Tom Harrington, Primo Water CEO
By Exec Edge Editorial Staff
Exec Edge: Who is Primo Water and how has the business changed over the last few years?
With so much uncertainty in the markets, Primo Water offers investors what many others don’t. We are:
- the only public pure-play consumer water platform with leading national and local brands in both North America and Europe;
- a predictable, recession-resistant revenue base;
- attractive high-single digit long-term organic growth targets;
- supported by multiple favorable tailwinds such as increased consumer attention to health and wellness, aging water infrastructure, and unsafe municipal water supplies.
We’ve undergone a serious renovation over the past couple years so we have a healthy balance sheet with low financial leverage and our compelling low-20’s EBITDA margins allow us to deliver consistently strong free cash flow for shareholders.
Through our various channels including direct delivery, in-store exchange, and filtration, we meet the consumer where they live, where they work, and where they shop. You may think you know Primo Water, but – as we like to say these days – “we’re not who you think we are”.
Exec Edge: What are some of the macro factors effecting Primo?
Primo’s growth is supported by multiple favorable tailwinds such as increased consumer attention to health and wellness, aging water infrastructure, and unsafe municipal water supplies.
During 2022, we have faced significant cost inflation in labor, fuel and freight and successfully offset the impact of more than $65 million dollars of inflationary cost increases through Q3. We have offset cost inflation through pricing actions, customer retention, and the benefit from several of our 2022 investments in growth and efficiencies.
Also, effective November 6, 2022, dispensers, and filtration units are no longer subject to a 25% tariff, but instead will have a 2.7% tax. This change applies to the vast majority of Primo’s imports and will allow us to adjust the average selling price of dispensers, accelerating dispenser sell-thru and water connectivity. The benefit will be realized late next year as we work through current inventories.
Exec Edge: How are you looking to expand from both a revenue and a margin perspective?
We continue to execute our differentiated Water Your Way platform, and despite near record inflation, we delivered strong organic revenue and Adjusted EBITDA growth in the 3rd quarter. Our investment thesis remains intact with a portfolio of leading water solutions across multiple channels and geographies, strong consumer tailwinds, and a recession-resistant revenue base.
We are projecting our revenue outlook for 2024 of high single-digit annual organic revenue growth. Primo is experiencing revenue growth across all categories: Water Direct/Exchange, Water Refill/Filtration and Water Dispensers. Primo has a diversified residential and B2B customer base with adjusted customer retention rate of 86.5%.
We have recently increased our 2024 Adjusted EBITDA outlook to approximately $530 million dollars, with Adjusted EBITDA margins of approximately 21%.
Exec Edge: How does your team think about capital allocation in this uncertain environment?
Our capital allocation strategy includes a balance of reduction of debt, repurchasing of shares, increasing our dividend and continuing our tuck-in M&A strategy.
We remain focused on reducing our leverage ratio to below 3 times in 2023 and to less than 2.5 times by the end of 2024. Our current debt maturities are in 2027 and 2028 and therefore we have no pressure to refinance any of our debt at this time and are pleased with the current debt structure.
In August, we started a $100 million share repurchase program. During the 3rd quarter, we repurchased approximately 800,000 shares for approximately $11 million dollars. The repurchase program reflects the Board’s confidence in our future performance and our continued long-term cash flow generation and demonstrates our ongoing commitment to providing fundamental value for our shareholders.
In addition to the share repurchase program, we authorized a quarterly dividend of seven cents per common share. We are also planning a multi-year dividend step-up which includes an increase in our quarterly dividend per share by one cent in 2022, another in 2023 and another in 2024. The increase in the dividend will return over $6 million incremental dollars to shareholders in 2022 and $36 million dollars by the end of 2024.
The remaining area of capital deployment includes our tuck-in M&A strategy. For 2022, we expect to be toward the low end of our target of $40 to $60 million dollars as some of the potential deals may fall into next year.
Should we work in investments in innovation here?
- Innovative dispenser line-up, multiple water-delivery formats, and diverse family of brands underscore comprehensive product portfolio
- Recent innovations, such as 3-Gallon Alkaline, ingenuity in water filtration dispensers, and the Primo Fresh launch contribute to projected future growth
Exec Edge: How do you service your customers efficiently?
We have an Automated Route Optimization (ARO) tool in North America sequences routes in the most efficient path possible which maximizes the time route sales representatives will spend with customers, enhances commission earning time on-route, unlocks route capacity to handle future organic growth and minimizes the time spent behind the wheel for our drivers. ARO remains a key operating initiative. In September for example, we operated 23 more routes per day compared to August, with no increase in total miles driven. A direct result of the team’s efforts implementing the tool. In addition, our year-to-date revenue per stop in North America has increased nearly 22% compared to last year. These efforts have been a key driver offsetting the impact of labor and fuel inflation as well as positively impacting the customer experience by enabling increased delivery frequency to support our efforts to grow our water exchange business.
To accelerate our efforts on digital transformation, route logistics and supply chain, we are currently in the process of selecting third party consultants to support our growth algorithm and strengthen operating efficiencies across our route-based platforms. In doing so, we will leverage the considerable experience of two of our directors; Britta Bomhard and Susan Cates. Britta has extensive experience in e-commerce, digital and online marketing and Susan is the co-founder of a growth equity fund that invests in portfolio companies with digital platforms.
Exec Edge: Can you tell us a little more about Primo’s eCommerce efforts?
From a digital perspective, we are pleased with our efforts and investments in our Mobile App (My Water+) which is currently rated at 4.9 on both the IOS and Android platforms, a direct result of our most recent update. Our Google “on-line reputation score” has increased 63% since the end of 2021 and our Google “My Business” score has increased 46%. These ratings are a significant improvement from prior quarters and are a result of our recent investments updating the applications and the overall customer experience. We will continue to invest to provide a best-in-class digital solution for our customers. While we have re-platformed most of our digital/e-commerce websites over the course of the last 12 months, the next area of focus and investment is to redesign our website Water.com through a combination of internal and external resources to further enhance the effectiveness of this site.
Exec Edge: What is Primo Water doing from an ESG perspective?
As a Water company, caring for our planet and its natural resources is at the heart of our mission. As you will see in our ESG report, as part of our commitment to sustainability, the environment, and helping others, Primo Water Corporation supports responsible water stewardship, renewable energy, and community development projects at both a global and local level. In the years ahead, Primo will continue its focus on reducing its carbon footprint and supporting the wellbeing of the communities we serve. That said, over the past year, we are very proud of some of our achievement in sustainability:
- We achieved carbon neutral certification for our U.S. operations;
- We received certifications from the Alliance for Water Stewardship (“AWS”) for our Diamond Spring site in Pennsylvania and our Wekiva Spring site in Florida;
- We achieved carbon neutral certification for our European subsidiary, Eden Springs, for the ninth consecutive year;
- We continue to replace older model diesel vehicles in our delivery fleet with propane-powered vehicles that deliver greater fuel efficiency and help lower our greenhouse gas emissions; and
- We remain on target to reach full AWS compliance of all key owned spring sources by 2025.
Exec Edge: How is CFO search going? Board search/ composition?
I have the privilege of working with an excellent management team who have overseen a business transformation following the Cott acquisition of legacy Primo. Since that transaction, the company has more than double adjusted EBITDA margins, enhanced top-line growth while navigating the COVID-19 pandemic. In addition to the Cott acquisition, the management team continues to execute on strategic transformation via tuck-in M&A with a robust pipeline for the future.
I’d like to thank Jay Wells, our CFO, who announced his retirement effective April 1st. Primo has a strong finance team, and Jay has played a significant role in helping drive financial and operational improvements. We have engaged an executive search firm to assist the Board with his replacement. We are also working with the executive search firm as well as soliciting feedback from our shareholders on our continuing Board refreshment process. We are looking to identify and hire leaders who can help accelerate the transformation process and continue our growth objectives.