Primo Water Corp T.PRMW

RBC Preview

[retiredcf]

Currently have a target of US$19.00. GLTA

Primo Water Corp 1Q'21 Preview

Our view: For 1Q, we are modeling net sales growth of +1% to $479M (cons. $478.3M / guidance $455- $485M) and EBITDA of $75M (cons. $74M / guidance $70-75M). As a reminder, PRMW management reaffirmed 1Q guidance on 4/21. We expect more of the same this quarter with continued momentum in residential and slow/steady progress on the commercial side. It’s worth noting that the Primo Water acquisition (and S&D divestiture) is now in the base, which should result in tighter go- forward modeling. And while we believe a Nestle HOD deal would have been accretive, we think a period of relative stability will force investors to appreciate management ’s recent track record of execution.

Key points:

Continued residential momentum: Last quarter, North America residential water direct/ exchange was up +26% (excluding the 53rd week), a modest improvement from +23% in the September quarter. Our checks again point to growth of 20-25% as harsh winter weather resulted in an increase in time spent at home. Interestingly, we understand volume only modestly slowed in March despite a meaningful improvement in consumer mobility (sitdown restaurant reservations in the US went from -57% in January to -33% in March and -24% in April). Our checks pointed to the fact that the residential business becomes very sticky after consumers have been in the system for 6+ months.

More of the same on the commercial side: Recall that commercial water direct/exchange in both NA and RoW was down 20% in 4Q. Management did call out improving trends in Europe through January/February, but we anticipate more restrictive measures across a host of countries in Europe, muted overall progress - keep in mind PRMW's Europe business over- indexes to commercial. We are expecting both NA and RoW commercial revenue down mid-to-high teens.

Expecting FY'21 guidance to be reaffirmed: Recall last quarter, PRMW management issued FY'21 targets of +5% organic sales growth and EBITDA of $370-380M. We are currently a touch above the high-end of guidance on both metrics, but given management just recently reaffirmed their F1Q guidance and the path of COVID remains mixed in Europe, we are not expecting them to raise their FY'21 outlook.

Maybe missing out on Nestle was a good thing? The Nestle HOD news was disappointing, but we think it could end up being a positive for the stock. There’s been a lot of noise in the numbers over this past year with the acquisition of Primo Water and divestiture of S&D Coffee. While we still believe a Nestle HOD deal would have been highly accretive to earnings, we also know that it would have added another layer of complexity to the story. We believe a stable period (without transformative M&A) will force investors to give management credit for execution. We remind investors that last quarter, management implemented a LT algo of +5% organic growth and 20-30 bps of EBITDA margin expansion annually.