Primo Water's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Aug. 8.12 | About: Primo Water (PRMW)

Start Time: 16:30

End Time: 17:11

Primo Water Corporation (NASDAQ:PRMW)

Q2 2012 Earnings Call

August 7, 2012 04:30 p.m. ET

Executives

Katie Turner – IR

Billy Prim – President & CEO

Mark Castaneda – CFO

Analysts

Jim Duffy – Stifel Nicolaus

Andrew Wolf – BB&T Capital Markets

Mitchell Pinheiro – Janney Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to the Primo Water Corporation Second Quarter 2012 Conference Call. At this time, all participants are in a listen-only mode. Later we will hold a question-and-answer session and instructions will follow at that time. (Operator Instructions) And as a reminder, this call is being recorded.

I’d now like to turn the conference over to Katie Turner. Please go ahead.

Katie Turner

Good afternoon and welcome to Primo Water’s second 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 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 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 forward-looking statements incorporated 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 second quarter and our outlook for the remainder of 2012. And then, I will provide some closing remarks and open up the call for questions. We’re pleased to report that the second quarter net sales results were in line with our expectations. These results reflect strong dispenser and water sales as we continued to add households that have our Primo Water Dispensers and use our water.

Before I provide you with an update on our business strategy, I would like to provide you with a brief review on our business segments. First, our water business, our water business continues to grow and generate high profitability. The water segment sales increase is primarily due to an acceleration of U.S. exchange same-store sales unit growth of 14.7% for the second quarter. We plan to continue to add more water locations with most of them in locations where we will sell dispensers.

Our dispenser business continues to grow and gain more retail store locations. Consumers purchased a record 96,500 dispensers in the second quarter. As a result, our dispenser sales increased 58% to $9.3 million. We continue to believe the increased water dispenser penetration will lead to reoccurring water sales.

In the Flavorstation business, we continue to believe in the sparkling beverage category. We have great products and only CO2 direct store delivery capability. We have had some success expanding in this category with Lowe’s Home Improvement and certain grocery and hardware chains that currently sell our water. But we recognize there may be better ways to utilize our assets in this category long term.

As for gross margins, the water continues to have healthy gross margin in excess of 30%. We did have some extra costs this quarter related to consolidation of our refill service network, which slightly reduced our water margins compared to prior year. The water segment’s operating income for the second quarter of this year increased 4.2% to $3.8 million compared to prior year. The appliance segments of Flavorstation and dispensers have generated increased sales; however, they reported operating losses in the second quarter.

As a result of this operating performance, our future business strategy will focus more on the growth of our core water and dispenser business going forward. Our water business has generated more than $14 million in operating income over the last 12 months and continues to grow. For our Flavorstation appliance business, we plan to explore shareholder-enhancing strategic alternatives included – including, but not limited to, a brand licensing partnership for our Flavorstation appliance business or the sale of certain Flavorstation appliance business assets and technologies. We expect to complete this sometime in the second half of this year.

The past year has been difficult for investors, and much of the problem involves the timing of sales, expenses and profitability of the Flavorstation appliance business. During that time, our water business has grown and generated strong operating margins. For that reason, we are renewing our focus on the water and dispenser businesses, both of which are working well and growing. We are in a very 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 network with company-owned employees. While we are still in the early testing phase, we believe that from early results, it will lead to improve sales and profitability in the markets we serve long term.

In addition, we believe our Club Primo promotion will further generate water sales and has been well received by our consumers to-date. The Club Primo promotion is currently available on our website and is a strong social media tool for us to use to connect with existing and new Primo dispenser users to understand their beverage needs at home and in the office. In addition, our Win Water for Life promotion just started online and the response thus far is very favorable.

Going forward, we are confident that our strong product portfolio and distribution capabilities will enable us to realize continued growth and improved operating results.

Now, I will turn the call over to Mark to review the financial results.

Mark Castaneda

Thank you, Billy. I’m going to briefly review the second quarter results as well as our guidance for the third quarter and full year. To help investors understand our operating results, we do provide certain non-GAAP financial measures, including pro forma EPS, which I’ll discuss later in a few moments.

In the second quarter, we generated $25 million in sales, an increase of approximately 21% compared to the prior-year period and came in at the high end of our guidance. The year-over-year increase was driven by growth in both our U.S. water exchange business as well as our dispenser businesses.

Our net loss per share, on a GAAP basis, was $1.11 compared to a loss of $0.10 in the prior year second quarter. The loss was primarily driven by non-cash charges of approximately $25 million related to an impairment of certain intangible assets. On a GAAP basis, our pro forma loss was $0.03 per share compared to $0.01 per share in the prior period. The primary difference between GAAP and non-GAAP earnings is the non-cash impairment charges.

First, I’ll expand on the impairment charge. All companies are required to examine their intangible asset values when their stock price remains below their book value. We completed our exam and recorded a $25 million non-cash charge during the quarter. This charge is made up of an $11.5 million charge in our water segment for goodwill from acquisitions and the $13.4 million charge in our Flavorstation segment related to our Omnifrio acquisition. During the second quarter, we determined that we would not be able to have the single-serve soda machine available for this holiday season.

Next, drilling into the sales for the quarter. Water segment sales, which include our exchange and refill services, grew approximately 4% to $15.4 million. This sales improvement was primarily due to 14.2% increase in U.S. exchange sales. Exchange sales are driven by an acceleration of same-store sales growth of 14.7% compared with 5% same-store sales growth in Q1 and 2.5% same-store sales growth in the prior-year second quarter. We believe that same-store growth is due to new consumers entering the category through dispenser sales. Our U.S. exchange sales growth was partially offset by lower refill sales, as a result of lower empty bottle sales caused by changes in our service network during the quarter.

Sales for dispenser segment for the second quarter increased 58% to a record $9.3 million compared to $5.9 million in the second quarter of the prior year. The increase is due primarily to new locations that offer dispensers, as well as an increased mix of higher-priced units. Sell-through to consumers increased approximately 37% to a record 96.5 million units – I’m sorry, 96,500 units. We believe that the increase in the number of water dispenser households should lead to increased recurring water sales.

Moving to gross margin, in the current quarter, gross margin decreased to 17.5% from 27.1% for the second quarter of the prior year. There were three primary reasons for the reduction in gross margins. First, gross margins were negatively impacted by a $500,000 charge related to certain reserves against our flavor inventory. Second, margins were impacted by 7.6% reduction in dispenser gross margins, as a result of increased production cost. We have initiated a price increase, which went to effect late in Q2.

Finally, water margins were 2.8% lower than the prior year, primarily due to transitional cost related to changes in our refill service network. As a result of our network consolidation, we now have 60% overlap in our refill exchange service providers. We do expect gross margins to increase for the balance of the year in the mid-20%s range.

Our SG&A increased 4.3% to $4.7 million in the second quarter, compared to the same period in last year. As a percentage of net sales, SG&A decreased to 18.7% from 21.7% in the prior year. The dollar increase in SG&A is primarily a result of approximately $400,000 in addition of Flavorstation-related expenses. We currently expect that SG&A, as a percent of sales, for remainder of the year, will compare favorably to 2011 as we leverage our cost base with increased sales growth.

Now, turning to the balance sheet, the primary differences in the balance sheet are the reduction in goodwill and intangible assets and a corresponding change in equity due to the $25 million impairment charge. The other change in the balance is that our debt level is now all considered long term as opposed to at yearend we had a portion of our debt considered short term. This was due to the refinancing that we did in April. We borrowed – we have about $4.7 million borrowed in our $25 million credit facility at the end of the second quarter.

We have no material commitments for capital expenditures at the end of the second quarter. However, we do anticipate capital expenditures in the range between $2 million and $2.5 million for the remainder of the year. Our anticipated CapEx is primarily related to growth in our water segment.

Now, I’ll focus on guidance for the remainder of the year. We’re confident in our ability to generate solid sales and EBITDA growth for the second half of the year. However, as a result of seeking alternatives for our Flavorstation appliances, we’ve adjusted our guidance to minimize the impact of Flavorstation in the second half of 2012.

In addition, we expect full year 2012 guidance to reflect the impairment charges we’ve previously discussed. We now expect full year 2012 net sales to increase in the range between $94 million and $100 million, full year 2012 GAAP net income per shares have been revised to a range of a loss between $1.37 and $1.44, and on a non-GAAP basis, pro forma fully-taxed net income per share has been revised to a range of between $0.14 and $0.18. These revised estimates reflects non-cash impairment charges of the $25 million and about $1.1 million in debt restructuring costs incurred in the first and second quarters.

For 2012, we believe sales – water sales were increased between 12% and 17% and lowered our dispenser sales growth between 25% and 30% compared to 2011 due to less promotional pricing than originally planned, which will improve our gross margins. We expect to end 2012 between 24,500 and 25,000 total locations.

For the third quarter of 2012, we expect net sales to be in the range of $26 million to $28 million, second quarter GAAP net loss per share of between $0.05 and $0.08 and second quarter non-GAAP pro forma fully-taxed loss per share of between $0.02 and $0.04. We expect to end the third quarter of 2012 with between 24,200 and 24,500 total locations.

This concludes our financial review. Now, I’d like to turn the call back to Billy.

Billy Prim

Thanks, Mark. In closing, despite the challenges we have experienced in the last few quarters, our management team believes we now have the right approach to grow our business long term. We believe based on positive industry trends and the success of our water business to-date that we will continue to gain share in the water and beverage market. Going forward, we believe we can continue to add appliance household, which should help lead to continued reoccurring water and consumable sales.

Thank you for your participation today. We will open up the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from Jim Duffy of Stifel, Nicolaus. Your line is open. Please go ahead.

Jim Duffy – Stifel Nicolaus

Thanks. Hello.

Billy Prim

Hey, Jim.

Jim Duffy – Stifel Nicolaus

I’ve a number of questions. If you mentioned it, I didn’t hear. What’s the reason you won’t be able to have single-serve for holiday?

Billy Prim

Yes, Jim. That technology is not ready to be brought to market at a price point that we believe would benefit us or consumers.

Jim Duffy – Stifel Nicolaus

Okay. Transitional costs related to the retail service network, what’s behind that?

Mark Castaneda

Sure, Jim. As we have transitioned our service providers on the refill side to using our traditional exchange service providers, there are some costs in setting those new providers up. That’s primarily the difference. Now, the 50% of our providers are providing exchange and refill services.

Jim Duffy – Stifel Nicolaus

So, that’s all behind you at this point?

Mark Castaneda

That’s correct. Substantially behind, there’s some minor ones happening in Q3. But, yeah, substantially behind us.

Jim Duffy – Stifel Nicolaus

Was that incremental to the original plan, different from the original plan?

Mark Castaneda

It took a little bit longer than the original plan to get completed.

Jim Duffy – Stifel Nicolaus

Okay. And then, Mark, you had been providing guidance for adjusted EBITDA and the press release doesn’t contain that. Your adjusted EPS guidance, what does that imply for adjusted EBITDA as a range?

Mark Castaneda

It implies between $8 million and $10 million, which is different from the $11 million to $13 million that we previously provided.

Jim Duffy – Stifel Nicolaus

And to be clear, does that include the discontinued ops or are you excluding the loss from Flavorstation?

Mark Castaneda

That has – yeah, at this point, they’re not considered discontinued ops, because we haven’t determined what the course of action will be. So, it does have some impact of Flavorstation, but the revenue is a minimal and the EBITDA is about breakeven.

Jim Duffy – Stifel Nicolaus

Okay. When you guys acquired the Culligan business had about $9.5 million in trailing EBITDA, correct, thereabout?

Mark Castaneda

Correct.

Jim Duffy – Stifel Nicolaus

And where does that stand right now? Is the refill component of the business EBITDA-positive? I’m sorry…

Mark Castaneda

Yes, exchange.

Jim Duffy – Stifel Nicolaus

I’m sorry, the exchange component of the business?

Mark Castaneda

Yes. So, as Billy mentioned, our trailing is about $14 million for that water business. The refill business is probably closer to around $10 million on the trailing basis. So, the positive contribution for exchange is the difference. We do expect that $14 million to go between $16 million and $18 million for this year.

Jim Duffy – Stifel Nicolaus

And of the $14 million, the difference between that and the number that you gave for projection is what, just all Omnifrio stuff?

Mark Castaneda

Well, the difference is that’s the water segment on the $14 million.

Jim Duffy – Stifel Nicolaus

So, it doesn’t include the appliances?

Mark Castaneda

Doesn’t include appliances or corporate net unallocated costs. So, maybe I’ll summarize. The water expectation is $16 million to $18 million on an EBITDA basis, offset by some corporate costs between $8.5 million and $9.5 million, but then some dispenser distribution of between $0.5 million and $1 million and Flavorstation being zero.

Jim Duffy – Stifel Nicolaus

Okay. And then, for the quarter, what was the adjusted EBITDA number you would use for covenant calculation?

Mark Castaneda

It was around $2.5 million.

Jim Duffy – Stifel Nicolaus

And then where do you see that for the year?

Mark Castaneda

That’s about the same number between the $8 million and $10 million range.

Jim Duffy – Stifel Nicolaus

Okay. The distribution agreement with the Tel Aviv partner, there was a reciprocal inventory purchase requirement, correct? What happens to that?

Billy Prim

Yeah. That – as you said, that agreement was reciprocal. At this time, I would say that neither party will make the number by yearend that was allotted to each group.

Jim Duffy – Stifel Nicolaus

Do they have any recourse against you for that, Billy?

Billy Prim

No, there is no recourse there.

Mark Castaneda

They’re offsetting Jim, so we had a commitment and – of $10 million and SDS had a commitment, again, that’s for $10 million.

Jim Duffy – Stifel Nicolaus

Okay. Now, final question, Billy, what’s the pathway to value creation here? Help spell it out in some more detail. You said you and the management team have plans to grow the business. Where we sit right now, it’s hard to see that. If you could provide more detail around that, I think that would be helpful for everybody.

Billy Prim

Yeah. And that’s a good question, Jim. I think the point here is that we’ve had a lot of noise and a lot of distraction going on with the Flavorstation business with flavors, a lot of other things that has caused a lot of expenses, a lot of cash usage that in the meantime, we look at it and our core exchange and refill business continue to prosper. That business, as you said, that we purchased from Culligan in the refill business, still has every location and has actually grown those some and has the same margin structure today. But we haven’t focused our energies on growing that business. That’s a business that has almost 50% gross margins. That’s something that we’re going to put – take a real focus on now.

The same is true in our exchange business, because we’ve been doing a lot of other things. I don’t think that we focused as hard on adding locations, because we’ve been trying to sell Flavorstations and a lot of other things. We’re going to go back to our core business that is working, and we’re going to have flawless execution the rest of this year, which will in itself bring a lot of EBITDA to the table and then really put a start to work on growing the location channel, which we believe in long term can be substantial.

Jim Duffy – Stifel Nicolaus

Okay. Great. I look forward to that flawless execution, because we haven’t seen it yet, Billy.

Operator

Thank you. And our next question is from the line of Andrew Wolf of BB&T Capital Markets. Please go ahead. Your line is open.

Andrew Wolf – BB&T Capital Markets

Good afternoon.

Billy Prim

Good afternoon.

Andrew Wolf – BB&T Capital Markets

On the exchange business having good same-store sales, could you tell us a little about that? Obviously, it was a very hot period in a lot of the markets where you operate. And also, Wal-Mart is sort of starting to, I think, enter the comp base and so that kind of wrote down as a weather or Wal-Mart or anything else, but it’s probably the financial highlight for me at least of the quarter?

Mark Castaneda

Yeah. The same-store unit increase was substantial and it’s something that actually was a little bit ahead of what we expected. And it was primarily on – really in all grocery. So, Wal-Mart was the lead as far as what’s driving that. We added a lot of Wal-Mart locations last year that fell into the comp base. But we also had it in our other regional grocery stores, double-digit – strong double-digits in Kroger, H-E-B, Food Lion, they all had strong same-store sales growth, which as you mentioned, is probably is somewhat tied to the weather.

Andrew Wolf – BB&T Capital Markets

Okay. Billy, another side of the value-creation question is, the water segment, as a standalone business, is growing and makes money. You obviously paid a certain multiple for built half of it and bind half of it. What’s your sense of – if you felt there was any shareholders’ interests for any number of reasons, what the appetite might be like for that business, if it were to come – if it were to be – you thought about selling it?

Billy Prim

Well, I think that, as we said in the release, we do believe there are better uses for some of our Flavorstation assets. That’s a business that we believe that we can utilize better and we’re going to look for strategic alternatives. On the core business of water and refill, we believe those businesses are growing. We believe, they are undervalued today, but we have to execute, we have to provide visibility of that. And hopefully, the market will reward that. I think, first, we have to show that visibility in that execution that I’m talking about. And then, if the market does not reward that, we always have to look at alternatives.

Andrew Wolf – BB&T Capital Markets

And my other question is on trying to tie the what we see in the balance sheet to the cash flow statement, which we don’t see yet, it was in Q I think. So, debt went up about $3 million sequentially from March – for the March quarter. Looks like the working capital was net neutral, receivables and the inventory went up and the payables went up. And then, this item other long-term liabilities went down $3 billion. So, trying to figure out you did make some kind of payments that made the cash go up to reduce the liability, or I mean, the debt go up, or is that an operational issue or a CapEx issue? If you can explain why debt’s up, that would be helpful.

Mark Castaneda

Sure. So, in summary, cash flow from operations was about a use of about $300,000. So, it’s just about a breakeven for the six months, and this is on a six-month basis. And then, there were some CapEx of around $3 million. So, for the six-month basis, it was $3 million in CapEx that – it’s caused the use of cash.

Andrew Wolf – BB&T Capital Markets

Okay. And how do you feel about the business, as you’re emphasizing the core business away from Omnifrio, cash flow usage or generation on a free cash flow basis, this year, I mean, your growth business. I’m just trying to get a sense of, is that the kind of number you’re looking for in the back half to use $3 million of cash or something different?

Mark Castaneda

Yes, something different. So, on a full-year basis, we expect between $8 million and $10 million of EBITDA. This is the overall business, not just the water business, which CapEx against that – call it, $9 million, in the midpoint. CapEx against that a $5.5 million and some cash interest of around $2.5 million and working capital of between $2 million and $4 million, which is a cash need of around $2 million. That’s substantially less than a cash need than our prior guidance, which had a cash need of around $10 million, because of the Flavorstation working capital requirements.

So, we’re taking some other cash risks off the table, but not going so deep into that Flavorstation business. But our cash need of $2 million for the full year versus $3 million for the first six months, so it’s positive cash for the remainder of the year. When you look at debt levels, Andy, we’re at about $20 million debt, expect to be – less than $20 million in debt right now, and expect to be around that same level or slightly less.

Andrew Wolf – BB&T Capital Markets

Yeah, yeah, okay, good. So, you’re taking the risk out. And I just want to – kind of maybe think of a hypothetical, I’m not a big fan of hypotheticals, but let’s just say, if you had all the money you ever needed, with any constraints, would Flavorstation pulling back on that, I just want to get a sense is that more, in your guys’ minds, the technology or is it just really how to market itself is feeling, like as you go into price would be on Lowe’s, maybe there is a show-me thing. What’s going on with the sales calls or is it really almost all on the technology side?

Billy Prim

Yeah, I think there is – there is not a simple answer there, Andy, but I would say this. I think there are opportunities for us to utilize our assets with – in a different way. I think that a big brand would help an emerging category like this. I think that our assets and our core competencies today are our distribution network and our service providers. So, if we had all the money in the world, it really should be put to utilize those core assets, and that would be putting in more refill machines and saving at more exchange locations and continuing to utilize our network of service providers and DSD anyway we can. So, that’s what we plan to do.

Andrew Wolf – BB&T Capital Markets

And actually, I’ve one other question on kind of merchandizing product itself. I think, one thing that happened to bulk water, the business – your main business is certainly on the exchange side, all the discounting, private-label took away some of the value per gallon on it. Are there anything – look around the market, water with electrolytes, obviously, water with vitamins, there is still something that’s sort of what I see at least and what’s left of the premium market. Is that something that’s feasible that you can actually offer five and three-gallon sort of bulk offerings of something, a little different than merchandising side?

Billy Prim

That’s an interesting point. We do get and are getting feedback from retailers and consumers, not that they would want the whole five gallons can be flavored or have some kind of enhancement to it, but there’s plenty of additives that we can provide in either powder form or in concentrate form to go in those that give people the ability to have water in a different way and utilize it in a different way. And I think you’ll see that in the future.

Andrew Wolf – BB&T Capital Markets

And that would just go into the existing appliance or put right into the – I guess, you would go through the appliance?

Billy Prim

There’s two or three ways you’d do it. Think of the MiO product that Kraft has that you have in a concentrate form, and if you poured a few drops in your glass as after you get it out of your dispenser, as one way you can have a pack that you put in a form or you can have like our flavor cups in the dispenser that you could dispense whatever flavor you wanted that way. So, there is three or four different ways that we see in the future that you can have flavor with distilled water that you really don’t need to change our model at all for.

Andrew Wolf – BB&T Capital Markets

Okay. So, it sounds like that’s a more kind of pragmatic way you might be a player in that market?

Billy Prim

Absolutely.

Andrew Wolf – BB&T Capital Markets

Okay. Thanks a lot. Thank you.

Operator

Thank you. Our next question in queue is from the line of Mitch Pinheiro of Janney Capital Markets. Your line is open. Please go ahead.

Mitch Pinheiro – Janney Capital Markets

Yeah. Hey. Good afternoon. So, I didn’t understand regarding the refill sales, the part about the lower empty bottle sales. Can you elaborate it?

Mark Castaneda

Sure, sure. Good question, Mitch. When we had this changeover on refill providers, the prior refill providers were doing a lot of work for the stores as far as making orders for these empty bottles for the customers, and through that transition, we didn’t execute those orders as well as we should have during the quarter. So, that was some learnings that we had in this transition, something we think we’ve have in place now and that we can improve. So, water sales were down a couple percentage points and then the actual empty bottle sales, which are part of that segment sales, was down another couple of percentage points. So, in all, be around – down around 5% on refill versus…

Mitch Pinheiro – Janney Capital Markets

Well…

Mark Castaneda

Sorry, go ahead.

Mitch Pinheiro – Janney Capital Markets

Well – excuse me, what’s – I mean, why is the refill segment not growing faster? I mean, are you – where do you stand? Have you lost any refill locations? What are the plans to – where do you see refill locations going from here?

Mark Castaneda

Yeah. Refill locations are actually up. We’re up since last year from about 4,700 locations to around 5,000 locations. So, they’re up. It’s just that some new locations don’t sell at the same rate as existing and then we also had some empty bottle issues.

Mitch Pinheiro – Janney Capital Markets

Okay. And just sort of maybe in light of the macro environment, you think perhaps the value end of the water spectrum here should, at least, have a little more life than that. Is there any insight as to why that wouldn’t be a little stronger on, at least, the same-store sales basis?

Mark Castaneda

Yeah. I think what’s happened is it’s got to sale somewhat in the store. We are going to be doing some re-branding in the stores. So, hopefully, we’ll bring more attention to it is the super value. It’s the most environmentally and cheapest way to get purified water in that store. So, we need to do a better job of merchandising the space.

Mitch Pinheiro – Janney Capital Markets

Okay. And then, how about – your – the guidance were your dispenser revenue is obviously – it’s maybe doubled your exchange – the water revenue. What’s driving that? And where do you stand on sort of customer retention? They buy your dispenser and then you guys get the water business from that dispenser.

Mark Castaneda

Yeah. So, as far as the growth on dispenser sales, we’ve been very fortunate to have a couple of things go well. One is we’ve added more locations. So, for this year, in the last – even in the last quarter, we added some locations, primarily filling out the Lowe’s Home Improvement chain. We also added some locations in Wal-Mart, so big sellers of dispensers. We’ve also had a shift in the mix of dispenser sales. So, we’re selling more higher-priced or bottom low dispensers, which took the ASP up to $80 per unit from $70 per unit last year. So, people are buying up as far as the type of dispenser as well as we’ve got more locations where dispensers are available. So, that’s been very positive trend.

As far as consumers, the data is always a lagging indicator as far as how many consumers that buy our product dispensers actually buy our water. But the same-store sales growth is really attributable to new consumers.

Billy Prim

Yeah. And one of the things I would say, Mitch, is this new Club Primo and our whole social media way of connecting with our consumers, we believe that we can raise that attachment rate. In other words, the number of people who buy our dispensers, we want to start a relationship with them and maybe weather our relationships with Twinings tea is going to send them a free tea to experiment with or other flavors, or other things. There is ways that we form a relationship with them to get them to continue to use Primo Water either from refill or exchange.

Mitch Pinheiro – Janney Capital Markets

As far as staying on the dispensers for a second, Mark, I jotted down, you said something about 7.6%, is that a gross margin in the dispensers fell because of higher costs?

Mark Castaneda

Yeah, 760 basis points versus last year, so our gross margin in our dispenser business was just below 1% versus a little bit over 8% last year. And that was primarily due to really higher cost as well as the mix of consumer – customers that we sell to are probably the lower-margin customers, but primarily because the higher costs. We have put price increases in place. Those price increases don’t actually hit until – didn’t actually hit until the end of the second quarter is – because this is a direct import business, there was orders that were already in place and those orders took us primarily to the end of the quarter.

Mitch Pinheiro – Janney Capital Markets

Do you think, I mean, the price increase, I mean, it slows down the unit growth?

Mark Castaneda

We don’t think so.

Mitch Pinheiro – Janney Capital Markets

Okay. And then, as far as carryover, some of these costs that you have in the quarter, what exactly carries over into the next quarter and/or the remainder of the year?

Mark Castaneda

So, the cost in the transition of the network that’s in gross margin, you’ll see there was about a 2.8% reduction in water gross margins. You’ll see, we expect that to turn around next quarter and for the remainder of the year. As far as other costs, there is a Flavorstation costs, and then until we have a clear path of that business, we’ll continue to have some costs related to the Flavorstation business.

Mitch Pinheiro – Janney Capital Markets

Okay. All right. Thank you very much.

Operator

Thank you. And with that, I’m showing no further questions. I’d like to turn it back to Billy Prim. Your line is open.

Billy Prim

Thanks, operator. I’d like to thank our employees, our regional operators and our service providers for all they do to make this happen. We, as a company, will continue to execute our three strategic long-term goals, which are to grow our locations to 50,000 to 60,000 to be convenient to the masses; to continue to sell dispensers to increase households that use our water and consumables; and to make selective acquisitions. Thank you for your interest and good day.

Operator

Thank you. And again, thank you, ladies and gentlemen, for joining today’s conference. You may now disconnect. Have a great day.

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