Cott to strengthen focus on U.S. operations

by Eric Schroeder
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TORONTO — A decline in earnings and sales at Cott Corp. during the first quarter of fiscal 2013 is prompting one of the world’s largest beverage makers to place greater emphasis on managing its U.S. operations, said Jerry Fowden, chief executive officer of Cott.

In the first quarter ended March 30, net income attributable to Cott was effectively nil, which compared with income of $5.9 million, equal to 6c per share on the common stock, in the same period of fiscal 2012. Net revenues for the quarter were $505.4 million, down 4% from $523.8 million.

In a May 1 conference call with analysts, Mr. Fowden attributed the sluggish financials to lower volumes and gross margins. Total filled beverage case volume was 193 million cases in the first quarter, down 5% from 203 million cases a year ago.

“We set out in 2013 to reduce our rate of volume decline in the first half of the year, a move toward roughly stable volumes in the second half,” Mr. Fowden said. “While our first-quarter volume reduction of 5% was less than in prior quarters, we had hoped our quarter one volumes would have been higher than those actually achieved.

“This softer first-quarter volume resulted in unfavorable fixed cost recoveries in our plants, which, alongside the product mix in the quarter with lower C.S.D. volumes and slightly higher juice volumes in North America, as well as lower volume in higher gross margin products in the U.K., compressed our overall gross margins.”

Mr. Fowden said the first-quarter results are a reminder of the bumps in the road Cott faces moving forward. To help deal with the challenges, he said the company is placing greater emphasis and resources on managing its U.S. operations, “given the size and importance of these operations to our consolidated business.” The company has tapped Steve Kitching to lead the charge in the United States. Mr. Kitching for the past four years has led Cott’s U.K. and European operations. Additionally, Cott has hired a new chief financial officer for the U.S. business unit.

Asked to elaborate on the management change in the United States, Mr. Fowden explained, “Most people would know that our U.K. business has not only increased its EBITDA by some 50%-odd over the last four years (during Mr. Kitching’s tenure) and grown its volume from around 80 million raw cases to over 100 million raw cases, but especially what it’s done is it’s managed to shift the mix of its business so that less than 50% of its business is now dependent on that traditional 2-liter, 12-oz cup, private label sort of business. It’s a much more diversified business across contract, packing, private label, our own control brands. And that diversity reduces the risk of volatility that we often see in our business.

“So, it is with that goal of accelerating the shift in mix in our U.S. business that we’ve moved Steve across from U.K. Europe to the U.S. And we still have within our business, looking after the commercial side of it, the former president of our U.S. business (Michael Gibbons, who is now chief commercial and business development officer for the U.S.). So I see it more as the addition of a resource rather than as a replacement.”

He continued, “We need to strengthen our own control brand portfolio in the U.S., which is not as strong as we have in Canada or here in the U.K. We need to get a larger share of contract manufacturing business.”

Mr. Fowden said the changes should help the company rebound when placed alongside the company’s four Cs (customers, costs, capital expenditures and cash), diversification into U.S. pouch production and U.S. alcohol capability later this year, added resources in U.S. commercial and contract manufacturing teams, and small bolt-ons such as the recently announced U.K. Calypso Soft Drinks transaction.

Cott on April 30 signed an agreement to acquire Cooke Bros Holdings Ltd., which includes Calypso Soft Drinks and Mr. Freeze (Europe) Ltd., for $31 million. Calypso has annual revenues of approximately $50 million, and it has a strong presence in the food service channel with a line of branded children’s soft drinks. Calypso also is a leader in the U.K.’s market for freezables.
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