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Primo Water Corporation (NYSE: PRMW) Third Quarter 2021 Earnings Conference Call, November 6, 2021 at 2:00 PM Eastern Time
Good morning. My name is Pam, and I will be your conference operator today. At this time, I would like to welcome everyone to Primo Water Corporation’s 2021 third quarter results conference call. [Operator Instructions] Thank you.
I will now transfer the meeting to Jon Kathol, Vice President of Investor Relations. please continue.
Jon Kathol-Vice President of Investor Relations
Welcome to Primo Water Corporation's third quarter 2021 earnings conference call. All participants are currently in listen-only mode. This call will end before 11:00 AM Eastern Time. The conference call will be webcast live on Primo's website www.primowatercorp.com and will be broadcast there for two weeks.
This conference call contains forward-looking statements, including statements about the company’s future financial and operating performance. These statements should be consistent with the warning statements and disclaimers contained in the safe harbor statement in this morning’s earnings press release, as well as the company’s annual report on Form 10-K and quarterly report on Form 10-Q, and other documents submitted to securities regulators Consider it together. The company's actual performance may differ materially from these statements, and unless expressly required by applicable laws, the company assumes no obligation to update these forward-looking statements.
The reconciliation of any non-GAAP financial indicators discussed during the conference call with the most comparable indicators in line with GAAP, when the data can be estimated, is included in the company’s third quarter earnings announcement issued earlier this morning or in the investor relations section of the company Website www.primowatercorp.com.
Accompanying me are Primo CEO Tom Harrington and Primo CFO Jay Wells. As part of this conference call, we have provided an online presentation on www.primowatercorp.com to help you complete our discussion. Tom will begin today's conference call with a high-level review of the third quarter and our progress in strategic initiatives. Jay will then discuss our financial results for the third quarter in more detail and provide our outlook for the fourth quarter and the full year of 2021, and then turn the call back to Tom to provide a long-term perspective before the Q&A.
With this, I will now transfer the call to Tom.
Thomas J. Harrington - Chief Executive Officer
Thank you, Jon, and good morning everyone. Before we review the results of this quarter, the latest situation of our progress in the strategic plan, I would like to welcome Cate Gutowski and Jeff Johnson to join the team. Kate has joined our chief operating officer. With experience in sales and operational strategies, Cate will strengthen our management team and drive innovation, accelerate growth, and promote operational excellence in our differentiated Water Your Way platform. Jeff joined our team as Senior Vice President of Global Operational Excellence and Service Optimization. Jeff's leadership in the transportation industry and logistics will be used to increase profit margins and increase our return on investment capital. We welcome Kate and Jeff to join the team.
Our financial results for the third quarter proved the strength of our pure water products, as the demand for our products and services continued to increase this quarter. Compared with last year, our global chiller exit rate increased by 240 basis points, and the demand growth continued until October. As we have previously communicated, we have implemented a series of pricing measures to address the current inflationary costs of our entire customer base, and we continue to benefit from energy surcharges and delivery fees, which reduce energy-related costs (Especially fuel) growth. As Jay will outline in his speech later, we are satisfied with the full-year adjusted EBITDA guidance of US$390 million to US$400 million.
As we continue to transform our business, we announced earlier today that we plan to withdraw from the North American disposable retail bottled water business, mainly 1 gallon, 2.5 gallon and boxed water, as a way to improve our profitability and further improve our overall strategy Part. Reduce our environmental footprint. This exit will occur in the next few quarters, excluding our large exchange, supplement and dispenser business, nor our Mountain Valley brand, which mainly sells glass bottle products. Jay will introduce the modeling effect of this decision in his comment later.
In the quarter, revenue increased by 6% from US$518 million to US$551 million, excluding 5% of the foreign exchange impact. Driven by rising operating costs, adjusted EBITDA fell 4% from US$111 million to US$106 million.
The operational challenges we faced during the quarter were mainly due to the increase in COVID-19 infections in our workforce. We did not predict and did not anticipate that hundreds of route drivers would be adversely affected by COVID-19. This creates operational pressure as we work tirelessly to fill short-term vacancies caused by the absence of airline sales representatives. Where possible, we have deployed a series of strategies to provide services for as many routes as possible, including hiring temporary workers, increasing overtime hours, and allowing managers and company employees to enter the site to support route operations. The opening of these routes and our short-term efforts to fill vacancies have resulted in higher service costs.
Our team is once again responding to the challenges posed by the pandemic. I am proud of the team’s efforts and am satisfied with everyone’s commitment to safety and customer service. When we ended the quarter, we began to see a decline in the number of COVID cases throughout our operations, which continued until October, and were returning to normal service levels and expected operating costs as we worked hard to meet the current elevated level of demand , Especially in our North American water direct and exchange business.
Globally, our customer base grew to nearly 2.7 million in the third quarter. As I mentioned last quarter, the addressable 3-gallon and 5-gallon water market for residential households in the United States alone is estimated to be between 22 million and 29 million, and it is still growing. Residential opportunities to increase sales of 3 gallons and 5 gallons of recyclable water remain a top priority because the market potential of this category is 2 to 3 times that of today's installed base. We are focused on increasing the penetration rate of households implementing our razor/razor model. Our water dispenser sales provide an important entry point for reaching these families and using our 4R recurring razor/razor income model. As part of our lifetime customer strategy, the attractiveness of recurring purchases can continue to generate sales.
Our internal research shows that last year, approximately 1 million distributors were sold in North America, and 50% of the respondents were newbies in this category. Among those who may become future drinking fountain families, research shows that their purchasing preference is 45% of people choose direct water, 30% prefer to change water, and 25% prefer to further add water. Since our 4R model is still one of our strategic advantages, we should at least continue to gain our due share in this growth. Although the sales of distributors in the third quarter were negatively affected by the high cost of ocean freight and the tariff burden imposed in January, we hope that as we enter 2022 from the fourth quarter and ocean freight over time, the freight will be moderate.
As this involves our efforts in ESG, we are still focused on improving our position on environmental issues and looking for new ways to fulfill our commitment to clean water and sustainable development. This is why earlier today, we announced our intention to withdraw from the single-use plastic bottled water category sold in North American retail channels. We expect that exiting this category will improve our profitability, allow us to pay more attention to our razor/razor revenue model, and reduce our environmental footprint. Our progress in ESG improvement is ongoing. Last year, we achieved carbon neutrality in our water supply business in the United States. For the past 10 years, our European water business has been carbon neutral. In December 2020, we became the first company to certify spring water sources according to the Water Management Alliance standards and added a second in January. We expect to certify the other two locations by the end of 2021 and continue to work towards achieving carbon neutrality in our global water business by the end of this year. In addition, we welcome Mukesh Jha as our Vice President of ESG. He is an accomplished ESG professional with a 20-year record of success in leading ESG projects in four global organizations.
Our year-to-date performance, coupled with our confidence in the pure water model, prompted us to decide to maintain the full-year adjusted EBITDA outlook at between US$390 million and US$400 million. We expect organic growth of approximately 6%, plus some additional revenue from our M&A strategy. We are still expected to achieve the high end of the range of M&A targets of US$40 million to US$60 million in 2021.
I want to forward the call to Jay to review our third quarter financial results in more detail.
Jay Wells-Chief Financial Officer
Thank you, Tom, and good morning everyone. Starting from our consolidated results in the third quarter, revenue increased by 6% from US$518 million to US$551 million. Excluding the impact of foreign exchange, revenue increased by 5%. The revenue was mainly driven by the growth of our water direct and exchange business, partially offset by the decline in our water supply and drinking fountain channels.
Adjusted EBITDA fell 4% from US$111 million to US$106 million. As Tom discussed, the reason for the decline is the increase in operating costs associated with COVID-19, as the availability of employees and drivers during Delta peak periods, as well as the increased demand for products and services from residential consumers and B2B customers, challenge us Normal high level of service. We were also adversely affected by Hurricane Ida in September. As the storm swept across the east coast, Louisiana lost up to a week of operations and minor power outages. Fortunately, all our employees are safe and operations have been fully restored. These costs were partially offset by rising pricing, which benefited from continuous improvements in operating leverage.
Turn to our market segment performance this quarter. In North America, revenue increased by 5% from US$393 million to US$413 million. This growth was driven by strong sales and price increases in our Water Direct business, and was partially offset by a decrease in revenue from our water replenishment and water dispenser channels. Revenue from residential consumers increased by 2% in the quarter, and B2B revenue in North America increased by 12% as we saw steady progress in removing restrictions across the channel.
Due to the operational challenges I just discussed, North America's adjusted EBITDA fell by 3% to $88 million. The important thing is that we ended the quarter in a better state and are now closer to achieving our service level goals.
When it comes to our rest of the world, revenue increased by 11% to US$138 million, excluding foreign exchange effects, and revenue increased by 7%. This growth was driven by the growth of residential consumers, whose income increased by 24%. Revenue from B2B customers was flat this quarter because the performance of our Water Direct B2B customer base is still related to the relative level of office returns in each country we serve.
We will continue to work hard to launch products and services for residential consumption in Europe in an efficient and low-cost manner to further enrich our customer base and better balance customer names. The main highlight in the rest of the world is the measure of the increase in organic coolers this quarter. Coupled with the increase in retention rates, we are beginning to see the benefits of our continuous efforts to improve operational performance in the region. As we have discussed in the past few quarters, we believe that our existing footprint and knowledge of the European water services market puts us in a good position to seize the revenue opportunities we have identified. As government subsidized vacation programs in many European markets are coming to an end, adjusted EBITDA for the rest of the world fell by 10% to $23 million.
Turning to our liquidity position and balance sheet, our cash balance at the end of the quarter was US$125 million, the available net borrowing capacity of the cash flow cycle tool was US$141 million, and the total liquidity position was US$266 million. Our net leverage ratio is 3.7 times. We will discuss this in more detail on the upcoming Investor Day. Our current goal is to have a net leverage ratio of less than 2.5 times by 2024.
Looking forward to the fourth quarter, based on the information we currently have, we currently expect the consolidated revenue from continuing operations to be between US$540 million and US$550 million. We also expect adjusted EBITDA in the fourth quarter to be between US$108 million and US$118 million.
As part of our overall strategy to increase profitability and further reduce our environmental footprint, this morning, we announced our plan to withdraw from the North American disposable retail bottled water category, which is mainly 1 gallon, 2.5 gallons and boxed water. This factory does not affect our large exchange, supplement and dispenser business or our Mountain Valley brand, which mainly sells glass bottle products. On an annual basis, the revenue of these products is approximately US$140 million. After exiting these product lines, we expect the overall adjusted EBITDA margin to increase by approximately 100 basis points. We expect most of the impact will start in 2022, and we don't expect the cost of exiting these businesses to be very high.
For the full year of 2021, revenue is expected to continue to grow organically by approximately 6%, and we will maintain the adjusted EBITDA outlook at between US$390 million and US$400 million. We also expect approximately US$10 million in cash taxes, US$68 million in interest, and approximately US$150 million in capital expenditures. The capital expenditure figures reflect an increase from our previous forecast of USD 135 million, mainly due to the higher shipping and tariff costs for our delivery staff. We do expect these factors to weaken at some point, which will enhance future free cash flow.
Turning to other aspects of capital deployment, we purchased approximately US$1.8 million in stock at a price of US$29 million in the third quarter as part of our US$50 million share repurchase plan. Earlier this week, our board of directors approved a quarterly dividend of $0.06 per common share. The dividend will be paid in cash on December 3, 2021 to shareholders of record at the close of business on November 23, 2021.
In terms of mergers and acquisitions, we have maintained a disciplined approach and have been focused on accelerating the strong opportunities before us. This quarter, we announced the acquisition of Earth2O in Oregon, Health Waters in Pennsylvania and Get Fresh in Poland. We are still on track to achieve this year's goal of US$40 million to US$60 million.
In terms of our growth prospects beyond 2021, we look forward to the Investor Day scheduled for November 17, when we will provide details behind the high-single-digit organic income growth forecast and continue to implement the 40--60 million USD In addition to the one-time gain of approximately 100 basis points brought by our plan to exit the one-time retail bottled water business, the annual EBITDA profit margin has increased by 40 basis points to 60 basis points, and the target annualized EBITDA will exceed 500 million after 2024. USD, the net leverage ratio will be less than 2.5 times by 2024.
I will now turn the call back to Tom.
Thomas J. Harrington - Chief Executive Officer
Thanks, Jay. We will continue to focus on implementing a differentiated Water Your Way platform, and will use our pure water model to drive organic growth of approximately 6% in 2021. We will continue to improve customer experience by improving customer-oriented tools, build and launch more diversified e-commerce solutions, and improve customer experience through perfect delivery. We will continue to implement our razor/razor model, increase the number of sales dispensers, and drive revenue growth through a series of aquatic products.
In Europe, we are accelerating our water replenishment, water change and water dispenser business in order to diversify our customer base and capture the growing demand in the residential market. Other areas of focus include taking advantage of our predictable and reliable revenue growth while protecting our efficiency improvements and maintaining our highly variable cost structure, identifying and executing high value-added acquisitions in North America and Europe, and seeking new ways to further improve Our position is as a leader in ESG and sustainability.
Supporting our initiatives are more structured and thematic tailwinds, which are pushing consumers to switch to healthy hydrating solutions. The growth of the health and wellness category continues to support our prospects of gaining share in the broader beverage category. COVID continues to elevate the topic of health and wellness, and consumers are becoming more aware of their overall health and well-being. In addition, there are well-documented perceptions of the decline in the quality of municipal tap water, which supports the growth of our products and services. As the main source of drinking water, tap water is expected to continue to decline in the foreseeable future.
As Jay noted, we expect consolidated revenue in the fourth quarter to be between US$540 million and US$550 million, and adjusted EBITDA will be between US$108 million and US$118 million. For the full year of 2021, we expect revenue to grow by approximately 6% and maintain the adjusted EBITDA forecast at between US$390 million and US$400 million. We continue to see increased demand, and our staffing has begun to return to normal, with COVID cases reduced by approximately 80% compared to the middle of the third quarter. As we move towards the fourth quarter and next year, we expect that the Water Direct and Exchange residential customer base will continue to grow, and our Water Direct B2B customer base will improve. We also maintain a strong channel for M&A candidates, which we expect to execute in the rest of this year.
Finally, as a reminder, we will host a Virtual Analyst and Investor Day on November 17th at 9 am Eastern Standard Time, and we hope you can join us. The registration instructions are located in the investor relations section of our website. On Investor Day, we will provide detailed information behind our multi-year forecast of high-single-digit organic revenue growth, continue to implement high-value-added investments of US$40 million to US$60 million each year, and increase EBITDA margins by 40 basis points to 60 In addition to the basis point, we plan to exit the one-time retail bottled water business to bring about 100 basis points of one-time gains, target annualized adjusted EBITDA of more than US$500 million by 2024, and net leverage of less than 2.5 times 2024.
I would like to thank the Primo Water employees throughout the company for their unremitting efforts to serve our customers.
With this, I will turn the call back to Jon and let us enter the Q&A session.
Jon Kathol-Vice President of Investor Relations
Thanks, Tom. In the question and answer process, in order to ensure that we can hear the opinions of as many people as possible, we will ask each person to have at most one question and one follow-up. Thank you.
Operator, please open the phone for consultation.
Thank you. [Operator Instructions] Your first question comes from Kevin Grundy and Jefferies. please continue.
Kevin Grundy-Jefferies-Analyst
great. thanks. Good morning everybody.
Thomas J. Harrington - Chief Executive Officer
Kevin Grundy-Jefferies-Analyst
If you can, please ask me two questions. The first is the quarter, and then the follow-up of long-term guidance. So first of all, I think it will help, but from a cost point of view, some pain points surrounding labor and the inefficiency of the route caused by the pandemic may take a little longer. How has this progressed this quarter? Some of the costs you saw in October improved, especially in terms of labor shortages, which made you pleased with this year's guidance? Then I will follow up with long-term guidance. thanks.
Thomas J. Harrington - Chief Executive Officer
certainly. Kevin, this is Tom. In the middle of the quarter, I think we started to experience the peak of Delta Variant in late July and early August. About 10% to 15% of our airline sales staff are infected. If you think about it, there are a few days before they feel uncomfortable for the test, then they will be tested, and if they are positive, they will be absent for at least two weeks. And, of course, this does not happen in every building, but in the barrel.
So let me give you an example, Denver, Colorado, I have about 20 routes. Seven routes were opened. So we don’t have available labor. Obviously, we didn’t assume that kind of incremental number of employees to cover, so we scrambled and let us lag behind our ability to serve customers effectively, we missed customers, we missed revenue, and then we Incremental costs incurred for temporary labor, which did not receive proper training. We have incurred a lot of overtime, which is a short-term, if not a long-term good solution. Then we flew people from all over. I will use Jay as an example. As an example, Jay provides help on a route in Denver. Therefore, we allow everyone to solve the vacancy problem.
As we entered September, the number of cases began to decline. Then we-take October as an example, the current cases are 80% lower than the peak period. So we have now begun to resume more normal operations. As a result, we are starting to see more normal operating costs because we don’t have flying people everywhere, and we may be serving our customers. So-hope this will give you an idea of the impact of variants. Obviously, we will not predict this, and we are happy that in October, it has passed. We are almost back to normal now.
Jay Wells-Chief Financial Officer
You can even see it in our September results. For example-if you look at September alone, our revenue increased by 11% and EBITDA increased by 12%. So you can see that when we walked out of this quarter, even if it did not fully return to where it should be, it appeared in our September results, and frankly, it might last until October.
Kevin Grundy-Jefferies-Analyst
understood. Thank you both. Then, if I can follow up on long-term guidance, I know you will spend more time on this during the analyst day. So I think we can understand this, but maybe just for the purpose of this conference call, to spend a little time on high single-digit organic sales growth guidance, which is good, maybe just talk about how you think about building blocks broadly Across your business and geography.
Then the profit margin outlook is also encouraging. Maybe just talk about the key factors that drive it. How does it compare? I think historically, especially in HOD, the profit margin has increased by 10 basis points to 20 basis points, and now you are looking for 40 basis points to 60 basis points for the entire business. Therefore, in a cost environment where many companies are clearly struggling, this is a big step forward and very encouraging. So I think it will help.
Then, I'm sorry to be a little bit for both here, but I think just the last one will also help people. Now take a look at the EBITDA guidance, look at 2024, and combined with your new leverage target of 2x and 2.5x, maybe you can talk about the use of free cash flow, especially in terms of stock repurchases, because you provide information on discount trading Comments, so I think we can assume a reasonable level of capital expenditure, and so on. But just want to better understand your thoughts and what is included in the multi-year outlook on the repurchase, just to make the math work here? I think it will help. So thank you guys. Then I will pass it on.
Thomas J. Harrington - Chief Executive Officer
OK. Let me start from the top line.
Jay Wells-Chief Financial Officer
You basically accepted our investor day agenda, Kevin. So we may answer some, but not all, how about it?
Kevin Grundy-Jefferies-Analyst
This is completely fair. thank you all.
Thomas J. Harrington - Chief Executive Officer
Let me tell you my views on high single-digit growth. Therefore, we have been achieving and clarifying an organic growth of approximately 6%. When we exit the retail business, this number will rise to 7%, which is a high degree of confidence because we have been providing this number. You also know that we recently hired Cate Gutowski and Jeff Johnson. There are two areas where we are improving our skills so that we can make a real investment in the future growth of digitalization. Kate has some experience there.
Then regarding your question about the expansion of EBITDA profit margin, we think that Jeff will help us improve and improve the operational efficiency of our entire business, so that we can increase EBITDA profit margin. So this is really a high-level approach, why we think it is there, of course, we will have to invest in growth. We have already invested in mobile apps and some websites, and we will have to accelerate this investment to push it to higher single digits.
Jay Wells-Chief Financial Officer
Yes. According to the leverage you proposed, this is indeed a feature [technical issue] We have a small amount of debt that can be repaid through our cash flow revolver and some financial leases, but we do not have a large amount of debt. As a result, the debt was repaid, but the increased leverage from EBITDA lowered our leverage ratio to EBITDA ratio. This is how we reduce our leverage to below 2.5 times by 2024.
Kevin Grundy-Jefferies-Analyst
OK. I will pass it on and answer some questions offline. Thank you for your time and good luck. I appreciate it.
Thomas J. Harrington - Chief Executive Officer
Your next question comes from Derek Lessard of TD Securities. please continue.
Derek Lessard-TD Securities-Analyst
Yes. thanks. Good morning, gentlemen. Are you OK?
Thomas J. Harrington - Chief Executive Officer
Very good, Derek. Are you OK?
Derek Lessard-TD Securities-Analyst
OK. thanks. Maybe I just want to talk about-which market segments I guess-sorry, let me rephrase it, because-thank you again for the revenue impact of our exit from these businesses. I just want to know if you can further subdivide in a few areas and what income can we find? Second, I guess, what are the differences between North America and the rest of the world? Third, when do you expect to completely exit the business?
Jay Wells-Chief Financial Officer
do you want me?
Thomas J. Harrington - Chief Executive Officer
Yes. So this is the retail issue, of course.
Jay Wells-Chief Financial Officer
Yes. In the first half of the year, if you check our channel breakdown report, you will find other water. In fact, other water is only retail water, which is located in North America and Israel. In Israel, we have the number one premium retail brand. So this is a very good and very profitable brand. Here, when you look at the business we are exiting, it is about 140 million U.S. dollars. This is my prepared comment. We have discussed this business before. It is basically the EBITDA we are pursuing or basically zero. EBITDA business fixed cost leverage. So, this is the EBITDA effect, it actually just eliminates the basically zero EBITDA type of income, thereby increasing our profit margins.
Regarding other points, I’m not sure if Tom said in his prepared comments, but this will eliminate the 400 million plastic bottles we sell from our product portfolio, and we will work with retailers to replace them with our products it. Replace the machine with our Refill machine. Therefore, it is indeed an effort to remove disposable plastics from our overall product line. So this is the key part of it.
One last thing, I know that I will encounter inflation at some point, so whether I can still solve it. The biggest inflationary pressure we see is also part of this industry. We have the resin we are buying, and we have the freight we are shipping. We have seen an inflationary headwind of about $6 million in this industry. The most important thing is this year. , So it will also be eliminated part of the business that does have commodity sports. Then you have to price through large retailers, which is known to be much longer than our ability to price most of the other 2.7 million customers.
Derek Lessard-TD Securities-Analyst
This is very helpful, Jay. Thanks for that. Maybe it's just my last one. As far as the impact of the Delta variant is concerned, I just want to know how it affects you in terms of smoking cessation rate or short-term smoking cessation rate and customer service complaints?
Thomas J. Harrington - Chief Executive Officer
Yes. Therefore, it is obvious that we will not provide a normal level of service, which will increase the cost of the call center. We deployed all available personnel to solve this problem. It is encouraging that when we respond to customers saying that we are working hard to solve this problem, our customers may be very forgiving, which can be evidenced by the reduction in the exit rate of coolers. Therefore, 240 basis points lower than the same period a year ago shows that we are still making good progress in retaining customers, and we have responded appropriately or best possible within a rather crazy six to eight weeks.
Derek Lessard-TD Securities-Analyst
OK. Thank you, guys.
Jay Wells-Chief Financial Officer
Yes. Derek, including the CFO, knocked on the door with a 5-gallon jug and thanked them for being a customer.
Derek Lessard-TD Securities-Analyst
What if I want to see it?
Thomas J. Harrington - Chief Executive Officer
Your next question comes from John Zamparo of CIBC. please continue.
Jay Wells-Chief Financial Officer
John Zamparo - CIBC Capital Markets - Analyst
Thomas J. Harrington - Chief Executive Officer
John Zamparo - CIBC Capital Markets - Analyst
Good morning. I also hope to see pictures of Jay driving the truck on the upcoming Investor Day.
Jay Wells-Chief Financial Officer
They didn't give me a complete truck. They just gave me a van and they will trust me, John.
Thomas J. Harrington - Chief Executive Officer
Try to limit the disadvantages.
John Zamparo - CIBC Capital Markets - Analyst
very fair. I want to ask about the distributor business. I know there will be noise every quarter, and tariffs seem to have an impact here, but this is the second consecutive quarter that we have seen a decline. Is there anything you can add?
Thomas J. Harrington - Chief Executive Officer
Yes. Several things have happened to us. Obviously, like everyone else, the shipping cost is higher, right? Therefore, we have seen a significant increase in the cost of shipping the goods here, which leads to a price increase, which obviously takes us a while to complete, because this is a retail department. The current level of shipping has declined slightly, but it is still significantly higher than a year ago, or better in the third quarter, entering the fourth quarter, then the second quarter and the beginning of the third quarter. Our delivery time has been delayed, but now from an inventory point of view, we are in a very advantageous position. So our-my team did a very good management job when they came here, so we believe that we will open in a very good position in 2022.
Since it is related to tariffs, we did not provide a window when it expires at the end of 2020. The tariffs have been implemented since the beginning of this year, and we can now apply for exemptions from these tariffs. The process will end around December 1, and then we will wait for the government's decision. When we first experienced this process, I want to say that in 2016, we finally got the exemption, so we are cautiously optimistic, but we have to wait and see. Once it returns to normal, we expect the distributor business to return to its original state and continue to grow. Even if the situation is unstable, I think we will still sell 800,000 cooler orders this year. There are still a large number of new users in this category, which is expected to be used with our Water Direct, Exchange and Refill businesses.
Jay Wells-Chief Financial Officer
There is another point you didn't mention. Last year we did some inventory loading of retailers because they saw these headwinds coming. So, technically speaking, when you look at the 1 million units we sold last year, retailers’ purchases have increased. Therefore, this has also brought some resistance to our year-on-year comparison this year.
John Zamparo - CIBC Capital Markets - Analyst
OK. This is very helpful. thanks. Then my follow-up work is on ESG. I think you have made tangible efforts and progress in this area. The investment community may or should be very clear about this, but I am puzzled by customers. Is there any way to make customers aware of your efforts and benefits, and will eventually bring more customers or treat it as a retention tool? I just want to understand your views on ESG work from a consumer perspective.
Thomas J. Harrington - Chief Executive Officer
Yes. I think this is a good point, John. We need to communicate better, so I will call it 3R, refill, reuse, and recycle. This is the real advantage of our large size bottles. It should become a more important part of communication between our marketing customers and consumers. I think you will see us go further along this path in 2022. Then, frankly, the exit of the retail business gives us the opportunity to re-engage and open up its communication with customers, and once we get rid of all this completely by mid-2022, you will see us start this communication.
John Zamparo - CIBC Capital Markets - Analyst
understood. OK. This is very helpful. thank you very much.
Jay Wells-Chief Financial Officer
Your next question comes from Andrea Teixeira and JP Morgan. please continue.
Andrea Teixeira - JPMorgan Chase - Analyst
Thank you. Good morning. And hope you and your logistics team are doing well now. Jay, you deserve a lot of respect. I think there’s one thing about stocks—your bonus is there, right?
Jay Wells-Chief Financial Officer
I was shocked, he was sleeping [unrecognizable] Orange County. So, let me not get all the glory, he is also on the market.
Andrea Teixeira - JPMorgan Chase - Analyst
So here you are. So my question is, I think you mentioned it too, but I just want to make sure we put all the parts together. Therefore, your EBITDA margin for the fourth quarter means 20% to 21.5%. Therefore, this is a big step from the previous year, and may even be higher than the level of the third quarter of 2020, which we believe may be the highest level ever. So what do you think is driving the increase in profitability, especially, I guess, do you think labor and third-party interest rates continue to rise? That is-I mean, obviously, the exit of the retail water business is coming, as you said, in the middle of next year, but as you carry over, there will be some improvements in the mix, so we should know any additional Is the pricing still lagging?
Thomas J. Harrington - Chief Executive Officer
Yes. Andrea, it's there. We will get pricing benefits for the entire quarter. So we are very aggressively pricing in the third quarter, but it is not the entire third quarter. It will be conducted throughout the fourth quarter, covering almost all of our customer base. Therefore, we will benefit from it. Then, Jay mentioned that September revenue increased by 11%, and we had a good demand for our products in October, which will also provide us with leverage from volume declines to EBITDA margins.
Andrea Teixeira - JPMorgan Chase - Analyst
OK. It makes sense now. Everything belongs to this quarter, and by the way, since PG [Phonetic], this is very unique to everyone else. So this is impressive.
Thomas J. Harrington - Chief Executive Officer
Jay Wells-Chief Financial Officer
This is the benefit of having a very diverse customer base. We have already said that we do have the ability to set prices because our average customer bill is $50. We do not have large retailers that can conduct RFP, which gives us the ability to set prices, and we are accepting it.
Andrea Teixeira - JPMorgan Chase - Analyst
Yes. perfect. Directly to consumers. thank you very much.
Thomas J. Harrington - Chief Executive Officer
Your next question comes from Nik Modi and RBC Capital Markets. please continue.
Filippo Falorni - RBC Capital Markets - Analyst
Thomas J. Harrington - Chief Executive Officer
Filippo Falorni - RBC Capital Markets - Analyst
Hey. This is Filippo Falorni of Nik. Regarding a short question about labor, you have clearly mentioned that the situation is improving and has returned to normal. However, if you consider the potential long-term impact of COVID from a long-term perspective, given the rise of the gig economy and more options for people to find alternative jobs, have you ever seen the difficulty of finding employees? Is this something you have considered for a long time in terms of labor?
Thomas J. Harrington - Chief Executive Officer
Yes. In terms of route labor, we have taken appropriate measures on a market-by-market basis according to our starting salary level, which has been incorporated into our expectations, and we have not seen huge challenges. This does not mean that there are no talents somewhere in North America, and there is a specific problem there. But in general, we think we are in a pretty good position in terms of our ability to fill and keep filling these routes, unaffected by the peaks caused by future variants.
Then the other biggest area for us is our call center. So our salary at the Lakeland factory is competitive, and frankly, the entire team is focused on retention, right? So part of it is, once you can attract people, when we get them, are we doing all the right things to keep them, a very important focus of the company is to guide people appropriately and make them feel the team’s Part, so they will be with us.
Filippo Falorni - RBC Capital Markets - Analyst
understood. That makes sense. In terms of ESG, maybe you can give some indicators. From the perspective of emissions, how can exiting the North American bottled water business help improve your company's ESG situation? In the long run, you have made a lot of progress on this topic. What other measures are you considering?
Thomas J. Harrington - Chief Executive Officer
So there is-I will give you one of the other initiatives, and then I will hand the bigger retail issue to Jay. As you will read last quarter, we invested in a company called Sipple. Sipple is a refill vending machine that can sell containers of one liter or less. So we actually believe that it will be a one-time replacement. We currently only invest in the UK, and we have global rights. This will become part of our growth story in the next three years, and we believe that this is a truly environmentally friendly solution with very good growth potential.
Jay Wells-Chief Financial Officer
When you look at ESG, I mean, you see, we-our main product is the most environmentally sensitive packaging we can use. We pick up a package, we sterilize it, and we reuse it up to 50 times. That's it. However, when you look at our product portfolio, this is only a small part of our business, but we are still using more than 400 million disposable containers, and this situation will disappear. So you look at greenhouse gases. By the end of this year, we will achieve carbon neutrality on a global scale and work hard-through carbon credits, but work hard to reduce the amount of greenhouse gases we produce. We are a member of the Water Management Alliance. We are really focused on really taking care of aquifers and water sources. This will enable us to reach the same position in packaging, because this one-way packaging is an area that does not fit our strategy. So you really look at Part E of ESG, this is really the last step we really need to really move in the right direction as a company in each of these three categories.
Filippo Falorni - RBC Capital Markets - Analyst
great. make sense. thank you all.
Thomas J. Harrington - Chief Executive Officer
Jay Wells-Chief Financial Officer
Your next question comes from Derek Dley of Canaccord Genuity. please continue.
Derek Dley - Canaccord Genuity - Analyst
Hi, everybody. congratulations...
Thomas J. Harrington - Chief Executive Officer
Derek Dley - Canaccord Genuity - Analyst
Hello everyone. Congratulations for the strong quarter and the obvious short-term and long-term good guidance.
Jay Wells-Chief Financial Officer
Derek Dley - Canaccord Genuity - Analyst
So, one thing I want to talk about is acquisitions. So you mentioned that you will continue to pay attention to tips of 40 million to 60 million dollars. Can you talk about the multiples you see? I know you have given a range in the past. On the private side, are their multiples still within this range? Are there larger or medium-sized ones out there? Finally, will these be mainly concentrated in the United States?
Thomas J. Harrington - Chief Executive Officer
Generally speaking, the multiples are roughly the same as in history. The scale of what we are doing may be a bit larger than average. So I think our average level over the years is about 2.5 million US dollars, maybe 3.5 million US dollars, if you want, it may be a little bit larger than this. Therefore, its scale is a bit bigger. You will see a number in North America very early, and Get Fresh is a good scale acquisition in Poland, so we have done more to ensure that we properly integrate the business, which is about 20,000 customers, if I I remember correctly. We think there is a good runway, so we have said 40 to 60 million US dollars, so we think we still have a lot of sweet spots, if you want, historically reasonable multiples, and then rarely bigger There, we will wait and see how they will develop over time.
Derek Dley - Canaccord Genuity - Analyst
OK. Then, I thought, just a little change, you guys-you mentioned some of the cost inflation you see in labor, in transportation. I want to know what you see in terms of packaging, I think, in terms of plastics. I mean, is this something you can easily set or pass the price on, or how do you deal with it?
Thomas J. Harrington - Chief Executive Officer
Yes. Yes. This is a good question. If you think about our business, excluding the retail business, there is a little inflation and the cost of polycarbonate PET 5-gallon containers, but because we use them 50 times, this is really not a big impact. Frankly speaking, this becomes the biggest material we buy at the end of the day. Therefore, our exit from the retail industry will not be pressured by the cost inflation, resin and fuel associated with packaging. We will not buy any corrugated paper, we will buy a lot less shrink packaging, all of which are some hidden benefits, not just plastic bottles, but environmentally friendly.
Derek Dley - Canaccord Genuity - Analyst
Yes. That makes sense. OK. Then there is my last one, as far as the European residential business is concerned. I know it is too early, but you mentioned a 24% year-on-year growth. What do you think of the early performance of the business? Is it still located in the selected metropolitan agglomeration?
Thomas J. Harrington - Chief Executive Officer
Yes. We are very satisfied with the performance of the residential business. We are now-I think the last site we built was in Russia, and we are very satisfied with the early stages of Russia. We will now establish sites throughout Europe. So everyone has a basic aspect of trading. This is an area that we need to develop over time. As we enhance the digital experience, this is one of the growth areas. But we are very satisfied with the growth. At this point, it tends to be more like Eastern Europe. But we are very satisfied with what we think is where it can grow, and there will be quite significant growth in the 2021 calendar year.
Derek Dley - Canaccord Genuity - Analyst
Okay, great. thank you very much.
Thomas J. Harrington - Chief Executive Officer
Your next question comes from Daniel Moore of CJS Securities. please continue.
Jay Wells-Chief Financial Officer
Thomas J. Harrington - Chief Executive Officer
Daniel Moore-CJS Securities-Analyst
Good morning, Tom and Jie. You cover a lot of areas, so maybe just talk about the pace of Europe's reopening in business? How does this start to recover in this quarter and the beginning of the fourth quarter? thanks.
Thomas J. Harrington - Chief Executive Officer
Yes. I think that in terms of returns, the business has actually basically flattened out. Therefore, our current method of operation is that this is the new normal. And we must keep in mind that our customer base is a larger business and a larger office. This is a balance between working from home and the reopening of European companies. So its recovery rate is very slow, and frankly, it has been stable for the past month. Therefore, one of the reasons why our focus on residential growth has become more important is that we diversify our customer base, but since these consumers spend the same amount of time at home, this is an important time for us to promote the growth of the entire African continent.
Daniel Moore-CJS Securities-Analyst
perfect. Finally, in terms of capital allocation, the color is very good, I appreciate it. This quarter shows a little hope to strengthen or continue to strengthen stock repurchases, or it is just a speculation. Second, leverage, simple mathematics. Very simple, but will this prevent you from exploring larger strategic mergers, or just assume it will not happen? thanks.
Jay Wells-Chief Financial Officer
I think you answered your own question about stock repurchase. This is opportunistic. We did buy a large part of the stock when it fell. We bought 1.8 million shares this quarter. This is the purpose. We have experienced most of the work assigned to us by the board of directors. So this covers this.
On the balance sheet, we do have a good balance sheet. If necessary, we have the ability to conduct larger-scale transactions, but during this period, our goal is to grow our business and increase EBITDA. I previously talked about the deleveraging year that will naturally occur as we achieve organic growth in the next three years. .
Daniel Moore-CJS Securities-Analyst
OK. Looking forward to Investor Day. Thank you for the color.
Jay Wells-Chief Financial Officer
Thomas J. Harrington - Chief Executive Officer
Your next question comes from Pavel Molchanov and Raymond James. please continue.
Pavel Morchanov-Raymond James-Analyst
Thank you for answering my question. Let me also zoom in on Europe. Compared with the United States, cases in Europe have risen by nearly 50% in the past 30 days-Britain, Germany, and I think Eastern Europe in particular is now in the fourth or fifth wave. Does this have a similar impact on the US-based airline operations you discussed earlier?
Thomas J. Harrington - Chief Executive Officer
I want to think about it this way. Since it is the fourth or fifth wave, this is a normal process, right? Therefore, we will not have an impact on airline operations or the European employees we have experienced in North America. So we do not have a large number of infected people. In miles, when we track it by market every week, we know where people are negatively affected, and we just don’t see that side of it.
Pavel Morchanov-Raymond James-Analyst
OK. Glad to hear it. Sipple, you mentioned in your initial Sipple announcement that you will deploy their mini kiosks based on your European assets and bring them across the Atlantic to North America. Do you have a timetable for deploying this technology based on your assets?
Thomas J. Harrington - Chief Executive Officer
Yes. I will tell you that our exact location today is to find suitable manufacturers in North America and Europe so that we can scale up, right? Therefore, we are actively discussing solutions. So it's kind of-we have the technology, and now we have to expand it. I don't want to ship it all over the world. So I would rather produce it on the African continent, if you wish, based on the year on the left. So it is now underway. I will decide when I can actually plug in and open them, but we hope to deploy some by the end of 2022.
Pavel Morchanov-Raymond James-Analyst
understood. Thank you very much. Congratulations.
Thomas J. Harrington - Chief Executive Officer
Yes. Thank you. Appreciate it.
Your next question comes from George Doumet from Scotiabank. please continue.
Thomas J. Harrington - Chief Executive Officer
Jay Wells-Chief Financial Officer
George Doumet-Scotiabank-Analyst
Hi, everybody. Good morning. I want to talk about pricing, maybe the price increase we took in the third quarter may be very large, maybe look at your high single-digit long-term algorithm, whether this is still a third of it, or do you expect pricing May start at a price higher than in history?
Thomas J. Harrington - Chief Executive Officer
During the quarter, our pricing increased by 6%. Water Direct and Exchange, most of our business. So we are very satisfied with it. Then we hope this situation continues, obviously because we have implemented this. The long-term algorithm is that from a quantitative point of view, it is always part of the number of customers we acquire and their contribution, and we are very strict with regular price increases, so this will become an important part of our growth story. Customer retention is part of our growth story, so it's not just bringing in new customers, but retaining the customers you own, which is very valuable to us.
Jay Wells-Chief Financial Officer
I mean, if you look at that part of the business where Tom talked about 10% this quarter. A little over 1% is customer growth, a little over 2% is sales growth, and then 6% is pricing, rounded to 10%. We feel that there is investment behind the growth. We can increase the growth of our customers and consumption will continue to grow. I think we are demonstrating our ability to set prices in our customer base. So these are still the three promises [Phonetic] that we pay attention to.
George Doumet-Scotiabank-Analyst
Okay, great. And turn to Israel, which is more immune than most of our jurisdictions. Just want to know, have you-what have you seen in terms of the number of each customer, has it increased in general, has it been stable in the past few months?
Thomas J. Harrington - Chief Executive Officer
Yes. The business has been fairly stable and growing. However, as Jay said, in the retail aspect of our business, we are the number one brand in the country. Therefore, we have seen an increase in consumption there. Our home and office or Water Direct business has been very solid this calendar year and has experienced quite significant growth. The time they come back from COVID is different from other people, yes, in terms of time, so it takes a little longer for them to come back. Therefore, although they do have a little peak, it is short-lived compared to what we saw on Delta in the United States.
George Doumet-Scotiabank-Analyst
OK. The last point, if I can, is that our pace of reinforcement mergers and acquisitions is much higher than US$40 million to US$60 million, at least on the basis of recent operating rates. I just want to know, if you look at it from a 12-month period, can you maintain and ultimately get a higher contribution?
Jay Wells-Chief Financial Officer
I mean-George, I mean, the point is, if you look at the years when we were over 60 million dollars, we might have done a larger type of indentation of 30 million dollars or 40 million dollars, I mean Yes, the valley is an example, which is what makes us at the high end. To some extent, we continue to do this-as Tom said, the average is 2.5 million US dollars, 3 million US dollars, maybe larger, some very few. I think this range is correct, but we do continue to look for larger ones. I'm not talking about strategy, but in the case of US$30 million, US$40 million, and US$50 million, these will obviously push us out of scope. However, if we continue with the average we are talking about, then $40 million to $60 million is the right way to look at it.
George Doumet-Scotiabank-Analyst
OK. Thank you for your answers, guys. good luck.
Jay Wells-Chief Financial Officer
Thomas J. Harrington - Chief Executive Officer
There are no other questions at this time. please continue.
Jon Kathol-Vice President of Investor Relations
This concludes Primo’s third-quarter earnings conference call. Thank you all for attending.
Jon Kathol-Vice President of Investor Relations
Thomas J. Harrington - Chief Executive Officer
Jay Wells-Chief Financial Officer
Kevin Grundy-Jefferies-Analyst
Derek Lessard-TD Securities-Analyst
John Zamparo - CIBC Capital Markets - Analyst
Andrea Teixeira - JPMorgan Chase - Analyst
Filippo Falorni - RBC Capital Markets - Analyst
Derek Dley - Canaccord Genuity - Analyst
Daniel Moore-CJS Securities-Analyst
Pavel Morchanov-Raymond James-Analyst
George Doumet-Scotiabank-Analyst
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