Primo Water Corporation (PRMW) CEO Matt Sheehan on Q2 2019 Results - Earnings Call Transcript

Aug. 06, 2019 2:31 AM ETPrimo Water Corporation (PRMW), PRMW:CA
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Primo Water Corporation (NYSE:PRMW) Q2 2019 Earnings Conference Call August 5, 2019 4:30 PM ET

Company Participants

Madeleine Kettle - ICR

Matt Sheehan - CEO

David Mills - CFO

Conference Call Participants

George Kelly - Imperial Capital

Jon Andersen - William Blair

Mike Grondahl - Northland Capital Markets

Amit Sharma - BMO Capital Markets

Mike Petusky - Barrington Research

Operator

Good day, ladies and gentlemen, and welcome to the Primo Water Corporation’s Second Quarter 2019 Financial Results Conference Call. [Operator Instructions] Also as a reminder, this conference call is being recorded. At this time, I’d like to turn the call over to your host, Madeleine Kettle of ICR.

Madeleine Kettle

Good afternoon, and welcome to Primo Water’s Second Quarter 2019 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 p.m., Eastern Time. If you’ve not received today’s press release, it is available on the Investor Relations portion of Primo Water’s website at www.primowater.com. This call is being webcast, and a replay will be available on the company’s website.

Before we begin, we would like to remind everyone that the prepared remarks contain forward-looking statements 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’d like to turn the call over to Primo Water’s CEO, Matt Sheehan.

Matt Sheehan

Thank you, Madeleine. Good afternoon, everyone, and thanks for joining us on today’s call to review our second quarter results. I’ll begin with an overview of the quarter, then David will provide more financial details before the two of us answer questions. I am pleased with financial results for the quarter which were in line with our guidance. We’ve made great progress on several initiatives and believe the business is well positioned to grow as we began to accelerate our location expansion efforts. As we look towards the remainder of the year, our business will be driven by some bright lights, retail headwinds and some long-term investment opportunities. More specifically we continue to expect to see strong growth in dispensers and exchange driven by same-store sales performance as well as growth in locations along with e-commerce growth in dispensers.

We also have confidence in our free water our IRC redemption program which has far outperformed our expectations. We now also have a number of meaningful promotions coming in the back half of the year. The promotional activity is expected to drive future growth even though they are investments that will negatively impact our EBITDA in the near-term. In Refill, our business continues to improve from operations and pricing perspective.

And we have seen sequential improvements over the first quarter with some clear examples of our ability to grow the business year-over-year. However we have experienced more retail attrition in the back half of the second quarter and into the first part of Q3 driven in part by store closures. Focusing on Q2, sales for the quarter increased to $79.3 million near the high-end of our expectations and adjusted EBITDA was in line at $13.4 million.

Sales were led by a significant increase of 45% in dispensers driven by a record sell-through of 218,000 units up over 12% including e-commerce growth of over 50%. In addition in the quarter we expanded into a majority of the Home Depot stores with an initial SKU. Overall, we believe this growth is creating many new water households which should pay dividends for our Exchange and Refill businesses down the road. Exchange sales increased 5% to $21 million driven by our connectivity initiatives that have resulted in continued strong U.S. exchange same-store sales unit growth which was 13.4% for the quarter.

This is the 29th consecutive quarter of 6% plus same-store sales unit growth and the sixth consecutive quarter of same-store sales unit growth over 9%. We are seeing an accelerated rate of growth in channels such as home improvement in grocery as we aggressively roll out our new CD joints Exchange signage beyond Walmart. Lastly I’m pleased that we have continued to grow top line sales in Exchange despite the current retail environment which has led to location attrition over the past year.

In Refill, the team's efforts to improve the operational fundamentals of the business with the use of technology contributed to an overall improvement with total Refill sales down only 5.5% in the quarter. This is an improvement over the decrease of 7.7% in Q1. We have seen continued sequential improvement in U.S. Refill same-store sales. This demonstrates the improved uptime and operational fundamentals of the business. With the completion of the credit card reader and telemetry rollout to all outdoor Refill locations. The technology has allowed us to reduce downtime to two to four days from the historical seven to 10 days. We have seen steady volume improvements in same-store sales and locations, the longer that the telemetry uptime operating model and pricing are in place. We continue to be encouraged with that progress. To note a good portion of the sales gap in Refill this quarter is due to location attrition which we believe we can replace in the coming quarters and something I will discuss in more detail shortly.

In addition we successfully completed the divestiture of the ice business in June which we expect will improve operational efficiencies and profitability of the Refill segment going forward. Stepping back, our overall Refill strategy remains intact which has three primary elements. First improve uptime through technology and operational changes, second drive same-store sales using marketing, pricing and technology. Third as we have mentioned previously with the operational improvements and same-store sales initiatives in place, we are turning our focus to expanding locations.

As it relates to these strategies, we completed the rollout of the credit card readers and are already seeing the downtime improvements resulting in positive signs in same-store sales. We’ve seen same-store sales improve the longer the credit card readers and telemetry are in place. Accordingly we expect another sequential improvement in same-store sales in Q3 from Q2. In addition, we are focused on driving same-store sales through marketing, pricing and technology. These efforts which have been underway on our Walmart indoor locations for some time are bearing fruit.

Sales at these indoor locations were up over 8% for the quarter with volume gains even after a price increase last fall. This is indicative of what we believe can also occur in our outdoor Refill locations. With the improvements in place and the marketing initiatives underway, we’re confident that we can drive same-store sales growth in Refill. In terms of pricing optimization, we’re seeing positive signs across certain markets and retailers and will continue to strategically review pricing on an ongoing basis.

Moving on to a broader location strategy, it applies to all of our segments not only Refill. We have long believed and communicated that operational improvements and increased same-store sales were key to future location expansion across all of our businesses. We’re confident in our ability to gain locations with quality retailers to offset the impact of the overall brick and mortar retail headwinds in store closures that are out of our control.

Today with proven tactics to drive same-store sales across Dispensers, Exchange and now Refill. We are accelerating our efforts to expand locations more aggressively. I'll discuss several examples. First our strong Exchange same-store sales success at Walmart has led to their support for an additional expansion. We expect to add between 100 and 200 Walmart Exchange locations in the second half of this year which is on top of the over 650 Exchange locations we have added since the beginning of 2017.

Retailers get behind you in a big way when you can produce a consistent level of same-store sales growth that we have experienced at Walmart. Second our announcement of a new Exchange partnership with Albertsons provides additional evidence that our same-store sales focus and our product portfolio strategy is working. Albertsons indicated that our relationship in Refill coupled with our Exchange expertise, consumer research and willingness to invest in marketing along with the passion for our brand with differentiators that led us to being awarded a long-term contract for Exchange. Albertson’s has been Glacier Refill partner for years with approximately 1500 locations, when we purchased Glacier, we envision cross-selling Exchange into Glacier Refill locations and Albertsons represented the largest opportunity.

This deal for around 1,000 new Exchange locations initially and the potential for more over time is a prime example of the portfolio power of Refill and Exchange. It is also clear that our same-store sales performance and our Exchange business played a key factor in this win. Our success growing locations at Wal-Mart and Albertsons amongst other victories our perspective retailers like Meyer, Giant Eagle and Home Depot give us confidence to accelerate our investment in sales. In addition in our Refill business, the improved same-store sales trends and the much improved operations and uptime allow us to now invest in resources to expand locations.

Moving onto our outlook. Two factors to keep in mind first as previously mentioned we now expect more retail attrition in the second half of the year driven in part by store closures. As this retail environment continues, we are increasing our efforts to aggressively expand locations which we believe will offset the location losses in time. This will result in an increased investment in sales efforts in Q3 and Q4. Secondly, the new promotional activity in the second half of the year in addition to the IRC will impact margins and also require marketing and promotional investments. With these factors in mind, we’re reducing our 2019 expectations for sales and EBITDA.

However we believe the items impacting our results in the second half of the year are transitory in nature and that the investments we are making will lead to long-term profitable growth. David will provide more details shortly. In summary, I’m pleased with our team's efforts and the progress we have made across our entire business. We remain excited about the opportunity to invest in our business and expand to 50,000 to 60,000 locations.

With that, I'll turn the call over to David.

David Mills

Thanks Matt. Today I will review our financial results for the quarter and then discuss our outlook for the remainder of the year. Finally, I'll return the call back to Matt for closing remarks. To start-off, we utilized non-GAAP financial measures such as adjusted EBITDA and adjusted net income to assist investors in understanding our operating results. A reconciliation of each is included in this afternoon's press release which is available on our website.

Turning to our second quarter results. Sales for the quarter was $79.3 million near the high end of our expectations driven by record demand for our dispensers and continued strong growth in Exchange. Dispenser sales for the quarter was $16 million an increase of 45% over the prior year. We continue to experience a high level of retail demand which was driven by record sell-through.

Exchange continues to be a bright spot and sales increased 5% to $21 million despite the brick and mortar retail challenges. Once again in-store marketing initiatives specifically the free water or IRC program at Walmart and new display signage at Walmart and now other retailers grow double-digit U.S. exchange same-store sales unit growth of 13.4% for the quarter. Fewer locations and the impact of the IRC were the primary drivers of the difference between the same-store sales increase and the overall sales increase. As a reminder, the free water units while not producing sales are included in our total and same-stores sales units as we believe these consumers will become Primo households and we will see the compounding effect over the long-term.

Also keep in mind that we will be adding approximately 1000 Albertsons exchange locations during the second half of the year. Refill sales for the quarter were down 5.5% to $42.3 million. As Matt mentioned this was an incremental improvement from the first quarter. In addition, we saw improvement in U.S. same-store sales on a dollar basis as our operational initiatives have taken hold. Our gross margin for the quarter was 26.6% compared to 30.4% in the prior year. The decrease was a result of a higher mix of dispenser sales which represented 20.2% of total sales compared to 14.6% in the prior year as well as lower margins in both Refill and Exchange.

Dispenser gross margin for the quarter increased to 10.2% from 9.9%. Exchange gross margin for the quarter decreased to 30.7% from 32.5% primarily related to the investments we are making in the IRC program which we continue to believe is driving the growth in both Dispensers and Exchange. While the IRC is impacting margins in the near term, we continue to believe that this will drive long-term growth over time. Refill gross margin for the quarter decreased to 30.7% from 34.6% as a result of lower overall volumes and incremental operating costs related to addressing the downtime issue. SG&A costs for the quarter decreased to $8.8 million from $9.6 million.

As a percent of sales, SG&A excluding non-cash stock based compensation was 9.8% compared to 10.8% in the prior year. Going forward on an annualized basis, we continue to expect SG&A as a percent of sales in the 9% to 11% range. Interest expense for the quarter decreased significantly to $2.7 million from $11.2 million as we have benefited from the improved terms and lower debt balances related to the June 2018 refinancing.

On a GAAP basis for the quarter, we had net income of $873,000 or $0.02 per share compared to net income of $451,000 or $0.01 per share in the prior year. On a comparable basis, adjusted net income was $3.3 million or $0.08 per share compared to $4.5 million or $0.12 per share. Adjusted EBITDA was $13.4 million compared to $15 million. A few points on the balance sheet. Inventories were unchanged for the prior quarter at $13.7 million and up from the $10 million at year-end. This is due to the strong dispenser demand that continues to drive growth in our e-commerce and domestic dispenser business.

Total debt was $199.4 million up from year-end due to our typical annual working capital cycle in addition to an increase in capital leases of $3.7 million related to new vehicles as we improve the reliability and maintenance costs in our fleet. Overall our leverage ratio was 3.9 times and we currently expect our leverage ratio to decrease going forward. Looking at the statement of cash flows for the first half of the year, our cash flow provided by operations was $8.9 million compared to $10.2 million in 2018. Capital expenditures increased to $14.2 million from $9.3 million primarily the result of the roll-out of the credit card readers and new in-store Exchange displays and signage.

For 2019, we continue to expect capital expenditures for the full-year to be in the range of $24 million to $26 million. In addition going forward, we expect capital expenditures to return to normalized levels of approximately $20 million driving future growth in free cash flow.

Turning to our outlook as Matt noted, we are confident in the positive trends we are seeing in the turnaround of the Refill business, that said we are adjusting our outlook to address the continued retail headwinds and the promotional opportunities. Again we believe the second half promotions and sales investments are important to fuel future growth. With these factors in mind, we now expect sales for the full-year to be in the range of $312 million to $320 million and adjusted EBITDA to be in the range of $56 million to $58 million. Looking at the third quarter, we expect sales to be in the range of $84 million to $87 million and adjusted EBITDA to be in the range of $17 million to $18 million. With that, I will turn the call over to Matt for closing remarks.

Matt Sheehan

Thanks David. Before turning it over to the operator for questions, I would like to thank the team as the last few quarters have required significant effort. That type of grit is what makes Primo a great company and is something I'm proud of. True to our mission of inspiring healthier lives to better water, we manage our business for the long-term and believe we are improving each day in our ability to drive long-term sustainable value for consumers, retailers, employees and shareholders.

Before closing, it's important to remember the market trends that fuel our business. Consumer concerns over health and wellness tap water quality and sustainability continue to gather steam. Demand for better water solutions in consumers homes will remain a long-term growth driver. On that note more than ever before, consumers and the press are focused on the use of plastics specifically bottles and their negative impact on the environment. In fact we have not touted the positive environment aspect of our business to consumers, retailers and investors nearly enough which we'll see more of going forward. We believe our products position us very well within these trends and consumer preferences. To close, I'm confident about our ability to drive long-term growth as we have a strong recurring platform upon which to invest. With that, I'd like to open the line for questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question will come from Mark Argento from Lake Street. Your line is now open.

Unidentified Analyst

Hey guys this is John on for Mark. Thanks for taking my question. Now that you have the card readers and telemetry up on all of the retail machines, just curious if you're getting any kind of early insights in the consumer data that you weren't able to get before any trends there that you might find interesting? Thank you.

David Mills

Hey John, this is David. With the credit card readers, we don't have direct access to the consumers, we get credit cards but we don't have credit card information or the individual's information. That said as Matt mentioned on the call, the longer these are in place, the better the benefit we're seeing and if we go back and look at the ones that were installed prior to January of this year, we're seeing really positive trends on a year-over-year basis in those units. So the longer they're in place, the better they perform.

Matt Sheehan

And John this is Matt. I just add one thing to your question. I believe we're getting closer and closer to the consumer as we use the credit card reader to do things like digital codes, gift cards that we can get pretty specific with a specific code for consumer. So we're working our way towards getting the exact info you mentioned.

Unidentified Analyst

Got it. And just as a follow-up, are you guys running any sort of promotions through Refill yet or should we expect that coming in the future?

Matt Sheehan

We are using the credit card readers and things like gift cards. We are in the early innings of some of those promotions now John but some of those are localized but under way. It’ll take a couple of quarters for us to come up with results. But we are testing as we speak.

Unidentified Analyst

All right. Thanks guys.

Matt Sheehan

Thank you.

Operator

Thank you and our next question comes from George Kelly with Imperial Capital. Your line is now open.

George Kelly

Hi guys. Thanks for taking my questions. So maybe just to start. I know you've talked about the guidance change but can you give any more granularity just about on the revenue side, what the difference is versus your prior view what the main impacts that are driving the change?

David Mills

Yes, George this is Dave again. So in the latter half of the quarter and we continue to see it as the first part of Q3, we saw a significant number of attrition in the retail side. A lot of location closures specifically in the K-Marts are now starting to hit unexpectedly little bit more than we anticipated. We’re also seeing -- continue to see some consolidation in the dollar channel and the smaller independent and really smaller grocery channel. We've seen a little bit of a pickup over the last couple of months.

George Kelly

Okay. What I didn't hear you just said, are you seeing any kind of all these different initiatives, technology and marketing related initiatives that you've been testing has when these things are fully implemented or as you continue to roll them out as the ROI surprised you at all?

Matt Sheehan

Hey George this is Matt. No, we've seen some positive lights when we have rolled all this together. Again we just finished a credit card readers little more than a month ago or so. So but we are seeing the plan of our marketing, our telemetry with the credit card readers and even some of the pricing optimization work to our benefit. So as we look at the second half of the year, we think it's all going in the right direction.

George Kelly

Okay. And then last question from me just about -- I think you mentioned 13.4% unit same-store sales. What was the dollar same-store sales?

David Mills

We don't disclose on the Exchange side, the dollar same-store sales because there's been really little pricing changes on the Refills on the Exchange side. Total dollar change in Exchange was 5% but that was impacted significantly by location attrition as Matt mentioned.

George Kelly

Okay, all right. Thank you.

David Mills

Thanks.

Operator

Thank you. And our next question comes from Jon Andersen with William Blair. Your line is now open.

Jon Andersen

Good afternoon everybody. I guess you talked about a couple of things impacting the second half outlook location attrition and also incremental promotion. You've kind of addressed the attrition issue I think. Could you talk a little bit more about some of the incremental promotion that you're planning in the second half of the year or are these bigger events like the Black Friday do with Walmart a couple of years ago. Is it continuation of IRC, just some more color around what you're planning to do there? Thanks.

Matt Sheehan

Yes, Jon it’s Matt. Thanks for the question. Unfortunately given the nature of the promotions, we can't talk much about -- much about those promotions, all the retailers keep a lot of this cost where they are best and they ask us to as well. But we do have much brighter line of sight at this point to two promotions.

David Mills

And we're also continuing to work to expand the IRC program to other retailers where it makes sense and that's another piece of the equation.

Jon Andersen

Okay. And on the other, the attrition piece can you talk about within the business is this something that's affecting both Exchange or Refill in relatively equal proportion. Is there one part of the water business that's having a greater impact on?

Matt Sheehan

Yes, this quarter compared to last quarter. I mean Exchange and Refill, Refill is a little, little worse than Exchange but not too far, not too far different in terms of numbers but historically Refills been struggle a bit more with the higher level of independent smaller regional chains versus Refill with this quarter some of that has leveled out but it's still a bit more than exchange.

David Mills

And Jon one note on that, as we look at retail, we've seen the consolidation and just the change in retail environment over a couple of years now, we think in some part that has solved itself in other parts it hasn't. And even within the last few weeks, we've seen more of that happen and not in the smaller part of the retail industry. So but that sort of leans back on our strategy for a long time which is make sure you have the assets you have working really hard and now what we're saying is because we have more tools to drive our asset base through same-store sales, we're going to invest now in some more salespeople get out there and knock on some more doors. So that's sort of a transition for us because we have tools to fight that but retail consolidation and closures continue to happen.

Jon Andersen

Okay. And how should we think about the guidance, what are the baseline assumptions for attrition, is it kind of the run rate level you're seeing now and what's in there or location expansion. Is it the 1000 Albertsons locations plus the Home Depot doors you mentioned is there -- are there other things in the pipeline that you could announce or those kind of longer term selling cycles where we'd be talking about looking at 2020 at this point?

David Mills

It varies by segment but in the Exchange side, Jon we have the Walmart’s that we believe we can install by the end of the year between 100 and 200 and largely the Albertsons play a big part. And we started that process this week. On the retail side, the sales cycle on the it depends on the retailer. The smaller more regional chains you can accelerate that sales cycle as we've talked in the past Albertsons was a much longer cycle is a big much bigger retailer but the big ones are those two and then obviously Home Depot getting an initial SKU in there getting our foot in the door on a nationwide basis is important as well.

Matt Sheehan

We also have a healthy pipeline and we're going to invest our resources in it, Jon. So we're going to focus more and more on getting more and more retailers in the mix or just cross-selling what we already have.

Jon Andersen

Thanks. Just last one from me and pass it on. On Refill is there a timeframe that you have in mind for kind of inflection into growth in that business on either a volume or an overall dollar basis. I understand that things are getting sequentially better and some of the earlier conversions, machine conversions are performing well on the same-store sales basis but can you give us a better sense of your expectations for the sequential improvement going forward from here? Thanks a lot.

Matt Sheehan

Jon I'll start then Dave will probably jump in. So again to your question, the trends are absolutely going in the right direction. We've seen a host of examples of locations and frankly groups of locations that are comping year-over-year and we think that group will just expand over time, so more and more locations comping year-over-year. So we're seeing all the bright lights we need to and again this is a long-term pass of -- but if once we keep growing those through some of those location attrition, I think we'll be good. So Dave I don’t know if you have any other.

David Mills

No, that’s spot on.

Operator

Thank you. And our next question comes from Mike Grondahl with Northland Capital Markets. Your line is now open.

Unidentified Analyst

Hi this is Michael on for Mike. Thanks for taking our questions. Maybe first just on the IRC at Lowe's. Can you talk about how that rollout progress is going there?

Matt Sheehan

Yes, again just for maybe semantics for a second. So IRC is really only a program we're going to run at Walmart just the way they do it. We’re working on different types of clot free water programs, IRC is pretty specific but we are in the early innings of that free water program at Lowe's as we speak now.

Unidentified Analyst

Okay. And then just on Home Depot you mentioned the initial SKU for Dispensers. What can those stores look like is that two to three SKUs or how do we think about that like longer term?

Matt Sheehan

Yes, we think that's a good opportunity for us. Again this is just a -- this is a single SKU across the fleet of Home Depot. We think that could be depend on store, depend on space, so it's hard to peg a number. But we can see anywhere from three to seven SKUs everything from four feet Bay to a 12 foot Bay in those retail environments. So we have consistently looked and said that Home Depot dispensers are a big opportunity for us not only for the revenue and small margin, we'll make on dispensers but really our ability to connect the two since we already have the water. And we've clearly demonstrated what happens in water when we can, when we have the dispensers as well like such that we do in Walmart and Lowe's. Does that help?

Unidentified Analyst

Okay, yes, that’s helpful. And maybe just one more follow-up on e-commerce, was that more company Web site or Amazon or company retail website?

Matt Sheehan

Yes, the majority is Amazon and our own website. And we're just getting more and more traction and getting better at learning how to promote that category within the e-commerce channel and working with Amazon to do so and frankly using our own site to communicate in all of our different messages. So we just continue to see our ability to drive that business. We're also really important need to remember, we continue to work on connectivity in that world as well, so that we're not just selling dispensers that we're getting them to engage in a lot of business as well, we keep getting better at that. So we feel great about that and we're going to well I think again it's early as it relates to e-commerce growth specifically it relates to just the size of the product. It's a perfect product to ship home whether it's from our Web site or Amazon.

Unidentified Analyst

Thanks.

Operator

Thank you and our next question comes from Amit Sharma with BMO Capital. Your line is now open.

Amit Sharma

Hi, good afternoon everyone.

Matt Sheehan

Hi Amit.

David Mills

Hi Amit.

Amit Sharma

Yes. A couple of questions, clarifications and then may be couple more. So last quarter we talked about pricing based promotion having some issues in Refill. Can you provide some update on that?

Matt Sheehan

As we talked about last quarter Amit, we continue to understand pricing in a local level and as we’ve said optimize where need to lot of that optimization is going well, we’re doing it in small chunks if you will in very localized areas and we’re going to watch it for a while before we make any larger decisions but as we said for a while, we think pricing is needs to be optimized on a regional basis and so far so good on that initiative.

Amit Sharma

Is it still a drag on your volumes or that it's being sort of addressed with that model or scale or adjustments on pricing that you did?

Matt Sheehan

You’re talking about the year-ago price change or you talking about more?

Amit Sharma

No. Well, remember if in some markets if your competitors are acting more aggressively, at least my understanding was you would adjust prices to drive those guys back. Is that happened? Or is still in the process of happening?

Matt Sheehan

We have again we want to be careful overshoot the testing because it is early but we do certainly have examples where based on the pricing we can drive volume.

Amit Sharma

Got it. And then at the downtime issues, you mentioned that in terms of the margins for the Refill. I mean are those new or is that a continuation of what we saw in the fourth quarter and in the first quarter? And are we completely done with that now?

Matt Sheehan

Yes, those are a continuation of what we've discussed in the past in the fourth quarter, in the first quarter of this year. So we expect those costs to there'll be so obviously ongoing with the credit card readers but the costs overall margins should improve in Q3 and into Q4.

David Mills

And Amit just let me help just clarify I think that from sort of cost side of it. I mean the impact on this has been pretty clear for us, our ability to see when a machine goes down remotely is drastically different than beforehand. And so we feel very good about our ability to manage this business at a much tighter, tighter basis with the technology. So we've been very, very pleased with what we've seen so far.

Amit Sharma

And then on the Refill side, Matt I think Jon asked that question, is it fair for us to assume that as you lap the pricing which in almost all of that in the second quarter in the back half should we expect positive volumes. Or is this still an accretion really going to keep you on the negative side even in the back half as you've lapped the volume losses from last year?

David Mills

Yes, volumes are returning as Matt noted this quarter was better than a year ago or better than the first quarter. The attrition is real and we believe we'll continue that on a same-store basis, we believe we'll start to see positive gains on it from a dollar perspective we'll start to look at it from a dollar perspective versus the true volume perspective with the pricing that's going on.

Matt Sheehan

If attrition goes away, we feel really good about ability to drive the business. I mean it's really hard to predict attrition if that goes away just sort of isolate variables. We feel pretty good about where the Refill business is going and what we have to do to combat the natural attrition retail's going through is make sure we get more folks out there, more feet on the street, tell a story and get more deals to offset that.

Amit Sharma

And that's what I really wanted to -- that was the last question anyway that I hate a lot more focus on new stores this quarter, compared to last quarter and maybe even fourth quarter, right? And this is not unwelcome, right? I mean look if you see opportunity in the store count, and you're stepping up to realize that opportunity, something shifted, you feel like your product portfolio, your reception of the retailers is enabling you to be a little more aggressive, chasing new stores or is this just a continuation of what you've been doing?

Matt Sheehan

Great question. So let me step back a little bit for a few years now we've been talking specifically in Exchange about our need to almost look inward and we saw some attrition starting to begin and we wanted to make sure that the assets we had worked a lot harder. So we've been we've tried to be very consistent on saying that same-store sales is a key driver to location expansion, we know retailers well, we know that what they want, they want growing, they want every square foot in their door to be growing.

And so we've in Dispensers and in Exchange, in indoor refill. And frankly now in outdoor refill, we have tools to drive same-store sales. That's what really matters to retailers. And when you have a story like that, they frankly just get a lot more excited about you. So let's just break down Walmart for a minute. The store count that you've seen us grow about right around 650 exchange locations over the last, I think we said two to three years that has come because of our production and so that that has been a strategy for a while which is let's get same-store sales right, buying some levers to grow the business and then come out of that transition into a location growth expansion mode.

And so we're doing that certainly in dispensers. We've clearly found our way to grow that business. We've found that ability to grow Exchange business which is really exciting. Frankly we've done that in indoor Refill as well as we shared some of the numbers. We’ve been working really hard to make sure that we find some of those levers and improve the operational nature of the outdoor business. And that path frankly has taken the same path that our other three if you will businesses are taking. And that is make sure your ops are tight, find some marketing levers and when you do then go out and get on the road and start talking to retailers.

So for us we've seen this up for why we've tried to communicate that. We did put a lot of reliance on same-store sales in last year, in last few years. And now what we are seeing across those businesses gives us a lot more conference to get out there and show them that the operational support, the operational backbone we have and to show them the tools that that matter to drive growth. That's what a retailer really cares about and when we show that to them, they get much more excited. So I do think you're seeing a shift. We look at it as a transition in a longer term strategy that we've seen for a long time. And so for that that we're really excited because we have certainly built businesses before that are driving a lot of location growth.

We've been very consistent on 50,000, 60,000 points of distribution. We had to hit pause for just a little bit to make sure that we had the tools in place and the operational foundation now that we have that across all of our businesses we're really excited to lean into that. And again we believe that the combination of same-store sales and really energized sales team with frankly more feet on the street with tools in their back pocket. That's a really good combination to get on the street and go after locations to reset, what's happening to just the retail environment in general. Does that help?

Amit Sharma

That’s really helpful. Just a couple more on that, so is that 50,000 to 60,000 is that a like short term like how long could it be to get there, is that a realistic goal for this business as well?

Matt Sheehan

Yes, I think we’ve always said somewhere on three to five years for that number. Remember we’re well over 40,000 today and we get more aggressive at that, we can certainly do that but long-term business let’s get it right and then lean into locations. So I’d say three to five year strategy.

Amit Sharma

And then last one is, as you add more stores, Matt, are these stores coming in at a similar or better margins? Or do you have to have them in the system and there is onboarding periods so these stores may not be as profitable initially? How should we think about that?

Matt Sheehan

Yes, I will take it and Dave can step in. Keep in mind a couple of things one is not all locations are created equal right. So when you’re just looking at location numbers, it may look like if you had 100 Walmart’s that's the same as losing 100 Kmart’s. It’s not even close. And so investors have to really understand the difference between a Walmart and what that that's versus what some smaller locations do. So that's one thing, Dave can talk about the margins I think we have a lot of it. We have more expandability in our Refill business because that's really our team and our trucks and all that. So Dave can step into that but we have more I'll call it expandability in the Refill margins than we do in Exchange. Dave?

David Mills

Yes, I mean with the Exchange locations margins should be pretty similar to what we have currently in place. The one advantage with Albertsons from a velocity or volume perspective, the consumers there have been involved or engaging in the bulk category for a number of years. So the volume where they should come on board at a more mature base than in a traditional store they didn't have the book water category in there. And so the margin should be very similar. And then in Refill is as Matt mentioned we have more as volume expands and grows, the margins in the Refill side will expand with that. So a little bit different in each of the two businesses.

Amit Sharma

Got it. Thank you so much.

David Mills

Thanks Amit.

Operator

Thank you. And our next question comes from Mike Petusky with Barrington Research. Your line is now open.

Mike Petusky

Hi guys. Number of my questions have been asked and answered but let me just ask real quickly. You have a rough total of what the total locations today, you said well over 40,000 I mean is it like 44,000 or something around there?

David Mills

It’s 44,600 into the quarter and keep in mind we sold the ice business that was just over 500 locations. We sold that at the end of the quarter.

Mike Petusky

Okay. All right. And then on the Dispensers in Home Depot that's already occurred where you said the majority, you're in a majority of Home Depot stores with at least one -- I guess with one SKU?

Matt Sheehan

That's correct.

Mike Petusky

What's the rough price. I mean is that a $99 machine, is that $200 machine, do you have that to share?

Matt Sheehan

Yes, Mike it’s Matt. It’s good question. It's one of the early price points runs. It’s slightly around $30, so it's one of the early one, not want full size items.

David Mills

Yes, mostly the manual pumps and maybe some table tops.

Matt Sheehan

It means that goes from $10 to $30, it's on the lower side of it.

Mike Petusky

Okay, all right.

Matt Sheehan

The opportunity obviously is in the opportunity Mike is on the other side of it, if we can that’s SKU we can get in, we show them how we perform which we certainly will. Then we can expand that a number of SKUs per store if you will. So we get really excited about our ability to sort of lean in and on our way to SKU growth.

Mike Petusky

Right. Okay. And then you sort of touched on a little bit but David I mean what do you think longer term the opposite, what the Refill is tracking at 30.5% to 31% growth margin. I mean is the longer term opportunity there and longer term meaning three to five years is that can that be a 34% gross margin business, 33% or how do you see Refill?

David Mills

Yes, definitely good question. In the peak season quarters Q2 and Q3 we believe this can be a 34% to 35% margin business with volumes coming back and in everything else in place. I think we've talked before about 100 to 200 basis point improvement over where it's been historically in the off-peak quarters you could be about 100 to 200 basis point improvement which would put you in the 32% range in Q1 or Q4.

Mike Petusky

All right. And then just last one I don't think you guys have really touched on this in a while. But I know you're trying to do more with social media, podcast things related to health and fitness. Have you guys had any wins there or even anecdotal that you can talk about where you may have gotten some traction over the past few quarters? Thanks.

Matt Sheehan

Yes, Mike. We've done a bunch at a localized level. So even social media is not necessarily national on basis, we have a lot of local influencers, we've been testing a lot of that work and getting a lot of positive traction in that space. It's really early for us but we are leaning into that and for the first time we're using outdoor Refill as almost the target if you will of our social media and that's frankly in the Refill business that's never really been done before. And so we get really excited about that in some of the really important markets for us getting out there, telling the story letting influencers help us tell a story early innings for us but those early innings are frankly a bright, bright spot.

Mike Petusky

All right, very good. Thanks guys.

Matt Sheehan

Thanks Mike.

Operator

Thank you and we have a follow-up question from Jon Andersen from William Blair. Your line is now open.

Jon Andersen

Yes, hi. Thanks for taking the follow-up. On the GAAP, first one was on the gap between the Exchange U.S. Exchange same-store sales units 13% and the dollar sales of 5%. Can you quantify just or order of magnitude the impact of the IRC versus location attrition maybe which was more pronounced in the quarter and explain the Delta?

Matt Sheehan

Yes, the majority of the Delta is the location attrition that occurred in the quarter. The IRC does impact but if you look at it, if you remove the IRC units from the same-store unit number of 13.4, it was only about 100 basis point impact. So it's still really strong growth in terms of total units excluding the free ones. So mostly location attrition story in the quarter.

Jon Andersen

That's super helpful, thanks. And then on Albertsons the new exchange locations can you be a little bit more precise on the timing of that rollout, is that happening Q3, Q4. And then how quickly you kind of ramp, these were existing locations from a competitors, so I'm assuming the productivity is pretty good right out of the gates?

David Mills

Yes, so the rollout will start this quarter and it will take through the remainder of the year and you're spot on replacing the competitor, these will we believe will perform much better than a location that didn't have this category in the past.

Matt Sheehan

And Jon I’ll just add as we target more and more location growth, we're going to be really smart about the locations we go after, we're going to go after more high profile, high productive locations, so they come in earlier in our lifecycle than later. So we have a lot of location information that we're going to target those as much as we can.

Jon Andersen

Great, last one from me. On the ice business what's the impact to EBITDA for the -- I guess it would be the second half of the year or on an annual run rate basis?

David Mills

It was about just under $8 million annualized business and the EBITDA was just under 10% margins on that.

Jon Andersen

Great. Thanks so much. Good luck.

David Mills

Thanks.

Operator

Thank you. And our next question is a follow-up from Amit Sharma with BMO Capital. Your line is now open.

Amit Sharma

Hi, thank you so much for taking the follow-up. Dave, on this last point, as you think about the guidance change in this quarter for the rest of the year, can you dig that into that? Is ice a factor into it? And then can you may be provide a bit more color how much of that is greater than expected so attrition versus this investment behind sales promotions?

David Mills

So ice has been out of the number Amit. So I think during the quarter it was about $3 million in revenues this quarter and the second quarter. Going forward obviously not there but their overall what’s driving the change has been the location attrition much farther much more in excess of what we originally expected or guiding towards with some on the investment side, the IRC promotions that impact -- does impact revenue keeping away bottles and it impacts margins. We’re seeing much higher redemption rates than we’ve seen even as we talked in Q1 as that continues to accelerate. So but overall the majority of the changes is location attrition compared to where we were before.

Matt Sheehan

Yes, Amit I just add the IRC is well above what we expected it to be and it does have a short term impact. But we love to see that connectivity and what is driving dispensers. And our ability to invest in these additional promotions gets us really excited for the long-term. But we know it’s having -- it kind of have a drag on our second half EBITDA but we’re leaning in because we have seen in the past our ability to use promotions to drive the future of the business.

Amit Sharma

And the reason I'm asking this is, look, investors are going to be perfectly fine but if you are spending more on IRC and that’s the reason for your EBITDA down, right? That's really good given really good ROI on this investment. This is really good investment? Nobody will judge you for that. So I just want to know have a better understanding of what is driving this out of down, right? So yes, those two are the reasons we know that I just wanted to get a little bit more clarity on is 75% of the EBITDA negative is driven by store closure versus 50%, I don't know. Any help so that in our minds and in investor mind, they know what's driving it? And if they look at 2020, how should they think about that?

Matt Sheehan

Yes, from an EBITDA perspective yes the IRC and the promotions probably about 50:50 comparing that to the location attrition.

Amit Sharma

50:50, okay perfect. That’s all I wanted to know. Thank you so much guys.

Matt Sheehan

Thanks.

Operator

Thank you. And I’m showing no further questions in the queue at this time. I would like to turn the call back to Matt Sheehan for any final 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. You may now disconnect. Everyone have a great day.

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