Primo Brands Corporation (PRMB) Earnings Call Transcript & Summary

We're going to get started. It's great to have Primo Brands with us, CEO, Eric Foss; and CFO, David Hass, with me this afternoon. Eric, a special welcome to you at your first time back at the conference in this capacity. The story has evolved considerably since this time last year, and there's a lot to cover. I do have a legal disclaimer I have to read. So bear with us or check your phones. But before we begin, I'd like to note that during today's presentation, Primo Brands may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements are based on the company's current expectations and are subject to risks, uncertainties and assumptions that could cause actual results to differ materially. The company undertakes no obligation to update these statements. For a discussion of the risks and uncertainties that could affect the company's future results, please refer to the company's most recent annual report on Form 10-K and subsequent filings with the SEC, which are available on the company's Investor Relations website. So I'm proud of Eric, okay. So when you think back about the company today versus when you stepped into the CEO role back in November, what has surprised you most about the business opportunity? And where are we today in the stabilized, optimized growth framework that you laid out earlier this year?

Yes. Well, first of all, thanks for having us. We're very excited to be here. I think one of the things that's really encouraging is just the business model and the business opportunity. So we're really pleased with the progress. I know we'll get a chance to talk about that. When I entered the door, there was some disruption on the direct delivery business. But if you really take a step back and look at where can this business go and you think about it through the lens of a very healthy, attractive, large, growing, profitable category. If you take a look at it on our position within that category as the clear leader in water and healthy hydration, a major player across liquid refreshment beverages, which also has continued to grow year-to-date, and then you take a look at the brand portfolio of leading brands and this flexible patchwork quilt of route-to-market options, there's just a whole lot to like. And so coming into the CEO role, it was really important for us to make the priorities line up in terms of importance. Number one, get the customer experience fixed on the customer direct business. We've done that. Second, make sure the business gets back to growth. We've done that. We've had 2 quarters of beats and raise on the top line. And so as we think about this business going forward, it's a business that still has tremendous growth potential, multiple growth vectors, whether you think about that through the direct delivery lens or the retail lens. And again, for us, it was really important to stabilize. We're now beginning to move into the optimize. And ultimately, we'll get into unlocking the long-term growth algorithm and financial flywheel. So exciting time.

Okay. Great. I'd say the market seems increasingly comfortable that the integration disruption is moving into the rearview mirror. But what, if anything, still needs to happen before you'd say you've really -- like, the company is fully transitioned from recovery mode into playing offense?

Yes. I think, again, what we have done and what's behind us, I believe, is we've stabilized the supply chain, getting a better sales forecast, getting product produced to schedule, getting warehouse out-of-stocks eliminated. That's enabled us to go on the service front, provide great customer service at the moment of truth, right product, right place, right time, account services scheduled, an important metric on time and in full, that's now back up north of 90% and has been so consistently. And I think as we think about this, what you've seen happen now to the business is you're seeing less calls, you're seeing a much quicker ability for us to respond and recover if there is a customer opportunity. And importantly, the overall growth trajectory of that business returned to growth in second quarter, which we found encouraging and we would expect that trajectory to continue.

Okay. You've spoken a lot about culture and also when I spent some time with you earlier this year. So, culture, frontline empowerment and operational excellence. Can you remind us what specific changes you've made in these areas that ultimately should yield better revenue growth, the customer retention and profitability?

Sure. I think culture is really important to a winning team. As we thought about culture, one of the first things we did was we went back and revisited what is our mission each and every day, which is all around hydrating a healthier America. Importantly, we had to make some changes to a couple of our values. We moved up the importance of this customer-first mindset. We also moved up an important value around frontline first and making sure as leaders, we're all obsessed with giving them the training tools, technology, anybody on the front line that's make, moving, selling or delivering our product. And then from there, I think it was really trying to implement both a performance culture and a recognition culture. We've tried to invest in capability. We want to make sure that all leaders, whether they're in a specific function or line of business, are thinking more like a general manager and thinking through an enterprise mindset and lens to how their role in helping optimize the enterprise and help it reach its full potential. So, we've done a lot of that. We recently made some changes on the leadership front, particularly in our customer direct business, brought in somebody with real deep experience in selling excellence, route-to-market excellence, which will help us on that journey, whether it's service selling or operational excellence. So good progress, more work to do.

Okay. Great. And the direct delivery discussion has evolved from one focused on restoring service levels to building a better business, and you just mentioned it's higher. So 2 or 3 years from now, I guess, what should direct delivery and specifically the HOD component which I guess you're calling customer direct now. So -- but bear with me. What should that look like if the strategy is fully successful?

I think there's 3 milestones. One, it's a business that should provide an absolute great customer experience consistently each and every day at the moment of truth. I think second, it should be able to unlock a growth flywheel that is delivering consistent, sustainable, balanced top line growth. And I think the vehicle to do that is multidimensional. So if you think about the way this model should work is we've got to make sure we're keeping a good handle and focus on retaining our valued customers. We need to add that through new quality customers that are quality, durable and payable customers for us. We need to make sure we have a more comprehensive effort. Once we have a customer that in most instances in HOD is a 5-gallon customer, we can attach our premium water or our regional spring waters to that. And then obviously, we have the pricing lever. And then we have had a proven tuck-in acquisition model that has been accretive. So that's the growth flywheel. That's number two. And then third is operational excellence. And we have to find a way to make sure in a route and direct door delivered business model that we have the right metrics around getting that product there in an effective and efficient way. So those 3 things to me are really milestones that should be achievable in this business.

Okay. One of the more interesting dynamics, I think, in this HOD business this year has been a shift away from prior generation, let's call it, kind of maximizing sign-ups and growing the business that way through aggressive promotions and toward a focus on acquiring, kind of, higher quality consumers and households. So are there any more concrete thoughts you can offer us on like what you think or hope this will mean for retention and long-term value of the customer?

Yes. I think what's very important here is this ecosystem around the 5-gallon really begins with, do you want to rent or purchase your dispenser outright? And then mixed with the 2 main acquisition channels we have, which are digital and club-oriented booth programs that we run at both Sam's and Costco. So if you want to own or purchase outright the dispenser, we are the leading supplier through typical channels like mass, home improvement. And again, it's really leaning into a razor and blade model. That also supports the Exchange and Refill business, which I think we'll talk about in a minute. But really, it steps back and says, what are the right prices to help train the customer on what this basket is and costs on a monthly basis. And as separate competing companies, one might have chosen months where you would run incentive offers, run subsidized or cheaper per bottle or per rent-oriented products through the web sign-up. And we found that all you're really doing is discounting those that are already looking. And you're not necessarily increasing the retention. You're not necessarily stimulating the top of funnel to offset what you may be subsidizing in terms of those discounts. And so as we step back, and obviously, we went through the integration challenge, we had a goal of trying to close the gap between the customers that were more tenured and may have been disappointed in service and departed and who we are signing up today. And we found that with these sort of more rationalized prices that are back at more of an expected recurring fee or recurring charge you'd have monthly that we really didn't see a slowdown in top of funnel. And so that really, I think, gives us permission to sort of lean in there, make sure we're signing up customers, I think Eric often refers to the willingness to, the ability to and really to stick with us is how can you really afford this service, and that's turned out quite great for us because on the back side of that, the opposite of that is the inability to pay, and we really don't want to kind of deal with that. It goes through working capital inefficiencies and some other things. So again, I think we remain very encouraged where that quality of customer aligned.

Okay. Great. And to what degree, as you mentioned you're not competing with 2 companies anymore. But to what degree is there still a price harmonization story to play out between legacy Primo and BlueTriton, which I think had been an original talking point of the merger?

Yes. I mean, again, if you are an existing user for either which platform you came from, again, we'll go through typical anniversary pricing activities. I think we're very conscious of this operating environment and making sure as we read all of the pricing dynamics and inflationary pressures the consumer faces that we're very conscious of that. So what we've really stuck with to date is typical anniversary pricing that sort of comes up, goes through some nominal sort of low single-digit kind of increases on an annualized basis. The only thing that we really do at this point nationally is our delivery fee, which is imposed on sort of most of our customers uniformly in the country. So I do think, again, if there were some -- if there was a little bit of a relaxation in some of the cost pressures, we might start to look a little bit more surgically there. But again, I think in the prior question of starting the customer at the right price, it's important going through the anniversary pricing that we are continuing to do. Those are the ways I think we'll access that at this point in the journey.

Okay. You've discussed investments in several digital tools like call center of the future, the new warehouse management system. Which of those initiatives do you think have the greatest potential to become growth drivers as opposed to simply yielding operational improvements?

Yes. I think the answer is both. I think we have an opportunity to create kind of the call center of the future. It's really important as you think about the customer journey from engagement and sign up to the right service model to transparent billing to drive that retention flywheel that I was talking about earlier. So there's going to be, I think, a continued investment in technology. Certainly, AI use and application is an opportunity for us on the call center front. So I think that will enable us to really provide and optimize that service model that we're looking for, which will help drive retention and ultimately help drive revenue. On the warehouse management side, it's the same thing. We have never had a warehouse management system on the direct delivery business. We do on the retail business. And so as we look at this pilot and we ultimately are able to scale it, it's going to fix what was one of the big causes a year ago of the disruption around making sure we get the right sales forecast, product produced schedule, eliminating warehouse out of stocks and then ultimately, enabling the selling and service organization to optimize that. So I think they both have the ability to be accretive to that, both on the growth side and quite honestly, on the margin side as well just by creating a more effective system on both fronts.

Okay. So exchange and refill continue to perform well, but often get less investor attention than HOD. So how should we think of the role of these businesses within the medium-term growth algorithm? And how -- roughly how large are these businesses exchange and refill?

Yes. Combined, they are a little over $600 million within the enterprise. Historically, that would have represented a larger percentage of the legacy Primo Co, which was the larger of the 2 contributing businesses that sort of brought those business models into Primo brands today. So that would have helped that historical company grow a little bit faster as they represented a little bit more than 25% of that historical business. What's really important, though, is back into that ecosystem is that if you want a recurring 5-gallon structure, whether at the residential point of consumption or commercial, it comes down to are we stimulating the right sell-through of dispensers. Obviously, that's the only piece of our business really exposed to tariffs. We've leaned in, driven promotion, worked with the retailer to try to stimulate those sales. That creates a household. Then the household now steps back and says, "Am I going to want and can I afford it delivered? Do I want to do the work myself where I hit that middle price point of exchange? Or do I want to do a little bit more work and staying at the refill machine and fill it myself." And so I think what we're really encouraged by and very fortunate to be is the leader in the sale of the dispenser, the delivery of home and office-based water, the leader in exchange, where you do the work yourself and the leader in refill. And ultimately, it comes down to a convenience and affordability spectrum for the consumer. So again, they tend to grow faster than where the enterprise is. And I think that's something we see on the horizon continuing based on our leadership.

Okay. Great. So let's shift to the retail business. You've spoken about underindexing in immediate consumption and cooler space relative to your market share. How large is that opportunity? What needs to happen to Primo to cover or to close that gap? And then also maybe if we could talk a little bit about premium versus regional spring because I think in general, we talk about it as more regional spring but as we're sitting here, I'm thinking a lot about immediate consumption of Saratoga as well?

Sure. Maybe I'll start by trying to just frame how we view the multiple growth vectors we have available to us in retail, and you've touched on 2 of them. First is we have an opportunity, I think, broadly to just create a lot more in-store presence and points of interruption across our broad portfolio from purified to regional spring water to premium. And so that's everything from gondola space, display inventory, rack penetration, et cetera. A second growth opportunity is immediate consumption. I'll come back to that in a minute. 1/3 would be premium. I'll also come back to that. And then I think beyond that, we still have opportunity to get much better at RGM and pricing. So multiple growth opportunities on this business that has actually performed very well. The growth has been balanced and broad-based as we looked at our business coming out of the most recent quarter, we had growth across the entire brand portfolio in almost every single channel across our retail business. So a lot to like about where we are. Specific to premium and immediate consumption, premium is still very much in the early innings. The reality is that we still have pretty significant white space distribution opportunities. Once we get those distribution voids closed, pretty significant opportunities to create different display inventory issue opportunities. And then we also have a chance, really, if you think about it, it's probably more developed in the on-premise business and in the mass channel. And so the opportunities still remain in grocery. They certainly remain across small format from convenience to drug and up and down the street. So again, a really significant opportunity to continue this double-digit kind of strong double-digit growth momentum we've got on premium. Immediate consumption is maybe the most attractive opportunity in the segment right now. The reason why is it's the biggest piece of the profit pool and as you mentioned, we're under-indexed. So our immediate consumption as a percentage of our mix is still single digit, which is really, really low. If you look at our overall market share, our immediate consumption share is less than half of our overall market share. And so the way we're going to go about this is water itself as a category is under-indexed. And so as you think about immediate consumption, think single-serve 20-ounce, 1 liter, 1.5 liter, one opportunity is to get much better at penetrating the retailers' cold equipment, whether that's an open door cooler in grocery or a cold vault in convenience. A second is to place coolers, our own branded coolers in a retailer where we would use our branded coolers, our capital. But the beauty of this is you can actually unlock the immediate consumption opportunity in this category without selling product cold. I'm a big cold water consumer, but I have a lot of friends and family that prefer drinking water ambient. So it doesn't necessarily take a cooler to activate and unlock this opportunity. You can do that through displays, through racks through side stacks. And so you're going to begin as we head into the 2027 selling season, see us go through the customer account planning cycle and talk a lot more about this opportunity in immediate.