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Cott Corp. reports profit in second quarter


July 28, 2009
By Administrator

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NEWS HIGHLIGHT

Cott Corp. reports profit in second quarter
Soft drink maker Cott Corp. unnerved investors after it warned
that increased competition from national brands and higher input costs
during the second half of the year threatens to flatten the fizz.

July 28, 2009 – Soft drink maker Cott Corp. unnerved investors Monday after it warned that increased competition from national brands and higher input costs during the second half of the year threatens to flatten the fizz the company has injected into its financial results.

Cott's share price plummeted nearly 26 per cent Monday, losing $2.15 on the Toronto Stock Exchange to close at $6.16 on a volume of 1.8 million shares traded after the company warned of a weaker second half, softening summer volume trends and an imminent equity issue.

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The Toronto-based private label soft drink maker and water bottler said its gross margins could decrease by two percentage points the rest of the fiscal year, from the 17.6 per cent average achieved in the second quarter.

Cott said it continued to make progress in restoring its financials as the company booked a profit for the second time this year even though foreign exchange dragged revenue lower in the second quarter.

Reporting in U.S. dollars, the Toronto-based company reported before markets opened Monday that it earned net income of US$33.7 million or 48 cents per share for the quarter ended June 27.

The earnings were more than three times higher than the analyst estimates of 15 cents a share projected for the quarter.

The profits marked a reversal from the loss of $1.8 million or three cents per share booked during the corresponding quarter of 2008 and the second straight profitable quarter for the company, which had previously racked up a string of six successive quarterly losses before the 2009 fiscal year.

"Our second quarter was another positive step in the right direction for Cott," chief executive Jerry Fowden said during a conference call with analysts.

The performance was driven primarily by profitability improvements in its North America business, by far its largest segment. It benefited from operating cost savings, lower selling and administrative costs, reduced freight expenses and the impact of first-quarter price increases.

"Improved results are a critical element for us in our plan to restore Cott's long-term financial strength and thereby provide a sustainable platform that enables us to further help our retail partners to improve their private label business and their beverage margins."

The company said revenue declined 5.9 per cent due to the impact of foreign exchange, falling to $438.8 million from year-earlier levels of $466.5 million. Excluding foreign exchange items, Cott said revenue would have increased 2.3 per cent.

Fowden said the company is still braced for tough economic conditions in the rest of 2009. It expects commodity prices for aluminum and resins to increase.

"While the challenges we face are complex, we remain optimistic due the continued positive momentum we have experienced as a result of our private label refocus plan and through the substantial reductions in costs and increases in operational efficiency we have achieved," he said, noting that two good quarter don't make a successful turnaround.

While many investors were pessimistic about the company's fortunes, David Hartley of BMO Capital Markets said the stock selloff was overdone.

He said a stronger-than-expected reduction in selling, general and administrative expenses suggest further savings could offset margin declines. And he said the $300 million equity issue would give the company flexibility to pay down debt and get its fiscal house in order.

"Are they going to have earnings as strong as the first half, no I don't think so, but they are still going to have very strong earnings growth in the second half and it hasn't deterred by enthusiasm for the kind of earnings they can put up this year and next," Hartley said in an interview.

Cott said global beverage case volume fell 2.5 per cent during the quarter, led by a 32.5-per-cent plunge in volumes in its Mexican division. Cott said its own actions to stabilize the company in the area were exacerbated by the H1N1 flu virus.

Case volumes were flat in North America and down 2.5 per cent in the U.K.

Its water business in the United States continued to be challenged by consumer resistance that is affecting the entire industry.

Asked by an analyst if the company would consider selling the water operations, Fowden said it remains committed and is looking to increase the number of customers after investing substantial capital in 2007 and 2008.

"Our priority is on expanding our customer base for water, winning some new water business as our customer base is very concentrated at the moment," he said.

Cott recently restructured under pressure from activist shareholder Crescendo Partners and has been returning to its core business of making store-brand soda pop, rather than developing new products such as energy drinks.

The company has been cutting jobs and streamlining operations in an effort to reduce annual operating costs by up to $43 million.

Cott announced in January that it was losing its exclusive deal with Wal-Mart (NYSE:SMT) to be the supplier of store-brand pop to the world's biggest retailer.

The company said at the time that it would wind down the exclusivity deal over three years, and that it represented nearly 40 per cent of its overall business.