Primo Brands Corporation

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 3/5

Primo Brands Corporation operates as a water solution business that offers water exchange services to consumers as well as various types of water filtration units.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Primo Brands Corporation (PRMB) is a company focused on providing purified water solutions. The company mainly has two segments which are:

  1. Water Exchange: This segment consists of a network of self-serve purified water dispensing machines which allows customers to purchase purified water in their own containers.
  2. Water Filtration: This segment involves the sale of various water filtration units to consumers as well as businesses. This would be point of use solutions where the water is purified on-site.

Primo’s business model seems to focus on making purified water available to the public using different convenient methods.

Revenue Distribution:

PRMB’s revenue is primarily derived from two sources:

  • Water Exchange Revenue: This comes from fees collected at its self-serve dispensing machines.
  • Water Filtration Product Sales: This comprises revenue from sales of water filtration units which include various components like replacement filters, cartridges, etc.

While the geographical distribution of revenue isn’t directly outlined in the financial document, we can assume a large portion of the revenue is derived from North America, given the companies operations are centered there.*

The water solutions industry is characterized by several trends:

  1. Growing demand for purified water: Concerns about water quality and health consciousness are fueling the demand for purified water. This trend favors both the water exchange and filtration segments of the business.
  2. Increased awareness of water contamination: A heightened awareness about waterborne contaminants and their health implications is also pushing consumers to invest in purification solutions.
  3. Competition from both large and small players: The market consists of large players (like Culligan and Nestle Waters), who offer both home delivery services and filtration equipment, and small local players that usually offer only filtration.
  4. Focus on sustainable and environmentally friendly solutions: Consumers are increasingly looking for environmentally friendly alternatives, and this focus on sustainability and reducing plastic waste may favor refillable models of water purchase.
  5. Growing global water insecurity and the expansion of private water companies: As water becomes a more scarce resource and infrastructure projects are harder to fund governments start to shift to privatized water services

Competitive Landscape:

The competitive landscape for PRMB is relatively complex.

  • Water Exchange: In this area, the company has to compete with local water bottle refills which often are cheaper for consumers, and water delivery services. While the brand is not particularly important for this type of service, convenience is an important variable.
  • Water Filtration: This is a more complex space with large players like Culligan and smaller local players all competing in price and quality, with brand recognition being another factor in this industry

What Makes PRMB Different:

Primo Brands stands out primarily due to their distribution network that focuses on offering a diverse variety of channels for consumers to purchase water. By combining both a self service network and also filtration systems they can appeal to a wide range of customers.

Financial Analysis

Let’s delve into their financials, with emphasis on the latest 10Q report which ended September 30, 2024.

  • Balance Sheet (unhealthy): The company’s balance sheet reveals several red flags.
    1.  The cash and cash equivalents have drastically fallen to just $175k at the end of Q3 2024, from $28.3M in Q3 2023 and $14.5m at end of 2023. 
     2.  The company has a negative working capital of $18.9 million, which indicates that their current liabilities far exceed their current assets. This indicates short term liquidity and default concerns.
 3.  The company has negative equity of $141.3 million which might also raise concerns about solvency for the company.
     4. Total liabilities are $1,903.3 million, of which debt liabilities comprise most, this is a huge concern.  *    **Income Statement (unprofitable)**:
 The company is currently unprofitable, but there seems to be some signs of improvement.
1. Revenue increased 13.4% from 2023 Q3 to 2024 Q3 but gross profits only increased 10%. That shows that some profitability increases have been offset by cost increases.
2.  Operating expenses remained relatively flat, and the company has net losses that reduced. This is a positive sign.    3. For the 9 months ending on September 30, 2024, the operating losses were 13.9 million.
4. Net income showed an increase from a loss of 66.5 million in the first 9 months of 2023 to a loss of 13.1 million in the first 9 months of 2024. *   **Cash Flow Statement**:    Looking at the statement, it appears that the company has been unable to produce positive operating cash flows for the last 9 months, with total cash outflows being $137.2 million. This means the company has to rely on additional debt and equity financing for its operations and capital expenditures.

Overall, there seems to be significant improvement in profitability, but it is still very far from generating any positive net profits. Cash flows also continue to be severely negative and this poses significant solvency challenges.

Moat Rating: 2/5

Based on the analysis, Primo Brands receives a moat rating of 2 out of 5 with the following justification:

  • Brand Recognition: While it has a recognizable name among some customers, its overall brand is not particularly strong. There isn’t evidence of strong brand loyalty or a high degree of product differentiation which translates to pricing power.
  • Switching Costs: There are some switching costs, but they aren’t significant. Customers can relatively easily switch to other refill options or other filtration companies.
  • Network Economics: Network effects are largely absent from this type of business, they do not benefit from more customers using their products.
  • Cost Advantages: While they try to implement a low cost strategy, this is easily copied and is not particularly durable. Their scale might help reduce costs.
  • Niche Dominance: In certain markets they do dominate some niches, but are unable to maintain a strong competitive moat.

Conclusion: The company has some competitive advantages, such as niche markets and a convenient way to sell their product, but they are not particularly durable. Hence a narrow moat rating.

Risks to the Moat and Business Resilience

Several risks could erode PRMB’s moat and hurt its business resilience.

  1. Increased Competition: The entry of new players or the increased aggression of current competitors can erode pricing and market share of the company.
  2. Technological Change: The development of more cost-effective water filtration systems by rivals can render the company’s products obsolete and reduce its competitive advantage.
  3. Operational Problems: Problems in their supply chain can lead to issues. Also, if they are unable to provide high quality water or consistent performance that may cause reputational damage.
  4. Regulatory Changes: Regulation changes could negatively affect its business.
  5. Economic Downturns: Economic downturns may negatively affect revenue as it would reduce disposable income and capital investments.
  6. Solvency Concerns: the company has negative equity and continues to burn cash and will probably need to find external financing again. If that funding is not forthcoming they could potentially face bankruptcy.

The biggest challenge for PRMB would be if the market shifts and people start purchasing more and more filtration systems than going to refill stations. This can severely erode the revenue stream from their largest segment.

Understandability Rating: 4/5

Based on the analysis, PRMB receives an understandability rating of 4 out of 5:

  • The business operations are relatively straightforward with clear revenue streams and cost components, and how they interlink.

  • The business model is easily understood by most investors.

  • However, the financial information can be a bit complex at first glance, and the nuances of the industry can be difficult to comprehend without adequate research.

Balance Sheet Health Rating: 3/5

Based on the analysis, PRMB receives a balance sheet health rating of 3 out of 5:

  • While there’s improvements in profitability, the balance sheet is extremely weak. They have negative equity and their short term liabilities far exceed their current assets.
  • They will need to continue to seek external capital in order to maintain solvency, and if that is not forthcoming they may become bankrupt.

The recent financial situation is a concern as the company has decreasing cash and negative equity. This leads to major solvency concerns that investors should pay careful attention to. *