Primo Brands Corporation (PRMB) Earnings Call Transcript & Summary

Good morning, everyone. Thanks for tuning in for today's fireside chat. I'm joined by Robbert Rietbroek, CEO of Primo Brands; David Hass, CFO of Primo Brands; and Jon Kathol, VP of Investor Relations. I just wanted to thank the Primo Brands team for taking some time to have this fireside chat, especially considering the chain of events over the past few months. I also want to thank the investment community for sending in their questions for this fireside chat. I try to get in as much as I could. So hopefully, I've covered all the ground. But gentlemen, we have a lot to go through. So thanks for being with us today and then let's get going.

Just wanted to start first with the details around the direct business. A lot of questions coming in, in terms of what part of the planning around the integration went wrong to result in these service issues and how can investors feel confident that this can be resolved as we move forward?

And Nik, let me take that on. Hi, good morning, everyone. This is Robbert Rietbroek. I'm the CEO of Primo Brands Corporation. Yes, I would say the following, we had a combination of several things that impacted our business in the second quarter. Beginning with the retail side, where we were impacted by tornado damage at the largest retail plant in Hawkins, Texas. We also experienced a record cold and wet quarter in the Northeast where we have a 40% market share. So that really put a bit of a damper on the retail growth. Good news is the first half. We still are in net growth at 11 basis points. And we're the only large branded manufacturer in water that's still growing share through the first half in the category. Now the bigger issue that was self-inflicted was in our last mile business or we used to call that home and office development, Nik. We closed 40 facilities in the quarter for a total of 48 to date. Now we're like -- we're 8 months into the merger right now. We were 7 months into the merger at the end of the second quarter. So we really took a highly decisive and somewhat aggressive approach to the restructuring. We also reduced another 1,100 associates in the second quarter for a total of 1,600 to really prioritize speed of synergy delivery. So what happened is that once we start closing factories, which happened in the month of May, primarily. In the second half of May, we ran into supply issues. And those supply issues were driven by equipment compatibility issues for the bottles and racks and general shortages of the racks that carry the 5-gallon bottles. Those are usually 4-wide, they carry about 40 bottles per rack. And we've since infused about 70,000 of those racks and a couple of million of additional bottles to overcome these shortages. We've made significant progress. From a technical standpoint, we basically backed the Primo Water company into the legacy BlueTriton or Nestlé systems, SAP, the handheld, the geo-routing system. And we experienced some initial change management challenges. And we also needed to update the IT technology to accommodate more complex business model which now includes frequent retail deliveries in exchange. So those are the racks that you see at Walmart or Kroger. Now where are we today? We've largely restored service levels. We're approximately at 92% daily service rate and we are working our way back to get over 95%, which would have been the premerger base. We will continue to see some minor disruptions for the next 8 to 10 weeks through the end of September, but we will be normalized, hopefully, by Q4. We've all the reasons to believe that, that will be the case since we already are working our way back and well above the 90s. We're currently looking at particularly South Florida and Mid-Atlantic where we have some supply shortages. But the big markets, LA, Dallas, Chicagoland have been pretty much addressed. So Nik, that's really a quick summary of what happened. Now we've been decisive. We've addressed the issues, and we'll continue to implement corrections to restore performance.

Yes. And Robbert, if I could just kind of follow up on that. You mentioned speed several times during your prepared remarks when you reported earnings. So maybe if you could just -- I think that's another big question people have on their minds is just why go so fast. Maybe you can just provide some context around that.

Yes, it's a great question. We -- as we announced the merger in June of 2024, we communicated $200 million of synergies by the end of year 3. We then decided to advance that to the end of year 1. It really truly drives the value thesis of the merger. There's really two ways of doing these mergers. You can either take a very slow approach and look at effectiveness. And then you will gradually work your way through protracted issues that occur or you can go for speed and efficiency where you have one period where you run water through the pipes. In hindsight, I probably would have slowed it down a little bit. But obviously, we are now where we are, and we've redirected all of our focus towards resolving the issues. And I'm glad to report that we have resolved the majority of issues. We are currently back at 92%, which is spitting distance from the 95% premerger. We have ways to go. And the benefit of this approach is that we don't have multiple quarters of compounding smaller issues, but we've just got through it in one rip the band-aid off quarter.

Got it. Okay. That makes sense. Maybe, Robbert, and David, if you want to also kind of chime in. What was -- what does the run rate look like before you started running into these challenges for the HOD business, right? So what did it look like before? And then how much did it kind of drop off, if you can just give us some relative context on the delta?

David, do you want to...

Yes. So we would have -- in our Q1 disclosures, as everyone may recall, we delivered a 3% top line, which is a 4.2% growth rate on an equivalized leap day basis. And within that, you had a last mile or direct delivery business that would be sort of on par with our algorithm of 3% to 5% in that case. And those were largely two different sovereign operating entities running service to customers that would have been brought to the combined company. And so that really proves the confidence we have when the service disruptions are remediated because there's a demand signal every day from these customers in addition to our retail partners in things like exchange and refill where the customer base has the demand profile for the volume we delivered. And we started the year actually pretty significantly skewed toward volume contribution within those results in Q1. And so really, Q2 is a quarter where as the major pieces of integration started to occur, it's led to the disruptions. We've obviously talked about and Robbert just answered again. So we remain pretty confident that the consumer demand is there. We've really not had a lot of pricing influence within our quarterly results. Again, we're still speaking exclusively on the direct delivery side of the business. And therefore, as we are able to satisfy our customer demand as we recuperate our product supply, we feel that we'll be able to sort of exit Q4 in the latter part of the year back to a more stable place that provides a more resilient 2026 sort of back exactly where we would have thought the algorithm would have delivered.

Okay. Great. Super helpful and then what was the portion of your user base that you actually had the issues or you lost during the quarter. Obviously, a lot of folks just trying to understand what the churn looked like, if you can provide any context on that.

Sure...

And Nik -- yes, let me go first, David. I'll -- the majority customers were unaffected. But as I said in the earnings call, we -- our delivery temporarily dropped to below 80% DSR. So that was probably about 10% to 20% of our customers at some point affected either by nondelivery or delayed delivery, and we see a slight increase in attrition, but not actually as much as we would normally see in -- with major disruption. We've seen customers be very resilient, and the need for our product remains out there. And we see continued adds from digital as well. So we're recruiting a lot of new customers into the base. So the top of the funnel is healthy and growing. And our focus is on recovery of service and stabilization, and we are also implementing win-back programs. But right now, if you are at 92% daily service rate, it means that around 8% of fill rate is not completed. So we're working hard to get that above 95%. 95% would mean that there's a 5% variability in deliveries, which you can normally cover through next-day delivery or a Saturday or Sunday delivery. But let me pass it on to David for some additional perspective.

Yes. I think a couple of areas that are really important here. One, there is not a top of funnel or new customer waning demand in any way. You've talked about this for a couple of years now, interest levels in tap water quality and safety are, I would say, continuing to progress essentially setting all-time highs in the way we look at interest levels. Unfortunately, obviously, we went through this disruption, and that has not, in any regard, whether it be Trustpilot, Google Review. That has not slowed new customer or brand new to the category customer interest. Again, we don't take that for granted. We know where we have to resolve and improve our service levels. But we remain very optimistic that the top of funnel issue is not creating an issue, and we remain sort of vigilant there. In terms of actual quits, it's left us in a couple of month period of a net deficit where our adds are not outpacing the quits. We believe that, that's impacted. We have a rough approximate user base here of about 3 million on a direct delivery basis. There are other customer bases within exchange and refill not quantified in that 3 million. But within the actual delivery to residential and commercial customers, it's about a 3 million user base. We believe we've lost sort of anywhere between 1% and 1.5% or about 50,000 during this period. But that's, again, can be short term in nature because the ability to continue to add, resolve our service issues can put us back into a net accretive or net organic add position, and we'll continue to work diligently to win back customers where we have disrupted their service to the point where they've decided to leave. Again, we remain very confident, however, that when they choose to depart, we will have an opportunity to address and reclaim sort of potential service in the near future.

Got it. And where -- like the customers that left, where did they go? Do they just stop having home and office water delivery and just started buying in retail? Or did they switch to a competitor? Any context around that?

In our past, we've done a lot of research within our customer base to say, how have you migrated to becoming a direct delivery customer today? And typically, you have a moment in your journey where you choose to leave tap water as your primary service. You would end up potentially in one of our 5-gallon options, be it refill exchange or direct delivery or we then obviously have alternatives where they might be in sort of case pack consumption, simple or more advanced filtration stages. Again, whether or not there's a halo impact around our brands, we have not seen any elevated increase in filtration user additions to signal perhaps that they're giving up on one side of an offering and moving to another. Now again, that could be because you have a negative affiliation with us as a brand, but we don't believe that's the issue. Exchange and refill have continued to perform quite well. And we don't believe that typically that's an offset. So we think it might just be a temporary kind of pause in their consumption figuring out what they're going to do next as it is somewhat of an elongated user journey to sort of decide what they're going to do. But again, we do believe that we will have an opportunity to win them back. We do remain very active in our tuck-in pipeline where we can address potentially looking at regional or local opportunities to sort of acquire those in our future. But again, we believe this is a lagging indicator of our service challenge, and as service stabilizes, it's a decently self-fulfilling prophecy of sort of resuming sort of a net organic acquisition.

Great. So for the direct delivery disruptions, lack of supply was cited as one of the main problems, but what are supply levels now relative to demand? Like do you still have less demand? Or do you have more supply than demand at this point?

Nik, in general, I would say that demand is very, very healthy and strong in the last mile. It's our ability to supply that has been the question, and that remains the question. In general, we do not have a demand issue. It's right now all about restoring service, ensuring our product supply is there. And one of the things we're trying to get to is having a day on hand of inventory at the branch, a day in transport and a day at the factory, that will avoid us from having to rely on trailer arrivals in the morning for the load out of our trucks. Once we have that fully restored, we get to that 95% DSR, we should be able to take advantage of the demand. And obviously, the weather is very, very good right now. It's hot outside, and that really drives demand in water consumption.

And Robbert, I guess that is really the key for this whole September time line that you're talking about, right? It's just kind of getting all that situated?

Correct. Yes. By the end of September, we should be fully addressed. We would have not only the markets that I have discussed that are completely back to normal. But the remaining two, I would say, focus areas, which are the Mid-Atlantic and South Florida in a position where we have sufficient mod racks, sufficient bottles in the system to have the new lean optimized network function at that level that we would have had premerger in both corporations. And as you understand, Nik, because peak season and its hot weather, that is a factor because every case we produce, we are delivering.

Got it. Okay. And then one of the things that was supposed to be part of the back half top line was price harmonization. I'm assuming that's not the right time for this at this moment. So maybe you can just give us some context around that in terms of timing and kind of how you think about pricing in the direct business.

Yes. As we've discussed, we believe that remediating our service challenges from against first stabilizing price -- excuse me, product supply is paramount. If you are in either of the legacy company systems and have not migrated, if there are anniversary increases or other adjustments that are typical for your experience of being a long-tenured customer, those will continue. They have not been in a meaningful contribution to the overall top line at this point. Our win-back efforts are first and foremost of our priority, which again starts with a better and more stable service. And then we really will shift more of that priority into next year where we believe that several experiences of more satisfied customer behavior and stable service is the right environment to sort of do that.

And then when I look at the latest Trustpilot data as of early August, it suggests that the negative reviews have dropped by 75% from their peak. If that is the case, why will it take to the end of September to get to a normal trend rate? Is there some kind of delay in terms of when people start complaining and kind of the service levels?

There is a slight lag in that. But first of all, you're correct to share that observation our Trustpilot ratings are recovering. And as you know that premerger, both companies were very focused on Google rankings, Trustpilots. We're making tremendous progress. We use Net Promoter Score as well. We look at call center data, first call resolution, average wait times. All of those metrics are starting to improve. But again, since we're in peak season, Nik, we're pretty much [ shipping ] every 5-gallon bottle we're producing which continues to put pressure on the days on hand at the branch. And therefore, we need about 8 to 10 more weeks to get through peak season, through the hot season, and then it will stabilize back to where we needed to be on an everyday basis.

Okay. Yes. This is helpful because I think this was a missing link for a lot of folks in trying to understand why it was going to take that much longer, but that would make sense given -- you're basically trying to catch up at this point. So that's super helpful. Look, I know you guys have been shying away from giving specific quarterly guidance. But look, I've been getting a lot of questions just in terms of how we should think about phasing for the direct business between 3Q and 4Q. Any context to just help us frame that would be super helpful.

Sure. So again, we look at the business as a single segment. We go to market via our brands and our retail channel partners, which, in some cases, will have multiple offerings, whether it be premium, regional spring water, purified and then obviously, different formats, large and small. Specific to the direct side, which would have -- is a disclosure item in a channel, you would have seen a decline in the quarter. That decline really would have reflected a portion of the period of sort of these service disruptions. Again, it began in late May and only really began to sort of build momentum in Q2. So when you look at Q3, we look at that as a period of recovery, where we are still likely to face -- because of the issues we just literally discussed with lingering supply constraints and some of that time line to normalize service, we believe Q3 is going to face sort of part of the recovery actions because a lot of the consumer behavior is on a lag based on when they experience a disruption. So while we've seen Trustpilot and other things stabilize that's really their experience with whatever their current order was. Our goal is obviously to fulfill a higher percentage of the daily demand that's occurring. And as we work our service gap higher across the quarter, that will really shift a lot of the recovery and phasing into more of the late parts of sort of Q4. So again, you'll come out of September and ideally be moving into the portions of Q4 with the recovery activities underway. Now one challenge there, obviously, is Q2 and Q3 are where consumers, especially in things that are like exchange where the demand is pretty much, how much -- how many bottles you can keep on the rack because of how strong -- and I think we reported mid-teens growth there in the quarter. So just Q2 and Q3 are very strong quarters for us. And so because we've experienced this disruption that does make part of our recovery plan a little bit deferred to Q4. You're just delivering less consumption or less product volume in that period. So that's kind of the way we look at the phasing. We don't believe that -- counter to that, we don't believe that retail is really in a period where it should be sort of constrained or facing any challenges. Now the Hawkins plant and how it handles Ozarka is really back in sort of full speed in production and delivery.

Got it. And then, Robbert, you were discussing kind of ERP transition in terms of the non-BlueTriton business. Can you just give us some sense of should we anticipate any potential hiccups? Or do you feel really good about this transition going through seamlessly?

The ERP transition which is mostly transitioning factories and branches from Oracle to SAP, which is the legacy BlueTriton system, has not necessarily caused any issues per se, where we have mostly seen hiccups in the IT space is the transition in the handheld. Legacy Primo had one system that ran on iPhones. BlueTriton has a slightly more resilient piece of equipment that we use. There were slightly different delivery interfaces get -- pulling the order out, taking a photo, which is something that Primo use -- not -- didn't use to do, so there are some small adjustments that our drivers have had to make. We've also rolled in a couple of the features that were really beneficial from the Primo Water legacy app into the [ BTB ] legacy app. And with that, we have improved the overall experience for all of our associates in the front line. But as you probably imagine, that did push some additional delay into the system where people are just learning how to use new equipment. That is really normalizing again. We see that because we track delivered units per day, and we're getting very favorable feedback from both frontline associate populations on the revised updated app technology, and we'll continue to update that as we go. So the ERP conversion, which several of the folks asked about on Friday and Thursday, causing a little bit of angst because in other cases, with other transitions we've seen companies struggle with those is not necessarily causing that many problems for us. It's mostly the adoption of the associate interface app technology and the geographic routing technology.

Got it. Okay. One last question on the direct business before I move over to retail. But look, I spent a lot of time on this company, and I was frankly very surprised by this office coffee services headwind that you discussed. So just -- wanted to just get into that and understand are there any other dynamics that we should be attending to that might cause somewhat of a blind side, if you will, on parts of your business. Just anything along those lines just so we're aware of?

Yes, Nik. So we -- when we started bringing the businesses together, we started asking some pretty significant questions about different -- through different phases of diligence, how much does the product portfolio overlap and where are there areas of differences? As you can imagine, as a private company, BlueTriton with their private equity ownership, made a pretty intelligent decision to sort of really simplify the SKU profile of what they bring to their customers. And office coffee services has always remained a headwind for the business. It's just been less material in how that is basically portrayed on a per quarter basis. It had been in serial decline for the last several years, largely because on a post-COVID basis, it was difficult to maintain a growth in that business where either return to office policies had not really brought enough people in for that portion of what they consume, whereas water would have been more of a staple or as people -- they've just been able to find more attractive ways to purchase products like K-Cups and [ rent brewers ] and other equipment. And so as we came into 2025 and really understanding that BlueTriton had largely moved away from this business, we looked at how should we assess ours. We had been in discussions with several kind of route-based market providers that solely do this as a breakroom sort of offering where they have more scale and advantage. The business was in decline year-to-date, and we simply made a decision with what we had to recover and resolve within our consumers and customer base. We really needed to decomplex basically the supply chain. So this is an area where we have things that have expiry like K-cups and other brew [ hot ] coffee. We just thought that it would be an easier way to simplify and frankly, really does not provide any headwind or concern with our existing customers. There are opportunities to get this service from others, whereas there are not as many opportunities to get water service like we provide from others. And so we felt it was a noncore, it was easy thing to sort of decomplex our business as the team really just solely focuses on resuming the water service to the best of our ability.

Got it. And so David, there are no other kind of ancillary businesses that could potentially also be discontinued or sold off?

At this time, no. I mean again, we look at brand rationalization that came up at our Investor Day. We have been transitioning brands in our water portfolio, but those really should not have any impact like what we're experiencing here with office coffee. Obviously, there has been a little bit of a tariff environment where we've assigned some of the future guide challenge to sort of us working with retail partners to rationalize price to keep this affordable for their customers who shop in stores like Walmart. But at this time, no, there are not anything of the magnitude of what this was, which was sort of in the $54-plus million annualized basis that we'll lose about half of that either through route sales or decomplexing and then as we head into next year, it will be fully out of our base, of which we'll provide sort of transparent bridges and tables to help folks look through that.

Awesome. And Robbert, just a quick follow-up. When you said that there was a 1% to 1.5% churn figure. Is that net or gross of customer adds?

That was the net number that we registered throughout those 2 months. And we obviously -- those are not numbers that would have in any way, impressed us through previous years, premerger as independent companies because we tend to see that level of churn on a normalized basis as well. This was maybe slightly elevated, maybe 50 basis points, but we do see turnover in our customer base, particularly, as we talked about in previous years, in the first 6 months, right, after trial period, we usually see slightly elevated. That's why we track both within the first year and post first year. And the good news is that we see our recruitment through digital acquisition improving because both legacy companies now have access to powerful brand portfolio, regional spring brands, whereas previously only BlueTriton had those. So we're seeing the marketing of our services significantly improve through digital acquisition. And so we're pretty confident that we can, through both our win-back campaign and with our digital marketing acquisition and then the in-store programs, we can probably recruit most of those people back this year. If not this year, we'll be getting them back next year. But whilst it's slightly elevated, 1.5% or 50,000 more or less customers and a 3 million customer base was not as high as we could have expected it to be.

And what does win back campaigns look like? Like is this providing free product, promotions, like -- any context around that?

Yes. Yes, exactly. So we would typically receive a cancellation. We would get that over the phone or any other means. There's -- that's usually followed by a pickup of the equipment. Between the cancellation and the pickup, there is a window where we can reach out to the customer and talk a little bit about, "Hey, what went wrong, apologize for the delay in service." Can we give you a free product reimbursement or overall -- let's say, an overall discount level, a dollar amount of discounted products over the next couple of months, and we see very high success rates with those win-back campaigns because ultimately, the customer really wants our water and is open to renew very often as long as we commit to restore service levels.

Got it. Okay. Perfect. Just moving on to the retail business. Obviously, we all know weather was an issue that's been well documented. But do you think there's anything from a macro perspective weighing on the business at all, perhaps movement into private label. That's a question we get a lot on the retail side.

Yes. Let me give a bit of a perspective. The first quarter, we saw accelerated growth rates in dollars. That slowed down considerably in Q2 primarily as a result of colder weather. We do see slightly elevated private label share throughout the first and the second quarter, which would be an indication of consumer confidence. We have grown market share through the first half, as you know, 11 basis points. As you look at the second quarter -- sorry, the third quarter where we're now -- and you look at publicly available data, we continue to grow share. And this morning, obviously, we got the data of last week where we grow -- we saw in Circana that we grew 2.2% dollar share growth or scan sales with dollar share growth of 47 basis points and volume share of 1.3% and 48 basis points and that's a continuation. That's the week through August 3. That's a continuation of the first 4 weeks into July, and I think it's a 6-week of consecutive share growth that we've had so far. So we feel good about our portfolio of brands. Remember, we have not only Pure Life, but we have the leading Spring brands in the U.S., Poland Spring, Ozarka, Zephyrhills, Deer Park, Arrowhead, and we also have our super premium brands that are doing quite well with Saratoga, Mountain Valley. And in that mix, I believe we have a very robust presence on the shelf. And then at the front of the store, we have the 5-gallon offering in exchange. So we really play across all the price tiers. And what that helps us do is in these periods of consumer confidence, uncertainty and maybe a tendency to look a little bit more at what you spend, we have offerings across all price points in all formats from premium glass to case packs and 5 gallons in the store, and that makes our model very unique and competitive right now in this marketplace, and this is why we're growing share.

Excellent. And just looking at the distribution, it's been very strong. And some would say, well, if they're getting so much distribution, how come we're not seeing better retail sales growth especially at a time where I think Aquafina and Dasani are both kind of coughing up even more market share. So Robbert, maybe you can just kind of address that head on in terms of when we can expect to see that distribution really manifest in better top line?

Yes, I think the distribution, we grew total points of distribution, which is a metric you can find in Nielsen or Circana, it's based on scans, right? So where does the product scan through the store? It's inarguable data. We grew 10% distribution. We're starting to see that distribution materialized into higher shares, into the first month of Q3. Remember, our Q2 share was largely impacted by the weather in the Northeast where we have a 40% share. So the Northeast is our stronghold market with Poland Spring and Pure Life, we have about 40% share versus National we have about a 20% share in bottled water in retail. And then Ozarka obviously, one of our fastest-growing brands was severely impacted by the Hawkins tornado which would have then resulted in a lower share growth situation. So now that we're through those things and the weather is normalized, you see the category rebounding on a dollar basis and on a volume basis. And we are obviously growing slightly faster than the category behind that portfolio of very unique and competitive propositions. And that's, I think, going to -- we're going to hopefully see more of the impact of the loss -- of the distribution. Now when you build distribution on new items, those include Splash Sparkling Water with flavor. They include Arrowhead sparkling in California, and they include a lot of the PET offerings at Mountain Valley and Saratoga, not all of those will have the same velocity levels in day 1 as our case pack water. And so we need to build velocity by promoting those brands in this -- on display and various other tactics in store. So it's our job with the retailers to drive velocity on these new items and make sure they prove out in the retail environment. So all those variables have led to where we are right now.

Excellent. Super helpful. And then just another big question that's been coming in is just the delta, the very large delta between what we see in scanner for the premium brands, right, over 150% versus what you reported in the last quarter in the mid-40s. So can you just help square that gap? Like what is going on? I know a lot of that business is untracked, but any perspective would be helpful.

Dave, do you want to take that one?

Yes. Yes. So Nik, part of the issue there is simply the untracked pieces, right? So Mountain Valley would have grown up in the natural channel, where you have to get to different panel data to get to that answer, but largely a part of this is Mountain Valley has a very, very successful direct delivery component to our customers. It is a product beloved because of part of its glass packaging. Obviously, its spring properties where athletes, celebrities, everyday users have found it to be a very resilient and important brand to their lifestyle. As we ran into service disruptions, again, product supply prioritization was done largely in our regional Spring Water and Pure brands, whether it be Pure Life or Primo. And so some of the Mountain Valley's disruption or gap there between scanner data really is when we consolidate that reporting into our channel disclosures for public consumption, some of that is just literally a ceiling on the brand because of some of the activities in direct delivery. But again, it's a combination of that as well as sort of scanner panel data and more sort of off-channel or atypical sort of reported retail channels.

Okay. So this is really a Mountain Valley issue because of the direct. And you can imagine with all of the Saratoga, Ashton Hall dynamics happening throughout the quarter, I think there was a very high level of expectation for that business. And people were seeing it in scanner data, and I think they were a little thrown off guard when they saw the reported number. So that is helpful clarity. All right. Just moving on to the last kind of few questions here, just on the financials. The sequence of your synergy opportunity chart that you had in the deck implies that you'll tackle call center after you did IT and ERP. So given that historically, this has been a source of some customer headaches in the past, do you see any more further integration issues there. Are you baking that in? Or do you feel like that's not going to be much of an issue.

No. I mean part of it is the aggravation, which I'm sure investors are curious about as we remain very confident. When you go through our original synergy map and look at how we were going to collect them over time, as we get longer into this journey, certainly in '26, it will be more difficult each quarter to perfectly parse out which level of contribution and where is it coming from. But within the call center specifically, we were underway in reducing the duplicative resources, the different approaches by each legacy company on how to go to market to support call activity. Clearly, however, though, when you get into late May, June and July, you had a resumption, which obviously Trustpilot remains a very strong external indicator of how people feel, we had to ramp some of that activity back up. As you can look at the complaint data, people were upset with the duration they may have had to wait online or to get resolution. And so as we ramped up what had previously been sort of a declining rate of those associates within our company or the way we go to market and doing that, that's led to some of that aggravation. We do believe, though, as again, service is the first sort of order of magnitude of things we have to focus on and everything else is a derivative of that. If you give good service, your quits go down, your ability to actualize harmonization and price works, your ability to reduce your staff that's needed to sort of handle interactions via chat, web or e-mail or call direct, all those are areas we can start to sort of get back into momentum on capturing synergies.

Got it. And then, David, the EBITDA margin expanded in the second quarter, but gross margins did contract. Can you just walk us through the moving parts there and how we should think about that dynamic as we think about the back half?

Sure. So just as a reminder, it's not leaning in on the question. But just as a reminder, any public data today on a GAAP basis or SEC reported is not comparable because it is legacy BlueTriton only denominator over prior year period and Primo Brands numerator over current year period. So when we do look at margins, there is some decline. Part of that is just simply the nature of the two different companies coming together. Regardless, there is a slight decline. And really where that happens is when there's aggravation in the supply chain where we are inefficient with getting volume to the end customer, that's going to show up in where our cost of goods line occurs. And then obviously, the resulting impact will be to gross margin. So a couple of things on the longer-term perspective, if you zoom-out a large portion of our synergy capture, the branch, the production, the facilities occurs in our cost of goods. So as we're able to affect the synergy capture without a lot of the future aggravation, you'll see that margin improve. And then certainly, there are other areas where you're still able to see EBITDA improve because a lot of the fixed costs and the operating expenses, selling costs, more of the human capital or associate capital that we're removing from a duplicative standpoint occurs later in the P&L. But regardless, when we have volume accretive growth, it really helps the whole P&L perform at a much higher level than obviously we experienced in Q2.

Yes. Yes, it makes sense. And then I guess the -- just kind of two final questions, and I'll kind of turn it over to the team here to see if they have any final comments. But the $1 billion in free cash flow by 2027 despite some of the challenges you've had this year, what's allowing you to maintain that confidence.

Yes. So again, we have not really gotten into outside of some of the inventory and the inefficiencies I addressed with related to office coffee services, we've really not leaned in yet on sort of where we can enhance our accounts receivable and our DSO sort of turns. So as you can imagine, when you're creating friction with the customer, and I was supposed to deliver to you on Monday, and I don't get to you until Wednesday or Friday or the next Monday, I'm delaying my cycle. And then when I create a friction experience after I've delivered to you, I might have to have credits or something to sort of retain your customer. That's not really allowing us to be on our front foot with regard to our AR management. Similarly, we are just going through a lot of the procurement saves, which is great from a cash basis or sort of the OpEx or COGS we have in our company. But we really haven't really unified sort of our approach on AP. So when you just think about how much working capital affects our business, we're really very early in those innings on how to sort of improve that. And certainly, it's going to be an area we have to improve once we have stable service so we really get a good baseline. So that remains an area where we can still drive behavior, that regardless of the conversion to a lower EBITDA, we should still have opportunities. A second area, again, part of this is hindsight, right? A lot has changed in the macro environment. But obviously, there's been some very important legislation with regard to depreciation policies of in capital or capitalized or in service equipment. And so we feel very fortunate about some of the other macro factors with regard to tax policy and others that we'll be able to take advantage of. And I think we also might be coming in clearly to an environment where, as predicted, some slightly lower interest rates, where we still do have a term loan B where we have opportunities. We did reprice that earlier this year in February, but we have opportunities on how we might handle that debt. So we're really looking at how interest expense might be a contributing factor to sort of remain resilient and committed to that $1 billion target.

Okay. Super helpful bridge. And then the final question for me is as you can imagine in 2 quarters of results that were lower than what people expected, there are questions that come up about the credibility of the guide. And so a lot of folks have been asking how many -- how much in terms of contingency or cushion do you think they've embedded? So hard for me to answer, so I figured you'd be in a better place to give some perspective on that.

Sure. Yes, I mean, again, we approach guidance as a range. We've really approached this year on a fiscal basis trying to have a range that allows us to achieve our results. Clearly, we are not pleased with having to revise that guidance today. We've tried to at least provide some transparency on what we believe are sort of onetime issues in sort of the 100 basis points of the 350. Other areas being the 110 basis points related to retail, which was largely sort of first half concentrated due to Hawkins and weather items. So it's where we're seeing the business and calling the ball today. Obviously, we're working vigilantly to recover and do a better job. I mean frankly, the demand is there. We have to do a better job of servicing it. And that provides us gateways to do other things that were thought of strategically in the merger from the start, like pricing harmonization and the ability to sort of really capture top of funnel customers more efficiently. So we remain very focused there and the faster we can recover the business, obviously, that has a direct correlation to our ability to perform within that guide or ideally, we would be in a position to do better.

Yes. Excellent. David, Robbert, let me hand it back over to you if you have any kind of final comments before we end today's fireside chat.

Yes, sure. Thanks, Nik. Well, what I'd say is we are taking decisive actions to restore the issues that we had in the second quarter, which were partially self-inflicted operational issues and some due to the nature with the tornado and the -- then there was the discontinuation of the coffee business. We will continue to implement corrections to restore performance. But the value creation thesis of the company remains unchanged. The Primo Brands is a leader in a large and rapidly growing healthy hydration segment. We deliver essential beverages to millions across North America with unmatched scale and reach. Our resilient operating model provides stability and performance consistency, even amid economic fluctuations and operational hurdles because of the continued strong demand in the water category. We have -- we are in the early stages of substantial margin capture, which you know of, and we have a path to get to 25% adjusted EBITDA margins by '27 through synergies and efficiency gains and pricing optimizations. We have strong organic growth factors. We have innovation. We have market expansion, and we believe that we are positioned for long-term growth post 2025. We have a number of value creation levers. We've multiple pathways to drive shareholder value. We have robust organic growth runway. We've accretive M&A as an example and sustainable free cash flow generation, targeting high levels of conversion of adjusted EBITDA. We have flexible capital allocation for dividends or share repurchases as we're doing this quarter and strategic investments. So the net of it is, if -- I think of the power of Primo brands as a bigger and stronger and faster entity post the merger of Primo Water and BlueTriton. We're the leader in healthy hydration with unmatched scale. We have a coast-to-coast network of manufacturing and branches, which are vertically integrated. And let's also remember our brand portfolio. We have the strongest and most diversified water brand portfolio. We have product formats across value, core, premium in Poland Spring, Deer Park, Ozarka, Saratoga, Mountain Valley and Primo Water, which is a big brand on its own, driving innovation in a sustainable healthy hydration segment. So all-in-all, we have a very promising future. And I want to thank you, Nik, for giving us a quick opportunity this morning to talk to our investors.

Yes, you bet. Thank you again to the team here for taking the time and for everyone tuning in. If you have any follow-ups for me, you know where to find me. And everyone, have a great week, and thank you again.

All right. Thank you.