Cott Corporation - Shareholder/Analyst Call

| About: Cott Corporation (COT)

Cott Corporation (NYSE:COT)

April 30, 2013 8:30 am ET

Executives

David T. Gibbons - Chairman and Member of Corporate Governance Committee

Marni Morgan Poe - Vice President, General Counsel and Secretary

Jay Wells - Chief Financial Officer and Vice President

Jerry S. G. Fowden - Chief Executive Officer and Director

David T. Gibbons

All right. A new -- little bit more intimate setting for our annual meeting this year, and good to see you all. Again, good morning. My name is Dave Gibbons. As Chairman of the Board of Directors. I'm very happy to welcome all of you here to Cott Corporation's 2013 Annual and Special Meeting of Shareowners.

This morning's agenda will include the formal part of the meeting and, also, 4 resolutions for consideration by our shareholders. Followed by a financial review of our 2012 financial results, which will be given by Jay Wells, our Chief Financial Officer. Following Jay's remarks, we'll hear from our Chief Executive Officer, Jerry Fowden, who will offer his perspective on the results in 2012 and he will also provide some forward-looking views of our business. Lastly, we'll open up our meeting for shareowner questions, when we get through the formal presentations.

I'd like to begin by introducing our current Board of Directors. Start with Eric Rosenfeld, the Lead Independent Director and Chairman of the Corporate Governance Committee. Andy Prozes, Chairman of the Human Resources and Compensation Committee; Graham Savage, Chairman of the Audit Committee; Mark Benadiba; George Burnett; Steve Halperin; Betty Jane Hess; Greg Monahan; Mario Pilozzi; and Jerry Fowden. And I'm really proud of the team that we have. We've kept the Board of Directors team together through some tough times, a few years back. And I'm very pleased that we've stayed together to see Cott come back up, that way we have. I'm very happy with the Board and the way we worked with management. And I'd like to express my gratitude to the Board for their service and their absolute dedication, over the years, to Cott. Thank you.

I'll now call the meeting to order. I'll serve as chair and conduct the remainder of the meeting but I will ask Marni Poe, Cott's General Counsel and Secretary, to act as meeting Secretary and to lead us through today's formalities. Marni?

Marni Morgan Poe

Thank you, Dave. This is the Annual and Special Meeting of Owners of Common Shares of Cott Corporation. Mark Thompson and Shirley Tom, Computershare Trust Company of Canada, the registrar and transfer agent of the company, will serve as scrutineers for this meeting. Jim Gary, [ph representing the auditors, PricewaterhouseCoopers LLP, is present and available to answer appropriate questions.

I would like to direct your attention to the Safe Harbor statement currently on the screen. During the meeting, we'll be making statements that are forward-looking. These statements involve inherent risks and uncertainties and we caution you that a number of important factors could cause actual results to differ materially from those contained in any such forward-looking statements. You are urged to carefully review and consider the various disclosures including, but not limited to, risk factors contained in the company's Annual Report on Form 10-K for the year ended December 29, 2012, as well as other periodic reports filed with the Securities and Exchange Commission.

During the meeting, we may also refer to certain non-GAAP financial measures. We have posted tables on our website at cott.com, that contain a reconciliation of differences between GAAP and non-GAAP financial measures that are included in this presentation.

Notice of this meeting, the Annual Report, including the financial statements, a form of proxy and a proxy circular have been sent to shareowners of record, and additional copies are available at this meeting.

I will now table a certificate as to the mailing of notice. Proof of service of the notice calling the meeting has been tabled. I direct that a copy of the notice, together with proof of service, be kept as a record of this meeting. Will someone now move, and someone second, a resolution dispensing with the reading of the notice?

Unknown Attendee

I move the resolution [indiscernible]

Unknown Attendee

I second the resolution.

Marni Morgan Poe

All those in favor of the resolution, please so signify, by raising your hand.

[Voting]

Marni Morgan Poe

Contrary, if any?

[Voting]

Marni Morgan Poe

I declare the resolution carried. The scrutineers have reported that a quorum of shareowners is present. I declare that a copy of the report be kept with the records of this meeting. Due notice of this meeting, having been given, and a quorum being present, I declare this meeting constituted for the transaction of business.

The last meeting of shareowners was held on May 1, 2012. Any shareowner who wishes to review the minutes of that meeting should speak with me after today's meeting. The next item of business is the presentation of the Annual Report for the year ended December 29, 2012, including the financial statements for the company's last completed fiscal year and the auditor's report thereon. The Annual Report will be tabled at this time, but questions arising out of the annual report and the financial statements will be dealt with later in the meeting, when shareowners' questions are entertained.

As you are aware, 4 resolutions will be considered at this morning's meeting. We will proceed to vote by a show of hands on the first 3 proposed resolutions, unless any shareholder insists that we proceed by way of ballot. We will proceed by way of ballot for the fourth proposed resolution.

The first resolution deals with the election of directors. Eleven directors are to be elected. The meeting is now open for nominations.

As each nominee is called, I ask that they stand and remain standing until all nominees have been introduced.

Unknown Attendee

I nominate David Gibbons, Eric Rosenfeld, George Burnett, Mark Benadiba, Stephen Halperin, Betty Jane Hess, Gregory Monahan, Andrew Prozes, Graham Savage, Mario Pilozzi and Jerry Fowden, as directors of the company.

Unknown Attendee

I second the nominations.

Marni Morgan Poe

Are there any further nominations? If not, I declare the nominations closed. Would someone move, and someone second, a resolution for the election of these persons as directors, and directing me, as Secretary of this meeting, to cast a single ballot for their election?

Unknown Attendee

I move the resolution as follows:

Resolved, that each of the 11 nominees, whose names have been read at this meeting, are hereby elected as directors of Cott Corporation, to hold office until the next Annual Meeting of Shareowners or until their successors are elected or appointed. And the Secretary of this meeting is hereby authorized to cast a single ballot for their election as directors of the Cott Corporation.

Unknown Attendee

I second the resolution.

Marni Morgan Poe

All those in favor of the resolution, please signify by raising your hands.

[Voting]

Marni Morgan Poe

Contrary, if any?

[Voting]

Marni Morgan Poe

I declare that each of the 11 nominees, whose names have been read at this meeting, has been elected directors of the company, to hold office until the next Annual Meeting of Shareowners or until their successors are elected or appointed. Congratulations and many thanks to our Board of Directors.

The next item of business is the appointment of auditors. Would someone move, and someone second, a resolution appointing PricewaterhouseCoopers LLP, as auditors of the company, and directing me, as Secretary of this meeting, to cast a single vote for their appointment?

Unknown Attendee

I move that PricewaterhouseCoopers LLP be appointed auditors of the company, to hold office until the next Annual Meeting or until their successors are appointed. And the Secretary of this meeting is hereby authorized to cast a single ballot in favor of this resolution.

Unknown Attendee

I second the motion.

Marni Morgan Poe

The motion has been moved and seconded. All those in favor, please signify by raising your hands.

[Voting]

Marni Morgan Poe

Contrary, if any?

[Voting]

Marni Morgan Poe

I declare that PricewaterhouseCoopers LLP has been appointed auditors of the company. Thank you.

The next on the business is a nonbinding advisory vote on executive compensation. The scrutineers have confirmed that 98.2% of votes cast by proxy have voted for the approval, on a nonbinding advisory basis, of the compensation paid to Cott Corporation's named executive officers, as disclosed, pursuant to Item 402 of Regulation S-K, including the compensation discussion, analysis, compensation tables and narrative discussion. All those in favor, please signify by raising your hands.

[Voting]

Marni Morgan Poe

Contrary, if any?

[Voting]

Marni Morgan Poe

I declare that the resolution for the approval, on a nonbinding advisory basis, of the compensation paid to Cott Corporation's named executive officers, is hereby approved.

It will be necessary to vote by ballot for the resolution approving the amended and restated Cott Corporation Equity Incentive Plan, as described in Cott Corporation's proxy circular dated March 28, 2013, under the heading, Approval of Amended Restated Cott Corporation Equity Incentive Plan. Shareowners who have already submitted their proxies have not receive ballots. Their shares will be voted in accordance with the instructions contained in the proxies granted to their proxy holders. Registered shareholders and proxy holders, who are present and who have not sent in their proxies, are entitled to vote by ballot. No such ballots were handed out by the scrutineers. I therefore declare, the poll closed.

I have received the scrutineers' report relating to the proposed resolution to approve the amended and restated Cott Corporation Equity Incentive Plan. The resolution, having been approved by a majority of votes cast, is carried.

If any shareowner is interested in the exact number of votes cast in respect of the resolution to approve the amended and restated Cott Corporation Equity Incentive Plan, he or she may obtain the particulars, on inquiry. The scrutineers' report shall be kept with the records of this meeting. Thank you.

I'm now please to turn the podium over to Chief Financial Officer, Jay Wells, for a financial review of our fiscal year 2012.

Jay Wells

Thank you, Marni, and good morning, everyone. Fiscal 2012 was a successful year for Cott's, as we made good progress on restoring gross margin, following a period of significant commodity inflation, improved our balance sheet and initiated a quarterly dividend for the first time in 10 years. Our gross margin restoration strategy achieved a 110 basis point increase in gross margin, the 2012 gross margin being 12.9% versus 11.8% in 2011. Though this strategy resulted in lower volume and revenues in 2012, we believe, we took the necessary steps to restore gross margin by adjusting price up and exiting certain low gross margin business.

In addition to focusing on restoring gross margin, we continued our low-cost philosophy and kept our SG&A expense to around 8% of revenue. This is considerably less than most companies in our industry and, we believe, is the appropriate level of SG&A for our company.

Our progress on gross margin restoration and managing costs tightly, resulted in 2012 net income increasing 27% from the prior year, as well as earnings per share increasing 25% to $0.50 per share. Further, our adjusted EBITDA, which excludes Cliffstar's integration expenses and purchase accounting adjustments, increased 7% to $213 million.

Improved operating performance, along with management's tight control of cost and capital expenditures, resulted in the fourth consecutive year Cott generated over $100 million of free cash flow. 2012 results also led to the strengthening of our balance sheet. First, we ended the fiscal year with a leverage position of 2x net debt-to-adjusted EBITDA. This is well below our leverage ratio of 3.25x in 2010. This rapid deleveraging evidences management's commitment to reducing debt and further stabilizing Cott's financial foundation.

Our improvement on gross margin, from a combination of adjusting our price per case, the exiting of certain low gross margin business and a continued focus on operating efficiencies, generated an adjusted EBITDA that has led to our interest coverage being approximately 3.9x, a vast improvement from 2008, when interest coverage was approximately 2.6x. The improvement in these financial metrics resulted in an upgrade -- upgraded credit rating and outlook.

In the third quarter of 2012, S&P upgraded our corporate family rating from B to B+. And Moody's improved our credit rating from stable to positive, while keeping our credit rating the same. As a result of our improved financial condition, we are well-positioned to reduce our interest expense by redeeming a majority, if not all, of our 2017 senior notes in November of this year.

In summary, Cott made good progress with restoring gross margin, strengthening our balance sheet and positioning Cott to significantly reduce interest expense in 2014. Thank you for your time this morning and we will be hosting a conference call to discuss the first quarter 2013 results tomorrow morning. I will now turn the meeting over to our Chief Executive Officer, Jerry Fowden, who will offer his perspective on 2012, as well as our strategy over the next couple of years.

Jerry S. G. Fowden

Thank you, Jay. Before I make a few remarks, I'd like to take this opportunity to introduce Carlos Baila. Carlos joined us, just a couple of months ago, as our Chief Procurement Officer. Carlos has an extensive experience in procurement, as well as supply chain, and I look forward to your valuable contribution to the management team.

Now returning to Jay's specific remarks about 2012 and our performance. As mentioned, 2012 was a year that did show further improvement in many of our financial metrics. Adjusted EBITDA up 7%, net income up 27%, and EPS up 25% to $0.50 a share, alongside a further $100 million-plus of free cash flow.

I think it's important to put these results in context with our long-term strategy and vision. Cott's strategy can best be described as having 3 phases. And as we sit here today, I believe we are making good progress against this strategy, even if there have been bumps in the road since we set out on this journey in 2008 and 2009.

As shown, our strategic objectives required us, in the first phase, to stabilize the business during a time of significant financial volatility. Once we stabilized the business, we were able to complete and integrate our acquisition of Cliffstar in 2010. Following that acquisition, we set out on a clear path to deleverage the company and improve our financial metrics.

To this regard, we've made significant progress. The business has been run tightly with a real focus on our Four Cs: cost, cash, CapEx, but most importantly, listening to our customers. Alongside this, this has brought the rewards of allowing us to reduce our debt, lower our interest costs as we look forward, and transfer value, thereby, from debt owners to equity owners.

The second phase, which really began in earnest in 2012, is built around increasing Cott's attractiveness to our shareholders, via the introduction of our balanced capital deployment strategy. Now to expand on this second phase of our strategy, let's look at it in a little more detail. Now that our financial foundation and balance sheet is stabilized, we've been able to allocate approximately 30% of our free cash flow to shareholders, primarily, via our quarterly dividend, but also by the board's approval of a discretionary share repurchase program that we will implement opportunistically.

This strategy also involves the reduction of debt, allocating approximately 40% of our free cash flow towards that objective. Specifically, we can look forward, this year and next, to redeem all or a substantial proportion of our 2017 notes and then, depending on market conditions, refinance our 2018 senior notes near the end of 2014 with a lower interest cost. This leaves the remaining 30% of our free cash flow for investment in the business, both by organic means and bolt-on acquisitions, such as the recent U.K. transaction announced just this morning to acquire Calypso Soft Drinks.

And now, this leads us to the third phase of our strategy. As we look out over the next few years, we aim, alongside our Four Cs, to allocate more resources, time, money and people towards the objective of improving our growth and margin opportunity. We believe, if we can offer our customers a wider range of products and packages, i.e. become a better one stop shop supplier, we'll be able to sell into more channels that we don't service today, such as food service or contract manufacturing. We will not only improve our growth and margin prospects slowly over time, but we should be able to reduce various areas of business concentration and thereby, reduce the risk and volatility that Cott has often seen in our business.

This third strategic phase, which is important, as we look out over the next 2 to 3 years, will involve organic investment in our existing manufacturing facilities to produce new types of products, in different packages, such as pouch beverages or liquid enhancers. But it will also include bolt-on acquisitions to accelerate our diversification into package formats and channels that account for very little of our business today. A consistent focus on the Four Cs on this third phase of diversification should see us to continue to progressively build the value of this business and stability over time. I'm sure it won't be instant or quick, and I'm certain, there'll be some further bumps in the road. But I would also believe we can continue to make this business more robust and increase shareholder value, if we can stay focused on executing the strategy.

Now, at this point, I'd like to thank all of Cott's management and associates who worked hard and with passion, everyday. As well as our Board of Directors for their guidance that they give the management team, and you, the shareholders, for your belief and investment in Cott.

As a reminder, I'd invite you to join us tomorrow morning for our First Quarter 2013 Earnings Conference Call, but at this time, I'll be happy to answer any shareholder questions. But first, I'd like to remind you that any specific questions around our current trading will have to wait till tomorrow morning's earnings call. So if there are any questions, please raise your hand, so a microphone can come to you. If not, thank you very much, indeed, and I'll turn the meeting back to Marni.

Any questions?

Marni Morgan Poe

May I now have a resolution for the termination of the meeting?

Unknown Attendee

I move that the meeting be terminated.

Unknown Attendee

I second the motion.

Marni Morgan Poe

All those in favor of the resolution, please raise your hand?

[Voting]

Marni Morgan Poe

Contrary, if any?

[Voting]

Marni Morgan Poe

I declare the meeting terminated. Thank you all for coming.

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