around 18% in that business.
Alright, that's great. Thank you and my follow up is.
On the commercial side I think last quarter you mentioned.
Commercial sales has not yet returned to pre pandemic level.
Curious where it is trading now thank you.
Yes, it's still not back.
But I think I referenced that we believe it's a tailwind.
And you can see it in.
Frankly, the stellar performance of our business in Europe .
In terms of growth.
I think it was up $580 million of 580 basis point improvement in adjusted EBITDA margin.
So we're seeing it come back it's not all the way back I don't know if I ever be back to where it was in 2019, but we are seeing good performance on both sides of the Atlantic in that.
Commercial customer base.
And you'll remember that the commercial customer base in Europe is a little bit more large office and commercial customer base.
North America is a little bit more of what we call small office.
Hopefully that helps.
Yes. It does thank you.
Thank you.
Your next question comes from Steve Powers from Deutsche Bank. Please go ahead.
Hey, guys good morning.
Good morning, Steve.
Good morning, So I wanted to ask.
Maybe just give us a little bit more detail on to what extent.
Where we are in the process of a flushing the.
The the dispensers from the marketplace to take care of the higher tariff costs, I think you've talked about that still being a bit of a headwind.
Consumption in the second quarter so.
To what extent where are we in that process when is that inventory expected to clear from the channel and then as you think about it should we expect an acceleration and sell through once that inventory does clear how do we think about that.
Over the coming couple of quarters coming here.
A couple of ways to think about it. So we sold through 251000, which was I want to say 4% versus prior quarter prior.
Prior year.
We're pleased with that.
We are seeing inventories.
Inventories deplete.
Obviously aggressively managing that.
We would expect today that we will get to that million dispenser 12 months sell through number.
I think it's in the in the supplemental would suggest 1 million 17. So we're still on track for that which is a positive sign.
The retail pricing is lagging so yet until it's all flushed through.
Which will be for sure not before the end of the year.
We wouldn't expect to see deflation in the price of dispensers.
As we move into 2024, and we haven't guided anything on this we would expect that the dispenser revenue.
Might be lower than the prior year as the.
Pricing that we've had to implement for tariffs is.
Eliminated.
So and it's going to vary by customers. So its not a perfect on Tuesday January 3rd just not going to work that way, it's going to vary by customer and how aggressive frankly, they are it will certainly depend to a large degree on promotional activity in Q4, particularly around traditional black Friday.
D day days or weeks, depending how you look at it.
So we feel we have still have a ways to go but that's how we look at it today. The key indicator is that we're still getting the sell through.
And whilst we still deal with some elevated inventories.
And then as I said by retail.
I guess is there.
Is there a reason to not be more.
The revenue goes down as U S.
So that flow through but I mean volume metrically I would I would I guess I'm thinking you should see an acceleration of sell through which is a good leading indicators you've talked about is that.
Ambitious or are there reasons to temper my enthusiasm or is that a fair expectation I would.
Without giving guidance I think <unk> million dollars a year is a good number.
Because part of the way that you deal with this is there could be a mix shift on the dispensers that get solved so I can sell this lower price dispensers.
I can sell higher dose priced expenses, it's going to all of those have puts and takes on.
The pricing if you will per unit.
Uh huh.
So I think I'm going to model it model $1 million.
Because I think like a three year number ish.
In terms of if you looked at three buckets of individual year, Steve So yeah, and I think the follow up I'd add there is.
Theoretically if you added 10% and to sell through you actually could do better.
<unk> connect more of the existing 1 million, we already do sell to our existing solutions. So that's why it theoretically you could sell a $1 million for several years now as long as we improve our connectivity tactics as long as we improve our market share in our businesses.
The amount that convert to our use of water as a much higher throughput than just simply trying to gun the sell through of the dispenser if that makes sense.
Dollar basis that gets much more confusing because whether you buy a pump or <unk>.
Choose to buy a high end unit, the $300 that might do single Cup coffee or tea.
It's a very different mix, they still are going to consume the annual gallons when they buy whichever one they choose to buy.
Yes, okay, great I appreciate the discussion thanks.
Thanks, Dave.
Ladies and gentlemen, as a reminder, should you have a question. Please press the star followed by the one your next question comes from Graham price from Raymond James. Please go ahead.
Hi, good morning, Thanks, Thanks for fitting me in.
For my first one great to see the progress on the private fleet side, you mentioned, the $3 5 million in annualized savings.
Just curious how high you think back and go in.
And then wondering if those routes to distribution centers or short enough.
They are applicable to the electrified or or use alternative fuels.
Yes.
Well good morning.
Two questions. There. So we're analyzing all of the private all of the common carrier lanes today.
Well frankly never get to 100%.
And it just has to do with.
We like to have trips that you can complete in one day sell out and back if you will.
Thats the most effective highest return and how we do this and it avoids all those short run spot rate.
So the Pac northwest was the one where we put $2 million in and I think our annualized return on its $1 3 million there are other initiatives.
And work that we're doing that are frankly part of our 2020 for any incremental capex that we've talked about about how we benefit from those investments to get to the higher margin and to deliver the $530 million of EBITDA, we've talked about for 2024 as an example.
Electrification.
Date.
On the bulk of our fleet, which is beverage bought a large route trucks large format bottles.
Are not an affordable solution.
So the cost for that asset is I'll be wrong, but it's.
Three X.
It is for.
A propane.
Route truck.
So I think there'll be a benefit sometime.
But it's not yet there today in terms of return on invested capital. So we've got to be thoughtful about the costs, we lay out for the asset and the return we get balanced against our shift of propane is about being as ESG responsible as we can with the constraints of appropriate returns.
And so hopefully hopefully that gets to your two questions.
It does yes, thank you for that.
And then for my follow up.
We saw.
Modest, but growing dispenser sales in Europe .
I assume that's tied to the return to office trends that you mentioned just wondering about.
Any kind of read through from that.
So expect from Europe in particular, which which looked especially strong this quarter.
Yes, I think.
Our European team has done a terrific job.
We're confident that they'll deliver on their commitments and against their strategic plans I think we referenced so we have a high degree of confidence in their ability to deliver on their commitments. There is a benefit of more return to work for sure.
And we see that flow through and we would be early stages on selling dispensers in Europe , So I wouldnt, yet call a green shoot but.
Wants to be one, but we will continue to focus on.
How we provide.
Solutions for European consumers to participate in.
Our one of our services and at the end of the day so.
So we're quite pleased with Europe and confident in their ability to continue to deliver.
Their fair share of our 'twenty three 'twenty four.
Yeah, absolutely. Thank you very much I'll pass it along.
Thanks have a good day.
John There are no further questions at this time. Please proceed with your closing remarks.
Thanks, Julie This concludes primo water second quarter results call. Thank you all for attending.
Ladies and gentlemen, this concludes your conference call for today, we thank you for joining and you may now disconnect your lines. Thank you.
Okay.
Yeah.
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