Primo Water (PRMW) CEO Matt Sheehan on Q4 2018 Results - Earnings Call Transcript

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About: Primo Water Corporation (PRMW)
by: SA Transcripts
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Earning Call Audio

Primo Water (NASDAQ:PRMW) Q4 2018 Results Earnings Conference Call March 5, 2019 4:30 PM ET

Company Participants

Katie Turner - Investor Relations, Partner at ICR Inc.

Matt Sheehan - President, Chief Executive Officer

David Mills - Chief Financial Officer

Conference Call Participants

Jon Andersen - William Blair

Mike Petusky - Barrington Research

George Kelly - Imperial Capital

Mike Grondahl - Northland Securities

Amit Sharma - BMO Capital Markets

Mark Argento - Lakestreet Capital Markets

Operator

Good day ladies and gentlemen and thank you for standing by. Welcome to the Primo Water fourth quarter 2018 financial results conference call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will host a question-and-answer session and our instructions will be given at that time. [Operator Instructions]. As a reminder, this conference call may be recorded.

It is not my pleasure to turn the conference over to Katie Turner from ICR Inc. You may begin.

Katie Turner

Thank you. Good afternoon and welcome to Primo Water's fourth quarter and full year 2018 earnings conference call. On the call with me today are Matt Sheehan, Chief Executive Officer and David Mills, Chief Financial Officer.

By now, everyone should have access to the release that went out this afternoon at approximately 4:05 pm Eastern Time. If you have 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 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 the 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 SEC.

And now I would like to turn the call over to Primo Water's CEO, Matt Sheehan.

Matt Sheehan

Thanks Katie. Good afternoon everyone and thank you for joining us to review our fourth quarter results. For our call today, I will give a summary of the quarter and year, discuss continued tap water issues consumers face each day and finally provide an update on some progress on key initiatives. David will then provide more detail on the financial results of the quarter and outlook for 2019.

Let's start with a brief review our quarterly and annual results as well as a few key metrics. Sales for the quarter increased by 3.8% to $70.9 million which is impressive given the tariff and retailer year-end inventory pressure we faced in dispensers along with the operational focus in Refill. More to come on that shortly.

For the year, sales increased 5.6% to $302.1 million. Even with the impact of the tariff, our Dispenser sell-thru in Q4 was 158,000 units and we finished the year with sell-thru growth of 10% to a record $725,000 units. U.S. Exchange same-store unit growth exceeded our expectations with a very impressive 13.3% comp for the quarter.

This is the 27th consecutive quarter of 6% plus same-store unit growth. More impressive, however, this is the fourth consecutive quarter of an increased growth rate driven by our Dispenser sell-thru, connectivity and other marketing initiatives. To put this in context, the 13.3% growth rate is a level not seen since 2012 during Hurricane Sandy and that was at a time where our unit base was significantly smaller. For the full year of 2018, we hit double-digit growth of 10.7% and headed into 2019 with momentum fueled by our marketing strategies.

On adjusted EBITDA, we achieved our expectations coming in at $11.8 million for the quarter and $55.4 million for the year. In Refill, I am pleased with our attention to uptime through our credit card reader installation which is on schedule as we have installed 11,224 units as of today. More on that shortly.

With that financial and key metric information in mind and before getting into the key initiatives, it is important to remind you of the tap water quality issues we continue to see. We believe tap water issues will continue into the foreseeable future and will attract new consumers to our business. Each week, families continue to face hundreds of boil water alerts and major U.S. cities continue to disclose issues with their municipal water systems.

Here are just a few recent examples. Recent heightened awareness around PFAS and man-made chemical continuing to appear across the U.S. because of its prevalent usage for waterproofing and as a fire retardant and its presence in key household items like textiles and nonstick cookware, the increase in events and water quality notifications will likely continue to rise. Since the chemical is not impacted by boiling water, it has been labeled the next lead and potentially a more severe issue to rectify in this country.

Additional research conducted by the Journal of Environmental Health recently showed that nearly 5.6 million Americans have an above average exposure to nitrate concentrations, particularly in the Midwest and West. Nitrates also tend to be a good marker for the presence of other contaminants in drinking water as nitrates are something that should be removed meaning other issues could be reaching the tap water of these communities.

Lastly, recent studies confirmed that the number of American households that depend on mostly or only tap water continued to decline. We are not surprised by these tap water issues and believe their occurrence will only accelerate in the future along with the media coverage. More than the pure quality that we offer, consumer surveys consistently report an increase in home consumption of 25% to 30% when using the Primo solution. All-in, Primo remains very well positioned for growth as our household offerings drives a behavioral change in greater water consumption doubling the value proposition for families looking to improve their health and wellness.

Moving on, let's dive into the key initiatives that give us confidence in the business. I will address some notable highlights across our five key strategies. First, grow household penetration. Second, improve connectivity of our dispensers to our water. Third, increase same-store sales. Fourth, optimizing our cost to serve. And fifth, foster highly engaged teams.

First, let's look at our household penetration and connectivity, our first two and highly related strategies. We are the clear market leader in Dispenser sales at retail and are enhancing our focus on both growing our sell-thru of dispensers and increasing the connectivity to our water. This focus has led to an inflection in the unit growth rates of our Dispenser and Exchange businesses throughout 2018. However, as it relates to dispensers we did face a short-term headwind in Q4 related to retailers executing a full quarter of increased on-shelf pricing due to the tariffs but we were still able to drive unit sell-thru of 158,000 dispensers.

A few notes on the tariff. First and very importantly, we worked hard for an exemption from the tariff for the category which was received in December. Additionally, we have begun working with retailers during this current quarter and nearly all have recently lowered Dispenser pricing to pre-tariff levels, a few getting even more aggressive by lowering prices even further. We believe that lower retail prices will drive sell-thru in Q2 and beyond.

Second, it is important to consider that sell-thru comp in dispensers is different from most categories. Even if our growth rate slows or goes negative in a quarter, we are still adding new water households that drive our water business growth. On a per store basis, adding just one new household can have a positive long-term impact on our water results, yet we sold 158,000 dispensers in the quarter across our retail network with a greater connectivity rate to our water than in the past. That is the nature of a razorblade model. The Dispenser growth rate may slow but we can still add new water households.

Moving on from the tariff, a specific bright light in our Dispenser business is our e-commerce performance. We delivered another strong quarter of e-commerce unit sell-thru which increased 76% in the quarter. Even with the tariff in place, we were able to drive social media awareness activities to significantly enhance sell-thru. For example, primowater.com and Amazon sell-thru increased over 400% in the quarter. Additionally, the e-commerce sites of our key retailers were also particularly aggressive during the tariff window with one running a special on the OPP top loader at $70 for a period of time versus the typical $99 price point, never mind the post tariff price point of $118.

We see e-commerce as a key lever for us, specifically since this is still a little relatively small part of our Dispenser business. We began 2018 with only 6% of sell-thru from e-commerce and finished with approximately 20%. This is a growth vehicle we frankly didn't have over a year ago and we believe that e-commerce will continue to provide a tailwind in 2019 and beyond. While this percentage will fluctuate from quarter-to-quarter, we are now even more confident in our ability to create new Primo Water households through both brick-and-mortar stores as well as e-commerce.

Lastly, as it relates to our first strategy. We introduced three new SKUs with advanced innovation, our pet Dispenser, our hTrio unit with enhancements that include singleserve K-Cup brewing technology and our electric pump that provides potable and convenient water dispensing. These SKUs accounted for approximately 5% of our total sell-thru. As it relates to innovation and sell-thru, we will be launching another round of innovation this year along with several modifications to our Dispenser lineup. With our marketing support, these annual launches drive a conversation and engagement starter across our ever growing social presence. Additionally, we do this to bring newness to our lineup and support our retail relationships where we continue to have the majority market share.

Let's move on to our second strategy of connectivity. As you know, our conductivity strategy has been a strong driver of our Exchange business and helped to accelerate an already strong growth rate. With that in mind, we have much progress to share. To start, I am excited with the success of the instant redeemable coupons or IRCs, promotion for free water in all Walmart stores that carry dispensers. We have seen an increased redemption level that has taken the connectivity success we found in Black Friday of 2017 and made it an everyday program. Consumers more than ever are leaving with Primo Water when they make their Dispenser purchase.

The connectivity levers continue for consumers after opening the Dispenser box to reveal additional coupons inside that help them learn more about our Exchange and Refill programs. The IRC promotion at Walmart has increased their already healthy growth and we are now working with other retailers that sell dispensers, Exchange and Refill to implement similar promotions. In addition, we have also moved this connection strategy online with improved messaging and coupon. Lastly, keep in mind, we have a very investable and long-term consumer. The IRC and inbox couponing strategy are driving a new level of connectivity in new water households.

Moving on from our first two strategies, we have several updates to share as we continually focus on our third strategy, increased same-store sales in our water businesses. As noted, we continue to emphasize driving same-store sales while we do continue to work with retailers, both current and new on expanding our location footprint. With such a small percentage of retail traffic buying our products, we believe significant growth is possible in our current locations which doesn't require much incremental capital.

With that in mind, we continue to see retailer contraction but we have also analyzed ROI at existing locations and removed underperforming assets. Keep in mind, however, we have continued to grow right through that contraction and as it has been with Walmart, strong comps are what drive retailer excitement about expansion.

With that said, let's dive into Refill. We have made significant progress on the downtime issue that we uncovered into Q3 and walked you through in detail during our last call. As a quick summary, after rerouting machine service based on volume which resulted in a significant reduction in operating cost, we uncovered a latent machine downtime issue which negatively affected volumes in Q2 and Q3 and to a lesser extent q4. With that in mind, I would like to share several details.

As we have explained, we are implementing credit card readers that include telemetry to bring a twofold benefit. First, it gives us near immediate notification of machine issues. And second, it gives consumers several new electronic payment methods. We believe these benefits will help us grow the business beyond anything in the past.

With that overview in mind, I am happy to report that not only did we exceed our target of 6,000 readers installed by the end of Q4, as of today we have installed 11,224 readers and are on schedule to hit our total location installation target by The end of June. We continue to expect to see the full benefit of this technology in the second half of the year as the rollout continues through Q2.

That said, the visibility we are getting from credit card readers is already helping us to reduce downtime and recapture volume. The system we have built around this error alert process allows us to close issues much faster, anywhere from a few hours to a few days. In many cases, that is five to 10 days faster than before and sometimes as much as 15 days based on the new routing model.

Two important pieces of context, comparison to Q3 and then pricing. In Q4, while we still had a volume reduction, it shrank to 11% compared to the 15% of the previous two quarters, which we believe is a signal that our plan is on track. Second, it's very important to consider this volume in context of the price increase implemented in the second quarter.

If you recall, from our pricing tests, we experienced volume declines while the revenue increased was accretive. As we have rolled out the price increase, we continue to expect volume declines of anywhere between mid and high single digits just as we saw in testing. Given that expectation, the Q4 volume decline of 11% is just off what the baseline would have been with pricing, giving us confidence that our downtime reduction formula and efforts are working and the revenue accretion from pricing is within our grasp.

As it relates to our downtime reduction plan, the credit card technology is also helping us understand the core reasons for downtime which we are using to make proactive supply chain changes. The installation of credit card readers also gives the consumer new electronic payment methods which also attracts new consumers who would not have otherwise used Refill due to a cash only option.

This not only includes credit cards but mobile payment apps such as Apple Pay and Samsung Pay. In our testing, we did see these payment options drive low single digit lift. In addition, we continue to see a healthy transition from cash to e-payment. For the initial credit card installations, we see e-payments reaching approximately 20% of total transactions. Given the cost of handling cash, we do believe this transition will drive cost efficiencies long-term.

Lastly, we have launched several other tests to help us reduce downtime and improve the consumer experience. We are testing programs such as using texting as a communication vehicle with consumers and shifting to a more on-demand or dynamic service routing model, based on algorithms, we can now build using the new detailed information we are getting from telemetry.

Sticking with Refill but moving from supply chain to our brand, we expect to begin the brand transition in the second quarter which will bring the Primo brand to all Refill locations over the next two years. We have labeled this project the ultimate machine as it will incorporate all of the positive results of our test, branding, credit card readers, video screens, texting and signage. We believe this move, backed with a stronger supply chain, will drive growth.

Moving from branding, I would like to update you on pricing. While I briefly touched on our outdoor pricing earlier, during the quarter we also rolled out a slight price increase across our indoor machines at Walmart. This price increase along with some of our marketing efforts is driving low to mid-single digit revenue comp increases. While this indoor business is a small percentage of our overall Refill business, it is a positive sign that we can and will grow Refill through pricing and other marketing initiatives.

In addition to the indoor pricing, we have started regional price optimization testing in our outdoor locations. As we previously discussed, in many cases our existing outdoor coin markets have a broad spectrum of prices. Our initial outdoor price increase included a single move of a nickel. It did not include rationalizing market or regional pricing. We believe that the effectiveness of the initial price increase could be somewhat diluted in some markets as we still offer a variety of price points and allow consumers to cross shop. We believe there maybe upside with consistent pricing and will provide updates in future quarters.

Moving from Refill to same-store unit growth in Exchange. We are making significant progress in growing Exchange. The refinancing in mid-2018 with the new credit facility provided flexibility and interest savings to allow us to accelerate our branding and marketing unit growth drivers in the second half of 2018 and you can see the results. We are continuing these investments on an accelerated timeframe throughout 2019. We are excited and the results simply speak for themselves.

Heading into 2018, we knew we had a successful Black Friday program executed in 2017 and the new water homes created during the promotion started growing same-store unit sales in Q1 to 9.5%. The new signage in our IRC strategy at Walmart helped increased comps further to 9.7% in Q2, 10.4% in Q3 and then we closed the year with an amazing 13.3% lift in Q4. To be clear, that is for consecutive quarters of an increased growth rate on top of the business that haven't been below 6% for 27 quarters.

A few notes on the strategy behind the results. First, we continue to invest in our CD joint signage rollout. Having completed the Walmart program at the end of 2018, we are well underway bringing this in-store marketing package to all of our Exchange retail locations which we expect to complete by the end of 2019. Not only do we continue to see growth related to the signage, it will bring ubiquity and messaging to our Exchange business for the first time. In addition to in-store signage progress, our couponing strategy is having a significant impact on the business by increasing the connection of Dispenser sales to our water.

The combination of these marketing initiatives continue to pave the way for rapid same-store unit growth expansion. Keep in mind, this comp inflection is mainly due to poor efforts at Walmart as they are leaning into the category in a big way. However, all the retailers are catching on and we are expanding these programs. 2018 was transformative and a culmination combination of harnessing of three key strategies.

Stepping back and looking at all of our initiatives, it's important to know the additive effect that they have. While we do test all of our programs in isolation, we do see a complementary effect. Two examples. We tested CD separately from IRC and both showed positive lift and returns. We are just beginning to see the additive effect of the two at Walmart.

Secondly, as it relates to pricing and marketing at Refill. We analyzed and tested the indoor price increase at Walmart separately from our video tests. While we see small single-digit revenue accretion due to pricing alone which comes with small single-digit volume declines, we see both volume and revenue accretion in the machines that have both pricing and video. We continue to believe that the combination of improving operations, well-tested marketing and pricing will deliver good results in our business, specifically in Refill.

Lastly, we launched our new website just last week using significant consumer research to bring forward a new look and feel, navigation and e-commerce experience. We believe this will help tell our story and attract new consumers at a faster rate. With that update on the key initiatives across our strategies, we are very excited about our business. Along with our investment and lowering the average sales price of dispensers, these core water initiatives should help propel our same-store unit growth in 2019.

As a reminder, the base units in our business are significantly higher than just last year in 2018 but we believe we can continue this growth rate. We believe these activities will not only grow our business but make Primo even more attractive to both our current and new retail partners and our future location growth.

In summary, our consumers are very loyal and investable. We have strong growth businesses in dispensers and Exchange. And we are well on our way to driving growth in the Refill business. That operational and marketing focus combined with the increasing industry tailwinds gives us a lot of confidence and excitement about our business and we believe we are well-positioned to accelerate our growth. Always fueling our focus is our purpose of inspiring healthier lives through better water. I remain confident in our ability to drive value for consumers, employees, retailers and shareholders.

With that, I will turn the call over to David to cover our financial results.

David Mills

Thanks Matt and good afternoon everyone. I will start with a review of our financial results and then discuss our outlook for 2019 before turning the call back over to Matt for closing remarks. First off, to help investors understand our operating results, we do provide adjusted EBITDA and adjusted net income which are non-GAAP financial measures. A reconciliation of each is included in our earnings release issued this afternoon and available on our website.

Turning to our results, we accomplished a lot in the fourth quarter as our team successfully executed several initiatives, as Matt outlined. On the topline, sales for the fourth quarter grew 3.8% to $70.9 million driven by growth in both dispensers and Exchange.

Dispenser sales for the quarter were below our expectations but still up over 20% to $12.1 million. Dispenser sales were negatively impacted by the tariffs that resulted in higher retail prices thus slowing consumer demand or sell-thru. The slowdown in sell-thru in addition to retailers managing inventory year-end levels reduced orders in the last month of the quarter more than we expected. However, we did receive a one-year exemption from the tariffs in December and have recently seen retail prices come back down to pre-tariff levels or lower. Despite the increase in retail pricing, we continue to see strong consumer demand, primarily the result of the IRC program at Walmart and our e-commerce growth which drove Dispenser sell-thru to 158,000 units in the quarter.

Refill sales for the quarter were down 2.3% to $40.5 million, primarily the result of lower Refill volumes. As Matt mentioned, we have made a lot of progress on the rollout of credit card technology that we believe will continue to improve the downtime issue. While it is early and we have many locations remaining to install, in the fourth quarter we have seen some volume return. Overall volumes were down 10.8%, a sequential improvement from the volume declines of approximately 15% that we experienced in the second and third quarters.

Exchange segment sales for the quarter increased 8.9% to $18.3 million. In Exchange, we continue to see the positive impact of the in-store promotional efforts, specifically the IRC or free water program and the improved in-store signage. U.S. Exchange same-store sales again accelerated in the fourth quarter to 13.3%, capping off a year in which we exceeded each previous quarter's same-store unit sales.

Turning to gross margins. Overall for the quarter, gross margin was 28% compared to 28.7%. As we look at the segments, Dispenser gross margin for the quarter was 13.9% compared to 10.9%, primarily due to the impact of the tariff exemption that was retroactive back to the end of June. Excluding the tariff impact, gross margin would have been in the mid single digits which is more indicative of the level we are targeting in 2019 as we proactively work with retailers to drive down retail pricing.

Gross margin for the quarter in Refill was 31.1% compared to 31.9%. The change in gross margins is primarily due to the incremental operating costs we are incurring related to the downtime issue, as we discussed last quarter. Exchange gross margin for the quarter was 30.4% compared to 31.4%. Exchange gross margin was primarily related to the investment we are making in the IRC program that was started in the third quarter of 2018 which we believe is driving growth in new households using Primo Water.

Next, SG&A cost for the quarter increased to $9.1 million from $8 million. The increase is primarily due to marketing and promotional costs, certain employee related costs as well as bad debt expense related to the Sears bankruptcy, all of which is offset somewhat by a decrease in non-cash stock-based compensation. For the quarter, as a percent of sales, SG&A excluding non-cash stock-based compensation was 11.4% compared to 10%. While marketing and promotional investments will fluctuate from quarter-to-quarter, we believe we can grow the business while continuing to leverage overall SG&A spend going forward in the 9% to 11% range which we have done in the past.

Moving down the income statement. Interest expense for the quarter was $2.5 million compared to $5.1 million. On a GAAP basis for the quarter, net income was $1.7 million or $0.04 per share compared to $3 million or $0.09 per share. The fourth quarter of 2017 included a $4 million tax benefit as a result of the tax reform act. On a comparable basis, adjusted net income increased six-fold to $3.1 million or $0.07 per share compared to $500,000 or $0.01 per share. For the fourth quarter, adjusted EBITDA was $11.8 million compared to $12.9 million.

Turning to the balance sheet. We ended the year with $7.3 million in cash. Inventories increased to $10 million from $6.2 million in order to support the accelerating growth in our e-commerce Dispenser business. Total debt decreased to $190.1 million from $273.3 million as a result of the debt refinancing completed in June 2018. Our leverage ratio at the end of the year was approximately 3.4 times which is down from approximately five times at the end of 2017.

Looking at the statement of cash flows, for the full year our cash flow from operations increased over 85% to $32.7 million compared to $17.6 million. Capital expenditures increased to $23.2 million from $20.4 million as we accelerated the rollout of credit card readers and new in-store Exchange signage. Free cash flow, which is operating cash flow less CapEx, increased substantially to $9.5 million from negative free cash flow of $2.8 million.

Turning to our outlook for 2019. For the full year, we expect net sales to be in the range of $315 million to $325 million. We expect to continue to see strong growth in dispensers and Exchange and expect Refill to begin growing in the second half of the year as a result of the operational improvements and the beginning of the rebranding. For the full year, we expect adjusted EBITDA to be in the range of $60 million to $63 million. Keep in mind for comparability, as we noted last quarter, we expect to sell the ice business in the near-term and on an annualized basis that business contributed around $8 million sales and $1 million in adjusted EBITDA.

Turning to CapEx. We have a number of marketing initiatives that we are rolling out in 2019, as Matt outlined. Given these rollouts, we expect CapEx to be in the range of $22 million to $26 million. As it relates to interest expense, the refinancing and new credit facility put in place provided a weighted average interest rate at the end of 2018 that improved over 300 basis points from 2017 even with the 100 basis point increase in LIBOR rates during the year. In 2019, we expect total interest expense to be approximately $10 million.

Moving to the first quarter. We expect net sales in the range of $67.8 million to $70.8 million. A few notes to provide some context. First, as a reminder, in the first quarter of 2018, Dispenser sales benefited from retailer Black Friday replenishment as well as the Memorial Day promotion orders in 2018. And we do not expect to achieve the same selling levels in 2019. In addition, as we have discussed, we are seeing positive signs in Refill and believe the full impact of the credit card readers will be seen in the second half of the year.

Turning to adjusted EBITDA. We expect to be in the range of $9 million to $10 million, primarily the result of continued investment in Refill, Dispenser margins and the IRC promotion. The incremental operational Refill costs are expected to phase out during the second quarter.

With that, I will turn the call over to Matt for closing remarks.

Matt Sheehan

Thanks David. 2018 was an important year for the business and our team for a host of reasons. First, we learned a lot which I strongly believe is already making us stronger. We will continue to challenge ourselves, set stretch targets and move this business forward. I am not only proud of how the team has responded to the Q3 issues, I strongly believe we are better for having gone through it. We maintain a long-term investment view to our business and we have always come through challenges better on the other side.

I very much believe our Refill business will be stronger than ever by the second half of the year. Aside from that, as I look back upon 2018, we refinanced our debt producing significant interest savings, taken that savings and leaned in on growth drivers in the business. We posted good growth numbers in dispensers and Exchange and we have moved several key initiatives forward. All-in, we are excited to increase growth investments and drive even stronger results while we continue to improve our operating leverage.

Our strategy has been intentional for years, create great products and gain distribution, then turn to marketing. With over 45,000 points of distribution, we have convenient scale to leverage our marketing spend and communicate to consumers. We are excited that our investment in marketing has laid the foundation for long-term and sustainable growth. I would like to thank our team, our retailers and our partners for their continued loyalty and support of our purpose.

With that, I would like to open the line for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions]. And our first question will come from line of Jon Andersen with William Blair. Your line is now open.

Jon Andersen

Hi. Good morning everybody or good afternoon, I should say, everybody.

Matt Sheehan

Hi John.

David Mills

Hi John.

Jon Andersen

I wanted to first ask about the Dispenser business. You mentioned unit sales were impacted by tariff pricing in the fourth quarter and I think you expect a bit of an impact to carry into the first quarter. How are you thinking about unit sales of dispensers and sell-thru on a full-year basis in 2019 given the pricing investments and marketing investments you are making.

David Mills

A great question, John. As I mentioned earlier, Q1 is a tough comp just from what we experienced in 2018. We see dispensers growing in high single digits to low double digits, focused more around second quarter and third quarter. That's where we see timing coming in for selling.

Jon Andersen

Okay. And the impact of the retroactive tariff exemption, did that help by about $1 million in the quarter, is that my understanding? And is that kind of a one time thing where it's kind of a catch-up adjustment that will not be carried forward in 2019?

David Mills

You are spot on, John. That's correct. It was around that amount and it's a catch-up from all the tariff we paid from the end of June through the end of the year.

Jon Andersen

Okay. So the expectation is that margins in that business will be more in this mid single digit range that we have seen in the past quarter too and that's an investment you are willing to make at this point before the incremental household penetration. Is that kind of the right way to think about it?

Matt Sheehan

Yes. John, this is Matt. It's very purposeful. So as we talked to retailers and we understand the impact through our testing and promotions, as you have seen, average sell price of dispensers is a key driver for us. So we are going to do our part to get as tight as we can on those margins. It doesn't bring a lot of EBITDA to the entire business anyway but really drives the business for frankly short but certainly long-term is household penetration and connectivity. So yes, price matters here. We are doing our part and as we talked about earlier, we see retailers more and more leaning in whether it's promotional or on an everyday basis. So we want that snowball just continue to start so Asp comes down. So it is very proactive on our point to get to, call it, mid single digit margins in dispensers.

Jon Andersen

Okay. On the Refill business, it seems like, you have almost, to your point earlier, gotten back to kind of level -- the elasticity that you have seen has been internally consistent with your testing of the higher pricing. As you look forward, why the second half until we kind of return to revenue growth? Is it just you need to complete the balance of the rollout? Because it seems like you have the majority of the machines upgraded and probably more of the network volume upgraded as you have probably gone after the higher volume machines first.

Matt Sheehan

We still have, so I will take this in a couple of directions. Well, we still have the roughly 7,000 card readers to install at this point. So that's still a healthy chunk. That's number one. Two is, we try to be conservative on things like that. So that's two. And we still have a little ways to go to get back to sort of sea level. As we said last quarter, we think this is going to be a two to three quarter clawback. I think the second, what we saw in Q4 was the right progress and pretty much it's getting closer back to where it would have been with pricing alone. But we are not all the way there. So we think across Q1 and Q2, we will climb through that and then what you are really going to see is the benefit in Q3 and Q4.

David Mills

And the one thing I would add, John, is the initial rollout or the initial locations were obviously a little bit higher volume locations and they were on a higher frequency than the locations that we are rolling out in Q1 and into Q2. So those will have, we believe, a little bit larger impact than the initial ones, based on frequent tests.

Jon Andersen

Okay. Where do you think, based on what you have seen so far, when it is all said and done, do you have thought around the average downtime? I think you said pre the start of the rollout, you were doing something like seven to 10 days on average, is what you had determined. Where do you think you end up after all is said and done with the telemetry upgrade? And then also, second part to that question, do you think you will see some meaningful incremental volume, giving the consumer more payment options on these machines?

Matt Sheehan

Yes. John, I will take that one. So just let me back up again. Pre-rerouting, what we saw through all of our analysis was a machine going down four times a year, seven to 10 days at a pop. We call that 28 days, call it a month. We spiked that, not purposely, we spiked that in Q2 and Q3 to really be 12 to 15 days when they do go down. What we have seen is, our downtime when issues happen, where we do have credit cards, we brought that down to two to four days, sometimes hours. So if we have a tech that's close and we get pinged from a credit card machine, some of our guys and gals have said, hey, I was there in four hours.

And so what we predicted last time is absolutely coming through as it relates to the locations where we do have credit card readers. If you take all that and you do the math, we still contend that, in time what you will start to see in the second half of the year is we could be seeing 4% revenue growth just by the credit card readers being installed and a faster uptime. So that's one, I think, we still contend and the numbers we shared before in that 4% upside is still there.

On your second one, our testing did show that the existence of Apple Pay, Samsung and the credit card readers alone for the use of credit cards would give us a small lift. But we say that's small single digits. We do expect that to come true over time.

Jon Andersen

Okay. Let's see, two quick ones. Sorry, I am taking a lot of time here. But on the ice business, what are your expectations there for timing of the sale? And what do you plan do with the cash flow?

David Mills

It should be in the near-term. We have talked about it several times. But in the next, I would say, 30 to 60 days, it's working, the process is working as we expected. Cash flow, just going to working capital as we continue to accelerate the marketing initiatives.

Jon Andersen

Okay. And last one for me on e-commerce. It was, I think you mentioned 20% of sell-thru this quarter which is significant, right. We are getting pretty material. Do you expect that to continue to rise? And what are the margin implications when you sell through e-commerce? Are you doing most of that through third-party e-commerce retailers? Are you selling that direct to consumer from your website? What's the balance there and the margin implications? Thanks.

David Mills

Yes. It's a mix across both our own site which is, I will use your word, direct and then through Amazon and others. So that's really a mix of retailers. That is already in some of our margin projections, John. So that's part of that mid single digit margin forecast that we have. Some of those can be pretty tight on margins, depends on SKU and the mix, a different question there. But again, we think e-commerce is a really great way to get a bulky item to a home and once the customer has that item, they are going to be looking for water.

So we think it's a really great fit, not only for e-commerce partners but also frankly for our physical retail partners who have stores because that water is most likely going to come if the consumer is picking up at stores. So we will definitely lean into e-commerce. From a percentage perspective, it could be close to that if not more, as we really lean in, although our brick-and-mortar clients continue to lean into retail as well and we continue to get more shelf space.

Jon Andersen

Great. Thanks a lot.

Matt Sheehan

Thank you.

David Mills

Thanks John.

Operator

Thank you. Our next question will come from the line of Mike Petusky with Barrington Research. Your line is now open.

Mike Petusky

Hi guys. I want to try to dig in or understand the guidance, in particular in terms of the revenue and particularly the upper end. So if the ice business was $8 million and let's say, it ends up being sort of an incremental hit of $6 million, sort of your $302 million then goes to $296 million. And so if you take the $296 million and then essentially say, hey, we have a chance to get to the upper end of guidance, you are essentially saying that the remainder of the business overall grows close to 10%, let's call it: 9%, but close to 10% It sounds like you are saying that the Dispenser business could grow 10% but really the implication of the upper end of the guidance is, the rest of the business could grow to close to that rate as well. And I guess what I would like to ask is, is that essentially is the guidance that you are giving or is there some M&A that's assumed in there? Or can you just speak to the upper end of the revenue guidance, how that happens? Thanks.

David Mills

Sure. Mike, as we mentioned earlier and Dispenser sales, as you know, can always be up and down and change things dramatically. But we see dispensers high single digits. It could get into the double digits, again like this year did. Exchange, we continue to see the strength of the IRC program. The in-store signage that we are rolling out. And so we see the second half of the year in Exchange being really strong as well, even comping Q3 IRCs, Q4 IRCs. So we see strong growth there. And as we mentioned, Refill Q1, Q2 will be similar challenges but improving over time. But as Matt mentioned earlier, we see growth starting to happen in Refill. And it's a much bigger business. If we can get that business moving in the low single digits and maybe a little bit more in the second half of the year, it really drives the topline on the top end of that.

Mike Petusky

Okay. Look, David, I mean are you pushing back at all on my math. So essentially it feels you are essentially saying, the entire business sort of grows 10% to get to the higher end of the range and you are saying that's a distinct possibility, if I am understanding that. There's no M&A assumed here?

David Mills

No. We are always looking at the smaller refill deals, but nothing material. And we have not factored anything material into our guidance estimate.

Mike Petusky

Is there anything wrong with my math?

David Mills

No. You are seeing it clearly. What we are seeing is more back half loaded without a doubt and we are seeing a lot more positives as we rollout this Exchange in stores, the signage of Exchange to Lowe's and then other retailers and then the positive signs. We have seen that in Walmart alone. As we roll that out throughout the year, we will see continuing growth in Exchange. And then refill, we still believe second half of the year could be strong in Refill as we get all the credit card readers in place and the operational improvements start to hit.

Matt Sheehan

And Mike, we are not pegging Refill at 10%, just to be really breaking it out. But we think that, when that base really gets moving and given the momentum we have in Dispensers Exchange and that will bring it up. But I think your math is right and we are really excited about our business.

Mike Petusky

So Matt, if you are not pegging Refill at 10%, which doesn't surprise me, you are pegging the other two businesses at or even above 10% for the upper end of the range.

Matt Sheehan

We are.

Mike Petusky

Okay.

Matt Sheehan

That's correct. Your math is right.

Mike Petusky

Okay. All right. And then just a quick question. So you guys are well aware, some of the Southeast had some storms in Q4. I didn't hear it if you called it out, but did weather impact, in your view, revenue at all in Q4 or do you not feel like that really played much of the role?

Matt Sheehan

Yes. We didn't see it play much of a role, some of it was a spotty weather but we didn't see any major impact, negative or positive in the quarter, Mike.

Mike Petusky

Okay. All right. And then I guess just following on to the earlier question, the 20% sell-thru online, if you said where you thought that could go, I didn't catch it. I mean could that be a third of your business in the next year or two?

Matt Sheehan

Yes. I want to be a little careful on guiding that, only because brick-and-mortar is leaning in hard too. So we don't think it's going to drop-down far below 20%. And a lot of this is new business. And hence why you are seeing the overall growth. But we think that's probably 20%, maybe a little bit higher than that as brick-and-mortar grows into more.

Mike Petusky

Okay. Very good. Thanks guys.

Matt Sheehan

Thanks Mike.

David Mills

Thank you.

Operator

Thank you. And our next question will come from the line of George Kelly with Imperial Capital. Your line is now open.

George Kelly

Hi guys. Thanks for taking my questions. Just a couple. First to go back to the previous question to make sure that I have all the numbers right. So the ice business did $8 million in 2018. And you are baking in that selling in the next 60 days as part of your 2019 guidance.

David Mills

Yes. That's correct. It is around $8 million and we expect to sell that business in the next 60 days or so.

George Kelly

Okay. Great. Second question about just CapEx expectations for 2019. I may have missed it on the call but what is your full year expectation? And what are the biggest pieces that you are spending?

David Mills

Yes. The expectations are between $22 million and $26 million. The biggest drivers are continued rollout of credit card technology in the Refill side of the business but also beginning the additional rollout of Exchange signage, CD joint signage that Matt mentioned and then the last part, in the second half of the year we will start the rebranding of all the Glacier locations.

George Kelly

Okay. And then to follow-up on that last part, the rebranding. Can you update us? And Matt, I know towards the end of your prepared remarks you were talking, I think, about some of the advertising initiatives, more marketing related test that have been going on. What is the plan this year? Have you been pleased with the more media advertising tests that you have made? And can you start spending more before the brands are unified?

Matt Sheehan

Great question. We do believe that unification of the brand is really important. As we have done some of our marketing initiatives, we are not our there talking about two brands. And so we don't believe Glacier has got, frankly, any benefit from any of our marketing, whether it's our website or social media or any of the more localized word-of-mouth or advertising. So we do believe that's important. It doesn't mean that we are going to stop our testing until that's all unified but we do believe that one brand across everything is certainly more important.

Like all testing, to the first part of your question, we have seen some positives across all of our testing and we know that you are going to have a batting rate that is not a thousand and we are okay with that. We do small tests. When they work, we lean into them. A couple of examples, IRCs. We tested that two years ago, really leaned in on Black Friday. When that worked, we rolled it. CD joints was a part of three different marketing kit that we tested for a good six months. We saw the results. CD was a clear winner. We rolled in. There is others, video screens, things like that. So as we look forward, we do believe unification is important. We have tested a lot and will be rolling out a good-looking attractive, I call it magnetic, look and feel across the entire country in the end of second quarter, really Q3 and Q4.

George Kelly

Okay. Great. And then last question for me. It sounds like the attach rate is significantly higher when there is promotional materials included with the Dispenser sale. How widely, can you give any more detail about what, I am not asking you to quantify, I guess it's probably kind of hard to give too much, but what is the different lifetime value of that customer? And what percentage of dispensers are sold with that coupon attached at the initial sale?

Matt Sheehan

Yes. I will give the sort of strategy. Dave can jump in with some numbers. From our perspective, well, Dave, you want to jump in on the numbers first?

David Mills

Sure. So as we about this investment in IRCs, George, we have a very investable consumer. All our data shows that, on average a family buys 35 five-gallon bottles a year. If you do some math, these are gross margin of 30% and about a $5 wholesale value on our product. Over the lifetime, it's a $200 to $300 investable value there. And so --

Matt Sheehan

That's gross margin, that's $1,000 customer value to us, right. That's $250 of gross margin.

David Mills

Correct. Yes. So very investable consumers. That's the way we look at it. And we look at it at a five to six year period, just to be clear.

Matt Sheehan

Yes. And then on that, I think the numbers are good to start. And then on percentage, we are not sharing those exactly. What we can tell you though is, as we rolled out a higher connection between the dispensers and the water through things like everyday IRCs, not only are the IRCs driving connection but that's actually driving more connection to the secondary coupon that's in the box. The combination of the two, that means we are effectively funding two bottles for every dispenser customer and that is really important. That's anywhere from, call it, $20 to $25 investment for a customer that's going to get us $250. That's a decision we will make often. And that's what we are doing. So the percentage, the yield if you will, is improving. We are going to continue to lean into the value of the consumer.

David Mills

And the last thing I would say, George, what gives us a lot more confidence is if you just look at the sequential improvements in Exchange same-store sales, Black Friday was in Q4 2017 and every quarter in 2018 we improved same-store sales and that was where those water customers coming back in the store quarter after quarter and layering on as we bought the IRC on in Q3 and Q4.

George Kelly

Okay. Great. Thank you.

Operator

Thank you. And our next question will come from the line of Mike Grondahl with Northland Securities. Your line is now open.

Mike Grondahl

Yes. Thanks guys. To brand the Glacier location, how much is that costing and what do you think the payback is or how long is the payback?

Matt Sheehan

So to rebranding per machine is around $500, $600 on each location. It could vary a little bit based on the number of times and the age of the machine. But overall, we think that will take between starting in the second half of this year into 2020. So CapEx will be a little bit additive this year but a little bit more in 2020.

David Mills

Yes. Mike, I don't look at our IRR hurdles any different or rebranding than we do everywhere else. We have always said we look at 30% IRR. This is another marketing program that we believe will reach that hurdle. Hence why we made the decision. I think there is some even upside that we haven't modeled into the decision as you think about a unified brand. And so when you do have marketing messages that can really wrap everything, I think that could be potentially more accretive than we have said. But we use that 30% IRR hurdle on everything we do so we don't see it any different here.

Matt Sheehan

Yes. The average cost could probably end up being a little bit less than I told you, probably in the $250 to $300 range per machine depending on the types. And with credit card readers, it would be in the $500.

Mike Grondahl

I mean, if you had to add that two, got it, okay, but that can be done.

Matt Sheehan

That's correct.

Mike Grondahl

And then in terms of retailers shutting down stores, are you still seeing that headwind? How would you describe that?

Matt Sheehan

Yes. We are seeing it at certainly the Kmarts of the world, the Office Depots. We are seeing it in a lot of small independent grocers across the country as they try to compete. Some of them compete really well and some of them don't. So we do expect more of that to continue as the big guys continue to lean in more and more on their marketing strategies.

Mike Grondahl

And maybe just to follow-up to that. Would you say, is that 10% of your book, 15% of your book where you kind of have or fighting that headwind? How material is it?

Matt Sheehan

I would say, it's not that material overall, as you can see. When you look at the year-over-year, locations are down maybe around 500 in Refill alone, maybe around 500 locations. But you can see the business is still, volume still around 11% which is an improvement over Q2 and Q3. Exchange, you could see locations are fairly flat but dollars are continuing to grow. So the marketing efforts are really driving the efforts there. And as I mentioned on the call, as we start to see those comps, retailers are going to start to lean in more and it will make expanding the footprint even easier in the future.

Mike Grondahl

Got it. Okay. Thanks guys.

Matt Sheehan

Yes. Thanks Mike.

Operator

Thank you. Our next question will come from the line of Amit Sharma with BMO Capital Markets. Your line is now open.

Amit Sharma

Hi. Good afternoon everyone.

Matt Sheehan

Hi Amit.

David Mills

Good afternoon Amit.

Amit Sharma

Matt, can you provide us a little bit of detail or update on Mexico? What's happening and how far are we? And then also just talk about like overall how do we think about the opportunity for you in Mexico? And may be a simple timeframe to get there?

Matt Sheehan

Sure. We are not offering any projections on Mexico. It's really early in that. But we are very excited about it. Keep in mind, just as a refresher, the way we did this was, it was a very low investment model from our perspective, very low risk with a good partner. And so very early innings. I think we announced that just over about two months ago at this point. And so it's really early innings. We will keep you up to speed but nothing of major significance since, as we are really getting our partner up to speed, learning the business and start to grow it. We will keep you up to speed. We are not going to give any projections on that here. But keep in mind, it's going to be low distraction from our perspective. We have got a good partner. And it's really a royalty model. So I don't expect it to hit our economics at all. The exciting part will be when they get it to some scale. We have already locked in some buyout rates which will be material down the road.

David Mills

Yes. We don't expect it to be material in 2019 at all, Amit.

Amit Sharma

Yes. Of course. Is there any competitor that actually exists? Or are you going to create the category there essentially?

Matt Sheehan

There are very, very small competitive base in Mexico and so I do believe just giving the per capita consumption of bottled water, Amit, that is the highest in the world, we think Refill is a great place. It's got the right demographics, the right income base, really high per capita consumption. All of that, we believe, is a really great, I guess, mix for Refill.

Amit Sharma

And that's why I am trying to get a little bit more understanding of, not this year 2019 and perhaps even 2020 is too early, but what is the size of the opportunity in Mexico? And I will encourage you to maybe provide a little bit more color on it as we get closer to it?

Matt Sheehan

Yes. That's our plan. So as we get closer, we will get folks up to speed on Mexico. It's a big water opportunity and for sure we will get that as we get closer.

Amit Sharma

Absolutely. And then couple more for me. From the IRC and its impact on Exchange. And it's very clear that you are pretty happy with the ROI on that investment and the trends are accelerating. Should we expect that to also lean into the Refill side of business? Or is that IRC related investment is generally going to only be on the Exchange side? Like over time, do you expect that to show up on Refill volumes as well?

Matt Sheehan

We do. So first, keep in mind, IRC is only at Walmart and really focused in on Exchange. So that's where you are seeing it. But we absolutely believe that a lot of Dispenser consumers or Refill consumers, we have all that data and so we are going to lean into that more and more, not beyond Walmart. And so what you are seeing on the impact, most exciting thing we see is the impact on the comps. Everybody is growing in Exchange, but the real impact has been at Walmart. And so we have only done that program with one retailer and if and when we do that across multiple retailers, we get be really excited about in Exchange and certainly at Refill.

Amit Sharma

And what's holding you back from launching it with other retailers? Is it the logistics off it? Or the retailers not ready? What's the hold up? It's such a big positive.

Matt Sheehan

Yes. It's a great positive. Some retailers coupon differently than others. So Walmart does IRC. Others will do free water. So we will look and feel slightly different. But we are having really good conversations with others. In fact, we are in test with other retailers as we speak. And so no, I don't think there is a delay. Just it was new for us. As you know us, we focus, let's get it right, it's working well and now let's take that and run with it as fast as we can. So I don't think there's a lot of hold back, just a little bit of linear approach in our perspective, which is get it right and then move forward.

Amit Sharma

And then from a next year's outlook perspective, right and both on sales and EBITDA and we had the discussion about what that number implies from a growth perspective. What I am more interested in, if you look beyond 2019, like 2019 obviously the first half from a Refill perspective is a big headwind for you, right, as you lap what happened last year and Refill happens to be a fairly large part of your business, right, the largest. So as you look to 2020, that headwind will be gone. You will have more contribution from these growth initiatives that you are putting in place, including investment behind dispenser and the connectivity. Is double digit topline the right metric for you going forward? I am not asking you to like bless forever, but I mean all of these initiatives should give us more comfort that topline for you could actually be very high single digit, low double digit?

Matt Sheehan

Yes. We look at it 100%. And again we are confident in our business. We are trying to be very real about the Refill sort of pull back, right, or pull forward, if you will. But we think all of the trends in the business in the marketplace from water or from health and wellness and that's really going to continue to drive the overall bottled water space and we think we can capture our more than fair share of that. And then all the programs we have tested and we are rolling out, that's still early innings. We think 10% topline is doable on top of a bigger base every year. And so we are being very frank with you and everybody about what we need to do to get there. But it's a strong business with good growth potential and we see no reason we can't get there.

Amit Sharma

And [indiscernible]. Sorry, go ahead.

David Mills

I just got to say, Amit, as you think about 2019 and how the second half is going to look, that gives us a good indication of how we believe 2020 and forward will look as well when the Refill business is operating as efficiently as possible.

Amit Sharma

That's a good point. And then David, just for you, from this type of growth, what kind of operating leverage or SG&A, I mean, obviously you are investing behind increasing connectivity, so there is expectation that at least marketing part of it will continue to increase, but there should be a pretty significant operating leverage from this type of topline growth as well, right?

David Mills

Exactly right. You are spot-on again. So marketing, free cash flow and the marketing leverage will get from that. And we will continue to invest in marketing this year and you will see some growth. We won't be doubling like we did in 2018, but we will continue to invest where we see the opportunity. But we do see that leverage coming down in the SG&A side and still be in that 9% to 11% depending on where we are in the marketing investment each quarter. But long-term that will gradually come down as well as the topline start to accelerate a little bit ahead of where our investments are going. So we see that continuing to drive down towards the 9% and maybe even a little bit lower when we get further out.

Matt Sheehan

And Amit, I would just add that as we have done the last couple of years, when we find something that works, we will be open about it and we will lean in and then we will continue to do that. But if you it stops growing, it's a pretty leverageable model.

Amit Sharma

Yes. Got it. That's all I have. Thank you so much.

Matt Sheehan

Thanks Amit. Ryan, are you still there?

Operator

Mark, you may proceed with your question, sir.

Mark Argento

Yes. This is a Mark Argento. Is my line open?

Matt Sheehan

There you are Mark. Yes, we hear you now.

Mark Argento

Okay. All right.

Matt Sheehan

How are you doing?

Mark Argento

Last but not least, hopefully here. Just quickly, I guess maybe we could just go back up 5,000 feet here. And maybe you could help us think through little bit of kind of the key takeaways, the delta from expectations relative to what you have seen so far now with the Glacier acquisition? It seems to me like, maybe it's been a little bit more challenging from a volume perspective. Maybe pricing has been a little more fickle than you thought. Maybe you could just kind of sum it up for us a little bit how you are thinking about the business relative from acquisition till now? Thanks.

Matt Sheehan

And Mark, I will start. Dave can jump in. I have a couple of thoughts here. One is, just keep in mind how well we did integrate operationally. I have always said that you have got to make sure the operational integration goes well. We pushed the envelope a bit but the routing we have been very open about how we probably could have paced that probably little more aggressive on that. But if you think about the cost which we got out of the business in 2017 and even in 2018 through routing, I feel really good about our ability to find those synergies.

If we had paced the rerouting and pricing differently and we didn't have that Q3 issue, we would be in really, really great shape. So I think long-term, culturally it's a good fit. I think when you think about the ability to promote dispensers and water and now outside water, I feel really good about that long-term thesis on the business. And again, we took a lot of cost out of the operating model. I think we have shown in the past our ability to come close to 35% margins in that business and we are going to get the volume back. So we will call it a hiccup. But in general, I am not any less, in fact I am probably more positive on our ability to build value out of the combination.

Mark Argento

Great. Are there any stores or any locations that you think you might need to close or continue to optimize at this point?

Matt Sheehan

Yes. We have been doing it. I mean if you look at our locations, we will always continue to look at unit center economics. And when you have underperforming assets, we will pull them out and try to redeploy them. It's been some I have done in my career. We will continue to do it here. There is likely a better home for those units elsewhere. So you will continue to see us even if it brings down our net location number, which we have done consistently before Glacier and certainly post that, we will pull out non-performing assets, redeploy them and really put our efforts against new locations, new good location of retailers and making sure our current family of locations are producing as much cash flow as they can.

Mark Argento

Great. Thanks for the thoughts.

Matt Sheehan

Thanks Mark.

David Mills

Thanks Mark.

Operator

Thank you. And I am showing no further questions at this time. So now, it is my pleasure to hand the conference back over to Mr. Matt Sheehan, President and Chief Executive Officer, for any closing comments or remarks.

Matt Sheehan

Thank you for your participation on today's call and interest in Primo Water. Have a great night.

Operator

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program and you may all disconnect. Everybody, have a wonderful day.