And that’s really how we’re looking at the walk. Okay.
Derek Lessard: Thanks for that. And David, just to be clear, you’re still enjoying some of the working capital tailwinds that you’ve come out of the quarter with?
David Hass: Yes, that’s correct. And a lot of it, as you remember, coming out of the supply chain challenges, we were to have been a little over in terms of dispenser inventory. We’ve managed to work through that well with our retail partners. That allowed us to sell into the channel, get again, very close to that $1 million in sell-through target. And then you’ll see some nice enhancements into our AR cycle. And really the continuing operations really allows the benefit of our cash conversion cycle to shine, whereas the domestic entity we are here, we have a much tighter and more rapid cash conversion cycle than our international side of the company would have had.
Derek Lessard: Okay. That’s helpful. And just in terms of your top line across 2023, maybe just talk us through sort of where your customer base ended? And then maybe more specifically, could you just talk about the Costco initiative and sort of the progress or the ramp up there?
Robbert Rietbroek: Yes. Let me talk Costco first, and I’ll pass it back to David then. So we had a significant ramp-up in ’23 around our Costco program. And if we look at ’24, we will have a full program in place fully staffed and with all the events that we want to execute across all the geographies that we want to execute. And Costco is a critical partner for us in recruitment of new customers. I’ll pass it over to David.
David Hass: Yes. On the customer side, Derek, we finished strong with Water Direct. Again, normalizing things for folks for the continuing operations side. We mentioned we’re about a 1.5 million Water Direct cut base on a run rate going forward. And really, where we saw a nice volume lift there, as Robert mentioned, the 2% that came through in Q4, as we transition into 2024, again, we’ll have that Costco benefit for the entire calendar year, whereas last year would have been a ramp period. And then complementing that business is the strength that we continue to see in the health of our retail consumers, and that retail health is exhibiting itself through both the exchange, which continues to produce significant growth in units as well as refill for the first time in several quarters turned back volume positive in Q4 of last year, which means that the consumer there has now cycled through the price increase impact and that volume is now back net positive on a year-over-year basis.
And again, when you look at all three legs of our water business, that really showcases the health. We have the premium customer in Water Direct, where our customer growth will expand. And then on the two retail sides at the different economic price points between exchange and refill providing customers an alternative in this sort of environment. And Robert talked about the great value that we provide sort of in our bulk category.
Derek Lessard: Absolutely good work there. And maybe one last one for me is on the North American EBITDA margin in Q4, in particular, was down, let’s call it, 25 bps year-over-year but you’ve got all these efficiency initiatives on the go. So any color there would be helpful. And I just — and I’m also asking the questions — I assume that you’re including corporate overhead in there. So I was curious if what we should be modeling going forward?
David Hass: Yes, great question. It is — it does show on the page as a decline in basis points. Most of that is related to the repatriation of our shared services overhead that would have been distributed across our global platform. When we talk to folks in November about the announced sale, we talked about how 2024 would have to absorb some of that overhead that previously would have been allocated to the international businesses. That is what you see there. But what I’d like to direct you to is immediately in the Q1 guide of our EBITDA, where you see — with the exhibits we’ve provided to help rationalize each quarter for continuing operations in ’23, you see that 170 basis point expansion in Q1’s EBITDA margin. And then you see the overall 70 bps, again at the full year level, both of those starting to exhibit our ability to reduce costs, drive scale.
And again, that’s prior to what Robert mentioned will be the ramp rate of our business optimization program that gets to sort of full bright, if you will, by the end of the year.
Derek Lessard: Okay, that’s helpful. Thanks, David.
Operator: Thank you. The next question comes from John Zamparo from CIBC. Please go ahead.
John Zamparo: Questions on route optimization, and is there anything you can say to frame the remaining opportunity on AR over the next few years? And just to be clear, is it completely separate to or incremental to the $20 million in business optimization savings you referred to?
David Hass: Yes, John, thanks. This is David. It is. So ARO would be a natural outcome of the business model gaining the volumetric growth that comes either from the Water Direct side of the business or the water exchange growth that comes out through our retail relationships. There is a natural ceiling, but as a reminder, inside that, that is a route average on a roughly 2,000 route basis. So there always are opportunities to bring sort of the lower end of that optimization toward the mean. Again, it is not contemplated in necessarily the $20 million of network optimization we’re seeking as that might be more about should we be in this branch or that branch? And should we have sort of these connections to our communities where the demand is. But again, while it does have a natural ceiling, we’re always looking at it on a route-by-route basis and working sort of anything below par more toward that mean.
John Zamparo: Got it. Okay. That’s helpful. And then my follow-up is on the debt target. You’re seeing net leverage at sub-2.5x. I guess you want to be conservative there, but that provides for meaningfully higher leverage than what you have currently, especially relative to the ’24 outlook that accounts for the higher buyback, that accounts for the dividend increase, and that’s especially true when you factor in some proceeds for the businesses you’ve committed to selling. So I’m wondering what else you’re baking into that 2.5x number.
David Hass: Yes. I guess maybe it should be better said is that’s a long-term ceiling we hope to remain below. We have no immediate needs in this year of 2024 sort of walking that backwards. But as we start to acquire things, including sort of what might be a larger water direct tuck-in year, obviously, the cash will go out, the EBITDA will come back in and then that EBITDA synergizes down on its first anniversary and second anniversary. So that’s just really more of the little stuff that would be at play within the leverage. But at no time this year, do we really anticipate heading back towards the 2.5, we were just kind of giving folks a longer-term sort of outlook to — obviously, we’ve done great steps and taking great steps to improve the balance sheet, and we’d like to keep it there.
John Zamparo: Understood. Thank you very much.
David Hass: Thanks John.
Operator: Thank you. The next question comes from Pavel Molchanov from Raymond James. Please go ahead.
Pavel Molchanov: Thanks for taking the question. Going back to the M&A topic. Obviously, it’s always opportunistic, but are there any geographies within North America where you feel like you need some additional help to kind of penetrate the market?
Robbert Rietbroek: Yes, Pavel, that’s a very, very good question. We have identified ready to sell businesses, usually family-owned operators across the nation that are highly complementary geographically to our current footprint. So what we wouldn’t do is go buy a branch that’s within 25 miles of an existing branch, but really, we are looking for new places to go serve new customers with their existing customer base. But we’re also overlaying that with geographic trends, migration trends, there’s definitely some areas that are growing in population in certain states, certain cities that we are definitely looking at improving our footprint in. And then even within certain states within the network of branches, we may need to open new branches as well in the middle of certain geographies where we’re just currently driving too far, right?
So it’s going to be a combination, but there is a pre-identified multiyear list of owner-operated, water direct service companies that we have identified that we have relationships with, and we are the preferred buyer for right now.
Pavel Molchanov: That’s helpful. Following up, the multiple at which you sold the European business is paradoxically higher than the multiple at which the stock trades today on the North American business. Bearing that in mind, is there an opportunity to accelerate share buyback further, maybe even do a leverage buyback just given the spread between the public market and the private?
David Hass: Yes. Thanks. Our approach has been so far to increase that share authorization, as mentioned, to $75 million. We were able to deploy approximately $2 million of that new authorization in the end of ’23 million. and then have that sort of as an evergreen usage across ’24. Our Board is always looking at opportunities at future discussions depending on where we are with our capital deployment. Again, we’ve talked about the enhanced M&A pipeline this year but our Board is consciously and actively considering each and every quarter what’s best to do and sort of direct us there. Part of it was obviously to step up our dividend with a 13% increase to $0.36 annualized payment this year. But I understand the question, we consistently look at that across the year.
Pavel Molchanov: Thanks very much.
David Hass: Thanks Pavel.
Operator: Thank you. There are no further questions. I will now turn the call back over to Robert for closing comments.
Robbert Rietbroek: Well, thank you all for attending today’s call and for your continued interest in Primo Water. As I hope you can tell, I’m excited to be part of the Primo Water team. The path started is the right one to build on. And overall, we have the tools to win. We have a lot of work ahead of us, and I along with our team, are committed to taking Primo Water to the next level. Thank you for joining us in our exciting water journey, and I look forward to meeting many of you at upcoming events.
Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.
