PRMW

Primo Water Corporation (PRMW)

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Primo Water Corporation (PRMW)

Q3 2012 Earnings Call

November 7, 2012 4:30 PM ET

Executives

Katie Turner – IR

Billy Prim – Chairman and CEO

Mark Castaneda – CFO

Analysts

Andy Wolf – BB&T Capital Markets

Mitch Pinheiro – Standing Capital Markets

Presentation

Operator

Good day ladies and gentlemen, and welcome to the Primo Water Third Quarter Fiscal Year 2012 Earnings Conference Call. (Operator Instructions) I would now like to introduce your host for today’s conference, Katie Turner. Ma’am, you may begin.

Katie Turner

Thank you. Good afternoon, and welcome to Primo Water’s third quarter fiscal 2012 earnings conference call. On the call with me today are Billy Prim, President and Chief Executive Officer; and Mark Castaneda, Chief Financial Officer. By now everyone should have access to the release which went out this afternoon at approximately 4:05 p.m. Eastern Time. If you’ve not received today’s press release, it’s available on the Investor Relations portion of Primo Water’s website at www.primowater.com. This call is being webcast and a replay will be available on the company’s website.

Before we begin, we’d like to remind everyone that the prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. The forward-looking statements should be considered within the meaning of the applicable securities laws and regulations regarding such statements. Many factors could cause actual results to differ materially from those 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 incorporated into – in the press release issued this afternoon and in all documents that Primo Water files with the SEC.

And now I’d like to turn the call over to Primo Water’s President and CEO, Billy Prim.

Billy Prim

Thank you, Katie. Good afternoon, everyone, and thank you for joining us. I will provide some opening remarks, then Mark will review our financial results for the third quarter. And finally, I will provide some closing remarks, then we will open up the call for questions.

Before I begin, I would like to make a comment on Hurricane Sandy. While we are fortunate not to have incurred any damages at our offices related to the hurricane, our hearts go out to those that were impacted and we wish everyone a safe recovery. We will continue to provide water for those relief efforts through our partners.

Now, as we discussed on the second quarter call, we are focusing on improving results through ending our investment in the launch of Flavorstation and executing on our core business by adding more households through selling water dispensers, which should lead to continued re-occurring water sales, which generates continued increases in cash flow through operating margin improvement.

I’m pleased to report that we have made progress on all fronts this past quarter and we expect to continually make improvements throughout the next year. These results enabled us to report third quarter net sales and adjusted earnings in line with our expectations. Furthermore, the strength of both our core Water and Dispenser businesses has led to improved EBITDA and positive cash flow from operations in the quarter.

First, we have continued positive trends in our core business, Dispensers and Water. Both continued to post improvements and growth in the quarter. In the third quarter, consumers purchased a record 114,000 plus dispensers at retail, which is up 30% over the prior year. This growth illustrates that consumers continue to change their habits in consuming water at home. We believe there are approximately 780,000 households that use Primo Water today, which is up 14% over the last year. Additionally, we have added 400 net new locations during the quarter that offer our water and/or dispensers. Included in that number are several Wal-Mart exchange-and-refill locations. We ended the quarter at total locations of 24,600.

In addition to increased dispenser sales, we improved our dispenser gross margin to 8% versus 0.5% in last year’s third quarter as a result of price increases and a favorable mix of sales from our higher-margin, bottom-load dispensers. Our operating margin in our dispenser business did not improve, as we incurred some one-time cost of expediting product for a rollout which allowed us to get our bottom-load dispensers in more locations. Going forward, we do expect to see improvements in the operating margin of the Dispenser business.

Our water business continued to grow and generate higher operating income. Our Water segment sales increased approximately 3% to $17.3 million and income from operations increased 21.8% to $4.5 million compared to the prior year. Our water business was up against some difficult comps from Hurricane Irene in the prior-year’s third quarter that impacted the Mid-Atlantic States in August of last year. Despite the challenging comps, our US Exchange business grew 9.1% in revenues which was driven by a 13% same-store unit sales increase.

Our Refill business was down 3.4% compared to prior year, primarily as a result of positive hurricane volume from the prior year. Our operating income improvement was the result of gross margin and expense management. Looking forward, we believe the impact of Hurricane Sandy will benefit our same-store unit sales in the fourth quarter. However, at this point, is still too early for us to quantify.

We are in a strong position with our water business to leverage our existing regional operator network to service customers. We’ve also started to test servicing our refill machines with company employees. While we are still early in this testing phase, we believe from early test results that it will lead to improved sales and profitabilities in the markets we service long-term.

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