Q2 2019 Earnings Call
Again, thank you for dialing in please remind the buying a call will we be getting momentarily.
We appreciate your patience.
Currently all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time.
Also as a reminder, this conference call is being recorded at this time I'd like to turn the call over to your host Madeline Kettle up I see our.
Good afternoon, and welcome to Primo Water's second quarter 2019 conference call.
On the call with me today are matching <unk>, Chief Executive Officer, and David Miller, Chief Financial Officer by now everyone should have access to the release that went out this afternoon at approximately 45 P.M. eastern time.
If you've not received today's press release is available on the Investor Relations portion of Primo water's website at Www Primo water Joc.
This call is being webcast and a replay will be available on the company's website.
Before we begin we would like to remind everyone that the prepared remarks contain forward looking statements, including financial guidance and management may make additional forward looking statements in response to your questions.
The forward looking statements should be considered within the meaning of applicable securities laws and regulations regarding such statements. Many factors could cause actual results to differ materially from these forward looking statements and we can give no assurance of their accuracy and Primo water assumes no obligation to update them.
We encourage participants to carefully read the section on forward looking statements included in the press release issued this afternoon and in all documents that Primo water files with the FCC and now I'd like to turn the call over Primo water's CEO matching yet.
Thank you Matt.
Good afternoon, everyone and thanks for joining us on today's call is review our second quarter results.
I'll begin with an overview of the quarter and David will provide more financial detail.
For the two of us enter questions.
I am pleased with the financial results for the quarter, which were in line with our guidance we've made great progress on several initiatives.
I believe the business is well positioned to grow as we began to accelerate our location expansion efforts.
As we look toward the remainder of the year, our business will be driven by some bright lights.
Retail headwinds in some long term investment opportunities.
More specifically, we continue to expect to see strong growth in dispensers and exchange driven by same store sales performance as well as girls and location.
Along with e-commerce growth in dispensers.
We also have confidence in our free water or IR, She redemption program, which has far outperformed our expectations.
We now also have a number of meaningful promotions coming in the back half of the year.
The promotional activity is expected to drive future growth.
Even though they are investments that will negatively impact our EBITDA in the near term.
And refill our business continues to improve from operations and pricing perspective, and we have seen sequential improvement over the first quarter, but some clear examples of our ability to grow the business year over year.
However, we have experienced more retail attrition in the back half of the second quarter and into the first part of Q3 driven in part by store closures.
Focusing on Q2 sales for the quarter increased to 79.3 million near the high end of our expectations and adjusted EBITDA was in line at 13.4 million.
Sales were led by a significant increase of 45% in dispensers driven by a record sell through of 218000 units up over 12%, including e-commerce growth of over 50%.
In addition in the quarter, we expanded into a majority of the home depot stores with an initial skew.
Overall, we believe this growth is creating many new water households, which should pay dividends for our exchange and refill businesses down the road.
Exchange sales increased 5% to 21 million.
Driven by our connectivity initiatives that have resulted in continued strong U.S. exchange same store sales unit growth.
Which was 13.4% for the quarter.
This is the 29th consecutive quarter of 6% plus same store sales unit growth.
In the sixth consecutive quarter of same store sales unipro over 9%.
We are seeing an accelerated rate of growth and channels such as home improvement in grocery as we aggressively roll out our new CV joints exchange signage beyond Walmart.
Lastly, I'm pleased that we have continued to grow topline sales an exchange. Despite the current retail environment, which has led to location attrition over the past year.
In refill the team's efforts to improve the operational fundamentals of the business with the use of technology contributed to an overall improvement with total retail sales down only 5.5% in a quarter.
This is an improvement over the decrease of 7.7% in Q1.
We have seen continued sequential improvement in U.S. retail same store sales.
This demonstrates the improved uptime and operational fundamentals of the business with the completion of the credit card reader and telemetry telemetry rollout to all outdoor refill locations.
The technology has allowed us to reduce downtime to two to four days from the historical seven to 10 days.
We have seen steady volume improvements in same store sales in locations the longer that the telemetry uptime operating model and pricing are in place.
We continue to be encouraged with that progress.
No a good portion of the sales gap and refill this quarter due to location attrition, which we believe we can't replace in the coming quarters and something I will discuss in more detail shortly.
In addition, we successfully completed the divestiture of the ice business in June .
Which we expect will improve operational efficiencies and profitability of the retail segment going forward.
[laughter] stepping back our overall regional strategy remains intact, which has three primary elements.
First improve uptime through technology and operational changes.
Second drive same store sales and marketing.
Pricing in technology.
Third as we have mentioned previously with the operational improvements in same store sales initiatives in place we are turning our focus to expanding locations.
As it relates to these strategies.
We completed the rollout of the credit card readers and are already seeing the downtime improvements, resulting in positive signs in same store sales.
We have seen.
Same store sales improve the longer the credit card readers and telemetry are in place.
Accordingly, we expect another sequential improvement in same store sales in Q3 from Q2.
In addition, we are focused on driving same store sales through marketing pricing and technology. These efforts, which have been underway on a Walmart indoor locations for some time are bearing fruit.
Sales at these indoor locations were up over 8% for the quarter with volume gains even after a price increase last fall.
This is indicative of what we believe can also occur in our outdoor retail locations.
With the improvements in place in the marketing initiatives underway. We are confident that we can drive same store sales growth and refund.
In terms of pricing optimization, we are seeing positive signs across certain markets and retailers and will continue to strategically review pricing on an ongoing basis.
Moving onto our broader location strategy it applies to all of our segments not only refill.
We have long believed and communicated that operational improvements and increased same store sales were key to future location expansion across all of our businesses.
We are confident in our ability to gain locations with quality retailers to offset the impact of the overall brick and mortar retail headwinds and store closures that are out of our control.
Today with proven tactics to drive same store sales across dispensers exchange and now refill we are accelerating our efforts to expand locations more aggressively.
I'll discuss several examples.
First our strong exchange same store sales success up Walmart has led to their support for an additional expansion.
We expect to add between 102 hundred Walmart exchange locations in the second half of this year.
Which is on top of the over 650 exchanges locations. We have added since the beginning of 2017.
Retailers get behind you in a big way when you can produce a consistent level of same store sales growth that we have experienced at Walmart.
Second our announcement of a new exchange partnership with Albertsons provides additional evidence that our same store sales focus and our product portfolio strategy is working.
Albertsons indicated that our relationship and refill coupled with our exchange expertise consumer research and willingness to invest in marketing.
Along with a passion for our brands are differentiators that let us to being awarded a long term contract for exchange.
Albertsons has been a glacier refill partner for years with approximately 1500 locations.
When we purchased glacier, we envision cross selling exchange into glacier refill locations and Albertsons represented represented the largest opportunity.
This deal for around a thousand new exchange locations initially and the potential for more overtime.
He is a prime example of the portfolio power of refill and exchange.
It is also clear that our same store sales performance in our exchange business played a key factor in this win.
Our success growing locations at Walmart and Albertsons.
Amongst other victories at respected retailers like Meyer giant Eagle and home depot give us confidence to accelerate our investment in sales.
In addition in our retail business the improved same store sales trends and a much improved operations and uptime allow us to now invest in resources to expand locations.
Moving onto our outlook two factors to keep in mind.
First as previously mentioned, we now expect more retail attrition in the second half of the year driven in part by store closures.
As this retail environment continues we are increasing our efforts to aggressively expand locations, which we believe will offset the location losses in hot.
This will result in an increased investment in sales efforts in Q3 and Q4.
Secondly, the new promotional activity in the second half of the year. In addition to the IR seat will impact margins and also require marketing and promotional investments.
With these factors in mind, we are reducing our 2019 expectations for sales and EBITDA.
However, we believe the items impacting our results in the second half of the year are transitory in nature and that the investments, we're making will lead to long term profitable growth.
David will provide more detail shortly.
In summary, I'm pleased with our team's efforts and the progress we have made across our entire business.
We remain excited about the opportunity to invest in our business and expand to 50 to 60000 locations with that I will turn the call over to Dave.
Thanks, Matt.
Today, I will review our financial results for the quarter, and then discuss our outlook for the remainder of the year.
Finally, I'll return the call back to Matt for closing remarks.
To start off we utilize non-GAAP financial measures such as adjusted EBITDA and adjusted net income to assist investors in understanding our operating results.
A reconciliation of each is included in this afternoons press release, which is available on our website.
Turning to our second quarter results sales for the quarter were $79.3 million near the high end of our expectations.
Driven by record demand for our dispensers and continued strong growth in exchange.
[noise] dispenser sales for the quarter were 16 billion, an increase of 45% over the prior year.
We continue to experience a high level of retail demand, which was driven by record sell through.
Exchange continues to be a bright spot as sales increased 5% to 21 billion, despite the brick and mortar retail challenges.
Once again in store marketing initiatives, specifically, the free water or IR C program at Walmart.
New display signage at Walmart and no other retailers grow double digit us six us exchange same store sales unit growth.
13.4% for the quarter.
Fewer locations and the impact of the Irish Sea were the primary drivers of the difference between the same store sales increase and the overall sales increase.
As a reminder, the free water units well not producing sales are included in our total and same stores sales units as we believe these consumers will become premium households.
And we will see the compounding effect over the long term.
Also keep in mind that we will be adding approximately 1000 albertsons exchange locations during the second half of the year.
Retail sales for the quarter were down 5.5% to 42.3 million.
As Matt mentioned this was an incremental improvement from the first quarter.
In addition, we saw improvement in US same store sales on a dollar basis as our operational initiatives initiatives have taken hold.
Our gross margin for the quarter was 26.6% compared to 30.4% in the prior year. The decrease was a result of the higher mix of dispenser sales.
Which represented 20.2% of total sales compared to 14.6% in the prior year.
As well as lower margins in both rebuilt in exchange.
[noise] dispenser gross margin for the quarter increased to 10.2% from 9.9%.
Exchange gross margin for the quarter decreased to 30.7% from 32.5% primarily related to the investment we're making in the IR C program.
Which we continue to believe is driving the growth in both dispensers and exchange.
While the RC is impacting margins in the near term we continue to believe that this will drive long term growth.
Overtime.
[noise] refill gross margin for the quarter decreased to 30.7% from 34.6% as a result of lower overall volumes and incremental operating costs costs related to addressing the downtime issue.
SGT cost for the quarter decreased to $8.8 million from $9.6 million.
As a percent of sales SGN, a excluding noncash stock based compensation was 9.8% compared to 10.8% in the prior year.
Going forward on an annualized basis, we continue to expect as today as a percent of sales in the 9% to 11% range.
Interest expense for the quarter decreased significantly to $2.7 million from $11.2 million.
As we have benefited from the improved terms and lower debt balances related to the June 2018 refinancing.
On a GAAP basis for the quarter, we had net income of 873000 or two cents per share compared to net income of 451000 or one cents per share in the prior year.
On a comparable basis adjusted net income was $3.3 million or eight cents per share compared to $4.5 million or 12 cents per share.
Adjusted EBITDA was $13.4 million compared to 15 million.
A few points on the balance sheet.
Inventories were unchanged for the prior quarter at $13.7 million.
And up from the 10 million at year end.
This is due to the strong dispenser demand that continues to drive growth in our e-commerce and domestic dispenser business.
Total debt was $199.4 million up from year end due to our typical annual working capital cycle.
In addition to an increase in capital leases of 3.7 million related to new vehicles, as we improve the reliability and maintenance costs in our fleet.
Overall, our leverage ratio was 3.9 times and we currently expect our leverage ratio to decrease going forward.
Looking at the statement of cash flows for the first half of the year.
Our cash flow provided by operations was $8.9 million compared to $10.2 million in 2018.
Capital expenditures increased to $14.2 million from $9.3 million, primarily the result of the rollout of the credit card readers and new in store exchange displays and signage.
For 2019, we continue to expect capital expenditures for the full year to be in the range of 24 to 26 million.
In addition, going forward, we expect capital expenditures to return to normalized levels of approximately $20 million.
Driving future growth in free cash flow.
Turning to our outlook as Matt noted we are confident in the positive trends, we are seeing in the turnaround of the refill business.
That said, we are adjusting our outlook to address the continued retail headwinds and the promotional opportunities.
Again, we believe the second half promotions and sales investments are important to fuel future growth.
With these factors in mind, we now expect sales for the full year to be in the range of $312 million to $320 million.
And adjusted EBITDA to be in the range of 56 to 58 million.
Looking at the third quarter, we expect sales to be in the range of $84 million to $87 million and adjusted EBITDA to be in the range of 17 to 18 million.
With that I will turn the call over to Matt for closing remarks.
Thanks, David.
Before turning it over to the operator for questions I would like to thank the team has the last few quarters have required significant effort.
That type of growth is what makes primo a great company and that's something I'm proud of.
True to our mission of inspiring healthier lives through better water, we manage our business for the long term and believe we are improving each day and our ability to drive long term sustainable value for consumers retailers employees and shareholders.
Before closing, it's important to remember the market trends that fuel our business.
Consumer concerns over health and wellness tap water quality and sustainability continue to gather steam.
Demand for better water solutions, and consumers' homes will remain a long term growth driver.
On that note more than ever before consumers and the press are focused on the use of plastic specifically bottles and their negative impact on the environment.
In fact, we have not touted the positive environmental aspect of our business to consumers retailers and investors nearly enough, which we'll see more of going forward.
We believe our products position us very well within these trends and consumer preferences.
To close I am confident about our ability to drive long term growth as we have a strong recurring platform upon which to invest.
With that I'd like to open the line for questions operator.
Thank you, ladies and gentlemen, if youd like to ask a question at this time, Please press star enough and the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. You may do so by pressing the pound key we ask that you. Please meet your line once you've asked a question to prevent any background noise from coming through again that is star then one to ask a question. Our first question comes from Mark Argento from Lake Street. Your line is now open.
Hi, guys. This is John on for Mark. Thanks for taking my question now that you have the card readers and torn the true up on all the retail machines. Just curious if you're getting any kind of early insights into you know consumer data that you weren't able to get before any trends there that you might find interesting. Thank you.
Hey, John This is David on the.
With the credit card readers, we don't have direct access to the consumers, we get credit cards, but we don't have credit card information or the individuals information.
That said as Matt mentioned on the call we.
The longer these are in place the better the benefit we're seeing and if we go back and look at the ones that were installed prior to January of this year, we're seeing really positive trends.
On a year over year basis in those units so the longer they're in place the better they perform.
And John This is Matt I, just I'd just add one thing to your question I believe we're getting closer and closer to the consumer as we use the credit card readers to do things like digital codes gift cards that we can get pretty specific with a specific code for consumer. So we're working our way towards getting the exact info you mentioned.
Got it and just as a follow up or are you guys running any sort of promotions through refill yet or should we expect that.
Coming in the future.
We are using the credit card readers and things like gift cards. We are in the early innings of some of those promotions now John but some of those are localized but under way it'll take a couple of quarters for us to come up with results, but we are testing as we speak.
All right. Thanks, guys.
Thank you Mr.
Thank you and our next question comes from George Kelly with Imperial Capital. Your line is now open.
Hi, guys. Thanks for taking my questions.
So maybe just to start.
I know you talked about the guidance change, but can you give any more granularity just about on the revenue side what's the.
What the differences versus your prior view with the main impacts that that are driving the change.
Yes, George this is Dave again, so in the latter half of the quarter and we continue to see it into the first part of Q3.
We saw a significant number of attrition in the retail side a lot of location closures.
Specifically in the Kmarts are now started to hit unexpectedly.
Little bit more than we anticipated we also seeing continue to see some.
Consolidation in the dollar channel and the smaller independent and really small groups small grocery channel too weve seen a little bit of a pickup over the last couple of months.
Okay, well, what I Didnt hear you just said.
Are you seeing any kind of.
All these different initiatives technology and marketing related initiatives.
That you've been testing has when when these things are fully implemented or as you continue to roll them out.
As the ROI surprise to you at all.
Hi, Georges Emad.
No we've seen some positive lights when we have rolled all this together again, we just finished a credit card readers of little more than a month ago or so.
So, but we are seeing.
The plan of our marketing.
Our telemetry with the credit card readers and even some of the pricing optimization work to our benefit. So we as we look at the second half of the year, we think thats all going in the right direction.
Okay and then last question for me just about the.
I think you mentioned, 13.4% unit same store sales what was the dollar same store sales.
We don't disclose on the exchange side the dollar same store.
Sales, because theres theres been really little pricing changes on the rebuilds on an exchange side.
The total dollar change in exchange was 5%, but that was impacted significantly by location attrition as Matt mentioned.
Okay all right. Thank you.
Thanks.
Thank you and our next question comes from Jon Andersen with William Blair. Your line is now open.
Hi, good afternoon, everyone.
I guess, you talked about a couple of things impacting the second half outlook.
Location attrition and also.
Incremental incremental promotion.
You kind of address the attrition issue I think.
Could you talk a little bit more about some of the incremental promotion that you're planning in the second half of the year are these.
Bigger events like the Black Friday event with Walmart a couple of years ago.
Continuation of Rcs, just some more color around what you're planning to do there. Thanks.
Hi, John its Matt Thanks for the question Unfortunately, given the nature of the promotions.
We can't talk much about.
Much of all those promotions all the retailers.
Give along those cost for their best and they ask us to as well.
But we do have much brighter line of sight at this point to two two promotions.
And we're also we're also continuing to work to expand the IR C program to other retailers, where it makes sense and that's that's another piece of the equation.
Okay.
And then on the other.
The attrition piece.
Can you talk about within the business is this something that's affecting both exchange or refill and relatively equal proportion is there.
Is there one part of that.
The water business, it's it's having a greater impact on.
Yes, this quarter compared to last quarter, I mean exchange and refill rate it was a little little worse than that exchange, but.
Not not too far.
Not too far different in terms of numbers, but historically refills been.
Struggled a bit more with the higher level of independent smaller regional chains versus rebuild with this quarter.
Some of that is leveled out but it's a.
I'm still a little bit more than exchange.
Hi, Jon K., and what not again gentlemen, one one note on that just as we look at retail we've seen the that consolidation and just the change in retail environment.
Over a couple of years now we think in some part that has solved itself in other parts it hasn't.
And even within the last few weeks, we've seen more of that happening in the small part of the retail industry. So.
But that.
Sort of leans back on our strategy for long time, which is make sure you have the assets you have working really hard and and now what we're saying is because we have more tools to drive our asset base through same store sales.
We're going to invest now in some some more salespeople get out there and not on some more doors. So that's a that's a sort of a transition for us.
Because we have tools to fight that but the retail consolidation and closures continue to happen.
Okay and.
And how should we think about the guidance.
What are the baseline assumptions for.
For attrition is this is a kind of the run rate level, you're seeing now and what's built in there for location expansion is if the sales and Albert's and locations plus the.
The home depot.
Doors. You mentioned is there is there are there other things in the pipeline that you that you could announce are those.
Kind of.
Longer term selling cycles, where we'd be talking about looking at 2020 at this point.
There there are it varies by segment, but in the exchange side, John we have the walmarts that that we believe we can install by the end of the year between 102 hundred.
Largely the Albertsons play a big part and we started that process.
This week.
On the retail side those are the sales cycle on the.
Depends on the retailer this smaller read more regional chains, you can accelerate that sales cycle as we've talked in the past Albertsons was a much longer cycle is a big much bigger retailer but.
The big ones are those two and then obviously home depot getting an initial SKU and they're getting our foot in the door on a on a nationwide basis is important.
Well there as well.
We also now we also have a healthy pipeline and we're going to invest our resources in it John So we're going to we're going to focus more and more on.
Getting more and more retailers and the mix or.
Just cross selling what we already have.
Makes sense last one from me ill pass it on on refill I mean is there is there a timeframe, but that you have in mind for.
Some kind of inflection in into growth in that business on a either a volume or overall dollar basis I understand that things are getting sequentially better and some of the earlier.
Conversions.
Machine conversions are performing well on a same store.
Sales basis, but can you give us a better sense of your expectations for the the sequential improvement going forward from here. Thanks a lot.
John I'll start and then Dave will probably jump in so again to your question. We that the trends are absolutely going in the right right direction, we've seen a host of examples of locations.
And frankly groups of locations that are comping year over year, and we think that group will just expand over time, so more and more locations comping year over year, So where we're seeing all the all the bright lights, we need to.
And again this is a long term long term path so.
Yes, but if once we keep growing those through some dislocation attrition I think will be will be good. So David if you have any other no that's spot on.
Thank you and our next question comes from Mike Grondahl with Northland Capital market. Your line is now open.
Hi, This is Michael on for Mike. Thanks for taking the questions. Maybe first just on the Irish Sea at Lowe's can you talk about all that real progress is going there.
Yeah again, just for Ah maybe semantics for a second supplier. She is really only a program were going to run at a at Walmart just the way. They do it we are working on different types of we'll call. It free water programs higher she is pretty specific but I'm. We are in the early innings of that free water program at Lowe's as we speak now.
Okay, and then just on home depot, you mentioned the initial skew for dispensers.
What can those stores look like is that.
Two to three skews <unk>, how do we think about that like longer term.
Yeah, we think thats a good opportunity for US again. This is just a saying this is a single skew across the fleet of of home depot, Yeah, We think that could be depends on store depends on space. So it's hard to.
Peg a number but we can see anywhere from three to seven skews you know everything from a forfeit beta what 12 foot Bay.
In those retail environment. So we have consistently looked and said that home depot dispensers are a big opportunity for us not only for the revenue and small margin, we'll make on dispensers, but really our ability to connect the two since we already have the water and we've clearly demonstrated what happens in water when we can.
When we have the dispensers as well like such that we do in Walmart and lows.
So okay, yes, that's helpful and maybe just one more follow up on ecommerce was that more.
Company website or Amazon or company.
Retail.
What's that.
Yes, it's the majority is Amazon and our own website, and we're just getting more and more traction and.
And getting better at learning how to promote that category within the E Commerce.
Channel and working with Amazon to do so and frankly, using our own site to communicate and all of our different messages. So we just continue to see.
Our ability to drive that business. We're also really importantly to remember we continue to work on connectivity in that world as well. So that we're not just selling to Spencer is that we're getting them to engage on water business as well, we keep getting better at that so we feel great about that and we're going to I think again, it's it's early as it relates to e-commerce growth specifically as it relates to just the size of the product. It's a perfect product to ship home, whether it's from our web site, our or Amazon.
Thanks.
Thank you and our next question comes from its Sharma with BMO capital. Your line is now open.
Hi, good afternoon, everyone.
Yes, I have it.
Yes, I got a couple of questions clarification, and then other than that maybe a couple of more.
So last quarter, we talked about pricing based promotions, having some issues in refill.
Can you provide us an update on that.
As we talked about last last quarter, Matt we continue to understand pricing at a local level and.
As Weve said optimize where we need to a lot of that optimization is going well and we're doing it in small a small chunks. If you will in a very localized areas and we're going to watch it for.
A while before we make any larger decisions, but as we said for a while we think pricing is needs to be optimized on a regional basis and.
So far so far so good on those on that initiative.
Is it still a drag on your volumes are that being.
Sort of addressed with this smaller scale adjustments on pricing that you did.
I mean, the you're talking about the Yearago price change or are you talking about more no not did that well remember if in some markets. If your competitors are acting more aggressively.
At least my understanding was you would adjust prices to drive those guys back is that happen are still in the process of happening.
Yes, we have again, we want to be careful Dover overshoot the testing because it is early but we do certainly have examples where based on the pricing we can drive volume.
Got it and then add the downtime issue you mentioned that the income to the margin for the refill.
Yeah, I mean are those new or is that a continuation of what we saw in the fourth quarter and the first quarter and RV completely done with that now.
Yeah. Those are a continuation of what we've discussed in the past in in the fourth quarter in the first quarter of this year. So.
We expect those costs to there will be so obviously ongoing with the credit card readers, but the cost overall margins should improve in Q3 and into Q4.
And then just let me let me help just clarify I think thats on a sort of cost side of it I mean, the impact on this has been pretty clear for us our ability to see when a machine goes down remotely is drastically different than beforehand, and so we feel very good about our ability to manage this business at a much tighter.
Tighter basis with the with the technology. So we've been very very pleased with the.
With what we've seen so far.
And then on the film side Matt.
I think John asked a question.
Is it fair for us to assume that as you lap the pricing, which in almost all of that in the second quarter in the back half.
Should be expect positive volumes or is this 200 accretion really going to keep you on the negative side, even in the back half as you lap the volume losses from last year.
Yes volumes are returning as Matt noted in this this quarter was better than than a year ago or better than the first quarter.
The attrition is real and we believe we will continue that on a same store basis. We believe we'll start to see positive gains on it from a dollar perspective, we'll start to look at it from a dollar perspective versus a true volume perspective with the pricing that's going on.
If attrition goes away, we feel we feel really good about ability to drive the business and it's really hard to predict attrition that goes away just to sort of isolate variables.
We feel pretty good about where the retail business is going and what we have to do to combat the natural attrition retails going through is make sure we get more folks out there more feet on the street.
Tell a story and get more deals to to offset that.
And that's what I really wanted to that was the last question in a way that.
I hear a lot more focus on new stores this quarter.
Compared to last quarter, and maybe even the fourth quarter right and this is.
Not not unwelcome right I mean look if you see opportunity in the store count and you are stepping up to to realize that opportunity.
Something shifted do you feel like your product portfolio. Your reception at the retailers is enabling you to be a little bit more aggressive.
Chasing new stores or is there, it's just a continuation of what you've been doing.
Great question, So let me step back a little bit.
For a few years now we've been talking specifically in exchange about our need to almost look inward.
And we saw some attrition starting to begin and we wanted to make sure that the assets. We had worked a lot harder. So we've been we've tried to be very consistent on saying that same store sales is a key driver to location expansion retailer as well, we know that what they want they want growing one every square foot in their door to be growing and so weve in dispensers and exchange.
In indoor refill and frankly now in outdoor refill we have tools.
To drive same store sales, that's what really matters to to retailers and when you have a story like that they frankly, just get a lot more.
Excited about you so, let's just break down Walmart for a minute.
The store count that.
You've seen us grow above.
Right around 650 exchange locations and over the last I think we said two to three years that has come because of our our production.
And and so that has been a strategy for a while which is let's get same store sales right buying some levers to grow the business and then come out of that transition into a location growth expansion mode and so we're doing that.
Certainly in dispensers, we've clearly found our ability to grow that business weve found that ability to grow exchange business, which is really exciting frankly, weve had weve done that in indoor we refill as well as we shared some of the numbers.
We've been working.
Really hard to make sure that we find some of those levers and improve the operational nature of the outdoor business and that path frankly is taken the same path that our other three if you will businesses are taking and that is make sure. Your ops are tight.
Find some marketing levers and when you do then go out and get on the road and start talking to retailers. So for US we've seen this off or why we've tried to communicate that.
We did put a lot of reliance on same store sales than last year in the last few years and now what we are seeing across those businesses.
Gives us gives us a lot more confidence to get out there and show them. The operational support the operational backbone, we have and to show them the tools that matter to drive growth Thats, what a retailer really cares about and when we show that to them. They get much more excited so I do think you're seeing a a shift we look at it as a transition.
In a longer term strategy as we've seen for a long time and so for that where we are really excited because we we have certainly built businesses before that are have driving a lot of location growth. We've been very consistent on 50 60000.
Our points of distribution, we had to hit pause for just a little bit to make sure that we have the tools in place and the operational foundation now that we have that across all of our businesses, we're really excited too.
To lean into that and again, we believe that the combination of same store sales and.
A really energized sales team with frankly more feet on the street with tools and they're back pocket.
That's a really good combination get on the street and go after locations to reset what's happening too.
Just the retail environment in general.
So does that help.
Yes, that's really helpful. Just a couple of more on that so is that 50 to 60000 is that.
Is that a.
Unlike a shortened like how long could it be two to get there is that a realistic goal for this business as well.
Yes, I think we've always said somewhere around three to five years for that number remember were.
Well over 40000 today and.
And we get more aggressive at it we cannot we can certainly do that but long term business, let's get it right and then lean into locations. So I'd say in all three to five year strategy.
And then last one is as you add more stores Matt are these stores.
Summing it add a similar or better margins or do you have to have them in the system and data is onboarding period. So these stores may not be as profitable initially how should we think about that.
Yeah, I'll say I'll take it Dave can can step in keep in mind them in a couple of things. One is not all locations are created equal rights. So when you.
When you just looking at location numbers.
It may look like if you add 100, Walmart that's the same as losing 100 K marts, it's not even close and so.
Investors have to really understand the difference between a Wal Mart and what that bats versus what.
Some smaller smaller locations do so thats one thing.
Dave can talk about the margins I think we have a lot of it we have more expandability in our refill business because that's really our that's our team and our trucks and and all that so Dave can can step into that but we have more I'll call. It expandability in the retail margins than we do.
In extreme yes, I mean.
With the exchange locations margins should be.
Pretty similar to what we have currently in place the one advantage with Albertsons.
From a velocity or a volume perspective, the consumers there have been been involved are engaging in the bulk category for a number of years. So the volume where they should come onboard at a more mature base then.
None of the traditional store that didnt have the bulk water category in there.
And so the margin should be very similar and then and refill as Matt mentioned, we have more as volume expands and grows the margins in the in the refill side, we will expand with that so.
A little bit different in each of the two businesses.
Got it thank you so much.
Thanks Mitch.
Thank you and our next question comes from Mike Pitofsky with Barrington Research. Your line is now open.
Hey, guys.
Number of my questions have been asked and answered, but let me just ask real quickly you have a rough total of what the total locations. Today are you said well over 40000, I mean is it like 44 something around there.
Yes 44600.
The end of the quarter.
And keep in mind, we sold the ice business that was just over 500 locations. We sold that at the end of the quarter. Okay. All right and then on on the.
The dispensers in home depot Thats already occurred where you said the majority youre in a majority of home depot stores with at least one once I guess with one skew.
That's correct that occurred in the what's the rough price I mean is that a $99 machine is that a 200 dollar machine do you have.
Do you have that.
Yes, Mike Mike as Matt. Good question, we it's one of the early price points.
Sort of flight around $30.
So.
So.
So it's one of the it was one of the early when does not want to full size full sized items, mostly the manual pumps and maybe some table tops, which basically means that goes from $10 to $30 is on the lower side of it.
Okay all right.
The opportunity obviously is an up the opportunity Mike is on the other side of it if we get Thats a skew we can get in we show them, how we perform which we certainly will.
Then we can expand that number of skews per store, if you will so where where we get really excited about our ability to us. So.
Lean in and on our way to skew growth.
Right, Okay, Okay and then.
Yes, you sort of touched on a little bit but.
David I mean, what do you think longer term the opposite what was once a refill is tracking at 30.5% to 31% growth margins. I mean is the longer term opportunity there and longer term, meaning three to five years is that can that be a 34% gross margin business, 33%, how do you see refill.
Yes.
Yes definitely good good question in the peak season quarters, Q2, and Q3, we believe this can be a 34% to 35% margin business with volumes coming back in and everything else in place.
About I think we've talked before about a 100 to 200 basis point improvement over where it's been historically.
In the off peak quarters, you could be you know.
About 100 to 200 basis improvement, which would put you in the 32% range in Q1 or Q4.
All right and then just last one I don't think you guys have really touched on this in a while but I know you're trying to do more with social media podcast.
Things related to health and fitness have you guys had any.
Wins, there even anecdotal that you can talk about where you may have gotten some traction over the past Uh huh.
Few quarters. Thanks.
Mike we have done a bunch of localized level. So even social media is not necessarily national on base you have a lot of local influencers, we've been testing a lot of that work and getting.
Getting a lot of positive traction.
In that space, it's really early for us, but we we are leaning into that and for the first time, we're using outdoor refill as.
Almost the target if you will of our social media and that frankly, the refill business, that's never really been done before and so we get really excited about that and some of the.
Really important markets for us getting out there telling the story letting influencers help us tell a story.
Early innings for us, but those early innings or.
Frankly, a brake bright spot.
All right very good thanks, guys.
Thanks, Mike.
Thank you and we have a follow up question from Jon Andersen from William Blair. Your line is now open.
Yes, hi, thanks for taking the follow up.
On the gap first one was on the gap between the.
Exchange.
US exchange same store sales units or 13% in the dollar sales of five.
Can you quantify just order of magnitude the impact of the IR see versus location attrition, maybe which was more.
Pronounced in the quarter in explaining the delta.
Yes, the majority of the Delta is the location attrition that occurred in the quarter.
The IR see does impact, but if you look at it if you remove the RC units from the same store unit number of 30.4. It was only about a 100 basis points.
Impact so it's still still really strong growth in terms of total units.
Excluding the free ones so.
Mostly a location attrition story in the quarter.
Thats Super helpful. Thanks, and then.
Yes on Albertsons, the new exchange locations.
Can you be a little bit more precise on the on the timing of that rollout is is that happening.
Q3, Q4, and then how quickly.
You kind of ramp it needs where existing locations from a competitor so im assuming the productivity is pretty good right out of gates.
Yes. So the the look is the rollout will start this quarter and will take through the remainder of the year.
But you're and you're spot on on the replacing a competitor or these these will we believe will perform.
Much better than a location that didnt have this this category and in the past so and John I, just I'd just add as we target more and more location growth, we're going to be really smart about the locations. We we go after we're going to go after more high profile high productive locations. So they come in earlier and I'll lifecycle them than later so.
We have a lot of location information.
And we're going to target those as much as we can.
Great last one for me.
Ice business.
What's the impact to us.
And EBITDA.
For the I guess it would be the second half of the year or on an annual run rate basis.
It was the about US just under an 8 million dollar annualized business and the EBITDA was just under 10% margins on that.
Great. Thanks, so much good luck.
Thanks.
Thank you and our next question is a follow up from amidst Sharma with BMO capital. Your line is now open.
Hi, Thank you so much for taking the follow up Dave on this last point.
If you think about the guidance change in this quarter for the rest of the year.
Can you dig down into that a lot of it is is a factor into it.
And then can you maybe provide a little bit more color how much of that is greater than expected sort of duration worth the investment behind sales promotions.
Yes, so ice has been as been out of the out of the number amid those I think during the quarter. It was about $3 million in revenues this quarter in the second quarter.
Going forward, obviously, not there, but the overall, what's driving that change has been the location attrition much farther much much more extensive what we originally expected or.
Or we're guiding towards.
With some of the on the investment side, the IR see promotions that in fact, it does impact.
Revenues are given away bottles and it impacts margins.
We're seeing a much much higher redemption rates than we've seen even as we talked in Q1.
As it continues to accelerate so but overall the majority of the change is location attrition.
Compared to where we were before.
Yes, and then I just had to.
The RC is it.
Well above what we expected it to be and it does have a short term impact, but we we love to see that connectivity and when it's driving dispensers and our ability to to invest in these additional promotions gets us really excited for the long term, but we know.
It's having on it's going to have a drag on our second half EBITDA, but we're we're leaning in because we.
We have seen in the past our ability to use promotions to drive the future of the business.
And the reason Im asking I'm asking this is the investments are going to be perfectly fine, but if you are spending more on IR see and that's the reason for your EBITDA down right and that's really good and given the really good ROI on this investment is a really good investment right nobody will be ready for that so I just want to like have a better understanding of what is driving this outlook down right. So yes. Those two other reasons and we know that I just wanted to get a little bit more clarity on is 75% of the EBITDA.
Negative is driven by store closure versus 50% I don't do any sort of help.
So that in our minds and invest in mind, they know what's driving it and is it a good warranty 20, how should we think about that.
Yes from an EBITDA perspective, yeah, the RC and the promotions.
Probably about a 50 50 compared that to the location attrition.
50, 50, okay perfect. That's all on an interim goal. Thanks, so much guys.
Thanks.
Thank you and I'm showing no further questions in the queue at this time I'd like to turn the call back to Mexico and for any final remarks.
Thank you for your participation on today's call and interest in Primo water have a great night.
Ladies and gentlemen, thank you for your participation you may now disconnect everyone have a great day.