Q2 2019 Earnings Call
Ladies and gentlemen, this is the operator today's conference call is schedule to begin momentarily until that time your lines will again be placed on forward.
Thank you for your patience.
Welcome to Cott Corporation's second quarter 2019 earnings conference call.
All participants are currently any listen only mode.
This call will end no later than 11 am eastern time.
The call is being webcast live on <unk> website at Www Dot <unk> dot com and will be available for playback there until August 20 seconds 2019.
This conference call contains forward looking statements, including statements concerning the company's future financial and operational performance.
These statements should be considered in connection with cautionary statements and disclaimers contained in the Safe Harbor statement in this morning's earnings press release.
In the company's annual report on form 10, dashed <unk> quarterly reports on Form 10-Q , and other filings with the U.S. and Canadian Securities regulators.
The company's actual performance could differ materially from these statements and the company undertakes no duty to update these forward looking statements, except as expressly required by applicable law.
A reconciliation of any non-GAAP financial measures discussed during the call with the most comparable measures in accordance with GAAP is available on the company's second quarter 2019 earnings announcement released earlier this morning or on the Investor Relations sections of the company's website at Www Dot Com Dot com.
I'll now turn the call over to Derek cuts and VP of Investor Relations.
Good morning, and thank you for joining our call.
Today I'm accompanied by Tom Harrington, our Chief Executive Officer, and Jay Wells, Our Chief Financial Officer.
Tom will kick things off by providing his thoughts and a number of activities within our business segments, including a discussion on some of our ongoing initiatives and our operational performance during the second quarter relative to our expectations. He will then turn the call over to Jay for a discussion of our second quarter consolidated financial performance as well as the results of our key operating segments and thoughts on the full year and Tom will conclude with a few thoughts before we moved acuity with that let me now turn the call over to Tom.
Thank you Gerry and good morning, everyone.
I am pleased with the performance of the company over the first half of the year in particular, the adjusted EBITDA performance relative to prior year and compared to consensus in the second quarter overall, the business performed well and would have been even stronger if the FX headwind had not increased.
On the operational front, we continue to execute against the initiatives that weve outlined in the past and fully expect them to contribute to our growth over the coming quarters in years.
Within our route based services businesses, we've seen improved results from our European operations.
Our customer growth programs have been the most successful since we acquired Eden Springs in the middle of 2016.
Execution of our high density area sales and marketing efforts as well as other countries specific activities are delivering net customer growth in most key markets.
We have enhanced our footprint through organic growth and tuck in acquisitions in countries, such as Poland, where h. or de watering is enjoying good growth.
And where we are building meaningful route density as a result of our actions.
We're also pleased with the extension of our Booth program into the United Kingdom.
Sales productivity is meeting expectations and over three quarters of the new customers our residential.
This is an important development as we look to implement actions in the coming years to develop the underpenetrated residential markets across our European operations.
Turning to our U.S. route based services business.
We continue to see good top line and EBITDA growth.
Even with the general inflation in the U.S. over the last 18 months.
As you are aware the freight costs, we face were a headwind in 2018. However, we're pleased they are now largely resolved.
Well more recently, we've seen some wage inflation given the low unemployment rate these cost have been offset by our pricing initiatives.
Importantly, as the U.S. route based business is our largest business. It's nice to see that we delivered 5% H or do you want a topline growth in the quarter when excluding the mountain Valley acquisition.
Consistent with historical seasonality the team drove this growth due to the delivery of good net customer growth.
Continued improvements in our customer satisfaction in service levels as well as improved pricing.
We remain confident that the investments in a customer experience that we are making will contribute to our future growth.
Although these route based service activities all come with investment we believe that they are positioning our company for success and continued growth as we look out over the next three to five years.
As an update we have implemented enhanced communications with our customers in the U.S. in advance of the implementation of the new <unk>, New mobile App, which is on car target for Q4 Rolla.
Weve introduced more relevant consumer offerings through products, such as our mountain Valley brand sparkling eyes.
And branded sparkling water filters.
We are increasing penetration of case pack water that we sell into our returnable customer base.
Best to think of this effort as cross selling a new package to our customer.
We continue to develop new and expanded channels of customer acquisition.
Such as the new E Commerce platform, which enables consumers to order and reorder returnable five gallon water through the significant online retailer as you know we begin test marketing during the second quarter in a few cities in Georgia, and our expanding across the state of Florida during Q3.
We are working with our customer on the timing of a further expanded roll out and were excited to add another channel of customer acquisition to our current portfolio of customer acquisition tactics.
We continue to make improvements and investments in our digital customer acquisition Cape in its capabilities.
True search engine optimization and search engine marketing initiatives.
As well as executing on new tuck in targets across the mountain Valley distribution network.
We continue to work on developing state of the art equipment offerings for our customers.
For instance, we will introduce a new and improved water coffee dispenser called the opposite very stuff, which is a combo unit that dispenses water and K cups.
As well as an aiotv internet of things enabled filtration water cooler later in the year.
In terms of the new patented filtration technology, we will be introducing a solution to the market that we will that we believe will provide us with a competitive advantage in terms of retaining and attracting new customers.
This new patented filtration technology meaningfully extends the life of the water filter.
Will require far fewer service interactions and in turn we expect will increase customer satisfaction.
We plan to shift a dialogue with the customer from when did you last change your filter to a solution that provides high quality safe drinking water transparently through the introduction of an app that enables customers to confirm their water quality in real time.
Which we believe will Libby alleviate any fear they may have about water quality, which as you know has been a long standing issue relative to relative to municipal water supply in some markets across our footprint.
We will then utilize this technology to proactively contact the customer if we see any changes with the award of quality and communicate one it is time to replace the filter.
With this new technology.
And then investment and expanded sales team, we anticipate good growth from this channel over the coming years.
As we've noted in the past the filtrate that filtration channel for US is a separate and distinct channel from our E. Joe do you want a channel.
Filtration is generally not the most economical solution for our core HR the water customers in a small commercial accounts.
When looking at the water filtration segment of our business compared to each of the water historically, we've only seen around 3% of our total quit convert to water filtration.
Naturally.
Its filtration is what a customer wants to move to we would expect that these customers would convert to what caught solution.
Our typical commercial HL deepwater customer is a small business with 10 to 15 employees that generally utilizes a water cooler and a customer facing areas such as the waiting area at a doctor's office, a dentist office or an auto repair shop.
But the cost to install a filtration unit and extend the water lines and these types of locations is not cost effective.
We believe that H a de bottle water provides the lowest cost solution for this customer base.
In terms of water filtration, we target larger businesses as the economics for the customer can be better and therefore, the installation of the unit and a three to five year contract or rental agreement typically makes the most sense.
Elaborating more on customer experience initiatives.
The overall goal of our business and service proposition is to position the customer at the center of everything we do and to strive for flawless execution on all customer interactions.
The idea of the ultimate customer experience is not a new one to our business, but a mindset that we've been reinforcing for a number of years.
The evolution started back in 2015, when we invested in our state of the art customer contact center in Lakeland, Florida, well, we have around 500 associates.
Who serves approximately over 3 million calls per year.
This customer contact center has evolved into a world Class Center and these investments are paying off in improved service satisfaction as we've consistently seen reductions in calls per customer alongside lower customer churn.
After rolling out our new state of the our contact center, we invested in a platform designed to improve and assist us with the route based delivery system utilizing a handheld iPhone for a route sales representatives or Rs ours, well, we create a seamless solution for artists ours to get their routes delivery schedule to learn what the customers special instructions are and to plan out there day utilizing best in class technology.
These tools are real time in nature, so were able to see where ours ours are located at any point in time during the day.
What inventory they still have on their truck.
And how far along they are on their route.
This transactional data is then married up with omni tracks our investment in routing software that enables us to do more efficient route plan.
We continue to see good progress with route logistics and we'll continue to develop our skills on this platform as we look to invest in our operations in order to continue to leverage our business and create margin expansion.
And looking at our overall customer initiatives think them. Our initial efforts as building the foundation and most importantly building customer satisfaction through improved service capabilities.
Now we are focusing our investments to drive further customer loyalty and revenue per customer.
By interacting with the customer directly and providing them with the communication tools that they desire.
Once we are satisfied with the effectiveness of the platforms, we have built in the U.S.
We will then export them to your.
Moving to our coffee tea and Xtract solution business.
We believe that competitive environment will be less of a challenge for us as we move into the back half of the year.
That said even in this competitive environment, we delivered good coffee volume growth during the quarter of 3%.
And delivered extract volume growth of 24%.
With this consistent growth in our core coffee business and the full year expectation for extracts to grow 30%.
We're confident that our coffee tea and Xtract solution segment is on the right track.
Growing market share and is poised to move past the short term challenges and return to a consistent revenue and EBITDA growth story as we move into 2020.
Switching over to a new initiative that we rolled out this year environmental social and governance.
Weve made good progress in the development of our U.S.G. programs, but we're still early in the process.
Though we are trending in the right direction.
As part of our planning and growth we are building our strategy and internal capabilities to meet our environmental goals of achieving alliance for water stewardship and carbon neutral certifications.
We're also working with S.G. rating agencies to ensure our current efforts are reflected in their assessments and have seen us sustain analytic scores improved from our efforts moving up to the top third of our industry.
We expect our school was to improve along the way as we continue building, our U.S.G. programs and engaging.
With rating agencies.
I'd like to now move to a quick update on our annual strategic review process.
We officially began or annual strategic review process late in Q2.
And although this is a fluid process that is ongoing throughout the year. This is the time that we look back over the past few years and forward over the next three to five years and perform a thorough review of our businesses.
The process provides an opportunity for our entire leadership team to review past successes.
And identify areas for opportunity, while reviewing historical internal performance data, revealing external third party data as well as other analytics, including feedback from investors and to align and developed the actions we need to take in order to ensure our continued success as a business.
This process enables us to reinforce our commitment and focus on efforts that accomplish a number of important objectives.
Such as ongoing succession planning and employing employee development as well as customer operational and other strategic investments all of which lead to and support.
Predictable organic revenue growth in both segments.
With the minimum expectation of 2% to 3% of revenue growth.
Maintenance of a robust pipeline of M&A targets in the RBS reporting segment that drives a minimum of 1% to 2% of revenue growth and a continued focus on free cash flow management.
With that.
I'll turn the call over to Jay where he will review our second quarter results and provide an update on full year expectations before I wrap things up and we moved to today.
Thank you Tom and good morning, everyone.
We continue to see good topline performance with revenue up 6% when you exclude the impact of foreign exchange the sale of cop beverages, LLC and the change in average cost of a coffee driven by growth and pricing benefits with an H or de water and good price mix and extract growth within our coffee tea and extracts solutions segment.
Gross profit, excluding coffee beverages, LLC, which was sold in February 2019 increased 5% our gross margin as a percentage of revenue was up 50 basis points to 51.8% driven by fixed cost leverage as a result of good topline growth.
[noise] SGN, a expenses increased to $284 million compared to $275 million due to the addition of selling and operating costs associated with the Mountain Valley acquisition.
General inflation, which was mitigated through pricing actions.
And increased sales and operating expense within our coffee tea and Xtract solution segment associated with increased coffee volumes.
Offset in part by the sale of Cop beverages LLC.
Adjusted EBITDA was $84 million compared to 81 million as the growth in revenue and corresponding fixed cost leverage was offset in part by $5 million increase in sales and operating costs within our coffee tea and extracts solutions segment as well as increased foreign exchange headwinds with our route based services segments.
Adjusted free cash flow from continuing operations was $12 million of usage, primarily driven by the timing of working capital in the quarter.
In terms of free cash flow cadence, we typically see free cash flow usage in the first half of the year as we build inventory and prepare for the busy summer season.
And then we see good cash inflows in the back half of the year.
Turning to returns to shareholders. During the second quarter, we returned approximately $28 million to shareholders through $8 million and quarterly dividends and $20 million a share repurchases.
Moving to our full year outlook.
We continue to expect revenue to be over $2.4 billion inclusive of increased FX headwinds of around $25 million or over 1% for the year.
And green coffee commodity costs, which has continued to be low resulting in a full year revenue impact of around $15 million, albeit this is simply a pass through.
But as I said, even with these factors, we see over $2.4 billion of revenue in 2019.
Moving to adjusted EBITDA. The current Bloomberg consensus figure of $328 million is reasonable relative to our full year outlook when looking at the current macro environment.
As we reaffirmed in our press release this morning, our full year free cash flow guidance remains at 150 million plus.
Let me now cover the operating performance of our route based services segments.
The route based services segment saw revenue increased 6% on an FX neutral basis.
We continue to have good growth and our it show deepwater channel, where FX neutral revenue grew around 6% overall and 4% excluding mountain valley, Despite rain above historic norms and many of our geographies.
This growth was driven by increased volumes in part from a stronger customer base, which was up approximately 3% year over year, Excluding mountain valley as well as increased revenue per customer.
Gross profit increased 4% to $272 million driven primarily by revenue growth.
Gross profit as a percentage of revenue was roughly flat at 59.6% as growth within this segment was offset by negative foreign exchange.
SGN expenses increased to $238 million compared to 229 million due primarily to the addition of selling and operating costs associated with the Mountain Valley acquisition.
And general inflation, which has been mitigated through pricing actions.
SGN expenses as a percentage of revenue were roughly flat at 52.2%.
Operating income was up 5%, while adjusted EBITDA was up 3% at $80 million as revenue growth and the ensuing operational leverage was partially offset by a negative foreign exchange impacts.
Overall, we've been pleased with the performance of our route based services segment during the quarter as we have been able to demonstrate the strength of the business. The elasticity of pricing and have continued to invest in our customer experience, including new technologies customer service and new skews and also invest in our people who are the most important component of our shareholder value creation model.
Let me now cover the operating performance of our coffee tea and extract solutions segments.
As Tom mentioned, we continue to take market share in the second quarter with a 6% increase in adjusted revenue grew 24% growth and extracts and continued growth and coffee and tea pounds sold.
Gross profit improved to $42 million compared to $37 million driven by increased volumes and operational leverage.
Improving gross margin as a percentage of revenue to 27.7% compared to 25.7%.
Yesterday was $39 million compared to $34 million, driven primarily by increased selling and operating costs, which in turn resulted in adjusted EBITDA of $9 million.
All in all we were pleased with the results of our coffee tea and extracts solutions segment as the business was able to generate good volume growth and both pounds of coffee sold and liquid volume sold to offset the pricing pressure that was experienced as a result of the competitive environment.
This pricing pressure is expected to begin to subside in Q3, and although Q3 is typically the least active quarter for this business. We would expect to see continued volume growth in Q3, and we'd expect to leave Q4 with both topline and bottom line growth as we exit the year.
Putting us in a strong position as we enter 2020.
I will now turn the call back to Tom.
Thank you Jay.
Before we close I just wanted to reiterate what our long term expectations are for this business, albeit there will be a few puts and takes along the way.
First we look to generate between two and 3% organic revenue growth each year, driven primarily by a U.S. route based services division, which saw a 5% Asia de water growth this quarter when excluding the mountain Valley acquisition.
We would then look to add to that growth with another one or 2% of growth through tuck ins.
The organic revenue growth should then generate $10 million plus of organic EBITDA growth another $5 million to $10 million of tuck in EBITDA growth.
As I look back over the last few years I believe we have performed fairly consistently at generating both organic and tuck in growth to our route based services operations, even with the increased foreign exchange headwinds, we've seen although we've seen competitive pricing or coffee tea and Xtract solution segment, and some dis synergies associated with our corporate cost.
Which resulted from the sale of our legacy business.
We are well set up for the future.
Let me also revisit our expectations for 2019.
As Jay mentioned, we expect revenue to be over $2.4 billion, including the additional FX headwind headwind and continued low coffee commodity cost of green coffee.
In moving to adjusted EBITDA, We believe the current consensus figure is reasonable and in line with our full year outlook. We do believe that Q3, and Q4 are slightly imbalanced, but in aggregate, we expect to deliver the full year current consensus.
We remain committed to our full year free cash flow guidance of 150 million plus stocks.
Before I pass the call over to Jarrod.
I want to thank all the teams across the business units for delivering a good quarter and for remaining focused on delivering on our full year commitment. Thank you.
Thank you gentlemen, during the Q today, so that we can hear from as many of you as possible. We would ask for a limit of one question and one follow up per person.
Thank you for your time operator, please open the line for questions.
Certainly at this time in order to ask a question. Please press star and then one on your telephone keypad, well pause for just a moment to compile the <unk> roster.
Your first question is from Judy Hong with Goldman Sachs. Your line is open.
Thank you good morning.
Why don't you morning, Judy.
So I guess, Tom you commented on the EBITDA projection for the full year I. If I look at consensus it's around 330 million, which does imply a pretty big acceleration in the back half. So number one can you just walk us through.
What.
It's sort of the Delta from first half in the second half in the context of what gets better and then.
I guess, if you kind of take a step back and looked at your EBITDA projection beginning of the year. How do you think it's evolved.
Certainly be given that FX has become more negative and obviously in the first half we had some pressure on some of the operating cost increases.
Thanks, Judy looking at EBITDA performance for Q3 last year, we saw good EBITDA outperformance with 11% growth versus the prior year.
In Q4, we incurred higher cost in the quarter, resulting in 3% growth versus the prior year.
With the lower hurdle, where we're lapping in Q4, we estimate that EBITDA growth for the back half of the year would be weighted more heavily natch weighted to Q4 based on those cycles.
If you look at those growth Weve, we for sure have FX headwinds, we would expect them to taper off towards the end of the year.
And we didn't have as you recall the management incentive hurdle from Q4.
Which we which we clearly it won't have this year. So that's how we think about you know the change quarter over quarter and of course, we have the growing improving not growing improving performance of S. A day as we cycle through all the competitive pricing issues Weve had in the past.
And I think you asked about FX versus you know when we started the year, yes, I mean, everybody sees the U.S. dollar continues to strengthen as the year has gone on has probably provided you a five to 7 million dollar headwind.
Got it Okay, and then just on <unk>.
And the second question is just as you as you're going through the annual strategic review.
I'm, just wondering how you're thinking about the coffee business strategically going forward. It sounds like you know you do expect the competitive environment to get better and 2020 potentially setting up for a better year from a from a performance standpoint, but when you kind of think about how that business fits in strategically can you just comment on how you're approaching that as you're going through the strategic review. Thank you. Yes. It's it's really early in the process duties. So you know we've had our initial discussions, but I wouldn't articulate them yet as strategic we have meetings over the next six to eight weeks and I think we would have clarity as we move through the year.
No turn specifically the coffee business the headwinds are about behind US as we've noted we are happy with the performance we've gotten through that pricing competitive issue. When we begin to return to growth frankly in Q4, and we think where that business is set up quite nicely for 2020.
Got it okay. Thank you.
I can do it thanks guys appreciate it.
Your next question is from Kevin Grundy with Jefferies. Your line is open.
Hey, good morning, guys.
A question on on capital deployment can you talk a little bit about what the pipeline looks like for tuck in M&A, how you're thinking about de leveraging versus buyback it looks like you've exhausted the existing.
Share buyback authorization, but.
You know of course with the stock down here.
It would seem like that would be a sensible consideration relative to what you're seeing from a tuck in.
M&A perspective, maybe you could comment on that and then I have a follow up.
Yeah in terms of the the tuck ins, we articulated that we'd be at the high end of the range on those tuck ins.
That remains our expectation we have a good pipeline that you know some we would execute this year, but a developing pipeline as we move into 2020, so no material change to our confidence and the ability to deliver the M&A.
Pipeline on a go forward basis.
You know in terms of current capital deployment, it's really about you know investment in innovation and organic growth.
Lot of that innovation is clearly in our investments against the customer experience, which we think enhances our business short and long term.
In terms of retention rates and ultimately at the end of day revenue per customer.
We would look to accelerate at the higher end of this range on our tuck in so closer to 60, then 40.
We have we continue with the quarterly shareholder.
You're absolutely correct, we have exhausted the share buyback and we'll continue to review large your acquisition opportunities should they come up so we continue to do our diligence the markets remain frothy from our view and you know you look at the share buyback Kevin I mean, we know we have utilized all the available allocation for this year, but also we've bought back almost $100 million of stock over the past year. So really when you look at you know how I planned deployment of my capital and liquidity, we've really utilize the amount of cash we have available for that share.
Okay. Thanks, one follow up and then I'll pass it on just the gross margin progression or your margin progression broadly in route based services and the back half the year and your level of visibility on the margin improvement there that will that will be required to to deliver on the consensus numbers would you guys indicated that you're comfortable with can you comment on the level of visibility between the pricing that's in place some of the.
Operating cost pressure that you saw in the first half the year, which seems like it should should subside a bit particularly around labor can you just comment on sort of the level of visibility to hear here in the back half of the year.
Yes, let's start with the.
You know the production issue that was in the tail right. So while we did incur the incremental temp labor and unplanned overtime.
Largely as a result of the wage inflation.
The team did a good job in cost down actions in the second quarter.
That at the end today has mitigated that cost frankly team did better than we thought so we don't see that as a particular challenge as we move into Q3 and Q4 as we sit here today.
Hey, guys.
Sure, Yes, and if you want to look at pure.
The margin on EBITDA between now and the remainder of the year.
Keep in mind that we're still going to have some FX headwinds I'm going through the end of the year, but so as we're still be you know having pretty good headwinds in Q3, you know, we we should be holding.
Relatively flat on an FX neutral basis, and then seeing more upside in Q4.
Okay. Thank you good luck.
Thanks, Kevin.
Your next question is from Amit Sharma with BMO capital markets. Your line is open.
Hi, good morning, everyone.
Good morning on it.
Very good thank you.
Kinda dumb you your tone on the on the on the Rvs topline <unk> certainly.
Better than it has been right at 5% growth in the quarter.
You have a number of initiatives Taylor coming online customer service at a filtration in the fourth quarter.
I mean, as we look to 20 horny.
What do you what do you think like it's pretty you want to stick with that or could there be an upside at some of these initiatives.
Todd do help you from me organic topline perspective.
Yeah, you know we're focused on how we finished the year and ensure that we deliver on our two to threex and one or two in terms of organic and tuck in we have you know FX neutral enjoyed good revenue growth.
But it does produce some challenges to us right as an impact that particularly Q3 and Q4 and I look I think 2020, you know a first step about how we look to the future is around the strategic review process and why do we see over the next three years and then after we align on what that is we started the process of what's the annual operating plan and we're frankly not there as I sit here today.
And if you look at the year and how we're guiding to get to the $2.4 billion. I mean in Q1, we had about 6% growth on an FX neutral basis, you know, 6% in Q2, but really view in the back half of the year, we see that more nordling down to you know we say between four to five let's say four to have really to hit the 2.4 billion plus so I think on the back half the year see more of a normal range and that will continue into 2020.
Got it and then on the near term you did talk about the large ecommerce customer expanding that Pat can you talk about data a little bit.
In terms of how quickly could ramp up if it has any margin implication for.
RBS business and then.
Comment on pricing environment easing in the C D category.
Is there potential for you to pick up some additional wins if pricing is normalized.
Phil will take the E. Commerce question first look we're in a.
Well, we're expanding to Florida in the quarter that you know a significant number of ZIP codes and we're very focused on ensuring that we execute effectively with that new customer base and we install it and you know on that just think of this of learning from our past experience with the customer acceleration.
Back in the days with the Booth program call. It 2016, so we've learned from that experience and on being a judicious on the rollout.
In terms of margins, we're happy with the margin structure of that business.
So we don't anticipate that it would have a negative impact on our existing U.S. RBS business. So we're quite happy with.
Where we are at the moment.
In terms of coffee pricing pressure has in fact east.
And well see our business turned around as we move through Q3 and Q4 and.
You know we reference themselves investment so we'd expect that you know we would win our fair share of new customer opportunities as we move into 2020 and remember you know the team our SMB team did a good job extending contracts into the future. So we don't see a large risk of competitive pricing on our installed base, if you will and.
You know, we're happy with the 3% and a forecast that 30% growth and and that's pretty aligned with our expectations.
Got it thank you so much.
Thanks Todd.
Your next question is from Peter Grom with JP Morgan Your line is open.
Hey, good morning, everyone going up here.
Good morning, Peter.
Just a quick one for me and then I just had a broader question, but did weather have any impact the impact on performance in the quarter.
Yeah.
Weather over the last and with favorable weather over the last month or so have you seen kind of any uptick in consumption trends.
Yeah, I'll I'll stick to Q2, and you know, we do see some weather impact, particularly in our European operations. So.
It was certainly wed in the U.S., but it was nowhere near as warm in Europe as it was a year ago. Okay. So you know it actually has an impact but that's baked into the performance that we had in the quarter and.
You know the 6% obviously includes a tougher cycle. So we're quite pleased with the performance overall on that revenue growth FX neutral for the Q.
Okay and then.
My second question is just on free cash flow and I know a lot of this was timing related but can you help us bridge to the 150 million plus growth in the context of the first half performance.
And then just broadly I think previously you had stated working capital is expected to be about flat for the year is that still the right target. Thanks.
Yeah, Peter Moore, our free cash flow as you know historically backend weighted but I'll, let Jay walk you through how we're thinking about and you know as he said it really was driven by free cash flow and similar to last year. We did have three of our four interest payments in the front half of the year. So you know easier working capital in the back half and then also we've talked about you know the FX headwind you know that is providing us a headwind on EBITDA, which does flow through to free cash flow. Good news is that is more of a book had when they're not because I'm not repatriating the cash at this point in time, but we remain confident and 150 million plus in a couple of different ways. You know one you look at our Capex. What should also spent in a foreign currency. So we're getting some benefits on on Capex and you really look at an assessment for the first half of the year as has been 50 million. So we're definitely trending at the lower end of our 115 to 125 million historic Capex, So that will provide an offset.
And in a similar you know we do see some additional pockets of working capital that we can.
Take advantage off to offset the remaining FX that we're seeing.
Great, but you still think flat guidance from a working capital perspective is the right no no. No. You know you look at you look at the five to 7 million FX is hitting us I'd say on FX are probably get a couple of million Bakken and cap ex and like I said are probably be closer to the 115 of our range. But then we will also see some working capital benefits to offset the other part of the FX headwind, we're saying.
Okay, great. Thank you.
Thanks Peter.
Your next question is from Daniel Moore with CJS Securities. Your line is open.
Yes. Good morning, Thanks for taking the questions just wanted to hone in on Europe , a little bit in terms of the RBS business seems like you're seeing some pretty solid underlying organic volume trends despite macro being.
I'm a little bit if he so that kinda talk about those puts and takes in what's a what's driving the success there on the ground.
Yeah. So youve recall Weve talk about high density and that really is an investment in customer growth and some of the markets in Europe .
Particularly those with a higher percentage of the population. So we're seeing you know if we were in year, two and plus of that good execution and growth from those investments. So that gives us. Despite all the other issue that we are expanding penetration and the commercial piece or our booth program in the UK is rather exciting it's meeting expectations on productivity, which is if you think about a completely new channel of customer all of our customer acquisition tactics in that country and that's providing some good benefit as we.
Again address that customer base, there and then we reference Poland in the script. So we've done some good tuck ins that are strained sending some of our existing business Poland happens to be one of those and then of course water quality municipal water concerns on the eastern part of our business would be a little bit higher than the western part of our European business. So we could see good consumption that so I think we're benefiting from a number of the taxes. The team has successfully implemented over the last couple of years that.
It's coming to fruition here in the summer of 2019 thankfully.
Helpful and Jay just a little housekeeping item, but on the adjusted free cash flows about between eight and 9 million in terms of acquisition integration. What do you expect that to come in for the full year.
Thanks, Dan Good question as we're still integrating.
It would be a.
Very rough guess, but you know I would say you look at the Mountain Valley. We have then progress same.
I would say it wouldn't be as high as that but could it be around five plus million Oh that sounds about right.
Understood. Thank you.
Thank you Brad.
Your next question comes from Mark Petrie with RBC capital markets. Your line is open.
Hi, good morning.
I just wanted to touch on the pricing dynamics in the water business and.
I know you had talked about that as a potential offset to some of the labor pressures that you've been seeing but it sounds like maybe you address those and even better than you had expected so.
Could you just sort of summarize where you're at in terms of the impact on pricing.
In the water business in Q2, and then also the outlook.
For that through the balance of the year.
Yes, so our current pricing is in line with our expectations and we see one or 2% and we frankly see that not changing as we go through the balance of the year end.
You know the pricing environment.
We're experiencing good price elasticity and the ability to continue to execute pricing with our customer base.
It's certainly supported by our efforts on things like customer experience and customer sat satisfaction in service levels that our teams are executing so you know when a customer is serviced flawlessly. It gives us greater power in terms of pricing less it.
And then if I could just ask about the filtration launch I'm just to confirm the timing of that and then your expectations in terms of how that how that would roll up.
So we would expect the new device to land some time in Q3.
And this will be a slow roll out at all frankly, starting to western United States. Because you know you have the pipeline of the asset hitting the U.S. and then we'll refine our skills in terms of how we do the sales pitch.
And we'll implement the app, so that customers can see water quality in real time.
And then roll it out over the coming years. So this is not a roll it out you know across the entire RBS footprint or filtration footprint.
You know in one quarter it will be over time over the course of a couple of years.
And that will go through your existing at least in the tests are the initial launch in the western us through your existing sales force.
Yeah, we have a dedicated team of people today, but we would look to expand that once we have that asset in place because its really two parts to the execution Mark there's the installed base, which we want to convert for retention purposes, and an upgrade and that's you know a handwritten 60 or 70000.
You know filtration customer locations and then use the expanded sales force than to build on that base of 160 that some of the larger number in the future.
Okay. Thank you.
Great. Thanks Buck.
Your next question is from Bryan Hunt with Wells Fargo. Your line is open.
Thank you.
Just wondering if you could talk how are you doing.
Jay.
I was wondering if you could discuss a little bit more on your efforts to cross sell and had cases in sparkling you know the basket opportunity seems like a great opportunity 'cause there's no initial additional stop but it definitely adds additional dollars and gross profit to each stop so when you look at you know what you reported for the quarter. A I believe you said you were up 4% ex acquisitions and pricing is up one to two do we assume the rest of that basket.
And could you just explore maybe maybe those comments.
Yeah that.
Our current focus is first on case water, which is traditional case word of that.
You might buy a 24 pack you know at some retail location and we really are using our direct sales force to get to the consumer to fill that consumption occasion.
And we're quite pleased because when you know that the historical penetration was roughly.
8% to 10% in the U.S. and we're seeing you know double digit increase in that penetration, which is really increasing the size of the basket.
Now in addition to that we began a slow rollout this year of sparkling ice.
Across the business and we've also focused on a sparkling water and sell to two different brands you know one essentially in the west and one in the northeast corridor and they're producing some good results. This is a ongoing execution contact with the customers. So our CX is actually we believe going to be the key enabler as we begin the <unk> not rely on the route sales person to interact directly with the customer they're doing a good job, but our investments in CX will enable us to enhance the communication via mobile via text VR App and we think that that will help us build that base of penetration over time.
It's largely a U.S. execution today. So will you know over time, we have to you know find the appropriate solutions in Europe and extend it to Europe , and frankly a into Canada.
Great. Thank you.
It sounds like an exciting upturn next.
You know looking at this online retailer a that that you're expanding across Georgia, and Florida with.
Can you talk about you know what their pricing strategy is relative to your core pricing strategy as well as.
Because you're expanding potentially so rapidly with them geographically.
Does does that new customer kind of skew your your acquisition targets geographically. Thank you.
Yeah. Its look in terms of pricing there as there is really no conflict between what they market online for and what we market online for.
And we've been very cautious about the economics of that customer and so that we don't self inflict mix issues right or pricing pressure right. So.
We like our current price elasticity and we're going to stay very focused on how that contributes to our revenue growth you know in the next couple of quarters and well into the future. So weve been rather judicious in our approach to that.
As we look at it in terms of cost from acquisition tactics. If we have six tack that this would be tactic number seven.
And then we would always look to balance.
Those customer acquisitions by channel.
Right. So if you will we love all of our customers about what to particularly focused on small commercial because it has.
The highest profitability largely driven by higher pricing and the length of the customer right. So we'll always look to balance and you know our local teams are accountable for ensuring that the balance in any market any region is appropriate to maximize the topline and the bottom line along the way and I think the teams are doing a pretty good job of that today.
And then my last question if I can squeeze in one more just talk about maybe balance sheet goals. You know whats your target leverage I know, there's seasonality in the business today, and you're kind of peak for the year, but.
Where do you see yourself longer term and that's it for me. Thank you and best of luck.
Yeah, Thanks, and on NATO leverage our leverage if you disregard the the new lease accounting rules for everybody are starting to put leases on their books and every rule will slow the catch up in our leverage is around three and three quarters right Pal.
And we you know, we really expect that number to continue to decline as we pay down or a b L.
And grow our EBITDA during the year and were continue to do so over.
The remainder of this year and for several years to come so no specific targets, but that's where our focus cash flow deployment is after the dividend.
After the tuck ins and invested in growth, but we'll continue to focus on reducing our leverage.
Thank you.
Our last question.
It's from a mid Sharma with BMO capital markets. Your line is open.
Hi, Thank you so much for taking the follow up.
Tom just wanted to make sure that I heard this right. So if you were talking about your filtration business did you say, 3% off your HSD customers tend to convert different Fracing clarification, sorry go ahead.
Oh, that's a good question. So <unk> clarity is helpful of our total quit.
3%.
Oh, Okay. Okay got it right now, but it's a very small number right right. Okay. So as far as Tom talked about so we don't see what's important is we don't see a big exodus of my HL de water base converting to filtration right. If they do we expect them to stay with us and frankly, we think that will only be enhanced with the pending execution and rollout of our new patented technology. So we think it really will will will get more of those 3% that come to us and then obviously expand our market share over time.
Got it and just one more on that and when you think about the revenue structure off the filtration business.
Can you talk about that a little bit you did say that you enter into a longer term contract like how should we think about that it's less revenue, but gross profit is that the way to think about filtration business.
Yeah, it's not necessary or less revenue and frankly depends on the customer right. So you have some that are less some that are more higher revenue comes with larger customers.
Well they would typically enter into a longer term agreement.
You know when you think about.
Free cash flow from the customer.
And look this is an average of an average you know for our customer base. It's about the same.
As an H.L.D. customer when after you factor out cap.
Got it.
Even if people move to filtration, it's not dilutive to your free cash flow.
I believe the word agnostic, we like customers were happy to have them in either solution and look our investments are about enhancing you know our footprint in the filtration side of our business. So at the end of the day, we we benefit from the best of both worlds in healthy hydration growing category.
Yeah and in some of our larger customers. We do both correct you know where their offices are they have an easy access to water. There, we do filtration units and the plants, where there's no easy access to water. We do we do water cooler. So our goal is to generate similar dollar profits and be agnostic to which our customer want and just providing the service that best fits their needs.
Got it thank you so much.
Great. Thanks on it.
Isn't that much because this concludes the Q and a period and I'll turn it back to Jerry for any closing remarks.
This ends our Q2 2019 earnings results. Thank you all for joining.
Goodbye.
This concludes today's conference call you may now disconnect.