Primo Brands - Q1 2022
May 12, 2022
Transcript
Speaker 0
Good morning. My name is Pam, and I will be your conference operator today. At this time, I would like to welcome everyone to the Primo Water Corporation's First Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Thank you. I'd now like to turn the conference call over to Mr. John Caudill, Vice President of Investor Relations. Please go ahead.
Speaker 1
Welcome to Primo Water Corporation's 1st Quarter 2022 Earnings Conference Call. All participants are currently in listen only mode. This call will end no later than 11 am Eastern Time. The call is being webcast live on Primo's website at www.primowatercorp.com and will be available for playback there for 2 weeks. This conference call contains forward looking statements, including statements concerning the company's future financial and operational performance.
These statements should be considered in connection with cautionary statements and disclaimers contained in the Safe Harbor statements in this morning's earnings press release and the company's annual report on Form 10 ks and quarterly reports on Form 10 Q and other filings with securities regulators. The company's actual performance could differ materially from these statements, and the company undertakes no duty to update these forward looking statements, except as expressly required by applicable law. A reconciliation of any non GAAP financial measures discussed during the call with the most comparable measures in accordance with GAAP when the data is capable of being estimated is included in the company's Q1 earnings announcement released earlier this morning or on the Investor Relations section of the company's website at www.primowatercorp .com. I am accompanied by Tom Harrington, Primo's Chief Executive Officer and Jay Wells, Primo's Chief Financial Officer. As part of this conference call, we have included a deck online at www.primowatercorp.com that was designed to assist you throughout our discussion.
Tom will start today's call by providing a high level review of the Q1 and our progress on Primo's strategic initiatives. Then Jay will review our segment level performance and will discuss our Q1 performance in greater detail and offer our outlook for the Q2 and full year 2022 before handing the call back to Tom to provide a long term view ahead of Q and A. With that, I will now turn the call over to Tom.
Speaker 2
Thank you, John, and good morning, everyone. I am quite pleased with the start to 2022 and our Q1 results. As the impact of the pandemic begins to wane and we adapt to the current inflationary environment. We remain confident in our ability to deliver on both our short term and long term outlook. I'm especially proud of the efforts of the team and pleased with everyone's continued commitment to safety, customer satisfaction and growth as our teams have once again responded to the challenges presented by the unprecedented cost inflation and the war in Ukraine.
In the Q1, we achieved double digit revenue growth driven by strong customer demand, particularly in our water direct and exchange businesses and continue to deliver robust growth on Mountain Valley, America's premium spring and sparkling water brand. Our global water direct and exchange customer base increased 4.5 percent to 2,300,000 for the quarter. This was an increase of 100,000 customers versus Q1 of 2021 through organic customer additions, customer base acquisition through our tuck in strategy and improved customer retention rates, which increased to 86.5%. As I mentioned last quarter, the 3.5 gallon bottled water category growth opportunity is estimated to be as large as an incremental 29,000,000 U. S.
Households and continues to increase based on tailwinds, including growing consumer demand for environmentally responsible products, The shift away from sugary sweetened beverages and well documented concerns with tap water quality. The residential opportunity for increased sales of 3 5 gallon return of bottled water remains a top priority as the category has significant growth potential from our perspective. We remain focused on increasing household penetration through our execution of our razor razorblade model. While the water dispenser segment declined during Q1 Because of higher retail price points and less promotional activity, driven by tariffs and the elevated cost of ocean freight, sell through volume of more than 190,000 dispensers to consumers resulted in a 2.4% sequential increase in the Q1 versus Q4 of 2021. As ocean freight costs moderate, We expect to see a return to growth in our Dispenser business through increased promotional activity and the benefit of new customer distribution wins and the increased penetration from our existing customer base.
As an example, we recently gained new dispenser business at Costco with shipments beginning in Q2. We continue to experience elevated costs driven by inflation across several operating expense categories, including labor, fuel and freight. To address the higher cost of approximately 10% during the quarter, We implemented 2 pricing actions, the first in January and the second in March, each in response to higher than forecast inflationary costs at that point in time. Currently, we believe that the pricing actions we have executed will cover the higher costs. The full benefits of these pricing actions are expected to be realized in Q2.
Despite the cost headwinds, We continue to invest in the customer experience, evidenced by organic customer growth and improved customer retention rates, Improved pricing, continued demand for our products and the improvement in customer retention gives us confidence and our 2022 guidance and our long term 2024 outlook of high single digit organic revenue growth and adjusted EBITDA approaching $525,000,000 In Q1, Consolidated revenue increased 10% to $526,000,000 and adjusted EBITDA increased 15% to $88,000,000 again driven by higher demand for our products and improved pricing and volume led by our water direct and exchange businesses. Consolidated revenue, excluding the retail single use plastics business in North America, grew 13% to $500,000,000 And on an FX neutral basis, overall revenue was up 14%. Consolidated organic revenue was up by double digits as we experienced a gain of 12% for the quarter. As referenced earlier, the water dispensers segment declined because of higher retail price points and less promotional activity, driven by tariffs and the spike in ocean freight costs experienced during the quarter. As ocean freight container rates moderate, We expect to return to growth in our dispenser business.
As I mentioned in the past, water dispenser sales provide a key point for consumers to enter the bottled water category, where we can capitalize on our recurring razor razorblade revenue model. The recurring purchase behavior generates organic water sales as part of our water go to market strategies. As a reminder, our internal research indicates that approximately 60% of respondents surveyed are new to the water category, 45% prefer water direct, 30% prefer water exchange and 25% prefer water refill. We should continue to gain our fair share of this growth as our razor razorblade model remains one of our strategic advantages. You will likely remember that our B2B channel experienced some softness in December January, resulting from reduced foot traffic.
A clear demonstration of what some call the January swoon is illustrated in the chart of mobility data included in our supplemental presentation on Page 8 titled Visits to Retail and Recreational Locations. It shows a decline in foot traffic of roughly 20% in the December January timeframe. As we suspected, The timing corresponds with increased rates of the Omicron variant here in the U. S. Fortunately, we have seen these visits to retail start to rebound as the effects of the Omicron variant have eased and we continue to work diligently to meet the current levels of demand.
We've added an analysis of our North American B2B customer base on Page 9 of the supplemental presentation deck that provides a view of the diverse mix of our B2B customer base. Importantly, it shows that we have no appreciable customer concentration in our water direct business. A recap of our growth drivers on Slide 10 demonstrates growth in several key areas. Customer count increases on water direct and exchange, consistent gains in the average selling price of our 3 5 gallon bottles, our premium Mountain Valley revenue and e commerce revenue. We continue to invest in route operations to improve our service metrics, enhancing the customer experience.
We are near our targeted staffing levels and are currently staffed more than 98% in route delivery in the U. S. We believe the long term benefits of improving the customer experience and increasing customer retention outweigh any short term investments. As it relates to our efforts in ESG, We remain focused on elevating our position on environmental responsibility and finding new ways to honor our commitment to protect the environment, by quality drinking water and managed sustainability. Later this quarter, we plan to publish our 1st environmental, social and governance report.
The report represents the next step on our ESG journey. We've been working on formalizing our priorities and governance structure, establishing initial targets and enhancing the collection of our data from across our company. As part of our ESG strategy, Last November, we announced the planned exit of the single use bottled water retail business in North America. We remain on pace to completely exit this category by the end of the second quarter eliminating approximately 400,000,000 bottles from the ecosystem. This is a major step in enhancing our ability to focus on our more environmentally friendly returnable bottled water business.
Our 3 5 gallon returnable bottles provide an attractive alternative to combat the challenge of plastic waste based on their reusability and recyclability. Over the last few months, we've been asked about our business exposure to the war in Ukraine, as well as our business in Russia. In 2021, our business in Russia recorded approximately $14,000,000 of revenue and approximately $3,000,000 of adjusted EBITDA. We have decided to exit Russia and expect to complete this exit over the course of the next 60 to 90 days. As we work to exit our business in Russia, we will continue to supply water to the humanitarian and NGO efforts in Eastern Poland as they manage the influx that Ukrainian citizens displaced from their homeland.
I would like to extend my appreciation To those associates of ours in Poland and in other European countries, as several of our associates are hosting refugees from Ukraine in their own homes, and we're profoundly proud of the help they are providing in these very difficult times. Our thoughts are with the people of Ukraine and we hope for a speedy end to the conflict. I'd like to now turn the call over to Jay to review our Q1 results in greater detail.
Speaker 3
Thank you, Tom, and good morning, everyone. Starting with our Q1 consolidated results. Consolidated revenue increased 10% to $526,000,000 compared to $478,000,000 Excluding the impact of foreign exchange and the exit of our North American single use plastic bottled water retail business, Revenue increased by 14%. These gains were largely driven by growth in our water direct and exchange businesses as we saw a rebound from the effects of reduced foot traffic and the Omicron variant, which caused B2B volumes to suffer in December early January. Rebound has continued into our 2nd quarter.
Total organic revenue growth was 12% for the quarter. Adjusted EBITDA grew 15 percent to $88,000,000 As Tom discussed, the effects of pricing actions, volume growth and strong demand drove profitability. During the quarter, we made substantial progress in achieving full staffing levels and now have more than 98% of our route delivery position stills. We are confident that the incremental investments we are making in our people will enable us to deliver on our target of 9% to 10% revenue growth for the year. The increased staffing costs were accompanied by continued inflationary cost and other areas of our business.
The major buckets of higher costs include the materials associated with our soon to be exited North America single use bottled water business, ocean freight, transportation and labor. The additional pricing actions taken in the Q1 have offset these increased costs and we have captured enough price to offset cost increases that we have seen to date. Turning to our segment level performance for the quarter. North America revenue increased 9% to $397,000,000 compared to $366,000,000 Excluding the impact of foreign exchange and the exit of the single use plastic bottled water retail business, revenue increased by 13%, driven by growth in our water direct and exchange businesses. Organic revenue growth was 11%, driven by a 3% increase from volume and 11% increase from price mix within our water direct and exchange businesses.
Adjusted EBITDA in North America increased 15% to $79,000,000 Turning to our Rest of the World segment, revenue increased by 14% to 100 $29,000,000 Excluding the impact of foreign exchange, revenue increased by 18%. All channels in the Rest of World segment showed increases, demonstrating the benefit of our multi country, multi channel model. The increase was driven by growth in both residential and B2B customers. We are pleased with the performance of our rest of world business, which is beginning to recover from the pandemic and commercial businesses are beginning to return to work. Adjusted EBITDA in the Rest of World segment increased 8% $16,000,000 as the benefit of higher revenues from Europeans returning to work was partially offset by investments in sales and marketing for residential customers in Europe to further diversify our customer base and better balance the customer mix.
Turning to our Q2 and full year outlook. Revenue was strong in Q1 and is off to a good start in Q2 with strong customer demand and price increases to offset increased costs. With respect to adjusted EBITDA, Inflation has resulted in cost increases in labor, fuel, freight and materials. We are confident We can take price to offset these cost increases, but it may result in short term windows of cost headwinds. In addition, we are focusing on long term growth and laying the foundation for future growth.
This requires us to invest in that foundation this year. Finally, the exit of the business in Russia creates a one time headwind as we lap $14,000,000 of revenue and $3,000,000 of adjusted EBITDA from this business. With that said, and based on the information we have available to us as of today, We expect consolidated revenue from continuing operations to be between $540,000,000 $560,000,000 and our 2nd quarter adjusted EBITDA will be in the range of $100,000,000 to $110,000,000 For the full year 2022, organic revenue growth is projected to be 7% to 8% and overall revenue growth is expected to be 9% to 10 Adjusted for the exit of the North American single use retail water business, we expect 2022 adjusted EBITDA to between $410,000,000 $420,000,000 As Tom mentioned, the exit of the North American single use retail water business continues to move quickly. In 2021, these products accounted for revenue of approximately $142,000,000 We now expect the 2022 revenue of this product line to be about $40,000,000 with minimal effect on adjusted EBITDA. We still expect to exit this category by the end of the Q2.
For the year, we also expect around $10,000,000 of cash taxes, $50,000,000 of interest expense as well as capital expenditures of approximately $200,000,000 The capital expenditure figures include incremental spending, as we discussed during our Investor Day last November, which is being used to support our growth outlook and EBITDA margin expansion. Key initiatives being funded are a multiyear incremental CapEx include driving digital growth and leading dispenser innovations such as the rollout of an update to our mobile app, My Water Plus and plans to execute a global e commerce webshop, both of which will grow our customer base. Leading the to support sustainable fleet management. Investment in new spring sources, including Mountain Valley, to support increased customer demand and future growth. Installation of water production equipment that supports our ESG strategy, reduces water usage and increases efficiencies in in places like Los Angeles and Calgary, investment in leading software solutions to support supply chain and logistics operational excellence.
These initiatives and investments will support our 2024 outlook, which includes revenue and adjusted EBITDA growth as well as EBITDA margin expansion. As we announced yesterday, our Board of Directors authorized a quarterly dividend of $0.07 per common share. As discussed during our November Investor Day, our growth outlook and increased free cash flow generation can fund our growth as well as an increase in our annual dividends. Our path to a multiyear dividend step up includes an increase in our quarterly dividend per share by $0.01 in 2022, another in 2023 and another in 2024. The increase in the dividend will return over $6,000,000 incremental dollars to shareholders in 2022.
Other aspects of capital deployment include continuing our tuck in M and A. For 2022, we continue to target $40,000,000 to $60,000,000 of tuck ins and remain focused on Our long term organic growth outlook has not changed. We remain confident in our outlook for 2024. We are forecasting high single digit percentage organic revenue growth, targeted annualized adjusted EBITDA approaching $525,000,000 adjusted EBITDA margins of 21% to 22%, adjusted EPS of $1.10 to $1.20 per share, net leverage of less than 2.5 times and ROIC greater than 12%. I will now turn the call back to Tom.
Thanks,
Speaker 2
Jay. Looking ahead, we remain focused on executing on differentiated water your way platform. We will leverage our pure play water model to drive revenue growth of 9% to 10% in 2022, adjusting for the exit of the North American single use plastic retail water business and including the revenue from the tuck in acquisitions made during 2021. Organic revenue growth is expected to be in the range of 7% to 8%. We continue to prioritize the customer experience on all things digital, and we remain focused in understanding the new customer journey by leveraging data to segment our audiences to provide the right content and products to them.
Our current and future customers will be empowered to fully embrace our water your way strategy in the new format with the ability to manage their accounts on the go, Easily obtaining Primo products whenever, wherever and however they want them. We're also on pace to launch our new direct to e commerce destination later this year with new features that enhance the purchasing experience and will accelerate our dispenser sales. Our initiative sets the tone for our commitment to digital acceleration to provide the best solutions to our customers. We will continue to execute our razor razorblade model with growth in the number of dispensers sold, driving top line growth through sale of water products. Interest levels for the launch of our new alkaline water brand, Primo Plus, has been very encouraging.
Primo Plus Alkaline Water complements our existing portfolio and is a growing trend globally. Primo Plus Alkaline Water has a pH level of 9.5 at the time of bottling, is sold in 3 gallon bottles, is currently available for water direct customers in certain U. S. Geographies. We have a pipeline that could lead to incremental distribution of more than 1,000 Primo Plus Exchange Rack places.
Our efforts are paying off in other areas such as refill. Who's partnered with a major retailer to install up to 1,000 additional refill machines at net new locations in 2022 and 2023. Supporting our initiatives are more structural and thematic tailwinds that are driving consumers toward healthy hydration solutions. The growth in the health and wellness category continues to support our prospects of gaining share of the broader beverage category. In addition, the perception of the declining quality of municipal tap water is well documented, which supports the growth of our products and services.
Tap water as a primary drinking source is expected to continue to decline in all parts of the world for the foreseeable future. As Jay noted, We expect our consolidated second quarter revenue to be between $540,000,000 $560,000,000 and for our adjusted EBITDA to be between $100,000,000 $110,000,000 For full year 2022, We continue to forecast revenue growth of 9% to 10%, adjusting for the exit of the North America single use retail bottled water business and including the revenue from the tuck in acquisitions made during 2021 as we continue to see the improving demand of both the residential and B2B sectors as consumers and workers are increasing their mobility. We are forecasting our adjusted EBITDA to between $410,000,000 $420,000,000 We're also maintaining a strong pipeline of M and A targets, which we expect to execute during the remainder of the year. Once again, I'd like to thank the Primo Water Associates across the business for their tireless efforts to serve our customers. With that, I will turn the call back over to John to move us to Q and A.
Thanks, Tom. During the
Speaker 1
Q and A, to ensure we can hear from as many of you as possible, we would ask for a limit of 1 question and one follow-up per person. Thank you. Operator, please open the line for questions.
Speaker 0
Thank you. Your first question comes from Kevin Grundy with Jefferies. Please go ahead.
Speaker 4
Great. Thanks. Good morning, everyone, and congrats on the strong results. Hey, good morning Tom. Good morning Jay.
I wanted to pick up on your outlook for the year and then shift to pricing if I could. So first just with respect to the outlook, Maybe just comment on your decision to maintain your revenue and EBITDA guidance for the year despite the strong first quarter And what appears to be a solid start to the second.
Speaker 2
Yes. Clearly, we're pleased with the Q1. Revenue growth, EBITDA growth, margin expansion. So it's a rock solid beginning and we see that carrying into Q2, But it's early. So we'd like to get the next little bit under our wings if we will before we make any decisions about where the guidance I also think it's important to note that while we announced the exit of Russia, we're not changing our guidance to effect for Short term headwind of $14,000,000 $3,000,000 in EBITDA.
So we'll continue to deliver our guidance in spite or despite that decision. So that's where we sit. But the business to your point is off to a terrific start. We're quite pleased with it. And it has continued into April, and I guess it won't be the 1st couple of days of May.
Speaker 4
Okay. Very good. I think that makes sense. And then just pivoting to pricing, Jay, I think the comment was you took pricing in January and in March. So just a couple of questions or a couple of areas maybe you could touch on.
The magnitude of the price increase relative to CPI, which is currently in the 8.5 percent area year over year. Observations on elasticity so far, seemingly so far so good, although early, with the 1st round given the results. And then just broadly, the view on the ability to take additional pricing Should the inflationary environment worsen from here? So thanks for that guys. I'll pass it on.
Speaker 5
Yes. Thanks, Kevin. I'll take a
Speaker 2
piece of that and then I'll flip it over to Jeff. The best measure for us is our retention rate and we're seeing good stickiness in our customers in both Across our water direct and exchange business at 86.5%, if I have the number correct. So it's Good growth versus prior year and that says that our investments in service, our ability to be 98.5% staff on route delivery, which is the best place we've been in, good golly, since before any variant, which frankly is very important that we're properly staffed so that we can deliver on our commitments to the customer and they're sticking with us. Then in terms of if you look at our growth, I guess the best indication is double digit revenue growth on both residential and B2B pretty much everywhere we do business, which we think is a pretty solid sign that our pricing is sticking, customers are sticking, which gives us confidence that We're in a good spot as we move forward. Jay, any color you want to add?
No, I think
Speaker 3
I talked a little bit on my prepared remarks. If you look at North America water direct exchange up 17% in the quarter, of that 11% is related to pricing. So that will give you the magnitude. When you talk about the 2 price increases, we have different levers to pull on our price increase. So I'd say earlier in the quarter, we took pricing on certain products.
Later, we more increased our delivery fee, our ESC, as we saw diesel prices Seeded to rise during the quarter. So even though we took 2 tranches, they were on different line items of
Speaker 2
our bill on different products.
Speaker 4
Okay. Very good guys. Thank you. Good luck.
Speaker 5
Yes. Thanks guys. Appreciate it.
Speaker 0
Your next question comes from Andrea Teixeira with JPMorgan. Please go ahead.
Speaker 6
Hi, good morning everyone and echoing The success and congrats on the quarter. My question is more related to how you're seeing Price elasticity, it looks as if it's probably early to tell, but wondering if you can parse out commercial against residential. And on that vein, if you're seeing anything as you point out like in the quarter, Quarter to date, you've had very good improvement. If you can kind of give us a little bit of a difference between coming back in some of the commercial clients, so even B2B against residential and what are you seeing there quarter to date? Thank you.
Speaker 2
Yes. So there's a good morning, by the way. Thank you, Anastasia. There's a couple of questions embedded there. And let me take If you went to North America, our B2B business is growing at a faster rate in terms of revenue than residential, both double digit.
And then if you went to Europe, they're about the same in terms of growth, both in excess of call it mid single digit, mid double digit in terms of growth. So we're quite pleased. The pricing has gone through. And remember, our delivery and energy surcharges Generally, Peg, their price and fuel. So it covers us from those, the volatility in In that area, hence the reason that we took another initiative in March once we saw the price of oil spike at the beginning of the Ukraine conflict.
Speaker 3
And on different pricing, keep in mind, our average customer bill $50, dollars 55 Whether you're a small business or whether you're a residential. So very similar billing structures, very similar volume and consumption, and the same type of billing structure. So we're taking pricing, we're taking it across our entire customer base in North America here, not just focused on residential or B2B and we've seen good volume in both, good revenue in both and good retention growing in both. So not seeing any elasticity issues with the pricing we're taking.
Speaker 2
And I think one important Our current staffing levels and route operations at 98 essentially fully staffed There's a significant difference from where we were a year ago before Delta, right. So I think we're in the best possible position In the event anything comes forward that I'm staffed, I'm ahead of it. We have much better planning tools in place. We've learned a ton from last year. So that gives us confidence that we can continue to deliver our customers, which frankly enables our pricing
Speaker 6
Right. If I can just follow-up a little bit on the quarter to and acknowledging that you have a tough comp on organic basis, I think you were up 12% last year, total company. Is that something you were trying when your commentary about like tracking well in the quarter, is that Higher than what you were able to achieve with the 10% in the Q1 or we should be cognizant of what's happened I mean the comparisons inorganic.
Speaker 2
Yes. I think we're cycling if you looked at last year, rock solid Q1 last year. So very good performance on a year over year basis. We're cycling a good performance in Q2 of a year ago. So we like our current positioning, but I'm a third of the way through the quarter.
So I don't want to get too far ahead of myself here. And we're confident we'll deliver against our commitments and we'll see how it turns out. But right now, we're in a very good position.
Speaker 6
Great. Thank you so much. I'll pass it on. Best of luck.
Speaker 5
Thanks, Sandy. Appreciate it.
Speaker 0
Your next question comes from Derek Lessard with TD Securities. Please go ahead.
Speaker 7
Yes, good morning, everyone. Hey, good morning. Good morning. Echoing the Good morning and congrats on the quarter. Just going back to some of the EBITDA adjustments that you made in the quarter, it looks like A big jump in integration expense.
Just curious if that was just a bigger quarter in terms of tuck ins for you guys?
Speaker 2
Yes, go ahead.
Speaker 3
I would say, you're really seeing the final type of severance costs related to the overall acquisition, the larger acquisitions we have done. You are seeing some related to SIP Well over in Belgium where we did complete that right at the end of the year. But I would say Yes. As we've wrapped up our synergy capture, it's now that we're eliminating some dual staffing and you're seeing the cost of that running through, I would say. So, right, we have a little bit more of that through the year, but I would say you're seeing the final cost associated with the larger acquisitions we've done.
Speaker 7
Okay. Thanks for that, Jay. And I guess one more for me. And it sounds like I was wondering how you guys are thinking about the balance between return to office and maybe more permanent working from home schedules, but it sounds to me like you're agnostic either way.
Speaker 2
That is correct. We took it on the chin as everybody knows when we went through the pandemic on our commercial business and we've benefited from work from home and residential. Good news is our as people have begun to work from home, our residential business continues to grow. Retention continues to improve and We have that mid double digit growth in commercial in Europe, which is a real sign of the work from home and we're seeing similar if not better numbers in North America. So we're quite pleased of the current balance between the channels as the world makes its last changes, let's hope into what the balance Work from home and work in the office will be.
So we think we're really well positioned. Our business today is roughly in terms of customer count fifty-fifty. About half of our water direct business is residential, excuse me, and the other half is commercial. So we have good balance And we have good double digit growth in both. So we really like where we're at.
Speaker 7
Okay. And Maybe just a follow-up to that. Where are you in terms of the initiatives in Europe to sort of improve that mix?
Speaker 2
Right. So we had last year, we articulated good residential growth. We continue to have good residential despite the war, Good growth in our European business. We're seeing continued growth in that residential business. We're continuing to enhance our website.
We've opened a number of e commerce shops, which is important because that's where we will sell dispensers, which is the gateway to water services. So we're quite pleased with where we are. We are making enhancements. We refreshed our mobile app in North America. We'll be extending that app into Europe sometime in 2022 and we are consolidating and investing in new sites in Europe and a couple of those we rolled out in the last month or so.
So all those components of the plan are coming together and we think we will over time continue to derisk and get better mix in our customer base in Europe.
Speaker 7
Okay. Thanks for that and good luck for the rest of the year, gentlemen.
Speaker 5
Thanks, Derek. Appreciate it.
Speaker 0
Your next question comes from George Doumet with Scotiabank. Please go ahead.
Speaker 2
Good morning. This is Bahramin calling on George's behalf. Congrats on the quarter.
Speaker 8
Good morning.
Speaker 2
Can you talk a little bit about like expectation going forward in Europe during the war? And also how does the volume compares to
Speaker 3
I missed the first half of that question. Do you mind repeating it, it
Speaker 2
Painted a little bit. Yes,
Speaker 8
the volumes in Europe given uncertainties going forward.
Speaker 5
Yes. So,
Speaker 2
we don't have any direct business in Ukraine. We do have good sized businesses as everyone is aware in Poland and Hungary and those businesses are performing quite nicely Despite all the disruption, so we're pleased with how those businesses perform. If you look on it over a 2 year basis come Back to pre pandemic, our revenue is growing. It's higher, by the way, versus 2 years ago.
Speaker 3
Our commercial business in Europe is still a little down.
Speaker 2
A little slow. But aggregate is the increase offset by our stated objective of growing the residential business. So that's coming to fruition a way we would have hoped. So we're quite pleased with what's in aggregate is happening in Europe. We also benefit from there's more work from home and that's why you see our Commercial business beginning to perform better.
We expect that frankly will continue.
Speaker 3
Yes. I mean, you look at you are seeing more and more countries turn to work right now over in Europe. That's how we are having mid teens growth in our commercial business over in Europe. And if you look at versus 2 years ago, I'd say, just that part of the commercial leases Europe were down mid single digits only at this point in time, We're at the worst part of the pandemic. We were down 40%.
So we have seen we're seeing a very good return to that part of the business as things start to normalize over in Europe.
Speaker 2
Right. Also on last call, you mentioned rightsizing opportunities in Europe. You are waiting for the last programs to end there. Can you talk about the opportunity there as well? We finished some of our rightsizing in 2021.
And then Jay referenced there is some M and A work that we chatted about with Derek that we were finalizing. So we think we're largely in the structure we want, largely. And really, we're now beginning to focus on some investments in SG and A, obviously, to focus on growth and things like the And the appropriate service levels as our business returns to growth in Europe after a challenging year.
Speaker 3
And the only other thing you might be referring to is we are centralized in our back office function to Barcelona and Europe because Historically, this has been a very decentralized back office business over a year and we're making very good progress. We haven't stand it up and We're well along the way of Phase 1 and we have a second basis in smaller countries and we'll move in later on this year, but the back shop Consolidation in Europe has moved along and progressed very well.
Speaker 2
Very helpful. Thanks.
Speaker 0
Your next question comes from Daniel Moore with CJS Securities. Please go ahead.
Speaker 9
Thank you. Good morning, Tom. Good morning, Jay. Price cost coverage was obviously really good in the quarter despite Inflationary pressures, was there any measurable impacts on EBITDA in the quarter just given the lag in timing between inflation and when you
Speaker 2
I think we've exhibited in the past that we're pretty nimble. And if you went back to the beginning of the pandemic and adjustments we made to the cost structure, We reacted to pricing. So that second price increase in March was pretty close to when the impact happened, but There might have been a little bit of a lag there. And then certainly, as we mentioned in our prepared comments, we Expect to get full realization of those efforts in Q2 because on a year over year that delivery in the fee will be higher, obviously.
Speaker 3
Yes, I think net net net you look at our pricing actions, they were made to offset cost increases. So net net net, I wouldn't expect that incremental costs our pricing to benefit our bottom line is really to offset the cost pressures we've seen.
Speaker 9
Got it. Very helpful. And then maybe just talk about working capital for the expectations for the remainder of the year and how it relates to free cash flow,
Speaker 3
If you look at our free cash flow statement, you will see we do have elevated inventory levels that we're carrying right now. And that was the decision we made to make sure we bought early and stocked up on dispensers. We want to make sure we are pushing dispenser sales. That is our razor. So we've made the knowing decision to buy forward The inventory we're going to buy later on in the year and I would expect that to continue through the year.
We want to make sure we're going to push Dispenser sales hard this year, we want to make sure we have inventory in stock. So I would say that's the one pressure you will see if you look at our statement cash flow that I would We'll bleed it then at the end of the year, but throughout the year, we're going to make sure we have the steps because that's a key focus To really push the razor so we can sell more razor blades, as the saying goes.
Speaker 9
Makes sense. Maybe last is, It looked like M and A activity was still a little light, but I know you reiterated your target. Any guidance or color on the cadence of potential tuck ins as we look at the rest here. Thanks.
Speaker 2
Look, our target remains $40,000,000 to $60,000,000 We did a number of we executed number at the end of last year. So we always want to digest those, right? So that we don't just show up and do them on Tuesday. We got a little bit of work to do. So we're focused on the ones we did at the end of the year, but we're confident that we have a solid pipeline.
We'll get between $40,000,000 $60,000,000 as the year progresses, For sure.
Speaker 9
Very good. I appreciate the color.
Speaker 5
Thanks, Ben. Appreciate it.
Speaker 0
Your next question comes from Steve Powers with Deutsche Bank. Please go ahead.
Speaker 10
Hey, thanks. I was hoping if you could just maybe expand on any challenges or maybe relative Expect stories in this environment just around associate recruitment, retention and wage inflation on top of all the other cost inflation spoken about and just how you're thinking about those dynamics, the sort of labor dynamics going forward over the balance of the year? Thank you.
Speaker 2
Yes. We spent the better part of, let's call it from the arrival of the Delta variant through the end of the year, Very focused on the associate experience part of our strategic plan that is focused on 1 retention. So that we properly onboard people, that we get them trained properly and then they can get into position to take care of our customers. We've made good progress because as we referenced, we're 98.5 percent or 100% staffed on routes. And we're generally staffed across the company.
It doesn't mean every town in the market, but we're pretty well staffed and very focused. Yes, there's been wage inflation. We've called that as one of the outcomes and part of our inflation. We have adjusted wages to ensure we attract And now that we're staffed, our challenge is and focus. I don't want to call it a challenge, just keep the ones we got So that we can continue to make progress on growing the top of the business and probably servicing the customers that ultimately closer to the bottom line.
Speaker 3
I would say one good thing we implemented as we got to the end of last year and rolling to this year is Our RSRs, our drivers, we've implemented a predictive hiring model now that we're not waiting for the seat to be empty anymore to hire the person. We're looking at historic trends, modeling out where we see the openings will come up based on those trends, and we're hiring ahead of it. So that's really what's given us the ability to get all of our positions full at this point in time is a really well executed predictive hiring model.
Speaker 10
Great. Thank you very much.
Speaker 2
Thanks, Steve.
Speaker 0
Your next question comes from John Zamparo with CIBC. Please go ahead.
Speaker 3
Good morning, John. Thanks. Good morning, everyone.
Speaker 11
Good morning. If I can ask one more on pricing and elasticity, Did you see any change in retention rates or customer sign up on the March price increase versus the January price increase? And is there any divergence By channel, whether it's residential B2B or even e commerce.
Speaker 2
We're not seeing any meaningful changes customer sign ups or retention cross, let's call it inside Waterdirect. So we're quite pleased with that. We obviously We'll follow that through our call center, but we're pleased with where we are from a retention perspective as we move from Q1 to Q2, which is for us one of the best indicators. So we're not seeing a flurry of calls about delivery fee, we're not seeing a flurry of Losses of customers, we're not seeing your business on ability on people signing up. So we think that we're in a pretty good spot that relates to that.
And frankly, it is also an outcome of investments we've made on the Customer experience and to Jay's earlier point, if we do all those things better and we do them right The incremental $5 or $6 a month for a bill, it's not causing people to flee, And of course, there's other benefits to us in terms of tailwinds about healthy hydration and people Sorry for high quality drinking water and we give it to you any way you want.
Speaker 11
Okay. That's helpful. Thanks. And then my follow-up is on the organic growth. You listed 11.5% year over year.
I'm not sure if you have it handy, but in case you do, can you share the pro form a number from Q1 last year? It was noisy versus Q1 2020. I get around minus 7 or minus 8, but just
Speaker 3
I am sorry, John. I can follow-up with you on that one. I don't have last year's Number handy right now. Is that what you're asking, what's Q1 last year's number was?
Speaker 11
Yes, that's fine. We can follow-up later.
Speaker 2
And that was full pandemic, no pandemic.
Speaker 3
Yes, exactly. Yes. So that's I know we were lapping Q1 2019 With no pandemic and we were still well in the pandemic of Q1. So yes, a negative number does sound right, but off the top of my head, John, I don't have that much handy, but we can
Speaker 11
Okay, understood. That's all for me. Thanks very much.
Speaker 5
Thanks, John.
Speaker 0
Your next question comes from Derek Dley with Canaccord Genuity. Please go ahead.
Speaker 12
Yes. Hi, good morning, everybody. Can I I've got just one well, two questions? One, can you sort of rank order your business lines By margin, I mean, it kind of sounds like based on the commentary on this call and then as well in the press release that the water direct tends to carry a higher margin than the other business lines?
Speaker 3
And you're talking EBITDA margin, right, Derek or gross margin?
Speaker 12
Well, if you can walk it down to EBITDA, that'd be better.
Speaker 2
EBITDA is a little bit,
Speaker 3
but now let's start with gross margin and I'll work it down, I'll work it down compared because gross margin is very identifiable. I mean, you look at water direct and let's exclude depreciation because that's how I like to look at it. Yes, you're in the high 70%, touching 80 at some quarters on our water direct business. So definitely a strong margin. When you compare it versus our other lines, they're much smaller lines.
If you look at our filtration business, We're not manufacturing our selling products, so it also has good gross margin, but down in SG and A is where we have our routes. You'll spend it on that or in depreciation because we're amortized units. So we have a very good gross margin many lines of our businesses, the retail business that we've talked about that were exiting very low gross margin, our coffee business that's down in other Since we're selling coffee, again, a lower margin business, but very happy with our water direct business that does run, like I said, high 70% type gross margin.
Speaker 2
The one standout is our Dispenser business, the razor. And the razor is we want to get That dispenser in consumers' hand, so that we can benefit from the sales of water products, whether it's in water direct, water exchange, water refill. So that would be the one outlier in terms of gross and frankly EBITDA because we want to sell it and get them in your home at the lowest possible price because they will, 45% of them are going to come to Waterdirect, 30% will go to Exchange and 25% will go to our Refill business. And that's the proverbial holy grail, right, razor,
Speaker 13
razor, razor, razor, razor, razor, razor, razor, razor, razor, razor, razor, razor, razor, razor, razor, razor, razor, razor, razor, razor, razor, razor, razor, razor, razor, razor, razor, razor, razor, razor,
Speaker 12
call. Just I'm wondering if you have any update or perhaps you already gave it just on the tariff reimbursement that you mentioned last quarter. I believe it was around $8,000,000 on the CapEx side and $5,000,000 on the COGS side.
Speaker 2
Yes. We don't forecast it. It's in the hands of others. So If it comes, it comes, but it's nowhere in any of our current guidance or forecasted performance. We'll let the U.
S. Government Make their ultimate decision on where that turns out.
Speaker 12
Okay, got it. Thank you very much.
Speaker 5
Thanks, Derek. Thanks, Derek. Appreciate it.
Speaker 0
Mr. Caudill, there are no further questions at this time. Please proceed.
Speaker 3
Thanks, Pam. This concludes Primo's first quarter results call.
Speaker 12
Thank you all for
Speaker 0
your attention. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.