COTT CORPORATION ANNOUNCES SECOND QUARTER RESULTS AND
SIGNIFICANT NEW COST REDUCTION PROGRAM
- SECOND QUARTER EPS OF $0.11 AFTER CHARGES OF $0.09 PER SHARE FOR CEO
CHANGE, STOCK OPTION EXPENSE AND UNUSUAL ITEMS
- KEY PRIORITIES SET FOR TOP-LINE GROWTH
(ALL INFORMATION IN U.S. DOLLARS)
TORONTO, JULY 27, 2006 -- Cott Corporation (NYSE:COT; TSX:BCB) today announced
results for the second quarter ended July 1, 2006. Driven by strong
international and concentrate sales, volume increased 12% in the second quarter
of 2006, compared to the second quarter of 2005, to 363.6 million eight-ounce
equivalent cases. Excluding the impact of the Macaw acquisition, organic volume
was up 6% for the quarter compared to the second quarter of 2005.
Revenue increased 2% in the quarter to $502.0 million compared to $492.7 million
in the second quarter of last year.
Gross margin as a percentage of revenue was 14.4% in the quarter compared to
16.4% in the second quarter of last year. Importantly, the gross margin
percentage increased a full percentage point from 13.4% in the first quarter of
2006.
Net income for the quarter was $7.6 million or $0.11 per diluted share, compared
to $25.0 million or $0.35 per diluted share in the second quarter of 2005. The
decline in net income reflects pre-tax charges of $8.9 million, or $0.09 per
diluted share after taxes, related to the Company's recent CEO change, the
expensing of stock options (which the Company began recording this year) and
charges related to unusual items.
"Our Q2 results reflect the challenges the Company is facing and the initial
progress we are making on cost reduction and growth with key customers,"
commented Brent Willis, the Company's newly-appointed chief executive officer.
"As we move
1
forward, we will remake Cott into an aggressive, low-cost, and
highly-disciplined company."
SECOND QUARTER
Revenue increased 2% in the quarter compared to the second quarter of 2005.
However, excluding the impact of acquisitions and foreign exchange, second
quarter revenue declined 5% when compared to the second quarter of 2005.
Revenue in the Company's North American segment declined 8% from the prior
year's second quarter, primarily due to the previously disclosed structural
change in an agreement with one of the Company's self-manufacturing customers.
While Cott continues to supply this customer with filled beverages, a portion of
the business is now in the form of concentrate sales, lowering total revenue but
having minimal earnings impact. Additional factors impacting North American
second quarter revenue were continued volume softness in the carbonated soft
drink category and the Company's product rationalization actions.
U.K./Europe revenue in the quarter rose 60% when compared to the same quarter in
2005, due to strong base business as well as contributions resulting from the
Macaw acquisition, which was completed in the third quarter of 2005. Excluding
acquisitions and foreign exchange, U.K./Europe revenue was up 12%. Revenue for
the International segment increased 21% in the quarter compared to the second
quarter of 2005 on continued growth from both Royal Crown International (RCI)
and Mexico.
Gross margin as a percentage of revenue was 14.4% in the quarter compared to
16.4% in the second quarter of last year, up from 13.4% in this year's first
quarter. The decline in gross margin compared to the second quarter in 2005 was
impacted by the $4.9 million benefit related to the settlement of a lawsuit
against suppliers of high fructose corn syrup that was recognized in the second
quarter of 2005. Gross margin was also impacted by increased capacity-related
fixed costs in the second
2
quarter of 2006, as compared to 2005. These factors were partially offset by a
favorable product mix impact.
Selling, general and administrative expenses increased in the quarter, as
compared to the second quarter of 2005, mainly due to charges for the recent
change in the Company's CEO, increased incentive compensation provisions and
stock option expense. Stock option expense was $1.9 million pre-tax, or $0.02
per diluted share after taxes. Cott began recording expenses for stock options
in 2006 under the provisions of FAS 123(R).
Unusual item charges of $0.7 million on a pre-tax basis, or $0.01 per diluted
share after taxes, were recorded in the quarter for severance and other costs
related to the previously announced North American realignment as well as fees
associated with the review of the Macaw acquisition by the U.K.'s Competition
Commission. Operating income (EBIT) declined to $23.0 million from $44.7 million
due to the factors outlined above. Interest expense increased $0.9 million in
the quarter primarily due to the Macaw acquisition. The effective tax rate
increased to 47%, reflecting higher non-deductible expenses and additional tax
provisions due to changes in estimates.
FIRST HALF 2006
Volume increased 10% in the first half of 2006, compared to the first half of
2005, to 658.6 million eight-ounce equivalent cases, which includes the
contribution from the Macaw acquisition. Organic volume was up 5% in the first
half, compared to the first half of 2005.
Revenue in the first six months increased 1% to $896.2 million from $888.2
million in the first six months of the prior year. First half revenue was flat
excluding the impact of foreign exchange but declined 5% from the first half of
last year when the impact of both foreign exchange and acquisitions are
excluded. Revenue in North America declined by 8% in the first half, compared to
the first half of 2005, due to the same factors that impacted the second
quarter. U.K./Europe revenue was up
3
56% for the first half of the year and was up 12% excluding the Macaw
acquisition and foreign exchange, when compared to the first half of 2005.
International revenue increased 18% over the first half of 2005, driven by
continued strong revenue growth in both Royal Crown International and Mexico.
Gross margin as a percentage of revenue for the first half of the year was
13.9%, compared to 15.4% during the first half of last year. The 1.5 percentage
point decline was due primarily to increased capacity-related fixed costs and
the impact of the high fructose corn syrup settlement in 2005. These factors
were partially offset by a positive product mix impact.
Selling, general and administrative expenses increased to $88.6 million from
$72.4 million in the first half of 2005 due to CEO change charges, stock option
expense, increased incentive provisions and the inclusion of Macaw.
Operating income (EBIT) declined to $30.7 million from $64.7 million in the
first half of 2005 due to the factors outlined above and unusual items totalling
$5.7 million.
Net income for the first half of 2006 declined to $5.5 million, or $0.08 per
diluted share, compared to $33.3 million, or $0.46 per diluted share, in the
first half of 2005. Year-to-date net income was impacted by after-tax charges of
$0.17 per diluted share comprised of: costs related to the CEO change ($0.06 per
share); unusual items ($0.06 per share) for severance and other costs related to
the previously announced North American realignment and fees associated with the
review of the Macaw acquisition by the U.K.'s Competition Commission; and, stock
option expense ($0.05 per share).
NEW OVERARCHING COST REDUCTION PROGRAM
4
Cott also reported that it has initiated the most extensive ongoing cost
reduction program in the Company's history, designed to transform business
practices and support its goal of being the lowest cost producer in its
segments.
The cost reduction program encompasses five areas of focus:
1) Asset optimization, fixed cost reduction, and world-class efficiency
2) Sub-Zero-Based Budgeting (SZBB)
3) Selling, general and administrative (SG&A) expense optimization
4) Centralized procurement
5) SKU rationalization
These programs will be entrenched in Cott's policies and operating practices as
permanent drivers of profitability and are expected to have a positive impact on
the business in 2007 and beyond.
In SG&A optimization, Cott reported that it will have eliminated 77 positions by
July 28, 2006, resulting in annualized savings of approximately $8 million with
the full benefit beginning in 2007.
In the area of centralized procurement, Cott previously announced the successful
implementation of a new demand planning system, the first phase of a total
supply and inventory management solution supplied by Manugistics Inc., which is
expected to deliver annualized savings of approximately $2.5 million when fully
implemented. The previously announced transition of its North American
transportation management to Transplace is expected to deliver approximately $2
million in annual savings beginning next year and a recently completed agreement
with Ecolab to centralize procurement and management of global cleaning,
sanitation and lubrication programs is expected to reduce overall costs by
approximately $4 million over five years.
KEY PRIORITIES ESTABLISHED FOR TOP-LINE GROWTH
5
In addition to the cost reduction initiatives, Cott also described its model to
drive the top-line by focusing on the most attractive sources of growth in
customers, channels, geographies and beverage segments. The model encompasses:
1) Superior in-store execution
2) Penetration of new, high-margin beverage segments
3) Expansion to new, high-margin channels
4) Expansion to new global customers and geographies with Cott and
Royal Crown International
In the area of penetrating new, high-margin beverage segments, Cott is making
progress expanding its portfolio of energy drinks with new flavors and packaging
formats to new customers and channels in the U.K., Canada, and the U.S. In
addition, Cott has recently developed a line of premium ready-to-drink single
serve teas - a segment that boasts more than 25% growth year-over-year - and has
gained authorizations from major North American customers. These teas, offered
in 20-ounce PET bottles, and will begin shipping in the third quarter.
"I'm confident that Cott can lead the `premiumization' of the tea category with
our new Orient Emporium Tea Co.(TM) brand, which includes exotic flavours such
as Jasmine Sumana and Ooolong Jahini, in addition to the popular white and green
teas," commented Willis.
In the area of geographic expansion, the new business in Brazil is on track and
expected to expand further in that country through the balance of the year. Cott
also reported that it has entered into arrangements with three bottlers in China
to meet the future needs of key customers in one of the fastest growing CSD
markets worldwide. Growth in other international locations continued at a robust
pace in the first half with volume growth of 60% in the Philippines with the
Company's RC(R) brand, and significant double-digit growth in other markets in
Asia Pacific and the Middle East.
OUTLOOK
6
Cott continues to expect net income, excluding unusual items, stock-based
compensation expense and charges related to the change in CEO, to be
substantially lower in 2006 compared to 2005.
2006 charges for unusual items, including pre-tax impairment and restructuring
charges are expected to be between $23 million and $43 million. This amount is
part of the previously announced charges of $60 to $80 million. 2006 expenses
for stock-based compensation are expected to be between $10 million and $12
million on a pre-tax basis.
The Company also indicated that, moving into 2007, it plans to provide longer
term targets for volume growth, revenue enhancements, cost reductions and
operating income (EBIT) growth with quarterly updates against these targets.
"Remaking Cott is not without its challenges," commented Willis. "As we go
forward, we will have an unwavering focus on both cost reduction and growth to
lead the Company from good to great. This will require disciplined execution,
something that has not been a strength within the Company in the immediate past,
but will be a key driver to result in superior, sustainable and profitable
growth over time."
"The Board of Directors and I are very pleased with the action plans that Brent
and his senior management team are leading," added Frank Weise, Chairman of
Cott's Board of Directors. "We're confident that the challenges faced by the
Company are now being aggressively tackled with the right initiatives, and
measured accountabilities, and we're optimistic about Cott's future prospects."
SECOND QUARTER RESULTS CONFERENCE CALL
Cott Corporation will host a conference call today, Thursday, July 27 at
approximately 9 AM ET to discuss second quarter financial results.
7
For those who wish to listen to the presentation, there is a listen-only,
dial-in telephone line, which can be accessed as follows:
North America: (800) 814-4857
International: (416) 644-3417
WEBCAST
To access Cott's second quarter conference call with analysts over the Internet,
please visit the Company's website at http://www.cott.com. Please log on 15
minutes early to register, download, and install any necessary audio/video
software. For those who are unable to access the live broadcast, a replay will
be available at Cott's website following these events until August 10, 2006.
ABOUT COTT CORPORATION
Cott Corporation is one of the world's largest non-alcoholic beverage companies
and the world's largest retailer brand beverage supplier. The Company
commercializes its business in over 60 countries worldwide, with its principal
markets being the United States, Canada, the United Kingdom and Mexico. Cott
markets or supplies over 200 retailer and licensed brands, and Company-owned
brands including Cott(R), Royal Crown(R), Vintage(R), Vess(R) and So Clear(TM).
Its products include carbonated soft drinks, sparkling and flavoured mineral
waters, energy drinks, juices, juice drinks and smoothies, ready-to-drink teas,
and other non-carbonated beverages. The Company's website is www.cott.com.
NON-GAAP MEASURE
For the second quarter ended July 1, 2006, the term EBIT consists of earnings
excluding interest, income tax expense, other expenses and minority interest and
is identical to Operating Income on the Consolidated Statement of Income.
SAFE HARBOR STATEMENTS
This press release contains forward-looking statements reflecting management's
current expectations regarding future results of operations, economic
performance, financial condition and achievements of the Company.
Forward-looking statements,
8
specifically those concerning future performance such as those relating to the
success of the Company's measures to reduce costs and increase sales and income,
are subject to certain risks and uncertainties, and actual results may differ
materially. These risks and uncertainties are detailed from time to time in the
Company's filings with the appropriate securities commissions, and include,
without limitation, stability of procurement costs for raw and packaging
materials, the Company's ability to restore plant efficiencies and reduce
logistics and other costs, adverse weather conditions, competitive activities by
other beverage manufacturers, the Company's ability to develop new products that
appeal to consumer tastes, the Company's ability to identify acquisition
candidates, successfully consummate acquisitions and integrate acquired
businesses into its operations, fluctuations in currency versus the U.S. dollar,
the uncertainties of litigation and regulatory review, loss of key customers and
retailers' continued commitment to their Company-supplied beverage programs. The
foregoing list of factors is not exhaustive. The Company undertakes no
obligation to publicly update or revise any forward-looking statements.
(FINANCIAL TABLES IN EXHIBITS 1-5 ATTACHED)
COTT CONTACTS:
Media Relations
Kerry Morgan Tel: (416) 203-5613
Investor Relations
Edmund O'Keeffe Tel: (416) 203-5617
9
EXHIBIT 1
COTT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS OF US DOLLARS EXCEPT PER SHARE AMOUNTS, US GAAP)
UNAUDITED
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
--------------------------- --------------------------
JULY 1, 2006 JULY 2, 2005 JULY 1, 2006 JULY 2, 2005
------------ ------------ ------------ ------------
SALES $ 502.0 $ 492.7 $ 896.2 $ 888.2
Cost of sales 429.7 412.0 771.2 751.5
------------ ------------ ------------- ------------
GROSS PROFIT 72.3 80.7 125.0 136.7
Selling, general and administrative expenses 48.7 35.5 88.6 72.4
Loss (gain) on disposal of property, plant & equipment (0.1) 0.5 - (0.2)
Unusual items
Restructuring 0.2 - 1.8 -
Asset impairments (0.1) - 1.3 (0.2)
Other 0.6 - 2.6 -
------------ ------------ ------------- ------------
OPERATING INCOME 23.0 44.7 30.7 64.7
Other income, net - (0.6) (0.2) -
Interest expense, net 7.5 6.6 15.7 13.1
Minority interest 1.1 1.4 2.1 2.3
------------ ------------ ------------- ------------
INCOME BEFORE INCOME TAXES 14.4 37.3 13.1 49.3
Income tax expense 6.8 12.3 7.6 16.0
------------ ------------ ------------- ------------
NET INCOME $ 7.6 $ 25.0 $ 5.5 $ 33.3
============ ============ ============= ============
VOLUME - 8 OZ EQUIVALENT CASES 363.6 326.0 658.6 598.3
- FILLED BEVERAGE 250.6 249.7 450.5 453.3
NET INCOME PER COMMON SHARE
Basic $ 0.11 $ 0.35 $ 0.08 $ 0.47
Diluted $ 0.11 $ 0.35 $ 0.08 $ 0.46
EXHIBIT 2
COTT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS OF US DOLLARS, US GAAP)
UNAUDITED
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
--------------------------- ---------------------------
JULY 1, 2006 JULY 2, 2005 JULY 1, 2006 JULY 2, 2005
------------ ------------ ------------ ------------
OPERATING ACTIVITIES
Net income $ 7.6 $ 25.0 $ 5.5 $ 33.3
Depreciation and amortization 19.1 15.9 38.4 32.7
Amortization of financing fees 0.2 0.3 0.5 0.3
Stock option expense 1.9 - 4.6 -
Deferred income taxes 6.4 3.5 6.6 3.3
Minority interest 1.1 1.4 2.1 2.3
Loss (gain) on disposal of property, plant
& equipment (0.1) 0.5 - (0.2)
Asset impairments (0.1) - 1.3 (0.2)
Other non-cash items 0.2 0.3 0.5 0.9
Net change in non-cash working capital (15.6) (13.3) (31.4) (17.5)
------------ ------------ ------------ ------------
Cash provided by operating activities 20.7 33.6 28.1 54.9
------------ ------------ ------------ ------------
INVESTING ACTIVITIES
Additions to property, plant and equipment (8.4) (26.7) (16.7) (54.8)
Proceeds from disposal of property, plant
& equipment 0.8 1.0 1.5 2.0
Other investing activities (3.3) (2.6) (5.7) (4.1)
------------ ------------ ------------ ------------
Cash used in investing activities (10.9) (28.3) (20.9) (56.9)
------------ ------------ ------------ ------------
FINANCING ACTIVITIES
Payments of long-term debt (0.3) (0.2) (0.5) (0.4)
Short-term borrowings (9.7) (0.6) (16.7) (5.5)
Distributions to subsidiary minority shareowner (0.7) (0.8) (1.8) (1.9)
Issue of common shares - 1.5 - 2.4
Financing costs - (0.5) - (2.6)
Other financing activities - (0.1) (0.1) (0.2)
------------ ------------ ------------ ------------
Cash used in financing activities (10.7) (0.7) (19.1) (8.2)
------------ ------------ ------------ ------------
Effect of exchange rate changes on cash
(0.1) (0.1) - (0.5)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH (1.0) 4.5 (11.9) (10.7)
CASH, BEGINNING OF PERIOD 10.8 11.4 21.7 26.6
------------ ------------ ------------ ------------
CASH, END OF PERIOD $ 9.8 $ 15.9 $ 9.8 $ 15.9
============ ============ ============ ============
EXHIBIT 3
COTT CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS OF US DOLLARS, US GAAP)
UNAUDITED
JULY 1, 2006 DECEMBER 31, 2005
------------ ------------------
ASSETS
CURRENT ASSETS
Cash $ 9.8 $ 21.7
Accounts receivable 239.6 191.1
Inventories 161.8 144.2
Prepaid and other expenses 17.8 9.5
Deferred income taxes 8.1 7.3
------------ ------------------
437.1 373.8
PROPERTY, PLANT AND EQUIPMENT 385.4 394.2
GOODWILL 155.8 150.3
INTANGIBLES AND OTHER ASSETS 256.4 260.4
DEFERRED INCOME TAXES - 0.4
------------ ------------------
$ 1,234.7 $ 1,179.1
============ ==================
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 150.1 $ 157.9
Current maturities of long-term debt 0.8 0.8
Accounts payable and accrued liabilities 217.1 182.5
Deferred income taxes - 0.2
------------ ------------------
368.0 341.4
LONG-TERM DEBT 272.2 272.3
DEFERRED INCOME TAXES 69.4 61.0
------------ ------------------
709.6 674.7
MINORITY INTEREST 22.8 22.5
SHAREOWNERS' EQUITY
Capital stock 273.0 273.0
Additional paid-in capital 22.9 18.4
Retained earnings 191.7 186.2
Accumulated other comprehensive income 14.7 4.3
------------ ------------------
502.3 481.9
------------ ------------------
$ 1,234.7 $ 1,179.1
============ ==================
COTT CORPORATION EXHIBIT 4
SEGMENT INFORMATION
(IN MILLIONS OF US DOLLARS, US GAAP)
UNAUDITED
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
-------------------------- --------------------------
JULY 1, 2006 JULY 2, 2005 JULY 1, 2006 JULY 2, 2005
------------ ------------ ------------ ------------
SALES
North America $ 383.2 $ 414.1 $ 692.7 $ 749.5
UK & Europe 92.9 57.9 158.2 101.5
International 24.2 20.0 42.1 35.7
Corporate 1.7 0.7 3.2 1.5
-------- -------- -------- --------
$ 502.0 $ 492.7 $ 896.2 $ 888.2
======== ======== ======== ========
OPERATING INCOME (LOSS)
North America $ 27.6 $ 41.9 $ 40.1 $ 61.0
UK & Europe 6.5 3.1 6.3 5.3
International 4.1 2.8 7.0 5.0
Corporate (15.2) (3.1) (22.7) (6.6)
-------- -------- -------- --------
$ 23.0 $ 44.7 $ 30.7 $ 64.7
======== ======== ======== ========
COTT CORPORATION EXHIBIT 5
SUPPLEMENTARY INFORMATION - NON GAAP MEASURES
(IN MILLIONS OF US DOLLARS)
UNAUDITED
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
-------------------------- --------------------------
JULY 1, 2006 JULY 2, 2005 JULY 1, 2006 JULY 2, 2005
------------ ------------ ------------ ------------
NET INCOME $ 7.6 $ 25.0 $ 5.5 $ 33.3
Depreciation and amortization 19.1 15.9 38.4 32.7
Interest expense, net 7.5 6.6 15.7 13.1
Income tax expense 6.8 12.3 7.6 16.0
-------- -------- -------- --------
EBITDA $ 41.0 $ 59.8 $ 67.2 $ 95.1
======== ======== ======== ========
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
-------------------------- --------------------------
JULY 1, 2006 JULY 2, 2005 JULY 1, 2006 JULY 2, 2005
------------ ------------ ------------ ------------
NET INCOME $ 7.6 $ 25.0 $ 5.5 $ 33.3
Other income, net - (0.6) (0.2) -
Interest expense, net 7.5 6.6 15.7 13.1
Minority interest 1.1 1.4 2.1 2.3
Income tax expense 6.8 12.3 7.6 16.0
-------- -------- -------- --------
EBIT $ 23.0 $ 44.7 $ 30.7 $ 64.7
======== ======== ======== ========
NON-GAAP MEASURE
EBITDA is defined as net income before interest, income taxes, depreciation and
amortization. Cott uses operating income as its primary measure of performance
and cash flow from operations as its primary measure of liquidity. Nevertheless,
Cott presents EBITDA in its filings for several reasons. Cott uses multiples of
EBITDA and discounted cash flows in determining the value of its operations. In
addition, Cott uses "cash return on assets," a financial measure calculated by
dividing Cott's annualized EBITDA by its aggregate operating assets, for the
purposes of calculating performance-related bonus compensation for its
management employees, because that measure reflects the ability of management to
generate cash while preserving assets. Finally, Cott includes EBITDA in its
filings because it believes that its current and potential investors use
multiples of EBITDA to make investment decisions about Cott. Investors should
not consider EBITDA an alternative to net income, nor to cash provided by
operating activities, nor any other indicators of performance or liquidity which
have been determined in accordance with U.S. or Canadian GAAP. Cott's method of
calculating EBITDA may differ from the methods used by other companies and,
accordingly, Cott's EBITDA may not be comparable to similarly titled measures
used by other companies. Earnings before interest and income taxes (EBIT) is a
widely-used non-GAAP financial measure of operating performance. The Company's
management believes it is useful to investors to evaluate the Company's results
because it excludes certain items that are not directly related to the Company's
core operating performance. EBIT is calculated by adding back interest expense,
income tax expense, other expenses and minority interest to net income and is
identical to operating income on the Consolidated Statement of Income. EBIT
should not be considered as a substitute for net income, an indicator for cash
from operating activities, or any other indicator of performance or liquidity.
In addition, because EBIT may not be calculated identically by all companies,
the presentation here may not be comparable to other similarly titled measures
of other companies.