May 5, 2015
Executives
Katie Turner - Investor Relations, ICR Inc. Billy Prim - Chairman and Chief Executive Officer Matt Sheehan - President and Chief Operating Officer Mark Castaneda - Chief Financial Officer
Analysts
Kara Anderson - B. Riley & Co.
Mike Petusky - Barrington Research Associates
Operator
Good day, ladies and gentlemen, and welcome to the Primo Water’s First Quarter 2015 Financial Results Conference Call. At this time, all participants are in a listen-only mode.
Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.
I’d now turn the call over to your host, Katie Turner. Please go ahead.
Katie Turner
Good afternoon, and welcome to Primo Water's first quarter 2015 earnings conference call. On the call with me today are Billy Prim, Chairman and Chief Executive Officer, Matt Sheehan, President and Chief Operating Officer and Mark Castaneda, 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 have 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’d 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 those forward-looking statements and we can give no assurance for 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, Billy Prim.
Billy Prim
Thank you, Katie. Good afternoon, everyone, and thank you for joining us today to review our first quarter performance.
I’ll begin today’s call by providing a few comments on our overall business. Then Matt will discuss our operational initiatives in more detail.
Finally, Mark will review our financial results and the outlook for the remainder of 2015. Before we get into the details on the quarter, I want to start by saying I’m incredibly proud of the Primo team and the way we’re executing on our plan.
We have the right people, the right products and the right market and have plenty of potential ahead. Our potential is supported by favorable market growth trends as the demand for healthy beverages continues to grow.
According to the Beverage Marketing Corporation, bottled water consumption has grown by nearly 33% over the past five years to 10.9 billion gallons in 2014. Meanwhile, soda declined for the tenth consecutive year to 12.8 billion gallons.
Clearly, more and more Americans are ditching soft drinks for purified bottled water. It is not surprising that the Chicago Tribune recently declared water the ultimate health drink.
Now, for the details on our first quarter. We have started 2015 off with positive momentum and posted another quarter of strong top line growth of approximately 24% to $29.2 million, driven by both the water and dispensers segment.
Adjusted EBITDA of $3.7 million was up over 36% from the first quarter last year and generated $320,000 in operating income in a traditionally non-peak quarter. These results exceeded our guidance and due to the better than expected results, we’re raising the full year outlook.
Our results reflect the team’s execution of our strategies, which are: grow household penetration of dispensers, improve connectivity, increase retail outlets, drive unit economics, highly engaged teams and lastly to live our values. Last year we took a number of steps to better position our business for profitable growth and we’re pleased to report that these efforts continued to pay off.
These steps included the addition of 2,500 locations, vertically integrating over one half of our US refill service network, and rolling out new technologies for our refill locations. We also completed the transition of our US exchange distribution network and have converted the majority of DS services legacy customers to Primo.
We continued to add more households with our dispensers which in turn creates growth in our exchange and refill businesses. We plan to invest in marketing initiatives that expand our brand awareness, location revenue and households.
Additionally, we will continue to leverage our core business to improve our operating efficiencies. In summary, we are extremely pleased with our first quarter performance and strong start to the year.
We ended the first quarter with approximately 24,500 retail locations and continue to believe we can grow this number to 50,000 to 60,000 over the next few years. With that overview, I’ll turn it over to Matt.
Matt Sheehan
Thank you, Billy. Now, I will discuss the details and key strategies that support our mission and vision for the future.
First, grow household penetration of dispensers. The dispenser business is the razor of our model and continues to perform.
In Q1, the sell-through of our dispensers was approximately 119,000 units, up 6.3%, confirming more and more households are entering the category and providing a strong indicator of future water sales. We continue to improve the quality and breadth of our dispenser lineup to encompass the different needs and price sensitivity of consumers.
While we sell these dispensers at low margins, we do so to gain future water households. Second, improve connectivity.
Based on our household penetration strategy, we want to ensure that those dispenser consumers connect with our water. We continue to work on these initiatives to increase the attachment rates even further.
We’re also working on ways of remaining top of mind to our retail clients helping them see the value of the connected Primo consumer. Being a only provider that offers both exchange and refill, often in the same store that sells dispensers, we continue to see the value of this connected offering.
Third, increase retail outlets. We continue to receive strong support from retailers on the strategic nature of our business, given the health focus and the decline of soda sales.
In the first quarter, we focused on integrating 1800 locations we added in Q4 and continued to invest in service levels and sales. Further, we continue to work with both current and new clients and believe we are on track to add productive locations that need our IRR hurdle thresholds at a rate of approximately 2000 per year.
Fourth, drive unit economics. Our focus over the past two years has been to improve the supply chain cost of our businesses.
Through the transition of our exchange distribution network, deployment of CORT both in the US and Canada, installation of telemetry monitoring and improvements in the management of service parts, we’ve secured a stronger margin foundation that allows us to shift focus towards growth. We are now building an analytical marketing team focused on consumer strategy and driving unit revenue both in-store and online.
We have several tests underway to drive consumer acquisition and loyalty, all rooted in qualitative and quantitative feedback from current and potential consumers. Simultaneously, we’re in the beginning stages of planning our online strategy and appearance.
We believe we are developing several levers that will positively impact our unit revenue in the future. As these initiatives take time to develop, we’re a fortunate company with an on-trend consumer offering that is growing double digits.
Fifth, engaged teams. We continue to measure on improved Primo’s culture.
We are improving the alignment of teams, goals and communications through our balanced scorecard process. We believe it is important to have a culture of strong engagement and commitment to our mission, which strengthens our ability to add value to consumers, retailers and shareholders.
Last, but not least, our sixth strategy is to live our values. We believe that at the core of any strong business is a set of values that drive good business decisions and attract and retain talent.
Overall, our business continues to grow. We are gaining better control of the levers in the business, have a strong team, a roadmap for the future and an ability to measure our progress.
We are confident in the business and are proud of our accomplishments thus far. Now, I’ll turn the call over to Mark to review our financial results and outlook for the remainder of the year.
Mark Castaneda
Thanks, Matt. I’ll now review our financial results in more detail.
To help investors understand our operating results, we do provide certain non-GAAP financial measures, including adjusted EBITDA and pro forma fully taxed earnings. Overall, we’re very pleased with our financial results for the quarter.
We exceeded the high-end of our growth expectations for both sales and adjusted EBITDA. As Billy mentioned, sales for the first quarter grew 24% to $29.2 million, driven by growth in both water and our dispenser segments.
Looking deeper at our top line results, water segment increased 30% to $20.7 million, primarily due to the addition of retail locations and US exchange same-store unit growth of approximately 8.6%. In our dispenser segment, sales increased 12% to $8.5 million.
As a reminder, the dispenser segment sales can be lumpy based on the timing of orders by our retail customers. However, this revenue has limited impact on our EBITDA.
We continue to believe that increased water dispenser penetration will lead to further increases in our recurring higher margin water sales. Gross margin dollars increased approximately 24%, primarily due to increased sales and our overall gross margin percent was essentially flat at 26.2%.
Next, we saw an increase in overall SG&A expenses, primarily due to higher non-cash stock compensation expense, driven by performance based stock awards. SG&A as a percent of sales decreased to 16% compared to 16.3% in the prior year.
Excluding the non-cash stock compensation, on an adjusted basis, SG&A decreased to 13.7% from 14.9% in the prior year, illustrating the leverage in our model. Interest expense for the quarter decreased to $0.5 million, due to more favorable borrowing rates under the new credit facility we entered into last June and adjusted EBITDA increased approximately 37% to $3.7 million from $2.7 million in the prior year.
On a GAAP basis, net loss from continuing operations was around $200,000, or $0.01 per share, for the first quarter, compared to a loss of $3.6 million, or $0.15 per share, in the prior year. On a comparable fully taxed basis, reported earnings from continuing operations of around $300,000 or $0.01 per share compared to a loss of $900,000 or a loss of $0.04 per share for the prior year.
Continuing on to our balance sheet, our working capital grew about $1 million due to increased accounts receivable as a result of our sales growth. Our DSO was flat at 32 days which reflects solid receivables management.
Our total leverage ratio decreased to 1.8 times from 2.4 times in the prior year. Turning to our outlook, due to our strong Q1 results, we are raising our 2015 outlook.
We now expect net sales to be in the range of $114.5 million to $118.5 million, up from our previous guidance of $113 million to $117 million. We’re also raising our adjusted EBITDA to a range of $14.7 million to $16.2 million, up from our previous guidance of $14.4 million to $15.7 million.
Today, we are also introducing guidance for the second quarter of 2015. We expect net sales of $29.8 million to $30.8 million and adjusted EBITDA of $3.8 million to $4.0 million.
I will now turn the call over to Billy for closing remarks.
Billy Prim
Thanks, Mark. We’re off to a great start for the year and we’re more excited than ever about our long term growth opportunities.
There is an increasing demand for our products and we believe this will translate into another year of record performance for Primo Water. We have built a solid foundation and are confident in our ability to grow the business through the increased distribution of our water and dispensers.
Here at Primo, our team is committed to inspiring healthier homes through better water. This concludes our prepared remarks.
We are now ready for questions.
Operator
[Operator Instructions] Our first question comes from Kara Anderson with B. Riley.
Kara Anderson
Just a couple of housekeeping questions, first, did you guys provide the water and dispenser gross margins?
Mark Castaneda
We did not provide those in the release, but I can give those to you. The water gross margins were 34.2% and the dispenser gross margins were 6.8%.
Kara Anderson
And then similarly, did we get a total water and dispenser location count?
Mark Castaneda
The locations were flat in water and dispenser locations were down 100 locations, so 6,300.
Kara Anderson
Sorry, you said water was flat?
Mark Castaneda
Water was flat at 18,200.
Kara Anderson
So we didn’t add any DS locations during the quarter?
Mark Castaneda
That’s correct.
Kara Anderson
Are you still expecting that to be completed by mid 2015?
Billy Prim
We are. We’ve added about 2,500 DS locations overall.
The remaining locations probably are not going to meet our internal rate of return and the locations that we add through the balance of the year, which we believe we can add locations at about 2,000 a year rate, are mostly going to come from organic locations. I will say that we do expect to get all the revenue we initially guided to a year and a half ago.
We will all that, even despite those other locations, not having those locations.
Kara Anderson
And then with 2,000 you think you can achieve annually, can we get a sense for how you expect to prioritize new locations, are there certain retailers that are sort of just waiting their turn or are you actively seeking new retailer relationships at this time?
Matt Sheehan
I think we are doing a bit of both, we are trying to prioritize as good as we can on our returns, as Billy said before. But we see opportunities as you we both in our current set of clients and also clients and channels that we haven’t even penetrated yet.
So it’s a mix strategy.
Kara Anderson
And then the implementation of telemetry and CORT, is that complete?
Matt Sheehan
It’s generally complete, Kara. There’s a few pockets where we are improving expanding that such as Canada with CORT, but that’s a much smaller enterprise if you will than the US CORT mission.
So we will increase those in small pockets as we see opportunities.
Kara Anderson
And then with the telemetry, I’m wondering if you’ve gained any insight onto same store sales for refill, I know that was one of the things that would open up some visibility there?
Matt Sheehan
We continue to watch that, we don’t share those numbers, Kara, openly, but we are watching that pretty closely to understand the business even better.
Operator
Our next question comes from Mike Petusky with Barrington Research.
Mike Petusky
So in terms of the sell through of the dispenser, I guess my question is where is most of the, for the lack of a better term, action happening in terms of price point, in terms of features, I mean, where are you guys really making inroads in terms of the dispensers?
Matt Sheehan
Good question. We continue to see growth from a SKU mix perspective in bottom loader rather than the top loader SKU.
We continue to see that as an increasing mix of our sales and it does stretch across home improvement particularly.
Mike Petusky
And then I think I heard Billy say essentially and maybe this isn’t formal guidance, but you guys are basically hoping in terms of reasonable goal for growth for retail locations, about 2,000 a year, did I hear that right?
Billy Prim
It’s accurate.
Operator
[Operator Instructions] There are no further questions. I’ll now turn the call back over to management for closing remarks.
Billy Prim
Thank you. We appreciate your interest in Primo and appreciate your participation in today’s call.
The progress we have made cannot have been accomplished without the efforts of our employees, distributors, refill service providers, manufacturing partners, and retail partners, and we sincerely thank them for their continued dedication. We look forward to providing you with an update on our business progress next quarter.
Have a good evening.
Operator
Thank you. Ladies and gentlemen, that does conclude today’s conference.
You may all disconnect and everyone, have a great day.