Billy D. Prim - Founder, Chairman, Chief Executive Officer and President
Matt Sheehan - Chief Operating Officer
Mark Castaneda - Chief Financial Officer, Secretary and Assistant Treasurer
Primo Water (PRMW) Q1 2013 Earnings Call May 14, 2013 4:30 PM ET
Good day, ladies and gentlemen, and welcome to the Primo Water Corporation First Quarter 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Hunter Welles. Ma'am, you may begin.
Good afternoon, and welcome to Primo Water's first quarter of 2013 earnings conference call. On the call with me today are Billy Prim, President and Chief Executive Officer; and Mark Castaneda, Chief Financial Officer; and Matt Sheehan, Chief Operating Officer.
By now, everyone should have access to the release that went out this afternoon at approximately 4:05 p.m. Eastern Time. If you've not received today's press release, it is 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 would 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 with the meaning of the applicable securities laws and regulations regarding such statements.
Many factors can 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 in the press release issued this afternoon and in all the documents that Primo Water filed with the SEC.
And now I would like to turn the call over to Primo Water's President and CEO, Billy Prim.
Billy D. Prim
Thank you, Hunter, and thank you for joining us in the call. I'm going to start out with a few comments on where we are in our core business and then turn the call over to Matt Sheehan, who will go a little deeper into our initiatives to drive operational excellence. Then Mark Castaneda will give you a first quarter 2013 financial recap and our outlook for the remainder of 2013.
We are off to a solid start in 2013 and pleased to report our fifth consecutive quarter of positive adjusted EBITDA as we exceeded our first quarter expectations. We continue to see the benefit from our strategic decision to discontinue the Flavorstation Sparkling business and focus on our core Water and Dispenser businesses.
In the first quarter, total sales were up 12.8% to $22.3 million and cash flow from operations increased to $4 million with $2.6 million in free cash flow after CapEx expenses, both record results for the company.
We are pleased with our consistent adjusted EBITDA performance, which increased 57% to $1.9 million from Q1 of last year. We will continue to focus on operating efficiencies across our core businesses to increase adjusted EBITDA throughout the remainder of the year. Our improvement in this metric will help us refinance our debt and lead to lower-cost capital long term.
Focusing on our first quarter sales results in a little more detail, dispensers were the real star of the quarter. Dispenser sales were up 54% to $7.4 million. We believe this is exciting growth as we increased the number of our dispensers and households across the nation, it will lead to reoccurring water sales in the future.
As for water, the bright spot was the U.S. Exchange business, which had the 12% same-store sale unit growth in the first quarter. Sales growth in the water segment was partially offset by both a mix change and our U.S. Exchange business, as well as softness in empty bottle sales in our Refill business. When combining these items, the Water sales were virtually flat.
In closing, we exceeded our expectations for sales and operating results across-the-board. We did this in a seasonally weak quarter that also included unfavorable weather conditions throughout the U.S. when compared to the prior year.
Regardless, we believe we are off to a great start, on track to meet our guidance and ready for the upcoming summer season.
With that brief overview, I'll turn it over to Matt Sheehan, our Chief Operating Officer.
Thank you, Billy. I'd like to provide an update on our foundational execution plan we outlined for you last quarter.
We continue to strengthen our operational focus to support our future growth initiatives, all while operating on an efficient, productive and profitable business model. That said, our team continued to focus on 3 core elements: one is consumer and retailer focus; two, simplicity; three, analytics. We are pleased with the progress in these core initiatives to date.
On consumer and retailer focus, we're making improvements across many areas of the business. First, to better understand our reputation, we are beginning to survey our consumers and retailers. We believe this information will help us better understand the consumer and retailer needs and drive the business according to these insights. Keeping with the consumer, we continue to identify and execute our brand standards at retail, along with attachment strategies, that increase the percentage of people who buy our dispensers, as well as our water.
Moving to simplicity, we are increasingly focused on our core business segments, finding areas for greater efficiencies and refining some of our operational processes.
The last of our core elements is analytics, which we you continually use to drive our business decisions. Our use of a balanced scorecard approach is putting analytics in the front and center of our business. In conclusion, we expect to be more productive on a unit economic basis as we increase efficiencies, focus on our key strategic initiatives and drive long-term growth.
We recently completed our National Operators Conference for the U.S. Exchange business and are excited for the upcoming summer season.
Now I will turn the call over to Mark to review our financial results for the quarter.
Thanks, Matt. I'm going to review the first quarter financial results in more detail. Also to help investors understand our operating results, we do provide certain non-GAAP financial measures, including adjusted EBITDA, which I'll discuss in a few moments.
Overall, as Bill mentioned, we're off to a solid start for 2013. Our total sales for the quarter increased to 12.8% to $22.3 million. Drilling in a little deeper to the top line, our water revenue was essentially flat compared to the prior year period at roughly $15 million. While the first quarter is a seasonally slower period for Water, we believe our sales were negatively impacted by weather conditions as Billy mentioned.
Our first quarter revenue reflected an increase of 2.1% in Exchange sales, driven by same-store unit growth. Exchange growth was offset by a 4% decline in Refill sales.
Our recent April results indicate a return of stronger Water revenues trends compared to March.
Dispensers segment revenues increased 54% compared to the first quarter of the prior year to $7.4 million. Dispenser units sold into the retail channel increased 19% to 88,900 units. This is a result of an increase of number retail locations offering our dispensers, as well as same-store sales increases.
Dispenser units sold through to the consumers increased 12% to 104,000 units in the first quarter compared to the prior year. Sales dollars increased more than the unit sales due to the increase in sales mix for higher-priced dispensers, as well as the price increase we put in place last year. We believe that increased water dispenser penetration in consumer homes will lead to increased water sales.
Next, we continued to see improvements in SG&A spend which decreased by 16% to $3.8 million. As a percentage of net sales, SG&A decreased to 17.2% from 23%. The improvements are a result of focusing the cost structure to align with our core business.
As Billy mentioned our adjusted EBITDA increased almost 60% to $1.9 million as we are able to convert a significant ratio of top line growth to the bottom line, illustrating the leverage and improvements in our model. In addition, cash flow from operations increased almost threefold to $4 million. The increase in cash flow from operations resulted in free cash flow of $2.6 million during the first quarter of 2013 compared to about a breakeven in the prior year. We define free cash flow as cash flow from operations less cash used in investing activities or CapEx.
Our net loss per share from continuing operations improved to $0.10 from $0.13 in the prior year. On a non-GAAP pro forma fully tax basis, the net loss per share from continuing operations improved to $0.04 compared to $0.05 loss in the prior year. We do not expect to pay cash taxes in the near term due to net operating loss carry-forwards.
Continuing onto our balance sheet, highlights for the quarter include the reduction of about $2 million in debt, which is funded by operations and improvement in working capital. Our inventory decreased $1.8 million, primarily due to a seasonal build at year end to manage factory downtime during Chinese New Year.
Our accounts receivable decreased to $0.5 million as a result of improved DSO, which improved to 38 days from 52 days in the prior year.
Turning to the outlook. First, we reiterate our full year guidance of net sales increasing 2% to 4% or in the range of $93.3 million to $95.3 million and full year adjusted EBITDA in the range of $9.2 million to $9.4 million. We continue to expect Water segment revenue to increase 5% to 7% to $65.8 million to $67.1 million. For the second quarter of 2013, we expect net sales in the range of $21 million and $22 million and adjusted EBITDA in the range of $2 million to $2.2 million. This represents a reduction in top line revenues compared to the prior year due to the timing of dispenser sell-in. We do, however, expect Water revenues to increase and expect a significant improvement in EBITDA to the amount of over 50% compared to the prior year.
Dispenser selling to the retail channel can be lumpy as retailers manage their inventories, as well as fill the supply channels as we add new dispenser locations. We typically have visibility to sales orders 6 to 9 months out, but the timing of those sales in the specific quarters is depending upon retailers inventory management.
In the first quarter, we did benefit from sales pull-forward into the first quarter. Also prior year second quarter dispenser sales included channel fill from the rollout of a new retail location for major customer.
As previously discussed, we believe the key measure for Dispenser business is the consumer sell-through, which had experienced solid double-digit growth which we expect to continue.
We also continue to expect capital expenditures in the range of $5 million to $6 million for the full year. Our anticipated capital expenditures are related to growth primarily in the Water segment.
We believe we have sufficient debt capacity to continue to invest in growth and add new locations. We also believe that we can continue to improve our operating results and refinance our debt with lower cost capital over the next 9 months.
This concludes our financial review. Now I'd like to turn the call back over to Billy.
Billy D. Prim
Thanks, Mark. We remain focused on growing our core Water and Dispenser business. We are fortunate to be in an industry that is growing. We believe that the healthy living trend is causing more and more people to switch from high-calorie beverages to water, and we feel Primo is well positioned to capture some of that volume.
Our management team believes we have the right strategies in place to grow our business long term. Going forward, we believe we can continue to add appliance households, which should lead to a continued reoccurring sales.
Thanks for your participation today. Operator, we will now open the call for questions.
[Operator Instructions] Our first question comes from Rob Schultz of Gilford Securities.
I have a couple of questions and then I'll get back in the queue. But why don't we just start with some easy things? Mark, NOLs, what total view does the company have now?
It's approximately $90 million in NOLs.
Okay. And then on CapEx, you said you're going to expect about $5 million to $6 million for this year. Is that considered maintenance CapEx or is maintenance CapEx a different number?
Yes, it's included as a subset. So the CapEx is broken down to about $2 million of maintenance, about $3 million of Refill and about $1 million of Exchange.
Okay. And then turning to cash flow. Clearly, it's nice to see positive free cash flow. Did that come faster than you expected? And then importantly, maybe you can tie that into the capital structure conversation. You did state that you wanted to refi within the next 9 months. What trend do you expect that to have as you go through this year? Will it go lower than it currently is? Or is this $19 million level stabilized for the rest of the year?
So from a cash flow, I guess, the first part of your question is, yes, it was a little -- it was stronger than we expected for the first quarter. A couple of things that we did do is we did renegotiate some terms with some suppliers to extend some terms or still to improve our cash flow and working capital. And we do expect to have working capital to be a slight use of funds this year as opposed to a greater use. I think last quarter we said it would be about $1 million to $1.5 million. Now I think that's about even to $0.5 million used. That puts overall free cash flow, or cash flow of around $2 million to $3 million versus last quarter. I think we said $1 million to $2 million. Debt levels at the end of the year are probably will jump up and down depending on the seasonality of the business as we need some more working capital. At the end of the year, it will probably be near the same range we're at today even after investing about $5 million to $6 million in the business.
Okay. And then I guess to turn to the Water segment, I think you said that even though sales were flat in the quarter, but I think you said that recent trends have improved. Did I hear that right?
That is correct.
I don't know if you're willing to talk about it, but if you could talk about inter-trend -- inter-quarter trends. And I guess importantly, were there any specific drivers to those trends improving over the last several weeks?
So the change in the trend was -- March was a weaker period and mostly we believe due to the store traffic as what our retailers were telling us. And it was pretty obvious. The weather was, compared to last year, it was significantly different. But this year, we saw kind of back on trend as we're looking at the first 2 months of the quarter which is strong sales growth on the Exchange side.
And on the Refill business itself, is there any strategy that you could implement or anything that you guys are doing to perhaps achieve some growth in that business? If that's possible.
Yes. This is Matt, Doug. Good question. I think the big one for us is to understand our consumers and their buying behaviors more than we do today. More tangibly than that is empty bottles, giving the consumers the ability to buy a container than to the water in the Retail business. And that's where we've already seen some improvement that we've done some testing and we'll continue to do so.
And that testing that you're doing? How long will that take? Do you -- will that take weeks? Or will it take months or quarters?
We think it's probably in a month's time frame. We want to make sure we test right and we have right answers. And so I'd say in a month.
And Matt, since you've come to the company, I know you spoke on last call as well. Any surprises or any other incremental reflections that you've had about the business as you've got to know it a little bit better, as well as I'm sure you're out there talking with the customer bids?
No major surprises. I still feel very bullish in the business. I'm a very unit-center, economic-focused person and those all continue to be strong and growing and we're going to continue to focus on that. We have met even most recently with our operator community in the country, and I feel very strong after that meeting. The energy is high and our ability to deliver what we're telling all the world here is very high. So I feel no major surprises, but even more bullish on the business?
That's good news. Mark, one last question for you. Regarding the Dispenser sales segment, there were a couple of items that were discussed in the press release as drivers of that segment, increased retail locations, sell-through, as well as sell-in. Could you give us a little bit more color of the mix of that so we understand which drivers are driving this segment?
Yes. So it was about equal, same-store sales, as well as additional locations. So we added about 9% additional locations and then same-store sales were a little bit more than that, which accounts for about the 19% increase.
[Operator Instructions] Our next question comes from Eric Wagner of Force Capital.
In the last conference call, you talked about the Dispenser sales and it's good to see that improving. And you also had mentioned that your price structure is going to change. It looks like the price structures taking in sales are going up. Are you getting the Dispenser sales out into more grocery store retail locations? Or can you talk a little bit about the mix of business and how it's broadening out?
Billy D. Prim
Yes. Eric, I will remind you that we do use our Dispenser sales as really a marketing tool. The last year, we had -- we increased prices to make sure that our marketing tool was also generating positive EBITDA for us and positive margins. And we've been successful doing that over the past 3 or 4 quarters of implementing those price increases, controlling cost and then expanding the retail distribution. And that's what you're talking about. You can now see our Dispenser is not only at Lowe's and Wal-Mart, but you will see them in grocery, you will see them in office, you'll see them in other locations as we have expanded the retail network.
Thank you. And at this time, I'm not showing any further questions. I'd like to turn the call back over to management for any closing comments.
Billy D. Prim
Thanks, operator. We would like to thank our employees, regional operators, Refill service providers and retail partners for their efforts in our growth and continued execution and improvement. We will continue to execute on our long-term growth strategies of increasing locations to 50,000 to 60,000 retail points of distribution, increase households through dispenser sales and improve our operating results to achieve profitability and lowering our cost of capital.
We appreciate your interest and thank you for your support. We look forward to providing you an update in our business progress next quarter. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.
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