Primo Water's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Start Time: 16:30

End Time: 17:11

Primo Water Corporation (PRMW)

Q2 2012 Earnings Call

August 7, 2012 04:30 p.m. ET

Executives

Katie Turner – IR

Billy Prim – President & CEO

Mark Castaneda – CFO

Analysts

Jim Duffy – Stifel Nicolaus

Andrew Wolf – BB&T Capital Markets

Mitchell Pinheiro – Janney Capital Markets

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Primo Water Corporation Second Quarter 2012 Conference Call. At this time, all participants are in a listen-only mode. Later we will hold a question-and-answer session and instructions will follow at that time. (Operator Instructions) And as a reminder, this call is being recorded.

I’d now like to turn the conference over to Katie Turner. Please go ahead.

Katie Turner

Good afternoon and welcome to Primo Water’s second quarter fiscal 2012 earnings conference call. On the call with me today are Billy Prim, President and Chief Executive Officer; and Mark Castaneda, Chief Financial Officer. By now, everyone should have access to the release which went out this afternoon at approximately 4:05 Eastern Time. If you’ve not received today’s press release, it’s available on the Investor Relations portion of Primo Water’s website at www.primowater.com. This call is being webcast and a replay will be available on the company’s website.

Before we begin, we’d like to remind everyone that the prepared remarks contain forward-looking statements 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 actual results to differ materially from those 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 forward-looking statements incorporated 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 President and CEO, Billy Prim.

Billy Prim

Thank you, Katie. Good afternoon, everyone, and thank you for joining us. I will provide some opening remarks. Then, Mark will review our financial results for the second quarter and our outlook for the remainder of 2012. And then, I will provide some closing remarks and open up the call for questions. We’re pleased to report that the second quarter net sales results were in line with our expectations. These results reflect strong dispenser and water sales as we continued to add households that have our Primo Water Dispensers and use our water.

Before I provide you with an update on our business strategy, I would like to provide you with a brief review on our business segments. First, our water business, our water business continues to grow and generate high profitability. The water segment sales increase is primarily due to an acceleration of U.S. exchange same-store sales unit growth of 14.7% for the second quarter. We plan to continue to add more water locations with most of them in locations where we will sell dispensers.

Our dispenser business continues to grow and gain more retail store locations. Consumers purchased a record 96,500 dispensers in the second quarter. As a result, our dispenser sales increased 58% to $9.3 million. We continue to believe the increased water dispenser penetration will lead to reoccurring water sales.

In the Flavorstation business, we continue to believe in the sparkling beverage category. We have great products and only CO2 direct store delivery capability. We have had some success expanding in this category with Lowe’s Home Improvement and certain grocery and hardware chains that currently sell our water. But we recognize there may be better ways to utilize our assets in this category long term.

As for gross margins, the water continues to have healthy gross margin in excess of 30%. We did have some extra costs this quarter related to consolidation of our refill service network, which slightly reduced our water margins compared to prior year. The water segment’s operating income for the second quarter of this year increased 4.2% to $3.8 million compared to prior year. The appliance segments of Flavorstation and dispensers have generated increased sales; however, they reported operating losses in the second quarter.

As a result of this operating performance, our future business strategy will focus more on the growth of our core water and dispenser business going forward. Our water business has generated more than $14 million in operating income over the last 12 months and continues to grow. For our Flavorstation appliance business, we plan to explore shareholder-enhancing strategic alternatives included – including, but not limited to, a brand licensing partnership for our Flavorstation appliance business or the sale of certain Flavorstation appliance business assets and technologies. We expect to complete this sometime in the second half of this year.

The past year has been difficult for investors, and much of the problem involves the timing of sales, expenses and profitability of the Flavorstation appliance business. During that time, our water business has grown and generated strong operating margins. For that reason, we are renewing our focus on the water and dispenser businesses, both of which are working well and growing. We are in a very strong position with our water business to leverage our existing regional operator network to service customers.

We’ve also started to test servicing our refill network with company-owned employees. While we are still in the early testing phase, we believe that from early results, it will lead to improve sales and profitability in the markets we serve long term.

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