Primo Water Earnings: International Unit Sale Sharpens Focus on U.S. and Improves Efficiencies

No-moat Primo Water’s PRMW share price popped 10% today after the firm announced a planned sale of the bulk of its struggling international operations for $575 million in cash (scheduled to close by the end of 2023), with plans to dispose the remainder in 2024. We view this as a prudent move allowing management to sharpen its focus on the healthy North America business, reduce leverage (to its stated long-term target of 2.5 times net debt to EBITDA), diversify into water adjacencies via acquisitions, and return cash to shareholders through buybacks. Revenue will likely fall in the near term as a result, but we expect the impact will be mitigated on the bottom line by cost savings from a smaller operational footprint.

Concurrently, the firm reported solid third-quarter results (sales and adjusted EBITDA up 6% and 21%, respectively) that matched our estimates and kept the firm on track to meet our 2023 forecasts for $2.35 billion in sales and $465 million in adjusted EBITDA, which square with management outlook. We plan to tweak our estimates to reflect the disposable but see no need to make material changes to our 10-year projections for mid-single-digit sales growth and for operating margins averaging in the 10%-11% range. Our $15.70 and CAD 20.90 fair value estimates remain in place and shares trade in a range we’d consider fairly valued.

The 6% topline growth was solid, which we attribute to price hikes implemented in past quarters and expanded customer acquisition efforts including digital media and the Costco tie-up, although we’d expect pricing to be more muted in the coming quarters as the firm looks to retain its price-sensitive user baser amid consumer belt-tightening. Adjusted EBITDA margins expanded an impressive 270 basis points to 22.7% primarily on better route density and delivery efficiencies, but we continue to see labor cost inflation as a risk that management needs to manage closely to maintain service level as well as profitability.