Primo Water Corp. Reports 70 Percent Gain In Second Quarter Sales

Aug. 10, 2011

Primo Water Corp., a provider of multi-gallon purified bottled water, self-serve filtered drinking water and water dispensers sold through major retailers throughout the U.S. and Canada, today announced financial results for the second quarter ended June 30, 2011.

Business highlights include:

  • 1,300 installations during the second quarter, resulting in 15,900 locations for the Water segment;
  • Record second quarter sales increased over 70 percent to $20.7 million compared to the prior year;
  • Completed branding initiative for appliances, with all appliances to be marketed under the "Primo" brand;
  • Introduced Primo "Flavor Station™" line of carbonating appliances with related CO2 and flavors for 2011 holiday season distribution;
  • Announced Primo Flavor Station 100 that will retail for less than $100 and Flavor Station 500 that will retail for less than $300;
  • Announced direct to consumer marketing campaign to sell Primo flavor stations and water dispensers;
  • Added chief marketing officer to the executive management team to support entry into the carbonated beverage category.

Primo continued its retail rollout strategy with 1,300 locations installed in the second quarter of 2011, for a total of 3,300 installations year-to-date, or an increase of 26 percent from the number of locations at the end of 2010. Most of the locations added in the quarter were in the large mass merchant and office channels of trade. The company believes the office channel represents a significant opportunity, particularly in light of the planned rollout of the company's new commercial combination coffee and water dispenser appliance in the fourth quarter of 2011. Water services were offered in the U.S. and Canada at approximately 15,900 retail locations as of June 30, 2011.

"We are extremely pleased with our ability to execute on our location growth plan, which we believe will lead to long-term revenue growth," commented Billy D. Prim, Primo Water's president and chief executive officer in a prepared statement. "Our team continues to make Primo's industry leading water and appliances conveniently accessible to consumers where they shop."

The company also installed its first "Primo Pure Ice" locations during the quarter. The company plans to test approximately 100 locations in 2011 with a major retail customer. The launch of "Primo Pure Ice" provides the company with a complementary product to offer the consumer and allows it to further leverage its distribution capabilities and retail customer base for incremental sales over the long-term. The ice product is not expected to have a material impact on the company's results in 2011.

Total net sales increased 70 percent to $20.7 million from $12.2 million in the second quarter of 2010. This increase was primarily due to significant growth in the company's water segment.

Water segment net sales for the second quarter of 2011 increased 115 percent to $14.8 million compared to $6.9 million in the second quarter of 2010. Sales from the water segment consist of sales of multi-gallon purified bottled water (exchange services) and self-serve filtered drinking water vending services (refill services). The sales improvement was primarily due to the acquisition of the refill business in November 2010 and a 23 percent increase in sales of exchange services. Exchange services same-store unit sales increased 2.5 percent in the second quarter of 2011 compared to the same period last year. 

The company's water dispenser sales for the second quarter of 2011 increased 11 percent to $5.9 million compared to $5.3 million in the second quarter of 2010. The increase was due primarily to dispenser unit sales growth of 7 percent to end consumers at retail for the second quarter of 2011 compared to 2010. 

Gross profit for the second quarter of 2011 increased to $5.6 million compared to a gross profit of $2.4 million last year. The gross margin increased to 27.1 percent compared to 19.9 percent in the second quarter of 2010 primarily as a result of an increased mix of higher margin Water segment sales. Water segment sales represented 72 percent of total sales during the quarter compared to 57 percent of sales in the second quarter of 2010. 

Selling, general and administrative (SG&A) expenses were $4.5 million or 21.7 percent of net sales for the second quarter of 2011, compared to $2.8 million or 23.0 percent of net sales in the same period last year. The increased expense on a dollar basis is the result of expenses related to the development and marketing of new carbonated beverage appliances, increased headcount necessary to operate as a public company, additional expenses related to the company's recent acquisitions and the costs of operating duplicate back-office operations following the acquisitions. 

The GAAP net loss for the second quarter of 2011 was ($2.0) million or ($0.10) per share, compared to ($3.0) million or ($2.06) per share in the same period in the prior year. In addition, for the second quarter of 2011 non-GAAP pro forma fully-taxed net loss was ($0.3) million or ($0.01) per share and the company reported non-GAAP adjusted EBITDA of $1.9 million. The company does not expect to pay U.S. income taxes in the near future as it has sufficient net operating loss carryforwards to offset taxable income.

While the company's net sales for the second quarter increased more than 70 percent over the prior year, results were below previous guidance primarily due to lower water dispenser and corresponding water sales. Prim noted, "Two of our major retailers were scheduled to launch a national water and dispenser promotions during the second quarter; however; due to their inventory constraints and other circumstances beyond our control, neither were completed in the second quarter as we expected. The positive news is that both retailers are committed to the program and have started rolling out the national promotion of water and dispensers in the third quarter." The company expects these major mass retail partners to continue to roll out the national promotion during the remainder of the third quarter and in the fourth quarter of 2011. 

In the first quarter of 2011 the company announced that it had purchased the assets of Omnifrio Beverage Co., LLC, a company that was developing a single-serve carbonated beverage system, and as a result the company would begin a strategic brand and competitive base positioning project. The company completed that project in the second quarter and determined that the new single-serve carbonated beverage systems will be branded "Primo Flavor Station." There will be two models, the Primo Flavor Station 500 that uses the company's patented Flavor-Cups and CO2 cylinders, or "Primo Carbonators," and the Flavor Station 100 that is expected to retail for less than $100. Each device will be offered as a tabletop model for the 2011 holiday season. In 2012, the company expects to launch a version of the Primo Flavor Station 500 as a module that will attach to Primo's bottom load dispensers.

Prim added, "We are excited about the introduction of the Primo Flavor Station line. The Flavor Station 100 will make carbonated beverages in a single-serve, refillable bottle. Our research shows consumers have personal beverages preferences and our Flavor Stations will allow them to create their beverage of choice in the convenience of their home and office. Both series of the Primo Flavor Station will offer consumers a unique, easy and affordable way to drink beverages and water as we further leverage our consumables."

The Flavor Station products represent an extension of the company's overall razor/razorblade strategy. The introduction of the flavor station products will provide the company with numerous high margin "razorblades" for the consumer headed into the holiday season and fiscal year 2012. Consumers who have purchased the "razors" can then be expected to purchase our "razorblades" – water, flavors, CO2 and other beverage accessories. The company expects that these appliances and consumable products will positively impact its long-term growth prospects.

During the fourth quarter of 2011 the company plans to implement a new direct-to-consumer marketing campaign to increase exposure and raise awareness of its full product offering and to drive sales of appliances and consumables.

"We look forward to the opportunity to increase awareness and educate more consumers about the benefits of Primo's products and services with our new direct marketing campaign. Surveys show consumers are passionate about our water and appliances once they try them. As we continue retail installations, we believe a targeted marketing message will generate increased consumer adoption of our products," commented Prim. "Going forward, we have the opportunity to leverage our marketing spend across all of our appliances."

The company announced that John Maples joined Primo Water as chief marketing officer during the second quarter. Maples joined the company from PepsiCo with extensive consumer packaged goods and beverage experience. Maples was instrumental in the success of the development and growth of PepsiCo's Gatorade business as well as building key relationships with several major retailers including Walmart and Sam's Club.   

"We further increased the depth of our management team with the addition of John, whose industry experience will be instrumental as we evolve our beverage offerings. We are fortunate to add a senior executive who brings over 20 years of consumer packaged goods experience, including the development and growth of iconic beverage brands," added Prim.


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