Primo Brands Corp Stock

Good morning, and welcome to the Primo Brands 2026 Third Quarter Earnings Conference Call.

I would now like to turn the call over to Traci Mangini, Vice President of Investor Relations. Please go ahead.

Thank you, operator, and hello, everyone. With me on the call today are Eric Foss, Chairman and Chief Executive Officer; and David Hass, Chief Financial Officer.

Our discussion today includes forward-looking statements within the meaning of U.S. federal securities laws, which are subject to risks and uncertainties that may cause actual results to differ materially. For information, please refer to the forward-looking statements disclosure in our earnings release.

In addition, the definitions of and applicable reconciliations for any non-U.S. GAAP financial measures are included in our earnings release and supplemental earnings slides, which were made available earlier today on the Investor Relations section of our website.

With that, I'll pass it to you, Eric.

Thanks, Traci. Good morning, and thank you for joining us. Today, I'll review our third quarter performance and the progress we've made over the last 12 months since I was named Chairman and Chief Executive Officer. I'll also discuss how we've positioned the company to be fit to win, advanced our key growth priorities and managed a dynamic cost environment and how that progress has set us up for 2027. David will then discuss our financial results and 2026 guidance in greater detail. Then, we'll be happy to take your questions.

Let me start with the quarter. We're encouraged by the momentum across the business with strengthening fundamentals supported by stronger-than-expected performance in direct delivery and broad-based strength in retail, including dollar share gains in bottled water. This led to third quarter net sales of $1.8 billion, up 3.3% on a comparable basis versus prior year, resulting in a third consecutive quarter of year-over-year growth.

Adjusted EBITDA increased 1.6% to $411 million as growth in productivity helped offset continued freight and oil-related input cost pressures while we maintained disciplined investment in the business. With 1 quarter remaining in the year, we're narrowing our 2026 comparable net sales growth and adjusted EBITDA guidance expectations within the prior ranges. Our momentum this year supports approximately 3% net sales growth, which is the midpoint of our previous guidance of 2% to 4%. We expect adjusted EBITDA at the lower end of the previous guidance range of $1.465 billion to $1.515 billion, as continued freight pressure and strategic growth initiatives partially offset improved operating performance.

Taking a step back, 1 year ago, our business performance and the operating environment were very different. Since then, we've simplified the leadership structure to allow faster decision-making, sharpened accountability, improved execution and returned both direct delivery and the total business to growth. More importantly, the improvement reinforces the ability to sustainably grow over the long term.

We have a leading position in an attractive category, a strong portfolio of brands and an advantaged route-to-market network that provides us multiple avenues for value creation. This is all supported by our team of associates who I'd like to thank for their dedication and contributions, which are essential to our progress and long-term success.

When I came into this role, we established 4 priorities. The most immediate were to first improve the customer experience in customer direct; and second, return the company to balanced growth. We have done both. The third was to deliver on our financial objectives and the fourth was to drive long-term shareholder value creation.

So let me walk through the progress we've made over the last year. Direct delivery has delivered 4 consecutive quarters of sequential improvement, reaching 2.2% net sales growth in the third quarter this year. The improvement reflects a customer-first orientation that has led to improved service, better execution around customer acquisition and disciplined pricing.

Our focus on service is paying off. On-time in-full increased dramatically from an average of just over 50% in the third quarter a year ago to over 90% this year in the third quarter. Achieving this during peak season demand is particularly encouraging and it led to lower contact center call volumes and continued improvement in customer satisfaction metrics with increases in both NPS and Trustpilot scores.

With service levels stabilized, we are beginning to translate that recovery into better operating efficiency. In the fourth quarter, we began implementing targeted productivity actions, including seasonally adjusting routes and headcount. We also continue to advance our initiatives to create a more efficient, technologically enabled contact center and warehouse management system, which we expect to roll out in 2027.

Our second priority was to return the total business to growth, which is exactly what we've done for the last 3 consecutive quarters. Enterprise growth was broad-based across direct delivery and retail across regional spring waters and purified waters and continued strong double-digit growth in premium brands. Growth in both regional spring water and purified water also accelerated in the third quarter when compared to the first half of the year. In addition to strength across water types, we grew across nearly all channels and multiple pack sizes with particular strength in case pack and occasion pack.

We are excited by the opportunities that lie ahead, and we continue to invest to strengthen our brands, expand our presence and drive improved growth via immediate consumption, premium and through revenue growth management capabilities.

Our final priorities are to deliver against our financial objectives and build a strategy for long-term shareholder value creation. We plan to share more on our long-term strategy at CAGNY in February. So for now, let's discuss our financial objectives.

Amid a challenging macro cost environment this year, our business has performed well. We raised our net sales guidance twice this year and continue to improve the quality of our free cash flow and strengthening of our balance sheet. Against this backdrop, our Board's authorization, as announced today, of a new $300 million share repurchase program underscores our confidence in the opportunities ahead and the commitment to creating long-term shareholder value.

Given the environment, we wanted to give you an early look at 2027 and the direction we are headed. The progress we're making in the business and the actions underway give us confidence in a path to adjusted EBITDA dollar growth, adjusted free cash flow growth and improvements in net leverage in 2027. We intend to provide formal 2027 guidance in February, including the magnitude of adjusted EBITDA dollar growth. But for now, we wanted to share the drivers that give us confidence in that path. These include carryover pricing from 2026, stronger revenue growth management, favorable mix as immediate consumption scales, continued premium brand growth and newly introduced productivity initiatives across the business.

We've increased our diesel hedging for 2027 to a level similar to 2026, and we reached that position earlier than we did headed into 2026. This does not fully insulate us from cost pressures, including potential cost pass-throughs, but we're encouraged by the steps we're taking to manage the costs within our control. David will discuss some of these drivers in more detail in a moment.

In summary, 1 year into this journey, we're pleased with our progress, with more work to do to optimize our potential. As One Team Primo, we're building a customer-focused culture obsessed with executional excellence and that commitment is showing up in our service levels and in our performance. Direct delivery has stabilized and returned to growth. Retail has demonstrated broad-based strength and continued to gain dollar share of the category and the organization is operating with greater focus and accountability.

And while there is more work to do, we remain confident in our ability to deliver long-term profitable growth, cash generation and shareholder value creation.

With that, let me turn the call over to David.

Thank you, Eric. To enhance comparability of continuing operations, we focus on comparable results, which exclude the Eastern Canadian operation exited in the first quarter of 2025 and the Office Coffee Services business exited during 2025. Reconciliations are available in our earnings release and supplemental slides on our website.

Third quarter comparable net sales increased 3.3% versus the prior year. Price/mix contributed 5.9%, which offset a negative 2.6% volume contribution. Importantly, growth continued to broaden across the business with direct delivery increasing 2.2% on a comparable basis and retail and direct delivery had a more balanced growth profile for the first time since the first quarter of 2025.

In retail, net sales increased as price and mix offset lower volume. Retail volume declined on a case equivalent basis, partly reflecting changes in certain product selling strategies to support our immediate consumption offering.

Direct delivery net sales growth was driven by price and mix, partially offset by a volume decline. On a quarterly sequential basis, net sales growth accelerated, providing further evidence that recovery efforts are improving performance. Adjusted EBITDA increased $7 million to $411 million. Comparable adjusted EBITDA margin declined 40 basis points to 22.6% versus the prior year, primarily reflecting higher transportation costs given the tight freight market and elevated spot rates as well as ongoing strategic investments to support long-term growth and productivity.

EBITDA before adjustments increased substantially for the quarter and year-to-date, while our adjustments related to acquisition, integration and restructuring expenses decreased 73% in the quarter and 55% year-to-date. On a quarterly sequential basis, comparable adjusted EBITDA margin improved 120 basis points as operating efficiency and productivity continued to stabilize during our seasonally strongest quarter.

Turning to the balance sheet and cash flows. Our balance sheet continued to strengthen and the underlying quality of our cash flow improved. EBITDA and free cash flow adjustments declined significantly in the quarter, bringing reported results into closer alignment with underlying performance. Net leverage improved to 3.32x at the quarter end from 3.42x at the end of the second quarter, marking 3 consecutive quarters of decline. We remained focused on reaching a net leverage ratio of below 3x and expect to achieve that target during 2027.

Our liquidity remained strong with $1.064 billion of availability between our cash balance and our unused line of credit. We ended the third quarter with $477 million of cash on our balance sheet, up $111 million from the second quarter and $101 million from year-end 2025, demonstrating the cash-generative nature of our business despite ongoing inflationary pressures and last year's integration disruptions, which are behind us.

We generated $293.6 million of cash flow from operations for the quarter. Adjusting for significant items, most notably integration and merger activity, cash flow from operations would have been $329.8 million. Adjusted free cash flow, which excludes integration-related capital expenditures, was $274.2 million in the quarter, representing a $36.9 million decline versus prior year. Underlying cash flow remained strong, even as cash taxes increased due to higher pretax income in the quarter and working capital investments to support the growth in sales.

Our strong financial flexibility allows us to reinvest in the business while returning cash to shareholders. Third quarter total capital expenditures were $83 million. Of that amount, the majority of the investment supported growth initiatives and maintenance with only $20 million related to integration activities. Overall, capital expenditures were down 37% in the quarter.

During the quarter, we repurchased a total of 943,000 shares for $22 million, comprised of approximately $12 million or 532,000 shares in market repurchases and $10 million or 410,000 shares in connection with One Rock's secondary offering on August 6. At quarter end, we had $40.8 million remaining under the program authorization. As part of our commitment to returning cash to shareholders, today, we announced that the Board authorized a new share repurchase program of up to $300 million, replacing the existing program, which included the approximately $41 million of unused capacity that I just mentioned. Finally, this week, our Board of Directors declared a $0.12 quarterly dividend, which annualizes to $0.48 per share.

Turning to guidance. As a reminder, in 2026, we cycled the exit of our Office Coffee Services business, which accounted for $25.5 million in our reported 2025 net sales as well as the Eastern Canadian operations, which accounted for $3.6 million in our reported 2025 net sales. This puts the comparable 2025 net sales base at $6.635 billion. As Eric discussed, we expect comparable 2026 net sales growth of approximately 3%, the midpoint of the previous guidance range. We also now expect adjusted EBITDA at the lower end of the previous guidance range of approximately $1.465 billion, reflecting the dynamic macro cost environment, notably the freight market and ongoing strategic investments in new growth channels like immediate consumption.

Our refined guidance implies a year-over-year growth rate for fourth quarter adjusted EBITDA. As performance has improved this year, integration recovery-related to reinvestments have begun to roll off, allowing us to shift to productivity measures. In the fourth quarter, we are implementing targeted actions to seasonally optimize routes in direct delivery and other enterprise-level workforce reductions to better align headcount across routes, warehouses, production and corporate functions.

These measures include an ongoing voluntary early retirement program. We expect to record a related one-time charge in the fourth quarter, with most of the benefits expected to be realized in 2027. We are reaffirming our adjusted free cash flow guidance of $790 million to $810 million, supported by the strength of our cash generation, along with expected add-backs associated with the fourth quarter workforce productivity program.

Lastly, we are maintaining an annual base capital expenditure target of approximately 4% of net sales. In 2026, this was supplemented by approximately $100 million of integration capital expenditures with minimal usage expected for the balance of the year.

In closing, we remain focused on driving net sales growth while taking disciplined actions to manage higher transportation costs, reduce spot freight exposure and mitigate commodity pressures. These actions include our growth plans, the newly introduced productivity initiatives and potential additional pricing actions, further supported by proactive financial risk management. If cost pressures remain elevated for an extended period, we have additional flexibility through delivery fees and fuel surcharges.

Our 2027 diesel hedging is ahead of where we were at this point last year, bringing our current coverage broadly in line with the overall percentage of our exposure we hedged for 2026. While the prices we have locked in for 2027 are above our 2026 average, they remain below current spot prices and continue to provide meaningful protection against market volatility. We have also selectively secured virgin PET supply contracts for 2027 and remain in active negotiations with suppliers. While these actions do not eliminate commodity cost volatility, when taken together, they improve our visibility, reduced near-term exposure and support a path to deliver adjusted EBITDA and free cash flow growth in 2027.

With that, I'll turn the call back to Traci.

Thanks, David. [Operator Instructions] Operator, please open the line for questions.

[Operator Instructions] Your first question comes from Peter Galbo with Bank of America.

David, I guess just to start and appreciate the early commentary on 2027, but just wanted to press a little bit on that to gauge some of the puts and takes, particularly around the EBITDA number. I know you're calling for dollar EBITDA growth. I think consensus is currently looking at, call it, mid- to high single-digit growth, which given just the cost environment, I wanted to press a little bit on that. I know you're going to get more specifics as we get into February. But just looking at the current consensus relative to what you're saying about plans for growth, we just don't know how much. If you could help us a little bit more there as we kind of refine models for next year.

Sure. Thanks, Pete. Yes, I think we're going to stick with providing that specific dollar value and range, both for the top and bottom line in the February calendar event that we discussed. But I think as you look into the environment, we remain pretty confident with where sales have trended and where we think that horizon looks for us, notably because obviously, the premium brands and the broad-based diverse growth that's occurred year-to-date, we expect to sort of have that tailwind with us as well. We'll obviously have pricing actions that sort of roll into next year on an annualized basis.

And then when it comes to the cost environment, I think we're at a place where our hedges, at least within our indirect and direct diesel usage set us up favorably with how we acquired those hedges and at what prices across this year. Obviously, that's subject to where WTI and subsequent diesel refined product ends up. But I think we feel good that we at least go in with an understanding of those cost pressures and how to understand what volume or price-oriented actions are required.

And I think the other thing with regard to sort of capital allocation decisions, we remain pretty confident that we can navigate 2027 on a 4% CapEx basis of top line. And I think that should start to provide clarity along with sort of repurchase announcements and things like that with our primary goal investing in the business, but also being able to delever with the current rate environment and continue to reduce sort of our interest expense exposure. So I think that's really the comfort we're able to provide today. Again, I think we remain committed to using this period between now and February to really refine our productivity targets to sort of ensure that dollar growth we just communicated.

Your next question comes from Derek Lessard with TD Cowen.

I just wanted to hit on the direct delivery, which, Eric, it beat your expectations. So I was wondering if you could maybe talk us through what drove the upside? And where do you see the growth opportunities from here? And then maybe just as a follow-up, with the integration now behind you guys, and I think you touched on it briefly in your opening remarks, maybe just add some color on where you see the biggest optimization opportunities.

Thanks, Derek. It's Eric. Yes, I think we're really encouraged by the recovery and the progress we've seen on the direct delivery business. Obviously, it starts with our ability to put a great service foot forward, which we've done. Again, we've seen for several months now on-time in-full continue to be right in that mid-90s range, which obviously impacts the number of calls and the number of quits. So again, we continue to see the sequential growth of that business. That's translating into improved retention, improved NPS and Trustpilot customer satisfaction scores. And as you said, I think the integration is now behind us.

I think we've definitely demonstrated that, that business has stabilized. Now it's about unlocking the growth flywheel, which is really all about, again, improved retention, making sure we have -- drive new business, but that, that new business is durable in nature, driving attachment to our existing customer base. Our exchange and refill business continues to perform very, very well. And so I think the additional add I would probably include is that now that we are post-Labor Day and we've route optimized coming out of that, I think some of the key operating metrics on a go-forward basis will lead to improved operating leverage on that business as well.

Your next question comes from Lauren Lieberman with Barclays.

Wanted to get some color on how the immediate consumption pricing initiatives have been going, sort of just an update on conversations with retailers, what your sense has been in terms of any kind of consumer perception or reaction or lack thereof? And then also with that, would just love to hear more about progress and runway on cooler placement and if there's a particular set of channels that you're focused on first and just how big you think that opportunity could be?

Sure. I mean we continue to believe this is a real big and important opportunity, Lauren. So as we've said before, it's a big piece of the category, a little less than 1/3 of the category in terms of sales, but even more important in terms of its profit contribution. And we're very under-indexed. We're underdeveloped. Again, it's -- our share on immediate consumption is half of what it is on our total market, and it's a single-digit percentage of our mix.

So our strategy going forward is really to drive presence and availability. So it's about distribution. It's about getting into the customer-owned coolers and cold vaults. It's about placing our own branded coolers and driving the ambient side of this business, which in our category is, in many cases, consumer preferred as well, rack, side stack. So it's an exciting opportunity.

Most of this will play out in 2027. So again, as we've gone through this year, it's been a lot of preparing to win. And as we go through the annual customer development agreements, that's where a lot of the selling strategy will come to life. But -- we're continuing to monitor our cooler throughputs in the pilot markets and again, are really encouraged about where this will go in 2027 in particular.

Your next question comes from Daniel Moore with CJS Securities.

Maybe just talk broad picture. Great to see the increased hedging actions you're taking to protect further inflationary pressures. As inflation sort of built on itself, is it getting harder, not only for Primo, but the competitors to take price? Just wondering what you're seeing in terms of customer elasticity and whether there's been any noticeable changes across the businesses after multiple rounds of price increases and that inflationary pressure. How is it impacting just overall volumes that you're seeing? Any comments there would be great.

Sure. Yes. Let me try to start with maybe what we've tried to do on the pricing front, and then I'll bridge that to kind of how we think about that and what some of the key metrics we're monitoring on the volume front. So again, our overarching goal is balanced volume and pricing. Our principles around pricing have remained intact. We continue to run any of our pricing actions through the lens of how will the consumer react. Obviously, we want to maintain our level of competitiveness, which we have done. And then in terms of the company P&L, absorb the inflationary costs that we're seeing.

So we initiate pricing actions. We continue to be pleased with those and monitoring those. I think as we went through this quarter, one of the things we're encouraged by that David mentioned is the position we're in now as we head into 2027 given the rollover pricing that will impact that. I think we continue to have, again, a great value impression to the consumer across consumer occasions from refill to exchange to our Pure Life brand, particularly on the value side.

And then in terms of volume, again, overarching, very pleased with the growth trajectory. I think we're seeing healthy balanced growth across the portfolio, whether it's direct delivery, whether it's retail, brands, channels. I think that really speaks to the strength of and kind of diversity of both our business model as well as the continued consumer engagement around healthy hydration. We continue to look at what's happening relative to some key consumer metrics like volume per buyer, dollar per buyer, trips per buyer, all of those were up in Q3.

And obviously, we continue to monitor where we stand from a market share standpoint. And in our case, we're the only scaled national player that has grown our value share in Q3 and year-to-date. And when you just look at the branded piece, we continue to grow both our value share and our volume share. So we'll continue to monitor it and be flexible to try to drive as good a balance as we can, but certainly encouraged by the continued growth of the business.

[Operator Instructions] Your next question comes from Andrea Teixeira with JPMorgan Chase.

Drew Levine on for Andrea. So I just wanted to circle back to the initial comments around 2027. David, I'm just wondering maybe does that comment sort of assume any incremental pricing actions that would need to be taken to grow EBITDA dollars? Or does it sort of contemplate what's already in the market? And you also mentioned that if commodity prices remain elevated, you may look to take fuel surcharge or delivery fees on the direct business. I'm wondering when those sort of actions could potentially take place if this sort of commodity level would necessitate that action? And anything else from a direct delivery pricing perspective relative to retail where you've already sort of taken larger increases?

Yes. Thanks, Drew. I think within the business -- and because our '26 pricing actions didn't exactly begin on January 1 of this year, we do have different waves, if you will, that sort of roll into 2027. I think we remain very flexible and dynamic within the market. I think if things stand where they are today, we would largely rely on distribution and those rollover actions to sort of shape the top line situation for '27. But again, I think that remains entirely dynamic as we feel like we are in a better spot for next year than we were coming into this year with respect to diesel and those direct exposure points, obviously, that's been an incredibly dynamic market.

Even in the last 3 weeks, WTI has moved in magnitudes of $20-plus a barrel. So I think we're in a better position set up for that to at least know our cost activity to either attack that through, again, rollover pricing actions, volume/distribution gains in both immediate consumption, retail or sort of customer dynamics in direct delivery.

And then what productivity actions we have to continue to align against. Again, notably, those will continue to be things like increasing our private fleet, becoming more efficient with miles driven overall as we're exiting the year with a much better OTIF percentage than we obviously entered 2026. I think that allows us to focus on sort of more legacy productivity tactics where we look at productivity per route. We look at miles driven per route. We look at man-hours per route, and we start to really refine and optimize that.

So I think the short of it is we feel more confident that our existing pricing actions will provide a nice starting point. And again, I think we remain totally flexible that if the dynamics from here change, we'll have to consider other things. But as Eric mentioned, that will always start and end with the consumer. I think we're incredibly blessed to have a very diverse portfolio within our bulk product.

Again, the Pure Life brand playing well against private label, the regional spring water and then, of course, the premium side, which we expect that growth to continue into 2027. So I think it's a nice starting point. Obviously, between now and February, we're going to monitor the market and make sure we're set up for success next year.

And Drew, it's Eric. The only thing I would add is, again, we're a branded company that right now is competing in a very, very attractive category, leading brands within that category and engaged consumer around healthy hydration that I mentioned earlier. And I think back to David's point earlier, we certainly are positioned much better than we were a year ago at this time, given where we sit around rollover pricing and the impact that will carry into 2027, new productivity initiatives. And obviously, we'll continue to monitor and manage the dynamic environment. But the intent was to really communicate that we're better positioned than we were a year ago at this time. And again, we continue to benefit from pretty significant advantages, both at the category level as well as our position within the category.

Your next question comes from Andrew Strelzik with BMO.

I wanted to go back to the top line discussion and the commentary and the confidence all sounds very constructive. But if I look at the guidance and what it implies for the fourth quarter, it seems like a bit of a flattening sequentially of that growth rate from the third quarter. So I'm curious how you're thinking about the puts and takes there. I would assume that direct delivery business maybe continues to accelerate. So are you seeing some offset on retail? Are there any other kind of one-offs that we should be aware of? Any color there would be great.

Sure. Thanks, Andrew. So I think when we step back and look at the quarters this year so far, the one area I want to highlight is, obviously, we are very proud of Q2 success. That 4.2% top line enterprise value really comprised about 150 basis points of growth that was related to the Hawkins-related issue in Q2 of 2025. So when you start to normalize for that and you look at the sequential pattern on a -- if you want to adjust that, that kind of sits at about a 2.7%, you then progress to about a 3.3%. That puts us at a year-to-date, even with that 4.2%, of about 3.1%.

So I think as we just look at the environment, I think we're remaining confident in that midpoint. I understand the sort of the mathematics there. I think it's basis points on the margin either side. But again, I don't think there's a signal from us that there's a consumer waning of interest in the category or our products. I think we're just trying to single into a kind of a sweet spot for the full year with the time remaining. And I think that sets us up for a good foundation for next year. So I wouldn't look into that in any way, but I think the color on Q2 maybe provides a little perspective of how we're thinking about on an adjusted basis where that sequence really falls.

Your next question comes from Jon Andersen with William Blair.

On direct delivery, as you pivot to the growth flywheel, Eric, could you talk a little bit more about what some of those initiatives might look like and how they'll kind of roll into the market? I'm thinking about things you've talked about in the past around building the basket or attach rates to other products, maybe price harmonization, other things there. And then also in -- with respect to direct, could you talk a little bit more about top of funnel, the kind of the add part, the added customer part and your approach there and maybe now relative to how it maybe differed prior to your tenure, I'd appreciate that.

Sure. I'll take some of that and let David jump in and add his thoughts as well. I think, first of all, on the RGM and pricing, yes. I mean, for us, we want to continue to make sure that lever is working for us either on the retail or the customer direct business. I think for us, again, it starts with retention because the most valuable customer we have is the one that we're servicing today. But through what we call our First Focus initiatives, we are looking in fourth quarter to really focus on attachment, whether that be case pack or premium packaging to our direct delivery customers. So that's one that we'll continue to execute against.

And then relative to the top of the funnel, again, a variety of initiatives that we continue to pursue. And again, continue to be encouraged because as we said, I think, throughout the year, that customer base has remained stable and very consistent quarter in, quarter out.

This concludes our Q&A today. I would now like to turn the call over to Eric Foss for closing remarks.

Thank you. Again, thank you all for joining us today. We're looking forward to the momentum and are encouraged by the path forward. And we appreciate your continued interest and investment and look forward to updating you on our continued progress. Have a great day.

Thank you. Ladies and gentlemen, this does conclude your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.

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.

But 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 a 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.

So I'm proud of Eric, okay. So 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 stabilized, optimized growth framework that you laid out earlier this year?

Yes. 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. So 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 direct delivery 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. And so 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 2 quarters of beats and raise on the top line. And so 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 direct delivery lens or the retail lens. And 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. So exciting time.

Okay. Great. I'd say the market seems increasingly comfortable that the integration disruption is moving into the rearview mirror. But what, if anything, still needs to happen before you'd say you've really -- like, the company is fully transitioned from recovery mode into playing offense?

Yes. 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 and in full, that's now back up north of 90% and has been so consistently. And 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. And 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. So, 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, the customer retention and profitability?

Sure. I think culture is 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 front line that's make, moving, selling or delivering our product. And then 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.

So, we've done a lot of that. We recently made some changes on the leadership front, particularly in 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. And 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 2 or 3 years from now, I guess, what should direct delivery and specifically the HOD component which I guess you're calling customer direct now. So -- but bear with me. What should that look like if the strategy is fully successful?

I think there's 3 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. And 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. And then we have had a proven tuck-in acquisition model that has been accretive. So that's the growth flywheel. That's number two.

And then third is operational excellence. And 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 3 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 a 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 like what you think or hope this will mean for retention and long-term value of the customer?

Yes. 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? And then mixed with the 2 main acquisition channels we have, which are digital and club-oriented booth programs that we run at both Sam's 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. And 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. And 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. And 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.

And so 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. And we found that with these sort of more rationalized prices that are back at more of an expected recurring fee or recurring charge you'd have monthly that we really didn't see a slowdown in top of funnel. And so that really, I think, gives us permission to sort of lean in there, make sure we're signing up customers, I think Eric often refers to the willingness to, the ability to and really to stick with us is how can you really afford this service, and that's turned out quite great for us because on the back side of that, the opposite of that is the inability to pay, and we really don't want to kind of deal with that.

It goes through working capital inefficiencies and some other things. So again, I think we remain very encouraged where that quality of customer aligned.

Okay. Great. And to what degree, as you mentioned you're not competing with 2 companies anymore. But to what degree is there still a price harmonization story to play out between legacy Primo and BlueTriton, which I think had been an original talking point of the merger?

Yes. I mean, again, if you are an existing user for either which platform you came from, again, we'll go through typical anniversary pricing activities. I think we're 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're very conscious of that. So what we've 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 were some -- 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, it's important going through the anniversary pricing that we are continuing to do. Those are the ways I think we'll access that at this point in the journey.

Okay. 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?

Yes. 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. So 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. And so as we look at this pilot and we ultimately are able to scale it, 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.

So 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. So exchange and refill continue to perform well, but often get less investor attention than HOD. So how should we think of the role of these businesses within the medium-term growth algorithm? And how -- roughly how large are these businesses exchange and refill?

Yes. Combined, they are a little over $600 million within the enterprise. Historically, that would have represented a larger percentage of the legacy Primo Co, which was the larger of the 2 contributing businesses that sort of brought those business models into Primo brands today. So 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. Then the 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 staying at the refill machine and fill it myself."

And so 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. And ultimately, it comes down to a convenience and affordability spectrum for the consumer. So 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. So let's shift to the retail business. You've spoken about underindexing in immediate consumption and cooler space relative to your market share. How large is that opportunity? What needs to happen to Primo to cover or to close that gap? And then also maybe if we could talk a little bit about 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 2 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. And so 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. 1/3 would be premium. I'll also come back to that. And then 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 in almost every single channel across our retail business. So 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. And then we also have a chance, really, if you think about it, it's probably more developed in the on-premise business and in the mass channel. And so the opportunities still remain in grocery. They certainly remain across small format from convenience to drug and up and down the street. So 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're under-indexed. So 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. And so the way we're going to go about this is water itself as a category is under-indexed.

And so as you think about immediate consumption, think single-serve 20-ounce, 1 liter, 1.5 liter, 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. But 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. So 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. So your 2026 guidance -- hit my glass just to make sure to not mess -- your 2026 guidance is for 2% to 4% sales growth this year versus the 3 to 5 originally stated in the medium-term algorithm, at the time of the merger. So which levers do you expect to contribute most to closing that gap over time? And what's your confidence level in that?

Yes. I'd say 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. And 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. And then finally, you've got that tuck-in acquisition model. So I think you look at the customer direct, those 4 or 5 opportunities, you look at the retail business and the 4 or 5 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. And I guess when you became CEO, you inherited effectively a set of financial targets that you 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.

Yes. I mean I think as we came in for 2026, I said there were 4 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; and 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. And as we go forward into 2027, we'll provide more specifics.

Okay. Great. So 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. So presumably, there's 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 will -- when the company moves more into offense mode?

Yes. I think importantly, as Eric mentioned, we'll talk about '27 in the spring of next year. But I think what we have chosen to do where we have improved service is continuing to lean in on direct delivery. And 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. And now that we're through Labor Day continuing to work on engineering and optimization activities to sunset some of those route counts, we will.

And so I think throughout this year with where our guide started at 0 to 1 to where it is today at 2% to 4%. I think that's paid off while, as Eric mentioned, the retail business and the premium side of that retail business has continued to perform. So I think Again, we took the liberty within that to lean in where those investments and costs we knew or we believe, 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 breakeven.

So we think that's 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's 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.

Yes. Okay. So just thinking about costs, transportation and freight have been called out as areas of pressure. We've heard it so far the last day or 2 incrementally versus what was discussed across the board this summer during earnings season. So for you guys, you previously talked about productivity, rightsizing the elevated direct delivery costs in the back half as an offset. So I know it's early, but we've had this more recent change in freight market that's getting called out. So 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's probably popping up?

Yes. 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. And so 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're bringing a customer on a 5-gallon basis from your branch to someone's -- 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's 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 noncontracted, 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.

And so areas, again, that we can continue to lean in are, where can we in-source 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'll continue to lean in on that. Again, the CapEx there or lease model is not too significant, but it does help combat some of those lanes where you're paying a little bit more of the spot or third-party aggravated rates.

And then we'll step back and look at our overall productivity and where can we address that 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 if you see it today, as it's been a topic that there's nothing you're seeing that's really impeding your visibility in a material way through the end of the year.

That's correct.

Okay, right. Where I want to go next? Let's talk about the consumer. So another kind of near-term things. You mentioned the decision between doing exchange, refill, direct delivery. It may be too early, but what are you seeing is anything in terms of consumer pattern? Because I would think it -- a household making a switch to a more affordable option would be -- could be a very -- maybe it's not a leading indicator, but like a lateral indicator, real-time indicator of consumer household health and sentiment. 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, 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. So 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, and then you move into premium. So I think the resilience of the category. I do think that the reality is, 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 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.

And from where we sit right now, we're continuing to see the category perform very well. And the reality is, 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. So maybe a 2-parter. So 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?

Yes. 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 kind of 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. And so the quality and the cleanliness, if you will, of both the sort of income statement and cash flow statement are there and start to set the stage for where the near term might be as we address '27.

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 have been where we would run into OTIF or service or customer experience challenges in home and office delivery that would have 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 work. Again, when we make product today for retail that very effectively moves from our system to the retailers and moves quite fluidly. And then as we step back and again have less to address internally, we can start to really leverage our vendor network, extend payable days and sort of 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. So I do believe we can continue to work our cash conversion cycle into a more optimal spot. And again, it all kind of required the unlock of first fixing the customer experience.

Okay. Great. And then the second part of my 2-parter is thinking about uses of cash. So 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. So how should we think about the appetite for this timeline? And just maybe to give people a better sense for what tuck-in -- 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?

Yes. I mean 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. 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, very disciplined and we would stay very much, I believe, in the space of water and healthy hydration to maybe fill in some gaps where we may haven't established ourselves as the leader.

But the reality is, is that now that we've got the fundamentals stabilized, the momentum building and this bright runway ahead of us, that's an opportunity for us as we get into 2027 and beyond.

Okay. We're going to wrap there. We're going to go to breakout. So please join me in thanking Primo and for keeping us nicely hydrated. So thank you.

Thank you.

Good morning. Welcome to the Primo Brands 2026 Second Quarter Earnings Conference Call. [Operator Instructions] This call is being recorded on Thursday (sic) [ Wednesday ], August 5, 2026. I would now like to turn the conference call over to Traci Mangini, Vice President, Investor Relations. Please go ahead.

Thank you, operator, and hello, everyone. With me on the call today are Eric Foss, Chairman and Chief Executive Officer; and David Hass, Chief Financial Officer. Our discussion today includes forward-looking statements within the meaning of U.S. federal securities laws, which are subject to risks and uncertainties that may cause actual results to differ materially. For more information, please refer to our forward-looking statements disclosure in our earnings release. In addition, the definition of and applicable reconciliations for any non-U.S. GAAP financial measures are included in our earnings release and supplemental earnings slides, which were made available earlier today on the Investor Relations section of our website.

With that, I'll pass it to you, Eric.

Thanks, Traci. Good morning and thank you for joining us. Today, I'll review our second quarter performance and how we're positioning the company to be fit to win by continuing to improve on the direct delivery customer experience, advancing our key growth priorities and simplifying our leadership structure. David will then cover our financial results and 2026 guidance. We're encouraged with the accelerating momentum across the business in the second quarter with strengthening fundamentals, driven by ongoing improvements in the customer experience in direct delivery and strong dollar in volume share gains in the bottled water category within retail.

Second quarter net sales were $1.8 billion, up 4.2% on a comparable basis versus prior year, ahead of our expectations and marking a second consecutive quarter of year-over-year growth. Growth was broad-based, reflecting continued strength across our brands in retail and a faster than expected return to growth in direct delivery. Adjusted EBITDA increased 5% to $385 million, with margin expansion driven by improving productivity, stronger operating leverage, and continued progress in direct delivery.

With top-line growth again exceeding our expectations and momentum broadening across both retail and direct delivery, we're raising our 2026 comparable net sales growth guidance for a second consecutive quarter. We now expect growth of 2% to 4%, up from the previously guide of 1% to 3%. We are reaffirming our adjusted EBITDA guidance of $1.465 billion to $1.515 billion as we intend to continue to invest behind growth and as we manage the current dynamic macro cost environment. Our business fundamentals continue to improve and we remain well-positioned in an attractive growing category.

Our differentiated portfolio of leading brands spanning the value spectrum and advantage route to market and disciplined execution gives us confidence we have the right foundation to drive long-term growth. Building on this, last month, we took an important step forward by simplifying our leadership structure. This included eliminating the Chief Operating Officer role, enhancing leadership capacity with the addition of a highly experienced beverage industry professional in the role of President of Customer Direct and Go-to-Market, and elevating certain critical roles like Chief Supply Chain Officer to report directly to me.

These changes are designed to improve our ability to serve our customers and accelerate key growth priorities and support faster decision-making and to create a more agile and accountable operating model. We believe these actions further strengthen our position and enhance our ability to capitalize on the growth opportunities ahead. Let's review our near-term priorities, which we have discussed in the last few quarters. First was to improve the customer experience in direct delivery and second was to return the company to balanced growth. We've now delivered on both of these priorities for a second consecutive quarter.

Direct delivery returned to growth, up 0.4% in the quarter. This return to growth was one quarter ahead of our expectations and marks a significant milestone reflecting meaningful progress in stabilizing the business and improving the customer experience. At a high level, direct delivery growth is driven by several key levers: adding new customers, improving revenue retention, disciplined pricing, and tuck-in M&A. In the second quarter, performance improved across several of these areas. New customer additions remained strong and with the reduction in the historical incentives, we're improving new customer quality and narrowing the average revenue gap to more tenured customers.

On a sequential quarterly basis, customer quits and the contact center call volumes also declined, with call volumes below pre-integration levels. We also saw improvement in key operational metrics. On-Time In-Full or OTIF, improved month-over-month through June, reaching the mid-90s despite elevated peak season demand. We also continue to make the customer billing experience easier and more clear through simpler invoices, expanded payment options, stronger credit processes, and improving invoice timing for many residential customers. Our Solve-by-sundown initiative has also been supporting faster resolution of customer concerns. We're encouraged with our progress, but there is more work ahead as we continue to stabilize the business and lay the foundation for optimization to accelerate profitable growth.

Supported by our simplified leadership structure, we're taking targeted actions to improve execution, productivity, and the customer experience, creating a flywheel that we believe will enhance operational performance and accelerate growth. Our second priority was returning the total business to growth, which we achieved for a second consecutive quarter. Our retail business delivered strong and broad-based growth. Our regional spring water net sales increased 4.1%, purified water increased 1.9%, and premium brands increased 30.5%.

We also expanded our retail presence through new points of distribution. This performance drove continued value and volume share gains in the bottled water category. Going forward, we see multiple growth vectors: continuing to brand build and innovate, improving our in-store presence in a more strategic and holistic approach to revenue growth management. We also see meaningful opportunity in cold and immediate consumption, where we're under-penetrated in a high-growth, high-margin segment.

Another growth vector is premium. Saratoga and Mountain Valley continue to be among the strongest growth assets in the portfolio, again, growing dollar and volume share of category in the quarter, driven by expanded distribution. With strong brand equity, growing distribution, along with new capacity, we believe they are still early in their growth journey and see meaningful opportunities for both scale and mix, driving operating leverage and margin expansion over time.

Our final growth priority is developing a more strategic and holistic revenue growth management approach across price points, packages, and channels. In the first half of the year, we took strategic and disciplined actions across select areas of our portfolio using our approach that begins and ends with the consumer while factoring in competitive dynamics, our cost structure and the economics of our retail partners. We continue to believe we are well positioned to manage through the current dynamic macro and geopolitical conditions. Our portfolio serves consumers across price points, packages, channels, and occasions. We have a number of levers, including productivity and pricing, that we believe can help mitigate inflationary pressures while supporting long-term growth and margin expansion potential.

In closing, we're encouraged by our first half progress, which reflects an enhanced customer experience, improving execution, and building momentum across the business. In short, we believe the business is fundamentally stronger than it was 6 months ago. As One Team Primo, our customer-first culture fuels our passion to serve our customers and consumers with excellence each and every day. Our near-term focus is to continue to execute with purpose and pace to drive sustainable, balanced growth. And as that growth scales, we expect productivity and operating leverage to support margin expansion, increased cash flow generation, and long-term value creation.

With that, let me turn the call over to David.

Thank you, Eric. For 2026, reported financials include Primo Brands results for both 2026 and 2025, as we're now past the anniversary of the merged companies. To enhance comparability of continuing operations, we focus on comparable results, which exclude the Eastern Canadian operations exited in the first quarter of 2025 and the office coffee services business exited during 2025. Reconciliations are available in our earnings presentation available on our website.

Second quarter comparable net sales increased 4.2% versus the prior year, driven by a 4.3% contribution from price mix, modestly offset by a negative 0.1% contribution from volume. In retail, net sales growth was driven across all channels, led by mass, grocery, and Away From Home. Across pack sizes, driven by occasion and case packs and brands, led by premium and regional spring waters. In fact, in retail sales channels, our premium sales growth exceeded the overall 30.5% premium water increase, reflecting ongoing strength in retail channels while continuing to recover within the direct delivery channel.

Direct delivery net sales growth was driven by price and mix benefits, despite lower volume resulting from a smaller customer base. On a comparable basis, direct delivery net sales increased 0.4%, slightly ahead of our breakeven expectations and a 340 basis point sequential improvement from the first quarter. This progress reinforces that our recovery efforts are driving tangible improvements in service levels, which is also reflected in continued increases in our NPS scores and Trustpilot ratings.

Adjusted EBITDA increased $18.3 million to $385 million, with comparable adjusted EBITDA margin up 10 basis points to 21.4% versus the prior year. On a quarterly sequential basis, comparable adjusted EBITDA margin improved 260 basis points, reflecting enhanced operating efficiency in a seasonally stronger quarter and productivity gains enabled by more stable operations. Within direct delivery, our continued investments in routes, service, and customer experience drove a more consistent net sales performance. At the enterprise level, adjusted EBITDA growth versus prior year was partially offset by higher transportation costs, primarily related to a tighter freight market and higher spot rates. We also continued to make strategic investments across the business to support long-term growth and productivity.

Turning to our balance sheet and cash flows, we are encouraged by the improved health of our balance sheet and the quality of our cash flow. Net leverage was 3.42x at quarter end, an improvement from 3.52x in the first quarter, demonstrating a normal seasonal deleveraging pattern as we move closer to our near-term target of below 3 times as cash flow and EBITDA continue to strengthen.

Our liquidity remains strong, with $953 million of availability between our cash balance and our unused line of credit. As expected, the level of EBITDA and free cash flow adjustments declined significantly, which is a positive step toward a cleaner cash flow profile and better alignment between reported results and the underlying performance of the business. We generated $227.9 million of cash flow from operations for the quarter. Adjusting for significant items, most notably our integration and merger activities, cash flow from operations would have been $266.4 million.

Adjusted free cash flow, which excludes integration related capital expenditures, was $200.1 million, representing a $30.4 million improvement versus prior year. Our strong financial flexibility allows us to reinvest in the business while returning cash to stockholders. Second quarter total capital expenditures were $104.6 million, while $35 million was related to integration capital expenditures, the majority supported growth initiatives and maintenance. We also continued to execute our share repurchase program. During the quarter, we repurchased $15.5 million or 708,000 shares under our $300 million authorized program.

Turning to guidance. As a reminder, in 2026, we cycle the exit of our office coffee services business, which accounted for $25.5 million in our reported 2025 net sales, as well as the Eastern Canadian operations, which accounted for $3.6 million in our reported 2025 net sales results, putting the comparable 2025 net sales base at $6.635 billion.

We are raising our comparable 2026 net sales growth guidance for a second consecutive quarter. We now expect growth in the range of 2% to 4% from our previous 1% to 3% guidance. This reflects our second quarter outperformance versus our expectations and the broadening of momentum across retail and direct delivery. We are reaffirming adjusted EBITDA guidance in the range of $1.465 billion to $1.515 billion.

At the midpoint, this implies an adjusted EBITDA margin of 21.8%, which is flat compared to the prior year, as we invest behind growth and manage a dynamic cost environment. This entails taking disciplined actions to manage higher transportation and commodity costs while continuing to invest in service, capabilities, and overall customer experience to support long-term growth.

We believe we have multiple levers to help mitigate commodity impacts, including pricing actions, growth initiatives, ongoing supply chain cost initiatives, and our financial risk management program. These actions are expected to support near-term cost mitigation and long-term margin expansion potential. In direct delivery, we expect productivity to improve following peak season as we realign the cost structure under our enhanced operating model while making disciplined investments in key initiatives such as the customer contact center and a warehouse management system that strengthen the customer experience and position the business for future growth.

Adjusted free cash flow guidance remains $790 million to $810 million, supported by the strength of our cash generation. We expect free cash flow quality to improve sequentially through the balance of the year, driven by lower adjusted EBITDA add backs and the typical timing lag between expense recognition and cash payment. Our strong free cash flow profile supports our capital allocation priorities. We continue to expect annual capital expenditures of approximately 4% of net sales, in addition to approximately $100 million of 2026 integration capital expenditures, of which approximately $18 million remained at the end of the second quarter.

Finally, we remain committed to returning cash to stockholders. Last week, our board of directors reaffirmed the $0.12 quarterly dividend, which annualizes to $0.48 per share. And we intend to continue executing our share repurchase plan with $62.8 million remaining under the program authorization as of the end of the second quarter.

With that, I'll turn the call back to Traci.

Thanks, David. To ensure we can address as many of your questions as possible, please limit yourself to one question, and if we have time remaining, we will re-poll for additional ones. Operator, please open the line for questions.

[Operator Instructions]

Ladies and gentlemen, we'll now begin the question-and-answer session. [Operator Instructions] Your first question comes from Andrea Teixeira from JPMorgan.

So I was wondering if you can talk about customer counts into the second half. We obviously have seen an improvement. You talked about the service levels, but also kind of net adds, and that's something that investors have been watching as you go. And I know the inflection was an important landmark for Primo. So if you look at the cadence also, when you think about the 47%, 53% that you highlighted before and how we should be thinking about it after these results? And lastly, just a clarification on the sequencing of the retail business, like what are you seeing in terms of the growth in volumes as we go through the balance of the summer? I know there was probably some pull forward, potentially for a number of different reasons. You had also an easy comparison. So if you can just kind of take us through the balances and for both businesses, that would be appreciated.

Thanks, Andrea. It's Eric. So let me start with the first one. I think number one, we're very pleased with our progress. Obviously, we've seen improved momentum really across the business. We continue to see both the retail business perform well broad-based across channels and brands. And the pace of our recovery and corrective actions that we took on the customer direct business are adding to the overall customer experience, and we're seeing that across leading and lagging indicators. So just on the customer direct business, we're obviously pleased with that progress.

To your question on cadence, yes. The cadence of our top line in customer direct, we did see stronger monthly performance in the months of May and June than we did earlier in the quarter. I think as you think about that business, obviously we talked a little bit about some of the supply chain disruption that is now, I think, fully behind us. And on the service side, I think this was probably the biggest step forward we made in the quarter, which is, if you think about call volume, it's back to pre-merger levels. If you look at quits, they continue to improve.

We talked about, on the prepared comments, kind of the mid-90s performance that we're seeing on OTIF. And then if you look at nets, we did see a positive month within Q2. So I think the really encouraging thing is this business has now returned to growth. We're seeing, again, NPS kind of customer satisfaction metrics improve dramatically versus where we've been. We have more to do. We talked about the warehouse management system, work on the customer journey, future call center, investments in tech and AI. So lots more to do, but really, really pleased with the overall recovery of that business.

On your second question, I think it was related to volume. Again, encouraged by the top-line recovery. We obviously saw sequential acceleration in that top line from Q1 into Q2. Again, very happy with how broad-based that growth is. When you're growing strong growth, double-digit growth on premium, but you're also seeing all of our regional spring waters and Pure Life grow at the same time. You're seeing that growth broad-based across almost every single channel we do business in. And I think one of the most important metrics is the fact that we grew both our value and our volume share is very encouraging to us. Anyway, overall, very, very encouraged by how the business has performed.

Eric, just a clarification. This is super helpful. On the HOD, the net adds, you said within the quarter you had -- it's returned to growth, inflect to growth. When was that? Was the exit month or that was an easy comp from last year or within the month in terms of cadence?

The growth cadence on the overall business, as I was trying to articulate was in the months of May and June.

And what happened, like now in July, how we should be thinking July and August in terms of that sustainability of that cadence or that improvement in the HOD?

Again, we feel, as I've said, very pleased with our progress. It's broad-based. We continue to feel like the actions we took, both the pace and the actual actions themselves are creating a much better customer experience. All of the leading and lagging indicators that we called out are in a better spot, and we continue to be encouraged by the continued recovery and certainly would anticipate that continuing to be in a good spot as we walk forward.

And our next question comes from Nik Modi from RBC Capital Markets.

Eric, I was hoping maybe you could just give us a little bit more color on kind of the volume versus price mix. It looks like the majority of the revenue growth was driven by price mix. So if you could just kind of help give us some kind of underneath the cover kind of perspective on that, that would be super helpful.

And then, David, just -- there was a lot of talk when the integration happened around working capital and working capital improvements. And I know that, obviously, a lot of that has been disrupted with some of the integration challenges. But now that we're kind of moving forward, I would love your kind of updated thoughts on the progress that you could make there and kind of time line.

Sure, Nik. Well, I think, let me try to deconstruct a little bit of the volume price dynamic. I think number one, while we saw a return to growth on the customer-direct business, it wasn't volume growth, so that recovery is still ahead of us. And what happens is if you really deconstruct this thing at a unitized level, we did see volume positive in the quarter. Again, if I break it down and actually move over to retail on a year-to-date basis, we're seeing a split of about 40/60. So pretty balanced between volume and price, which is obviously what we're trying to do.

So overall, again, I can't be more enthusiastic about our progress and how top-line growth actually exceeded our expectations. And again, we continue to look at this through a category lens. We've got a good category, pretty stable consumer environment, feel very good about our own position and are continuing to be encouraged by what lies ahead.

Yeah, Nik, on the working capital, I think when you go through last year and you run into some integration-related disruptions, you then kind of get caught up a little bit in your collections process, and that would not be as efficient as we would have liked. As you move into this year, that's improving pretty rapidly, as well as the quality of the customer that we are retaining, which is the most important measure. So I think when you look at that, that should continue to be a tailwind for us with regard to at least the cash cycle.

Again, I think we are getting our arms around vendor relations and continuing to take advantage of the benefits of the merger with those vendor relations. So that should also allow us to sort of action activities against payable days. And then inventory will be, what I'll call, sort of a variable in that equation where last year we probably could have advantaged ourselves with a little bit higher inventory levels going through some of the branch and integration transitions. This year, that's not a problem at all in customer direct.

And I think also where you'll see us sort of lean in on inventory is as we continue to develop our small format immediate consumption business, making sure we sort of have product availability ready for what is a much higher velocity business than our traditional shelf space program. Again, I feel very comfortable overall that working capital will continue to be a benefit for us as the business continues to perform more smoothly this year.

And your next question comes from Kaumil from Jefferies.

I guess I want to connect 2 things. One is the reorganization. One of the outcomes is that you're a lot more nimble than perhaps you would have been before. Now that you also have a business that's performing better than expected, that frees up a lot of investment dollars. So as you're thinking about the back half, what are some of the things that you might be doing differently now, maybe playing a lot more offense than you otherwise would have been, than what could have been the plan 6 months ago when we first started putting together some thoughts on how the year was going to play itself out?

Thanks, Kaumil, it's Eric. I appreciate your question. On the -- some of the things we did structurally, I mean, you've heard me talk before. We're in the people business, and the team with the best players win. So the strategic rationale around some of the changes we made was really focused on, first and foremost, the customer, improving that overall experience, making sure we're prepared each and every day to provide great service and great execution at the moment of truth.

Continue to reinforce some of the cultural dimensions around creating a performance and recognition culture, and then also making sure in a fast-moving category like this, we have the speed and agility on the decision-making front. So I think taking the customer-direct business direct to me, along with supply chain direct to me is kind of eliminates a layer and allows us to do that in a more seamless way and a quicker way. The folks that we've added from an experience and skill standpoint, broad-based leadership background, strong go-to-market in the beverage business and bring a lot of the relevant skills and experiences we were looking for.

I think relative to the second part of your question, obviously, it's -- you're much better positioned when you're in the virtuous cycle and kind of that growth flywheel than kind of where we saw ourselves several months ago -- 6 months ago. So again, we want to continue to play offense. I think what we have to do is continue to be very good on investments that are going to help the overall model succeed.

So whether that's call center resources, whether it's investments in tech and AI, whether it's investments in capability, obviously marketing and brand building, we're still in -- I've described in the past, I think, kind of moving from stabilize to optimize to ultimately strategize. And I think from where we are right now, our focus near term continues to be on growing the core. And as we get further into this journey, that should allow us to think differently about other growth options.

Okay, got it. David, I think you alluded to this a little bit, but as it relates to new customer adds, who are they? Are they different from customers you've had before? Are they returning customers that you would've lost when you had some of the issues, or are they entirely new? Maybe just a little more detail on the sort of the composition of the net adds.

Yes. So I think I'll start with the simple statement that we don't have as great of tracking of, you used to be one and now you are one again. Those are analytical capabilities we can continue to enhance as well as consumer intercepts and insights that sort of educate us a little bit more on that. What I feel fortunate about our position, especially in those direct-to-consumer bulk water categories, are more people are leaving tap each and every day than would be considering that their primary source of sort of home use or office-based water.

So when you look at a departure or a donation from that sort of share of consumer, again, they obviously can go to pitcher filtration, singles, and things that we also thrive at in retail. But when you come over to the bulk spectrum, we feel very advantaged and fortunate with our position from the lowest entry price water at refill to a mid-stage water price within our exchange business, where both of those you do your own work, to obviously the more premium end of the business where for delivery fees and sort of access to heigh and great brands and convenience that can be brought to your home or office.

So I feel like, again, we're in an advantaged position where the tailwinds would say that more consumers are making these decisions for their health and wellness benefits as well as sort of departing what was a former source of their primary water.

And your next question comes from Lauren Lieberman from Barclays.

Wanted to ask a little bit about the premium side of the portfolio, still up 30%, which obviously is a great number, but it was a deceleration versus what the business had been trending at previously. So just curious if there's anything to kind of call out there, and how you think about what's a sustainable growth rate on the premium side of the business?

We, again, saw continued double-digit growth, around 30%, as you mentioned, in premium. Stronger on Saratoga than Mountain Valley. As you'll recall, we were in the midst of starting up a new Mountain Valley line. That did create a little bit of product supply disruption at one point. We're still early in the journey on the premium. We have to continue to invest in brand building. The good news is very strong brand health across both of those brands. We got to continue to drive penetration, frequency, pack rate.

Overall, we continue to see it -- we're early in that journey, and we would continue to see these brands continue to perform very well. They both, in the quarter, grew value and volume share. So pleased with it, and we'll continue to walk down that journey and see those brands perform, I think, fairly well.

And your next question comes from Bonnie Herzog from Goldman Sachs.

I had a question on the pricing you took on your media consumption portfolio during the quarter. Eric, I guess I was just hoping to hear some more color on what you're seeing and hearing from retailers, consumers, and your competitors. Also, curious if you've been able to maintain shelf space. And will you consider future pricing on other maybe packages and/or channels? I guess I'm ultimately trying to understand if the strength in retail this quarter is sustainable going forward.

Sure, Bonnie. Well, let me start. Our growth goal is to be balanced across volume and price. And I think we mentioned on past calls that we had a lot of work to do in the area of RGM and pricing from an insights, process, tool standpoint. Again, our framework and principles and the way we think about this is we start and end all of our decisions on pricing with the consumer. We really want to make sure that we define value and how she looks at it, and we incorporate that into the decision-making matrix.

Maintaining competitiveness is another key principle of ours. And then obviously, we have to look at the company P&L and what's happening in terms of inflation and cost and margin implications. So then it's about how do you take that and package it into a comprehensive development approach around where are there opportunities, whether they're rate opportunities or mix opportunities or trade spend opportunities. So that's just a mental model for how we think about it. Earlier this year, we did take pricing on immediate consumption. Historically, we've had a large gap to competition.

Obviously, we've talked about the closer you link purchase to consumption, the consumer's orientation tends to be more convenience. So as we've done that, the good news is that we're still priced competitively, in most instances, still lower than competition. And again, I think as we think about this going forward, it'll be about looking at more -- if we do something, it'll be more on a precision basis, really looking at packages and brands where we need to improve profitability or returns.

In some instances, looking at trade spend, where it may have been ineffective historically. We did have some trade spend a year ago in Q3 that was put into the market on the retail side to try to offset some of the softness we were experiencing on direct delivery business. And so as we look at those and lap those, making sure those were effective and where we had no or low return on investment, we will look to tweak our trade spending in some instances. But again, overall, again, I want to come back to the fact that year-to-date, we are continuing in our retail business to be very balanced.

And again, I think, as David kind of pointed out earlier, the beauty of this portfolio is it is so well-positioned across the value spectrum through the eyes of the consumer. So from an entry point on refill through exchange into our packaged water business, obviously Pure Life is one of the most attractively priced branded products out there. You go into our regional spring waters and all the way through premium. So we feel very good about the position of the portfolio. And again, we will continue to approach things in a very balanced way.

Your next question comes from Peter Galbo from Bank of America.

David, just a question on the guidance. Obviously, a nice improvement in the top line, and you are raising the outlook there, kind of leaving the EBITDA unchanged, which I think is probably prudent. But maybe you can just help us think through a few items on that line. One, just the level of reinvestment, and you may have mentioned a number earlier, I think I might have missed it, but just the level of reinvestment that you are putting back into the EBITDA line this year.

Then maybe as a secondary, just how the cost environment is kind of shaping up as you begin to kind of do planning on 2027. Oil is obviously a lot lower than it was when we spoke 3 months ago. You're relatively well hedged for this year, I think just those 2 items would maybe help frame how we might start to begin thinking about the profitability potential for the next year. Thanks very much.

Thanks, Peter. So within the route side of the business, so we're in kind of the direct delivery channel at this point. We continue to ensure and look at kind of 2 indicators. Where are we on daily OTIF, which obviously compounds into monthly and quarterly performance, and then monitoring sort of call volume, which obviously is a indication that something didn't go right at the moment of truth with the consumer or in the billing process. And both of those continue to give us a signal that we can sort ofmanage the route count that typically follows the volume trajectory whereas, in Q1, that would've been a little heavier. So as we came into Q2, we had the right route sizing. And what is typical is as you exit Q3, you would go into route alignment that sort of matches the shoulder quarters of Q4 and then Q1 of 2027.

So again, without a specific number there, that remains sort of an area that we feel much more comfortable about as we performed during Q2 and as Q3 begins, but it's something that we'll continue to monitor. In terms of the general inflation environment, areas around diesel, which is a primary input of that route system, we remain obviously well hedged this year, an sort of we average into those hedges for next year, where we have a decent percentage already taken down for 2027.

And then the rest I think is really what's been well notable in the sort of market domain around the tightening freight market. And that continues to be some of the aggravation we see where we are in the spot or third-party market. So what Primo has done over the course of the year is continue to invest in what we call our private fleet, which is transitioning drivers or hiring drivers specifically to run vehicles either owned or leased on our own network, which again takes out some of that friction cost.

But those tend to be, as you've called out, some of the higher inflationary items within the business. When you look kind of year-over-year, obviously the business is benefiting from the pricing, obviously more an optimized OpEx structure, the volume return in retail and more of a stable market in direct, and then sort of navigating those inflationary items like freight and unhedged areas of the business.

And your next question comes from David Shakno from William Blair.

David Shakno on for John Anderson. Wanted to ask about the Club and Away From Home channels. Club, I think, was a little bit soft in 2025. It's been up mid-single digits the first half here. Away From Home, up high single digits the past couple of quarters here. Just wanted to understand what trends you're seeing in those channels, especially on the Away From Home, is it new partnerships and additional TDPs there? In Club, is it consumer value-seeking behavior? Just wanted to understand those 2 channels in particular.

Yes, I think to your point, we continue both in the quarter, we saw mid-single digit growth on Club, same thing year-to-date. I think on the Away From Home, high single digit. I think on the Away From Home, it's a lot about build-out of distribution and continuing to see that business continue to grow. Premium plays a key role in there. On the Club business, it's about making sure we're positioned right, pallet positions, new distribution opportunities.

But as we mentioned, it's not just Club and Away From Home, I mean, we're seeing really good balanced growth across now that both the direct business and retail business are growing, but within retail, grocery, club, mass, C&G, dollar, all performing really, really well. So the balance and broad-based nature of the growth is really encouraging.

And your next question comes from Daniel Moore from CJS Securities.

Just wondering if you could elaborate on some of the other levers that you have beyond commercial or price to pull, should we continue to see inflationary pressures continue to build throughout the year. And then in the direct delivery business, can you just give us an update in terms of how much redundant or excess costs you're carrying and when we expect those to wind down.

Yes. So I think with regard to levers, obviously, we'll continue to look through our hedging programs, as well as sort of traditional sort of RFP measures around sort of supply chain elements. And so that's ongoing, especially as we navigate budget planning sessions for 2027. Within the direct delivery side as, I guess, without specifics, we're at a route count coming into Q2 that allowed us to sustain that performance and deliver it about 40 basis points ahead of expectations with that growth expected to continue in the second half.

So I think what we'll do is we exit the quarter and start to look at what will be the optimal route count that matches the consumer demand for those volumes. And that's typically been the muscle we have every year, certainly premerger. But just obviously, through last year, we've kind of had that elevated. So again, we'll look at what those need to be, how that matches demand and sort of report a little bit clearer on that coming in and out of third quarter results.

And your next question comes from Andrew Strelzik from BMO Capital Markets.

I wanted to go back to the reinvestment topic. And obviously, you've made number of investments to restore the momentum in the direct delivery business this year. It doesn't sound like you really want to quantify that. But I'm trying to think through what reinvestment levels look like in '26 versus kind of the long-range reinvestment needs for the business. So is there any way you can kind of help frame that up, maybe talk about the long-term margin potential of the business? Any help around that would be great.

Yes. Unfortunately, we'll will navigate this year. Obviously, it's a pretty dynamic environment. I think commenting on anything longer term, we would say for our traditional sort of guidance reveal on '27 in the spring of next year. But obviously, again, it remains dynamic. I think we have levers at our disposal. I think we have a fortunate position of consumer demand that's generating volume. So that helps balance and to not be just price mix related. And again, I think, regardless of being through sort of what we call our major integration milestones, the productivity journey doesn't end and we'll continue to look through the P&L and continue to optimize the business for future success.

Yes. And the only thing I would add is I do think that as you think about what's now behind us, David mentioned the routes. We had an investment in win-back initiatives. We had an investment in additional call center resources, those are largely behind us. I mentioned earlier, going forward, we'll continue to invest in marketing and brand-building capability and tech and AI. But I think we will continue to be very disciplined around managing productivity across SG&A and efficient supply chain across manufacturing, warehousing and S&D and again, are looking to grow this business in a very balanced way and sustainable way.

And your next question comes from Derek Lessard from TD Cowen.

Great to see some good momentum coming back to you. One question for me is, can you just maybe provide some early signals or commentary on how the new warehouse management system is impacting your supply chain execution and I think customer satisfaction as well?

Yes. Thanks, Derek. Appreciate the comments and question. I think it's just too early to tell. We obviously have it in pilot and are continuing to learn. Again, it's going to add value. But at this point -- at this moment in time, it's really just about reading the pilot, making whatever necessary changes we do before we begin to roll it out. But it's just way too early to talk about any significant contribution from the warehouse management system.

And your last question comes from Eric Serotta from Morgan Stanley.

Great. Eric, earlier in the year, you talked about some low-hanging fruit from some kind of basic retail execution and blocking and tackling in the stores that just wasn't really done by the predecessor companies. Can you talk a bit about progress on some of those areas that you had in mind to date and sort of what you're seeing or what you're planning in terms of cadence of getting at some of these opportunities in second half or 2027?

Sure. And I think my focus is really all about what lies ahead versus what has happened historically. I think as you think about the growth vectors of this business, first and foremost, the improvement on the customer experience and customer direct hopefully creates a growth flywheel in that business for us as we walk forward to unlock. Second, we've talked a lot about improving our presence. And as you can see, we continue to drive new points of distribution across our retail business. So whether it's driving distribution, making sure we get more feature activity and promotional activity, certainly display inventory, expanding our presence on shelf, whether it be warm or cold and then cold drink and immediate consumption, all of those are opportunities for us.

I would say, as we walk forward, those are ones that we continue to focus on and will be kind of the centerpiece of how we approach the 2027 customer sell-in. But multiple growth vectors on this business, exciting to see where those opportunities are and more to come on how those plans will unfold as we get into the later half of this year and specifically into 2027.

Thank you. That does conclude our question-and-answer session for today. I will turn the call back to Eric Foss for closing remarks.

Thank you. Well, in closing, we're certainly pleased with both the Q2 and first half results. I want to thank all of the Primo associates for their passion and pride and all that they do every day. And thanks for all of you on the line for your time today and your continued interest and investment in Primo. Have a great day.

Ladies and gentlemen, this does conclude your conference call for today. We thank you very much for your participation, and you may now disconnect. Have a great day.

All right. Welcome, everybody. Thank you. Last but not least, today, on day 2, I'm very happy to welcome Primo Brands to the conference. With us today from Primo, Eric Foss, Chief Executive Officer; and David Hass, Chief Financial Officer. So thanks, guys, for joining us.

Good to be here.

All right. We're going to use the entirety of our time for Q&A. A lot to cover. But I guess, Eric, I'm going to start with you and to start very high level because there's a lot of moving parts to the Primo story at this point in time. But I guess if it's one headline that you want to kind of emphasize at the top, what would it be?

I think it'd probably be that if you go back to the time of the merger, the deal thesis and really the overall investment thesis is still firmly intact. Okay. And there are several reasons, I'm sure we'll talk about many of them as we go through the next 30, 35 minutes.

But the way I would characterize it is, this is a company that, first and foremost, is powerful, powerful in the fact that we've got leading industry brands, powerful in the fact that we have a go-to-market that has speed, reach and flexibility.

In addition to being powerful, I think this is a company that's proven, given we're the clear leader in water and the clear leader in healthy hydration and actually a major player. I think sometimes it goes a little bit unnoticed, but, a major player across liquid refreshment beverages, particularly when you think about velocity of the category and our brands within the category, we're a very important partner for our retail customers.

And then I think the final P is the promising future that is in front of us as a company. And part of that promise is driven by the fact that we compete in a very attractive category, large, growing and profitable. And importantly, the consumer and how she thinks about health and wellness and how she is continuing to think about the future of municipal water are all pretty attractive components of the Primo story.

Great. Let's dive in, and we'll start with direct because that's been the focal point. I think the biggest trigger of debate with respect to the investment story. We've now cycled last year's disruption. And we've seen a pretty clear sequential progress over the last couple of quarters, really underpinned by sequential improvement in service.

I guess, to what do you attribute the progress you've made so far? Where are we as we sit here today, in the early part of June? And I guess what remains to be done as we go forward?

Yes. I think a lot of the improvement was anchored in building the right culture and mindset, certainly, addressing some of the process and technology outages and also people. And so I think if you think about what created some of that, it was integration related. It was related to kind of the pace of what we did relative to some of the consolidation on the manufacturing side or warehouse side or even route optimization side.

And so I think what we did was try to just simplify what really needed to happen to deliver a great customer experience. And the first thing is we had to get product produced schedule. We also had to get the warehouse out-of-stock situation solved and then get trucks loaded as ordered so that the sales teams could go deliver kind of [ account ] services scheduled and this important metric that we talked somewhat about in Q1 around on time in full.

And so as we've worked through that process, the reality is, as you've seen that important leading metric of on-time and full move back north of 90%. I'm really pleased with what the team has done, both on the pace and the speed of how that has recovered.

But at the same time, I would characterize it while pleased, we have more work to do. And the more work to do, to me, really centers around, in particular, the call center on making sure we've got the right capability, we've got the right tools, technology. There's certainly AI applications that we could be thinking about as part of that. And so that's kind of really still work ahead of us.

We've also talked about we're in the process of piloting a warehouse management system that will improve both the out of stock and enable trucks to be loaded as ordered. So really pleased with the progress, but continuing down the success car.

Okay. When you dig into the -- that above 90% on-time in full metric, are there -- is it spread like peanut butter? Or are there still hot spots where you're not quite back to where you need to be?

Well, there's some hot spots geographically -- but I think for the most part, there's not hotspots on the production side. If there's hotspots, it's still within that warehouse situation or within the service model. And again, we've talked about it. We've continued to invest resources, feet on the street selling resources.

The way I think you'll see the evolution of that play out, Steve, is while we were over resourced during the off-peak time frame, we're kind of growing into our body now in terms of the staffing of those routes as we move through summer. And as we come through kind of the peak summer selling season, we'll rightsize that infrastructure. So you'll begin to see that tail off as we get into the second half of the year in terms of the investments.

Okay. Maybe, David, just around the cost -- or the, I guess, the cost/margin trajectory associated with this recovery. How do we think about as the service improves, as you've been running -- I mean, you've been doing a lot of things throughout densities, a bunch of stuff going on; what's the expected margin trajectory here?

I think most of your the cost dynamics are somewhat controlled for this year. I'll come back to that maybe a bit later. But just in terms of -- on the direct business itself, as revenue improves, assuming it does, what's the margin implications associated?

Yes, this is a business that's always made its peak margins in Q3, first of all, As we move into Q2, that would be the second sort of beneficial quarter. And then you have the natural Q4, Q1 or Q1, Q4, depending on the sequence of sort of the [ shoulder ] seasons.

So as Eric mentioned, coming into Q1 and into the new year with the progress made where Q4 of last year sequentially improved from the down 5 in Q3. We posted about a down [ 4.1% ] in Q4. We started seeing earlier signs of OTIF journey and saying, "Hey, this route investment is paying dividends," plus the cultural change and the leadership change that Eric brought in sort of helping everyone understand, the customer has to feel that satisfaction and when they order that it shows up in full and on time, and that's really what started.

So again, sequentially, Q2 will look better than 1, 3 better than 2. And as long as we continue to see that OTIF journey lead to lower call volume, lead to higher sentiment and satisfaction from the consumer side. we're not going to overly prescriptive manage the margin side if it continues to unlock top line growth. That's really what we've seen occur.

Again, it's a natural sequential improvement period for us. We are growing into that route count and are growing into that volume as seasonal lift comes in both the exchange and home delivery side. So we're pretty pleased with that progress so far.

Okay. Where are we on the path to net additions, the top of the funnel exceeding the bottom of the funnel? We're round about the time when we were -- I think you were targeting to get back on the positive side. Have we hit that market? Are we close? What's the trajectory there?

Yes. I think if you think about some of the most important metrics, while north of 90% is good and some of that journey is still ahead of us, the customer nets and ultimately getting at that quick portion of the nets because the top of the funnel has been fine is really still ahead of us. And so as we get through the next several months, I think you'll begin to see that get back to a more normalized level. So I think still to come, work in progress.

When you dig into the quit, what is -- is it service? Is it -- what are -- what's the rank order of rationale? And how do you -- therefore, how do you address it?

Yes. I think one of the bodies of work that's still ahead of us is what I would call just almost reconceptualizing the entire customer journey. And so if you think about it from exploration to sign up, a step 1; service and delivery; step 2; making sure you've got an accurate and timely bill, step 3; and then step 4, the issue resolution.

I think it's in those last 3 buckets, right, of first and foremost, it's the delivery and the service dimension. But as we've brought systems together, we have had some hiccups on the billing side as well. And then while most consumers don't expect you to be perfect, we've spent a lot of time on that last bucket of issue resolution.

As we dug into the process, we found out there was more coordination, more communication and more process and technology needed. When somebody made a call to the call center, the call center operator would solve it in his or her mind but wasn't connecting the dots back to the depot and the route. And so we've also stood up this respond and recover sell by sundown process. It has helped solve those issues on a 24-hour basis. All of that, I think, is helping us make progress as those leading metrics.

Okay. So when I think about -- think about some of the -- so warehouse management, harmonization of data, the call center investments; does that kind of -- thinking about that over the course of the next -- looking at it over the next 12, 24-plus months and juxtaposing against economic forecast at the time of transaction, do those -- some of those things seem like added investments added costs.

Can they be funded within the original financial forecasts funded by synergies or whatnot? Or are they -- or should investors start to think about maybe some incremental costs to come?

Yes. I think relative to reinvestment, I think some of those are going to be in to fall off. I mentioned earlier the feet on the street and the routes. Certainly, the win-back initiative reinvestment monies, those will begin to build a tail here as we get into the second half of the year.

I think the ongoing reinvestment is still ahead of us that will continue or in the area of the call center capability and technology. Those three, I think, are with us for a while until we can get get it set up for a great customer experience day in and day out. I'd say those three are still ahead of us.

Okay. Have you -- as you've settled into the I mean you were familiar with the business before you became CEO from a Board perspective. As you've gotten closer to the day to day, have you seen incremental opportunities value? Let's fast forward and let's say the businesses -- we've gotten through this, the business is now humming along, service levels are strong. Are there incremental upside opportunities that maybe you didn't fully appreciate a year ago?

Yes, I think there are. I think I've talked about kind of the three phases of our evolution of how we're approaching this. First phase is stabilization. I think we're working our way through that phase efficiently and at pace. The second phase is optimization. And then the third phase is more strategized.

And so I think as you look at this business, what are we really great at? Again, we spend the majority of our time talking about the customer direct business, but we got half of our business sitting over in retail. So as you think about that and you think about the growth vectors available to us as an enterprise, I would wind them up as follows. I think number one, getting that great customer experience on the customer direct side unlocks growth potential.

Two, on the retail side, we have an opportunity to really be much better in terms of in-store presence, more in line with our fair share and what we rightfully deserve. And this is a business that's grown up being really good at the cheap case pack water. Most of the profit pool sits over an immediate consumption. And so how we take advantage of that through a conquer cold initiative and cold drink, whether it's coolers or [ cold vaults ] is another growth vector for us.

And so I think as you think about this business, there's plenty of growth vectors here in terms of execution, selling service. And I didn't mention what's probably one of the hottest things going right now within the category, and that's our premium portfolio, which is also -- has a long runway ahead.

Yes. So let's dive into some of those things. as you say, retail, retail has had some externality events. We've had some weather. We've had tornado hit one of your facilities. But overall, the retail -- the category has been strong, the category is premiumizing. Your business has been delivering well.

I guess, how do you -- you talked about some of the unlocks in terms of single serve. I guess, do you have the capabilities to get at all of those opportunities that -- but whether it's in-store execution or it's actual manufacturing capabilities for single-serve, how much of that is kind of low-hanging fruit that's relatively easy to go after versus things you're going to have to build capabilities to realize?

Yes. There's no doubt there's a capability investment, Steve. But I think most of it is within our reach. And so on the retail side of the business, I mean, what makes us -- what we are today is the strength of the product portfolio that we bring to market each and every day. And so as you think about that, we're positioned very well to meet the consumer where she wants, how she wants, when she wants.

And it starts with we can compete at the value end of that spectrum with a product like Pure Life. We obviously can compete in the both value-oriented consumer and brand affinity consumer with our leading-edge -- leading market share regional spring waters and then it moves into premium.

And then you complement that, which I think is a muscle, we're going to get better at building, which is the in-store execution part, right, which is how do we get more of our fair share of the feature activity? How do we get more display inventory to support that feature activity? How do we get more space on the gondola? How do we get more points of distribution and availability throughout the store? That's all opportunities for us. And again, it will come with some investment in people and capability.

Okay. On the premium on Saratoga mountain valley, I guess maybe frame the size of the prize as you see it, where we are with capacity to be able to deliver on that? And I guess, yes, just how big can premium become and what lies in your way, essentially?

Yes. I think, one, it's great to see the 40-plus percent continued growth we're getting off of those two trademarks. So I think there's a long runway ahead of us on double-digit growth. I would characterize it in terms of framing as we're in kind of the early to mid innings still of a baseball game.

And so where do we need to go or how do we go forward? I think it's important to know that we're not capacity constrained. And yet because we're still in the early and mid innings, we still have tremendous points of distribution opportunity.

And then we really haven't unlocked that [ ex ] a channel or a customer to on the whole getting its rightful visual inventory levels and gondola space and properly positioned with more visual unity than it has today. So again, there is a long runway of continued growth in this. And obviously, it's a very attractive portion of the category for us to compete in.

Yes. Dave, maybe help a little bit in terms of the profitability implications, the mix implications of growing that premium segment. And as it scales, does it achieve even greater profitability? Or does that -- do those -- does that incremental growth require more brand investment? Is there both a margin and revenue story here? Or is it more about revenue profit dollar growth and positive mix on the portfolio?

Yes. So I think we're in a very fortunate position where both of these brands are incredibly attractive and popular. But they come at their go-to-market a little bit differently. And you've heard Eric talk about RGM capabilities, and that's really an unlock that is still a capability build to come for us as a business. But with that, it allows those prices and go-to-market activities to be set up incredibly profitable for those respective brands.

Each of those brands come to market a little bit differently. Mountain Valley had tended to come to market a little bit more balanced between a retail offering and a go-to-market or direct delivery direct-to-consumer setup. And Saratoga has typically been more of a retail away-from-home established brand that's now having some increased success off route.

So anytime you can have a better balance with the off-route part or direct-to-consumer part, you start to unlock the margins in a very nice way. You just had asked a question about sort of capacity expansion and the like as well.

So the Board and management was at the Hawkins facility, the same facility that was hit by the tornado. We actually had a nice cultural event there with the associate groups celebrating what I'll call kind of the grand reopening as well as the new commissioning of the line that had been introduced to that facility that allowed retail unlock of sort of our glass capability. So that's been very nice.

The Mountain Valley expansion in greenfield is starting to produce test product today as we speak. And so that's also an unlock. So both the brand portfolio opportunity, where it gets distributed, a balance between retail and direct to consumer, the RGM capabilities and then these capital investments all start to bring this to a nicely accretive position for us as a company.

Yes. Maybe talk a little bit about the -- to what degree -- our packages and brands, I would argue [ Saratoga and Mountain Valley], to me, I think retail, right? But to what extent our kind of retail packages, retail brands being leveraged in the direct business, I guess, we get the stop there?

Yes. I think if you think about our direct business and the -- once we get to the growth flywheel we desire, right, you would have kind of this dimension of really solid customer retention, adding, given the opportunity at the top of the funnel, net new business that's accretive to the algorithm, ensuring you've got the right RGM and pricing strategy up against that business.

And then you would take that existing in-home 5-gallon consumer and start to attach case pack to them or if they're having a dinner party this weekend and don't want a PET bottle of Poland Spring in the middle of the table or to their guests would have a glass bottle of Saratoga Springs or Mountain Valley.

And so that attachment opportunity is one that, to a large extent, to use a basketball analogy, we've been trying to figure out who to guard on the customer direct business. and playing a little more defense and on our heels than we'd like.

As we get on our toes and start playing offense, particularly as we get into the latter part of this year and next year, you'll see us start to think a lot more about how you bring some of that business back into the customer direct selling strategy.

What about the flip side? I mean, are there -- to what extent are -- does the logistics and some of the warehouse management, some of the capabilities you're trying to build on the direct side become leverageable in the retail business, especially as you're almost building more of a DSD-type presence in retail trying to control the perimeter? And so are there are there operational sort of leverage points in the opposite direction?

There are some. I think actually, our warehouse management system on the retail side is -- I don't know if light years is right, but certainly well ahead. But I think your question is a relevant one.

I think one of the things as we think about the growth opportunity on the retail side of the business, and I'll use immediate consumption, but I could apply the same principle to in-store execution. As we think through that opportunity to get more [ cold vault ] space or to get more coolers into the market, one of the things we're beginning to test in Texas is how we might stand up a more DSD-like delivery model.

You could do that off our customer direct trucks today or you could begin to think about it. And to be honest with you, where I'm agnostic is on the delivery aspect. Where I'm passionately engaged on the unlock is how we identify selling eyes and merchandising arms to activate and keep that cooler or [ cold vault ] full and presented the right way to the consumer. So I think on that side, there's an ability to take some of that model that we use on the direct side into the retail business more so than we have it today.

Okay. overall, the category is premiumizing. We see that in your portfolio, we see that in the category. But is there any kind of degree of value consciousness or competitive activity that is picking up in the current consumer environment? And to what extent is that a planning assumption that you're becoming more elevated as you think about the go forward, given the state of the U.S. consumer?

Yes. I mean I would -- first of all, I'm a big believer that you have to play your game and control what you can control. But -- and I would characterize the pricing environment is very rational.

I think what's -- the beauty of our portfolio in addition to the brand breadth we speak to is the value spectrum in which we can engage the consumer. So if you really think about it, almost the minute she steps away from tap water, the best value per ounce for her is going to be our refill business.

As she steps up the chain, she could go to our exchange business. As she steps further up the chain, you could go into our retail package business or ultimately to the home delivery business. And then she could do it across brands in that from our existing brands up through the regional spring waters and premium brands.

So I think it's really important for investors to understand how broad a value spectrum we have and can deliver against. And so there's no doubt, with some of the inflationary discussion on commodities that we'll see where all that lands. But I like our position in terms of the value impression to the consumer.

Okay. I want to talk about the cost side of that in a second. But in terms of for -- either one of you or both of you want to tag team, just the capabilities, as you're thinking about offsetting the cost inflation to come and what we're talking about is being able to flex revenue growth management in a way that allows to deliver the consumer what it needs in a way that also protects your profitability; how well developed are those capabilities? And are you ready for this moment as you go into the back half and think about [ '27 ] potentials?

Yes. I mean the way I think about it, Steve, is pricing is probably one of the most complex levers on the P&L. And the reason why it's complex is you need somebody that understands how the consumer defines value, you need somebody that understands how the customer is going to manage through on their trade margin and execution of that. and you need somebody that understands the in-depth economics of the company P&L.

And so you have a small number of people who really understand that. And so to be great at pricing, you need to be very principle-based. You're definitely going to have to invest in capability and tools and technology and look at AI applications, so on and so forth.

What's most important to me, though, is -- and I've been through this journey before at another company, whereby as we were being stood up through an IPO as a bottling entity and losing the concentrate P&L, pricing became the most important lever for us.

And so at the time, we talked about how we were making pricing decisions. And as I came back from Europe, one of the answers I consistently got was we wait and see what competition does and then we follow them. And my point was, I sure hope they know what they're doing because if not, we're going to be in big trouble.

And we changed that day from that mindset of waiting to see what competition does to making sure all of our pricing starts and ends with the consumer. And so as we think about pricing and RGM at Primo, we're going to make sure all of our pricing decisions starting in with the consumer.

What do you have to do? You have to figure out how she defines great, good and no value across usage occasions, price points, pack types. And so as we do that, one of the early bifurcations you'll find in this category is you have this future consumption business where the consumer's definition of value is very much price. You have this immediate consumption business where the consumer's definition of value is very much convenience.

So how you choose to play across your portfolio, what rate actions, what trade spend initiatives or what mix management opportunities you have is a pretty complex exercise. But we're very committed to it. Most importantly, we're committed to profitable growth, balancing it across volume and price. And I think you'll see us begin to talk a lot more about this in terms of how we take this forward.

And again, I didn't talk about it earlier when I talked about growth vectors, but this is another big one they [ won ].

Okay. So on the cost side, let's talk about what we're trying to offset. And I think let's start with '26, your degree of exposure relative to your degree of protection. And then how to at least help investors at least conceptualize the risks that may be accruing into '27? And how changes in spot prices may move that around? Because I think it's a little misunderstood as to how much flows through, how quickly within the Primo Brands P&L.

Yes. So I think importantly, we, like almost everybody attending this conference is exposed in some regard. So if it's direct delivery, we're typically expose more on the input cost of the vehicles themselves.

And so our -- we are fortunate where about 41% of our fleet is [ propane ] oriented. That market has been largely not affected by events in the Middle East. And then the balance of that is diesel, of which we have had a pretty comprehensive and robust hedging strategy. That hedging strategy always looks out on an event horizon and tries to take down sort of hedges using very publicly available sort of spot prices and diesel in that regard.

So we're pretty well balanced this year. We have hedges in place for next year, not to the degree we would have, obviously, of the current calendar year, but we continue to apply and look at that and sort of take down additional hedges as needed.

On the retail side, we're more exposed in that case to resin, in which we both come to market through virgin resin and recycled PET. And we'll do that on a forward kind of spot buy price with our vendor partners. In that case, you don't really have a natural market you can hedge, so you're doing that all through relational-type discussions.

Again, similar setup here where in the current calendar year and into a portion of next year, we have some positions in place or some contracts in place. And what we can do thereafter is look at the totality of exposure.

First, assess how we, as a growing entity, can offset that through just better productivity of the system to kind of go back to that analogy of direct delivery and Q1 route count versus Q2 route count and how that incremental volume helps. And then secondly, looking at it from the lens of, all right, what's that average basket of exposure and to protect margins or to potentially have incremental margins, how would we price product accordingly?

And that's that RGM lens that Eric talked about and how we would go through that entire assessment. And that wouldn't just be in the retail product, it would come all the way down to what's the appropriate refill price per gallon for instance, to do that.

So the good news is that while there are headwinds, we have, I think, a process that works for us. It's a process that's not just unique to us, it's structural across the industry that's exposed to these commodities. And I think we have a couple of different vectors to attack against that.

I think the thing I would build on David's comments would be, as you think about this, I think, first and foremost, the industry has certainly seen this before. I've seen it before, David seen it before.

I think second, it's really important and it's tough, given the day-to-day reading of the headlines, the level of volatility, uncertainty to keep coming back to it's temporary. And the fact that the industry is likely to be affected in a similar way, whether you're a branded player or a private label player, everybody's got there, as David talked about, hedging and forward buying strategies that are pretty similar.

And then the number of levers we have, productivity and price been two of them, but fuel surcharges as well as delivery fee changes are all part of the toolkit if we get to that moment in time.

Yes. The nature of your -- I guess, to some degree, your hedges, but also I guess, probably more likely your contractual relationships with key suppliers. To some extent, if commodities -- if the prices go high -- as they go higher, stay higher, what the hedges are doing essentially giving you time, right, to catch up, in a scenario where things remain more elevated for longer, you're therefore layering on more protection and more contractual protection, but then we see a reversal; are you -- to what extent are you locked in to those higher prices versus having some flexibility to renegotiate or participate in some of that downside? Does that make sense?

It does. Yes. I think notably in diesel, while we're largely protected in current year, if there was somehow a Q3 or a Q4 event, there is enough exposure in the spot market where we could have some benefit. Obviously, that could go against you in some degree if things go higher from here. But I think the best thing for an organization like ours, based on the finance team, supply chain and procurement teams; is just having a good level of understanding of what we're facing.

Again, within the last week, we've seen, I think, a spot market change on WTI of over $10. So that's not necessarily stable or easy to predict around. As long as we can get a general quantum of what we're up against, the organization can move into action, again, whether it's productivity initiatives or through that pricing and the levers available within that.

But yes, if things were to relax, there is some benefit, I think, on the supplier side, notably in resin, there would also be ways to continue to say, hey, this is a different market than what we talked about. Oh, by the way, we unlikely have taken delivery of the product. So let's talk about how we're going to handle that.

Yes. And I would think that with -- just given your scale and size that if there was one buyer who's going to have that ability to probably be -- yes, okay.

Let me just talk a little bit about sort of your cash outlook both for this year and as you bridge to the future. I guess what drives the next step up in free cash flow for you? And how would you be prioritizing uses of that cash once it comes?

Sure. So this will be the last year of integration-related activities. We completed round 6 in February [ around 7 ] in March. We're also going to extinguish sort of what we'll call our integration CapEx, which has been part of the add-back cycle within that. We don't anticipate another weather event. So unfortunately, we faced close to $45-plus million related to that tornado repair.

So all those things start to sunset. And so that allows the capital -- the CapEx investment to revert back to more of that normalized 4%. The nice thing within that is our original guide for the year was 0% to 1%. We delivered a 1.7% Q1. We've since then revised our top line guide to 1 to 3.

And then none of those scenarios did it anticipate a 4.5% or 5% capital to do that. It was a balanced achievement through diverse water portfolio growth across regional spring water purified and premium, across service growth and then notably in direct delivery a rapid or a more rapid improvement in the trajectory of that recovery arc.

So we're pretty excited that, that doesn't require extraneous capital to sort of generate that change in guide that we've given. Our first priority, again, would be to find projects where those capital investments within the existing sort of amount could generate or stimulate a higher top line.

Some examples of that continue to be investments we've made in the premium business, investments we've made in what is adding regional spring water exchange product to our existing footprint in the exchange business next to our purified product. So that's a nice incremental lift. And then most importantly, just looking across the portfolio where to play, how to win and where can some of that capital investment growth angle be used to sort of elevate the business?

Most importantly, our priority thereafter is to delever this business. So we think we can, again, start to get a little closer to that 3x and in a year from now, sort of breach through that 3x net leverage ratio. And that's a really strong position for us to sort of unlock valuation, we believe. From there. Again, communication of a dividend policy annually.

And again, we don't really believe we'll be in the share repurchase business unless obviously, there is the dislocation we faced in the last year. So that -- all those are things where both the base cash profile, the quality of the cash profile, the diminishment of the add-backs, all those things start to go in and sequentially improve each quarter this year.

Okay. We have a couple of minutes left. I almost -- right from the outset, I've been talking -- we've been talking about Primo as sort of one entity. In the grand scheme of things, we're only 18 months removed from what was a very large transformational integration.

Inside the company, is it one Primo? Or is there still -- to what extent are we still integrating?

Yes. I think we've done a lot of work. It's a good question. There's three things you have to get right. Anytime you bring companies together, successful integration, synergy capture and the culture. And the culture is really the centerpiece of your question.

We are one team Primo. And we have talked a lot as an executive leadership team, and we've talked a lot about to the senior leadership team. We had to get together with the senior leadership team about a month ago. And my message to them was I wanted them to change a couple of things. I wanted them to change their place. This is no longer Nestle Waters. It's no longer Blue Triton brand. It's no longer Primo legacy. This is one team Primo with one dream.

Second, I wanted them to change their pace. We need to be faster and we need to be more agile in a fast-moving consumer goods category like this. And the third is I wanted them to change their perspective. And what I meant by that is I want them to lay down their functional hat or their line of business hat, and I want them to put on the enterprise hat. And I want them to make sure that while technically and functionally, they're very capable, they also view the business through more of a general manager's mindset.

And so I think the team has responded really well to that. We'll continue to walk down a path of assessing capability who can and can't as well as culturally, who will and won't and make the necessary changes to make sure we're running the best team on the field. But I think we're in a very good spot relative to one Primo team.

Okay. Great. And then our final minutes, I mean, I guess, we've talked -- there's a lot of balls in the air that we're progressing through. You mentioned early innings a couple of times. So when we get to the end of the game, I guess, what do you want investors to understand about end-state Primo and the opportunities that lie ahead?

I would say end-state Primo, first and foremost, we want to be known as a great customer service entity. So you'd want to be able to drive great consumer satisfaction and great customer loyalty and a company that really helps our retail partners build their business.

I think, second, we want to be known as a growth company, so we want to unlock the growth full potential of this business through the growth flywheel. And that will be measured in our ability to grow and outgrow the category ultimately and grow share.

I think third, we want to be known culturally as a company that's a great place to work, where our associates can come and build a career and we're known as both a performance and a recognition culture. And then I think really important for us is we're trying to get this company into what I would call the virtuous cycle of really solid top line growth that is complemented with some margin expansion, which drives good earnings growth and free cash flow that you can reinvest in the business.

And ultimately, if we do that, it will be a great investment for our shareholders. And the thing that I'm really encouraged by is if you take this moment in time, I think the fundamentals are strengthening. I think the reality is, is that the momentum is building. And I think the path forward allows us a pretty nice path to create value going forward.

Okay. We're out of time. So we'll end it there. Good place to end it. Thank you both. Appreciate your time. Thank you all for joining, and enjoy the rest of the conference.

Welcome to the Primo Brands 2026 First Quarter Earnings Conference Call. I will now turn the call over to Traci Mangini, Vice President, Investor Relations.

Thank you, operator, and hello, everyone. With me on the call today are Eric Foss, Chairman and Chief Executive Officer; and David Hass, Chief Financial Officer. Our discussion today includes forward-looking statements within the meaning of U.S. federal securities laws, which are subject to risks and uncertainties that may cause actual results to differ materially. For more information, please refer to the forward-looking statements disclosure in our earnings release. In addition, the definitions of and applicable reconciliations for any non-U.S. GAAP measures are included in our earnings release and the supplemental earnings slides, which were made available earlier today on the Investor Relations section of our website. With that, I'll pass it to you, Eric.

Thanks, Traci. Good morning, and thank you all for joining us. This morning, I'll provide a high-level review of our 2026 first quarter results, share with you an update on our progress on our direct delivery customer experience and discuss the current operating environment and our key growth priorities. David will then take you through our financial results and our updated 2026 guidance. Let me begin by stating how encouraged we are by the strong start to 2026 and the momentum building broadly across the business. First quarter net sales of $1.63 billion were up 1.7% on a comparable basis versus prior year, marking a return to growth for Primo Brands. Top line performance was broad-based, driven by both price/mix and volume. It was fueled by the strength of our brands in retail, particularly premium and another quarter of sequential improvement for direct delivery with service levels exceeding our expectations.

Our comparable adjusted EBITDA was $306 million, down 10.4%. This was driven by increased investments in the business discussed during our last earnings call to improve service and direct delivery, which have yielded operational improvements, higher on-time in full and an improved customer experience, as well as incremental costs incurred attributable to the winter storms and incremental freight and logistics costs year-over-year. Based on our strong first quarter top line growth, we're raising our 2026 comparable organic net sales growth guidance to 1% to 3% from flat to 1% previously. At the same time, given recent geopolitical events and the dynamic cost landscape, while we believe we're well equipped with multiple levers to help mitigate oil-related commodities inflation, we are prudently widening our adjusted EBITDA range.

As a result, we're updating the low end to $1.465 billion while maintaining the high end at $1.515 billion. This implies a revised adjusted EBITDA margin midpoint of 22%, which would be up 20 basis points versus prior year. Despite the macro environment, we are executing with pace and purpose, so we are fit to win. We believe we are well positioned in an attractive growing category, supported by our differentiated portfolio of leading brands and our advantage route to market. On our fourth quarter earnings call in February, we outlined 2 critical near-term priorities. First was improving the customer experience in direct delivery and second was returning the company to balanced growth. Our actions in the quarter drove meaningful progress across both of these priorities.

First, on direct delivery, we achieved another quarter of improvement in key leading indicators and more importantly, sequential improvement in financial performance. Top of the funnel demand remains strong and customer quits continue to decline, leading to a sequential improvement in customer nets, which approached a net breakeven customer position in March. Customer call volume declined and our Respond and Recover Solve-by-Sundown initiative resulted in an accelerated pace of customer issue resolutions. Notably, one of our most important success metrics on time in full, reached over 90% in March. While pleased with our progress, there's more to do. So we're taking some additional actions. We're implementing a new warehouse management system to support superior supply chain execution from product supply to in-branch inventory to help satisfy customer demand.

With the final waves of our U.S. integration behind us and those delivery customers now on one enterprise management system, we're focusing on harmonizing data, enhancing analytics and insights and strengthening management tools to better serve our customers. We're reimagining and optimizing the end-to-end customer journey from customer sign-up and delivery through billing and issue resolution. By enhancing the digital and mobile app experience, strengthening our win-back initiatives and designing a more efficient customer contact center, this ongoing work is grounded in 3 principles that we believe matter most to our customers: transparency, convenience and trust. And with that in mind, our current initiatives are focused on streamlining and improving communications across every stage of the customer experience.

Our second priority was to get the overall business growing again. First quarter results put us firmly on that path, led by retail, where we expanded our leadership position in branded bottled water, gaining both dollar and volume share in the category. We plan to build on this momentum through multiple growth vectors going forward, including brand building and innovation, improving our in-store presence, leveraging the momentum behind our leading premium brands and a comprehensive development approach to revenue growth management and pricing. Our summer plans around brand building include building on our successful partnership with Major League Baseball for our regional Spring Waters. This marks the first time our entire regional Spring Water portfolio is under one creative campaign. In addition, we'll have a significant presence in Philadelphia this July as we celebrate this year's All-Star game.

As part of our multiyear partnership with Disney, we're launching a limited edition Pure Life bottle series this summer, featuring Toy Story 5. We are also focused on extending our retail presence by driving new points of distribution, getting more display inventory and expanding our exchange and refill footprints. Expanding our presence extends beyond physical footprints to e-commerce. In April, for the first time, our regional Spring Waters became available through Amazon Grocery, providing an opportunity to increase household penetration, further accelerate brand awareness, increase our share of virtual shelf at this important marketplace and add new customers. Another growth vector is prioritizing premium. Saratoga and Mountain Valley continue to be incredible contributors to growth, growing an impressive 43% in the first quarter. Both brands showed momentum via new points of distribution and grew volume and dollar share of category in the quarter.

Going forward, we'll be amplifying awareness of our new Saratoga collection, 4 sparkling flavors in a slim can with the highly recognizable Saratoga signature blue color. Also for the second year, Mountain Valley is the proud sponsor of the Academy of Country Music Awards in May. We believe these brands are early in their growth trajectory with expanding distribution, strong brand equity and investments in additional capacity coming online to drive continued momentum. Saratoga capacity in Texas became operational in May and adding the second production location supports lower distribution costs. We expect to complete the Mountain Valley new greenfield facility in mid-summer. Our final growth priority is the development and execution of a more strategic and holistic revenue growth management approach across price points, package types and channels.

Our pricing strategy begins and ends with the consumer, understanding how they define value and how that perception shapes their purchase and usage behaviors. At the same time, we assess our competitive position across our brands and products while attempting to make sure our decisions reflect both our cost structure and margin goals as well as the economics of our retail partners. As we navigate today's dynamic macro environment, pricing, along with productivity initiatives are levers we can use to help offset commodity headwinds. In closing, I want to extend my thanks to our associates for their pride and commitment to ensure we sell and serve our customers with passion each and every day. Let me also reiterate that the investment thesis behind the merger that created Primo Brands, the U.S. bottled water leader, remains intact.

We compete in an attractive category and continue to benefit from strong tailwinds in health and wellness and hydration. It's highly penetrated, frequently purchased and among the fastest-growing categories within liquid refreshment beverages. We are a clear leader in branded water and healthy hydration and a major player across the liquid refreshment beverage category. As a leader in a structurally advantaged category with consumer and customer-first culture, we're investing to capitalize on the category momentum and the power of our brands. By ensuring we elevate service and execution, we're positioned for sustained growth, margin expansion, stronger free cash flow and long-term stakeholder value. With that, let me turn the call over to David.

Thank you, Eric. For 2026, reported financials include Primo Brands results for both 2026 and 2025 as we're now past the anniversary of our first quarter as a merged company. For greater comparability on our continuing operations, we focus on comparable results, which exclude the Eastern Canadian operations, which we exited in the first quarter of 2025 and our Office Coffee Services business, which we exited across 2025. Reconciliations of this information is available in our earnings supplemental deck available on our website. For the first quarter, comparable net sales increased 1.7% versus the prior year, driven by 1.3% price or mix contribution increase and a 0.4% volume contribution increase. These results reflect an earlier-than-expected positive inflection in the business and validate that our actions are driving measurable top line progress ahead of plan.

Simply put, we had a priority of returning to growth, and we delivered that with a fairly balanced first quarter top line performance. Volume, which we define as case goods equivalents measured in 12 liters was driven by an increase in retail channels, partially offset by a decline in direct delivery. In retail, net sales growth was driven across multiple channels, particularly mass, club and away-from-home, pack sizes driven by occasion and case packs and brands led by premium. As Eric mentioned, Saratoga and Mountain Valley combined net sales were up 43% in the quarter, continuing their incredible momentum. While direct delivery net sales declined in the quarter, it reflected lower volume from a smaller customer base and a tough comparison to prior year, which was just prior to the main integration activities. That said, customer net adds trend continued to improve, approaching breakeven.

On a comparable basis, direct delivery sales declined 3% with sequential improvement each month within the quarter. The performance also reflects sequential improvement over the last couple of quarters, a trend we expect to continue over the balance of 2026. Comparable adjusted EBITDA decreased $35.5 million to $306 million with comparable adjusted EBITDA margin down 260 basis points to 18.8% versus the prior year. Margins were affected by our decision to continue to operate with a higher route count than typical in order to strengthen our direct delivery service levels, an investment that we -- that contributed to better-than-expected net sales and customer retention.

We expect these costs to begin to normalize in the second half of the year as we realign the cost structure under the improved operating model, which should improve the overall margin profile. This approach also helped us navigate the temporary disruptions caused by severe weather across many of our markets during the quarter. Leading indicators such as OTIF and customer volume trends validate these actions. Additionally, margins were pressured by higher transportation costs in retail tied to severe weather and a tighter freight market. Moving to our balance sheet and cash flows. Underscoring our commitment to a disciplined capital structure, on March 31, 2026, we proactively refinanced our $3.1 billion term loan at SOFR plus 275 basis points, extending the largest and nearest maturity in our debt stack to 2031 from 2028.

Our liquidity remains strong with $874 million of availability between our cash balance and our unused line of credit. At quarter end, our net leverage ratio was 3.52x, reflecting expected seasonal working capital dynamics in the first quarter. We believe we remain well positioned to generate leverage ratio improvement as cash flow strengthens throughout the year. We generated $103.8 million of cash flow from operations for the quarter, adjusting for significant items, most notably our integration and merger activities, cash flow from operations would have been $191.6 million. Adjusted free cash flow, which excludes integration-related capital expenditures, was $128.6 million, representing a $73.9 million improvement versus prior year.

Our strong financial flexibility allows us to reinvest in the business while returning cash to stockholders. First quarter total capital expenditures were $118.1 million, while $47.2 million were related to integration capital expenditures, the majority supported growth initiatives and maintenance. We also continued to execute our share repurchase program, repurchasing $29 million or approximately 1.5 million shares under the $300 million program announced last November. Before we move to our financial guidance, we believe it's important given the macro environment to outline our oil-related commodities exposure and how we manage that risk. We do not speculate on the market. Instead, we hedge key input costs to create predictability around our input costs and to strengthen our ability to forecast.

Our risk management program blends fixed price and forward contracts where those instruments are available. The strategy is intentionally balanced and programmatic in structure and opportunistic when conditions allow. It's guided by guardrails and typically include coverage that extends 12 to 24 months. Our primary oil-related commodities include plastic resins, virgin PET or VPET, recycled PET or RPET, high-density polyethylene or HDPE and low-density polyethylene or LDPE, which are used across our product portfolio as well as diesel and propane. Within our delivery fleet, about 40% of our trucks run on propane. And given elevated industry inventory levels, propane markets have been relatively stable. For the diesel-powered portion of the fleet, we have significant hedge coverage in 2026, and we are extending some of that margin protection into 2027 through longer-term derivative contracts that lock in prices well below current spot levels.

At present, oil futures in 2027 remain significantly below today's levels, which, in our view, provides visibility and confidence to navigate the current situation. That said, the recent unexpected volatility in these oil-related input costs occurred shortly after providing our full year 2026 guidance in February. While this will likely result in some added headwinds, we are actively managing our cost outlook and believe our financial risk management program is one of the multiple levers to help mitigate the impact. Moving to our financial outlook. We are raising our comparable organic net sales guidance for the year. As a reminder, in 2026, we cycled the exit of our Office Coffee Services business, which accounted for $25.5 million in our reported 2025 net sales. This puts our comparable 2025 net sales at $6.635 billion. This is the base for our full year 2026 guidance and growth rate.

With that in mind, we now expect comparable organic net sales growth in the range of 1% to 3% as compared to flat to 1% as provided in February. The increase is driven by not only the broad-based better-than-expected first quarter top line, but also a trajectory change in direct delivery. We now expect direct delivery to transition from the down 3% in the first quarter to closer to breakeven in the second quarter and to modest growth in the second half of the year. We also expect continued strength in our consolidated retail channels behind our brands and premium momentum. Our revenue growth management capabilities intend to fully leverage the power of our brands and should also help mitigate some of the commodity cost pressures. Turning to adjusted EBITDA. We are widening our previous range to include an updated low end of $1.465 billion and maintaining the $1.515 billion on the high end.

While we are confident in the guidance provided in February, the macro and commodity environment meaningfully changed shortly after. Despite the shift, we believe we have multiple levers, including pricing actions, growth initiatives, ongoing supply chain cost initiatives and our financial risk management program to help mitigate the impact. We expect to benefit from productivity improvements in direct delivery in the second half of the year as we realign the cost structure under the improved operating model. At the same time, we plan to prudently invest in enhancements in the customer experience, including the redesign of our contact center and capabilities that support future growth. The revised midpoint adjusted EBITDA margin is 22.0%, down approximately 50 basis points compared to the previous guidance and continues to imply margin expansion for the year.

We are reaffirming our adjusted free cash flow range of $790 million to $810 million. Beginning in Q2, we anticipate free cash flow add-backs to decline. This trend follows the first quarter reduction in EBITDA add-backs and reflects the typical reporting lag between expense recognition and cash payment. As integration activities mature, we expect a cleaner cash flow profile that more closely aligns with our underlying operational performance. Our strong free cash flow supports our capital allocation priorities. We continue to expect to deploy approximately 4% of net sales and capital expenditures for the year in addition to the approximately $100 million in integration capital expenditures. Also, given our commitment to return cash to stockholders, last week, we announced our Board of Directors authorized a $0.12 quarterly dividend, which annualizes to $0.48 per share. We also intend to continue to execute our share repurchase plan, which had $78.3 million available under the program authorization as of the end of the first quarter. And with that, I'd like to turn the call back to Traci.

Thanks, David. To ensure we can address as many of your questions as possible, please limit yourself to one question. And if we have time Operator, please open the line for questions. And if we have time remaining we will repoll for additional ones.

[Operator Instructions] Your first question comes from Peter Galbo with Bank of America.

David, thanks for all the detail around the hedging program, particularly Slide 6, I think, is very helpful. I wanted to just kind of pressure test that a little bit, David. First question being just how locked are you for the year? So if we do get kind of resolution based on the conflict and let's say, oil goes lower from here, is there actually kind of upside to what you presented? Or are you pretty much locked for this year? And then the second question is, I believe last quarter, you talked about a 48-52 split on EBITDA first half, second half for the year. I wanted to see if that still holds in light of kind of the updated guidance and given that Q1 maybe came in a little bit light of street, but maybe you could address those 2 items for us.

Sure. Let me maybe start with the second one quickie because I think in that regard, we're probably a little bit more like 47-53. It'd be about maybe 1 point from those investments inside the quarter. But again, I think we remain very encouraged by what that led to in our top line performance. And notably, when you see the momentum building in direct delivery, it gives us that confidence to go from essentially the down 3% in Q1 to closer to breakeven in Q2 and then resuming growth. So we think that those investments have really yielded the right activity set to respond to the consumer, deliver what they ordered on time and in full and if not, recover very quickly to sort of retain them, which is our #1 priority.

Into the actual hedging and some of that activity year-to-date, really where we have technical hedges is within our diesel activity, and that's basically just using sort of market-based hedges, and then that allows us to sort of transact with that and sort of align that usage to our sort of what we believe is our fleet consumption. We're pretty far hedged, but if there were to be a resolution as maybe the markets have anticipated this week, that would provide some opportunity for benefit balance of the year. And it would obviously allow us to start to lock if we felt so inclined, lock prices for '27 in that category itself. Where we have more forward priced contracts with our vendors, that happens in the resin portfolio. I think if there was a resolution, whatever premium that vendor or supplier is attempting to pass through to customers like ourselves and others, that would provide a more advantageous sort of negotiation posture for balance of the year and again, into 2027 activities.

Your next question comes from Nik Modi with RBC Capital Markets.

Maybe we can just talk a little bit about the scenarios between kind of the low end and the high end, whether it be on the revenue side and the EBITDA, just so we can understand exactly kind of scenario-wise, what would need to happen to get you to the high end versus, let's say, the low end? And then the second question is, I would love just some more clarity around some of the pricing actions that recently have taken place. If you could just kind of quantify like what percent of the portfolio is that happening? My understanding is it's not the case pack side. And do you believe you have opportunity to actually take price in case pack if you need to, to offset some of these headwinds from inflation?

Nik, it's Eric. Yes, thanks for your question. I think let me just start with the fact that I think we're really pleased, and I think we made meaningful progress in the quarter versus some of the growth priorities we laid out. So I'll get to your question. But I think the way to connect the dots to the low end or the high end on the growth side is, look, we continue to improve our customer experience in direct deliveries. That happened faster than we anticipated. So we were pleased by that. I think we also delivered earlier than anticipated this commitment to return the business to growth. I think on the last call, I talked about those 2 being our 2 focal points for the business.

And I think what, to me, leads me to conclude that the growth is durable and even structural is the fact that, that growth was balanced and broad-based. And it was -- it took place across premium, which has been a key growth facilitator for us. But it also was applicable to our regional springwater portfolio. It was applicable to Pure Life. It was fairly broad-based across channels. And so as we look ahead, to me, the path forward is clearly compelling. We think that the continued brand building to create demand, continuing to raise the bar on execution, we are going to leverage a very disciplined revenue growth management approach to drive value and over time, expand margins. So anyway, we really believe that we're in a good spot as we look forward to the rest of the year.

Second, I think when it comes to pricing, again, we still have a lot of work to do on RGM, but I'll give you a little bit of just the framework on how we think about pricing. Our first principle is that all of our pricing actions start and end with the consumer. So we keep the consumer and her decision-making matrix at the forefront of anything we would do. We also have to maintain competitiveness, which we have and will continue to do. And then we've got to look at the company P&L and look at the cost margin implications and try to make sure we're appropriately managing margin.

So I'd say it's a comprehensive development approach that includes rate mix and trade spend. And what we've done is we felt like, given the current environment, our focus would be more on immediate consumption where you tend to see the consumer be more convenience-oriented than price-oriented. We did take actions on the immediate consumption portfolio. We still maintain kind of the best value across channels in the marketplace. And relative to your question on case pack, yes, I think later this year, we probably look at taking some pricing on case pack, obviously, being very sensitized to the starting point, which is making sure we understand consumer value and elasticity on that package.

Your next question comes from Daniel Moore with CJS Securities.

Obviously, encouraged to see the increased revenue growth -- revenue and growth guidance of the delta or change beyond the improvement or faster recovery in direct delivery, are there other areas of the business you're seeing more significant opportunities or acceleration? And how much of that delta is kind of volume versus price?

Yes. Well, again, I think, we want to continue to be very balanced. So I think we came out of the quarter with a combination of price mix and volume. I think as we look at the growth opportunities, I think, again, if you think about the kind of the structural tailwinds at the category and consumer level, you look at our leadership position within the category. And then you think about the strength of our brands and where we can continue to make, I think, significant inroads on the direct delivery business.

We also have an opportunity to continue to grow our presence and retail execution in store. And so you look at the momentum we have had at retail, I think that's poised to continue to run really well for us the rest of the year. And again, the encouraging thing, as I mentioned in Nik's question, is how broad-based that momentum has started to become as evidenced by the Q1 results.

Super helpful. I'll just sneak one more in. Just you're at your 6-month anniversary, congratulations. Beyond the stabilizing HOD business, any surprises, takeaways or just things that you're hoping to change kind of culturally kind of high level, would love your thoughts there, and I'll jump back in queue.

Sure. Well, again, we -- I think, have made a lot of progress on the culture front. We had our senior leadership team together a few weeks ago and had a very good discussion around our mission around hydrating a healthier America, rolled out a new set of values with the customer and our frontline really at the centerpiece of that. And so we continue, I think, to strengthen the team. I think we continue to change the mindset, which is we're a leader in not just the water and healthy hydration space, but a major player across LRB. And I think we're developing a winning mindset and changing our pace to be a little faster to market and our perspective of who we really are. So I'm really pleased with what's happened on the culture front and how the team has responded. And I think we're in a very different position than when I entered in November.

Your next question comes from Andrea Teixeira with JPMorgan.

This is Drew Levine, on for Andrea. So you mentioned a number of potential mitigation options for the potential commodity inflation that we could be seeing, productivity and pass-through mechanisms among them. Just hoping you could talk a little bit more about some options on the pass-through side, particularly on direct delivery, maybe how quickly you would be willing to pull that lever?

And if you could give some perspective on the stickiness of the customer base historically when there are changes in delivery fees, for example. I think in the past, it's really not been too much of an issue when the service is good, but clearly, that's been an area that was maybe a little bit more challenged over the past year. So if you could give some perspective on when and if you'd be able to adjust the delivery fee and expectations from a customer perspective when that happens?

Sure. Yes, it's Eric. I'll take that, and then David can jump in as well. I think let me just maybe back up as we think about how we might face any commodity or inflationary pressures. I think there's a variety of ways and a variety of levers for us to think about. One is just more top line growth and leveraging that growth through the P&L. Second is productivity and cost management. Third is pricing. And then we have 2 other ones available to us, which historically at times have been activated, whether that's the delivery fee that you referenced or fuel surcharges. I think our near-term focus is really on the productivity and the pricing side and wouldn't see us, at least in the near term, thinking about any changes on the delivery fee or fuel surcharge.

And I think, again, our goal here is to make sure we have a balanced algorithm, meaning growth and margin improvement over time and that growth being a combination of sustainable volume and pricing actions. And that's what's reflected in the full year uptick in our growth guidance that you saw earlier this morning. The other thing I think I want to just make sure that I message is I've seen this movie before in the beverage industry. And I think when something like this happens, there's a couple of things to keep in mind. I think the first thing to keep in mind is unlike the growth potential that we have in this company, which is very much structural, this issue is transitory and is not -- while near term, there is volatility and uncertainty that we have to deal with, it's not structural.

Second, it tends to impact the industry broadly, both branded and private label players. And so everyone is kind of equally impacted. We all have our hedging strategies and forward buy processes that David highlighted. But that's the reality of how this typically gets impacted. And then the final one is that we have multiple levers to offset, which I talked about earlier. So again, we are, I think, in a very good position to deal with this and to continue to move this business forward.

Your next question comes from Derek Lessard with TD Cowen.

Great to see that sales performance, Eric and David. Just one for me. I just wanted to maybe touch on the retail side. Can you just talk about sort of the growth in your points of distribution category growth or maybe some share gains that you're getting in some of the categories?

Sure. Yes, I think this quarter, what you saw at retail is you saw us continue to expand points of availability across the portfolio. Certainly, we gained points of availability on the premium side. We also saw improved execution around number of displays. And I think as we go forward, again, we've talked about a more holistic approach to in-store executional excellence, whether that be displays, space, certainly coolers over time is a big priority for us.

I think we were encouraged because from a market share standpoint, in addition to the great growth, we obviously translated that into both dollar and volume share gains in water and the same thing across LRB. So again, we are making progress. We still have more work to do, whether that's on the customer direct and direct delivery side or the retail side. But again, some of those success metrics executionally are starting to trend in a more positive direction.

Your next question comes from David Shakno with William Blair.

This is David Shakno. Stepping in for Jon Andersen. Question, looking at Q2 specifically, if I recall correctly, a year ago, it was a pretty wet and cold spring season across the U.S. Just wanted to understand what we should be looking for in trends over the next couple of months here, especially as we get throughout May and June. And then separate from that, just kind of almost as a follow-up for the previous question. I wanted to understand if you're feeling kind of competitive pressures from private label given the weaker consumer right now. I wasn't sure if there's pressure in specific channels, be it club or somewhere else, just kind of overall, what you're seeing across channels related to private label, too.

Yes. Thanks, David. This is David. I think maybe let's start with a little bit of chronological framework of Q2 last year. So -- but what I want to start with is, first, Q1's performance. So if you recall, last quarter -- excuse me, same quarter prior year, we delivered a 3% top line. So on a 2-year basis, not only was this our hardest comp in which we still delivered actual growth, but it was obviously higher within the retail pieces of the business in our Q1 of this year, obviously, offsetting what was the direct delivery decline I mentioned earlier of approximately 3% -- so we feel incredibly encouraged by taking on a very challenged comp and still delivering.

And again, that growth was broad-based and really balanced. And when you look at the disclosure tables in our quarter information in the supplemental, you'll see a couple of things that I want to call out. One, almost every brand and pack basically expanded in the quarter. And when you see things like purified water showing de minimis growth, if not slight decline, that actually reflects a little bit more of the drag that's occurring in the direct delivery business itself. Similar things when you look at the premium water that grew substantially in Q1. And on a -- 2 years ago, this was a $50 million business in that quarter.

So we've basically essentially doubled that business in 2 years. That's actually held back because Mountain Valley was a larger distributed brand on our route-based system in direct delivery. So that growth actually would have been even higher if we wouldn't have gone through some of the integration challenges and like you mentioned, weather disruption that occurred. So now let's kind of go into that sort of time line. Last year, just a few weeks ago, last year is when our Hawkins facility was hit by a tornado. Actually, we held our Board meeting in Texas in the market and went and visited the plant, went and celebrated what that team has done to rally and bring that factory back online and not only bring it online, but actually enhance it with an expanded line that we mentioned where Saratoga product will be coming to market from that facility.

And then obviously, later in the quarter is when some of the integration disruptions began. So we're not raising guidance because we have an easier comp. We're raising guidance because we have structural tailwinds that are occurring in the business and feel pretty confident in what's happening and what we're watching with both service levels as well as the retail execution, which was your original question, that retail execution continues to perform quite well. And it's not really at the expense of another brand and not really feeling directionally threatened at this point from private label, but I'll let maybe Eric provide some perspective there.

Sure. I think when it comes to private label, again, in this sector, you're always going to have a price-only shopper that's going to look for what's cheapest, which tends to be, in most instances, private label. Having said that, as the leader in the category, the good news is there is a high level of brand loyalty. And so as we look at our future consumption business, as I mentioned earlier, we have and intend to continue as we go through the summer months to maintain very good value around that portfolio.

The encouraging thing in the first quarter is all 6 of our regional spring water brands grew. In addition to that, Pure Life, which is really our brand that tends to compete most against private label and we manage a gap accordingly, also grew. As a matter of fact, grew mid-single digit. And so I think the point David and I are trying to convey is the durability and sustainability of some of the things we're starting to see on the recovery side. And certainly, that applies to our retail business in a big way.

That concludes our Q&A. I would now like to turn the call back to Eric Foss for closing remarks.

Thank you. Well, in closing, let me just state how excited we are by our start to the year. I think the fundamentals are strengthening. The momentum is building, and we're very energized by the opportunities ahead and feel like we're well positioned to deliver sustainable long-term growth. So thank you for your continued interest, and we look forward to updating you on our progress.

Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may now disconnect.

Welcome to the Primo Brands 2025 Fourth Quarter and Full Year Earnings Conference Call. I will now turn the call over to Traci Mangini, Vice President, Investor Relations.

Thank you, operator, and hello, everyone. With me on the call today are Eric Foss, Chairman and Chief Executive Officer; and David Hass, Chief Financial Officer. Our discussion today includes forward-looking statements within the meaning of U.S. securities laws, which are subject to risks and uncertainties that may cause actual results to differ materially. For more information, please refer to the forward-looking statements disclosure in our earnings release. In addition, the definition of an applicable reconciliations for any non-U.S. GAAP measures are included in our earnings release and supplemental earnings slides, which were made available today on the Investor Relations section of our website.

With that, I'll pass it over to you, Eric.

Thanks, Traci. Good morning, and thank you all for joining us today. To set the framework for today's discussion, I'll start with a high-level review of our fourth quarter and 2025 results. Take you through our progress on our direct delivery, customer experience and our 2026 growth and capital allocation priorities, and David will then take you through the details of our quarterly and annual performance as well as our 2026 guidance. We're encouraged by our performance as we finish the year and how that positions us into 2026.

In the fourth quarter, we delivered net sales of $1.554 billion, a decrease of 2.5% on a comparable basis from prior year, which included an improved pace of recovery for our direct delivery business. At the same time, we built on the strengths of our well-known brands at retail, further expanding our leadership position through dollar and volume share growth in the category for the quarter.

For the full year 2025, we delivered comparable net sales of $6.660 billion, down 1% from the prior year. These results demonstrate the strength and resilience of our business model and indicate early signs that our initiatives are resulting in an improved trajectory for the business, positioning us for continued operational and financial improvement as we move forward.

Our fourth quarter comparable adjusted EBITDA was $334.1 million, up 11%, with related margin of 21.5%, up 260 basis points versus a year ago. Our annual comparable adjusted EBITDA was $1.447 billion, up 7.4% with a related margin of 21.7%, up 170 basis points from prior year. As we set our sights on 2026, our top priority is to get the business back to growth, while also expanding margins that leads to generating consistent growth in free cash flow. In 2026, excluding our Office Coffee Service business, which we exited at year-end 2025, we anticipate comparable net sales growth of flat to 1% and an adjusted EBITDA range of $1.485 billion to $1.515 billion.

This implies margin expansion of 60 to 80 basis points on top of our attractive adjusted EBITDA margins. Going forward, we're positioning the business for top line growth and margin expansion to drive solid earnings, free cash flow generation and long-term shareholder value. I've recently completed my first 100 days as Chairman and CEO of Primo Brands. I've been doing a lot of listening with key stakeholders, including our associates, and our retail partners as well as conducting market visits, looking closely at opportunities, capabilities and processes across the business.

What remains clear is the investment thesis behind the merger is firmly intact. We compete in an attractive growing category and have a differentiated portfolio of leading brands, and we benefit from an advantaged route to market. As One Primo, I'm confident in our ability to drive top line growth and margin expansion to leverage the power of our strong free cash flow through disciplined allocation of capital and to develop a winning culture to fuel ongoing success.

So let's start with top line growth. We're very well positioned in our industry. We compete in an attractive category. Unlike some categories within consumer staples, the bottled water industry has structural tailwinds, given quality questions around municipal water and the ever-increasing focus on health and wellness and hydration. The category is large, highly penetrated, frequently purchased and continues to be one of the fastest-growing categories within liquid refreshment beverage category.

Within the bottled water category, we are the clear leader with a comprehensive portfolio of brands and advantaged route to market designed to serve all consumer occasions across product, format, channel, price point and time and day. We are the third largest player by volume in liquid refreshment beverages and the leader in branded water and healthy hydration in the United States. We have strong industry-leading brands. And if you look at brand health, we have the top 5 bottled water brands as measured by our biannual study.

So we believe we have a strong base from which to grow, and we see multiple top line building blocks for 2026. First, we're focused on improving our customer experience in our direct delivery business, which we call customer direct. Encouragingly, we believe we are making progress. We saw continued strength in top of the funnel demand, and we saw a trend improvement in the quarter on a customer net adds.

Our on-time in full or as we refer to OTIF which is a key performance indicator and priority going forward continue to improve throughout the quarter. From a customer feedback perspective, our Net Promoter Score increased every month and our Trustpilot ratings return to pre-integration type levels. While we're pleased with our progress, we still have work to do to stabilize and return our direct delivery business to consistent growth.

As we move forward, we have initiatives underway that include implementing a new warehouse management system for superior supply chain execution from product to supply to in-branch inventory to help satisfy customer demand. On the technology side, following the completion of the last 2 rounds of integration in the coming months, we will be fully integrated and our focus will be to continue to harmonize our systems to create better management tools, data analytics and insights as well as improve our digital and app experience for our customers.

We intend to continue to optimize the customer journey, including a new program to support customer retention, called Solve-by-sundown, which should help us address and resolve customer service issues faster. It connects our customers more closely with our call center as well as our operational teams reducing friction that could lead to customer loss.

While early, we're pleased with how the team is responding with urgency to drive continued improvements. Lastly, we're envisioning a new approach to our call center to elevate satisfaction throughout the customer experience. This includes improved digital opportunities and leveraging AI to more quickly serve and solve customer issues. Our second building block is to drive executional excellence at retail by fully leveraging both the power of our brands and advantaged route to market.

We intend to increase our presence across the store. Our goal is to have more feature frequency, which leads to more display inventory while also expanding our shelf space and cold drink penetration and scaling our sizable exchange and refill footprint. On the brand front, we're excited about our marketing calendar for 2026. It includes partnerships with Major League Baseball for our regional spring waters where America's favorite pass time joins with America's favorite water brands.

Complementing this, we will continue to lean in behind our premium brands with partnerships with high-profile events like the Golden Globes, where the Saratoga's Blue Bottle recently showed up on the red carpet. And next up is the Academy of Country Music Awards with Mountain Valley. We believe these programs leverage consumer passion points and serve to increase the positive brand perceptions and build momentum. Our third initiative is to prioritize premium.

Mountain Valley and Saratoga Springs, while still relatively small, have been meaningful contributors to growth. Combined net sales for these brands increased an impressive 44% in 2025 driven by strong demand in retail and away from home. With our investments in capacity coming online across the first half of 2026 and the marketing campaigns I just mentioned, we plan to continue to grow share and distribution for these highly accretive brands. Our final building block is implementing a more strategic and holistic revenue management approach across price points, package types and channels.

This will allow us to zero in on SKUs that matter most to the consumer, focusing on the most profitable packages and channels, and simplify our production and route to market. We remain focused on the long-term potential of our business within the water category and are confident in our ability to grow and enhance margins. Investing in those areas provides an opportunity to enhance growth in our premium business, gain our fair share of opportunities like cold drink and enhanced portions of the direct delivery relationship with our customers.

As it pertains to the integration in 2025, we completed the first 5 and most complex rounds. Despite reserving the final 2 rounds until 2026, we were able to realize tangible synergies in 2025, and we remain confident in our ability to complete the final integration rounds. Synergy capture remains just one driver of our margin expansion. We have multiple other levers to drive long-term margin expansion, like building on our pricing competencies across the business, as I just mentioned.

In addition, opportunities for ongoing cost and productivity initiatives across our supply chain with increased facility automation, warehouse management oversight and reducing SKU complexity, all while driving an efficient SG&A structure. These efforts support continued growth in free cash flow, providing us even greater financial flexibility. Leveraging the power of our highly cash-generative business, we continue to take a disciplined approach to capital allocation to optimize our returns.

We intend to put the right support behind our brands, innovation, supply chain and commercial operations to drive sustainable, profitable growth. We plan to balance these investments alongside reducing our net leverage ratio and returning cash to shareholders by both growing our dividend and executing against our share repurchase program. Finally, for us to be successful, we need to continue to pursue a winning culture. We're committed to being One Primo team, developing a team and culture that is obsessed with our mission, including putting the customer at the forefront of all we do and ensuring our frontline focus gives our frontline associates the training, tools and technology to meet and exceed customer expectations every day.

To sum up, the industrial logic of the merger remains intact. We have more work to do to fully restore our direct delivery service model, but we're making progress, and I believe we are well positioned for the future. Now before I pass it to David, I'd be remiss if I didn't share how proud I am of the entire Primo Brands team. I continue to be impressed by the pride and passion of our people. We have strong employee engagement scores from our internal surveys, which clearly demonstrates that our unified team is committed and motivated towards driving a successful 2026. We remain focused on our mission of hydrating a healthy America with one culture and one unified set of behaviors and values. With that, let me turn the call over to David.

Thank you, Eric. As you've just heard, we are making progress. Our fourth quarter top line results were achieved due to improving service levels, which supported volume recovery in our direct delivery business. We believe this indicates early signs that our initiatives are resulting in an improved trajectory for the business into 2026.

Now before we get into the details on the financial results, recall that the GAAP financial comparison in this morning's press release reflect the 2025 results of the new Primo brand versus 2024 results that are primarily of the base legacy Blue Triton plus the combined company after the merger date. This is a typical GAAP reporting outcome of a merger transaction.

To assist with more apples-to-apples comparisons, we will be primarily discussing comparable results which incorporate the combination of both legacy organizations while adjusting for the exited Eastern Canadian operations for both years 2024 and 2025. Also recall, volume for Primo brands is defined as case goods equivalents, which are measured in 12 liters. For the fourth quarter, comparable net sales declined 2.5% versus the prior year, driven by a 2.9% volume decrease, partially offset by a 0.4% increase from price or mix.

The volume decline was driven by both retail and direct delivery. In retail, we cycled higher hurricane purchase activity in 2024, but finished the year largely in line with our expectations. Direct delivery declines were driven by a lower customer base. However, as Eric mentioned, while the customer net adds were negative, we saw month-to-month improvement throughout the quarter. Our premium brands helped to offset this volume decline and contributed to the favorable price/mix in the quarter. Saratoga and Mountain Valley net sales were up 39% in the quarter, continuing the strong momentum behind these highly accretive and consumer-coveted brands. Sequentially, the business showed continued signs of improvement, highlighting a positive inflection in our direct delivery business. The fourth quarter decline in this channel was 5.3% and represents an improvement from the 6.5% decline in the third quarter. Comparable adjusted EBITDA increased $33 million to $334.1 million with comparable adjusted EBITDA margin up 260 basis points to 21.5% versus the prior year. On a full year basis, comparable net sales declined 1% or $65.3 million to $6.660 billion, the 1% decline versus the prior year includes a 0.6% volume decrease and a 0.4% decrease from price or mix.

Net sales for the direct delivery channel were down 3.2%. This was largely due to the lower volume related to the integration, as previously discussed. This was largely offset by the strength in the mass and away-from-home channels with net sales up 0.9% and 1.2%, respectively, and by the continued strength of our premium brands with Saratoga and Mountain Valley net sales up 44%.

Notably, our results include interruptions from the Hawkins tornado, which occurred in the second quarter and one less trading day from the leap year adjustment impact in 2024. Leap Day in 2024 created a net sales headwind of $17.6 million for 2025. Separately, disruptions caused by the Hawkins tornado created a net sales headwind of $27.4 million. So all in, the cumulative aspects of these 2 activities alone was approximately $45 million.

Further, our office coffee services business weighed on our results as we wound down the business in 2025. This business contributed approximately 40 basis points of our 1% full year decline. Comparable adjusted EBITDA increased $100.3 million to $1.447 billion, with comparable adjusted EBITDA margin climbing 170 basis points to 21.7% versus the prior year.

Moving to our balance sheet and cash flows. Our balance sheet remains in a solid position with year-end debt capital, gross of deferred financing costs and discounts, totaling $5.2 billion. Our liquidity remained strong with approximately $990 million of availability between our cash balance and our unused line of credit. At year-end, our net leverage ratio was 3.37x. We generated $680 million of cash flow from operations for the full year. When accounting for significant items, including, but not limited to our integration and merger activities, our cash flow from operations would have totaled approximately $996 million.

Additionally, we invested approximately $245.7 million in capital expenditures, excluding integration and natural disaster Hawkins related capital expenditures, which resulted in adjusted free cash flow of $750.3 million. When compared to the prior year, on a combined basis, adjusted free cash flow grew $105.4 million. For full year 2025, our adjusted free cash flow conversion, which we define as adjusted free cash flow divided by adjusted EBITDA, was 51.9%. Related to year-end capital allocation, we have the financial flexibility to reinvest in the business, while at the same time, to return significant cash to shareholders.

Our full year 2025 total capital expenditures were $434.4 million, this included $151.5 million in integration capital expenditures and $37 million of natural disaster Hawkins related capital expenditures with the remainder supporting growth and maintenance spending. We also returned significant cash to shareholders in 2025, which included actively executing our share repurchase program, as we view our stock as a compelling investment.

As of year-end, we had repurchased $193 million of our stock or 10.3 million shares under the Board's $300 million share repurchase program authorization announced on November 9, 2025. There remains approximately $107 million available for share repurchases under the program authorization. In addition, prior to establishing the share repurchase program, we repurchased approximately $214 million of shares from entities affiliated with One Rock.

Moving to our financial outlook. We remain confident in our ability to reestablish annual growth in our business. As a reminder, for 2026, we will cycle the exit of our Office Coffee Services business which accounted for $25.5 million of our 2025 net sales. This puts our comparable or equivalent 2025 ending net sales at $6.635 billion. This is the base from which we are establishing our full year 2026 guidance.

We expect organic net sales growth in the range of 0% to 1% with the return to growth weighted in the second half. We faced a difficult first quarter comparison, cycling 3% year-over-year sales growth, after which we expect the comparable trend to improve over the balance of the year.

In direct delivery, we expect to transition to top line growth in the second half of the year on trend improvement. And as we cycle the onset of the disruptions that began in the second quarter of 2025, we expect growth in our consolidated retail channels, driven by the strength of our brands, our commercial plan and continued momentum from premium. This is supported by capacity expansion from Saratoga which remains on track to come online this spring, and our new Mountain Valley facility, which remains on track to open midyear.

Further, we will develop and implement our revenue growth management capabilities over the course of the year. Lastly, in terms of revenue phasing within the year, we expect a typical pattern in terms of quarterly contribution percentage to full year net sales with the year being relatively balanced 50-50 between first and second half, and the first and fourth quarter representing lower contributing shoulder seasons.

Turning to adjusted EBITDA. We expect a range of $1.485 billion to $1.515 billion with a midpoint, adjusted EBITDA margin of 22.5%, up approximately 70 basis points year-over-year. Our guidance midpoint contemplates adjusted EBITDA growth in excess of our midpoint net sales guidance as we expect to benefit from the productivity of synergies, partially offset by investments as we improve our customer experience, redesign of our call center and invest in capabilities to drive future growth.

We expect adjusted free cash flow in the range of $790 million to $810 million, which we expect to support our capital allocation priorities. We intend to deploy approximately 4% of net sales and capital expenditures. Additionally, we have approximately $100 million anticipated remaining integration capital expenditures, of which $50 million was carried into 2026 due to project timing.

Also, given our commitment to returning cash to shareholders, last week, we announced our Board of Directors authorized a $0.12 quarterly dividend, which annualizes to $0.48 per share, a 20% increase. We also intend to continue to execute our share repurchase plan, which has approximately $107 million remaining under the $300 million authorization. With that, I'd like to turn the call back to Traci.

Thanks, David. To ensure we can address as many of your questions as possible, please limit yourself to 1 question only. And if we have time remaining, we will repoll for additional questions.

Operator, please open the line for questions.

[Operator Instructions] And your first question comes from Derek Lessard with TD Cowen.

Just wanted to hit on some of your key KPIs in the quarter, more specifically on the direct delivery side. I think the silver lining view is that the volume decline wasn't as bad as expected. So I was curious, like how did some of those KPIs [indiscernible] and what have you, how did they perform exiting the quarter? And then maybe as a follow-up, how should we be thinking about the guide in terms of when you expect to get back to your historical financial algorithm? And maybe said another way, should we view your 0% to 1% sales guide as conservative?

Derek, it's Eric. And thanks for joining us. So I think it applies to customer direct. Yes, I used the word encouraged relative to how the quarter progressed. I think you're well aware that we had some work to do on the business process side. We had and still have some work to do on the technology and tool side, including the capability side, some work with the call center. But I think as I look at the business as simply as I can state it, what's really, really important to us around the supply chain is to really make sure we get an accurate forecast, we get product produced to schedule, we eliminate the warehouse out of stocks, and we get trucks loaded as scheduled.

And if you look at those KPIs, each and every one of them improved dramatically, and most of those are, I would say, north of the [ high high 90s ] from where they were when we really were experiencing some pretty significant challenges. Where I think we still have some work to do is on OTIF. And while we saw, again, sequential improvement each and every month as the quarter progressed, we're still not where we need to be.

We need to get OTIF back north of 90%. And so there's still some work to do on that side. I would tell you some other positive indicators from my perspective are we saw our customer calls reduce to kind of premerger levels as we exited the quarter, and we also saw a very important indicator, our customer quits were lowered and our customer net increased as we exited the year. So again, all in all, encouraged with more work to do.

Relative to your second question around the guide, I guess the way I would describe it is when I walk into the job about 3 months ago, there were 2 issues that were really front and center for me. The first was to fix the overall customer experience on our customer direct business. We just talked about that. And the second was to get the business growing. And we delivered it down 1% in 2025, not at all where we want this business to perform.

There's more work to do on the direct delivery front. But our focus right now is to make sure we get the company growing and we deliver against our financial commitments. As you think about the year, we've got more difficult comps certainly in the first half of the year. But again, once we get the business growing, again, I think we can better assess the upside potential, but ultimate -- our ultimate goal is to reach, obviously, the full potential of this business, and I've got a very high degree of conviction and confidence in our ability to do that.

So we remain very optimistic. We've got multiple growth vectors for this business, and our intent is to capture that to drive sustainable, profitable growth.

Your next question comes from Nik Modi with RBC Capital Markets.

I was hoping you could just provide a little bit more color and maybe some details on the top line guidance drivers across channels, volumes and just kind of thinking about the pricing strategy. And I know there was an expectation that you'll be able to harmonize pricing in the delivery business in '25, but obviously, that got thrown off track with some of the integration issues. So any color you can provide just to give us a sense of kind of how you're thinking about the details in the divisions on your top line guide?

Sure, Nik. I think, first, from a sequencing perspective, if you think about the full year, I touched a little bit on this in Derek's question, but there's no doubt the growth will be more second half weighted. We would expect trend improvement pretty much quarter in, quarter out as the year unfolds. And importantly, we expect to not only stabilize the direct delivery business, but to see that business return to growth. So I guess, one of the ways I would characterize it as we think about the growth algorithm going forward, we would expect it to be balanced, meaning both volume and price and within price, both rate and mix. We've got a really big opportunity, I think, Nik, on the immediate consumption business, in particular, in our cold drink business.

We're far less developed on that area of business than we are the future consumption business. And so over time, the profit pools available in the industry around immediate consumption in cold drink are a big, big mix opportunity for us, continuing to play the leadership role we played in premium, obviously, also plays to a mixed advantage for us.

And then I think in addition to the customer direct business, which we spent most of our time focused on and talking about with investors, I'm a big, big believer that not only more strategic revenue management across all the business, but importantly, I think continuing to really dial up our executional efforts at retail to be a much more complete -- execute across the key causal indicators of feature activity, display inventory, shelf space are real real opportunities for us from a selling strategy standpoint.

So we would expect to see the top line growth progress. And again, even over time, I think you'll see it be very broad-based across channels, brands, packages.

Your next question comes from Andrea Teixeira with JPMorgan Asset Management.

This is Drew Levine on for Andrea. So Eric, just hoping to dig in a little bit more as following up on next question. Maybe you could just provide some context on what's embedded in the guidance from a retail perspective. Obviously, category's gotten off to a good start here in 2026 with some [indiscernible] benefit. You mentioned lapping the Hawkins issue, lapping some poor weather into the spring. Some more context there would be helpful. And then related to that, maybe on the other side, if you want to call anything out from a phasing perspective, maybe from direct delivery side, if there's been any impact from the severe winter weather here in the Northeast where you had disproportionate share?

Sure. Thanks for your question. I'll start, and I'll let David jump in as well. I think let me take your second question first. I think weather hasn't been our friend as we started the year, but I think the teams have done a really good job. The good news is kind of the first wave of weather that hit us, I think we were able to proactively get out ahead of it. And so I think all in, it's probably going to be a little bit of a headwind, but not overly significant in terms of our ability to both show agility to respond to it as we think about how the quarter will play out.

I think relative to our retail business, again, we've started the year in a very, very strong position, not just within the water category, but across the broader liquid refreshment beverage category had a very strong [ share ] month during the month of January. We would expect that to continue. And again, as I said earlier, I think the way we're approaching this is we want to get balanced and broad-based growth across the enterprise.

So we want to return the customer direct business to growth. We certainly want to continue the momentum we've seen in our retail business. We want that to be both volume driven as well as some price as we get a little more strategic on the revenue management and price pack channel architecture. So I would say our intent in the way we've built plan is to have balanced and broad-based growth across channels, across brands, packages and certain geographies.

David, do you want to add anything on the sequencing?

Yes. Thanks, Drew. So I think as Eric has mentioned, our goal within that implied 0.5 is obviously a tougher start to the year with volume as we have some of those volume headwinds coming in the customer direct business based on obvious disruptions and things that occurred in 2025. We do expect that to balance out with volumetric growth in the second half of the year and notably in direct itself in the latter quarter, partial Q3 but largely Q4.

so we do expect that to be balanced. Obviously, if retail and as the premium areas like Saratoga and Mountain Valley volumes from our investments come online, there's obviously potential for those to continue to perform strongly. So again, we view this as [ a tale or 2 to have ] with that second half really getting us back into more of a normalized and balanced volume and price sort of contribution.

Your next question comes from Lauren Lieberman with Barclays.

Free cash flow guidance came in better than we were thinking and implies growth ahead of the EBITDA growth. So I'm just kind of curious about that piece and kind of specific opportunities there that you'll be pursuing.

Lauren, this is David. So thanks for the question. Areas there that we have are year 1 was really not focused on working capital enhancements. We were bringing together payable teams, bringing together procurement arrangements. And then obviously, as the direct delivery business ran into some obstacles from the integration that concluded with some collection and some other AR timing complexities. We believe that on a more normalized operating platform, we can begin to work through some of the benefits of the merger, both with terms, days against our procurement spend as well as a smoother collection process with our direct delivery customers exhibiting less disruption from their service. When there's less disruption from service, there's a lot better payable from the customer to us.

So our AR is smoother. There's not a lot of disputing activities that go on within that. And then over time, our credits, so things that we would have issued that could have been a detriment to our sales should stabilize and go back to more normal course patterns and that should also help. Obviously, on the CapEx, on the base investment, that remains consistent. The integration CapEx and the Hawkins repairs, we're adding back. So that's not really a contributing factor.

But it's largely around our working capital benefit and sort of working through that.

Your next question comes from Daniel Moore with CJS Securities.

In terms of pricing, how much of an impact do you expect discounting promotions to win back new customers will impact pricing in '26? And when should we think about lapping or anniversary-ing those initiatives? And then just secondarily, when do you expect to reflect a positive month-over-month growth within that customer adds?

Yes. Daniel. I think a couple of things. I think relative to the reinvestments, if you think about 2025 obviously, given the disruption, we had reinvestments that centered around route labor, call center labor, additional routes that we ran on weekends and absorption of over time. And then we had the investment, probably more specific to your question around the customer win-back initiative. We're continuing to invest in that initiative.

And I think as we go forward, we would continue to see reinvestments broadly around the business of marketing and brand building. Certainly, we're looking at making sure we're wired to win, and we've got the right selling resources in place across not just customer direct, but our entire business. And then in the area of technology and capability, continued reinvestments on those. So I think we would want to see those investments drive sustainable, profitable growth.

And I think as we think about that on the specific return to growth on the customer direct customer net, hopefully, I would anticipate that maybe sometime in second quarter that we might see that development.

Your next question comes from Peter Galbo with Bank of America.

Mr. Galbo, if you're speaking, you line is muted. I'll place Mr. Galbo back in the queue and try again. Your next question comes from Stephen Powers with Deutsche Bank. [Operator Instructions]

Eric, following up on that net add conversation, I guess, is there a way to frame I guess what I define as kind of the active customer base in the direct business, kind of where you are now relative to where you were predisruption that would help. And then secondarily, related to recruitment and getting those net adds trending more positive. Is there a way to kind of frame aggregate incremental investment in '26 versus '25? And are those efforts first half loaded as you try to kind of kick start the recruitment effort?

Yes. I think the answer is, yes, they'd be first half loaded as we continue our recovery. So I think more first half than second half to answer your second part of your question. I think the way I would frame it, and obviously, we're not going to give a lot of specific numbers for a lot of different reasons on the competitive front. But the way I would think about it is the great news is that the top of the funnel never really has been disrupted.

So if you look at our customer adds really throughout the year other than a little bit of kind of typical seasonality, if you will, the top of the funnel remains strong throughout the year. And the real trough was what we experienced during -- starting the second quarter, continuing in third quarter and then I would, as I mentioned earlier, a pretty nice rebound on the quick side and therefore, the net side as we exited the year. So I think, as I mentioned on the earlier question, we would expect customer nets to kind of return to positive sometime in the second quarter.

Obviously, the initiatives we put in place are focused to do that as soon as we can. And I just think that, again, whether you look at our direct delivery business or the exchange and refill business, I mean, the beauty of this is there is just a ton of opportunity for us to take advantage of. And most of the efforts that we're recovering from are ones that are well in our control. And so we feel confident about the initiatives, returning that business to the kind of growth trajectory we expected when we put the deal together.

Your next question comes from Peter Galbo with Bank of America.

Sorry about that technical issues this morning. I was hoping to get a little bit more color just on cadence actually of EBITDA for the year of kind of the [ $1.5 billion ]. I know you gave some color around the sales cadence. But just any help on kind of the phasing on EBITDA, particularly as we think about the first half would be helpful.

Thanks, Peter. we will expect that to sort of be a little bit different than sort of our, what I'll call, 50-50 setup, if you will, from the top line. And largely, that would be a little bit more, call it, like 48-52 kind of setup. So not terribly off, but what that really means is a first half kind of lean in on some of these continued investments. So what would that look like? That would look like higher route count to stabilize service and return the business to the appropriate levels of OTIF and other things that customers expect.

And then over time, that can phase back out. That's just 1 example, but that would be why you have a little bit different of a seasonal pattern sort of first half, second half within business specifically. Now I will say that if those RGM and other capabilities come online and we have greater permission both with our retail customer as well as our direct delivery customer base that could change. But that's sort of the initial landscape view of how we've laid out EBITDA, the margin progression that we talked to in the guide, and again, comment on that further as the year progresses.

[Operator Instructions] Your next question comes from Andrea Teixeira with JPMorgan.

Just one, David, maybe you could just update us on what the synergy capture was in the quarter? And then what's left to capture in '26 from the remaining 2 rounds of integration.

Sure. So again, we substantially covered off the synergy capture required inside the calendar year of '25. How we look at 2026 starts with integration waves that we have left. One was a few last weekend actually. And so far, that seems to have gone well. Again, we can see things pretty quickly in that regard now that we've had a little bit more space between the prior integration wave and the ones we're executing this year.

The team deployed significant training, on-site sort of teach-ins and things, and that seems to have gone quite well. And obviously, the way we were able to navigate the recent storms, again, performed very smoothly through that. The last wave is a little bit closer towards the end of the quarter in which, again, we experience and expect that training and sort of teach-in activities to sort of help that occur.

From there, what will happen is some additional consolidation through teams where systems or other things that were prevented from being captured due to those last waves being incomplete will start to occur. So again, I think we remain very confident in our ability to sort of execute against that. Obviously, we have placed some investments in the business, either to win back the customers or to sort of increase our service attention, and those should be able to be sort of looked at and reviewed as we get closer to midyear and understand sort of our glide path into year-end 2026 and potentially again set us up for 2027 period that looks and feels a little bit more different and normalize to how we want to attack and execute against the business.

Your next question comes from Steve Powers of Deutsche Bank.

Thanks for follow-up question for me as well. David, actually, a follow-up on Lauren's question on free cash flow. I agree the underlying guidance for free cash flow came in a bit ahead of our expectations as well. I'm just curious if you have any estimate of any, I guess the free cash flow net of any integration synergy capture or restructuring cash costs. Just trying to get a sense for where you think the actual free cash flow will land for the year if you've got that visibility.

Yes. I mean, again, outside of the integration CapEx add-back that we sort of go through, we really don't have any sort of curveballs that are occurring in the business. So again, we feel pretty confident that the flow-through will be able to produce an increase in our cash flow from operations. Our CapEx will remain in line with where our sales are going. Obviously, the one big beautiful bill has provided some tax benefit where some of that occurred in '25. We'll get some additional deployment and execution of that in '26.

And then it really comes down to focusing on our working capital improvements to sort of go from there. But again, we can follow up with any sort of activities you need there. But again, we feel pretty confident in our ability to sort of step through the year and sort of deliver that value.

And that concludes our Q&A. I would now like to turn the call back over to Eric Foss for closing remarks.

Thank you. Well, in closing, again, I'm more energized and excited today than I was when I stepped in this role a few months ago. We continue to see encouraging trends as we close the year and look to returning to growth and achieving our financial commitments. So I want to thank everybody for joining us and appreciate your interest, and everybody, have a great day.

This concludes today's conference call. We thank you so much for your participation. You may now disconnect.

Good morning. My name is Marissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Primo Brand Corporation's Third Quarter 2025 Earnings Conference Call. [Operator Instructions]

I will now turn the call over to Logan Grosenbacher.

Welcome to Primo Brands Corporation's Third Quarter 2025 Earnings Conference Call. The call is being webcast live on Primo brands website at ir.primobrands.com and will be available there for playback. This conference call contains forward-looking statements regarding the company's future financial results and operational trends estimated synergies, impacts from economic factors and other matters. These statements should be considered in connection with cautionary statements and disclaimers contained in the safe harbor statements in this morning's earnings press release and the company's quarterly report on Form 10-Q and other filings with the SEC.

The company's actual performance could differ materially from these statements, and the company undertakes no duty to update these forward-looking statements, except as expressly required by applicable law. A reconciliation of any non-GAAP financial measures discussed during the call with the most comparable measures in accordance with GAAP, when the data is capable of being estimated is included in the company's third quarter earnings announcement released earlier this morning or in the Investor Relations section of the company's website at ir.primobrands.com.

In addition to slides accompanying today's webcast to assist you through our discussion. We have included a copy of the presentation and a supplemental earnings deck on our website. Certain information discussed on this call concerning our industry and market position is based on information from third-party sources that we have not independently verified and is subject to uncertainty.

I'm joined today by Dean Metropoulos, a member of the Board of Directors and former Nonexecutive Chairman; Eric Foss, Primo Brands Chairman and Chief Executive Officer; and David Hass, our Chief Financial Officer. Our prepared remarks will begin with Dean discussing the leadership transition we announced this morning. Following that, David will discuss the third quarter performance of Primo Brands and the outlook for the full year 2025. And then Eric will share his thoughts on the business as he steps into the role as Chairman and CEO. Following that, Eric and David will take your questions.

With that, I will now turn the call over to Dean.

Good morning, and thank you, everyone, for joining us. As you have probably seen this morning, we announced that the Primo Brands Board of Directors appointed Eric Foss as Chairman and Chief Executive Officer. Eric is an experienced executive, having served as Chairman and CEO of Global Consumer businesses.

He has served as Director of the company's Board and its predecessor, Primo Water. I welcome Eric's energy and abilities as a transformative leader. He is known for his people-first leadership philosophy, brand-building experience, operational and executional expertise and the ability to drive long-term growth through customer focus, innovation and creating a winning culture.

He's highly qualified to lead Primo brands as future growth and value creation. I want to also express our deep confidence in the future of Primo Brands with its unique historic brands and unmatched and now highly integrated and efficient national network that will reach consumers in every aspect of their lives.

In addition, Primo Brands is a major beneficiary of strong tailwinds that are driven by an unprecedented consumer focus on healthy hydration. We're all very confident that Eric will lead Primo brands in this exciting new future, and we thank all of you investors for the continued support and interest in our Primo brands. Thank you.

In conversations with the Board, as we move into the next phase, following our breakthrough merger and integration, now is the right time for me to step away as Non-Executive Chairman. I will remain on the Board as a director and will support Eric during the transition. Robbert will lead the company and the Board to pursue other interests. We want to thank him for his hard work and contribution to the consolidation and integration of Primo Water and Blue Triton brands during the past year, and we wish him continued success.

I want to express my deep confidence in Eric as he assumes his new role and thank all of you again for your continued interest in Primo Brands.

With that, let us turn the call over to David. Thank you, David?

Thank you, and good morning, everyone. As you know, we announced a lot of news this morning. In parallel with today's management transition, our team has been hard at work decisively executing against our strategy to drive organic brand growth, synergy capture and operational excellence across our platform as our integration progresses.

We are working with a clear sense of urgency to realize our potential as the leading branded bottled water player in North America. An important category that consumers continue to rely on for everyday healthy hydration. We are pleased that improvements in operational and financial performance in our Q3 2025 results demonstrate the resilience in our business, strength of our brands and success across channels and offerings, reinforcing our confidence that Primo brands will return to delivering against our long-term financial algorithm.

Overall, for the third quarter, we generated net sales of $1.766 billion, a 1.6% comparable year-over-year decline, but a 90 basis point improvement from the 2.5% comparable year-over-year decline in the second quarter. Our top line results reflect ongoing unit case volume growth, which increased 0.7% versus the prior year period. With investment in price and promotion in our home and office delivery network as we prioritized customer retention during the quarter.

We delivered profitability ahead of expectations with comparable adjusted EBITDA growth of 6.8% year-over-year to $404.5 million for a margin of 22.9% and I will discuss these results in more detail shortly.

First, let me turn to an update on our integration and synergy capture. This summer, we worked with a sense of urgency to remediate challenges that emerged in our delivery business. And I am pleased to report that service levels are now back to pre-integration levels.

Importantly, demand for our 5-gallon product remains strong as evidenced by the year-over-year net sales growth for our exchange and refill offerings where we continue to grow distribution. Large format unit volumes also grew sequentially within the quarter, and we anticipate direct delivery customer base improvements as we exit 2025. And an important indicator that our integration efforts are back on track.

Our delivery service rate, or DSR, is currently back to approximately 95%, consistent with historical levels. And our relationship Net Promoter Score is continuing to trend in a positive direction from July lows. At the same time, our announced synergy plan remains on track and we are confident we will achieve the $200 million and $300 million run rate targets by 2025 and 2026 year-end, respectively.

To date, we have now closed 49 facilities or 16% of our premerger footprint, while optimizing head count to enhance productivity and efficiency. This fall, we seamlessly completed our latest round of integration, which gives me confidence in our final two rounds of integration as they are far less complex and will proceed smoothly. We are particularly excited about the future growth and margin prospects as we optimize routes and lean into cross-selling our brands, products and services.

From our viewpoint, we believe that we are in the early innings of consolidating our position as a durable branded category leader. Primo Brands has a strong arsenal to drive long-term value creation through several foundational elements.

First, we are anchored by our iconic brands with deep heritage, such as Poland Spring and Pure Life, coupled with our emerging growth leaders, Saratoga and the Mountain Valley as well as the Primo brand. Together, these give us great customer awareness and resilience that will help carry our momentum.

Second, we enjoy the benefit of being fully integrated from spring sources direct to our consumer. As well as one of the few branded beverage companies that owns our own Spring assets, which helps us sustain our water stewardship initiatives. Third, Primo Brands is the #1 player in the U.S. retail branded bottled water category by volume share. In Q3, we increased both volume and dollar market share by 15 basis points and by 25 basis points, respectively, according to Circana. Primo Brands was the only scaled bottled water company to grow volumes in Q3.

Fourth, we expect that our extensive market reach, as demonstrated by our access to customers through more than 200,000 retail outlets will help propel us into the second position in liquid refreshment beverages and provide a competitive edge for our business. We are making steady progress towards returning to our growth algorithm and have a clear line of sight to accelerating net sales profitability gains and increased free cash flows as the calendar advances towards 2026.

Now turning to results. As a reminder, the GAAP financial comparisons in this morning's press release reflect the Q3 2025 results of the new Primo Brand versus the 2024 results of the legacy Blue Triton business. This is standard GAAP reporting following a merger transaction, which can lead to growth metrics that are not comparable. To assist with the comparisons that include both entities in the prior year period, we will be primarily discussing comparable results while adjusting for the exited Eastern Canadian operations for both years 2024 and 2025.

Year-to-date, comparable net sales were down slightly by 0.5%, when compared to the prior year at the 9-month mark. When factoring in the leap day impact, normalized comparable net sales decreased by 0.2%. As a reminder, our year-to-date net sales results reflect the impact of the Hawkins tornado of approximately $27 million.

The cumulative impact of these activities is approximately $45 million, which would have put the business slightly ahead versus the prior year. While off our algorithm for 2025, we believe these results demonstrate the resilience of our business even with our short-term disruption in the direct delivery business.

At the comparable adjusted EBITDA line, we were able to capture a year-to-date increase of 6.4%, well ahead of our comparable net sales growth, while expanding comparable adjusted EBITDA margin by 140 basis points.

With that as the backdrop, let me share the financial details of Q3. Comparable net sales in the quarter were $1.766 billion, which declined approximately $29 million or 1.6% year-over-year. Contributing to our Q3 results was flat volume and pricing mix that was down 1.6%, largely due to mix within our noncore revenue streams like office coffee services and other investments in the retail channel.

Within those results, dispensers and office coffee services contributed approximately $14 million to the quarter's $29 million year-over-year reduction, which was as anticipated. Sequentially, net sales increased $36 million from the prior quarter and our year-over-year decline relative to the year-over-year decline in the second quarter improved by 90 basis points.

Turning to specifics on the performance. Our branded retail business delivered 2% net sales growth in the quarter, ahead of category growth driven by exceptional brand strength and remarkable distribution expansion of 12% in total points of distribution. This strong distribution growth positions us well for future quarters as we expect these new placements will mature into velocity gains. The combination of expanded household reach and enhanced retail presence, demonstrates the strength of our brand portfolio and our ability to execute.

In Q3, we continued to see strong results from our premium water portfolio products with Mountain Valley and Saratoga. Combined, premium net sales increased more than 44% year-over-year.

Moving into the direct delivery business. As a reminder, in our slides, we list our main net sales disclosure channels for Primo Brand. Our direct delivery channel includes the home and office delivery business, water filtration, water exchange deliveries to our retail partners and our office coffee service that we are in the process of winding down by year-end.

The dispenser and refill businesses are separate and listed across the various retail channels within each of the account relationships. For the quarter, the comparable net sales of direct delivery included a decline of 6.5% or approximately $47 million. The Office Coffee Services, or OCS business, that reports within this disclosure channel, accounts for approximately $8.2 million or 113 basis points of decline, which came in as anticipated.

Separately, credits provided to customers in the direct delivery business increased by $3.7 million year-over-year in the quarter. We believe this increase is temporary as we prioritized retention during the integration disruptions and will return to normalized levels as we exit 2025. The cumulative impact of these items was approximately $12 million, which would have resulted in the channel being down 4.9% versus the prior year.

As we previously shared, our direct delivery integration challenges in Q2 occurred over a shorter period as the disruption began in late May through June with Q3 exposed to a longer window of disruption. This disruption was balanced with improving service that continues to this day. It was clear that customers experienced peak disruption in July and the direct delivery business has recovery into quarter end and further to today's earnings call. Our goal remains to improve customer volumes to both existing and new household and commercial customers, as well as resume our cross-sell and upsell activities.

As a reminder, our home and office delivery business has a known base between residential and commercial customers. Our exchange and refill businesses have an implied user base of customers transacting directly with our retail partners. But we can estimate this from buying patterns. These customers continue to grow uninterrupted through this period.

Going forward, new user creation continues through the sale and rent of our dispensers, the razor, as well as new customer sign-ups through our digital and club channel opportunities and additional households adopting self-service exchange or refill services. This led to volume growth in Refill and Exchange in Q3.

Comparable adjusted EBITDA increased 6.8% to $404.5 million, with comparable adjusted EBITDA margins of 22.9%, an increase of 180 basis points versus the prior year. Within these results, our synergy capture continued, although some of the stabilization efforts remain in the business as we improve our product supply and deliveries to meet the demand of our direct delivery customers.

Turning to the balance sheet and cash flows. At the end of the third quarter, our debt gross of deferred financing costs and discounts totaled approximately $5.2 billion. Our $750 million revolving credit facility remains undrawn at the end of the third quarter, providing us with approximately $612 million of available liquidity after accounting for standby letters of credit totaling approximately $138 million. Our liquidity remains strong. With approximately $423 million of unrestricted cash on the balance sheet. When combined with the $612 million of availability under our revolving credit facility, our total liquidity is approximately $1 billion. At the end of the third quarter, our net leverage ratio was 3.37x.

Moving to cash generated from the business. In the third quarter, Primo Brands generated $283.4 million of cash flow from operations. When accounting for significant items, including, but not limited to our integration and merger activities, our cash flow from operations would have totaled $362.4 million. Additionally, we invested $51.3 million in capital expenditures, excluding integration-related and natural disaster Hawkins related capital expenditures which resulted in adjusted free cash flow of $311.1 million.

When compared to the prior year, on a combined basis, this resulted in adjusted free cash flow growth of $15.9 million. We also closely track our conversion of adjusted free cash flow to adjusted EBITDA. On a trailing 12-month basis, our adjusted free cash flow totaled $733.9 million yielding a conversion ratio of 51.9%.

Looking ahead, we remain focused on disciplined capital allocation while maintaining a strong balance sheet to support our ongoing integration and organic growth initiatives. We plan to continue to prioritize reducing our debt to our medium-term net leverage target of 2 to 2.5x and plan to take advantage of opportunities to repurchase shares with our newly authorized share repurchase program.

Since our recent authorization, we've repurchased $73.2 million of our stock and approximately 3 million shares. There remains approximately $177 million on our share repurchase authorization. Yesterday, our Board of Directors authorized another quarterly dividend of $0.10 per Class A common share, which represents an 11% increase over last year's quarterly dividend rate at Primo Water.

Before turning to our financial outlook, I want to provide an update on our last international divestiture transaction that closed after our quarter ended. On October 23, 2025, we completed the sale of our Israel business for approximately $42 million in net proceeds. The sale proceeds will be reflected in our cash balance when we report year-end results in February next year.

I want to thank the local Israel management team and all associates of May Eaton for their tireless efforts in running the business with flawless execution during the last 2 years. As we know, this has not been a normal operating environment since the events of October 7, 2023, but the team remained focused on serving their customers while also protecting the safety of their fellow associates.

Moving to our financial outlook. We remain confident in the progression of the business, notably our retail performance. Our Q3 retail performance exceeded our estimates, and we remain confident that the business has stabilized from the combination of the impact post-Hawkins tornado and weather events that challenged first half performance. In fact, we continue to gain share in retail scan data and see this momentum building into 2026. Similarly, our Exchange and Refill businesses experienced strong performance in Q3 and we expect this to continue into year-end into 2026.

Lastly, our OCS business continues on track with our exit plan and our dispenser business also remains on track with the decline previously stated into year-end. Based on recent trade relations, we are likely to enter 2026 with a more favorable tariff environment, alleviating some of the headwinds faced in 2025.

Narrowing in on our direct delivery business, we continue to see signs of recovery. The remaining gap between our operational and financial recovery and our original guidance expectation continues to be unit volumes at the customer level. Our product supply was originally disrupted, but we have now stabilized and increased our days on hand of inventory. We continue making progress expanding our customer reach as a result of specific programs.

First, we are expanding our Club booth program at Costco, Sam's Club and BJ's and we are seeing an exciting level of club additions since the end of the quarter. These partnerships help build awareness, demonstrate our quality and promote our robust customer service.

Second, we have specific strategic digital acquisition campaigns in place to help expand our customer footprint. Our digital marketing team is focusing on increasing our top of funnel and bringing in new customers through various online platforms, including web, social media and applications. We are seeing strong results from these efforts as our digital customer acquisitions grew 8.2% versus Q3 of last year.

Last, we believe this momentum combined with the reduced customer churn from improved execution and improved public sentiment is positioning us well to mitigate the volume impact as we turn the page towards 2026. The outliers are onetime activities like Hawkins, dispensers and OCS are all coming in according to our original estimated impact as is our retail business.

With the ongoing recovery in our direct delivery business, this is requiring a shift in our net sales guidance range. We still remain confident in the recovery of the business, but the recovery path is not at the right magnitude to deliver the midpoint of our previous guidance.

We now expect a net sales decline in the low single digits versus the prior year. This shift in guidance is solely related to the recovery path of the home and office delivery business, within the direct delivery disclosure channel.

On the adjusted EBITDA side, our path of stabilizing our service to customers has offset some of the gains of the synergy capture. However, this will help transition us into 2026 with optimal customer and volume recovery.

With that, we are moving our adjusted EBITDA guidance to approximately $1.45 billion or 21.8% margin, up 180 basis points from prior year. The majority of this shift is resulting flow-through of the shift in the net sales guidance with some additional expenses related to supporting the business into year-end. We are reiterating our adjusted free cash flow guidance with a range between $740 million to $760 million.

Looking ahead to 2026, we see several key growth opportunities that we believe will support the return to our algorithm. First, we are fueling the growth of our premium brands, Mountain Valley and Saratoga by investing in new capacity including more than $66 million in our new Hot Springs facility for Mountain Valley as well as a new bottling factory in Texas for Saratoga. Both brands have been growing consistently robust double-digit while being capacity constrained, and these investments will support new highly accretive growth.

Second, we are focused on sustained total distribution point growth starting with Mass and Club. In September, we were awarded distribution and water exchange at Sam's Club, adding to the over 1,000 incremental exchange racks installed earlier this year to support our customer demand. This distribution is expected to drive accretive and profitable growth in our large format network, particularly as we introduce higher value regional spring water brands and implement harmonized pricing actions across our exchange and refill offerings. Simultaneously, we continue to see strong performance from our case back distribution in alternative channels like convenience, foodservice and omnichannel.

Finally, we are preparing to implement pricing actions across our retail exchange and refill offerings. While we continue to prioritize retention in our home and office network for direct delivery, we are charging this offerings pricing strategy, which we will prioritize in 2026.

In the meantime, we have taken price, pricing and harmonized terms for dispenser purchases in our club channel effective last week. At retail, we are sharpening our capabilities to better blend price and mix growth with volume growth by improving trade spend efficiency, taking price and optimizing revenue growth management and price pack architecture. These activities will contribute to our 2026 top line growth.

Looking ahead, I am confident in our ability to deliver value for all stakeholders. We are a category leader in North America, with a comprehensive portfolio to serve all usage occasions. We have a differentiated coast-to-coast network, powerful reach in retail and a robust delivery footprint. And we continue to act with urgency, agility and focus on operational excellence and the best-in-class service that our customers have come to expect from Primo Brands. Reinforcing our performance in 2026 and beyond.

With that, I'd like to turn the call over to Eric.

Thank you, David. It's great to be here, and thanks to everyone for joining us today. Let me start by saying what a privilege it is to be Primo Brands new Chairman and CEO. For those of you who don't know me, I've spent my entire career running global consumer-centric asset and people-intensive business models in the food and beverage industries.

As CEO, I believe the purpose of the company is really the centerpiece of any enterprise. Our purpose as the premier healthy hydration company in North America is to hydrate a healthy America each and every day. I'd like to thank all of my Primo brands teammates for their passion and tireless efforts in focusing on our consumers and customers every day.

Over the last couple of years as a member of the Board of Directors of legacy Primo and now Primo Brands, I've had a front row seat and a hand in helping to create Primo brands to be a bigger stronger and faster company with not just a purpose, but with promise in a bright, bright future.

Since coming together about a year ago, our team has made a lot of progress. There's still more work to do to achieve our full potential, consistently meet our customers' expectations and deliver results that are consistent with our commitment to our shareholders. I feel blessed to step into the CEO role of a company that has strong leading brands across all consumer consumption and channel purchase options.

I'm also fortunate to have an exceptional and flexible go-to-market system that helps us drive speed, reach and frequency. That aims to meet or exceed the expectations of our customers. We have a passionate, capable and committed team. And I'm a big believer in the phrase, the team with the best players wins.

Let me spend a minute sharing some of my thoughts on where we are just about 1 year into our journey as Primo Brands. First, the investment thesis communicated at our Investor Day in early 2025, is fully intact. We compete in an incredibly attractive category. Bottled water isn't just the largest beverage category in the United States, it's continuing to grow.

The long-term outlook is powered by an aging population and an increased focus on health and wellness. What's just as important, our products are sourced right here at home. We're locally manufactured and more than 98% of our sales come from the United States. Primo Brands is the #1 player in the U.S. retail branded bottled water category by volume share. Our portfolio of leading brands have deep heritage and consumer loyalty.

We have a diversified portfolio with the potential to serve people when they want, where they want and how they want to hydrate. From iconic regional spring brands to pure and premium offerings, we give consumers a choice. And when it comes to premium, we have an unmatched portfolio with tremendous potential with our Saratoga Springs and Mountain Valley brands. We're going to keep investing in our capabilities in building these brands and expanding distribution so that they can reach their full potential.

Just last week, we broke ground on a new greenfield production facility for Mountain Valley in Hot Springs, Arkansas, set to open in spring of 2026. This merger has given us an opportunity to unlock the true power of Primo through synergy capture, ongoing cost and productivity that can be either reinvested in growth for expanding our margins.

Over the coming days and weeks, my focus is simple: to listen and learn from our consumers, our customers, our employees and our shareholders. That will help shape our agenda for the future. In the near term, my focus really centers on four areas.

First is to get the business growing. We'll do that by building deeper connections with our consumers, focusing on brand building and innovation and making sure we sell, serve and execute with excellence. We'll tap into the full potential of our two leading premium brands, Saratoga Springs and Mountain Valley.

Second, we're going to raise our gain in customer service. We'll sharpen our service and execution. Making sure we fully address and improve customer service levels. My third focus is on creating a winning culture, one that's anchored in performance and recognition. By ensuring we recognize the hard work and achievement of our people every day.

And finally, I'll work with this dedicated team to make sure we deliver on our financial commitments. By growing the top line, driving earnings, generating free cash flow and creating lasting value for our shareholders.

In closing, thank you for your continued interest in Primo Brands.

Thanks, Eric. To ensure we address as many of your questions as possible, please limit yourself to one question only. And if we have time remaining, we will repoll for additional questions. Operator, please open the line for questions.

[Operator Instructions] And your first question comes from Derek Lessard with TD Cowen.

I just had one for me. Is there anything that fundamentally changed from the time you closed last year to now, I mean, you had a hiccup in Q2 that seems to be fixed. Anything that we should be thinking about that justified the leadership change?

Thanks, Derek. This is David. I think, again, the Board felt this was the appropriate time for a change. They've made that change with Eric stepping into the role. Fundamentally, no. I mean, from the macro perspective, our consumer remains very healthy. The category remains very healthy. In the retail part of our business, the share gains continue to express the brand strength that we possess, and how our consumers are gravitating to those brands, notably the premium side, which again, put another quarter up of 44% growth.

This all largely remains contained to the home and office side within the direct delivery channel. But no, I think broadly speaking, this was the time for a change, and that's what happened.

And Derek, it's Eric. If you wouldn't mind, I'd just make a brief comment. I think as I step in, I think the Board felt like this was the right step for the company at this point in its journey. I think David referenced that it's really all around maximizing the full potential of this business. So I want to emphasize that the long-term investment thesis here is still fully intact, right? We have a very attractive category, large and growing.

As you continue to see consumer tailwinds around health and wellness and hydration, that's going to continue to be at the forefront of their decision-making matrix. And we're the #1 player. We've got leading brands. In the quarter, we actually saw an improvement in household penetration. We saw volume growth on the retail side, along with some share momentum. So I really do think that the long-term kind of value creation thesis and the financial model is still fully intact.

We have an issue that, as you mentioned, started a quarter ago that we've got to get our hands around, which is really around last mile direct delivery.

Okay. That's great detail. And then just maybe one follow-up to that, David, is it -- I guess, is it safe to assume that the majority of the integration challenges are now behind you guys?

Yes. Again, as I mentioned in my prepared remarks, product availability and stability in days on hand is back to their normal potential. Most of the routes are performing at or above expectations from pre-merger. And then when you look at some of the sort of consumer-oriented data points, call volumes are now back below sort of pre-integration levels. And then consumer sentiment, while that I understandably takes a little bit of time to rebuild trust, those that are choosing to post are starting to improve their sentiment and the large negative sentiment spikes we saw during the peak integration challenges have pretty much anticipated. So we feel very comfortable there. It's just a matter of time of resuming volumes to those customers and continuing day in and day out of building trust back with those customers.

Your next question comes from Daniel Moore with CJS Securities.

Yes. I wanted to ask. I know we'll get into a lot of detail in terms of the numbers, but high level, either for Dean or Eric or both, we had the disruptor Hawkins that said, the integration much more complex and challenging than we expected or believed it to be. Was it simply a case of moving too quickly? Or are there sort of naturally larger at least initially involved than expected, projected. Any high-level thoughts there would be really appreciated?

Sure, Daniel. It's Eric. I'll take that. I think again, use the term. I think most of the direct delivery disruption has been self-inflicted. And sometimes mergers can be complicated and more complex than maybe even anticipated going into them.

I do think we probably moved too far too fast on some of the various integration work streams. There's no doubt that, that speed impacted product supply. There's no doubt that, that speed impacted our ability to get through a lot of the warehouse closures and route realignment without disruption. And the ultimate output of that was the customer service issues that we've highlighted. There are also where, I believe, some just integration issues related to the technology move over.

But at the end of the day, as David said, the team has really been and continues to work hard to address those and correct those. I think in the quarter, David highlighted this, we saw continued improvement on multiple fronts. I think on the product supply front, we're pretty much corrected on that relative to in-stock conditions.

But we still have work to do at the moment of truth around making sure our deliveries are on time with the right product. We did see each of the kind of process metrics around customer call volume and did see both improvements in the quarter on customer SaaS scores. But again, there is more work to do on this front to completely get the issues solved and corrected.

Really helpful. And a quick follow-up. Are there -- if we sort of look at Q3 as a baseline, is there more cost investments that will need to be made in terms of routes, drivers, customer service, marketing, et cetera, kind of more permanent costs that may need to incur relative to our initial expectations to maintain that customer service.

Yes, Dan, this is David. You'd be right there. across Q2 and Q3, we started to move some routes back in to stabilize success rate across the customer visit. Obviously, we've had some, what I'll call, middle mile or interbranch transfer cost to sort of keep product supply stable. Those will largely dissipate and again, once we have a more stable and consistent pattern of delivery success, which has been happening post quarter to today's call, that will allow us to start to slowly work back out some of the excess routes or what I'll call over time or weekend support, which will bring our units per route up.

And as you are familiar, legacy Primo Water really had a large drive toward that productivity at the route level that will resume. And as we head into '26, we'll really start attacking miles, which was really part of the main benefit of this merger, which was the density of the route between the two customer bases.

So yes, I would say that, in short, we've had some surges in costs to both handle call center and the routes and the labor across the middle mile. And those things will start to unwind as we exit the year. And that puts us back into allowing the synergy capture to start to reveal itself more clearly in the P&L.

Your next question comes from Eric Serotta with Morgan Stanley.

Great. So a shorter-term question on the longer-term one. In terms of the short term, can you help us unpack the fourth quarter guidance between direct delivery and retail? It would seem that if retail is going to be -- growing even modestly, the guidance implies a pretty steep decline in direct delivery. And along with that, like what was the exit rate, whether you want to talk September or recent weeks, like what is HOD running in terms of a year-on-year rate now?

And then longer term, just wanted to circle back on the prior question. make sure I understood correctly, you're expecting the incremental costs to dissipate? Are you are you reaffirming the earlier back from February, the '26, '27 EBITDA margin targets or should we assume that between or EBITDA dollar target, should -- or should we assume that even if the majority of these costs dissipate that there is some incremental cost that will be ongoing that will kind of lower the earnings power versus what you previously thought?

So yes, as mentioned, a lot of the -- let's go through the exit categories. So like office coffee, exiting on trajectory, the dispenser headwind from tariffs exiting on trajectory, exchange and refill performing to their pretty regular nice growth, nice consistent volumes. And then the retail business, obviously the largest part of our business, once we've been through the Hawkins moment, if you will, and weather being less of a challenge, it's going to perform and exit the year sort of on track with our previous revision back in August, which has about a 2% second half exit rate. So we feel very confident there.

Obviously, that leaves us now with the direct delivery business, which is largely the HOD component. As I mentioned, I wanted to clarify just for people who are curious what all goes into that disclosure line in our earnings supplement. And that's largely the HOD part. And so again, we are at a moment where we're successfully visiting customers on schedule. It's accurately and to the maximum potential fulfilling their order, whether that be in the base 5-gallon unit, whether that be in a case pack unit or a premium unit that comes off the route.

So again, most of that exit challenge remains just fulfilling volumes to the appropriate level, but we have greatly reduced friction by missing their original dates or things that led to call center or negative sentiment online.

Transitioning to the second part of your question around margins. We obviously will have a lower base as we ideally exit the year at $1.45 billion in EBITDA. And approximately 22% margins. From there, we do intend to, again, unwind costs at the end of this year and early in Q1 and then resume sort of our margin expansion walk. Dollars obviously, will be slightly different than the original outline. We are not changing our synergy capture targets. And obviously, we'll look at 2026 when we provide full year guidance likely in February of next year.

So again, I think it remains a very healthy story, a very healthy exit on service that's helping sustain our customer retention at this point, but it's really getting back into the merits of this original deal, which is the right route count, the right drivers, the right units per route and the right support cost in the business.

And Eric, I would just add to David's comments. I think as I mentioned earlier, the investment thesis is intact, but the long-term algorithm is also doable, and I want to make sure you hear that from my perspective. We have to get this business growing, and we certainly have plans to do that. But at the same time, we do continue to have margin opportunities. And so I think the way to think about this is there are multiple value creation levers available to us, multiple growth vectors.

Obviously, the synergy capture is on track, and it's been executed pretty well, and we'll have ongoing cost and productivity initiatives as well that should lead to improved profitability, free cash flow generation and conversion and wealth creation value creation going forward. So again, I want to make sure that is fully, fully recognized.

Your next question comes from Bonnie Herzog with Goldman Sachs.

All right. And Eric, congratulations. I look forward to working with you again. I also have a couple of questions on your direct delivery business. I guess, first, I really want to make sure I understand what drove the sequential deterioration in Q3. I mean did you lose more customers in Q3 than what you lost in Q2. And then I guess I'm trying to understand why the implied decline in Q4 is worse if service is improving. And then ultimately, curious if you expect these declines to persist into the first half of next year as well. And do you have any visibility into a return to your long-term algo for your total company of the 3% to 5%? I mean, should we think about that more of a second half '26 or '27 story? Just any help there would be appreciated.

Sure, Bonnie. Thanks. This is David. Again, we believe that July was basically the peak disruption in customers where our ad was not outpacing sort of the churn or the challenge from sort of our integration friction. As we've exited Q3 and entered into October, that has largely stabilized. We believe we'll be at a point where we will be able to get to a net positive customer position in the month itself as we exit the year, and that requires us to then continue to recuperate some of those lost volumes from that period of time, if you will, of where that ultimate friction occurred with the consumer and our delivery customer.

So it's largely isolated solely to the home and office side. Exchange is a business that runs off that truck. That business has resumed its growth as the consumer is shopping every day at our regional and national chains like Lowes, Walmart, Home Depot, et cetera. When you move into next year, Q1 obviously was a 3% positive quarter, 4.2%, I believe, when we [ let ] adjust it. So that will be obviously a difficult quarter to compare based on the exit rate and sort of our run rate within that home and office delivery business, but our optimism remains in the other parts of the company.

And again, we'll continue to repair customer volumes in the home and office side that will get us back towards that long-term algorithm. But we'll comment specifically on '26 and longer-term outlook in February. Eric, anything else you want to add there?

Your next question comes from Steve Powers with Deutsche Bank.

I guess following up on that. So if -- if I heard you right, then net customer add losses will be assuming -- I don't know where we are entering the quarter, but if we're going to exit the quarter positive, they should be down relatively thinly -- relatively narrowly, which implies that the -- the sales decline in direct delivery is going to be a combination of either just lower velocity on those customers or lower value per customer because of price inducements or what have you. So is that right? What is the kind of the estimate around those variables? And then how do those -- how does the velocity and the kind of the value per customer pricing kind of dynamic flow into next year as you get back to net customer adds in your...

With regard to the customers, again, in the closing months here of 2025, we'll be at the monthly level we believe we'll be back to an ad position. That will take us a few months to sort of repair some of the losses. Again, what we really focus is on volume. So in the past using the exchange business, using the refill business and other things that consume 5-gallon units, along with the home and office delivery side.

We believe we can get back to volume growth that volume growth has also been complemented by upsell and premium that comes off route. At this point, part of the disruption, we really focused on was getting 5-gallon supply stabilized back into the hands of our branches, back into the hands of our consumers or customers.

And as that stabilizes, that should help improve. As we head into '26, we're going to look across price pack architecture for the entire company. whether that be retail, premium, our retail-oriented 5-gallon products like exchange or refill or the specific harmonization activities that occur in HOD, which was part of the original thesis that we had of bringing these businesses together with what I would call the pricing matrix that was not aligned appropriately for how we want it to run the business at the local market level.

So those will be all areas available for us with regard to growth vectors that we can sort of improve as we continue to work through the customer part.

Okay. And just to clarify, when you say net customer adds on a monthly basis, are you saying, you're going to be adding in December versus November, are you saying you're going to be adding in December versus last December?

Yes, we would just be, in the month itself. The ads less the quit of the particular month would be back to a positive position in the month itself. And as you -- the more months you string together of that outcome, you obviously start to replace sort of the trough of your base spread.

So adds versus the end of November?

That's correct.

Your next question comes from Andrea Teixeira with JPMorgan.

I was just hoping to see if you can speak to the -- kind of consumer dynamics in the purified water, in particular, I know you had increased some promo during the quarter. to support some of the affordability we have been seeing in the consumer side. Can you comment to that?

And then another question is how you're seeing distribution of the premium segment. on the retail side, obviously, unfolding and how you can see this. Obviously, you had this 46% growth in the premium water segment, how we should be thinking as we enter 2026 any particular gains in distribution or even on-premise or off-premise that you wanted to highlight? And from there, also how you're going to balance this price pack architecture as we go into next year? And finally, welcome, Eric. Looking forward to working with you.

I'll start and let David fill in. But I think if you really look at the consumer and how the consumer is engaging with the category and our brands, there's really a lot to like, I think, first and foremost, while you do have a change in consumer sentiment broadly, the reality is, is their appetite for healthy hydration hasn't waned as evidenced by the household penetration numbers in the quarter that were actually up for our brands, and we have a pretty significant penetration advantage versus our other key competitors.

If you look at the brands really broadly, I'll come back to premium in a minute, but obviously, premium has been on fire and we'll continue to be on fire given some of the continued opportunities we have and just the brand strength of both Saratoga and Mountain Valley. So -- but at the end of the day, it's really important to come back to the broad, I think, strength of our brand portfolio. We're seeing good growth across that portfolio. The regional Springs, Arrowhead, Ice Mountain Poland Springs, et cetera, we saw in the category at retail.

We grew our volume, we grew our revenue, we grew our -- both our volume and value share. So a whole lot to like relative to premium, we continue, despite great progress by our sales teams to have distribution opportunities. We're going to continue to invest in capacity. We referenced that in our prepared comments. The way I would describe it is we are in the very, very, very early innings of a long runway of opportunity for those brands. And I think relative to your pricing question, we're going to be balanced relative to the growth algorithm. It's going to be volume and price. You can expect -- other mechanisms.

Put out there a little bit during that answer.

You have us now?

We have you now. Yes. Thank you for confirming.

I'm not sure where I was cut off. So let me double back. I think my point was from a consumer standpoint, really, really encouraging. We continue to create household penetration, both the category and our brands. Premium has been on fire. Saratoga and Mountain Valley have tremendous upside and runway ahead, good growth on our regional spring water.

So at the end of the day, at retail, we grew our volume grew our value share. Strong performance will continue on premium, distribution opportunities and investment in capacity, early innings with long runway ahead of us. And on pricing, I was mentioning that we'll be balanced in our approach, but start with the consumer, make sure we understand how she defines value and again, take advantage of that opportunity as we walk forward. David?

I think all I'd add to that is as we head into '26, we've talked about the Mountain Valley supply constraint. That's coming online in the spring and summer. And we really think that the helps unlock. Within these results, I would say Mountain Valley has been held back a little bit. So I really think that unlocks us for '26.

That's super helpful. I just want to maybe double click on the on the retail side, especially the purified. Is there any improvement there as you exit the quarter? And then a second clarification with the exit into the Israel?

We can hear the operator, and I did hear Andrea, but she was cutting out, if there was a follow-up.

Yes, please. If I can just follow up on, as you exit the quarter, two follow-ups. One, as you exit the quarter, how was the purified performance, just to think about like if the consumer got a slightly better as you exit? And then a clarification on the exit of the Israel operations. Like is that -- was that included in a headwind into the quarter or no?

No, let me start there, please, just to clarify for everyone. Israel had always been in discontinued operations since the announcement of the original international sale. So that had nothing to do with the quarter itself.

From an investor, and I figured that was the case, but yes, I wanted to clarify.

That's correct. And then with regard to the purified water, largely the disruptions within the home and office delivery space created the challenges there. But at retail, our Pure Life brands and the Primo Water brand that goes to market through the exchange and refill services remains quite strong.

Ladies and gentlemen, due to timing. Our last question will come from Andrew Strelzik with BMO.

When you were talking about the service levels over the last several months, you gave some good kind of regional color about some of the markets that were lagging and kind of how that was progressing. And so I was just hoping to get a sense for the breadth maybe of this fulfillment issue that is ongoing. Is it kind of nationwide? Is it more concentrated in certain areas? Any help around that would be helpful.

Sure. Thanks, Andrew. So again, we go to market in six divisions. We track our DSR rate that we've talked about throughout the last couple of months of our journey. Again, that exits and sits to exited Q3, right around the 93-ish or so percent range. Today, it stands at 95%.

Generally, there are a couple of divisions performing above that. And then some of the more slow-to-recover areas have been in the Southeast and the Mid-Atlantic, but those are within 93%, 94%. So again, the overall mean is where we want it. Again, we need to continue to improve the volume of those routes, however.

We -- as I mentioned in the prepared remarks, we did go through a wave of integration in September because we had more time to prepare for the team for the change of management, the amount of leaders that went to the market to ensure that success that was very successful. We had very little friction at the consumer or customer level. So again, that really gives us the confidence that as we head into the first quarter with our remaining two waves that the time and the preparation activities that we can put into it is quite helpful for the success of that.

So again, I think we're just continuing through improving at the volumetric level at this point.

Okay. And is that challenge also kind of regionally concentrated? Or is that more broad-based? I guess that's what I was would be I guess I was trying to get.

Yes, it would be in those same regions that we're continuing to support and improve over time

It's my pleasure to turn the call back over to Eric Foss for closing remarks.

Thank you. So in closing, let me just emphasize the confidence we have in this business looking forward. I think the combination of our brand leadership position, as well as the increased focus on execution and operational performance can and will deliver a resilient top line algorithm as well as value creation going forward. And so I look forward to sharing our progress in the coming quarters.

Ladies and gentlemen, this concludes today's conference call. We thank you so much for your participation. You may now disconnect.