Primo Water Corporation Stock

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 an 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, Tracy. 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 and 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, expanding the value spectrum and advantaged 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 balance 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 marked 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 remain 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 in 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 solid 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 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 underpenetrated in a high-growth, high-margin segment. Another growth vector is premium. Saratoga and 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. And 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 OneTeam 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, and 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 pack and brands led by premium and regional spring water. 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 trust pilot 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 continue 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 3.43x 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 3x as cash flow and EBITDA continue to strengthen.

Our liquidity remained 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 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 results, putting the comparable 2025 net sales base at $6.635 million. 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 strengthens the customer experience and position the business for future growth.

Adjusted free cash flow guidance remains at $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 payments. 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. [Operator Instructions] Operator, please open the line for questions.

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 inflation was an important landmark for Primo. So if you look at like the cadence also when you think about like 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 like 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 easier comparison. So if you can just kind of take us through the balances and for both businesses that they'll be apprciated.

Thanks, Andre. 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 premerger levels. If you look at quit, they continue to improve.

We talked about the -- on the prepared comments, kind of the mid-90s performance that we're seeing on OTIF. And then if you look at net, we did see a positive month within Q2. So I think the really encouraging thing is, as 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, related to -- I think it was related to volume, again, encouraged by the top line recovery. We obviously saw a 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.

So -- and I think 1 of the most important metrics is the fact that we grew both our value and our volume share is very encouraging to us. So anyway, overall, very, very encouraged by how the business has performed.

Eric, just a clarification. This is super helpful. But on the each of the net adds, you said within the quarter, you had it's returned to growth in flat 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 in July and August in terms of like that sustainability of that cadence of that improvement...

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 lag indicators that we called out are in a better spot. And we continue to be encouraged by the continued recovery and certainly, we anticipate that continuing to be in a good spot as we walk forward.

And our next question comes from Nick 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 a 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's 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 can make there and kind of time line.

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.

Yes. Nick, 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 as we continue to develop our small format and media consumption business, making sure we sort of have product availability ready for what is a much higher velocity business than our traditional shelf-based program. So 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.

Thank you, everybody. Good morning. I guess if I want to connect 2 things. One is the reorganization, 1 of the outcomes is that you're a lot more nimble than perhaps you would have been before. But 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 then what could have been the plan 6 months ago when we first started having -- 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, I mean 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 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 eliminate the layer and allows us to do that in a more seamless way and a quick array. 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, I mean, 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. And 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 and I've described in the past, I think, kind of moving from stabilized to optimize to ultimately strategize.

And I think from where we are right now, our focus near term is -- 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. And 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 have 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 a 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, then would be considering that their primary source of sort of home use or office-based water.

And so when you look at a departure or a donation from that sort of share of consumer, again, they obviously can go to picture 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. It's obviously the more premium end of the business where for delivery fees and sort of access to high 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.

I 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 has been trending at previously. So just curious if there's any kind of call out there, and how you think about what's a sustainable growth rate on the premium side of the business.

Lauren Yes, 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. But 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.

But overall, we continue to see it. We're early in that journey, and we would continue to see -- these brands continue to perform very, 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 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 and 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.

And so then it's about how do you take that and package it into a a comprehensive development approach around where are there opportunities, whether they're rate opportunities or mix opportunities or trade spend opportunity. 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 consumers' orientation tends to be more convenience.

And so as we've done that, the good news is, is that we're still price competitively in most instances, still lower than competition. And again, I think as we think about this going forward, it will be about looking at more -- if we do something, it will be more on a precision basis, really looking at packages and brands where we need to improve profitability or returns, and 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 event, we'll 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're continuing in our retail business to be very balanced. And again, I think as kind of David pointed out earlier, the beauty of this portfolio it's 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'll 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're 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're putting back into the EBITDA line this year?

And then maybe as a secondary just how the cost environment is kind of shaping up as you begin to kind of do planning on 27. Oil is obviously a lot lower than it was when we spoke 3 months ago. You're relatively well hedged for this year. But 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, 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 modeling sort of call volume, which obviously is an 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 of manage the route count that typically follows the volume trajectory, whereas in Q1, that would have 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 sort of 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 perform 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 and 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 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.

And 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 sort of friction cost. But that -- those tend to be, as you've called out some of the higher inflationary items within within the business.

And so 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 inflation items like freight and sort of unhedged areas of the business.

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

David Shakno on for John Anderson. I wanted to ask about the club and Away-From-Home channel. So Club, I think, was a little bit soft in 2025. It's been up mid-single digits in the first half year. 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. Is it -- especially on the way from home, is it new partnerships and additional TDPs there. In club, is it consumer value-seeking behavior. I 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 and 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, CNG, 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.

And so I think what we'll do is we exit the quarter is 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 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 Cown.

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.

Good morning, everyone, and thank you for tuning in. This is Nik Modi, RBC's Co-Head of Consumer Research, and I'm the analyst covering household personal care, packaged food and beverages. We have a special fireside chat with Primo Brands this morning, and I would like to welcome its new CEO, Eric Foss, as well as Primo's CFO, David Hass. They are joined by Traci Mangini.

Let me kick it over to Eric very quickly for a few words, and then we'll get into our discussion. Eric, over to you.

Thanks, Nik. Good morning. It's great to be here, and I hope you and all the others had a great holiday, and your new year is off to a great start. As you mentioned, I'm joined today by David Hass, our Chief Financial Officer; and Traci Mangini, who is our newly appointed Vice President of Investor Relations.

Traci spent the last 6 years at Molson Coors Beverage Company, where she was the Vice President of Investor Relations. And prior to that, she was involved in other senior leadership roles across investor relations, corporate finance, and equity research. And I can tell you that I and we are very excited to have Traci joining the team Primo. So Traci, welcome to Primo Brands.

Thanks, Eric. I'm so pleased to be here. I've spent over 20 years in various financial roles within public companies and in equity capital markets, and nearly all of that has been focused in the consumer sector. So I well recognize that this is such an exciting and pivotal time at Primo Brands, and I could not be more excited to join the team.

Now today's discussion will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. I'd like to direct you to the cautionary statements regarding forward-looking statements included in our most recent Form 10-Q filing and earnings release, which are both available under the Investor Relations section of our website.

The Form 10-Q and earnings release include a discussion of the important factors that could cause results to differ from those expressed in any forward-looking statements. As is customary, the content of today's discussion will be governed by this language, and the company undertakes no duty to update these forward-looking statements, except as expressly required by applicable law.

In addition, during today's discussion, we may discuss certain non-GAAP financial measures. These non-GAAP financial measures exclude certain unusual or nonrecurring items that management believes impact comparability of the periods referenced. Please refer to our historical earnings releases and presentation materials available under the Investor Relations section of our website for reconciliations and additional information.

Finally, we will not be commenting on our fourth quarter or full year 2025 results. Any discussion of our performance today will be based on our results through the end of the third quarter, unless otherwise noted.

And with that, I'd like to turn it back to you, Nik.

Thank you, Traci. And again, welcome, and congratulations on the new role. So Eric, just to start things off, maybe you can just walk us through what you've learned over the past few months as you've gone from a Board member to now CEO and operator about the current state of the business.

Sure. Well, I think first, Nik, as you mentioned, I had a front-row seat as a Director at Primo Legacy. And really, I think, as you date back and think back about where all this started then and still today, I think, is just the reality that the industrial logic of this deal remains very clear and very compelling. It did at the time and it still does today as I stepped into the Chair and CEO role.

What we've done is put together a leader in healthy hydration. We've got a comprehensive and a very well-positioned portfolio that can actually serve consumers across channels, segments, usage occasions, et cetera. In addition to that, we've got a very powerful route to market and the synergy capture is tangible and doable. And again, I think not only myself, but the management team continues to have a high degree of confidence in our ability to deliver against the run rate synergies.

I'd say a second observation or learning is that integrations are very complex, challenging and can take some time. Having been through these at other companies, there's 3 things that are really critical to any integration success. One is the culture; second, a successful integration process; and third is achieving the synergy capture. And again, while we've made and continue to make a lot of progress across each of those coming into the new role, from my perspective, there's still a lot more work to do.

But what we've done here is basically take 2 very similar-sized companies, BlueTriton Brands and legacy Primo. One was public, one was private. They had similar business models, but to be perfectly honest, they were run and operated very differently. So one of the first steps is to make sure we've got alignment on a one Primo culture. At the centerpiece of that culture, we've got to have a performance-oriented culture while also having a recognition culture. We need to put the customer first. We need to make sure we're front line first focused. And really as leaders, we're here to support those folks on the front line that may move, sell and deliver our products every day.

And then as you think through the integration, we had some disruption in the supply chain. We had some business process disruption. We had some tech transfer challenges. And while we're making progress on all of those, again, it's not unusual to have speed bumps, setbacks as you work through any type of integration. But I come back to -- from my perspective, -- and I want to make sure that I'm clear on this, that the long-term investment thesis for my purview as the Chair and CEO is fully intact.

This is a major player in branded beverages. We're actually the third largest player in LRB as measured by volume, pretty much week in and week out, which gives us a ton of credibility and a ton of leverage with the trade. We obviously compete in a very attractive category. The category is large, the category is growing, the category is profitable. We're a clear leader in the space in which we participate in, which is water and healthy hydration. And again, we've got strong brands and advantaged route to market and tons of exciting growth opportunities across multiple vectors.

So -- and I guess the final thing is that this is a very attractive financial model in terms of growth, margin expansion, a proven tuck-in acquisition model that's accretive and proven to work in a business that can generate strong earnings and cash flow generation. So from my perspective, it did at the time, and it does today, even though my role has changed, the deal makes a lot of sense. We're making progress. We still work ahead of us. But the thesis to unlock kind of the growth and long-term shareholder value is still intact.

Excellent. Maybe just -- if you can talk about some of your experiences at Pepsi Bottling Group and Aramark and kind of how -- maybe there's some best practices that could transfer over to the situation at Primo that you find today?

Well, as you know, Nik, what I've done really throughout my career is run global, consumer-centric, fairly asset and people-intensive business models, and most of that has been done in the food and beverage space. And I think if you look back, whether it was at Pepsi or Aramark, a proven track record of building brands, increasing scale, improving margins, driving earnings growth and delivering shareholder value creation. And so I'm really excited about how that transfers here to Primo.

There's tons of similarities, tons of transferable, I think, opportunities. And right now, our focus is really here around driving customer satisfaction and loyalty, building an engaged workforce, and making sure we deliver strong and sustainable financial success, which is obviously very similar to what we were trying to do in the prior 2 roles.

I think -- again, if I go back to some of the business model similarities, what's transferable, again, it starts with building the right team and the right culture. I'm a big believer that the marketplace sets the table. And so in all 3 of these business models, really getting an understanding of what the consumer needs and wants are to improve customer satisfaction is really, really important. And again, I think -- if you think about those 3 companies that I've been privileged to lead, they've all had a strong portfolio of brands. They've all had a powerful route to market, and they've all had a committed team of associates.

And so I remember at the time back -- pre the PBG IPO, we were sitting around as a leadership team talking about what was going to matter most to be successful. And it was things like brand building and innovation, things like service, execution and operational excellence at the moment of truth. And those are applicable to Primo. And if I go back to the kind of the model we implemented at Pepsi was we were on this common, what I call journey towards excellence.

On the marketing excellence, it's about brand building and innovation. On the selling excellence, it's about a clear right to win. On service excellence, it's being great at the moment of truth, where we have opportunities here. On the execution side, it's making sure we can drive display inventory and points of availability and space gains, and it's about operational excellence in the way we make move and deliver in an effective and efficient way. And so those skills, experiences that have been applicable in other careers that I've had are definitely applicable at Primo.

Yes. And just going back to the leadership and the culture, you made some of those comments earlier. Can you maybe give us some specifics in terms of what you're seeing and maybe where the upside opportunities are?

Well, when I think about leadership, it's -- I think leadership is critical. And again, I'm a big believer that I never really viewed myself, I guess, going back to the Pepsi days that I was in the carbonated soft drink business or beverage business. At Aramark, I never viewed myself as being in the food service or uniform business.

And at Primo, I don't really view myself as being in the water business. I view myself being in the people business. And each of those companies have thousands of associates that almost on a daily basis are engaging millions of consumers. And those points of engagement each and every day make it really important to be good because we're really in the people business. And I'm a big believer that the team with the best players win.

So I mentioned it earlier. I'm a big believer that we've got to focus on the front line. If we do that, that's going to have a big impact on how we are able to service and execute and sell against our customers day in and day out. I think we've got to make sure we've got the right winning culture and value set. Again, it's about performance and recognition. It's about one team Primo. We got to make sure we continue to invest in training and tools and technology, particularly for our frontline associates.

And again, I think the way I think about our people, I mean, as CEO, I get to do a lot of things. And obviously, we're focused on growth, we're focused on making sure we drive long-term shareholder value. But one of my most important roles, at least from my purview, is really head coach and cheerleader. And so we've got to attract, retain, grow our talent, make sure we're building careers.

And from a leadership standpoint, my leadership model has 4 key dimensions to it. And so as we look at assessing capability of the team, it really is around whether they can or can't on the capability side and whether they will or won't on the culture side. But my leadership model is really focused on results, people who perform and can put points on the board, people who are good people leaders and can coach and motivate and energize an organization.

Influence leadership is, I think, really important in any business today. And the last dimension of that leadership model is really ideal leadership and it's about vision and strategy. But in these businesses, fast-moving consumer goods, it's mostly about the ability to simplify and focus. So I mean that's kind of the framework for how I think about leadership and how I think about evaluating leaders here or at other businesses that I've run.

Excellent. Now we have a lot of folks dial in today and some are new to the story. So maybe just if you can provide some -- your insight in terms of the category strength, right? Like you talked about Primo's positioning, but talk about the category and why you think this is such an attractive market.

Yes, sure. Well, let me start with the category, and I want to make sure I incorporate why I think we're positioned to win as well. I think the category attractiveness is driven by a number of factors. I mean the fact is that municipal water bills continue to rise. If you look at the last 5 years, they're up about 5%. If you look at the liquid refreshment beverage category, bottled water is the largest beverage category as measured by volume in the U.S. That's been the case for almost a decade.

In 2025, we're coming off a year where the category was the second fastest-growing scaled category within LRB. So there's a lot to like. I mentioned earlier, it's large, it's growing, it's profitable. And I think what's even more important is Primo's positioning within the category because we are the market leader.

At retail, we're the largest branded player by value or volume share. We're the clear leader in the home and office direct delivery business. We're the market leader in both the refill and the exchange businesses. We're the #1 seller of branded water dispensers. And we've got this industry-leading brand portfolio that really is designed to serve really every consumer occasion across product, across format, across channel, price point, day parts, et cetera. And so we're excited about that.

Again, if you think about our portfolio, we've got a couple of brands that are more than $1 billion. We've got 5 brands that are $300 million plus. We've got the Pure Life, the natural leader -- national leader in purified water, 6 regional spring waters that in their respective markets are the leader; and 2 of the fastest-growing brands in our 2 high-growth premium brands, Saratoga Springs and Mountain Valley. So again, I think not just the category but our position in the category, we really are positioned to serve consumers anywhere, any way they want.

Excellent. So let's move on to the water delivery business because I know there's a lot of focus and interest there. How have service rates, fulfillment rates and customer quits trended since September?

Yes, sure. I'm sure this is a question that -- I know there's a lot of interest on the phone. So let me maybe back up, if I can, Nik, and talk a little bit about what happened, maybe what I saw as I stepped into the CEO role, what corrective actions we've taken, and then a little bit about what's maybe behind us that we feel like we saw, and then some of the things that remain in terms of actions and some challenges.

So one -- I'll also share maybe a few specific metrics that from my purview at least, are pretty encouraging. So one, we experienced several challenges across the supply chain. And they run the gamut from product availability challenges to equipment and rack challenges that came through the acquisition. We had some tech transfer data management challenges, and all 3 of those kind of impacted our order fulfillment and customer service.

So having said that, I think we are making pretty significant progress on multiple fronts. Let me start with the supply chain. We've really obsessed about improving and making sure we've got an accurate sales forecast. We have product produced as scheduled. We've attacked and reduced warehouse out of stocks, which allows us to get trucks loaded as ordered. And we've seen the metrics across each and every one of the...

Eric, sorry, you -- right when you started answering the question, you cut out. Can you just kind of go back and -- when you started talking about the issues that you were addressing?

Sure. Yes. My apologies. I'm not sure what happened. But sure. So I said -- I think I said we experienced several challenges across the supply chain, number one. We had tech transfer challenges as well and kind of the combination of supply chain, product availability and equipment, tech transfer data management, all impacted our order fulfillment and customer service. So what I was saying is that we have made pretty significant progress on each and every one of those. So I'll take you through some level of specificity just to give you some texture for what we've done and the work that we've got behind us.

From a forecast to getting product produced properly, to getting trucks loaded properly, all of those success metrics have improved pretty significantly. Our product produced a schedule which was at one point in the low 80% range is now 99% plus. Warehouse out of stocks, same thing, 99% plus. As we've done that, that translates into reduced customer calls and we've seen an improvement, importantly, in customer quits. As we saw in fourth quarter as the quarter continued to evolve, we saw those metrics improve pretty much week in and week out.

From a selling and delivery standpoint, we have to continue to focus on making sure we get account services scheduled or what we call delivery success rate. And we have to make sure the most stringent measure here is what we call on-time in-full, where the order is there, not only on the day and time, but in-full. And the reality is, the 2 companies, as I mentioned earlier, they were run somewhat differently across several dimensions. One of those was OTIF. It was measured differently. So we now have an aligned metric on how we look at that.

And the other thing that we've implemented since I got here is something that I've done back in the Pepsi days, which is an initiative we call respond and recover. It was clear to me as I was coming in that we were getting far too many calls. And as we try to connect those calls back from the call center to the depot, to the manager, to the route, it wasn't happening as quickly as we needed to. And so we implemented this respond and recover, what we call solve by sundown, which to me creates not only the right process, but it creates a sense of urgency and a lot more of a rapid response that once the customer service issue is there, we have the ability to get that fixed.

So net-net, we've had a lot of progress. Again, we still have more work to do. But I would tell you, I was very encouraged by how we saw the metrics improve as we went through the quarter in Q4, and it did translate into improved -- the growth trajectory or the performance of the customer direct business trajectory-wise improved each and every month as we went through the quarter.

Excellent. Okay. Now that's very helpful and really good detail. Maybe just -- when you think about the customer acquisition strategy. And I just wanted -- because there's 2 components here, right? It's kind of getting back to the service levels, continuing to recruit new customers and then to this point, make up for some of the lost customers that have -- that you kind of gone through over the last few quarters. So maybe just talk about the plan or the path and the time line of customer acquisition, your strategy there as it relates to digital, clubs, inorganic, et cetera?

Sure. So I think, again, as it applies to customer direct, let me talk about kind of adds, quits and nets. As we got through the month of December, while still negative, we were much closer to the standard range that was actually pre-deal than we had been pretty much since early in the year. So we continue to see sequential improvement. And we are encouraged by, I think, the top of the funnel kind of customer demand, which continues to remain pretty strong.

Again, we still have some actions to take. And I want to -- maybe if I can, Nik, in addition to talking about customer acquisition, maybe just take the group through what other work remains relative to customer direct as we go forward. So while we've taken a lot of actions, there are still some actions ahead of us. And so let me try to cover that. And if I don't cover your specific question, please come back to it.

But I think, number one, we are going to be implementing a new warehouse management system that will further assist us in our ability to get the supply chain, execute it flawlessly. Second, there's a lot of work underway around SAP integration and data harmonization so that we can have more unified reporting.

To your question, we've got work underway to make sure we continue to enhance and deliver a better digital and customer app experience. We've got a body of work underway around customer journey optimization so that we can treat our most valued customers appropriately. We've got win-back initiatives that have been in place and will continue in place for some time with investment behind that. And then we have, what I'm going to call kind of our future state call center, where we want to continue to reconceptualize our processes, our technology and our capabilities.

So again, while I'm pleased with the progress we've made, there's still plenty of heavy lifting ahead of us on this, and that applies both to kind of the back of the house, supply chain, technology as well as some of the things we're doing on customer acquisition.

Excellent. And just -- if I can just clarify, historically, is December a month where this business typically sees customer losses just from a seasonality standpoint? I just want to make sure I'm -- I understand kind of how it works seasonality-wise.

Yes. I think that's fair. I think you should think about the seasonality of this business like you would -- any beverage business between summer and then the off-peak months. So yes, I think the answer is correct.

And to the degree you're comfortable, Eric, maybe you can give us kind of thoughts on phasing, right, the shape of customer recovery in 2026. Like how should we think about it? Because I think a lot of investors -- I don't think there's much debate around the investment thesis to your point. I think it's pretty clear. It's more of a timing issue in terms of the shape. So maybe you can just give us some comments if you care to?

Yes. I think it's tough for us to talk much about the shape of 2026. I think that's something, Nik, we'll come back to as we report in February. What I can do, if you want, is I can maybe frame up for you a little bit of kind of the strategy that I have and maybe how that applies specifically to growth because I do want to make sure that investors are obviously aware that while customer direct is an important part of our business, so is the retail business. And as we think about growing this business, I think there are several steps we need to take.

So from my perspective, strategically, we're right now in kind of this phase of what I'm going to call fit to win, and we've got to get some of these issues that we have behind us. And that's all about synergy capture and effective and efficient SG&A structure, making sure we get the integrated supply chain setup for service, speed, cost advantage, really driving operational excellence day in and day out. And then we get this customer direct service model to a point where it's creating a great customer experience.

But what's most exciting to me is our ability to grow this core and really return to growth given we've got multiple growth vectors around really unleashing the brand power, first and foremost, getting the full potential of customer direct business across direct exchange and refill performing.

But at retail, we still have a lot of opportunities to drive largely the playbook we ran at PBG, which was really driving service and executional excellence. And the ability to do that through feature frequency and display inventory and space is certainly here. You're going to see us put a really big press around conquering cold and continuing to move our premium business.

And then another lever that I don't think we've used as strategically as we can here is just the whole revenue management price pack architecture, which again, was another one that was critically important to us. So -- and I think if we do that, that will put us into kind of a third phase of more transformation, obviously, we want to innovate, and we want to make sure that we get back to the accretive tuck-in acquisition model and other opportunities we have out there. But there are just tremendous growth opportunities, I think, across this business that goes well beyond customer direct.

Yes. And just before we move over to the retail side, just real quick. You mentioned synergies earlier. But does the math work in a way where you have to spend more money in order to kind of retain existing customers, recruit those new customers? I mean, do you still feel comfortable with the initial synergy target? Or do you think that you're going to have to effectively spend more than what was originally anticipated given some of these challenges?

I think we feel comfortable with the synergy target that we will capture it. But to your point, there has been -- and over the near-term, there will continue to be investments to make sure we stabilize this business. So there's no doubt that there have been as we went through 2025, and there will continue to be, I think, particularly in the early part of 2026, to make sure we stabilize that business. That is priority one for us right now.

Okay. Makes sense. Makes sense. All right. Let's move on to the retail business. So 2025 was a substantial year of distribution gains. So maybe help quantify those gains, the financial impact, and kind of how we should think about that moving forward? Because I'm sure you can see it just like I can, Aquafina and the decision that Pepsi made there has opened up, I think, a lot of opportunity for competitors, and I think Coke is not focusing on case pack water for designing either. So maybe just give us your thoughts there on that side of the business?

Well, I think to your point, we were certainly pleased with the roughly 10% kind of double-digit total points of distribution that we saw in our retail business in '25. Again, I think -- as I think about retail growth going forward, distribution points of availability will be important, but driving executional excellence is really all about improving your feature frequency, driving display inventory levels, making sure we can penetrate the perimeter, conquering cold drink.

And again, that journey of excellence that I talked about earlier really changes what I think has been an orientation around points of distribution to a much more comprehensive development approach. And I know our retail teams are really working hard against this. But we are excited and believe that, again, given our brand portfolio and given our increased focus and attention around driving executional excellence, we'll continue to see solid momentum around some of those key causal indicators.

Great. And with the premium channel experiencing over 40% growth the past few quarters, what makes you confident? I mean, you mentioned it in some of your earlier remarks that this can continue.

Sure. Well, I think premium is one of those many growth vectors I highlighted earlier. So both Saratoga and Mountain Valley continue to see improvement. And I think what makes this sustainable from my standpoint is you start with looking at brand equity, you start at looking at some of the consumer purchase funnel metrics. As you think about things like awareness, value, affinity, consideration, past 12-month purchase and usage, all of that is trending in a very favorable direction. In addition to that, household penetration continues to improve on both brands, but it's still at a very de minimis level. So with a ton of room to grow that as we go forward.

And I feel good about the marketing plans that the marketing team has built. On Saratoga, we've got a new campaign that you'll see across TV, print, digital. Mountain Valley, we're going to be sponsoring the American Country Music Awards. And so to me, we also have an executionally, I would say, long runway ahead of us. Again, some of the same things I just talked about more broadly on our retail business certainly apply to premium. So this is -- we love where we are with both of these brands in the premium space and see continued growth as we walk this forward.

Excellent. And this last portion of our call, let's call it, 5 to 10 minutes, I wanted to take the discussion just at the enterprise level, right? So just kind of total Primo. And when you think about taking a step back, how should we think about the growth algorithm in '26 in terms of the building blocks? Like there was -- part of the thesis was there was going to be pricing in the HOD or direct business. Obviously, you can't do that while you're going through some of these challenges. So if you could just give us some of those building blocks? And is pricing still part of the plan at some point in the future?

Yes, it absolutely is. I mean I think about it is there's really 5 building blocks to think about as we enter 2026. One is our ability to restore the service model around customer direct. So that will be a really important driver and certainly one of those building blocks. Second, our ability to continue to drive executional excellence at retail will be the second building block. Third, prioritizing premium that we just talked about will be a building block.

Conquering cold drink, we've got a small format cold drink direct store-delivered test that will start up in Texas that we're very excited about. So you should expect cold drink to be part of that building block scenario. And I do think, Nik, that what I'm going to call strategic and a proactive revenue management approach across price pack channel, we do have opportunities certainly from a mix standpoint, but we also have some targeted rate opportunities, right?

I mean, the closer you link purchase to consumption, the more oriented that consumer is on convenience versus price. And yet, obviously, with our case pack business, the more you delink purchase and consumption, the more price value-oriented they are. So because of our portfolio and breadth across the channel reach, we will have pricing opportunities as we think about both, I would say, our customer direct business and our retail business over time. So those are the 5 building blocks.

Excellent. And then, Eric, now that you're in the CEO seat, how should we think about metrics, right, that you and the team, along with Traci who just -- of course, who just joined. But when we think about major KPIs that investors should be focusing on and disclosures that you'll be providing, if that would be different from what was happening prior?

So Nik, the way -- I guess the way I think about metrics is, if I go into one of our markets, the first thing I'm going to want to understand is what are the important marketplace metrics. Market share, customer satisfaction or NPS, employee engagement. And I've found over the years that if I -- if those are headed in the right direction, I can almost predict where the second chapter of those financial metrics, which are financial, are going to land.

But on the financial metrics side, obviously, revenue looking at volume, price, rate, mix, what we do on the margin expansion, I do believe we've got margin opportunity here over time as well. Obviously, profitability and then what happens from a free cash flow and conversion as well as leverage and returns are the core financial metrics that are front and center. And then the third chapter of metrics is kind of the more operational metrics. I've shared some of those with you today across the supply chain.

In addition to what I shared with you, obviously, we'll be very attentive to customer call center metrics. But all of those customer retention across the supply chain, obviously, adds, quits and nets are critical operational metrics. The last bucket is probably more of an internal one. There are times where, for obvious competitive reasons, we won't go into a lot of that specificity, but really 3 buckets: marketplace metrics, financial metrics and operational metrics.

Excellent. And you discussed kind of margin opportunities. Can you just maybe give us some thoughts on what exactly that would be or those initiatives would look like outside of synergies?

Yes, sure. I think -- as I think about margin, I mean, obviously, job #1 is to make sure we achieve the run rate synergies. But we do have opportunities beyond that. I think, one, I'm a big believer that great companies, year in and year out, have a comprehensive development approach to cost and productivity, and that starts with making sure we've got an effective and efficient SG&A structure. It extends across manufacturing, warehousing, route, selling and delivery, certainly includes procurement.

So I think there's certainly cost and productivity across our enterprise that we'll continue to work and get better at. And then the other big lever in addition to cost and productivity is the ability to leverage the strategic pricing potential. So both of those will be part of our strategies and plans. And again, for any great company that wants to achieve long-term success, driving cost and productivity and being strategic and building the right pricing competencies and skills is critically important, and that's exactly what we'll do here.

Perfect. A couple of last questions here before we wrap up. Any more non-core divestitures that the investor community needs to be thinking about in terms of go-forward numbers?

Well, first, we -- I think we've successfully divested all of the international operations. The OCS wind up is also getting close to being completed. So that's good. I think as we think about this going forward, over time, we may evaluate our Canadian direct delivery operation. But at the moment, with everything else going on, we haven't spent much time on that with any level of kind of strategic review of the business, but that's the way I would have you think about it.

Perfect. And then the last one here is, obviously, when things get a little bit more normalized on the direct delivery platform, how do you and the Board now think about future M&A? I know tuck-ins, obviously, that's going to be an ongoing thing. But just as you think about the portfolio long-term and the business model long-term, maybe just chime in on some thoughts there?

Sure. Well, I'd start with -- I just want to make sure I emphasize that right now, our focus is really around getting the customer direct business fix, kind of what I referred to as getting fit to win, and then it will be on growing our core. And so this is something as we get through that, we'll certainly look to. But my value creation model really is all around first, solid and sustainable organic growth; second, making sure we've got strong productivity and margins attached to that. That generates pretty good free cash flow generation.

And then I get to strategic M&A. And I do think at some point, we'll look at that where we have opportunities to either add scale, add capability, improve our competitive position. But again, we obviously are going to continue down the path of deleveraging and making sure those businesses have the right return profile on them. But again, while our primary focus, I'd say, would be the healthy hydration category within North America, there are, I think, lots of opportunities for us as we get more into that transformative chapter that I referred to earlier around M&A.

Excellent. Well, we're out of time, Eric. Again, I want to thank you and the Primo team for making yourselves available. I know people have been wanting to hear from you. So this is a great opportunity to start off the new year. Really appreciate it and best of luck this year, and we look forward to hearing from you guys when you report earnings.

Nik, thank you much. Enjoyed the time. And again, just I guess, in closing, I would say, first of all, thanks for your interest and continued investment in Primo. To those on the phone, we're continuing to make progress to get this fully restored service model around customer direct. And as I mentioned earlier, we're encouraged, but more work to do. The deal logic and value creation thesis certainly remains, and we're really excited given the strength of the category and our position within it. And as we go forward, we're committed to continuing to grow and create shareholder value as we walk this forward. So thank you, and look forward to talking to you on our February earnings call.

Excellent. Thank you, and thanks all for chiming in. Reach out if you have any questions.

We're going to get started. Good morning, everyone. Really happy to have Primo Brands with us this morning to kick off day 3 at our conference. We have the company's CEO, Robbert Rietbroek; and CFO, David Hass, with us. We're going to cover a lot of topics, but I wanted to give Robbert a moment to walk through some of the high-level elements of the story. The company relisted in November. So we're not quite a year and thought it might be a good opportunity to just share some background on the story.

Yes. Well, good morning, and thank you, Lauren, for hosting us here at this wonderful conference. The first time that Primo Brands is here at the Barclays Conference, and we're so grateful to be part of this great event and for the interest that we've seen from all the investors. So thank you for that.

So Primo Brands is a branded beverage company. It's the third largest in nonalcoholic in volume share in the U.S. We have 7 brands that are 100 years or older, including brands that date all the way back to the 1820s and 1870s, like Poland Spring, Saratoga and Mountain Valley. So we're really proud of our portfolio of brands and want to be seen and viewed as a branded beverage nonalcoholic company. Our business is quite unique because we have about 45% in direct delivery, and it's primarily a 5-gallon format. We sell PET and glass. We sell Mountain Valley in glass, that's a premium brand, but we also sell brands like Primo and brands like Poland Spring in that format. And those delivery trucks also deliver case packs of water and various other beverage products.

The other 55% is a retail business where we play with those iconic brands. Those include $2 billion brands, Pure Life and Poland Spring and then a number of brands that are $300 million or above. We play across every price tier, including refill, which is equipment at the store where you can refill your own 5-gallon bottle or 3-gallon bottle for about $0.50 a gallon. And Exchange, which is a unique business model where we have a direct store delivery model and deliver 5-gallon bottles at the front of the store in about 26,500 stores nationally.

So in summary, we're coast-to-coast manufacturing company with -- we're vertically integrated. On about 45% of the business, we go all the way from production to the end consumer and set the price and about 55% of the business we go through our valued retail customers. We launched November 11 on the New York Stock Exchange. We have had 2 quarters so far where we've reported a full combined company, and we're incredibly excited to be here today as part of this lineup of amazing businesses.

Great. Okay. Thank you so much. So like you said, retail bottled water is your biggest trade category. Can you tell us a little bit about your retail performance to date this quarter?

Yes. So retail bottled water is up 1.5% year-to-date, and our business is up 2.4%. So year-to-date, we've grown market share by about 17 basis points. This quarter, we see an acceleration in our retail scan performance. Through this weekend when we got the latest Circana data, we're up 3.6%, and that's a 33 basis point market share gain in the quarter. We see that there was a bit of choppiness in this category this year. We had a great strong first quarter. The second quarter was affected by a number of particularly climate effects. North -- the Northeast was a little wet and a little cold. The third quarter seems to be coming back quite nicely. And obviously, we're pleased with our performance.

The performance is primarily driven by the success of our super premium brands. We own Mountain Valley in still and sparkling and Saratoga in still and Sparkling. In fact, I want to thank the conference for allowing us to put Saratoga as the water of the conference. I hope you're all enjoying these beautiful blue bottles. It's a brand that got a lot of media attention this year through social media. The second thing that's really driving our business is the distribution gains we've had. So we've over 10% distribution gains year-to-date. In fact, the last reading was over 13%. That's a metric that Circana reads every period called TPD, total points of distribution. And I believe that distribution is the gift that keeps on giving. So we are in pursuit of more distribution, and we are quite successful in gaining that, including the launch of Saratoga, Mountain Valley at our valued customer, Walmart, which is off to a great start so far. And we're now present in both glass and PET.

Great. I saw a beautiful Saratoga ad during the U.S. open this week on TV, which a lot of people seem to be watching.

Question on the incremental distribution. One thing that a lot of people look at, I think, is velocities. So you're increasing your distribution, but velocity start to decelerate. So can you just tell us how do you think about that, right? Is decelerating velocity with increasing distribution something to be concerned about? Or is it anticipated and part of the model?

Yes. When you launch new items, they tend to need to build up trial and repeat. That's the same in laundry detergents or potato chips or any type of category where you launch a new item. And it requires a lot of display merchandising to create household trial. Our case packs, obviously some of the fastest rotating items in retail in America. In fact, the Poland Spring case pack is the #1 SKU in the New York area. So we're used to really high velocities. Now when you launch a premium pack of a -- 6 pack of maybe Mountain Valley or flavored Splash in California or Arrowhead with flavors, we're not going to get the same immediate velocity as our high-velocity case packs. But what we're obviously seeing in the third quarter is this increasing market share, which is driven by both the incremental distribution as well as our super premium brands that are having such success.

Okay. Great. So your updated guidance for 2025 looks for a below algorithm year, which we'll talk about in a moment. But the medium-term outlook is predicated on 3% to 5% net sales growth. Can you just talk about the building blocks that give you confidence in that range beyond this year?

Sure. So the retail beverage category, especially in the bottled water space, typically grew around 2% to 4%. Coming out of the COVID period, some of that had some price influence to it, but there were more normal course velocities and volume that was helping drive that behavior. So we still believe that on a medium-term basis, obviously, this year had some exceptional first half disruptions, one being sort of things we cannot control like weather. And another area was our largest facility that typically bottles and supplies the Ozarka brand in the Southwest and Southeast was struck by a tornado. So that helped interrupt what would have been a typical pattern.

We believe as we go forward, we still have pricing power within those spaces. I think we'll probably talk about private label at a later moment, but that kind of helps shape the framework of the 55% of the business. The 45% of the business is a large format distribution that comes across 3 verticals, as Robbert discussed, refill being $2.50 where a consumer can approach a kiosk and vend that water. That's typically grown at low to mid and in some cases, depending on the season, high single digits. Currently, it's growing around 8% to 9%. So that gives us a pretty strong confidence in that particular vertical.

Exchange is a business of similar size to refill, but has typically grown at high single to low double digits. And both exchange and refill really run off of a razor and blade model, where we are the #1 supplier of dispensers sold at retail and online. And through those purchases, consumers create household -- bring that appliance into their household and seek purchases of those retail bottled water. And then when you get to the largest piece of the direct delivery business, about 45 -- again, in aggregate, 45% of our company, that's a business that's typically grown at mid-single digits at or slightly at the higher end of our algorithm. And so when you put together these parts, we still feel and remain confident in that. The direct delivery business is typically a balanced mix between volume from existing and new customer acquisition as well as pricing drivers. As Robbert mentioned, we control price directly to those customers.

Okay. Great. And for those newer to the story, can you also talk a bit about the cyclicality of the bottled water business? And would you say that your own business' macro sensitivity differs from what legacy Primo or legacy Cott exposure might have looked like in the past?

Yes. So typically, we're not a 25% per quarter type of recognition. We're essentially about 52% middle 2 quarters, 48% shoulders. And why that happens is when you go through the middle of the year, you get the peak warm, you get occasion purchases, you get surge purchases with heat or unfortunately, natural disaster style activities that typically happen in those warmer seasons. But the delivery business has a pretty predictable and regular cadence to the customers' consumption patterns.

The exception there being, again, exchange and refill. As long as we continue to sell through dispensers, and we've talked about that in our revised guidance of leaning in there to help support that in the tariff environment, we continue to create households. And those businesses tend to grow throughout the year.

So again, while there are some shoulder season type patterns, water has typically followed a behavior of pretty consistent consumption. When we sign up a direct delivery customer at either a small commercial or a residential place of delivery, we can largely predict that consumption. That prediction helps us really handle our supply chain and make sure that we have stock to be able to handle those deliveries.

Okay. And anything in terms of economic sensitivity?

Yes. Typically, we believe that we have a good portfolio. So again, we talked about refill. That's an entry-level price of about $2.50. Exchange typically addresses an income level that's very similar to water delivery. They just choose to save a little money. They typically have younger inhabitants in the home. And when you get into the direct delivery business, again, excuse me, exchange is about $7.99, $8.50 per bottle on the reuse. And then delivery obviously comes at a premium to that plus the delivery fee. And both of those last 2 typically tend to be 6-figure incomes, the difference being, again, whether you're trying to save a little money and do it yourself or you have the time and convenience and the affordability to basically have that delivered.

Okay. Great. 40% of the downward revision to this year's sales outlook did stem from integration disruptions on direct delivery. In hindsight, you took on a tremendous amount of change very quickly post merger, which you guys have openly talked about. I'm curious if you could talk about what are some of the key learnings from the challenges that you've encountered?

Yes, I'd be happy to. We put together 2 individually great companies that have very similar activity systems. Both produce water, both sell 5 gallon. And in putting these together, there is tremendous synergies. As we communicated to the market, we initially said $200 million in 3 years. as we got more into the detail, we were able to confirm $200 million in year 1 and $300 million after year 2. So we're very excited about the opportunity there.

As we went about it, we decided to go fast. And we put together the companies probably a little faster than we should have. We closed 48 facilities through the second quarter. In fact, in the second quarter, we closed 40 facilities. Now the 48 are 38 depots and 10 manufacturing sites, of which 2 co-packers. We also restructured 1,600 FTEs, full-time equivalent associates. And so in doing that, we actually learned that we needed more modular racks, more bottles in the system to be able to meet supply. So we temporarily saw some service issues.

Our service, which is usually in the '90s, dropped to low 80s. We had -- obviously, we had some consumer complaints, and we were able to -- we were not able to fulfill all the orders. So the good news is that through the end of the year, we'll be adding 42,000 modular racks. That is the equivalent of about 1.7 million bottles, 2 days of national inventory on the 5-gallon front. With that, we'll be able to have a full day of inventory at the branch or depot, a full day on the road and a full day or 2 days at the factory actually with 2 days of racks, you need full racks and empty racks. And that is really a key enabler for us to work through this new optimized lean network.

So we see week-on-week improved performance right now in terms of deliveries and service. We're optimistic that we're going to get it back. The key markets, Los Angeles, Chicagoland, Dallas that were probably the hardest impacted markets have stabilized, and we're still working through some of the markets in Florida right now, particularly Orlando, Fort Lauderdale. But we are very optimistic that it will be stabilized and normalized by the end of the year, and we'll be able to exit that last mile business on a positive note and a growth note.

Now it's also important to say that we have had no disruption on retail. Our retail business continued to run favorably and well as we demonstrated through market share growth. It's entirely that integration of that last mile business. So yes, we've learned that we probably went a little too fast. It's mostly self-inflicted. The fact that there was a tornado, as David explained, didn't help because the team had to deal with multiple issues at the same time. But we're dealing with it very well, I would say, and I'm very proud of the team and the way they're moving forward with pace and a quality approach. We'll keep you posted on that.

Okay. And service levels troughed below 80% in early May and since recovered to low 90s as of early August. So where does that stand today and supply as well? I just want to make sure you're on track to conclude Wave 4 of the integration around September.

Yes. Our delivery success rate sits at 92% over the last week. We have added significantly more deliveries and more customers back into the system. So we'll keep adding more and then keep that high level of customer service in place. Simultaneously working on delivery accuracy. Every e-commerce delivery company has a concept called substitution. Substitution is where you maybe order a sparkling and you get a Primo. We're trying to minimize that as well to really get as accurate delivery as possible. If you deliver -- if you order 10 bottles, we deliver 10, not 8. So we're working simultaneously on delivery success rate and delivery accuracy as we add more deliveries to the system every week.

Okay. Great. And how you mentioned the team and being proud of the team. How would you characterize workforce morale around all this disruption and the willingness to adapt, particularly as it relates to new technologies?

Yes. So I would say it's currently very good. We had deployed new handheld technology to the legacy Primo drivers. This was an effort to align our operating systems with the ERP system that legacy Blue Triton had. So moving from Oracle to SAP, and that moves our iPhone-based system to the Zebra handheld. The Zebra is more resilient, particularly in warm and hot climates. It doesn't have to cool down or warm up.

Now the user interface, the associate interface was different and new for a large part of our workforce. And we've partnered with our IT team to replicate the ease of and the flexibility of the legacy Primo user interface, which allowed for multiple deliveries a week, maybe a Sunday delivery, maybe a delivery at the Home Depot on the way back to fill the Exchange rack to really allow our drivers to be entrepreneurs and have their own P&L, their own region and be the master of their own destiny because we work in a commission model.

So that technology has been upgraded with now over 22 upgrades and replicates very much the interface that we have with Primo. And simultaneously, we do a monthly pulse survey, and we actually saw record high morale last period. So we're very pleased with that. With regards to the leadership organization, the top 100 people, we pulled them all together, had a kickoff for the company. And we're very excited and the team now is a bit more battle-tested and more unified than we've ever been before because of the experience we just went through.

So there's a lot of good morale. We love our business. We love our brands. We know this is a business that is accretive, that's free cash flow generating that is going to be very resilient in the years to come. We have obviously all the price points needed to be able to succeed in a growing economy or even a downturn economy with the refill all the way up to super premium. And with all of the dynamic around tariffs, we see increased interest in our super premium brands. So we're really holding up Mountain Valley and Saratoga as our flagship businesses that the organization is rallying around. So I would say we're very pleased with the progress.

Great. You shared previously that direct delivery churn of 1% to 1.5% was not as bad as you would have expected relative to the extent of disruption. Why do you think that is? And how does that 1% to 1.5% compare to a more normal operating environment churn rate?

Sure. So we believe that when customers choose to quit, unfortunately, that's an experience in this particular case that our service disruptions, product supply and service challenges led to that outcome. Typically, again, we don't have harmonized unified Primo brand data as it takes all of the systems to convert to be able to calculate that effectively. But previously, legacy Primo, which was the largest of the direct delivery businesses, had an annual retention rate when excluding first year customers of about 86% and so when we saw, obviously, the lag effect of the quits that occurred in July, and we're still waiting to understand sort of the August feedback, we were pleased -- obviously, it's an unfortunate situation where we don't want to lose any customer, but we were pleased it wasn't to the degree that maybe we had previously expected or could have -- it could have been.

I think it's pretty clear from social sentiment online that people were frustrated. We experienced that in our call center volumes as well. But when you start to look at either public data or call center volumes based on that service resumption and service improvement, a lot of those leading indicators are starting to decline and improve. And in that case, we believe that we're largely through what would be the peak sort of period of frustration. And then that allows us the balance of the year to continue the digital ads that we have been going through as well as the membership programs that we have exclusivity with between Costco and Sam's. So when you look at all of that in summary, we believe that, again, we'll be able to get back to normal levels of retention. And it was probably a 2- to 3-month period here that we've experienced the biggest factors of that lagging indicator.

Okay. Great. And to that point, I know win-back programs are the top priority at the moment. But the current expectation seems to be that you can turn your focus to capturing price harmonization in HOD at some point in '26. So what metrics will you use to assess when is the appropriate time to start on that work? Because I think you'd want to be careful to not do it prematurely, stabilize the customer base first.

Correct. So by either geography or by individual customer, we understand where there's been a frustration point. So when you look across our approximate 3 million users that receive a delivery from us either at a small commercial or a residential contact point, we understand any of those that might have had a service disruption. So when you step back and say, okay, a legacy ReadyRefresh customer would have been charged X, a legacy Primo Water customer would have been charged Y. Where are they with regard to friction, service, call center interactions, we can go through all that data. So as we begin to work through harmonization, we would simply prioritize working through that harmonization effect for those who have been largely unaffected by service.

We will be more patient. Obviously, that was a lever we could have pulled at the beginning of this year. As we started seeing service disruptions, we felt that was inappropriate to do. We will not rush to do that because, obviously, the large benefit of this merger was the last mile or direct delivery piece of bringing those large service providers together, and we don't take that for granted. And we want to make sure that we -- as we improve the service levels and improve this customer satisfaction that we don't have a footfall with regard to that price harmonization. But that still provides great confidence for where we have avenues to get back to our midterm algorithm as we approach '26.

Okay. Great. Let's shift gears and talk a bit about retail. So can you just talk about sticking with pricing, your philosophy of managing price gaps versus private label? And I'm curious here what learnings you may have gleaned from the legacy Blue Triton trade playbook.

We have a portfolio that plays at the best value tier with refill and 5-gallon exchange. So that is the best value proposition in the market. And it's -- that's a business that usually grows at a high single-digit or a low double-digit clip on a normal basis with full supply. So Refill was unaffected, obviously, by the integration because it's its own ecosystem. Exchange was somewhat affected, but it's back at the previous stock levels right now as I was validating this week. Then there's the Pure Life brand, which is really going to be playing against private label as our purified option. So we'll always try to maintain a certain price index versus private label.

We take a bit more of a premium price on regional spring, i.e., Poland Spring in Northeast, Ozarka in Texas. And then our super premium spring, Saratoga, Mountain Valley should really be playing at that super premium level, sort of approximate right now, $2.99 a bottle to $3.49 a bottle. And we feel that with that portfolio of price tiers, we can really win across the entire consumer landscape, which is then evidenced by the very strong market leadership position we have amongst branded water companies and the fact that we're now the third largest volume share player in nonalcoholic branded beverage behind Coke and Pepsi.

So we feel that, that portfolio is a winning portfolio. Obviously, as we look forward, and this is beyond integration, we will be an acquisitive company. We'll continue to look at our capital allocation strategy and look at M&A opportunities as well to further drive our branded beverage portfolio forward.

Okay. So premium brands are only mid-single-digit percentage of the portfolio, but their outsized growth makes them a really important contributor to total company top line. So what are you most excited about in terms of the growth runway for Saratoga and Mountain Valley?

Yes. So Saratoga, Mountain Valley make up about 5% of our total revenue right now. But if you look at last quarter, Saratoga's retail scans grew over 100%. It was a social media hit through a celebrity called Ashton Hall, who dunk his face in water. You've probably all seen it, the banana. But in general, our partnership with the Golden Globes on Saratoga, positioning that as the more glamorous drink of choice for restaurants, for parties in a world where consumers are drinking less alcohol and in a world where 3 categories are growing in the U.S., we have water, protein and energy in growth. And so we're 1 of 3 categories that are growing, and it's becoming more and more fashionable to show up with a beautiful blue bottle at a party, for instance, or present that at a dinner table or drink a blue bottle of water or green bottle of water at the dinner table in a restaurant.

We also have aligned Mountain Valley with the American Academy of Country Music Awards. Mountain Valley is a brand from Hot Springs. It's sourced -- it's sourced at the source itself. And that brand is incredibly popular, not just in the South, it's actually really popular in places like the Hamptons and Beverly Hills and North Shore of Chicago. It's a premium brand, but it's available in home delivery and in retail execution. And I would tell you that one of the most exciting projects we're working on is the Saratoga 5-gallon bottle. So Saratoga currently is not home delivered in that format, but we're rapidly working on a 5-gallon format to be able to start delivering that just like Mountain Valley. There seems to be an enormous interest in that, and that should come late in the year or early next year.

Great. You set a long-term EBITDA margin target of 25%. Direct delivery is already close to that level. I think retail is around 20%. But I think more of the synergy capture from the deal comes on that direct delivery side. So can you just walk us through the key considerations on getting to the consolidated 25%?

Sure. Yes. So Primo Brands goes to market as a single segment; however, within the business, a lot of the synergy capture is going to come through the direct delivery system as we have duplicative branches, duplicative production facilities, duplicative headcount across route delivery and call center. So as you look at the business, when we outlined the original guidance for the year before synergy consideration, we had about a 20.2% EBITDA outlook on that. It's only about 20 basis points ahead of 2024's final position on a consolidated basis. So you can -- and the original guide then contemplated about 23% full year EBITDA margin when considering synergies. So you could see how much the synergies were the driver of that business. As we revised our outlook recently to $1.5 billion at the midpoint and 22.2%, again, the large driver there is still going to be the synergy capture across the system.

So as we end this year and then look forward to more medium and long term of advancing toward that 25% goal, just remind -- I wanted to remind everyone that, again, we've not really taken price harmonization activities. That's one lever. And then when you really start to look at how volume helps our P&L, when you go back to Q1, which was a more normalized performance for this business, we grew top line 3.0%, 4.2% when taking into consideration the leap day impact with that nominal growth, but on algorithm, we were able to grow EBITDA close to 12% and had a nice, I think, over 100-plus basis points of EBITDA expansion. So volume is the gift through the system that really drives that behavior. And then we, again, have really yet to lean in on price harmonization. So we believe that both of those are avenues that allow us to make that walk in successive years toward that 25% goal.

Okay. Great. And just relatedly, how should we think about fixed versus variable costs? Like how -- and you mentioned volume is the gift, like how sensitive is the business?

Yes. So our largest cost drivers, and I'll talk about those quickly are labor, fuel, obviously, diesel being a large product as well as an oil derivative in resin because a lot of everything we do comes in a PET format, freight and packaging. So when you look across those variables over the last several years, we've had fits and starts of different cost challenges, but we seem to be in a very moderate environment, most notably on the labor side. Kind of the post-COVID period, we had some challenges there. But when you step back and say, okay, when we were in Q1, delivering close to 2.8% of that 3% non-LEAP adjusted growth, that was all through volume. And again, that was a large driver.

So again, when we can get back into a volume accretive position where we are not experiencing these service disruptions, we feel that, that really helps the bottom line perform at that...

Great. And then you stood by the long-term guidance for $1 billion in free cash flow by 2027. Can you just talk about some of the specific initiatives you're looking to go after in terms of working capital improvements to support that?

Sure. So to this point, as we've been bringing the systems together, we've really not addressed a lot of the AR efficiencies that are possible. Over time, AP efficiencies will continue. You've heard Robert talk about we are proactively leaning in on extra inventory to make sure we don't have product supply shortages. So originally, that $1 billion was an approximate 50% conversion of that future state adjusted EBITDA. Today, even on a trailing 12-month basis, we're about 120 basis points ahead of that schedule.

We're at about 51.2%. Obviously, since we provided that $1 billion guidance, a lot has changed in the political landscape. The One Big Beautiful Bill really has a lot of avenues for benefits. We've also repriced some of our long-term debt that has provided interest tailwinds to us -- interest expense tailwinds to us. And while we don't control the macro or interest rate environment, we feel like we have a lot of access both in future refinancing levers, future drivers of EBITDA capture as well as, most importantly, the areas you mentioned and really going after the AR efficiencies and working capital elements, notably inventory where we can get a more normalized state. So again, we feel pretty confident that, that's a great opportunity for us as a company to hit that $1 billion goal.

Okay. Great. I want to touch about -- talk about capital allocation. So you've got a $250 million buyback that you announced in early August. What are your capital allocation priorities?

Yes. So obviously, we don't want to be in a position where we're off algorithm. But clearly, we will prioritize capital that goes into the business that helps drive and focuses on the growth of the top line. whether that's in OpEx form or CapEx form. Great examples of that are we recently broke ground on a brand-new facility for Mountain Valley that will help unlock some of the constrained supply that we have to sort of feed this growth. Saratoga is not in that position. So we've only invested minorly in things like an extra line and such. So we will continue to prioritize areas and avenues that help stimulate the top line.

Second, we believe that, obviously, we have areas to decrease the overall net leverage of the business. We started the year around 3.3x, have opportunities to reduce that. Clearly, in the case of a selling shareholder as well as a very opportunistic value chance to buy shares. We've prioritized that in the near term. We do have a dividend policy that produces about a $0.40 annual dividend. And then we will consider M&A. And where the company has really thrived in M&A in the past is doing tuck-in acquisitions that are regional or localized home and office delivery businesses. Those become incredibly accretive. We have a long history of consolidating close to 80-plus of these over the last 5-plus years. And they do not require the scale or the effect of the integration that we've gone through of merging ReadyRefresh and legacy Primo. So we believe that will still be an area.

Second to that acquisition, we will start to look at other beverage opportunities, but we'll be more patient as we really need to prioritize fixing the business in its current state.

Okay. Just in a minute or 2 we have left, I just wanted to follow up on the other beverage brands or categories piece. So I just -- I'm a -- I think previously, you've talked about white spaces like protein and isotonics. And I guess, I think picking the winners in beverages is hard, right? Just like picking the winners in beauty is hard. There's a lot of cool brands out there, but which ones really scale and get to the next level is very challenging. So I guess when you think about that, knowing it's the last on the list and probably a little bit further out in the future, what's the key, right? How do you pick those winners? Or is it just the fact that you've got this captive route to market that you think that's a key element of being able to take a cool brand like I phrased it to scale?

Yes. Our core brands are all in the water space right now. We do have sparkling and still and flavored. And we look at the category through a lens of healthy hydration. Our mission is to really drive health in the market. And therefore, we would be prioritizing water adjacent products that have functional benefits, potentially flavor benefits and we call that Water Plus. But we would be less interested in the spaces that have artificial ingredients, artificial preservatives, artificial flavors. And think about flavored sparkling, potentially isotonic, potentially functional. That's the space we're looking at. But we're also open to the space around filtration and refill, which is a big part of our business. So we're constantly looking at that part of the market as well.

Okay. Great. We'll wrap it up there. We are going to go to a breakout. So please join me in thanking Primo Brands for coming to the conference.

Thank you.

Thanks.