Primo Water Authorizes a $50 Million Share Repurchase Plan – Buyback Wednesdays

Many businesses experience growth by progressively broadening their offerings through the launch of new products or acquisitions over time. At some point these companies start optimizing their bloated products portfolios to improve profitability or unlocks assets that can be reinvested in the core business. An example of such a company is Primo Water Corporation (PRMW), which divested all its peripheral enterprises to focus on its water supply solutions.

Key Insights:

• Primo Water’s strategic shift towards prioritizing its core expertise in water should drive future growth and profitability.
• The company’s performance during the pandemic when many offices were shut down underscores the business’s remarkable resilience.
• Declining debt-to-equity ratio coupled with the absence of debt maturities in the near future.
• The company is focusing on returning value to shareholders through dividend distributions spanning over a decade and a recent focus on buybacks.

Primo Water Corporation (PRMW) is a leader in the realm of water solutions across North America and Europe. The company specializes in a wide spectrum of water-based offerings, catering to residential, commercial, and retail clientele. These encompass an array of products, including multi-gallon bottled water, water dispensers, self-service refill water machines, and water filtration appliances.

The genesis of the new incarnation of the company can be traced back to the acquisition of Primo Water Corporation by Cott Corporation, a prominent player in the beverage industry, engaged in the production, distribution, and sale of beverages. Cott  acquired Primo Water in March 2020 for $775 million, divested its non-water related assets and renamed itself Primo Water Corporation, along with a ticker symbol change to PRMW.

On August 10, 2023, the Board of Directors authorized a new $50 million share repurchase program, which replaces the previously authorized share repurchase program that expired on August 14, 2023. Furthermore, the Board announced a quarterly dividend of $0.08 per common share, marking a 14% increase compared to the dividend paid last year.

Divestitures & Acquisitions:

The company strategically exited several of its peripheral operational ventures including:

• In 2018, the company divested its conventional beverage manufacturing enterprise to Refresco in a substantial transaction amounting to $1.25 billion.
• In the subsequent year, 2019, it proceeded to divest its software-based drink concentrate production facility and RCI International division, known as “Cott Beverages LLC,” to Refresco for $50 million.
• In the year 2020, the company successfully concluded the sale of its S&D Coffee and Tea (“S&D”) business, which was acquired by Westrock Coffee Company (WEST) for $405 million. As a side note, Westrock went public by merging with a SPAC and is one of the few SPAC business combinations that have not seen their stock absolutely decimated post merger. Westrock has been on my radar thanks to a string of insider purchases at the company by members of the Ford family over the last year.

Beyond divestitures, Primo Water also pursued a proactive approach to expand its core water supply business through an array of acquisitions. The period from 2018 onwards witnessed the company engaging in the acquisition of over 120 different enterprises. Notable instances include:

• In 2018, the acquisition of Mountain Valley Spring Company for $78.5 million. This addition strengthened the company’s presence as a rapidly expanding American distributor of spring and sparkling water under the Mountain Valley brand.
• Simultaneously in the same year, the company also undertook the acquisition of Crystal Rock Holdings, which has a century-long legacy in direct-to-consumer home and office water, coffee, filtration, and office supply services.

C-Suite Changes:

The CEO of the company, Thomas J. Harrington, indicated that he plans to retire by the end of 2023. To facilitate a seamless transition, the Board of Directors has initiated a comprehensive search to identify a suitable successor. To ensure a smooth handover, Mr. Harrington has agreed to continue fulfilling his responsibilities as CEO until his successor has been selected and officially appointed.

Mr. Harrington assumed the role of CEO in 2019. Prior to this role, he held the position of Chief Executive Officer for Primo’s North America business division. His tenure as President of Route Based Services began in July 2016, further illustrating his significant contributions to the company.

Activist Involvement:

Legion Partners, a value-oriented activist investment firm, got involved in Primo Water with a 1.5% stake earlier this year and nominated four directors to join the Board. They think that they can get Primo’s stock price to triple in the next five years by improving profitability and growing revenue. Legion has placed directors on the boards of Bed, Bath & Beyond and Kohl’s in the past. Considering how both those companies have done over the last year, I am not sure Legion can move the needle at Primo Water.

Legion expressed dissatisfaction with the underwhelming performance of the Board, citing lackluster returns, a deficiency in prioritizing customer service, and stagnant customer growth. It criticized Primo for escalating expenses without yielding clear returns.

Assuring shareholders of a brighter future, the Managing Director of Legion Partners, Chris Kiper stated,

“Primo may be able to triple its share price over the next five years, and produce EBITDA of over $630 million in fiscal 2027. We believe this level of profitability is possible by achieving a 22% adjusted EBITDA margin (compared to 19% in 2022), monetizing non-core assets, tactically shrinking working capital and implementing a prudent capital spending program such that the return on invested capital (ROIC) of Primo expands to 12% from its current level below 5%.”

In line with a negotiated agreement, Primo Water has welcomed two new independent directors, Derek R. Lewis and Lori Tauber Marcus, nominated by Legion. Both individuals were nominated for election to the Board at Primo Water’s 2023 annual meeting of shareholders, which took place on May 31, 2023.

Ms. Marcus brings valuable experience as a senior marketing executive at prominent beverage companies, including PepsiCo and Keurig Green Mountain. Mr. Lewis, a former President of PepsiCo Multicultural Organization and PepsiCo Beverages North America, is a seasoned operations focused executive in the beverage industry.

Capital Allocation:

Primo repurchased $19 million worth of shares in 2023, building upon the $24 million repurchased in 2022. Furthermore, the company has the capacity to pursue up to $57 million in additional share purchases. The company also announced a 14% increase in its quarterly dividend to $0.08. The company’s forward dividend yield at 2.08% is not attractive but Primo Water expects to grow its dividend in 2024.

Source: Primo Water – Investor Presentation

Improving Leverage and Cash Flows:

Primo Water’s financial leverage has shown consistent improvement over the past three years, as evidenced by a reduction in net leverage from 4.3x to 3.4x. The company’s strategic objective is to further enhance its financial position, aiming to achieve a net leverage ratio of under 3.0x by the year 2023. It has strong operating cash flows along with value accretive capital allocation in M&A and capex with a focus on reducing debt and returning cash to shareholders through dividends and buybacks.
At present, the company’s net debt amounts to $1.32 billion, exclusive of capital leases. Notably, the majority of the interest expenses incurred are associated with two senior note debt facilities, which carry notably low interest rates of approximately 4%. Furthermore, these senior note debt facilities have maturity dates set for 2028 and 2029. This advantageous debt structure provides Primo Water with a substantial window of time to concentrate on optimizing its operational performance and then systematically retire its debt obligations.

Revenue & Cash Flow Growth:

Over the past decade, Primo Water’s revenue growth has been modest, with certain years witnessing slight declines. The company’s revenue has shown a gradual uptrend, progressing from $2.09 billion in 2013 to $2.25 billion in 2023. This translates to a Compound Annual Growth Rate (CAGR) of just 0.4%. While historical revenue growth may not have been remarkable, the prospects for future revenue growth appear promising. Projections indicate that revenue could potentially surge to $2.9 billion by December 2027.

Interestingly, Primo Water’s operation cash flow growth has significantly outperformed the sector median. With a growth rate of 14.65%, it surpasses the sector median of 5.71% by a substantial margin.

Q2 2023 Results:

Primo Water exhibited decent results for the second quarter of the year. While top line growth was lackluster, the company increased profitability significantly.

Source: Primo Water – Investor Presentation

• Consolidated revenue increased by 4% to $593 million compared to $571 million in Q2 2023. This growth was primarily propelled by revenue expansions in Water Direct and Exchange, clocking in at 7%. Additionally, there was revenue growth in Water Refill and Filtration, indicating an 18% increase. The company’s European operations also grew 9%.
• Adjusted EBITDA saw a notable uptick, increasing by $14 million to reach $122 million, signifying a 13% increase.
• Gross profit increased 11% to $368 million compared to $332 million in the prior year’s corresponding quarter.
• Gross margin increased 390 basis points to 62.1% compared to 58.2%, driven by pricing initiatives, increased demand, and the exit from the single-use retail bottled water business in North America.
• A pivotal metric, water dispenser sell-through, serves as a predictive gauge for the company’s future organic growth in water solutions. The company achieved a sell-through of approximately 251,000 water dispensers, a 4% increase compared to the same quarter last year. Its trailing 12-month dispenser sell-through remains greater than 1 million units.

Source: Primo Water – Investor Presentation

Outlook for 2023:

Given the strong performance in the first half of the year, management feels confident and has a positive outlook for the rest of the year.

• Annual revenue guidance is estimated to be between $2.32 billion and $2.36 billion, with normalized revenue growth in a range of 7% to 9%.
• Full-year 2023 adjusted EBITDA is expected to be between $460 million and $480 million. The company expects a $10 million increase in annual adjusted free cash flow to $150 million.
• Estimated CapEx guidance is $200 million, which accounts for around 7% of the revenue.
• Management remains committed to achieving its targeted net leverage ratio of below 3 times by the end of 2023 and a targeted net leverage ratio of less than 2.5 times by the end of 2024.

Bottom Line:

There are many things to like about Primo Water including its growing profitability, a durable business, promising long-term outlook, focus on capital return and the involvement of an activist.

The stock currently trades at a forward EV/EBITDA of 8.69 and a forward P/E of 34.2. The big difference between these two valuation metrics can partially be explained by the company’s leveraged balance sheet. I would like to monitor Primo Water’s capital allocation over the next few quarters before I get interested in the business.

Welcome to edition 72 of Buyback Wednesdays, a weekly series that tracks the top stock buyback announcements during the prior week. The companies in the list below are the ones that announced the most significant buybacks as a percentage of their market caps. They are not the largest buybacks in absolute dollar terms. A word of caution. Some of these companies could be low-volume small-cap or micro-cap stocks with a market cap below $2 billion.

Buyback announcement activity started declining last week. The previous week had 28 announcements, while only 14 companies announced buyback plans last week.

Top 5 Stock Buyback Announcements 

1. Mammoth Energy Services, Inc. (TUSK): $4.47

On August 11, 2023, the Board of Directors of this energy service company authorised a new $55 million share repurchase program, equal to around 21.2% of its market cap at announcement.

2. HUYA Inc. (HUYA): $2.63

On August 15, 2023, the Board of Directors of this game live streaming platform approved a new $100 million share repurchase program, equal to around 15.85% of its market cap at announcement.

3. Riskified Ltd. (RSKD): $4.77

 On August 15, 2023, the Board of Directors of this e-commerce risk management platform authorized a new $75 million share repurchase program, equal to around 15.1% of its market cap at announcement.

4. Hudson Global, Inc. (HSON): $19.7

 On August 10, 2023, the Board of Directors of this talent solutions provider authorized a new $5 million share repurchase program, equal to around 8.5% of its market cap at announcement.

5. Seadrill Limited (SDRL): $49.01

 On August 15, 2023, the Board of Directors of this offshore drilling company authorized a new $250 million share repurchase program, equal to around 6.4% of its market cap at announcement.

If you are reading this article and have not signed up to receive such articles by email, please sign up for our free, IA Plus or IA Premium service here. If you are an existing subscriber, you can login to the InsideArbitrage.com website to adjust the kinds of articles you receive by email by turning on or turning off specific categories of articles.