Legion Partners Issues Letter to Primo Water Corporation Shareholders Calling for Urgent Board Change
Legion Partners Asset Management has issued a public letter to Primo Water Corporation's shareholders, advocating for the appointment of four independent directors to the Board. This call for change stems from concerns over the company’s chronic operational underperformance, with Legion Partners holding approximately 1.5% of the outstanding shares. The proposed nominees possess substantial experience in beverage operations, marketing, and capital allocation. Legion Partners believes that with the right leadership, Primo could significantly improve its financial performance, potentially tripling its share price and achieving over $630 million in EBITDA by 2027.
- Nomination of four highly-qualified independent directors to improve board performance.
- Potential market opportunities in the water business, particularly with increased demand for safe drinking water.
- Projected possibility of tripling share price and reaching over $630 million in EBITDA by 2027.
- Chronic underperformance of Primo relative to peers and indices.
- Poor return on invested capital (ROIC) not exceeding weighted average cost of capital (WACC).
- Declining customer counts and limited growth in key business segments since 2020 acquisition.
- Increased capital expenditures without significant improvement in financial returns.
Highlights Company’s Chronic Operational and Share Price Underperformance and the Need for New Skill Sets in the Boardroom to Help Primo Reach its Full Potential
Nominates Four Highly-Qualified, Independent Directors to the Board Who Would Bring Valuable Experience in Beverage Operations, Marketing, Capital Allocation and Strategic Planning
The full text of the letter follows:
Dear Fellow Shareholders,
We have attempted to meaningfully engage with the Primo management team on multiple occasions around accelerating growth and improving profitability but have seen little action taken by the Company’s Board of Directors (the “Board”). We believe this lack of progress is a symptom of a stale Board that lacks the skills required to drive significant performance improvement and has enabled a culture of complacency at the highest levels of the Company. Rather than seeking the expertise required for Primo to flourish, this Board has been a landing spot for its ex-CEOs and a comfortable board role for long-tenured directors with little relevant experience or personal investment in the Company. With an average director’s tenure of more than nine years, and a history of underperformance, we believe that substantial shareholder-driven change in the boardroom is long overdue and necessary at the 2023 annual meeting of shareholders (“2023 Annual Meeting”) in order for Primo to achieve its full potential. This is why we have nominated four highly-qualified, independent candidates for election to the Board at the 2023 Annual Meeting.
While we are concerned about Primo’s past performance, we are very excited about Primo’s future. We believe Primo has attractive end markets in the water business and a strong market position in
The disconnect between the underlying value of Primo’s assets and its share price is why we have invested in the Company in the past. Notably, we originally invested in Primo before the Company was sold to
This initial letter details what has gone wrong at Primo and why substantial change is desperately needed. Over the upcoming weeks, our nominees intend to detail their ideas and release an operational critique of the issues hindering Primo’s performance. We firmly believe that if our nominees are elected and their ideas are fully implemented, Primo may be able to triple its share price over the next five years, and produce EBITDA of over
The Board Has Presided Over Long-Term Share Price Underperformance
The Board Has Presided Over Long-Term Operating Underperformance
Primo’s ROIC has been particularly poor for years. We believe the incumbent directors have failed to effectively guide management and hold it accountable for these poor results. Primo has been a prolific destroyer of value for years given that its ROIC has not once exceeded its weighted average cost of capital (“WACC”), which we calculate at
Primo’s management predicted in 2022 that ROIC would begin to materially improve after years of sub-par execution:
“Our long-term organic revenue growth outlook is compelling, and we remain confident in our outlook for 2024 as we forecast high single-digit annual organic revenue growth, an updated 2024 outlook to reflect an increase in adjusted EBITDA to approximately
However, since that time, Primo’s management has not mentioned the
“With respect to the Company’s expectations of its performance, the Company’s reconciliations of Q1 2023 and full year 2023 estimated Adjusted EBITDA, along with targeted 2024 Adjusted EBITDA, Adjusted EBITDA margin, net leverage, adjusted EPS, and ROIC are not available, as the Company is unable to quantify certain amounts to the degree of precision that would be required in the relevant GAAP measures without unreasonable efforts.” – Page 2 of Primo’s Fourth Quarter 2022 earnings presentation from
This seems to indicate that they once intended to hit the ROIC metric for 2024, but have since realized that they are underperforming and would rather not discuss this metric any further.
We Have Serious Concerns with the Board’s Oversight of Customer Growth as an Expanding Consumer Market Has Not Translated to Promised Growth at the Company
As we noted at the outset, Primo has an excellent set of assets focused on a growing consumer market. In fact, Primo’s management team often touts the growth in the industry.
While we believe that Primo’s assertion that its end market is growing, this does not seem to be translating into any significant growth of any of Primo’s customer or location metrics. Primo operates several different primary platforms for consumers to access its water:
- Home and Office Water delivery (Primo calls this “Water Direct”) – this is where customers are serviced by a network of trucks and drivers who deliver to end customer residential and commercial locations. In our view, growth in the business can be tracked through customer counts.
- Exchange (Primo calls this “Water Exchange”) – this service is comprised of racks at retail locations where consumers come and return a consumed water jug (generally five gallon) for a new pre-filled water jug. We believe growth of this activity can be tracked in exchange locations.
- Refill (Primo calls this “Water Refill”) – this service is the most affordable consumer offering and is comprised of a network of refill machines where consumers refill their own water jug (generally five gallon) using a refill machine that is generally located either inside or outside a retailer location. We believe growth of this activity can be tracked in refill locations.
Primo also sells dispensers at retailer locations, which is a critically important element of its strategy as they are viewed as the “razor” in Primo’s razor/razorblade approach. Generally, these dispensers are sold at nearly no profit as the goal is to place as many of these into service as possible to hopefully drive recurring sales of high margin water. We have tracked the growth of this activity in dispenser retail locations.
When we look at customer and location growth, it is notable that Primo has experienced customer declines for Water Direct and limited location growth for Water Exchange, Water Refill and its dispenser product sales since acquiring these businesses in 2020. In fact, on the day of the acquisition announcement, Water Refill, with its 23,100 locations, was touted in the presentation materials as a “significant location growth opportunity.” Unfortunately, it appears little of this vision has been realized.
Primo has expended significant capital attempting to build its base of Water Direct customers, but with highly unsatisfactory results. The Company has executed over 120 tuck-in acquisitions since 2014 and over 70 since 2018, primarily to inorganically grow its Water Direct business. We estimate that Primo has spent around
However, this has translated into near zero customer growth as Primo has been unable to sustainably grow Water Direct customers. Instead, we are concerned that Primo has been using its tuck-in acquisition program to cover up how awful its real organic customer count growth metrics look for Water Direct. We’ve asked Primo’s management team for organic data on customers repeatedly and they have refused to answer this question. To further highlight how embarrassing Water Direct customer growth is for Primo, the management team did not even provide a number for Water Direct customers in the Fourth Quarter Earnings Presentation on
As recently as 2017, the management of Legacy Primo stated its belief that there were a large number of retail locations for future growth:
“We believe there are over 250,000 major retail locations throughout
Primo had 46,000 locations in 2017 – therefore, the 2017 10-K statement implied 200,000 potential locations to be added. Yet, merely a year later, management characterized the opportunity as significantly smaller at 50,000 – roughly 150,000 locations disappeared:
“We believe there are over 50,000 additional major retail locations throughout
Despite our raising the issue back in 2017, there has been little progress made on location growth – there are 51,000 locations at the end of 2022 compared to 46,000 in 2017. Primo appears to have significant struggles driving organic customer and location growth. We believe that this issue can, and must, be corrected. While these issues have been well understood for years under the current Board’s oversight, nothing has materially improved. The operational execution issues linger as the founder and legacy leadership of Primo remain on the new Primo Board.
We Have Serious Concerns About the Board’s Oversight of Profitability
Primo is generating subpar returns on invested capital. Primo’s management team has used adjusted EBITDA as a key financial metric. We find this interesting given that
In an effort to better understand how Primo’s profitability compares with peers, we benchmarked the Company’s performance with eight route-based peers. While Primo’s preferred metric is adjusted EBITDA, we think, given the high level of capital intensity in the business, a better metric for comparing Primo’s performance would be one which takes into account the cost of depreciation. Thus, for our comparison purposes we are using adjusted EBITA for comparing Primo to this peer group.
Our benchmarking analysis suggests that Primo is a poor performer with an adjusted EBITA margin of
We Believe the Board’s Oversight of Capital Spending Needs Significant Improvement
As we have highlighted in this letter, Primo’s financial returns are poor and its margins, when depreciation is taken into account, are woefully behind Primo’s route-based peers. One reason for this may be the Company’s substantial capital expenditures. For 2022, capital expenditures totaled
- Drive digital growth;
- Dispenser growth through innovation;
- Build a more efficient delivery & service fleet;
- Invest in efficient water production lines to reduce water use and increase productivity; and
-
Drive growth in
Primo Fresh (a new untested kiosk) and new filtration innovations like BIBO.
During our subsequent calls with management, we’ve asked about the significant increases in capital spending. Frustratingly, they have no good answer for why the base level spending increased so dramatically from
Management has placed some kiosks for
We Believe the Board Lacks Sufficient Alignment with Shareholders
We believe that the Board’s failure to create value for Primo’s shareholders is in part attributable to its lack of “skin in the game” for the Company’s directors and management. It is easy to rubberstamp one failed acquisition or growth strategy after the other, sign off on large capital expenditures and approve excessive operating expenses when you have no material exposure to the Company’s share price. We analyzed purchases and sales of Primo stock by members of the Board since
Since
Our Nominees Have Extensive Experience in Water Delivery, Beverage Operations, Marketing, Diversity Equity and Inclusion, Capital Allocation and Strategic Planning and Are Well Positioned to Create Significant, Long-Term Shareholder Value
Our accomplished nominees include:
-
Henrik Jelert – Former President & CEO of ReadyRefresh®USA (“ReadyRefresh”), Blue Triton Brands and previously he was Executive VP, ReadyRefresh, NestléWaters North America . Jelert is a global, customer-centric and strategic operational executive with substantial experience in business transformation and omnichannel experience.
-
Lori Tauber Marcus - Founder ofCourtyard Connections, LLC , an advisory firm focused on marketing and leadership in consumer goods, retail, foodservices and consumer technology, and previously she was a senior marketing executive at beverage companies, including PepsiCo andKeurig Green Mountain .
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Derek R. Lewis – Former President ofPepsiCo Multicultural Organization ,PepsiCo Beverages North America . Lewis is a seasoned beverage operational executive and leading expert in diversity and inclusion initiatives.
-
Timothy “Tim” Hasara – Founder, Managing Partner, and Chief Investment Officer for
Sinnet Capital . Hasara is a leading capital markets expert with a proven track record and possesses valuable experience in corporate governance.
Sincerely,
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LEGION PARTNERS’ FOUR NOMINEES
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Mr. Jelert served as President & CEO of ReadyRefresh,Blue Triton Brands, Inc. from 2021 to 2022, after he helped lead a successful sale of NestléWaters North America (“NWNA”) toOne Rock Capital Partners andMetropoulos & Co. in 2021 in a deal that rebranded the company as$4.3 billion Blue Triton Brands, Inc. He directly led the sale of ReadyRefresh part of the sale, and its integration into the new PE organization. -
Prior to the sale,
Mr. Jelert served as Executive VP of ReadyRefresh, NWNA from 2015 to 2021. -
In his roles leading ReadyRefresh,
Mr. Jelert was responsible for growing the Direct-to-Consumer beverage delivery service that offers a diverse product portfolio directly to homes and businesses across the US, and led the transformation of Direct-to-Consumer business scale-up to become the #1 beverage delivery service in the US. -
Mr. Jelert led ReadyRefresh to achieve business Carbon Neutrality in 2020, marking the first Nestlé business globally to achieve the status. He also drove diversity and inclusivity as executive sponsor and ally of theBlack Employee Association , #PrideAndDiversity. -
Mr. Jelert joined Nestlé in 2003 and held roles including Managing Director and General Manager spanning Western, Central andEastern Europe . He was Regional Business Head for the Nestlé Waters Direct European Home and Office delivery business from 2008 to 2014 prior to joining NWNA in 2015. In 2014, he led the successful sale of Home and Office Delivery business inEurope toEden Springs Group , which was subsequently acquired byCott Corporation (nowPrimo Water ). -
Mr. Jelert holds a BS in Financial Management and a Bachelor of Commerce in Business Administration, both from TheCopenhagen Business School .
-
Ms. Marcus is the founder ofCourtyard Connections, LLC , an advisory firm focused on marketing and leadership in consumer goods, retail, foodservice and consumer technology. -
Ms. Marcus spent the majority of her career with PepsiCo, Inc. (“PepsiCo”) from 1987 to 2011 in marketing & general management positions of increasing responsibility, culminating in her appointment as Senior Vice President, Marketing Activation forPepsiCo Beverages North America . -
After PepsiCo, she served as SVP, CMO of The Children’s
Place, Inc. , EVP, Chief Global Brand & Product Officer atKeurig Green Mountain, Inc. , prior to its merger with Dr Pepper Snapple Group and Interim Global CMO, Peloton Interactive, Inc., prior to its initial public offering.Ms. Marcus also has significant board experience in public, private and not-for-profit companies. She presently sits on the boards of Fresh Del Monte Produce, Inc. and 24-Hour Fitness, Inc. She was formerly a board director at Phunware, Inc. from 2018 to 2011. -
Ms. Marcus previously served on the boards of privately-held companies, includingGolub Corporation ,DNA Diagnostics Center and Talalay Global. She is also a long-time board member of theMultiple Myeloma Research Foundation and serves as a board director for SHARE, a women’s cancer support organization. -
Ms. Marcus served for several years as the leader of the direct-to-patient workstream at Harvard Business School’s Kraft Precision Medicine Accelerator. From 2017 to 2020,Ms. Marcus worked with the Harvard Business School’s Kraft Precision Medicine Accelerator as Chair of Direct to Patient Initiative. -
In addition to her board work,
Ms. Marcus serves as an executive coach withCrenshaw Associates in NYC, where she coaches Fortune 500 C-suite and high potential executives. -
Ms. Marcus earned her BS from theWharton School of Business at theUniversity of Pennsylvania .
-
Mr. Lewis retired in 2023 after working for 35 years at PepsiCo. He held numerous leadership positions across the organization, including South Division president, senior vice president and general manager of field operations, and a role as vice president, consumer and category insights. -
From 2022 to 2023,
Mr. Lewis served as President ofPepsiCo Multicultural Organization ,PepsiCo Beverages North America . -
As the first president of the
PepsiCo Multicultural Organization ,Mr. Lewis was responsible for accelerating retailer business development in multicultural communities, expanding existing successful programming, including Pepsi Dig In and the Black Restaurant Accelerator Program, all aimed at supporting Black and Hispanic communities and leveraging the scale of PepsiCo to drive investment in and support of diverse suppliers and partners. -
The equity focus of the
Multicultural Organization included rebranding and national expansion of the successful Pepsi Stronger Together community engagement program, and elevating PepsiCo’s efforts to be an employer of choice for diverse cohorts and supporting the company’s employee resource groups to build a unified company that celebrates and thrives on the diversity of each employee. -
Outside PepsiCo,
Mr. Lewis served on the board of theAmerican Beverage Association . -
Mr. Lewis currently serves on the board ofYMCA of Central Florida , and theOrlando Magic Youth Foundation . He also serves on the board of trustees forHampton University . In addition, he is a member of theExecutive Leadership Council ,National Black MBA Association andKappa Alpha Psi Fraternity, Inc. -
Mr. Lewis holds a BS in Business Management fromHampton University and an MBA in Management fromXavier University .
Timothy "Tim" Hasara, age 59, is a capital markets expert with a proven investment track record who also possesses valuable experience in corporate governance.
-
Mr. Hasara is the Founder, Managing Partner, and Chief Investment Officer ofSinnet Capital Management, LLC (“Sinnet Capital”), a Microcap value fund, since 2021. -
Prior to
Sinnet Capital ,Mr. Hasara spent 27 years atKennedy Capital Management, Inc. (“KCM”) where he managed anInstitutional Microcap Fund with over in assets.$1 billion -
Mr. Hasara began his investment career at KCM in 1994 as an analyst and was promoted to Portfolio Manager in 1995 of a Small Cap Value fund with several hundred million in assets. He began working on a new flagship microcap fund in 2004 and grew it from to over$25 million in 2021.$1 billion -
Mr. Hasara has served as Independent Director on the board of United States Antimony Corp. since 2022. -
Additionally,
Mr. Hasara serves as Treasurer and Executive Board member of St. Patrick’s Center, a large non for profit serving the homeless inSt. Louis .Mr. Hasara has a bachelor’s degree in Business Administration from theUniversity of Notre Dame and a master’s degree in Management fromJohns Hopkins University .
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CERTAIN INFORMATION CONCERNING THE PARTICIPANTS
LEGION PARTNERS HOLDINGS STRONGLY ADVISES ALL SHAREHOLDERS OF THE COMPANY TO READ THE DEFINITIVE PROXY STATEMENT AND OTHER PROXY MATERIALS AS THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. SUCH PROXY MATERIALS WILL BE AVAILABLE AT NO CHARGE ON THE
The participants in the proxy solicitation are anticipated to be
As of the date hereof, Legion Partners I directly beneficially owns 2,134,328 shares of Common Shares, no par value per share, of the Company (the “Common Stock”). As of the date hereof, Legion Partners II directly beneficially owns 187,137 shares of Common Stock. As the general partner of each of Legion Partners I and Legion Partners II, Legion Partners GP may be deemed to beneficially own the 2,321,465 shares of Common Stock beneficially owned in the aggregate by Legion Partners I and Legion Partners II. As the investment advisor of each of Legion Partners I and Legion Partners II, Legion Partners Asset Management may be deemed to beneficially own the 2,321,465 shares of Common Stock beneficially owned in the aggregate by Legion Partners I and Legion Partners II. As of the date hereof,
Information in Support of Public Broadcast Exemption under Canadian Law
The information contained in this press release does not and is not meant to constitute a solicitation of a proxy within the meaning of applicable corporate and securities laws. Shareholders of the Company are not being asked at this time to execute a proxy in favour of Legion Partners Holdings’ director nominees. In connection with the Annual Meeting,
This press release and any solicitation made by
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