Cott Reports First Quarter 2017 Results

TORONTO and TAMPA, FL, May 4, 2017

TORONTO and TAMPA, FL, May 4, 2017 /PRNewswire/ - Cott Corporation (NYSE:COT; TSX:BCB) today announced its results for the first quarter ended April 1, 2017.

FIRST QUARTER 2017 HIGHLIGHTS      

• Cott revenue increased 28% to $896 million compared to $698 million.
  
  
• Gross profit increased 45% to $311 million compared to $214 million and gross margin as a percentage of revenue increased to 34.6% compared to 30.6%.
  
  
• Net cash used in operating activities of $5 million less $41 million of capital expenditures resulted in reported free cash flow usage of ($46) million and adjusted free cash flow usage of ($40) million (adjusted for acquisition, integration, and other cash costs) compared to adjusted free cash flow usage of ($47) million in the prior year representing a $7 million or 15% improvement.
  
  
• Issued $750 million of Senior Notes at a rate of 5.5% and an 8 year maturity with the proceeds to be utilized to redeem all $625 million of our 6.75% Senior Notes and $100 million of our 10% Senior Notes.
  
  
• Cott continues to target full year 2017 cash flow provided by operations of approximately $330 to $340 million and capital expenditures in the range of $165 to $175 million, resulting in adjusted free cash flow of $155 to $175 million (when excluding acquisition, integration, and other cash costs).
  
  
• Cott continues to target full year 2017 revenues of over $3.7 billion.

"I am pleased with our results for the first quarter of 2017 as our water and coffee solutions segment performed well with good growth and performance at DS Services and S&D Coffee and Tea especially.  As expected, adverse foreign exchange rates, principally related to the devaluation of the British pound in relation to the U.S. dollar and the Euro, impacted the cost of goods for our Cott U.K. reporting segment during the quarter. We expect this headwind will be remediated by the second half of the year as all necessary pricing has been agreed upon with customers," commented Jerry Fowden, Cott's Chief Executive Officer.  "Our first quarter results and improved cash flow performance puts us well on track to achieve our expectation of $155 to $175 million of adjusted free cash flow in 2017," continued Mr. Fowden.

FIRST QUARTER 2017 GLOBAL PERFORMANCE                 

• Revenue was $896 million despite $13 million of foreign exchange headwinds. Our reported revenue increased 28% (30% on a foreign exchange neutral basis). Revenue drivers in the quarter are tabulated below:

Revenue Bridge ARIVA.DE Börsen-Geflüster Kurse PRIMO WATER CORP. 20,09 $ +0,95%
2016 Q1 Revenue						$	698.4
S&D							143.3
Eden							89.0
DSS							5.4
All Other							(1.7)
Cott U.K.							(12.0)
Cott North America							(12.6)
Foreign exchange impact							(13.4)
2017 Q1 Revenue						$	896.4

• Gross profit increased 45% to $311 million, driven primarily by the addition of Eden Springs ("Eden") and S&D Coffee and Tea ("S&D") and improvement in DS Services operations, offset in part by the negative impact of foreign exchange rates and lower volumes in our Cott U.K. reporting segment. Gross margin as a percentage of revenue increased to 34.6% compared to 30.6%.
  
  
• Interest expense was $36 million after the issuance of $750 million of Senior Notes at a rate of 5.5% and an 8 year maturity with the proceeds to be utilized to redeem all $625 million of our 6.75% Senior Notes and $100 million of our 10% Senior Notes.
  
  
• Income tax expense was $1 million compared to income tax benefit of $10 million as we now place valuation allowances against North American net operating losses. Cash taxes during the period were minimal, with $1 million of cash taxes during the period versus $4 million of cash taxes paid in the comparable prior year period.
  
  
• Reported net loss and net loss per diluted share were $36 million and $0.26, respectively, compared to reported net loss and net loss per diluted share of $3 million and $0.02, respectively. Adjusted net loss and adjusted net loss per diluted share (including adjustments for acquisition, integration, debt redemption and other costs) were $19 million and $0.13, respectively, compared to adjusted net loss and adjusted net loss per diluted share of $2 million and $0.02, respectively.
  
  
• Reported EBITDA was $67 million compared to $69 million in the prior year. Adjusted EBITDA increased 21% to $88 million (adjusted for $21 million of acquisition, integration, debt redemption, other costs and share-based compensation expense in the current quarter; see Exhibit 6) due primarily to the improved contributions from our Water and Coffee Solutions segment, offset in part by $5 million of adverse foreign exchange headwinds and lower volume in our Cott U.K. reporting segment.
  
  
• Net cash used in operating activities of $5 million, less $41 million of capital expenditures resulted in free cash flow usage of ($46) million or ($40) million of adjusted free cash flow usage (adjusted for acquisition, integration, and other cash costs) compared to adjusted free cash flow usage of ($47) million in the prior year representing a $7 million or 15% improvement.

FIRST QUARTER 2017 REPORTING SEGMENT PERFORMANCE   

Water and Coffee Solutions

• Revenue increased 93% to $496 million driven primarily by the additions of S&D and Eden alongside the other items tabulated below.  Gross profit increased 70% to $262 million from $154 million due primarily to the additions of Eden and S&D as well as operational improvements in DS Services. 

• DS Services had net new customer additions of approximately 2% during the period.  In line with expectations, DS Services revenue increased over 2% to $263 million. DS Services operating income was up 37% as it began to implement its operational improvement plan.
  
  
• In line with our acquisition models, Eden and S&D contributed $89 million and $143 million of revenue, respectively.  Integration at Eden is tracking ahead of plan while S&D's new customer onboarding was completed during the quarter with 9% growth in coffee volume (pounds). 

Traditional Business

• Cott North America reporting segment volume was flat in actual cases due primarily to 5% growth in value added and sparkling water products and 9% growth in contract manufacturing which offset general market and private label declines in carbonated soft drinks and shelf stable juices.
  
  
• Revenue was lower by 4% at $301 million due primarily to ongoing product mix shifts within the business.

• Gross profit was $33 million or 11.2% of revenue compared to $35 million or 11.4% of revenue due primarily to the phasing of our new 7.5 million annual case hotfill contract manufacturing agreement with full production scheduled to occur by the end of the second quarter.
  
  
• Cott U.K. reporting segment volume, although in line with expectations, decreased 13% in actual cases due primarily to the previously announced loss of volume from a large retail customer.
  
  
• Revenue decreased 22% (10% on a foreign exchange neutral basis) to $94 million due primarily to the adverse foreign exchange impact of the British pound and the lost customer volume which will be fully lapped by the end of the second quarter of 2017.

• Gross profit as a percentage of revenue was lower at 11.8% due primarily to the adverse foreign exchange impact on commodity costs and lower volumes.  We have agreed pricing changes with our customers to offset the commodity cost increases caused by the weakness of the British pound that should remediate this adverse foreign exchange impact by the second half of the year.

2017 FULL YEAR FOREIGN EXCHANGE, REVENUE, AND FREE CASH FLOW OUTLOOK

Based on current exchange rates and the 2017 published forecasts of various major financial institutions, we continue to expect the adverse impact of foreign exchange rates on full year 2017 EBITDA to be $12 to $18 million.

Cott continues to target full year 2017 consolidated revenue of over $3.7 billion, full year 2017 cash flow provided by operations of approximately $330 to $340 million and capital expenditures in the range of $165 to $175 million, resulting in adjusted free cash flow of $155 to $175 million (when excluding acquisition, integration, and other cash costs).

FIRST QUARTER 2017 RESULTS CONFERENCE CALL

Cott Corporation will host a conference call today, May 4, 2017, at 10:00 a.m. ET, to discuss first quarter results, which can be accessed as follows:

North America: (888) 231-8191
International: (647) 427-7450
Conference ID: 7166215

A live audio webcast will be available through Cott's website at http://www.cott.com. The earnings conference call will be recorded and archived for playback on the investor relations section of the website for a period of two weeks following the event.

ABOUT COTT CORPORATION

Cott is a diversified beverage company with a leading volume-based national presence in the North America and European home and office bottled water delivery industry, a leader in custom coffee roasting and blending of iced tea for the U.S. foodservice industry, and one of the world's largest producers of beverages on behalf of retailers, brand owners, and distributors.  Our platform reaches over 2.3 million customers or delivery points across North America and Europe supported by strategically located sales and distribution facilities and fleets, as well as wholesalers and distributors.  This enables us to efficiently service residences, businesses, restaurant chains, hotels and motels, small and large retailers, and healthcare facilities.

Non-GAAP Measures
To supplement its reporting of financial measures determined in accordance with GAAP, Cott utilizes certain non-GAAP financial measures.  Cott excludes from GAAP revenue the impact of foreign exchange to separate the impact of this factor from Cott's results of operations. Cott utilizes adjusted net income (loss), adjusted income (loss) per diluted share, and EBITDA and adjusted EBITDA on a global basis to separate the impact of certain items from the underlying business.  Because Cott uses these adjusted financial results in the management of its business, management believes this supplemental information is useful to investors for their independent evaluation and understanding of Cott's underlying business performance and the performance of its management.  Additionally, Cott supplements its reporting of net cash provided by (used in) operating activities determined in accordance with GAAP by excluding additions to property, plant & equipment to present free cash flow, and by excluding acquisition, integration, and other cash costs to present adjusted free cash flow, which management believes provides useful information to investors about the amount of cash generated by the business that, after the acquisition of property and equipment, can be used for strategic opportunities, including investing in our business, making strategic acquisitions, paying dividends, and strengthening the balance sheet.  The non-GAAP financial measures described above are in addition to, and not meant to be considered superior to, or a substitute for, Cott's financial statements prepared in accordance with GAAP. In addition, the non-GAAP financial measures included in this earnings announcement reflect management's judgment of particular items, and may be different from, and therefore may not be comparable to, similarly titled measures reported by other companies.

Safe Harbor Statements
This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 conveying management's expectations as to the future based on plans, estimates and projections at the time Cott makes the statements. Forward-looking statements involve inherent risks and uncertainties and Cott cautions you that a number of important factors could cause actual results to differ materially from those contained in any such forward-looking statement. The forward-looking statements contained in this press release include, but are not limited to, statements related to the execution of our strategic priorities, future financial and operating trends and results (including the impact of foreign exchange on  2017 results, revenue, and adjusted free cash flow) and related matters. The forward-looking statements are based on assumptions regarding management's current plans and estimates. Management believes these assumptions to be reasonable but there is no assurance that they will prove to be accurate.

Factors that could cause actual results to differ materially from those described in this press release include, among others: our ability to compete successfully in the markets in which we operate; changes in consumer tastes and preferences for existing products and our ability to develop and timely launch new products that appeal to such changing consumer tastes and preferences; a loss of or a reduction in business in our traditional business with key customers, particularly Walmart; consolidation of retail customers; fluctuations in commodity prices and our ability to pass on increased costs to our customers or hedge against such rising costs, and the impact of those increased prices on our volumes; our ability to manage our operations successfully; our ability to fully realize the potential benefit of acquisitions or other strategic opportunities that we pursue; our ability to realize the revenue and cost synergies of recent acquisitions because of integration difficulties and other challenges; the limited nature of our indemnification rights under the acquisition agreements for our recent acquisitions; the incurrence of substantial indebtedness to finance our recent acquisitions; significant one-time transaction costs in connection with our recent acquisitions; our exposure to intangible asset risk; currency fluctuations that adversely affect the exchange between the U.S. dollar and the British pound sterling, the Euro, the Canadian dollar, the Mexican peso and other currencies; our ability to maintain favorable arrangements and relationships with our suppliers; our substantial indebtedness and our ability to meet our obligations under our debt agreements, and risks of further increases to our indebtedness; our ability to maintain compliance with the covenants and conditions under our debt agreements; fluctuations in interest rates, which could increase our borrowing costs; credit rating changes; the impact of global financial events on our financial results; our ability to fully realize the expected cost savings and/or operating efficiencies from our restructuring activities; any disruption to production at our beverage concentrates or other manufacturing facilities; our ability to maintain access to our water sources; our ability to protect our intellectual property; compliance with product health and safety standards; liability for injury or illness caused by the consumption of contaminated products; liability and damage to our reputation as a result of litigation or legal proceedings; changes in the legal and regulatory environment in which we operate; the impact of proposed taxes on soda and other sugary drinks; enforcement of compliance with the Ontario Environmental Protection Act; the seasonal nature of our business and the effect of adverse weather conditions;  the impact of national, regional and global events, including those of a political, economic, business and competitive nature; our ability to recruit, retain, and integrate new management; our ability to renew our collective bargaining agreements on satisfactory terms; disruptions in our information systems; our ability to securely maintain our customers' confidential or credit card information, or other private data relating to our employees or our company; our ability to maintain our quarterly dividend; our ability to adequately address the challenges and risks associated with our international operations and address difficulties in complying with laws and regulations including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act of 2010; and our ability to use net operating losses to offset future taxable income.

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