We're going to, we in? Okay. Yep. We're going to get started. It's great to have Primo Brands with us, CEO Eric Foss and CFO David Hass with me this afternoon. Eric, a special welcome to you at your first time back at the conference in this capacity. The story has evolved considerably since this time last year, and there's a lot to cover. I do have a legal disclaimer I have to read, so bear with us or check your phones. Before we begin, I'd like to note that during today's presentation, Primo Brands may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These statements are based on the company's current expectations and are subject to risks, uncertainties, and assumptions that could cause actual results to differ materially. The company undertakes no obligation to update these statements.
For discussion of the risks and uncertainties that could affect the company's future results, please refer to the company's most recent annual report on Form 10-K and subsequent filings with the SEC, which are available on the company's investor relations website. I'm so proud of myself. Eric, okay, when you think back about the company today versus when you stepped into the CEO role back in November, what has surprised you most about the business opportunity, and where are we today in the stabilize, optimize, grow framework that you laid out earlier this year?
Yeah. Well, first of all, thanks for having us. We're very excited to be here. I think one of the things that's really encouraging is just the business model and the business opportunity. We're really pleased with the progress. I know we'll get a chance to talk about that. When I entered the door, there was some disruption on the Customer Direct business.
But if you really take a step back and look at where can this business go, and you think about it through the lens of a very healthy, attractive, large, growing, profitable category, if you take a look at it on our position within that category as the clear leader in water and healthy hydration, a major player across liquid refreshment beverages, which also has continued to grow year to date, and then you take a look at the brand portfolio of leading brands and this flexible patchwork quilt of route-to-market options, there's just a whole lot to like. Coming into the CEO role, it was really important for us to make the priorities line up in terms of importance. Number one, get the customer experience fixed on the Customer Direct business. We've done that. Second, make sure the business gets back to growth. We've done that.
We've had two quarters of beats and raises on the top line. As we think about this business going forward, it's a business that still has tremendous growth potential, multiple growth vectors, whether you think about that through the Customer Direct delivery lens or the retail lens. Again, for us, it was really important to stabilize. We're now beginning to move into the optimize and ultimately we'll get into unlocking the long-term growth algorithm and financial flywheel. Exciting time.
Okay, great. I'd say the market seems increasingly comfortable that the integration disruption is moving into the rear-view mirror. What, if anything, still needs to happen before you'd say the company's fully transitioned from recovery mode into playing offense?
Yeah, I think, again, what we have done and what's behind us, I believe, is we've stabilized the supply chain, getting a better sales forecast, getting product produced to schedule, getting warehouse out of stocks eliminated. That's enabled us to go on the service front, provide great customer service at the moment of truth, right product, right place, right time, account services scheduled, an important metric on time in full, that's now back up north of 90% and has been so consistently. I think as we think about this, what you've seen happen now to the business is you're seeing less calls. You're seeing a much quicker ability for us to respond and recover if there is a customer opportunity. Importantly, the overall growth trajectory of that business returned to growth in second quarter, which we found encouraging, and we would expect that trajectory to continue.
Okay. You've spoken a lot about culture, and also when I spent some time with you earlier this year, culture, frontline empowerment, and operational excellence. Can you remind us what specific changes you've made in these areas that ultimately should yield better revenue growth to customer retention and profitability?
Sure. I think culture's really important to a winning team. As we thought about culture, one of the first things we did was we went back and revisited what is our mission each and every day, which is all around hydrating a healthier America. Importantly, we had to make some changes to a couple of our values. We moved up the importance of this customer-first mindset. We also moved up an important value around frontline first and making sure as leaders we're all obsessed with giving them the training tools, technology, anybody on the frontline that's make moving, selling or delivering our product. From there, I think it was really trying to implement both a performance culture and a recognition culture. We've tried to invest in capability.
We want to make sure that all leaders, whether they're in a specific function or line of business, are thinking more like a general manager and thinking through an enterprise mindset and lens to how their role in helping optimize the enterprise and help it reach its full potential. We've done a lot of that. We recently made some changes on the leadership front, particularly on our Customer Direct business, brought in somebody with real deep experience in selling excellence, route to market excellence, which will help us on that journey, whether it's service selling, or operational excellence. So good progress, more work to do.
Okay, great. The direct delivery discussion has evolved from one focused on restoring service levels to building a better business, and you just mentioned it's higher. So two or three years from now, I guess, what should direct delivery and specifically the HOD component, which I guess you're calling Customer Direct now, but bear with me. What should that look like if the strategy is fully successful?
I think there's three milestones. One, it's a business that should provide an absolute great customer experience consistently each and every day at the moment of truth. I think, second, it should be able to unlock a growth flywheel that is delivering consistent, sustainable, balanced top-line growth. I think the vehicle to do that is multidimensional. So if you think about the way this model should work is we've got to make sure we're keeping a good handle and focus on retaining our valued customers. We need to add that through new quality customers that are quality, durable, and payable customers for us. We need to make sure we have a more comprehensive effort. Once we have a customer that, in most instances in HOD, is a 5-gallon customer, we can attach our premium water or our regional spring waters to that.
And then obviously we have the pricing lever. Then we have had a proven tuck-in acquisition model that has been accretive. So that's the growth flywheel. That's number two. Then third is operational excellence. We have to find a way to make sure, in a route and direct door-delivered business model, that we have the right metrics around getting that product there in an effective and efficient way. So those three things to me are really milestones that should be achievable in this business.
Okay. One of the more interesting dynamics, I think, in this HOD business this year has been the shift away from prior generation, let's call it kind of maximizing sign-ups and growing the business that way through aggressive promotions and toward a focus on acquiring kind of higher quality consumers and households. So are there any more concrete thoughts you can offer us on what you think or hope this will mean for retention and long-term value of the customer?
Yeah, I think what's very important here is this ecosystem around the 5- gallon really begins with do you want to rent or purchase your dispenser outright? Then mixed with the two main acquisition channels we have, which are digital and club-oriented booth programs that we run at both Sam's Club and Costco. So if you want to own or purchase outright the dispenser, we are the leading supplier through typical channels like mass, home improvement. Again, it's really leaning into a razor and blade model that also supports the exchange and refill business, which I think we'll talk about in a minute.
But really it steps back and says, "What are the right prices to help train the customer on what this basket is and costs on a monthly basis?" As separate competing companies, one might have chosen months where you would run incentive offers, run subsidized or cheaper per bottle or per rent oriented products through the web sign up. We found that all you're really doing is discounting those that are already looking, and you're not necessarily increasing the retention. You're not necessarily stimulating the top of funnel to offset what you may be subsidizing in terms of those discounts. As we step back, and obviously we went through the integration challenge, we had a goal of trying to close the gap between the customers that were more tenured and may have been disappointed in service and departed and who we are signing up today.
We found that with these sort of more rationalized prices that are back at more of an expected recurring fee or a recurring charge you would have monthly, that we really did not see a slowdown in top of funnel. That really, I think, gives us permission to sort of lean in there, make sure we are signing up customers. I think Eric Foss often refers to the willingness to, the ability to, and really to stick with us is how can you really afford this service? That has turned out quite great for us, because on the backside of that, the opposite of that is the inability to pay, and we really do not want to kind of deal with that. It goes through working capital inefficiencies and some other things. Again, I think we remain very encouraged where that quality of customer aligns.
Okay, great. To what degree, as you mentioned, you are not competing as two companies anymore, but to what degree is there still a price harmonization story to play out between Legacy Primo and BlueTriton Brands, which I think had been an original talking point of the merger?
Yeah. I mean, again, if you are an existing user for either which platform you came from, again, we will go through typical anniversary pricing activities. I think we are very conscious of this operating environment and making sure as we read all of the pricing dynamics and inflationary pressures the consumer faces, that we are very conscious of that.
So what we have really stuck with to date is typical anniversary pricing that sort of comes up, goes through some nominal sort of low single digit kind of increases on an annualized basis. The only thing that we really do at this point nationally is our delivery fee, which is imposed on sort of most of our customers uniformly in the country. So I do think, again, if there was a little bit of a relaxation in some of the cost pressures, we might start to look a little bit more surgically there.
But again, I think in the prior question of starting the customer at the right price is important. Going through the anniversary pricing that we are continuing to do, those are the ways I think we will access that at this point in the journey.
You've discussed investments in several digital tools like call center of the future, the new warehouse management system. Which of those initiatives do you think have the greatest potential to become growth drivers as opposed to simply yielding operational improvements?
Yeah, I think the answer is both. I think we have an opportunity to create kind of the call center of the future. It's really important as you think about the customer journey from engagement and sign up to the right service model to transparent billing, to drive that retention flywheel that I was talking about earlier. So there's going to be, I think, a continued investment in technology. Certainly, AI use and application is an opportunity for us on the call center front. I think that will enable us to really provide and optimize that service model that we're looking for, which will help drive retention and ultimately help drive revenue. On the warehouse management side, it's the same thing. We have never had a warehouse management system on the direct delivery business. We do on the retail business.
As we look at this pilot, and we ultimately are able to scale it's going to fix what was one of the big causes a year ago of the disruption around making sure we get the right sales forecast, product produced schedule, eliminating warehouse out of stocks, and then ultimately, enabling the selling and service organization to optimize that. I think they both have the ability to be accretive to that, both on the growth side and quite honestly on the margin side as well, just by creating a more effective system on both fronts.
Okay. Exchange and refill continue to perform well, but often get less investor attention than HOD. How should we think about the role of these businesses within the medium-term growth algorithm? Roughly how large are these businesses, exchange and refill?
Yeah, combined, they're a little over $600 million within the enterprise. Historically, that would have represented a larger percentage of the legacy PrimoCo, which was the larger of the two contributing businesses that sort of brought those business models into Primo Brands today. That would have helped that historical company grow a little bit faster, as they represented a little bit more than 25% of that historical business. What's really important, though, is back into that ecosystem, is that if you want a recurring 5-gallon structure, whether at the residential point of consumption or commercial, it comes down to, are we stimulating the right sell-through of dispensers? Obviously, that's the only piece of our business really exposed to tariffs. We've leaned in, driven promotion, worked with the retailer to try to stimulate those sales. That creates a household.
That household now steps back and says, "Am I going to want and can I afford it delivered? Do I want to do the work myself where I hit that middle price point of exchange, or do I want to do a little bit more work and stand at the refill machine and fill it myself?" I think what we're really encouraged by and very fortunate to be is the leader in the sale of the dispenser, the delivery of home and office-based water, the leader in exchange, where you do the work yourself, and the leader in refill. Ultimately, that comes down to a convenience and affordability spectrum for the consumer. Again, they tend to grow faster than where the enterprise is, and I think that's something we see on the horizon continuing based on our leadership.
Okay, great. Let's shift to the retail business. You've spoken about under-indexing in immediate consumption and cooler space relative to your market share. How large is that opportunity? What needs to happen for Primo to cover it, or to close that gap? Maybe if we can talk a little bit for premium versus regional spring. Because I think in general, we talk about it as more regional spring, but as we're sitting here, I'm thinking a lot about immediate consumption of Saratoga as well.
Sure. Maybe I'll start by trying to just frame how we view the multiple growth vectors we have available to us in retail, and you've touched on two of them. First is we have an opportunity, I think, broadly to just create a lot more in-store presence and points of interruption across our broad portfolio, from purified to regional spring water to premium. That's everything from gondola space, display inventory, rack penetration, et cetera. A second growth opportunity is immediate consumption. I'll come back to that in a minute. A third would be premium. I'll also come back to that. I think beyond that, we still have opportunity to get much better at RGM and pricing. So multiple growth opportunities on this business that has actually performed very well. The growth has been balanced and broad-based.
As we looked at our business coming out of the most recent quarter, we had growth across the entire brand portfolio and almost every single channel across our retail business. A lot to like about where we are. Specific to premium and immediate consumption. Premium is still very much in the early innings. The reality is that we still have pretty significant white space distribution opportunities. Once we get those distribution voids closed, pretty significant opportunities to create different display inventory issue opportunities. Then we also have a chance, really, if you think about it's probably more developed in the on-premise business and in the mass channel. The opportunities still remain in grocery. They certainly remain across small format, from convenience to drug, and up and down the street.
Again, a really significant opportunity to continue this double-digit, kind of strong double-digit growth momentum we've got on premium. Immediate consumption is maybe the most attractive opportunity in the segment right now. The reason why is it's the biggest piece of the profit pool, and as you mentioned, we under-index. Our immediate consumption as a percentage of our mix is still single digit, which is really, really low. If you look at our overall market share, our immediate consumption share is less than half of our overall market share. The way we're going to go about this is water itself as a category is under-indexed. As you think about immediate consumption, think single serve, 20 oz, 1 L, 1.5 L .
One opportunity is to get much better at penetrating the retailers' cold equipment, whether that's an open door cooler in grocery or a cold vault in convenience. A second is to place coolers, our own branded coolers, in a retailer where we would use our branded coolers, our capital. The beauty of this is you can actually unlock the immediate consumption opportunity in this category without selling product cold. I'm a big cold water consumer, but I have a lot of friends and family that prefer drinking water ambient. It doesn't necessarily take a cooler to activate and unlock this opportunity. You can do that through displays, through racks, through side stacks, and so you're going to begin as we head into the 2027 selling season, see us go through the customer account planning cycle and talk a lot more about this opportunity in immediate.
Okay, great. Let's zoom back out to the big picture maybe. Your 2026 guidance, hit my glasses to make sure I don't mess up the notes. Your 2026 guidance is for 2%-4% sales growth this year, versus the 3%-5% originally stated in the medium-term algorithm, the time of the merger. Which levers do you expect to contribute most to closing that gap over time, and what's your confidence level in that?
Yeah. I'd say at a big picture level, our overarching goal is to drive balanced, kind of durable top line growth, combination volume and price, combination retail and direct, broadly across brands and channels. We talked a little bit about the growth vectors available to us in retail. If I shift over and do the same thing on the direct business, again, the direct flywheel on how we unlock this, as we've now delivered a better service impression to our valued customers is number one, we've got to continue to make sure we've got high retention rates. We've got to add through what has always been a pretty healthy top of the funnel new customer base, but that new customer has to be high quality, durable and payable.
Third, we have an opportunity to do some attachment through, whether it's regional spring or our premium waters that I think we mentioned earlier. Then finally, you've got that tuck-in acquisition model. So I think you look at the Customer Direct and those four or five opportunities, you look at the retail business and the four or five opportunities we talked about earlier. Those are the big things that we're focused on to ensure this continues to grow on a sustainable way.
Okay. I guess when you became CEO, you inherited effectively a set of financial targets that you've said, "We need to take a step back and just kind of assess the business." When should we expect an update on that front, in terms of what you see as the right go forward run rate for an algorithm?
Yeah. I think as we came in for 2026, I said there were four things that we wanted to make sure we did. First was return the experience on the direct business back to a normalized level. I think, check, we've done that. Second, get the overall business growing. We've also done that. Third was to deliver against our financial commitments. Then finally was to set the business up strategically for how we wanted to take this business forward over the long term. Again, at a high level, the way that model would work is driving durable top line growth that's balanced. You'd like to get operating leverage that you'd see margin expansion come from that. That would translate into sustainable earnings and free cash flow generation, which should drive long-term shareholder value. So that's the mental model we're looking at.
As we go forward into 2027, we will provide more specifics.
Okay, great. In that vein, with second quarter results, you reiterated the EBITDA and free cash flow guidance, even though top line came in ahead of expectations. Presumably there is some more flexibility in the P&L to reinvest this year or to absorb cost pressures in the near term. How should people think about the right long-term margin ambition, like if and when the company, well, not if, when the company moves more into offense mode?
Yeah, I think importantly, as Eric mentioned, we will talk about 2027 in the spring of next year, but I think what we have chosen to do where we have improved service is continue to lean in on direct delivery. If that meant carrying a little bit higher route count at the beginning of the year, which we did, carrying that route count through the key selling and warmer season, we have. Now that we are through Labor Day, continuing to work on engineering and optimization activities to sunset some of those route counts, we will. I think throughout this year with where our guide started at 0%-1% to where it is today at 2%-4%, I think that has paid off, while as Eric mentioned, the retail business and the premium side of that retail business has continued to perform.
I think, again, we took the liberty within that to lean in where those investments and costs we knew or we believed could generate a higher OTIF, a better NPS result from the consumer or customer, and then a lower call volume, which have all tended to play out and play out slightly ahead of our pace with Q2 coming in about 40 basis points above break even. So we think that has been the right thing to do. As we head toward next year, we would hope that that gets a little bit more balanced. But again, it is obviously subject to some of the very dynamic kind of cost pressures and environments that we all, we and any other kind of CPG or consumer-oriented player or someone that manufacturers today is facing.
Yeah. Okay. Just thinking about costs, transportation and freight have been called out as areas of pressure. We have heard it so far the last day or two incrementally versus what was discussed across the board this summer during earnings season. For you guys, you had previously talked about productivity, rightsizing the elevated direct delivery costs in the back half as an offset. I know it is early, but we have had this more recent change in freight markets that is getting called out. I just want to know how we should think about P&L impacts of that flexibility you have on delivery surcharges or what might be at your disposal to help mitigate some of that incremental diesel inflation that is probably popping up.
Yeah. Again, I think with Primo, we are not unique in this. Others are facing it, and we tend to have similar dynamics that we can address that. First and foremost, we look at where in our business today on a more stable footing can we start to address things through efficient and effective SG&A, through leaning in on productivity gains that can be done either at the point of manufacturing, at the point of moving product, or as we just discussed, at the point of last mile where you are bringing customer on a 5-gallon basis from your branch to a customer. So where those inflation points hit us are in some of our raw goods are obviously derivatives of sort of the commodities complex as well as the freight market.
And where we tend to do quite well is where we know we have lanes of demand that is going from point A to point B, where we can contract that movement. And where it has hit us like others is when you have more of the spot market moves which were unplanned or non-contracted, you deal with either their surcharges based on the commodity complex or some of the more notable sort of driver shortages or DOT-led enforcements. Areas, again, that we can continue to lean in are where can we insource some of those lanes. So we have a thing called private fleet, which would be a Primo-paid associate that would either be in an owned or leased tractor-trailer. We will continue to lean in on that.
Again, the CapEx there or leased model is not too significant, but it does help combat some of those lanes where you are paying a little bit more of the spot or third-party aggravated rates. And then we will step back and look at our overall productivity and where can we address it ourselves or where might we have to take additional pricing actions, like things that may include a surcharge if the commodity sort of elements stay elevated.
Okay. But as you see it today, since it has been a topic, there is nothing you are seeing that is really impeding your visibility in a material way through the end of the year?
That is correct.
Okay, great. Where do I want to go next? Let us talk about the consumer, so another kind of near-term thing.
Sure.
You mentioned the decision between doing exchange, refill, direct delivery. It may be too early, but what are you seeing, if anything, in terms of consumer pattern? Because I would think a household making a switch to a more affordable option could be a very, maybe it is not a leading indicator, but like a lateral indicator, real-time indicator of consumer household health and sentiment.
Yep.
Is there anything interesting that you've been seeing on that front?
No, I think where I'd start is, number one, I think this is a category that can perform in good economic times and more challenged economic times. The reality is the product is still very affordable. What we love about our position, over and above the brand strength and the brand lineup and the great flexibility of the route to market is think about our position across that value spectrum. The minute somebody steps away from tap water, the most affordable point of entry for them is going to be our refill business. Then you're going to move up to the exchange business. If you decide to go in-store, the first stop from a branded standpoint is going to be our Pure Life, which is the best-branded value play in the store.
We have regional spring waters that have the top brand equity scores in the category, yet are priced below the other branded players. Then you move into premium. So I think the resilience of the category, I do think that the reality is that, depending on where you are on the consumer continuum, some are more challenged than others. But at the end of the day, the category is still very attractively priced. Even as we work through some of the decision-making matrix that David Hass talked about on the pricing side, we continue to keep what is good and great consumer value at the forefront of our decision-making model. It's also important for us to be sensitized to private label, and so we're doing that. I think we're doing that in a very balanced and effective way.
From where we sit right now, we're continuing to see the category perform very well. The reality is we're the only branded player that for the quarter and year to date continue to pick up value share.
Okay. With the time we have left, I'd like to talk a little bit about cash flow and capital allocation. First, how should we think about free cash flow conversion trajectory as you execute against some of these working capital goals that you've laid out?
Yeah. I think most notably, as you look at things that were less clear last year and becoming more clear as the quarters progress this year, the integration CapEx, which are elements of spend that were required to normalize the network, that will largely subside balance of year. I think we're under $20 million left to spend there. The acquisition integration and restructuring add backs have continued to decline, and we expect that to occur and continue balance of year. The quality and the cleanliness, if you will, of both the income statement and cash flow statement are there and start to set the stage for where the near term might be as we address 2027.
Within working capital specifically, what really is the key unlock, it's never been a problem with retail, it's never really been a problem with exchange or refill, which didn't really have as much of a disruption. It would've been where we had run into OTIF or service or customer experience challenges in home and office delivery.
That would've created some AR friction between yourself and the customer, where we might have gotten into a dispute, might have had to issue a credit, or slowed down some of the collection days. So you're seeing us perform better and expect to perform better on the horizon for that. Second, with the supply chain disruption largely mitigated and then soon to be enhanced through the warehouse management system, we'll be able to have a more effective and efficient inventory position within our branch network. Again, when we make product today for retail, that very effectively moves from our system to the retailers and moves quite fluidly.
As we step back and again have less to address internally, we can start to really leverage our vendor network, extend payable days, and work through terms and establish a little bit more leverage with our vendor partners, which I think will overall start to address that payable side. I do believe we can continue to work our cash conversion cycle into a more optimal spot. Again, it all kind of required the unlock of first fixing the customer experience.
Okay, great. The second part of my two-parter is thinking about uses of cash. You mentioned already there was a tuck-in acquisition strategy that kind of went to the back burner, but with the focus on stabilizing the business, but I've noticed you've mentioned it more than once today without me asking. How should we think about the appetite for this timeline? Just maybe to give people a better sense for what you're thinking about, is it small, independent, HOD-type businesses? Is it brands that you can put on the truck and add into the system you already have?
Yeah. I think as we've looked at this, particularly near term, I think our focus on the M&A side would strictly be tuck-ins on the direct delivery business near term.
Okay.
It's a proven model and one that we feel we can incorporate and work into the system, given the proven model. As we go forward, again, near term, as David said, we're really focused on reinvesting in the business to grow, but specifically get the balance sheet levered to less than 3x . As we get beyond that and get into 2027 and beyond, I think we'll be able to look at maybe a more comprehensive pipeline of opportunity. We'll be very disciplined, and we would stay very much, I believe, in the space of water and healthy hydration, and maybe fill in some gaps where we may haven't established ourself as the leader. But the reality is that now that we've got the fundamentals stabilized, the momentum building, and this bright runway ahead of us, that's an an opportunity for us as we get into 2027 and beyond.
Okay. We are going to wrap there. We are going to go to breakout. Please join me in thanking Primo and for keeping us nicely hydrated all week. Thank you.
Thank you.