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Edited Transcript of PRMW earnings conference call or presentation 5-Aug-19 8:30pm GMT

Q2 2019 Primo Water Corp Earnings Call

WINSTON-SALEM Aug 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Primo Water Corp earnings conference call or presentation Monday, August 5, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David J. Mills

Primo Water Corporation - CFO, Secretary & Assistant Treasurer

* Matthew T. Sheehan

Primo Water Corporation - President, CEO & Director

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Conference Call Participants

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* Amit Sharma

BMO Capital Markets Equity Research - Analyst

* George Arthur Kelly

Imperial Capital, LLC, Research Division - VP

* John David Godin

Lake Street Capital Markets, LLC, Research Division - Equity Research Analyst

* Jon Robert Andersen

William Blair & Company L.L.C., Research Division - Partner

* Michael Pochucha

Northland Capital Markets, Research Division - Analyst

* Michael John Petusky

Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst

* Madeleine Kettle

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Primo Water Corporation's Second Quarter 2019 Financial Results Conference Call. (Operator Instructions) Also, as a reminder, this conference call is being recorded. At this time, I'd like to turn the call over to your host, Madeleine Kettle of ICR.

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Madeleine Kettle, [2]

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Good afternoon, and welcome to Primo Water's Second Quarter 2019 Conference Call. On the call with me today are Matt Sheehan, Chief Executive Officer; and David Mills, Chief Financial Officer.

By now, everyone should have access to the release that went out this afternoon at approximately 4:05 p.m. 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 would like to remind everyone that the prepared remarks contain forward-looking statements, including financial guidance, 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 cause actual results to differ materially from these 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 on forward-looking statements included 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 CEO, Matt Sheehan.

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Matthew T. Sheehan, Primo Water Corporation - President, CEO & Director [3]

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Thank you, Madeleine. Good afternoon, everyone, and thanks for joining us on today's call as we review our second quarter results. I'll begin with an overview of the quarter, then David will provide more financial detail before the 2 of us answer questions.

I am pleased with the financial results for the quarter, which were in line with our guidance. We've made great progress on several initiatives and believe the business is well positioned to grow as we began to accelerate our location expansion efforts.

As we look forward to the remainder of the year, our business will be driven by some bright lights, retail headwinds and some long-term investment opportunities. More specifically, we continue to expect to see strong growth in Dispensers and Exchange, driven by same-store sales performance as well as growth in locations along with e-commerce growth in dispensers.

We also have confidence in our free water or IRC redemption program, which has far outperformed our expectations. We now also have a number of meaningful promotions coming in the back half of the year. The promotional activity is expected to drive future growth even though they are investment that will negatively impact our EBITDA in the near term.

In Refill, our business continues to improve from an operations and pricing perspective, and we have seen sequential improvements over the first quarter with some clear examples of our ability to grow the business year-over-year. However, we have experienced more retail attrition in the back half of the second quarter and into the first part of Q3, driven in part by store closures.

Focusing on Q2, sales for the quarter increased to $79.3 million, near the high end of our expectations, and adjusted EBITDA was in line at $13.4 million. Sales were led by a significant increase of 45% in Dispensers, driven by a record sell-through of 218,000 units, up over 12%, including e-commerce growth of over 50%.

In addition, in the quarter, we expanded into a majority of the Home Depot stores with an initial SKU. Overall, we believe this growth is creating many new water households, which should pay dividends for our Exchange and Refill businesses down the road. Exchange sales increased 5% to $21 million, driven by our connectivity initiatives that have resulted in continued strong U.S. Exchange same-store sales unit growth, which was 13.4% for the quarter.

This is the 29th consecutive quarter of 6%-plus same-store sales unit growth and the sixth consecutive quarter of same-store sales unit growth over 9%. We are seeing an accelerated rate of growth in channels such as home improvement and grocery as we aggressively roll out our new [CD joints] Exchange signage beyond Walmart. Lastly, I am pleased that we have continued to grow top line sales in Exchange, despite the current retail environment, which has led to location attrition over the past year.

In Refill, the team's efforts to improve the operational fundamentals of the business with the use of technology contributed to an overall improvement of total Refill sales down only 5.5% in the quarter. This is an improvement over the decrease of 7.7% in Q1. We have seen continued sequential improvement in U.S. Refill same-store sales.

This demonstrates the improved uptime in operational fundamentals of the business with the completion of the credit card reader and telemetry rollout to all outdoor Refill locations. The technology has allowed us to reduce downtime to 2 to 4 days from the historical 7 to 10 days. We have seen steady volume improvements in same-store sales and locations the longer that the telemetry uptime operating model and pricing are in place.

We continue to be encouraged with our progress. To note, a good portion of the sales gap in Refill this quarter is due to location attrition, which we believe we can replace in the coming quarters and something I will discuss in more detail shortly.

In addition, we successfully completed the divestiture of the Ice business in June, which we expect will improve operational efficiencies and profitability of the Refill segment going forward. Stepping back, our overall Refill strategy remains intact, which has 3 primary elements: first, improve uptime through technology and operational changes; second, drive same-store sales used in marketing, pricing and technology; third, as we have mentioned previously, with the operational improvements in same-store sales and issues in place, we are turning our focus to expanding locations.

As it relates to these strategies, we completed the rollout of the credit card readers and are already seeing the downtime improvements resulting in positive signs in same-store sales. We have seen same-store sales improve the longer the credit card leaders and telemetry are in place. Accordingly, we expect another sequential improvement in same-store sales in Q3 from Q2.

In addition, we are focused on driving same-store sales through marketing, pricing and technology. These efforts, which have been underway in our Walmart indoor locations for some time, are bearing fruit. Sales at these indoor locations were up over 8% for the quarter with volume gains even after a price increase last fall. This is indicative of what we believe can also incur in our outdoor Refill locations. With the improvements in place and the marketing initiatives underway, we are confident that we can drive same-store sales growth in Refill. In terms of pricing optimization, we are seeing positive signs across certain markets and retailers and will continue to strategically review pricing on an ongoing basis.

Moving on to our broader location strategy. It applies to all of our segments, not only Refill. We have long believed and communicated that operational improvements and increased same-store sales were key to future location expansion across all of our businesses. We are confident in our ability to gain locations with quality retailers to offset the impact of the overall brick-and-mortar retail headwinds and store closures that are out of our control.

Today, with proven tactics to drive same-store sales across Dispensers, Exchange and now Refill, we are accelerating our efforts to expand locations more aggressively. I'll discuss several examples.

First, our strong Exchange same-store sales success at Walmart have led to their support for an additional expansion. We expect to add between 100 and 200 Walmart Exchange locations in the second half of this year, which is on top of the over 650 Exchange locations we have added since the beginning of 2017. Retailers get behind you in a big way when you can produce the consistent level of same-store sales growth that we have experienced at Walmart.

Second, our announcement of a new Exchange partnership with Albertsons provides additional evidence that our same-store sales focus and our product portfolio strategy is working. Albertsons indicated that our relationship in Refill, coupled with our Exchange expertise, consumer research and willingness to invest in marketing, along with a passion for our brand with differentiators have led us to being awarded a long-term contract for Exchange.

Albertsons has been a Glacier Refill partner for years with approximately 1,500 locations. When we purchased Glacier, we envisioned cross-selling Exchange into Glacier Refill locations, and Albertsons represented the largest opportunity. This deal, for around 1,000 new Exchange locations initially and the potential for more over time, is a prime example of a portfolio power of Refill and Exchange. It is also clear that our same-store sales performance and our Exchange business played a key factor in this win.

Our success growing locations at Walmart and Albertsons amongst other victories of respective retailers like Meijer, Giant Eagle and Home Depot give us confidence to accelerate our investment in sales. In addition, in our Refill business, the improved same-store sales trends and the much improved operations and uptime allow us to now invest in resources to expand locations.

Moving on to our outlook, 2 factors to keep in mind. First, as previously mentioned, we now expect more retail attrition in the second half of the year, driven in part by store closures. As this retail environment continues, we are increasing our efforts to aggressively expand locations, which we believe will offset the location losses in time. This will result in an increased investment in sales efforts in Q3 and Q4.

Secondly, the new promotional activity in the second half of the year, in addition to the IRC, will impact margins and also require marketing and promotional investments. With these factors in mind, we are reducing our 2019 expectations for sales and EBITDA.

However, we believe the items impacting our results in the second half of the year are transitory in nature and that the investments we are making will lead to long-term profitable growth. David will provide more detail shortly.

In summary, I'm pleased with our team's efforts and the progress we have made across our entire business. We remain excited about the opportunity to invest in our business and expand to 50,000 to 60,000 locations.

With that, I will turn the call over to David.

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David J. Mills, Primo Water Corporation - CFO, Secretary & Assistant Treasurer [4]

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Thanks, Matt. Today, I will review our financial results for the quarter and then discuss our outlook for the remainder of the year. Finally, I'll return the call back to Matt for closing remarks.

To start off, we utilize non-GAAP financial measures, such as adjusted EBITDA and adjusted net income, to assist investors in understanding our operating results. A reconciliation of each is included in this afternoon's press release, which is available on our website.

Turning to our second quarter results, sales for the quarter were $79.3 million, near the high end of our expectations, driven by record demand for our Dispensers and continued strong growth in Exchange. Dispensers sales for the quarter were $16 million, an increase of 45% over the prior year. We continue to experience a high level of retail demand, which was driven by record sell-through. Exchange continues to be a bright spot, and sales increased 5% to $21 million despite the brick-and-mortar retail challenges.

Once again, in-store marketing initiatives, specifically, the free water or IRC program at Walmart and new display signage at Walmart and now other retailers show double-digit U.S. Exchange same-store sales unit growth of 13.4% for the quarter.

Fewer locations and the impact of the IRC were the primary drivers of the difference between the same-store sales increase and the overall sales increase. As a reminder, the free water units, while not producing sales, are included in our total and same-store sales units as we believe these consumers will become Primo households, and we will see the compounding effect over the long term. Also, keep in mind that we will be adding approximately 1,000 Albertsons Exchange locations during the second half of the year.

Refill sales for the quarter were down 5.5% to $42.3 million. As Matt mentioned, this was an incremental improvement from the first quarter. In addition, we saw improvement in U.S. same-store sales on a dollar basis as our operational initiatives have taken hold.

Our gross margin for the quarter was 26.6% compared to 30.4% in the prior year. The decrease was a result of a higher mix of Dispenser sales, which represented 20.2% of total sales compared to 14.6% in the prior year as well as lower margins in both Refill and Exchange. Dispenser gross margin for the quarter increased to 10.2% from 9.9%.

Exchange gross margin for the quarter decreased to 30.7% from 32.5% primarily related to the investment we are making in the IRC program, which we continue to believe is driving the growth in both Dispensers and Exchange. While the IRC is impacting margins in the near term, we continue to believe that this will drive long-term growth over time.

Refill gross margin for the quarter decreased to 30.7% from 34.6% as a result of lower overall volumes and incremental operating costs related to addressing the downtime issue. SG&A cost for the quarter decreased to $8.8 million from $9.6 million. As a percent of sales, SG&A, excluding noncash stock-based compensation, was 9.8% compared to 10.8% in the prior year. Going forward, on an annualized basis, we continue to expect SG&A as a percent of sales in the 9% to 11% range.

Interest expense for the quarter decreased significantly to $2.7 million from $11.2 million as we have benefited from the improved terms and lower debt balances related to the June 2018 refinancing. On a GAAP basis for the quarter, we had net income of $873,000 or $0.02 per share compared to net income of $451,000 or $0.01 per share in the prior year. On a comparable basis, adjusted net income was $3.3 million or $0.08 per share compared to $4.5 million or $0.12 per share. Adjusted EBITDA was $13.4 million compared to $15 million.

A few points on the balance sheet. Inventories were unchanged from the prior quarter at $13.7 million and up from the $10 million at year-end. This is due to the strong dispenser demand that continues to drive growth in our e-commerce and domestic Dispenser business.

Total debt was $199.4 million, up from year-end due to our typical annual working capital cycle in addition to an increase in capital leases of $3.7 million related to new vehicles as we improve the reliability and maintenance costs in our fleet. Overall, our leverage ratio was 3.9x, and we currently expect our leverage ratio to decrease going forward.

Looking at the statement of cash flows for the first half of the year. Our cash flow provided by operations was $8.9 million compared to $10.2 million in 2018. Capital expenditures increased to $14.2 million from $9.3 million primarily the result of the rollout of the credit card readers and new in-store Exchange displays and signage.

For 2019, we continue to expect capital expenditures for the full year to be in the range of $24 million to $26 million. In addition, going forward, we expect capital expenditures to return to normalized levels of approximately $20 million, driving future growth and free cash flow.

Turning to our outlook. As Matt noted, we are confident in the positive trends we are seeing in the turnaround of the Refill business. That said, we are adjusting our outlook to address the continued retail headwinds and the promotional opportunities. Again, we believe the second half promotions and sales investments are important to fuel future growth.

With these factors in mind, we now expect sales for the full year to be in the range of $312 million to $320 million and adjusted EBITDA to be in the range of $56 million to $58 million. Looking at the third quarter, we expect sales to be in the range of $84 million to $87 million and adjusted EBITDA to be in the range of $17 million to $18 million.

With that, I will turn the call over to Matt for closing remarks.

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Matthew T. Sheehan, Primo Water Corporation - President, CEO & Director [5]

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Thanks, David. Before turning it over to the operator for questions, I would like to thank the team as the last few quarters have required significant effort. That type of grit is what makes Primo a great company and is something I'm proud of. True to our mission of inspiring healthier lives through better water, we manage our business for the long term and believe we are improving each day in our ability to drive long-term sustainable value for consumers, retailers, employees and shareholders.

Before closing, it's important to remember the market trends that fuel our business. Consumer concerns over health and wellness, tap water quality and sustainability continue to gather steam. Demand for better water solutions in consumers' homes will remain a long-term growth driver.

On that note, more than ever before, consumers and the press are focused on the use of plastic, specifically bottles and their negative impact on the environment. In fact, we have not touted the positive environmental aspect of our business to consumers, retailers and investors nearly enough, which you will see more of going forward. We believe our products position us very well within these trends and consumer preferences.

To close, I'm confident about our ability to drive long-term growth as we have a strong recurring platform upon which to invest. With that, I'd like to open the line for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Mark Argento from Lake Street.

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John David Godin, Lake Street Capital Markets, LLC, Research Division - Equity Research Analyst [2]

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This is John on for Mark. Now that you have the card readers and telemetry up on all the retail machines, just curious if you're getting any kind of early insights into consumer data that you weren't able to get before, any trends there that you might find interesting.

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David J. Mills, Primo Water Corporation - CFO, Secretary & Assistant Treasurer [3]

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John, this is David. Yes, on the -- with the credit card readers, we don't have direct access to the consumers. We get credit cards, but we don't have credit card information or the individual's information. That said, as Matt mentioned on the call, we -- the longer these are in place, the better the benefit we're seeing. And if we go back and look at the ones that were installed prior to January of this year, we're seeing really positive trends on a year-over-year basis in those units. So the longer they're in place, the better they perform.

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Matthew T. Sheehan, Primo Water Corporation - President, CEO & Director [4]

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And John, this is Matt. I'd just add one thing to your question. I believe we're getting closer and closer to the consumer as we use the credit card readers to do things like [coupon] codes, gift cards that we can get pretty specific with a specific code for a consumer. So we're working our way towards getting the exact info you mentioned.

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John David Godin, Lake Street Capital Markets, LLC, Research Division - Equity Research Analyst [5]

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Got it. And just as a follow-up, are you guys running any sort of promotions through Refill yet? Or should we expect that coming in the future?

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Matthew T. Sheehan, Primo Water Corporation - President, CEO & Director [6]

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We are using the credit card readers on things like gift cards. We are in the early innings of some of those promotions now, John. But some of those are localized but underway. It'll take a couple quarters for us to come out with results, but we are testing as we speak.

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Operator [7]

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And the next question comes from George Kelly with Imperial Capital.

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George Arthur Kelly, Imperial Capital, LLC, Research Division - VP [8]

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So maybe just to start. I know you talked about the guidance change, but can you give any more granularity just about on the revenue side, what the difference is versus your prior view, what -- the main impacts that are driving the change?

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David J. Mills, Primo Water Corporation - CFO, Secretary & Assistant Treasurer [9]

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Yes. George, this is Dave, again. So in the latter half of the quarter, and we continued to see [this] in the first part of Q3, we saw significant number of attrition in the retail side, a lot of location closures, specifically in -- Kmarts are now starting to hit unexpectedly a little bit more than we anticipated. We're also seeing -- continue to see some consolidation in the dollar channel and the smaller independent and really smaller grocery channel, too. We've seen a little bit of a pickup over the last couple months.

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George Arthur Kelly, Imperial Capital, LLC, Research Division - VP [10]

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Okay. What I didn't hear you just say is -- are you seeing any kind of -- all these different initiatives, technology and marketing-related initiatives that you've been testing, has -- when these things are fully implemented or as you continue to roll them out, has the ROI surprised you at all?

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Matthew T. Sheehan, Primo Water Corporation - President, CEO & Director [11]

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George, this is Matt. No, we've seen some positive lights when we have rolled all this together. Again, we just finished the credit card readers a little more than a month ago or so. So -- but we are seeing the plan of our marketing, our telemetry with the credit card readers and even some of the pricing optimization work to our benefit. So as we look at the second half of the year, we think that's all going in the right direction.

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George Arthur Kelly, Imperial Capital, LLC, Research Division - VP [12]

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Okay. And then last question from me, just about the -- I think you mentioned 13.4% unit same-store sales. What was the dollar same-store sales?

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David J. Mills, Primo Water Corporation - CFO, Secretary & Assistant Treasurer [13]

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Yes. We don't disclose on the Exchange side the dollar same-store sales because there's been really little pricing changes on the Refills -- on the Exchange side. The total dollar change in Exchange was 5%, but that was impacted significantly by location attrition, as Matt mentioned.

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Operator [14]

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And our next question comes from Jon Andersen with William Blair.

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Jon Robert Andersen, William Blair & Company L.L.C., Research Division - Partner [15]

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I guess you talked about a couple of things impacting the second half outlook, location attrition and also incremental promotion. You've kind of addressed the attrition issue, I think. Could you talk a little bit more about some of the incremental promotion that you're planning in the second half of the year? Are these bigger events like the Black Friday event you did with Walmart a couple years ago? Is that continuation of IRCs? Just some more color around what you're planning to do there.

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Matthew T. Sheehan, Primo Water Corporation - President, CEO & Director [16]

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John, it's Matt. Thanks for the question. Unfortunately, given the nature of the promotion, we can't talk much about those promotions. All the retailers keep a lot of those close to their vest, and they ask us to as well, but we do have much brighter line of sight at this point to promotions.

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David J. Mills, Primo Water Corporation - CFO, Secretary & Assistant Treasurer [17]

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And we're also continuing to work to expand the IRC program to other retailers where it makes sense, and that's another piece of the equation.

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Jon Robert Andersen, William Blair & Company L.L.C., Research Division - Partner [18]

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Okay. And on the other, the attrition piece -- can you talk about, within the business, is this something that's affecting both Exchange or Refill in relatively equal proportion? Is there one part of the water business it's having a greater impact on?

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David J. Mills, Primo Water Corporation - CFO, Secretary & Assistant Treasurer [19]

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Yes. This quarter compared to last quarter, I mean, Exchange and Refill -- Refill was a little worse than Exchange but not too far different in terms of numbers. But historically, Refill has been stung a little bit more with the higher level of independent, smaller regional chains versus Refill. But this quarter, some of that has leveled out, but it's still a little bit more than Exchange.

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Matthew T. Sheehan, Primo Water Corporation - President, CEO & Director [20]

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Jon, it's Matt again. Jon, one note on that, just as we look at retail, we've seen the consolidation and just the change in retail environment over a couple years now. We think in some part, that has solved itself. In other parts, it hasn't. And even within the last few weeks, we've seen more of that happen in the smaller part of the retail industry. So -- but that sort of leans back on our strategy for a long time, which is make sure you have the assets you have working really hard. And now what we're seeing is because we have more tools to drive our asset base through same-store sales, we're going to invest now in some more salespeople get out there and knock on some more doors. So that's sort of a transition for us because we have tools to fight that, but the retail consolidation and closures continue to happen.

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Jon Robert Andersen, William Blair & Company L.L.C., Research Division - Partner [21]

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Okay. And how should we think about the guidance? What are the baseline assumptions for attrition? Is it kind of the run-rate level you're seeing now? And what's built in there for location expansion? Is it the sales in Albertsons locations plus the Home Depot doors you mentioned? Is there -- are there other things in the pipeline that you could announce? Or are those kind of longer-term selling cycles where we'd be talking about looking at 2020 at this point?

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David J. Mills, Primo Water Corporation - CFO, Secretary & Assistant Treasurer [22]

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There are -- it varies by segment, but in the Exchange side, Jon, we have the Walmarts that we believe we can install by the end of the year between 100 and 200. Honestly, the Albertsons play a big part, and we started that process this week.

On the Refill side, the sales cycle on the -- it depends on the retailer. The smaller, more regional chains, you can accelerate that sales cycle. As we talked in the past, Albertsons was a much longer cycle as a much bigger retailer. But the big ones are those 2, and then obviously Home Depot getting an initial SKU in there, getting our foot in the door on a nationwide basis is important as well.

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Matthew T. Sheehan, Primo Water Corporation - President, CEO & Director [23]

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We also have a healthy pipeline, and we're going to invest our resources in it, Jon, so we're going to focus more and more on getting more and more retailers in the mix or just cross-selling what we already have.

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Jon Robert Andersen, William Blair & Company L.L.C., Research Division - Partner [24]

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And last one from me, and I'll pass it on. On Refill, I mean is there a time frame that you have in mind for some kind of inflection into growth in that business on either a volume or an overall dollar basis? I understand that things are getting sequentially better and some of the earlier conversions -- machine conversions are performing well on a same-store sales basis. But can you give us a better sense of your expectations for the sequential improvement going forward from here?

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Matthew T. Sheehan, Primo Water Corporation - President, CEO & Director [25]

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Again, I'll start and then Dave will probably jump in. So again, to your question, the trends are absolutely going in the right direction. We've seen a host of examples of locations and frankly groups of locations that are comping year-over-year, and we think that group will just expand over time, so more and more locations comping year-over-year. So we're seeing all the bright lights we need to. And again, this is a long-term path of -- but if once we keep growing those through some of those location attrition, I think we'll be good. So Dave, I don't know if you have any other...

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David J. Mills, Primo Water Corporation - CFO, Secretary & Assistant Treasurer [26]

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No. No, that's spot on. Yes.

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Operator [27]

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And our next question comes from Mike Grondahl with Northland Capital Markets.

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Michael Pochucha, Northland Capital Markets, Research Division - Analyst [28]

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This is Michael on for Mike. Maybe first, just on the IRC at Lowe's, can you talk about all that rollout progress that's going there?

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Matthew T. Sheehan, Primo Water Corporation - President, CEO & Director [29]

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Yes. Again, just for maybe semantics for a second. So IRC is really only program we're going to run at Walmart, just the way they do it. We are working on different types of we'll call it free water programs. IRC is pretty specific, but we are in the early innings of that free water program at Lowe's as we speak now.

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Michael Pochucha, Northland Capital Markets, Research Division - Analyst [30]

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Okay. And then just on Home Depot, you mentioned the initial SKU for Dispensers. What can those stores look like? Is that 2 to 3 SKUs? Or what -- how do we think about that like longer term?

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Matthew T. Sheehan, Primo Water Corporation - President, CEO & Director [31]

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Yes, we think that's a good opportunity for us. Again, this is just a single SKU across the fleet of Home Depot. We think that could be -- depends on store, depends on space, so it's hard to peg a number, but we can see anywhere from 3 to 7 SKUs, everything from a 4-foot bay to a 12-foot bay in those retail environments, so we have consistently looked and said that Home Depot Dispensers are a big opportunity for us, not only for the revenue and small margin we'll make on Dispensers but really our ability to connect the 2 since we already have the water. And we've clearly demonstrated what happens in water when we can -- when we have the Dispensers as well like -- such that we do in Walmart and Lowe's. Does that help?

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Michael Pochucha, Northland Capital Markets, Research Division - Analyst [32]

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Okay. Yes, that's helpful. And maybe just one more follow-up on e-commerce. Was that more company website or Amazon or company retail websites?

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Matthew T. Sheehan, Primo Water Corporation - President, CEO & Director [33]

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Yes. It's -- the majority is Amazon and our own website, and we're just getting more and more traction and getting better at learning how to promote that category within the e-commerce channel and working with Amazon to do so and frankly using our own site to communicate all of our different messages. So we just continue to see our ability to drive that business.

We're also -- really importantly to remember, we continue to work on connectivity in that world as well so that we're not just selling Dispensers, that we're getting them to engage in our Water business as well. We keep getting better at that. So we feel great about that, and we're going to -- well, I think again it's early as it relates to e-commerce growth, specifically as it relates to just the size of the product. It's a perfect product to ship home, whether it's from our website or Amazon.

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Operator [34]

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And our next question comes from Amit Sharma with BMO Capital.

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Amit Sharma, BMO Capital Markets Equity Research - Analyst [35]

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Yes. I got a couple of questions, a clarification and then maybe a couple more. So last quarter, we talked about pricing-based promotions having some issues in Refill. Can you provide us an update on that?

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Matthew T. Sheehan, Primo Water Corporation - President, CEO & Director [36]

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Yes. As we talked about last quarter, Amit, we continue to understand pricing at a local level and, as we've said, optimize where we need to do. A lot of that optimization is going well. We're doing it in small chunks, if you will, very localized areas, and we're going to watch it for a while before we make any larger decisions. But as we said for a while, we think pricing is -- needs to be optimized on a regional basis and so far, so good on those -- on that initiative.

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Amit Sharma, BMO Capital Markets Equity Research - Analyst [37]

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Is it still a drag on your volumes? Or that's been sort of addressed with these smaller-scale adjustments on pricing that you did?

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David J. Mills, Primo Water Corporation - CFO, Secretary & Assistant Treasurer [38]

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I mean you're talking about the year ago price change? Or you're talking about more...?

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Amit Sharma, BMO Capital Markets Equity Research - Analyst [39]

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No. No. Well, remember, if -- in some markets, if your competitors are acting more aggressively, at least my understanding was you will adjust prices to drive those guys back. Has that happened or still in the process of happening?

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Matthew T. Sheehan, Primo Water Corporation - President, CEO & Director [40]

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Look, yes, we have -- again, we want to be careful to overshoot the testing because it is early, but we do certainly have examples where, based on the pricing, we can drive volume.

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Amit Sharma, BMO Capital Markets Equity Research - Analyst [41]

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Got it. And then the downtime issues, you mentioned that -- in terms of the margins for the Refill, I mean, are those new? Or is that a continuation of what we saw in the fourth quarter and the first quarter? And are we completely done with that now?

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David J. Mills, Primo Water Corporation - CFO, Secretary & Assistant Treasurer [42]

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Yes, those are a continuation of what we've discussed in the past, in the fourth quarter and the first quarter of this year, so we expect those costs to -- there'll be some obviously ongoing with the credit card readers, but the cost overall, margins should improve in Q3 and into Q4.

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Matthew T. Sheehan, Primo Water Corporation - President, CEO & Director [43]

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And Amit, just look, let me help just clarify. I think that's on the sort of cost side of it. I mean the impact on this has been pretty clear for us. Our ability to see when a machine goes down remotely is drastically different than beforehand. And so we feel very good about our ability to manage this business at a much tighter basis with technology. So we've been very pleased with what we've seen so far.

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Amit Sharma, BMO Capital Markets Equity Research - Analyst [44]

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And then on the Refill side, Matt. I think Jon asked the question. Is it fair for us to assume that as you lap the pricing, which -- almost all of that in the second quarter, in the back half, should we expect positive volumes? Or is the store attrition really going to keep you on the negative side even in the back half as you lap the volume losses from last year?

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David J. Mills, Primo Water Corporation - CFO, Secretary & Assistant Treasurer [45]

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Yes. Volumes are returning, as Matt noted, and this quarter was better than a year ago -- or better than the first quarter. The attrition is real and we believe will continue. But on a same-store basis, we believe we'll start to see positive gains on it from a dollar perspective. We'll start to look at it from a dollar perspective versus a true volume perspective with the pricing that's going on.

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Matthew T. Sheehan, Primo Water Corporation - President, CEO & Director [46]

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If attrition goes away, we feel really good of our ability to drive the business. And it's really hard to predict attrition. If that goes way, just to sort of isolate variables, we feel pretty good about where the Refill business is going. And what we have to do to combat the natural attrition retail is going through is make sure we get more folks out there, more feet on the street, tell our story and get more deals to offset that.

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Amit Sharma, BMO Capital Markets Equity Research - Analyst [47]

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And that's what I really wanted to -- that was the last question, anyway, that I heard a lot more focus on new stores this quarter compared to last quarter and maybe even the fourth quarter, right? And this is not unwelcome, right? I mean look, if you see opportunity in the store count and you're stepping up to realize that opportunity, something shifted. You feel like your product portfolio, your reception of the retailers is enabling you to be a little bit more aggressive chasing new stores? Or is this just a continuation of what you've been doing?

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Matthew T. Sheehan, Primo Water Corporation - President, CEO & Director [48]

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Great question. So let me step back a little bit. For a few years now, we've been talking specifically in Exchange about our need to almost look inward. And we saw some attrition starting to begin, and we wanted to make sure that the assets we have worked a lot harder. So we've been -- we've tried to be very consistent on saying that same-store sales is a key driver to location expansion. We know retailers well. We know that -- what they want. They want growing -- they want every square foot in their door to be growing. And so we've -- in Dispensers and Exchange, in indoor Refill and frankly now in outdoor Refill, we have tools to drive same-store sales. That's what really matters to retailers. And when you have a story like that, they frankly just get a lot more excited about you.

So let's just break down Walmart for a minute. The store count that you've seen us grow, about right around 650 Exchange locations, the last, I think we said 2 to 3 years, that has come because of our production. And so that has been a strategy for a while, which is let's get same-store sales right, find some levers to grow the business and then come out of that transition into a location growth expansion mode.

And so we're doing that certainly in Dispensers. We've clearly found our ability to grow that business. We've found that ability to grow Exchange business, which is really exciting. Frankly, we've done that in indoor Refill as well as we shared some of the numbers. We've been working really hard to make sure that we find some of those levers and improve the operational nature of the outdoor business. And that path, frankly, has taken the same path that our other 3, if you will, businesses are taking, and that is make sure your ops are tight, find some marketing levers. And when you do, then go out and get on the road and start talking to retailers.

So for us, we've seen this for a while. We've tried to communicate that. We did put a lot of reliance on same-store sales in the last year -- in the last few years. And now what we are seeing across those businesses gives us a lot more confidence to get out there and show them the operational support, the operational backbone we have and to show them the tools that matter to drive growth. That's what a retailer really cares about. And when we show that to them, they get much more excited.

So I do think you're seeing a shift. We look at it as a transition in a longer-term strategy that we've seen for a long time. And so for that, I mean, we're really excited because we have certainly built businesses before that. Our -- have driven a lot of location growth. We've been very consistent on 50,000, 60,000 points of distribution. We had to hit pause for just a little bit to make sure that we have the tools in place and the operational foundation. Now that we have that across all of our businesses, we're really excited to lean into that.

And again, we believe that the combination of same-store sales and a really energized sales team with frankly more feet on the street with tools in their back pocket, that's a really good combination, get on the street and go after locations to reset what's happening to just the retail environment in general. Does that help?

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Amit Sharma, BMO Capital Markets Equity Research - Analyst [49]

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Yes. That's really helpful. Just a couple more on that. So is that 50,000 to 60,000, is that like a short term -- like how long could it be to get there? Is that a realistic goal for this business as well?

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Matthew T. Sheehan, Primo Water Corporation - President, CEO & Director [50]

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Yes. And I think we've always said somewhere around 3 to 5 years for that number. Remember, we're well over 40,000 today. And if we get more aggressive at it, we can certainly do that. But long-term business, let's get it right and then lean into locations, so I'd say, 3- to 5-year strategy.

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Amit Sharma, BMO Capital Markets Equity Research - Analyst [51]

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And then last one is, as you add more stores, Matt, are these stores coming in at a similar or better margins? Or do you have to have them in the system and there's onboarding period, so these stores may not be as profitable initially? How should we think about that?

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Matthew T. Sheehan, Primo Water Corporation - President, CEO & Director [52]

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Yes. I'll say I'll take it. Dave can step in. Keep in mind, Amit, a couple things. One is not all locations are created equal, right? So when you're just looking at location numbers, it may look like if you had 100 Walmarts, that's the same as losing 100 Kmarts. It's not even close. And so investors have to really understand the difference between a Walmart and what that maps versus what some other small locations do. So that's one thing.

And Dave can talk about the margins. I think we have a lot of it -- we have more expandability in our Refill business because that's really our -- that's our team and our trucks and all that. So Dave can step into that. But we have more I'll call it expandability in the Refill margins than we do in Exchange. Dave?

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David J. Mills, Primo Water Corporation - CFO, Secretary & Assistant Treasurer [53]

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Yes. I mean with the Exchange locations, margins should be pretty similar to what we have currently in place. The one advantage with Albertsons from a velocity or a volume perspective, the consumers there have been involved or engaging in the bulk category for a number of years. So the volume where they should come onboard at a more mature base than in a traditional store that didn't have the bulk water category in there. And so the margins should be very similar. And then in Refill, as Matt mentioned, we have more as volume expands and grows, the margins in the Refill side will expand with that. So a little bit different in each of the 2 businesses.

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Operator [54]

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And our next question comes from Mike Petusky with Barrington Research.

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Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [55]

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A number of my questions have been asked and answered, but let me just ask real quickly. Do you have a rough total of what the total locations today are? You said well over 40,000. I mean is it like 44,000, something around there or...?

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David J. Mills, Primo Water Corporation - CFO, Secretary & Assistant Treasurer [56]

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Yes. About 44,600 end of the quarter. And keep in mind, we sold the Ice business. That was just over 500 locations. We sold that at the end of the quarter.

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Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [57]

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Okay. All right. And then on the Dispensers in Home Depot, that's already -- where you said the -- you're in a majority of Home Depot stores with at least 1 -- I guess with 1 SKU?

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Matthew T. Sheehan, Primo Water Corporation - President, CEO & Director [58]

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That's correct.

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Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [59]

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What's the rough price? I mean is that a $99 machine? Is that a $200 machine? Do you have -- give that, share?

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Matthew T. Sheehan, Primo Water Corporation - President, CEO & Director [60]

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Yes, Mike, it's Matt. It's a good question. It's one of the early price points, so it's right around $30. So it's one of the early ones. It's not one of the full-size items.

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David J. Mills, Primo Water Corporation - CFO, Secretary & Assistant Treasurer [61]

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Yes, it's mostly the manual pumps and maybe some tabletops and...

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Matthew T. Sheehan, Primo Water Corporation - President, CEO & Director [62]

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I mean it goes from $10 to $30. It's on the lower side of it.

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Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [63]

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Okay. All right.

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Matthew T. Sheehan, Primo Water Corporation - President, CEO & Director [64]

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The opportunity obviously is in the -- the opportunity, Mike, is on the other side of it. If we get -- that's a SKU we can get in, we show them how we perform, which we certainly will, then we can expand that number of SKUs per store, if you will. So we're -- we get really excited about our ability to sort of lean in on our way to SKU growth.

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Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [65]

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Right. Okay. Okay. And then you sort of touched on it a little bit, but David, I mean, what do you think longer term the -- so let's say Refill is tracking at 30.5% to 31% gross margin? I mean is the longer-term opportunity there? And longer term meaning 3 to 5 years. Is that a -- can that be a 34% gross margin business, 33%? How do you see Refill?

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David J. Mills, Primo Water Corporation - CFO, Secretary & Assistant Treasurer [66]

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Yes. Definitely, good question. In the peak season quarters, Q2 and Q3, we believe this can be a 34% to 35% margin business with volumes coming back and everything else in place. I think we talked before about a 100 to 200 basis point improvement over where it's been historically. In the off-peak quarters, you could be about 100 to 200 basis point improvement, which would put you in the 32% range in a Q1 or Q4.

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Michael John Petusky, Barrington Research Associates, Inc., Research Division - MD & Senior Investment Analyst [67]

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Okay. All right. Then just last one. I don't think you guys have really touched on this in a while. But I know you're trying to do more with social media, podcast, things related to health and fitness. Have you guys had any wins there even anecdotal that you can talk about where you may have gotten some traction over the past few quarters?

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Matthew T. Sheehan, Primo Water Corporation - President, CEO & Director [68]

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Yes. Mike, we've done a bunch at a localized level. So even social media is not necessarily national on the basis you have local influencers. We've been testing a lot of that work and getting a lot of positive traction in that space. It's really early for us, but we are leaning in to that. And for the first time, we're using outdoor Refill as almost the target, if you will, of our social media. And that's -- frankly, in the Refill business, that's never really been done before. And so we get really excited about that, in some of the really important markets for us, getting out there, telling them a story, letting influencers help us tell our story, early innings for us, but those early innings are frankly a bright, bright spot.

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Operator [69]

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And we have a follow-up question from Jon Andersen from William Blair.

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Jon Robert Andersen, William Blair & Company L.L.C., Research Division - Partner [70]

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On the gap -- first one was on the gap between the Exchange -- U.S. Exchange same-store sales units of 13% and the dollar sales of 5%. Can you quantify just -- or order of magnitude the impact of the IRC versus location attrition, maybe which was more pronounced in the quarter in explaining the delta?

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David J. Mills, Primo Water Corporation - CFO, Secretary & Assistant Treasurer [71]

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Yes. The majority of the delta is the location attrition that occurred in the quarter. The IRC does impact, but if you look at it, if you remove the IRC units from the same-store unit number of 13.4%, it was only about 100 basis point impact, so it's still really strong growth in terms of total units, excluding the free ones. So mostly a location attrition story in the quarter.

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Jon Robert Andersen, William Blair & Company L.L.C., Research Division - Partner [72]

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That's super helpful. And then on Albertsons, the new Exchange locations, can you be a little bit more precise on the timing of that rollout? Is that happening Q3/Q4, and then how quickly you kind of ramp? These were existing locations from a competitor, so I'm assuming the productivity is pretty good right out of the gates.

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David J. Mills, Primo Water Corporation - CFO, Secretary & Assistant Treasurer [73]

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Yes. So the rollout will start this quarter, and it will take through the remainder of the year. And you're spot on, on replacing the competitor. These will -- we believe will perform much better than a location that didn't have this category in it in the past.

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Matthew T. Sheehan, Primo Water Corporation - President, CEO & Director [74]

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And Jon, I'd just add as we target more and more location growth, we're going to be really smart about the locations we go after. We're going to go after more high-profile, high-productive locations, so they come in earlier on a life cycle than later. So we have a lot of location information, and we're going to target those as much as we can.

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Jon Robert Andersen, William Blair & Company L.L.C., Research Division - Partner [75]

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Great. Last one from me. On the Ice business, what's the impact to (inaudible) in EBITDA for the -- I guess it would be the second half of the year or on an annual run-rate basis.

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David J. Mills, Primo Water Corporation - CFO, Secretary & Assistant Treasurer [76]

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Yes. It was about -- just under an $8 million annualized business, and the EBITDA was just under 10% margins on that.

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Operator [77]

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And our next question is a follow-up from Amit Sharma with BMO Capital.

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Amit Sharma, BMO Capital Markets Equity Research - Analyst [78]

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Dave, on this last point, as you think about the guidance change in this quarter for the rest of the year, can you dig into that a little? Is ice a factor into it? And then can you maybe provide a bit more color how much of that is greater than expected store attrition versus this investment behind sales promotions?

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David J. Mills, Primo Water Corporation - CFO, Secretary & Assistant Treasurer [79]

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Yes. So ice has been out of the number, Amit, so I think during the quarter, it was about $3 million in revenues this quarter and the second quarter. Going forward, obviously, not there. But the overall, what's driving the change has been the location attrition much farther, much more in excess of what we originally expected or guiding towards with some on the investment side, the IRC promotions, that impact -- does impact revenues as you're giving away bottles, and it impacts margins. We're seeing much higher redemption rates than we've seen even as we talked in Q1 as that continues to accelerate so -- but overall, a majority of the change is location attrition compared to where we were before.

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Matthew T. Sheehan, Primo Water Corporation - President, CEO & Director [80]

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And Amit, I'd just add, the IRC is well above what we expected it to be, and it does have a short-term impact. But we love to see that connectivity and -- when it's driving Dispensers, and our ability to invest in these additional promotions gets us really excited for the long term. But we know it's going to have a drag on our second half EBITDA, but we're leaning in because we have seen in the past our ability to use promotions to drive the future of the business.

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Amit Sharma, BMO Capital Markets Equity Research - Analyst [81]

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And the reason I'm asking this is, look, investors are going to be perfectly fine, but if you are spending more on IRC and that's the reason for your EBITDA down, right, that's really giving really good ROI on this investment. It's a really good investment, right? Nobody will penalize you for that. So I just want to like have a better understanding of what is driving this outlook down, right? So yes, those 2 are the reasons. We know that, right? I just wanted to get a little bit more clarity on, is 75% of the EBITDA negative is driven by store closure versus 50%, I don't know. Any sort of help so that in our minds and investor minds, they know what's driving it? And as we look to 2020, how should they think about that?

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David J. Mills, Primo Water Corporation - CFO, Secretary & Assistant Treasurer [82]

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Yes. From an EBITDA perspective, the IRC and the promotions, probably about a 50-50, if you compare that to the location attrition.

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Operator [83]

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Thank you. And I'm showing no further questions in the queue at this time. I'd like to turn the call back to Matt Sheehan for any final remarks.

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Matthew T. Sheehan, Primo Water Corporation - President, CEO & Director [84]

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Thank you for your participation on today's call and interest in Primo Water. Have a great night.

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Operator [85]

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Ladies and gentlemen, thank you for your participation. You may now disconnect. Everyone, have a great day.