Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Primo Water (PRMW)
Q1 2019 Earnings Call
May. 07, 2019, 4:30 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good day, ladies and gentlemen, and welcome to the Primo Water Corporation's first-quarter 2019 financial results conference call. [Operator instructions] Also as a reminder, this conference call may be recorded. At this time, I'd like to turn the call over to your host, Madeleine Kettle of ICR.

Madeleine Kettle -- Investor Relations

Good afternoon, and welcome to Primo Water's first-quarter 2019 earnings conference call. On the call with me today are Matt Sheehan, chief executive officer; and David Mills, chief financial officer. By now, everyone should have access to the release that went out this afternoon at approximately 4:05 p.m. Eastern Time.

If you've not received today's press release, it is available on the Investor Relations portion of Primo Water's website at www.primowater.com. This call is being webcast, and a replay will be available on the company's website. Before we begin, we would like to remind everyone that the prepared remarks contain forward-looking statements, including financial guidance, and management may make additional forward-looking statements in response to your questions. The forward-looking statements should be considered within the meaning of the applicable securities laws and regulations regarding such statements.

10 stocks we like better than Primo Water
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.* 

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Primo Water wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of March 1, 2019

Many factors could cause actual results to differ materially from those forward-looking statements, and we can give no assurance of their accuracy, and Primo Water assumes no obligation to update them. We encourage participants to carefully read the section on forward-looking statements included in the press release issued this afternoon and in all documents that Primo Water files with the SEC. And now I'd like to turn the call over to Primo Water's CEO, Matt Sheehan.

Matt Sheehan -- Chief Executive Officer

Thanks, Madeleine. Good afternoon, everyone, and thank you for joining us to review our first-quarter results. For our call today, I will give a summary of the quarter, discuss continued tap water issues consumers face each day and finally provide a progress update on our key initiatives. David will then provide more detail on the financial results for the quarter and outlook going forward.

Let's start with a brief overview on our financial results and progress on key metrics. For the quarter, we were in line with guidance with revenue of $70 million and adjusted EBITDA of $9.8 million. In dispensers, sell-through for the quarter was 185,000 units, significantly ahead of our original expectations. With temporary exclusion of the tariff on dispensers and return of retail prices to pre-tariff levels late in the quarter, we saw better-than-expected consumer demand leading to increased retail orders in March.

U.S. exchange same-store unit growth again accelerated to 13.6%. This is the 28th consecutive quarter of 6%-plus same-store unit growth and the fifth consecutive quarter of an increased growth rate since our Black Friday event in 2017. The growth has been driven by our increased dispenser sell-through, enhanced water connectivity and other marketing initiatives.

In refill, overall I am pleased with the progress we have made to date. We continue to see strong performance in our indoor refill locations. And as it relates to our outdoor locations, we are on track with our credit card reader and telemetry installations. I will provide more details on both shortly.

With that summary in mind and before moving on to our key initiatives, it's important to reiterate the degrading status of tap water impacting so many families. We do not expect to see tap water quality improve in the foreseeable future, and believe that it will continue to be a driver of the business as we provide families great water for their homes that is both convenient and a low cost. Here are just a few examples. More than 48 million people in the U.S.

and Canada count on the Great Lakes as a source for their drinking water. With the increased expenses to attack infrastructure upgrades and other pension deficits, cities like Chicago have seen a significant increase in water and sewer taxes. Tap water which previously may not have felt like an expense, is quickly becoming an increased burden on residents all while still facing inconsistencies in quality. Additionally, in Detroit, the city is dealing with an aging infrastructure that used to support well over one million residents, while today less than half of that occupies the city.

Similar controversial tax increases are currently under consideration in California as the state also deals with an increase in infrastructure challenges and water quality issues. Lastly, the Center for Disease Control and Prevention recently announced that it was teaming with the Agency for Toxic Substances and Disease Registry to conduct a multisite study on the human health effects of exposure to PFAS substances through drinking water. The initiation of the study confirms that PFAS in drinking water is just beginning to ripple through the regulatory channels, and awareness will only increase from here. As these tap water quality issues continue to accelerate, the media is helping bring awareness of the problem to consumers, while we continue to educate them on the best solution for their home.

More than the pure quality that we offer, our consumer surveys consistently report an increase in water consumption of 25% to 30% when using Primo at home. All-in Primo remains very well positioned for long-term growth as our household offering drives a behavioral change in greater water consumption, doubling the value proposition for families looking to improve their health and wellness. Moving on, I will provide an update on our key initiatives across our five key strategies. First, grow household penetration.

Second, improve connectivity of our dispensers to our water. Third, increase same-store sales. Fourth, optimizing our cost to serve. Fifth, foster highly engaged teams.

First let's look at household penetration. We are the clear market leader in dispenser sales at retail, and continue to enhance our focus on both growing our sell-through of dispensers and increasing the connectivity to our water. With retailers reducing on-shelf prices in the back half of the quarter, we saw a near immediate increase in dispenser sell-through across our key retailers and e-commerce sites. This growth propelled our sell-through to a level on par with last year, which seemed unlikely midway through the quarter.

Walmart even utilized the price reduction as a rollback opportunity in which they provide additional in-store signage and promotions. The increased sell-through was more than expected and lifted dispenser orders or sell-in ahead of our expectations. E-commerce performance continues to be a bright spot in our dispenser business. Along with this growth, we are improving the consumer experience and building enhanced consumer relationships.

E-commerce unit sell-through increased 113% and accounted for approximately 18% of the sell-through. As a reminder, this includes Primo-controlled sites like primowater.com and Amazon.com, as well as the e-commerce sites of our brick-and-mortar retail partners. Primo-controlled sites once again exceeded 400% year-over-year growth in the quarter and accounted for nearly 50% of the e-commerce sell-through. We continue to remain focused on this initiative to build a tighter connection to the consumer so we can learn more about their experience and build out further insights.

Given that increased focus, we've launched a completely new website utilizing an integrated Shopify e-commerce platform. Not only is our new and improved website easier to navigate, it highlights our brand, purpose and products in a more impactful way and also provides a more modern and mobile-friendly experience. This is an evolution for our e-commerce strategy and, most importantly, leads to an enhanced consumer experience. Additionally, this platform allows us to monitor real-time activity, provide more dynamic pricing and drive abandoned cart remarketing.

It relates to our price strategy of dispensers as we've mentioned in the past. We will continue to seek opportunities to lower the average selling price. While we continue to make efforts for that reduction to come from the retailer side of the equation, we will not hesitate to reduce our gross margin on dispensers if we believe it will lead to more retail deals, shelf space or, more importantly, increased sell-through. We are now taking proactive steps to drive greater sell-through and conductivity, and we are preparing for additional activity which may impact gross margins in the future quarters.

We believe that this is the right long-term strategy for our business. Lastly, we introduced a new dispenser in the quarter called the First Steps Water Dispenser. This dispenser combines our traditional on-demand hot and cold water features through a bottom load dispenser and also includes new technology that dispenses water between 98 and 104 degrees for the quick preparation of baby formula, which is a need that has come from the consumer research that we have been doing over the last couple of years. The dispenser also has self-sanitization features that maintain a high quality experience.

Check out our social media accounts to follow, along with our promotional activity and more importantly to see how Primo families are enjoying not only this, but all of our innovative products. Moving on to connectivity. The success of the IRC program when paired with reduced dispenser price points, has led to an expansion in our connectivity, once again hitting record levels. As the dispenser pricing continued to pre-tariff levels and Walmart introduced the rollback feature, we saw a higher-than-expected lift in IRC redemptions late in the quarter that has continued into Q2.

The instant redeemable coupon on the dispenser packaging has been a key catalytic mechanism that has driven significant connectivity, same-store sales expansion and new Primo households. We expect over time a compounding effect of the greater connectivity and higher same-store unit growth in our water businesses. Beginning in late Q2, we plan to utilize this program on an everyday basis with other retailers that sell both dispensers and our water. In addition to the IRC on the outside of the package, we have also included a free water coupon for either exchange or indoor refill inside nearly all of our dispensers.

Historically, the redemption of these coupons was average, at best. However, as usage of the IRC continues to increase, we're now seeing an increase on our inbox redemptions and a connectivity bridge not only to exchange but also to indoor refill. We are focused on helping consumers more easily understand and choose their in-home water solution, and we're happy to help jump-start their journey with these coupon initiatives. Lastly, as it relates to e-commerce and connectivity, we're excited as our initiatives continue to shape successful redemptions from online purchases as well.

These redemptions are happening at our core brick-and-mortar retail partners. This continues to solidify our retail relationships and prove that a true omnichannel relationship exists as we grow our online sell-through. Moving on from our first two strategies, we have several updates to share on our third strategy, increased same-store sales. As noted, we continue to emphasize driving same-store sales while at the same time working with retailers both current and new on expanding our location footprint.

The culmination of our dispenser and connectivity activities continues to shine through our same-store unit growth in exchange, as well as our indoor refill locations specifically at Walmart. That said, let's first dive into refill. We continue to make strides in refill. For the quarter, as expected, total refill volume was down by 14.8%, with sales down 7%.

While we continue to make progress and improve the downtime issue, we also face location churn as a result of retailer consolidation and store closures, as well as some locations lost to competitors. Taking location churn into account over the last year, same-store unit volumes were down approximately 10%, which is in line with our expected volume declines associated with the price increases. Given that, I'd like to share some insights what we've done and what we're planning to do. Let me start with some of the insights about our Walmart indoor refill locations, which represent approximately 25% of our refill business.

First, we do have the ability through marketing tactics to acquire consumers utilizing our connectivity, our couponing strategy discussed previously. Second, additional marketing initiatives such as video screens, improved empty bottle and stock rates and signage can drive increased volumes. And lastly, the combination of these marketing initiatives, along with a small price increase, is not only driving top-line growth but also growing unit volume. In fact, just two quarters into the indoor refill price increase at Walmart, we have not only achieved top-line growth, but we've also seen positive volume growth.

As we have said in the past, this aligns with our long-term strategy for our outdoor locations. We believe that the combination of pricing and marketing can have a very positive impact on the outdoor locations. That said, the indoor performance, while unique from outdoor in some ways, continues to give us confidence that we can grow our outdoor locations. With that in mind, let's transition and focus on outdoor refill.

As mentioned previously, both volume and revenue were down in the quarter compared to the prior year, but we continue to make strides to improve the business. Let's first look at where things stand. Weather can have a much greater impact on our outdoor locations than indoor locations, and varies from market to market. Credit card readers and the availability of telemetry is providing the information needed to reduce downtime.

The rerouting of the refill service network continues to provide a positive impact and frees technicians to better align to service dispatches. Not every location or market is created equal, as we have seen many outdoor locations producing positive year-over-year revenue as a result of the price increase. That said, many of our high-volume markets have led to the overall decrease over the past few quarters. While we do have significant market share in refill across the country, we do have competition in some of our high-volume markets.

This has impacted performance since we increased price, as some competitors have been more aggressive with price, as well as absorbed some of our downtime volume. The outdoor locations face competition at more of a local or regional market rather than nationally. With that, our pricing approach will be by market and include price optimization, which has already begun. Retail consolidation and closures will continue in the near term as retailers work to compete with the likes of Walmart and Amazon.

This isn't necessarily a negative long term for us, as many of these locations perform below our overall average. Given those insights, I'd like to update you on what we have done and what we are doing. Our strategy includes improvements and investments across six main levers: technology, machine equipment, operations, pricing, marketing and locations. Let's start with technology.

As we mentioned, the installation of our credit card readers and telemetry is giving us significantly improved visibility and intelligence about our business, all while providing consumers an enhanced way to pay for their water. We continue to be on track with our original installation schedule. The technology provides automatic dispatching of machine issues and is helping us recognize and respond much faster. We continue to reduce downtime in the machines with the technology to two-and-a-half days rather than seven days before technology.

We strongly believe that we are just scratching the surface of the power that this technology brings and see several impressive opportunities ahead such as dynamic routing, predictive maintenance scheduling, among several others. Lastly, as it relates to technology, we're able to monitor sales in consumer usage of the machines in near real time. This will allow us to monitor our marketing tests, operations, pricing activities and impact of weather in a shorter time frame. Moving on to machine equipment.

The detailed information we are getting from a telemetry is helping do more than just respond to down machines. It is helping us be more proactive on our equipment sourcing and maintenance strategy. The data we now receive not only helps us know that a machine is down, but what part or system caused the downtime. This can ensure that our technicians have the right parts on their trucks and have greater knowledge of exactly what to fix on the machine when they show up.

For example, we have learned that a common problem driving down time is the power being cut off to the machine. In many cases this is simply from our machines being unplugged either by store associates, the public or other equipment being placed near our outlets. Using this information, we are beginning to hardwire many of our machines to the electrical source. It may sound simple.

But these are important and impactful insights previously unknown prior to the installation of the credit card reader. Other insights have led us to upgrading various filter housings, sump pumps and investigating higher end coin and bill mechanisms as just a few examples. Moving on to operations. During this process, we continue to gain insights on operations.

Specifically, we have had enough time with the routing and pricing to analyze the results, and we found that our routing changes as we have added telemetry were not the leading cause of the decline, which is good news. That said, we continue to focus in on better metrics that we believe will drive improvements in the business. We're looking at ways to use the new technology-enabled dispatches to dynamically route some technicians, which is allowing them to be more responsive to service. Lastly, we've noticed significant inconsistencies as it relates to technician training.

We have developed a new training center near our corporate office in Winston-Salem and an onboarding program to improve our technician training. All new technicians visit the training center for more detailed technical training on the equipment they'll be servicing. We will continue to increase the time, energy and the investment we put into new employee onboarding and ongoing training. Lastly, to drive performance, we continue to improve our performance incentives to our technicians.

Moving on to pricing. As we discussed over the last several quarters, our pricing strategy was initially a $0.05 increase across our outdoor locations. With some time behind us now, we can see that the pricing worked in many locations. It's also clear, however, that in several markets, the consumers did not tolerate the increase as well, or competition used it as an opportunity.

Given that, we have begun optimizing prices by market. In some competitive markets, we will be reducing prices back to or below our original per-gallon price in order to win back consumers. In others, we have moved to a consistent single price. We believe that the combination of centralized pricing management with a local market knowledge is the best pricing strategy going forward.

This allows us to operate as a market leader while we increase our competitiveness in some markets that represent significant volume. Next, on the marketing front. We are deploying a spectrum of tactics in these markets to drive greater awareness, changing the brand to Primo and enhancing the conversation around outdoor refill using mainly digital forms of media. While we have increased our marketing spend over the last year, that spend was almost solely limited to activities in store, across dispensers, exchange and indoor refill locations.

This will be the first time we are truly addressing outdoor refill in a meaningful way. We have just begun these initiatives in our high-volume markets, and over time will apply the learnings across other markets. As we have discussed in the past, we will be transitioning the outdoor locations to the Primo brand and will begin in these high-volume markets. We anticipate increased spending on marketing as we scale successful tests in the outdoor locations.

This may result in a short-term financial impact, but we believe we will have a more profitable business in the long run. Lastly, in terms of locations, we still very much believe that same-store sales and unit economics are the key drivers to our business. That said, with the retailer consolidation occurring in the market, we will be leaning in with more focus on locations expansion in select markets. In addition to these levers, we know that refill locations perform quite differently across our various geographies and can be influenced by weather in certain parts of the country, as we believe was the case in Q1.

Where weather presents a greater influence, we will continue to drive operational and marketing initiatives, but be more mindful on pricing which could accelerate a sales decline if more of the volume decline was tied to weather. Either way, this allows us to tailor our action plans to the market level. Given all that, we are building a very different refill business than the one we bought just a few years ago. We've already reduced costs and created operating efficiencies in many of the core processes.

And as we continue to address the recent challenges, we'll have a much stronger business and one with an enhanced consumer experience. Moving from retail to same-store unit growth in exchange. We continue to drive significant gains in this business. We delivered another successful quarter of 13.6% same-store unit growth.

This follows the 13.3% in Q4 of last year. With 28 quarters of same-store unit growth exceeding 6%, we've been able to maintain and increase the inflection in our growth rate into another year. There are several initiatives driving our exchange business strength. First, while our exchange business has tremendous track record of comp growth, we drove an inflection in the business in 2018, by rolling out CD signage in the everyday IRC at Walmart.

This led to a compound effect which elevated same-store unit growth at Walmart to almost double that of our total comp. Based on that success, we just completed the rollout of the CD signage at Lowe's Home Improvement, and we'll continue to expand this initiative across nearly all of our other exchange locations. We remain very encouraged by the impact CD is having as we expand its presence outside of Walmart throughout the year. A second key initiative under way is capacity expansion at our key retailers.

Given the success of our marketing initiatives we mentioned before, over the past two years we're beginning to see unit growth typical of summer months earlier and earlier. To support that growth, we have been successful in increasing capacity at our existing locations. While our overall store counts will not change from these activities, the benefit of an additional display rack to an existing location performs very similar if not greater, than a new location. We hope to expand capacity across several hundred retail locations throughout the remainder of 2019.

Lastly, we continue to utilize new technologies to drive efficiencies. Just recently we paired with an artificial intelligence firm to help us scan, score and detail key next steps to optimize our brand presence and capacity expansion opportunity at retail. This project scanned photos of our three business lines at a key retailer and allowed us to see critical action to take to continue to enhance the growth in our business. With that, I will turn the call over to David to cover our financial results.

David Mills -- Chief Financial Officer

Thanks, Matt. Today I will review our financial results for the quarter and then discuss our outlook for the remainder of the year. I will then turn the call back over to Matt for closing remarks. To start off, we do utilize non-GAAP financial measures, adjusted EBITDA and adjusted net income to assist investors in understanding our operating results.

A reconciliation of each is included in this afternoon's earnings release, which is available on our website. Turning to our results. We continue to make good progress on many initiatives that are driving the business, and are pleased with our start to the year. On the top line, sales for the quarter were $70 million, in line with our expectations, driven by growth in exchange and better-than-expected demand in dispensers.

Dispenser sales for the quarter were ahead of our expectations at $12.4 million. With the exclusion of the tariff, lower retail prices drove higher-than-expected retail orders. In addition, the lower prices drove dispenser sell-through, totaling 185,000 units in the quarter. Refill sales for the quarter were $38.3 million.

The 7% decrease from the prior year was primarily driven by the downtime issue, fewer locations and the impact of weather. As Matt mentioned, we have made a lot of progress on the rollout of the credit card technology that will continue to improve the downtime issue. However, we did see some headwinds in the quarter related to retailer contraction versus the prior year. As background, over the last couple of years consolidation in the drug and dollar channels in addition to the struggle of smaller independent retailers to compete with Walmart and Amazon, are driving a large number of store closures.

That said, while total volumes were down 14.8%, on a same-store basis volumes were down approximately 10%. As we have previously noted with the price increase, we did expect volume declines in the mid- to high single digits, and we believe this demonstrates that we continue to make progress in returning volumes to expected levels. Turning to exchange. Building upon the strong results of 2018, exchange segment sales were $19.4 million or an increase of 6%.

The in-store marketing initiatives, specifically the Free Water program at Walmart, and new display signage at Walmart and other retailers, continues to drive improved same-store sales and grow new households. For the quarter, U.S. exchange same-store sales again accelerated to 13.6%. Keep in mind that the IRC, or free water units, while not producing revenue are included in our total and same-store units, as we believe that the consumers will become new Primo households and we will see the compounding effect over the long term.

Turning to gross margins. Overall for the quarter, gross margin was 26.4%, compared to 27.5%. As we look at the segments, dispenser gross margin for the quarter was 8.4%, compared to 10.2% as we proactively work with retailers to drive down on-shelf pricing. We continue to believe that driving gross margins lower and, in turn, lowering on-shelf pricing will drive increase sell-through in new households.

Gross margin for the quarter in refill decreased to 30.1% from 31.6% as a result of the lower volume and incremental operating costs related to the downtime issue as we've discussed last quarter. Exchange gross margin for the quarter was 30.8%, compared to 31.3% a year ago. The change in gross margin is primarily related to the investment we are making in the Free Water program, which we continue to believe is driving the growth in both dispensers and exchange. Next, SG&A costs for the quarter increased to $10.3 million from $9.2 million.

The increase is primarily due to marketing and promotional costs, as well as non-cash stock-based compensation. For the quarter, as a percent of sales, SG&A, excluding non-cash stock-based compensation, was 12.6%, compared to 10.7%. Long term, we continue to believe that on an annualized basis we can leverage overall SG&A in the 9% to 11% range. However, marketing and promotion investments will fluctuate from quarter to quarter.

Moving down the income statement, interest expense for the quarter was $2.6 million, compared to $5.3 million. On a GAAP basis for the quarter, we had a net loss of $1.3 million or $0.03 per share, compared to net income of $1.2 million or $0.04 per share. On a comparable basis, adjusted net income was $539,000 or $0.01 per share, compared to $987,000 or $0.03 per share. For the quarter, adjusted EBITDA was $9.8 million, compared to $12.4 million a year ago.

Turning to the balance sheet. We ended the quarter with $4.2 million in cash. Inventories increased to $13.7 million in order to support the accelerating growth in our e-commerce dispenser business, as well as planning around the Chinese New Year holiday. Going forward, we expect inventories to decline back to the levels we experienced in December 2018.

Total debt was $199 million, up slightly from year-end, but down significantly from the $278.1 million a year ago, as a result of the debt refinancing completed in June of 2018. Overall, our leverage ratio was 3.8 times, which is down from approximately 4.9 times a year ago. Looking at the statement of cash flows, our cash flow used in operations was $940,000, driven by changes in working capital, primarily inventories. As in previous years, we expect working capital to be negative in the first half of the year and positive in the second half of the year, but overall for the year neutral.

Capital expenditures increased to $7.7 million from $3.7 million, primarily the result of the rollout of credit card readers and new in-store exchange displays and signage. Moving to our outlook for the second quarter. We expect net sales in the range of $76.5 million to $79.5 million, and expect adjusted EBITDA to be in the range of $12.9 million to $13.9 million as we continue to accelerate and expand investments in refill, dispenser margins, and the IRC promotions. Turning to the full year.

Based upon the success and growth in dispensers, specifically e-commerce, we are more confident in our top-line guidance, and now expect sales in the range of $317 million to $325 million. This confidence is driven by both higher-than-expected coupon redemption rates and e-commerce sales, which drive top-line growth but result in lower gross margins in the near term. In refill, to advance our progress, we are now increasing our incremental investments that in the near term will reduce refill gross margins. As Matt mentioned, these investments include items such as training and in-store merchandising.

When combining these investments with the acceleration of marketing initiatives that are driving the long-term top-line growth, we will see near term pressure on adjusted EBITDA and now expect the full year to be in the range of $59 million to $62 million. With that, I will turn the call back over to Matt for closing remarks.

Matt Sheehan -- Chief Executive Officer

Thanks, David. As I reflect on our distinct businesses, dispensers, exchange and refill, both indoor and outdoor, we are building bridges across and between each of them. That in mind, our core dispenser and exchange businesses are doing very well, along with our indoor refill locations. In our outdoor refill locations, we continue to focus on improvement in growth just as we have done before when growing each of our other businesses.

I remain confident in our approach. I'd like to thank our team, our retailers and our partners for their continued loyalty and support of our purpose. With that, I'd like to open the line for questions. Operator?

Questions & Answers:


[Operator instructions] Our first question comes from Mike Petusky from Barrington Research.

Mike Petusky -- Barrington Research -- Analyst

So in terms of the pricing optimization strategy that you guys are going to kind of unfurl I guess, here in the next quarter or two, David, have you done the assessment as to what that actually means for gross margins in refill in terms of deterioration? I mean are we talking about -- let's just call it -- and I know Q1 is seasonally low. But 30% to 32% does that do to like 28% gross margins based on what you think at this point?

David Mills -- Chief Financial Officer

Hey, Mike. It's David. Currently the pricing optimization we anticipate in roughly 5% of the total locations. So the impact on overall refill gross margins will be just slightly negative, not to the magnitude you're talking about.

Mike Petusky -- Barrington Research -- Analyst

OK. Do you think you'll be able to hold on to 30% gross margins then?

David Mills -- Chief Financial Officer

Yes, we do. We do.

Mike Petusky -- Barrington Research -- Analyst

OK. Great. And then just in terms of the cadence of the year, historically, at least in recent years, typically your Q2 EBITDA generation is higher than your Q4. And based on the guidance you're giving for Q2, it would look like that would have to -- it almost certainly looks like that would have to flip.

And I guess I'm wondering, A, is that true? And B, what's the assumptions behind what you I guess assume is going to be a really strong Q4?

David Mills -- Chief Financial Officer

Yes. A few things, Mike. Q2 is, we talked in the past, dispensers, we're seeing a lot of acceleration in e-commerce. But some of the growth we saw in Q1 is not really a shift in timing, it's just overall growth in the business.

So we're seeing much stronger strength there, which is going to drive a higher percentage of dispenser sales overall.And then also, as Matt talked about on the call, we have a much better line of sight to some location growth going forward. And that'll be, we believe more of an impact in the latter half of the year.


Our next question comes from Amit Sharma from BMO Capital Markets.

Amit Sharma -- BMO Capital Markets -- Analyst

Couple of modeling questions, and then a bigger one for -- the 4-point impact from retailer consolidation in the quarter of volume, is that a good run rate, Dave, going forward? Or is it something in the quarter that just alleviated that impact?

David Mills -- Chief Financial Officer

Yes. I think over the long term, I think we'll still see some retailer contraction, specifically in the drug and dollar channels and some of the smaller independents. I think we've seen a lot over the last year, but we'll still see some in the near term.

Amit Sharma -- BMO Capital Markets -- Analyst

I was just going to say not of the similar magnitude?

David Mills -- Chief Financial Officer

Well, I mean it's hard to predict what's going to happen in retail. I think the last year's been tough. Whether the trade and everything else goes on, if that puts a lot of pressure on retailers, we could see some more closures. But at this point, we're not modeling a significant change from where we are today in terms of the rate or the differential between the same-store sales and the impact of closures.

Matt Sheehan -- Chief Executive Officer

Amit, this is Matt. We've seen this over time in our exchange business as well. The reason we keep focus on same-store sales is so we can grow through that. It's obviously not happening right now given some of the past Q3 issues we had in refill.

But our focus, to make sure that our comps are going in the right direction. And a lot of the locations, while it will pare back revenue in the short term, we think we can grow through that, because a lot of them are not very high-hitting locations. So I think over time that's our strategy to grow right through it.

Amit Sharma -- BMO Capital Markets -- Analyst

That makes sense. And then SG&A, Dave, pretty elevated in the quarter. But for the full year, we should still think about 11-ish percent of sales? Is this still the right number?

David Mills -- Chief Financial Officer

That's correct, still the right number. It'll fluctuate from quarter to quarter. But over the year, we should be around that mark.

Amit Sharma -- BMO Capital Markets -- Analyst

Got it. And then, Matt, I really want to dig into the investment that you're making near term and the impact of that on the EBITDA for second quarter and potentially 2019 as well. Right? That's clear from the guidance, right? You are making the investment and you're laying out a pretty convincing case that is the right thing to do. What I really want you to also highlight is, what does it do for Primo's growth and margins or potentially EBITDA growth as you look to get the benefit of this investment, whether it is 2020, or 2021? Can you talk about that a little bit?

Matt Sheehan -- Chief Executive Officer

Yes, I'll take a couple examples, then we can go back. Let me give you one refill one specifically. So one of the inconsistencies we saw and, frankly, something we just straight out missed was, we were hiring new refill technicians and hiring well, but kind of throwing them to the markets really fast and not doing a good job of training. Now one can say that is a lower cost model that we're in now.

But that has not set up our technicians for success. So now we actually have seven technicians today in our office where we're training them for the entire week here at corporate. That is extra cost than you have seen before. But it is absolutely the right way to go.

We do believe in our heart it's hard to model, that that is absolutely going to be accretive when you have better trained people who understand our purpose. I met with them for an hour and a half this morning myself. We think that's long-term growth, more purpose-driven, more educated folks on the street who understand how to talk to consumers on our behalf and fix machines. That's an example of an immediate hit on cost and absolutely a long-term benefit.

That's a refill. On the IRC, we're seen such good benefit from this, and we're going to continue to lean into this. Keep in mind that we've really just done this at Walmart. And there are ways we can improve the IRC redemption at Walmart.

We launched it well. We found some things we could do better. And then as we think about other retailers who also have water and dispensers where they all operate slightly different, we can take similar models to them. All that said, that is short-term drag on us.

But that is absolutely inflecting the acquisition growth rate we have for consumers. So those are two examples of things that obviously our decisions are near-term hits, absolute long-term benefit. Does that help?

Amit Sharma -- BMO Capital Markets -- Analyst

It does. If I could take a step farther than that. If we were looking for mid-single-digit growth or in the refill like let's say, I don't know, two to three or three to four, what does this new investment does to that growth once you look beyond this investment phase in 2019? Like is it topped by 1 point or 2 points? Or does it move the needle at all?

Matt Sheehan -- Chief Executive Officer

I think it does move the needle. I think it could take that, what we say two to five or three to five, and I think it can move it into the mid- to high single digits over time. But keep in mind even as we refine our present strategy, the price comparison to other water alternatives is amazing in refill. We love the business.

We have to do a better job of branding. We've never done social media on top of our external or outdoor refill locations. So all of that, we do believe that it will increase the growth rate, maybe just by a point or two. But we still believe long term into 2020 and beyond, that that business can grow 5-plus percent.

So this investment, we'd only do it, frankly, because we do believe it would increase the growth rate. And just one other thing, Amit. Nobody's ever really marketed the outdoor business. Anybody in the space, even some of the competition we've talked about, some have well operating machines.

But nobody's truly ever sort of wrapped some, I'll call marketing strategy or lever around it. And that's what we're going to try to do. And we think we have a great story to do it. We've done it in dispensers.

We've done it in exchange. We've done it in indoor refill as well. Some of those lessons will pour over. And then there are some similarities about the outdoor business.

We have to tweak the strategy. But we do believe our ability to market the business.

Amit Sharma -- BMO Capital Markets -- Analyst

No. I think as long as the sales test is there, the way we are seeing in the indoor refill exchange and what you're talking about for even outdoor machines, I don't think any investor will begrudge you for spending more as long as it leads to this accelerated growth. That's all I have for now.

Matt Sheehan -- Chief Executive Officer

Yes. One other note on that, Amit. Everything we do is an IRR hurdle. And so we'll do small tests at 5, 10, even 100 locations, and you all will never see the hit on that.

These are small tests that if they don't work, we'll pull them back. So we continue a discipline IRR hurdle on all of this stuff. So we'll continue that track record and lean in more and scale of some tests when they do work.


Our next question comes from George Kelly from Imperial Capital.

George Kelly -- Imperial Capital -- Analyst

So first just a follow-up on what you were talking about a little bit in the previous question with the branding, unification and doing more around the outdoor refill business. What's the timeline for that? And how big of an investment is it?

Matt Sheehan -- Chief Executive Officer

Yes, I'll give timing, and David can talk investment. As we've said, we'll do that throughout this year and into next year. So by probably mid- to call it Q3 of next year, we'll be done rebranding the entire country. If we see really great results, we could accelerate some of that.

But we haven't pulled back on our commitment. But I think it's probably a year's process to rebrand. And frankly, we'd love to go faster if we see results. So David, do you want to talk economics?

David Mills -- Chief Financial Officer

Yes, sure. On the rebranding, as Matt mentioned, it will take up to a couple years as we go through it. And we talked in the past, it'll be somewhere between $3.5 million and $4 million total. And it'll be spread out over a couple years.

And it's factored into this year's capex guidance, which was originally $22 million to $26 million. And it'll be more start in really the second half of the year as the first half has been focused on credit card readers and exchange.

George Kelly -- Imperial Capital -- Analyst

OK. OK. And then next question just still on the refill business. You gave a lot of reasons for some of the quarterly issues.

Just wondering if you could rank order? I guess what surprised you in the quarter? Weather and competition, all the things you listed, just the top few, if you could rank them.

Matt Sheehan -- Chief Executive Officer

Yes, George. I think weather was a bigger hit than we expected. We've had the business for a couple years. We've been analyzing over time.

But as you probably heard from a lot of beverage companies and retail companies, when you think about the West Coast and the weather it's had, it certainly had an impact on the business. That said, that's somewhat regional. It's good for us to understand that, to some of the comments in our prepared remarks. But that was the one that, frankly, we just hadn't really dug into yet.

And now we've got a ton of analysis, frankly, by like the top 50 MSAs in the country and they're -- our MSA's sort of the market groupings across the country. So it is an impact in California. We've seen that. And that is helpful for us moving forward as we start to watch weather more.

And we can, that's why we're leaning into marketing, we do believe we can potentially promote in those times to continue to drive demand. That's the one -- I think the credit card work that we've done, that's continuing to have the benefit we had. But it was covered up, frankly, with some of the weather issues. And the consolidation is not necessarily a surprise, because we've seen it for a while, even in our exchange business.

But we have seen some over the last couple quarters, and we want to communicate it and put a strategy against making sure that we go acquire at the same pace of attrition.

George Kelly -- Imperial Capital -- Analyst

OK. OK. And then last question for me just about the exchange business. You've had several very successful programs with Walmart.

And wondering how quickly you can replicate that at other retailers in the network.

Matt Sheehan -- Chief Executive Officer

Yes. There's a lot of urgency around here, if you can imagine, to take what we've learned and expand. So an example, CD signage is the signage that, frankly, we started testing a couple years ago at Walmart. It worked well.

We rolled it out last year. We've now completed taking that signage package, if you will, and rolling that across all of Lowe's Home Improvement. We are well under way, and I believe we said by the end of the year, we'll be complete in nearly all of our exchange locations. So that's an example where we tested.

It went really well. You're seeing the results, and now we're going to take it to just about all retailers, if not all of them. So that's one. I think the IRC is another one that we again tested, tweaked, have rolled out with Walmart and now we are talking to any retailers who both have dispensers and water, and we're making sure that a similar model shows up there as well.

That can take us a little time. And the only difference there is not all retailers use IRCs. So we have to figure out different ways to do a similar but free water option, when somebody buys a dispenser. So those are the two ones that from a marketing perspective have worked at Walmart, and they're really leaning into the business, we can expand elsewhere.

The other thing we talked about here was capacity. That is almost global. Anytime we see location, and we do measure this down to the location basis, where our demand is growing faster than the capacity we have at the store, and we're getting ahead of that with more capacity. So all three of those, we're trying to push as fast as we can across the entire exchange network.

Does that help?

George Kelly -- Imperial Capital -- Analyst

It does, yes. Thank you.


Our next question comes from Mark Argento from Lake Street.

Mark Argento -- Lake Street Capital Market -- Analyst

This is John on for Mark. Just wanted to touch on new products a little bit. You mentioned the new product in the quarter. I'm just curious as to kind of how much focus you guys plan on putting in kind of developing new products in relation to your other investments going forward throughout the year?

Matt Sheehan -- Chief Executive Officer

Yes. John, thanks for the question. Over the last couple years, we've definitely been leaning into this. We've built we'll call a small, but mighty product development team.

If you look into last year, we launched really four products. This year we're launching what we call the baby or First Step. And we're going to continue to build-out a multiyear product development strategy that is based on consumer research, in-home use testing and a lot of data to get there. So we already have a plan out looking more than two years at this time, probably for the first time looking out that far.

We're using consumer information and research to design and then test products. So we absolutely believe that there's large shifts in dispensers, like the bottom loader years ago. And even now more situational, great opportunities for us with baby, or First Steps we call it, and then Pet as well. And just as example to Pet, that has been received very well, very high scores on Amazon.

And we're going to continue to ratchet up the development and the builds on things like that. So I think you'll see more and more of that from us in the future.

Mark Argento -- Lake Street Capital Market -- Analyst

All right. That's helpful. And second, to your comments on competition. I guess as you kind of go through and optimize pricing, what really gives you confidence going forward that you'll be able to win back customers that you have lost just based on pricing from competition in some of those markets? Thank you.

Matt Sheehan -- Chief Executive Officer

Yes. The confidence we have is partially because of the way they handled our price increase. So when we increased, some of them came down, and that has worked. And we certainly have a section of customers that are loyal to us.

And we've heard from them very clearly. There's also some customers who are looking for, and value matters a lot. And so based on what we've learned -- by the way, competitors have handled this in some local markets. We think that the reverse is just as possible.

Again, we're not just doing a reduction in price. It's not in, actually, a lot of locations. It's very targeted. I mean we're talking down the street level.

And we're also on top of that, going to be adding social media. We're going to be rebranding. We're going to be doing other marketing in those markets. We think the combination of all that will help get us a lot more awareness, help us tell the story and win customers back.


Our last question comes from Mike Grondahl from Northland Securities.

Mike Grondahl -- Northland Securities -- Analyst

Just following up on the refill price optimization. About what percent of your volume do you think that is affecting?

David Mills -- Chief Financial Officer

Yes. Of the locations, it's just around or just under 5% of the locations. And probably volume would be comparable, maybe a little bit higher. It's a higher volume market.

Matt Sheehan -- Chief Executive Officer

It's probably a little bit higher than that, but it's not 50 or anything like that. It's meaningful, but it's a small -- I think our location losses were at a small percentage of our locations. And so our volume losses are a small percent of locations. That's really where we're targeting.

Mike Grondahl -- Northland Securities -- Analyst

Got it. Got it. And then refill has kind of had its challenges for a couple quarters. How confident are you in seeing refill growth in the back half of the year?

Matt Sheehan -- Chief Executive Officer

So I love thinking about analogs. So while there are differences between indoor and outdoor, they are also a retail customer. They're a customer who's willing to spend some time refilling their own container to get great water. So from that perspective there's a lot of similarities between indoor and outdoor.

We've done a really great job. In fact, when we acquired the business from Culligan years ago, it was a similar story, frankly. It was flat to slightly down. And we have just about never not comped.

We've always comped in that business. And now we're adding even more energy to that. So that, for me, is an example with some commonality of consumer, that's what we've done in indoor and, frankly, what we've done in exchange and dispensers, we can do in the outdoor. So that's one.

Number two is, nobody's ever really attacked this business from a consumer research, from a marketing, from a branding perspective. And we're also making changes with technology and operations equipment. And so we found a lot in this business where our coin mechanisms are, frankly, not replaced fast enough. I guess the idea of being resourceful is fine until you should just put a new bill acceptor in the machine.

We're finding things like that from all this great data where we can get ahead of it. And we also know, lastly, that the consumers really appreciate and need that offering to them. It's convenient. The price is still really good.

And it's at locations where they're gone a lot anyway. So Mike, you add all that up. We absolutely have confidence in the long-term approach of this business, while we're also trying to be very open about some of the challenges we see. But nothing that we've shared transparently about our challenges shakes our confidence in this business.

It's just a longer-term approach and we're hustling to get it done.


This concludes our Q&A session. At this time, I'd like to turn the call over to Matt Sheehan, president and CEO, for closing remarks.

Matt Sheehan -- Chief Executive Officer

Thank you for your participation on today's call and interest in Primo Water. Have a great night.


[Operator signoff]

Duration: 58 minutes

Call participants:

Madeleine Kettle -- Investor Relations

Matt Sheehan -- Chief Executive Officer

David Mills -- Chief Financial Officer

Mike Petusky -- Barrington Research -- Analyst

Amit Sharma -- BMO Capital Markets -- Analyst

George Kelly -- Imperial Capital -- Analyst

Mark Argento -- Lake Street Capital Market -- Analyst

Mike Grondahl -- Northland Securities -- Analyst

More PRMW analysis

All earnings call transcripts