Q3 2023 Primo Water Corp Earnings Call
Okay.
Good morning, My name is Chris and I'll be your conference operator today at this time I would like to welcome everyone to the Primo water Corporation's third quarter 2023 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.
We'd like to withdraw your question. Please press star followed by two thank you I'll now turn the call over to John <unk>, Vice President Investor Relations. Please go ahead.
Welcome to Primo Water Corporation third quarter 2023 earnings conference call.
All participants are currently in listen only mode.
This call will end no later than <unk> 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 there for playback.
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 the cautionary statements 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.
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.
The 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 Primo water Corp Dot com.
We have also included a deck on our website that was designed to assist you throughout our discussion.
I'm accompanied by Tom Harrington Primo waters, Chief Executive Officer, and David has Chief Financial Officer.
Tom will start today's call by providing a high level summary of the transaction announced earlier. This morning, followed by a review of the third quarter and our progress on Primo water strategic initiatives.
Then David will review our segment level performance and we'll discuss our third quarter performance in greater detail and offer our outlook for the full year 2023 before handing the call back to Tom to provide a long term view ahead of Q&A.
With that I will now turn the call over to Tom.
Thank you John and good morning, everyone.
Before I cover the exciting news announced earlier today and the strong results. The team delivered in the third quarter I'd like to share that our associates customers suppliers and the citizens of Israel have been and remain in our thoughts and prayers.
Our associates in Israel have shown an incredible commitment to our customers each other and their communities in the face of the horrific situation by continuing to supply bottled water.
The citizens of Israel, and I want to thank them for their tremendous efforts.
Now on to today's news as we announced that we have agreed to sell a significant portion of our international businesses to Culligan International.
This deal is the first of several transactions that will occur in 2024, as we are executing strategic alternatives for the remainder of the international businesses, which include EMEA foods in the United Kingdom, as well as our water and coffee businesses in the United Kingdom Port.
Nickel and Israel and expect to finalize dates in 2024.
We believe this deal unlocks significant value for Primo water shareowners.
The transaction was the result of our proactive board led process that resulted in an agreement that offers an attractive premium valuation for their business is sold.
It enables us to focus on the North American market, where we have leadership scale and a significant addressable customer opportunity.
The proceeds will be used to drive organic growth reduce leverage accelerate water direct tuck ins pursue opportunities in water Adjacencies and return capital to shareholders via share repurchases.
Highlights of the transaction include up to $575 million, all cash purchase price for a significant portion of our international businesses unlocking substantial shareowner value.
And attractive premium valuation multiple of approximately 11 times trailing 12 months Q2 adjusted EBITDA.
Upon closing the transaction, we intend to repay the outstanding balance of our cash flow revolver with a long term goal of sustaining net leverage under two five times adjusted EBITDA.
In addition, upon closing the board plans to authorized an incremental $25 million share repurchase program.
To be clear the existing $50 million authorization approved in August of 2023 remains in place until closing and will be increased on aggregate authorization of $75 million post closing.
The remaining international businesses are expected to generate additional cash as they are sold in the upcoming year.
This transaction marks another major milestone in our transformation as a company.
Following the completion of the transaction and the divestiture of the remaining international businesses.
Simplified pro forma Primo water.
We will have greater focus on our pure play North America water businesses with scale and operational focus.
An improved financial profile accelerating the achievement of several previously announced 2024 targets by approximately one year.
The means to execute highly synergistic tuck ins as well as the ability to pursue adjacent water services and high growth categories.
Our capital allocation priorities will align with our opportunities for growth and we will be able to support a full suite of options to drive value.
We will be able to drive organic customer growth digital initiatives and customer retention activities and our capital investments will be focused in high impact profit generating projects.
We will reduce leverage giving us increased flexibility to pursue the growth opportunities.
We will fund M&A through tuck ins as well as new and potential revenue streams.
And we will support the return of capital to shareholders via share repurchases.
Upon closing, we will have a north American based company that aligns with our brand strength, a leaner more focused associate base a balance sheet that has lower leverage the power to increase organic growth greater earnings power and a company poised to execute.
M&A at an accelerated pace.
We anticipate releasing next year's guidance in conjunction with our 2023 year end earnings in February 2024.
I would like to thank all of the Primo water teams for their contributions to the excellent performance of the business and delivering another quarter of strong revenue and earnings results and generating record adjusted EBITDA margins.
In Q3, we delivered consolidated revenue growth of 6%.
Adjusted EBITDA growth of 21%.
Adjusted EBITDA margin of a record 22, 7%.
At 270 basis point increase versus the prior year.
Adjusted free cash flow of $102 million and.
And sell through of approximately 252000 water dispensers.
For the third quarter consolidated revenue increased 6% to $622 million.
Compared to $585 million.
Excluding the impact of foreign exchange revenue increased 6% for the quarter.
Adjusted EBITDA increased $24 million to $141 million, an increase of 21%.
Excluding the impact of foreign exchange adjusted EBITDA grew 19%.
In short we delivered increased revenue adjusted EBITDA growth adjusted EBITDA margin expansion and significant free cash flow.
Revenue growth was driven by strong revenue growth of water direct in exchange of 7%.
Double digit revenue growth in water refill infiltration of 19%.
Increased revenue growth in our European operations up 4%, excluding the impact of foreign exchange.
And global water direct customer retention of approximately 86% a slight increase from last quarter.
2023 growth in customers is expected to reflect the 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 plans. These customers have strong retention rates.
Generally synergize within 90 days and enhanced route density, resulting in increased adjusted EBITDA dollars and margins in the markets were executed.
Our razor razor blade business model includes two approaches.
The rental of water dispenses direct to residential and commercial customers and the sale of water dispenses through retail partners.
Both approaches enabled growth in water solutions and contribute to a predictable and recurring revenue growth.
In Q3, we had water dispenser sell through of approximately 252000 units on pace with our target of $1 million water dispensers sold through for the year.
In 2023, we are particularly focused on growth with our brick and mortar retail partners, where we have greater visibility into the connectivity to our water solutions and where the connectivity is dramatically higher than through e-commerce.
Our consolidated water direct and exchange business continued to experience strong topline momentum during the quarter with 7% revenue growth driven by pricing and 86% customer retention and more to direct.
Our water refill and filtration business continues to exhibit strong growth with revenue increasing 19% in the quarter.
The growth was driven by pricing consistent service levels and machine uptime at our retail stations.
Have a high refill station retention rate and we are expecting continued revenue and profit growth in this category.
What are we felt targets a value conscious consumer and provide similar margins to our other water offerings, which provides a diverse platform award solutions for all consumers.
We are pleased to report that our commitment to improving the customer experience has resulted in improved operational metrics digital experience and customer satisfaction.
As a reminder, our key service metrics, we focus on is on time in full or <unk>.
<unk> simply put is did we deliver to the customer on the scheduled day and with all the products they requested.
Oh tip in North America in Q3 increased when compared to Q3 of 2022.
The ability to serve our customers in the most efficient manner possible is a critical driver of both our short and long term profitability.
Units per Rep per day increased approximately 4% compared to Q3 of 2022 and revenue per hour increased 7% compared to Q3 of 2022.
Our scale and leverage are becoming more evident as we service more customers with higher volume per app.
Route density and revenue per Rep have never been higher and as a result, we were able to post record adjusted EBITDA margins of 22, 7% across the entire company and North American margins of 25, 7%.
Relative to ESG.
Last month, we received the results of the sustained Atlantica GAAP analysis report.
We were able to significantly improve our overall risk or related to ESG factors and received a strong corporate governance score.
Our strength in ESG, coupled with our ownership of water rights and access to water sources as well as our expansive distribution network sets us apart in terms of our ability to meet our customers' needs whenever wherever and however, they want.
Have an economic moat that is not easily replicated and sets us up for sustained success.
Looking ahead, we are reaffirming our full year 2023 revenue guidance to be between 232 and $2 $3 6 billion.
With revenue growth in a range of 7% to 9%.
And full year 2023, adjusted EBITDA to be between 468 and $480 million, while understanding the current challenges in Israel.
Our disruptions to date had been relatively minor.
And we continue to monitor the situation closely.
We've made significant strides with respect to adjusted free cash flow generation through a combination of increased earnings and improved working capital we.
We expect an increase in full year 2023 annual adjusted free cash flow to $160 million, a $10 million increase versus prior guidance.
We anticipate releasing next year's guidance in conjunction with our 2023 year end earnings in February of 2024.
I will now turn the call over to our CFO, David <unk> 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 $622 million compared to $585 million, excluding the impact of foreign exchange revenue increased 6% for the quarter.
Adjusted EBITDA grew 21% to $141 million, which represents a 270 basis points of margin expansion to 22, 7%.
Excluding the impact of foreign exchange adjusted EBITDA grew 19%.
Turning to our segment level performance for the quarter, North America revenue increased 5% to $470 million compared to $447 million.
Adjusted EBITDA in North America increased 18% to $121 million.
Adjusted EBITDA margins climbed to 25, 7%.
A 280 basis point improvement over last year.
In our Europe segment revenue increased by 13% to $81 million, excluding the impact of foreign exchange revenue increased 4%.
Adjusted EBITDA in the Europe segment increased 32% to $20 million.
Excluding the impact of foreign exchange adjusted EBITDA increased by 18%.
Adjusted EBITDA margins climbed to 25, 2%, a 350 basis point improvement over last year.
Turning to our Q4 and full year outlook, we expect consolidated revenue for the fourth quarter to be between $558 million and $598 million and adjusted EBITDA will be in the range of $108 million to $118 million.
As Tom mentioned for the full year 2023, we are reaffirming our guidance with revenue projected to be between $2 three two and $2 36 billion with revenue growth in the range of 7% to 9% and full year 2023, adjusted EBITDA to be between $460 million.
And $480 million.
Additionally, we are raising our adjusted free cash flow guidance to $160 million, an increase of $10 million compared to the previous guidance.
Our reported SG&A expenses in the third quarter were 57% as expected our Q3 SG&A declined as a percentage of sales as we were able to benefit from the leverage and scale of higher volume due to seasonality on.
On a year to date basis adjusting for the onetime nonrecurring items such as the Actavis proxy contest SG&A would have been 52, 5% compared to the reported 53, 2%.
We are maintaining our 2023 capex guidance of approximately $200 million.
Which is approximately 7% of revenue plus an incremental $30 million.
We reaffirm our prior guidance that we expect to return to our total capex spend of approximately 7% of revenue in 2025 irrespective of the transaction.
Key initiatives to be funded from our Capex plan include driving organic growth, including investments in digital capabilities, leading dispenser innovation building, a 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 resale in filtration will refresh signage and branding of our existing units.
Development of our on the go units and new filtration innovations.
For the full year 2023, we continue to expect interest expense of approximately 70% to $75 million.
Most 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 that we are actively managing lower with excess cash while rates remained.
At approximately 7% due.
Due to the increased cash generation from the business and the management of Capex and working capital items, we've been able to prioritize reducing our cash flow revolver by $76 million in the third quarter below.
Full year 2023 cash taxes are expected to be approximately $25 million. This anticipates utilization of U S. Net operating losses or Nols, we still have a substantial amount of U S. Nols available in the balance of 2023 and 2024.
As a reminder, our water dispenser category was previously under a 25% import tariff, but was reclassified last year and a refund process was initiated.
Have recorded the refunds in the same manner as the original transactions.
Through Q3, we have received approximately $5 1 million of tariff refunds, a slight increase since last quarter.
Approximately $2 $4 million of the $5 1 million as reflected in year to date adjusted EBITDA related to water dispensers are sold to retail a similar $2 $4 million is related to the water dispensers that we read as capex with the residual value approximately $326000 related to interest income.
For the year to date tariff balance paid to Primo.
Through Q3, $5 $1 million is reflected in our adjusted free cash flow guidance that we'll discuss in a moment.
We have not included any additional refund amounts and our updated guidance due to the uncertain timing of the refund process.
As we look at our performance in the first three quarters of the year, we are confident in our ability to raise our annual adjusted free cash flow guidance to $160 million, an increase of $10 million.
The $10 million increase from prior guidance is attributable to the slight increase in tariff receipts since last quarter with the balance related mainly to the benefits in working capital actions across the quarter and anticipated into year end.
We are pleased to report that we've achieved our targeted adjusted net leverage ratio with the latest quarter coming in at two nine times, which is below our 3.0 time target for the end of 2023, and we remain committed to achieve a targeted net leverage ratio of less than two five times after the completion.
<unk> of the transaction.
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.
<unk> per customer acquired through acquisition is typically similar to other means of acquisition. However, the difference lies in the stickiness of the customer.
Customers acquired through tuck in acquisitions are already users of the service and understand the benefits and annual cost of water direct service.
We remain committed to water direct tuck ins 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.
Our board of directors has 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 each of the last two years.
As it relates to the transaction announced this morning, we are very excited about Primo water's financial profile on a go forward basis.
We remain confident in our ability to achieve previously communicated 2024 financial targets and this transaction will allow us to accelerate several of these targets by up to a year sooner than anticipated.
The transaction will also allow primo water to focus on the North American business that contributes most of the financial benefits to the company.
Across the board the transaction yields greater financial outcomes across the margin and adjusted free cash flow conversion metrics.
The notional value of adjusted EBITDA and free cash flow declines the conversion of each future dollar increases significantly.
This reflects the scale present in the North American business. When you take our updated 2023 full year adjusted free cash flow guidance of $160 million, the new Primo water will deliver approximately $140 million of that benefit as.
As we right size the company across 2024, we expect to replace nearly all of the $20 million of adjusted free cash flow by optimizing the cost structure of the company.
This is prior to the additional organic and acquired free cash flow growth that will occur in normal course throughout the year.
Immediately upon close we intend to repay the outstanding balance on our cash flow revolver as well as increased and fulfill the newly authorized $75 million share repurchase program. The additional.
Proceeds will provide financial flexibility to pursue organic growth accelerate accretive water direct tuck in acquisitions and engage in acquisition opportunities complementary and adjacent to our core North American water businesses.
To achieve the $20 million and business optimization previously discussed we intend to engage outside consultants to support initiatives to drive efficiencies as we shift from a global organization to one focused solely on the North American market.
We intend to provide updated 2024 guidance for the North American focused version of Primo water in February during our normal earnings call related to Q4 and fiscal 2023 results I will now turn the call back to Tom.
Thanks, David.
Our strong performance reinforces our confidence in our ability to deliver sustained growth supported by strong revenue growth in our water direct exchange refill and filtration businesses.
Continued execution of our tuck in M&A strategy.
The improved performance of our operations and adjusted EBITDA margin expansion.
We are making solid progress.
We have the right plan and the right team in place to succeed.
We are one of the only pure play water platforms, with leading national and local brands and we benefit from a large and growing revenue base.
Our long term growth targets are driven by the connectivity of water dispensers to our water solutions as well as consumer tailwind such as the focus on health and wellness and concerns about the aging water infrastructure.
We have a healthy balance sheet.
<unk> long term growth outlook and an attractive margin profile. We are confident that shareowners will be pleased with the results of the transaction announced earlier today as we create value by driving organic growth.
Using leverage funding M&A and supporting the return of capital.
As an update earlier this summer I announced my retirement at the end of 2023.
And the board initiated a search for my successor.
Board with the support of an international search firm has met with a number of highly qualified candidates and is in the final stages of the process and we therefore anticipate announcing a new CEO later this quarter.
As you can see from our results the business continues to perform at a high level with strong results and is clearly well positioned for the future.
It has been an amazing personal journey over the last two decades, including the last five years as a CEO of the company.
I am proud of what we have accomplished the.
The transformation of the company from a private label juice coffee and soft drink manufacturer.
To a pure play water company has proven to be the right move customers associates and shareholders.
All of this accomplished whilst managing through a global pandemic record high inflation.
Two major awards and a significant board refresh.
The current transaction to sell most of our international businesses had a premium valuation.
We will enable the company to become a more focused north American water business.
I will remain as supportive of the company and will be cheering them on as an investor fan and the customer.
I'd also like to thank you investors and analysts the financial community.
I'm hopeful that the marketplace recognizes the value of our model and our consistent execution and rewards us accordingly.
Our leadership team and our associates across the business are amazing and I. Thank them for their tireless efforts and support our mission of serving our customers with professionalism they choose.
Really are the best in the business.
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.
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 will hear three tell them prompt acknowledging our request and your questions will be pulled in the order. They are received should you wish to decline from the polling process. Please press star followed by two if you are using a speaker phone. Please lift the handset before pressing any keys one moment. Please for your first question.
Your first question comes from Derek Lessard TD Cowen Derek. Please go ahead.
Good morning, everybody.
Just wanted to say Derek.
Good morning, Tom.
Wanted to start off maybe with all congratulations Tom on your retirement I think you've done.
Marketable job at the helm of this organization through really challenging times to say the least so wishing you nothing but the best for the second act whatever that may be.
Thanks, Derik I appreciate that very much.
Of course, Youre going out with a buying I expected nothing less so congrats.
Ill.
Just had a few questions.
Yeah.
Maybe it's more for David but on the pro forma business with most of the really all on slide 12.
Just wondering if maybe you could clarify the step down in EBITDA from 470 million to $3 75, I think.
The legacy business that you are selling in Europe is close to $60 million of that so what what's the missing piece there.
Yeah. Thanks, Derrick so the.
The purpose of that was to give everyone a foundation of who.
And what we call Newco will be on a 23 guide basis. So.
So as you think about the $4 70, representing the midpoint of our guidance $3 75 would include the PWA component and the corporate component, but the reality is there is about $416 million of equivalent midpoint guide EBIT.
In the business.
That includes PW, ne Corp, and the assets that will be part of secondary transactions across 2024.
The other thing the $3 75 does not yet contemplate would be optimization gains as we look to right size the business I E reduce some of the.
Reduce some of the overhead in the business for just a domestic business and so obviously on a pro forma basis that $3 75 equivalent to the free cash flow chart has about $20 million of upside and this is all before we give guidance that includes both organic and inorganic growth.
Sitting across 2024, and so I think that's really the clarity we wanted to provide there I appreciate the question.
Okay. That's that's helpful and I guess, maybe you just touched on it two on the same slide looking at that free cash flow.
To walk it down to 140, even talk it back up to 160, just to remind I think you did allude to it on the call, but maybe just what youre expecting to drive that incremental 20 million Bucks.
Correct, Yes, so again 160 would be the guide we just took up with that $10 million increase for the enterprise for 2023 inside that 160 $140 million would be the adjusted free cash flow generative capacity of the PWM business that we will have as a go forward.
The $20 million represents the pro forma view of US again, right sizing with 100% flow through of that benefit basically saying that when were done on a run rate basis, there will be zero slippage in free cash flow for what we consider the newco business now that will take.
Across calendar 'twenty four to develop and again similarly to the comments in the prepared remarks.
That is prior to any organic or Inorganically acquired free cash flow that comes across 2024, So kind of the same thing $3 75 has upside when you think about these optimization and we depicted the $1 40 with its $20 million off the upside to sort of get us back to parity with the business. We are right now and that kind of shows you again the <unk>.
Cash flow potential of who will be going forward of just this domestic oriented business.
Okay. That's all very helpful and maybe I'll sneak one last one and just again on your 2023 guide more specifically on Q4, obviously big beat this quarter, but revenue and adjusted EBIT Guide you kept unchanged.
That's not in discontinued ops, just yet right now.
No.
No. So that's normal course right. So we expect to close on I think we've said 12 to 31, so that is existing company as its whereas look derek to be completely transparent.
We have a business in Israel.
It hasn't performed well through the last crazy four weeks.
And thus far minimal impact, but frankly, I don't want it to have a degree of conservatism here because I don't know whats going to happen over the next four to six weeks, we watch it were in contact and.
In real time, all the time with the team.
So.
Just hedging against what could be.
An outcome in Israel I don't know so I don't want to get ahead of myself I certainly don't want to leave this for the new Guy.
Uh huh.
Properly, reflecting what could be.
Yes, Thats fair guys. Thanks, Tom Thanks, David again, congrats absolutely Eric I appreciate it.
Thank you. Your next question comes from Stephen Powers of Deutsche Bank. Steven. Please go ahead.
Great. Thanks, so much and Tom Congrats.
Thanks.
Yes.
Great.
Hey, so.
Building on.
That topic the transaction topic I guess, the first thing Tom you had mentioned you used the words in your prepared remarks and slides as well.
Proceeds from the transaction of up to $5 75, and I just wanted to clarify what might be the variables around that I mean, if it's just normal course closing costs and the like that's fine, but if there is any kind of variability in terms of the deal that would be helpful to know no no. There is no.
And be it is just.
Those last minute closing close between now and then.
So, yes, we expect to close at $5 75, but.
Cost could vary a little bit between now and then so.
No triggers that set up or down or anything to that nature.
Great Okay.
And then.
I guess.
Maybe.
Yes, David if you could.
Clarify a little bit more just kind of bridging the pro forma I guess the.
Another way to cut it like what is the EBITDA base of the businesses that remain for sale what is that EBITDA base from the perspective of a of.
From a future buyer number one and then I guess netted against that what's the what's the stranded.
Corporate cost.
I'm sure that you've embedded here.
It's a hard time parsing that out from the numbers that you provided.
Yeah understood. So the obviously on the screen.
The same slide that Derek was asking about there's about a $95 million step down in.
Inside that the residual assets not included with this transaction.
On an equivalent kind.
Kind of a guide.
Apples for apples like value is about $40 million in USD.
Local currency here and then there is about $2 million of stranded.
North American overhead that gets shipped overseas basically if you will is support costs that comes back.
Increases the overall corp value to about $35 5 million.
And so that's kind of the the.
The bucket if you will of the money, where we're trying to seek the optimization across 24.
Okay, Okay, I got it but from an apples to apples basis, you've got about a $40 million EBITDA base that remains for sale.
That's correct, yes, and again, we are inactive processes to monetize those additional transaction.
All of those entities.
But today, obviously, we wanted to talk about the primary and the first transaction.
That is a major benefit for us to begin the focus here domestically.
Okay.
I just wanted to make sure that those conversations are all in flight. It sounds like they are just wanted to absolutely that's correct, yes. Okay.
Very good thanks, so much thank.
Thank you thanks, David I have to go in.
Your next question comes from Andrea Teixeira Jpmorgan Andrea Please go ahead.
Good morning.
Congrats on the transaction.
Thank you all have a good morning.
Yes, good morning, and I have to congratulate you on your retirement.
Again.
The nice thing about me I remember.
Yes.
And so I have two questions first on the on the deal if we step back Tom on this day faster you talked about strategic options.
You know as you have been and now youre going to be able to focus in the U S.
Can you think about like potentially bigger transaction transformational transactions as you had attempted in the past.
Obviously with your largest competitor.
Is that like this obviously puts you in a completely different.
Position from a capital structure perspective, youre going to have excess cash.
The leverage youre going to have obviously.
Additional free cash I mean, that's just a very little impact on your free cash flow. So from an LBO perspective or anything you can think of like I was just hoping to see if you.
Could this company to take.
In terms of like.
Next steps from a strategic perspective, and then secondly on the underlying business for a couple of things that I wanted to clarify one of the water direct in exchange.
Can you talk a bit more about the composition of the topline I know I know this is something that investors and CPG have been asking for how to like in terms of volume customers and pricing within the third quarter growth.
And also I mean, I know and dispensers you had a very tough comparison in the quarter. I think you were shift shipping ahead of consumption ahead of the price increase last year.
But just like a little bit of color there.
If you're seeing anything.
As it relates to any.
Any deceleration or anything that we shouldn't be a warehouse.
Alright, I know, it's a lot.
Yes, we will see if I.
We'll get through this so.
Let's talk about <unk>.
Our capital deployment strategy, which I think is important as we see it today, we will invest in growth.
In North America right. So that's.
Organic triggers digital capabilities as well as investments against high profit generating projects.
And that would be some of the plants that we've discussed in the past as an example continued development on our digital capabilities. So to support the growth of the topline from an organic perspective, we are focused on deleverage. So we will.
Reduce the cash flow revolver to zero at the time of closing, which youll get us in a position that we could maintain that two five times leverage go forward.
On for the foreseeable future that is our intended path.
We have the ability with because we have a robust pipeline of.
Think of it as water direct M&A tuck ins that we will invest the energy there the state remain.
Highly synergistic and help us build bulk EBITDA, but certainly EBITDA margins as we leverage that those incremental customers and new revenue.
Inside the markets, where we execute does so that'll be a primary focus of ours and then of course we.
Referenced share repurchase.
As part of our go forward capital deployment strategy.
We don't see anything transformative on the near term horizon.
We will look at what I'll call water adjacency. So are there other highly profitable areas that fit and water because without water company.
We will consider theres, nothing eminent or actionable there, but this gives us the ability to further pursue adjacencies that.
Fit with our model and that.
At the end of the day would ignore it in order to our shareholders benefit.
So that's the capital deployment.
Our current view of how we will use cash and responsive to your question about that biggest customer.
I'll skip the revenue I'll leave that one for David but I'll just touch base briefly on your dispenser question, Yes, we had a big comp.
We were able to sell through roughly 252000 dispensers, we're confident in our ability to get to approximately $1 million. This year importantly, millions of sell through in 2023.
Importantly, we're very focused on brick and mortar.
As opposed to e-commerce, and part of our cycle or the comp we have it's because of some activities. We did a year ago in e-commerce.
But we really shifted to be focused on that brick and mortar because we have a clear line of sight to the connectivity when they sell a dispenser a large retailer I can see it.
Translate into an exchange sale, it's much harder for us to see that benefit in e-commerce.
So I think some of the future work that the team will have to do with how do we improve that visibility on ecommerce, we're not there today and shift our real focus to how do we sell more in big box retailers in all of our customers were.
We enjoy relationship where they sell dispensers.
So hopefully that clarifies that a bit and then I'll flip the ret your revenue question or component questions over to David.
Yes Andrea.
Within the quarter itself again focused on the North America side as that's our go forward business we had.
Positive volume contribution of close to a percent with the balance being pricing and so that obviously shows a sequencing that is how we had articulated the pacing would undergo throughout the calendar year and that came true within water direct in exchange.
<unk>.
About a point of volume and the balance being price.
Very helpful I'll pass it on thank you.
Thank you Andrew Thanks Andrea.
Thank you. Your next question comes from Daniel Moore CJS Securities. Daniel Please go ahead.
Thank you good morning, Tom David and Tom. Thank you again best of luck I think he left the company with.
Exceptional collection of assets for voice for growth going forward.
Thanks, Dan.
Absolutely.
Two I was going to say don't let the door hit you, but I didn't say that.
Okay.
If it's in the presentation and I missed it. Please let me know but is there any tax leakage at the $5 75, and I am assuming there is no regulatory hurdles that you are particularly concerned with given the short window in which you expect to close.
Yes, we obviously have to get through some regulatory hurdles, but.
Mulligan believes they will get through those.
And you can see it's a pretty quick close so we think.
Yeah.
There are no guarantees.
But our view is collagen view is we will get through any of those in normal course over the next several weeks next.
Whatever it is two months Dan.
Yes, and Dan on the Tech side, where we're estimating some minimal leakage. We don't believe that will actually end up becoming true, but just for conservatism and kind of how we're looking to deploy capital, we're reserving a little bit sort of sub $10 million on that.
But we will circle back obviously upon close with the final outcome.
Perfect.
Then as it relates to the multiple you received from Culligan, Tom when you think about the assets that you're selling relative to the assets that remain.
Any discernible differences.
The words.
Obviously collagen will probably generate some pretty reasonable synergies on their side and thats embedded in the multiple but anything else that would explain the sort of discrepancy between the sale price versus where pretty much trading. Thanks again.
Yes.
The collagen deal stands on its own what it is and the value of that.
They will be willing to pay for us for <unk> in many cases overlapping assets.
So that's that and I don't want to get.
We're in processes and starting processes and don't really want to get into a public discussion about what multiple you might might not get for those remaining assets because it will all be different.
So I think it would be wise to not disclose any of that.
Our ability to maximize value frankly over the long haul on those assets.
And I think as communicated.
The ability with just that this transaction to eliminate the revolver with just this transaction to increase the share repurchase by $25 million.
Obviously, we will have additional communications as those transact about next set or next to use of proceeds but we're pretty pleased with just this transaction, we can be that impactful sort of our leverage and our cash flow.
Perfect and then the last one while I get one more crack at your Tom Route density.
A big focus and.
Kind of reached peak levels of that peak, but record levels this quarter.
Excluding further price increases how much room is there in your mind to continue to improve route density from current these current levels we saw in Q3.
Yeah. Thanks, Dan if you look at the numbers, we put out there it runs on the euro at 3% to 4% on a quarter over quarter. So I don't think we've finished.
It does absolutely have to do with customer density. So as we've been one of the things we benefit from our Costco relationship as we bring in customers over those same routes.
So as you reduce miles and you have more customers in a smaller geographic footprint will deliver more on a daily basis. So that footprint and then it's also an important component of our M&A tuck in strategy as you buy businesses and overlapping overlapping geographies, we will continue to benefit from the leverage.
That they provide us in terms of route density.
And I think maybe he dropped.
Okay. Thank you moving on your next question comes from John's MRO CIBC John Please go ahead.
Thank you good morning, Tom I know youre user already burning, but I'll Echo my congratulations on your career and transition as well it's been a pleasure.
Thanks, John I appreciate it.
My first question is on the M&A market and I Wonder what you've seen here are there more opportunities now relative to years past given private equity might be pulling back in the environment of higher for longer is that one of the reasons that you might want accelerates tuck in deals.
Well I think there as you may recall last year. When we gave our guide of tuck ins of 20 to 30, we were purposeful about.
Lack of clarity about.
The revenue performance of some of those tuck ins that.
We articulated we wanted to be cautious because many times with pay a multiple of revenue and we wanted to make sure that any price increases they took stock.
And secondly that we talked about the impact of high fuel prices on small operators. So we think that was a prudent decision.
And that as we stand here today, we have as robust a pipeline as we've had in <unk>.
Maybe as long as I can remember doing this right. So it is a.
Actionable.
'twenty four 'twenty five pipeline of activities.
We have to be thoughtful about timing of when we do them. So we can execute properly that the company's job.
But it is a robust platform. So I think it's the market conditions that are ignoring to our benefit.
And we continue to kind of be the leader in this space in terms of our ability to execute in more of a direct.
And I think John the one thing I'd pile on there is because of Primo's scale domestically in our branch network, we really don't bump up against private equity where a single transaction.
Benefit them done in creating or starting a platform. If you will so we would have the ability to compete at any at any level really because of the ability to synergize those down quickly within our network itself.
So I feel pretty fortunate that that's our that's our pipeline and its ability to sort of tuck in very smoothly.
Right understood. Okay. That's helpful. And then my follow up is on is on pricing.
Specifically, you've demonstrated some real pricing power over the past couple of years I Wonder how youre thinking about pricing for 24 do you have anything planned at the moment as it depends on your outlook for costs have you seen pushback on pricing subsequent to yes.
Yes, Yes, yes fair question, John I think in my prepared remarks, we talked about our retention rate on that what a direct business at 86%, which was a slight uptick from prior quarter.
So it's a pretty good indication of our ability and the customer's reaction to pricing.
So we haven't split pretty elastic.
We would currently in 24 look at normal course pricing.
Right. We don't currently see the need for accelerated pricing.
Based on.
Where inflation appears to be settling in.
But we've always reserve the right if that number moves and we will get ahead of it and we certainly watch fuel pricing.
On a daily basis and that takes the other way, we will take an action and I think the last two and a half years or so would indicate that.
Customer base is stable, we're able to drive the pricing through it does offset inflation and we've been able to add to our margins.
As a result of those actions over the course of I don't know 15.
A dozen quarters right that we've been doing it.
Yeah.
Okay fair enough. Thank you very much.
Thanks, John.
Thank you. Your next question comes from Pavel <unk> of Raymond James Pavel. Please go ahead.
Yes, thanks for taking the question kind of back on the M&A topic. The fact that you have not been.
Particularly active with roll off activity over the past 12 months is that because you've been kind of reluctant to take on more more debt. While you are above the leverage targets.
No.
We funded out of free cash flow.
And that has not been the driver it was more strategically obviously that are strategic in our long term target, where we said we wanted to get under three in 2023, we did it a quarter early with $2 91 at the end of Q3 clear line of sight to two and a half is normal course, so they don't want a diminished.
How important it is.
But it was really more about market conditions, largely driven by inflation largely driven within the fuel cost and how that.
We believed would wear on a smaller target or a direct operators and I believe that's now become true based on our pipeline.
Yes, I think Pablo.
We've been able to buy the right target at the right price. This year and then obviously within the quarter alone still reduce the revolving loan by $76 million. So it's not been an either or to date, it's been about the right target the right geography, the right ability to synergize the down for value.
But again, we're of course excited about the cash generative opportunity of the new business that seems to match well heading into 'twenty four with the pipeline that built across for us to execute against next year. So I think it's maybe reversing your question a little bit we're pretty excited about where we can go with tuck ins next year.
Yeah.
And now that you will be a north American pure play are there.
The killer.
Rates or Canadian provinces, where you have not historically, perhaps accessed but are now going to try to penetrate.
Our first course is all caught barbell overlapping because they are the most synergistic to us.
So.
Greenfield has historically not been an area, we've invested energy on tuck ins.
What we will do though is begin to think about what are those water adjacency that makes sense for us so that would be.
To the right of center, but it's something that this company needs to think about longer term about what are the things we could do because we will be in a position to do that that makes sense for the company and its shareholders.
Alright, thanks very much.
Thanks, Bob I appreciate it.
Thank you there are no further questions at this time I will now turn it back to Jon Cutler for closing remarks.
Thanks, Chris This concludes Primo water's third quarter results call. Thank you all for attending.
Okay.
Thank you ladies and gentlemen. This concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.