Cott (Canada) (COT) Jeremy S. G. Fowden on Q2 2016 Results - Earnings Call Transcript

| About: Cott Corporation (COT)

Cott Corp. (Canada) (NYSE:COT)

Q2 2016 Earnings Call

August 04, 2016 10:00 am ET

Executives

Jarrod Langhans - Director-Investor Relations & Corporate FP&A

Jeremy S. G. Fowden - Chief Executive Officer & Director

Thomas J. Harrington - Chief Executive Officer-DS Services, Cott Corp. (Canada)

Jay Wells - Chief Financial Officer

Ron Hinson - Chairman & Chief Executive Officer, S&D Coffee, Inc.

Analysts

Derek Dley - Canaccord Genuity Corp.

Mark Swartzberg - Stifel, Nicolaus & Co., Inc.

Bill Schmitz - Deutsche Bank Securities, Inc.

Judy E. Hong - Goldman Sachs & Co.

David Hartley - Credit Suisse Securities (Canada), Inc

Amit Sharma - BMO Capital Markets (United States)

Mark Petrie - CIBC World Markets, Inc.

Operator

Good morning, ladies and gentlemen, and welcome to Cott Corporation's Second Quarter 2016 Earnings Conference Call. All participants are currently in a listen-only mode. This call will end no later than 11:30 a.m. The call is being webcast live on Cott's website at www.cott.com and will be available for playback there for two weeks.

We remind you that this conference call contains certain forward-looking statements reflecting management's current expectations regarding future results of operations, economic performance and financial condition. Such statements include but are not limited to statements that relate to the company's business strategy, investment in organic and acquisition opportunities including expected synergies and financial impact related thereto, goals and expectations concerning our market position, future operations and estimated volumes, revenues, EBITDA, free cash flow, capital expenditures, commodities and the impact of foreign exchange rates.

Forward-looking statements are subject to certain risks and uncertainties which could cause actual results to materially differ from current expectations. These risks and uncertainties are detailed from time to time in the company's security filings. The information set forth herein should be considered in light of such risks and uncertainties. Certain material factors or assumptions were applied in drawing conclusions or making forecasts or projections reflected in the forward-looking information.

Additional information about the material factors or assumptions applied in drawing conclusions or making forecasts or projections reflected in the forward-looking information is available in the company's press release issued earlier this morning and the company' Annual Report on Form 10-K and quarterly reports on Form 10-Q. The company does not expect, as expressly required by applicable law, assume any obligation to update the information contained in this conference call.

A reconciliation of any non-GAAP financial measures discussed during the call with the most comparable measures in accordance with GAAP is available in the company's second quarter 2016 earnings announcement released earlier this morning as well as on the Investor Relations section of the company's website at www.cott.com.

I'll now turn the call over to Jarrod Langhans, Cott's Director of Investor Relations. Please go ahead, sir.

Jarrod Langhans - Director-Investor Relations & Corporate FP&A

Good morning and thank you for joining our call. Today I'm here with Jerry Fowden, our Chief Executive Officer; Jay Wells, our Chief Finance Officer; and Tom Harrington, our DS Services Chief Executive Officer. In addition, we are joined by Ron Hinson, the Chief Executive Officer of S&D Coffee & Tea. We're delighted that Ron could be here with us today, and we look forward to working with him and his team as we continue S&D's great success.

I would encourage everyone to review a copy of our press release, as we have provided a number of bridges within the release that we issued this morning in order to assist our shareholders, analysts and potential investors with understanding the operations of our various business segments during the quarter. In addition, we have included a slide deck online at www.cott.com covering our S&D Coffee & Tea acquisition.

With that said, Jerry will start this morning's call with some of his observations on the quarter and our broader strategy before turning the call over to Tom for an update on Eden Springs and a discussion on S&D Coffee & Tea. Jay will then discuss our second quarter 2016 consolidated financial performance and an overview of our business units before turning the call back to Jerry, who will complete the call with our expectations for the remainder of the year and beyond. Following our prepared remarks, we will open the call up for questions.

With that, let me now turn the call over to Jerry.

Jeremy S. G. Fowden - Chief Executive Officer & Director

Thank you, Jarrod, and good morning, everyone. As you know, our goal, Cott's goal has been to continue to transition our business through a combination of organic actions and synergistic transactional activity in order to progressively shift towards a higher margin and/or higher growth business while keeping a strong focus on our 4Cs, especially free cash flow generation, with the goal of building a more predictable, lower-risk business with strong compound growth in adjusted free cash flow for many years to come.

Quarter two 2016 has not just been a busy quarter, but has been one that has seen us make significant strides against this goal. Key highlights of the quarter's activity can be summed up as a second record-breaking quarter of DS Services' organic new customer growth in the U.S.; continued volume stability within our traditional Cott North America business; another quarter of strong adjusted free cash flow generation; the acquisition and closing of Eden Springs, Europe's largest home/office water filtration and office coffee services business.

And to top off the list of Q2 activity, today, we announced the signing of a definitive agreement to acquire S&D Coffee & Tea, a leading U.S. based manufacturer, distributor and service provider of custom coffee roasting and tea blending. The combination of these actions now in place provides a significantly improved business profile, with meaningfully lower customer concentration, reduced exposure to mature categories, a decreased proportion of our business in large format retail, and an attractive outlook for free cash flow generation.

To pick just a few highlights of this new Cott profile, private label is reduced to 36% of our revenue and 28% of EBITDA. Carbonated soft drinks are reduced to 16% of revenue and just 12% of EBITDA. Over 65% of Cott's EBITDA will be generated by Better For You products, up from just 21% in 2014. And most importantly, a strong outlook for compound annual growth in free cash flow, with adjusted 2019 free cash flow estimated at $225 million to $275 million.

On that note, let's look at Q2 and a few of these factors in a little more detail. First, DS Services, on an organic basis, we saw DS Services drive its second quarter of record-breaking U.S. customer additions, increasing 36% relative to the second quarter of 2015, with 30,000 net customer additions in the quarter.

Second, our traditional Cott North America business. In looking at volume, our Cott North America business delivered 4% growth in actual case volume during the quarter with its sparkling waters and mixes growing 10% and contract manufacturing growing 15%. Third, free cash flow. We continued to see strong free cash flow with Q2 adjusted free cash flow of $54 million, up $8 million or 19% versus last year.

Fourth, Eden Springs, although not impacting our second quarter, we were pleased we were able to announce the close of this transaction. Eden Springs will provide over €60 million of adjusted EBITDA and over €360 million of revenue in 2017 and provides Cott with the largest home and office water delivery platform in Europe, including a top five position in office coffee services and water filtration. The Eden Springs transaction has been effectively hedged from an FX point of view via the issuance of €450 million of long-term debt, funding 95% of the purchase price in euros at a 5.5% coupon.

And finally, fifth, we are pleased to announce the signing of a definitive agreement to acquire S&D Coffee & Tea, which has over $550 million of projected 2016 revenue and some $40 million of pro forma adjusted EBITDA. S&D Coffee & Tea has a great management team that has driven an attractive history of compound annual growth in both revenue and EBITDA, and provides significant potential from overlapping and complementary synergies with our existing DS Services office coffee business and strong cash flow generation. We are delighted Ron and his whole team have agreed to join us to drive S&D's continued success.

As we recently discussed, Cott's vision combines four elements, each designed to strengthen the business and progressively move Cott from a position of volume stability to a business with a more diversified mix and an improved growth profile, thereby creating a business with higher free cash flows, lower customer concentration, and hence, lower risk.

The four elements of this vision are: One, to drive the organic growth of DS Services and our wider home/office delivery business alongside value creative, small, tuck-in acquisitions. Two, to drive the synergies across Cott, DS Services, Aquaterra and our wider home/office delivery business. Three, to continue to deliver strong and stable free cash flow from our traditional business. And four, to add mid to larger-scale acquisitions focused on home/office water, coffee, tea and filtration services.

With our current performance and the additions of Eden Springs as well as S&D Coffee & Tea, we have made great progress against these goals and meaningfully improved the profile of our business. These transactions together are set to provide the same level of EBITDA margins, better growth and increased earnings predictability plus higher cash flow per share alongside lower volatility. And thus, Cott should in turn receive a higher valuation from the addition free cash flow per share and reduced risk profile. We believe that our current performance, plus the attractive combination of these two transactions, moves us a long way towards achieving this vision. In simple terms, the two transactions together provide EBITDA margins consistent with today and a good mix of growth and cash generation.

With the announcement of these transactions, it's appropriate to take a moment to discuss our forward view of deleveraging and free cash flow generation, as our goal now is to focus on both these key metrics with utmost priority. With the continued growth of customers at DS Services, the capture of additional synergies plus the attractive opportunity for us to refinance $350 million of high interest debt in 2017, alongside the additions of Eden Springs and S&D Coffee, we believe that we can attain adjusted free cash flows of $225 million to $275 million by the end of 2019. We believe this improvement in adjusted free cash flow will allow us to delever to the low three times adjusted EBITDA range by the end of 2019. In simple terms, our priority and focus now as we look forward is on organic growth, integration and small, highly synergistic tuck-ins to drive free cash flow and rapid deleveraging.

On that note, I'd like to pass over to Tom to provide an update on Eden Springs as well as an overview of S&D Coffee & Tea.

Thomas J. Harrington - Chief Executive Officer-DS Services, Cott Corp. (Canada)

Thanks, Jerry, and good morning, everyone. As you know, with the acquisition of Eden Springs, we combine our North American business, the largest volume-based home and office water delivery business, with a top five position in office coffee service in the U.S., with Europe's largest home and office water delivery business and office coffee services company. Cott now has home and office water leadership positions in 20 countries, creating an international platform for further organic and tuck-in transactional growth for years to come.

Eden generates revenues of approximately €360 million and contributes a complementary product and customer portfolio as well as significant production and route distribution infrastructure to Cott. Eden has four key business segments, with the home/office water delivery segment being the largest of the four, accounting for approximately 65% of revenues, which are driven by delivery of large format, returnable bottles to homes and offices across Europe.

Eden also has a leading position in office coffee as well as filtration services alongside a retail water offering in Israel. We will leverage SG&A plus share best practices, but we won't look to change the customer-facing component of Eden, where the current management will continue to drive the strong revenue, EBITDA and cash generation of the business. I've already spent quite a bit of time with the management team of Eden, some four to five trips through 10 to 12 cities preparing for the close and developing plans to capture synergies and begin the integration process. I'm confident that we'll get off to a quick start.

So on to S&D Coffee & Tea, I would ask that those following along reference the slide deck we posted on our website, www.cott.com, this morning. I'm going to start by describing the transaction and follow on with an S&D business overview, including the strategic rationale behind the transaction. I will then pass over to Jay to cover our quarter two financial results, and we'll save questions for the end.

On slide five, we are purchasing S&D for $355 million, which represents a high, six times 2016 estimated post-synergy adjusted EBITDA multiple and brings Cott's pro forma annual revenues to approximately $3.9 billion. As you can see on slide six, this acquisition has similar characteristics to both the DS and the Eden Springs acquisitions, while having some additional unique qualities in and of itself.

The acquisition is a continuation of Cott's growth and diversification strategy in that it improves our growth profile and provides access to new Better For You categories while reducing our dependence and exposure to carbonated soft drinks, shelf stable juices and big box retailers. And it also provides access to new channels, such as convenience stores, restaurants and foodservice distributors.

It is a scaled coffee and tea platform that has a proven management team that augments our current office coffee and tea service teams. S&D provides manufacturing operations that will be further utilized with supplier combined coffee and tea operations. We believe we can capture significant synergies, including procurement, route logistics and distribution, vertical integration and the back office. In looking at this opportunity, we believe we'll be able to capture approximately 12 million of synergies over a four-year period. S&D also has strong pro forma free cash flow conversion, which we intend to expand through efficient capital expenditures and synergy capture.

On slide eight, you can see that S&D operates in attractive channels and growth markets of coffee and tea to a diversified customer base and channel mix, with longstanding relationships of 10-plus years. In addition, S&D holds leading positions in foodservice coffee, as well as foodservice fresh-brewed iced tea.

On slide nine, we've provided some financial material and highlights. I'm not going to provide a detailed overview now, as we will hold a more in-depth financial modeling call on S&D and Eden Springs on August 17, but highlights include a growing top line with a 3% revenue CAGR.

In looking at opportunities within the U.S. coffee and tea market, we pay particular attention to the management teams of the various companies that we analyze and found that the S&D management team to be top-notch. As you can see on slide 10, the senior management team has extensive experience not only in the industry but within S&D.

Moving to slide 12, as Jerry spoke to earlier, the S&D acquisition is very much in line with our vision to create a more diversified, higher margin and/or growth company that is more dependable and predictable business that delivers strong free cash flows. The S&D acquisition clearly falls in the lower left quadrant of this vision in your larger-scale acquisition with a focus on a cash-generative coffee and tea service sector.

Let's flip to slide 13. And although we have discussed some of the benefits that S&D provides our business, let's take a look at the strategic rationale behind this transaction. First off, as we noted in an earlier slide, in line with our vision and strategy, the transaction provides Cott with a scaled growing coffee and tea platform within the U.S. upon which we can build. Second, the acquisition further diversifies Cott's products and channel portfolio in line with our stated objectives. Third, we expect to capture $12 million of synergies. Fourth, the transaction is accretive to adjusted free cash flow in its first full year, and in turn, will assist in rapid deleveraging. And fifth, we will utilize a proven integration plan similar to that used between DS Services and Cott.

Turning to slide 14, S&D contributes a complementary product and customer portfolio as well as a national distribution network that uses third-party distributors for around 80% of their sales, which just happens to be in the heartland of DS Services and will provide an opportunity for route and distribution synergy capture over the coming years.

In addition, the U.S. coffee and tea markets are expected to continue to post good compound volume growth. Based on our visits over the past few months, we've had the opportunity to meet with S&D management on numerous occasions, in addition to visiting their roasting plants, depots and operations. I can say, similar to Eden Springs, we've been very impressed by their strength and depth of management, the excellent condition of their manufacturing plant and distribution network, which have all benefited from significant investment and expansion over the past few years.

On slide 15, as we've noted, S&D is a scaled business with a growing top line, which will complement DS Services' coffee business and assist our OCS, office coffee services, performance. S&D will add incremental revenue and adjusted EBITDA along with great synergy potential that build the scale and prospects for our overall business, producing a company with around $3.9 billion of pro forma revenue and $460 million of pro forma adjusted EBITDA.

When looking at projected revenue growth for coffee and tea, on slide 16, you will see the market is expecting compounded growth of 3% to 4% for both the total coffee and tea categories, which bodes well for us as we look to the future.

In looking at slides 17 and 18, these pie charts really bring to life the transformation that we've made over the last few years. What was once a business that was concentrated in carbonated soft drinks and juices as well as private label, and lacked a significant presence in Better For You arena is now much more diversified, with growing categories such as HOD water, sparkling waters, mixers, coffee and tea, as well as other growing categories such as Aimia's powdered beverages, filtration services and other flavored water-based products, such that Cott's Better For You products now represent over 65% of adjusted EBITDA. As Jerry mentioned, the private label category is now less than 30% of our EBITDA, and carbonated soft drinks as a subset within are only 12% of our EBITDA. That's smaller than either our coffee or HOD water segment.

Turning to slide 19, we are pleased with the synergy potential of this transaction, given the overlapping as well as complementary characteristics. As mentioned, we believe we'll be able to capture synergies of over $12 million over the first four years.

On slide 20, you can see we expect our adjusted free cash flow to grow from this year's estimated range of $135 million to $145 million to between $225 million and $275 million by the end of 2019. This attractive free cash flow generation helps drive rapid deleveraging, such that we anticipate reducing our over-leverage to low three times by the end of 2019.

Now let's take a quick look at our integration plan on slide 21. As is the case with Eden Springs, the current S&D management team will remain in place to drive the continued strategies and growth of the business. We have no plans to change or alter the customer-facing structure of the business other than in ways that fully leverage the complementary nature of DS Services and S&D people and distribution system. Other areas where we see synergies and benefits include procurement, vertical integration of their roasting and grinding business, brewer refurbishment and SG&A functions.

In summary, S&D is a market-leading, large scale, coffee and tea production, delivery and service provider that spans the entire United States, providing access to attractive end markets with a positive growth outlook. The transaction furthers Cott's diversification strategy across multiple products and channels while reducing Cott's exposure to big box retailers. It delivers high expected synergies of approximately $12 million, driving a high six times post-synergy multiple. It is consistent with our focus on free cash flow generation and is expected to be accretive to adjusted free cash flow in its first full year. And the transaction further strengthens Cott's corporate profile, creating a business with lower customer concentration and risk.

With that, I will pass over to Jay to discuss our second quarter consolidated operations as well as our segment operations.

Jay Wells - Chief Financial Officer

Thanks, Tom. If we look at our business as a whole during the quarter, I would say that our operations performed more or less in line with our expectations. Similar to Q1, we continued to see some segments and parts of our business, such as home and office water delivery, sparkling water and mixers as well as contract manufacturing demonstrate good growth, while other segments remained more challenging, such as carbonated soft drinks and traditional brew basket office coffee services.

So let's take a look at some of the specific drivers within our second quarter's results, where you can see we again invested in and saw significant new, organic, U.S. customer growth of 36% at DS Services. And in our Cott North America business unit, we saw sparkling waters and mixers growth of 10% in actual cases and contract manufacturing growth of 15% in actual cases.

Adjusted EBITDA in the quarter was lower by 3% at $105 million as growth and synergy capture at DS Services, the addition of Aquaterra and tighter operating controls in our U.K. business was offset by $4 million of incremental investment and organic new customer growth at DS Services, continued higher than planned operating costs as previously communicated, and over $4 million of adverse foreign exchange. The cost of investing in DS Services' growth and foreign exchange headwinds were two key factors in our results this quarter.

So let's take a look at each of these in a little bit more detail. First, our investment behind customer growth. DS Services delivered the highest number of U.S. gross and net organic new cooler and equipment customer additions in the quarter, relative to any quarter in the history of DS Services. Second quarter gross organic customer additions, that's water coolers, brewers and filtration units, were 36% higher in the U.S. than the second quarter of 2015, and the net new customer growth for the first half of the year was approximately 50,000. This high level of organic net new customer additions places the business in a good position as we look to the second half of the year.

As we have previously explained, this new customer growth is attractive and provides real momentum to the business on a go-forward basis, but has required extra investment and work that at times has been challenging to keep up with. For instance, we have invested an incremental $4 million during the quarter in areas such as programs, sales, marketing, commission and installation plus overtime to keep up with the rapid pace of installations. As we look to the second half of the year, we plan to scale back our marketing efforts to focus on serving the record number of new customers we have signed up year-to-date.

Moving on to foreign exchange, as you are aware, foreign exchange rates have impacted most multinational consumer goods companies, and for Cott, the adverse impact of foreign exchange on our second quarter's adjusted EBITDA was over $4 million. And looking at Brexit, we see two foreign exchange-related areas where the lower value of pound-sterling post-Brexit will impact our results.

The first is the translation of our earnings into U.S. dollars. And the second is certain input and commodity costs that will increase as our existing coverages expire. That said, we do not see much of a potential impact on the underlying nature of our U.K. traditional business from Brexit, as we are a value beverage supplier in the U.K., and we believe the consumer will continue to drink value beverages, even in less certain economic times.

With regards to Eden Springs, we obtained debt based in euros to hedge against our euro earnings, and with almost all of each country's revenue and expenses being within that country's local currency, it reduces the transactional impact within Eden Springs to a negligible level and leaves just a translational effect of local currency into U.S. dollars.

In order to assist our analysts and investors, we have included some pie charts that show our pro forma revenue and EBITDA, inclusive of Eden and S&D by currency on our website at cott.com. In looking at these charts, you can see that we are concentrated in the U.S., with U.S. based operations accounting for over 70% of our total revenues and just under 70% of our EBITDA.

In looking at the UK, we generate roughly 14% of our revenues and 15% of our EBITDA in British pounds and 4% of our revenues and 7% of our EBITDA in Euros. Based on this mix of revenue and currencies, if pound-sterling and euro rates remain where they are today, the 2016 foreign exchange impact, inclusive of the recent Brexit related sterling weakness, should be $15 million to $18 million, up from the $11 million to $14 million prior guidance. And we'll provide our outlook for FX in 2017 as we get later in the year.

With respect to free cash flow, as Jerry noted, we continued to see positive results as we focused on our 4Cs controlling CapEx tightly and rigorously managing working capital. As a result, we saw adjusted free cash flows improve by $8 million during the quarter, as adjusted free cash flow was $54 million compared to $46 million. We continue to expect CapEx excluding Eden and S&D to be in the range of $120 million to $125 million and for our 2016 adjusted free cash flow to be in the $135 million to $145 million range, albeit at the low end of that range given the Brexit FX discussion we just had.

Turning to the acquisition of S&D and our leverage, we expect our debt-to-EBITDA ratio to be unchanged at 4.8 times after the acquisition of S&D, as the acquisition will be funded by incremental ABL borrowings and cash on hand after liquidity was boosted by our $230 million equity offering in late June. Our tax benefit for the second quarter of 2016 was $2 million. The acquisition of Eden Springs and S&D Coffee & Tea will modify our expectations for our full year tax benefit on a reported basis, and we will provide an update to our expectations on our modeling call scheduled for August 17.

With that, I will now cover the performance of our larger business units. Let's start with DS Services. Overall revenue was up 7% at $276 million, our primarily to the addition of the Aquaterra business. On an energy surcharge neutral basis, DS Services revenue increased 8%, 1.4% excluding Aquaterra as growth in home and office water delivery, the single cup coffee delivery and retail sales were largely offset by reduced sales and traditional brew basket coffee. As I noted earlier, DS had another record quarter in terms of U.S. gross and net cooler customer additions, which drove very good volume and dollar sales growth in home and office water delivery business. DS Services gross profit increased by 9% to $171 million while gross profit as a percentage of revenue increased to 62% from 60.7%.

Adjusted EBITDA increased by $1 million to $50 million, as DS Services growth and synergy capture was largely offset by investing $4 million behind strong second quarter organic growth in new customer programs and the somewhat higher Q2 operational costs previously mentioned. As it relates to Aquaterra, the business generated approximately $17 million of revenue during the quarter. Integration efforts are on track, and the performance is in line with our acquisition model.

In our Cott North America business unit, our second quarter 2016 volumes were up 4% in actual cases, driven by strong growth in the sparkling water and mixer category, which increased 10% in actual cases, as well as strong growth in contract manufacturing, which grew 15% in actual cases. Due to contract manufacturing growth of 2 million serving equivalent cases, brings our 2014 to-date contract manufacturing growth to 50 million serving equivalent cases, plus achieving the lower threshold of our three-year, 50 million to 80 million serving equivalent case growth target with another two quarters still to go.

FX neutral revenue was down 2% at $349 million with revenue growth from improved volume being offset by the continuing products mix shift and the contract manufacturing as well as the competitive landscape. Gross profit as a percentage of revenue increased to 15.1% compared to 14.8% primarily due to the operational leverage and increased volumes, offset in part by the negative impact of foreign exchange and higher operational costs.

Now turning to the UK, as we have been forecasting for the last year, the UK beverage and retail markets remain challenging, as hard discounters pressure the more traditional large format multiple grocers. But in the face of these headwinds, we were pleased with the operational results of our UK European business unit this quarter, as they continued to make good progress against the cost and business efficiency programs previously outlined.

And looking at the operating results for the quarter, UK Europe volume decreased 12% in actual cases and 8% in servings while revenue decreased 8% on a foreign exchange natural basis. Gross profit as a percentage of revenue increased to 18.2% from 16.6%, primarily due to the growth at A, tighter cost controls and lower inventory levels. Looking forward, we continue to expect the UK market to be a challenging environment over the next couple of years. And even though we have performed better than expected over the last three years, we see a headwind to 2016 EBITDA as a result of the UK market pressures, lower UK volumes as the year progresses and lasting cost and efficiency programs that we began implementing in the back half of 2015. With regards to Aimia Foods in the UK, we were again pleased with the performance of Aimia Foods, which had another good quarter with 23% local currency revenue growth and good EBITDA growth.

I will now turn the call back to Jerry, who will comment on the balance of the year and our longer-term outlook.

Jeremy S. G. Fowden - Chief Executive Officer & Director

Thank you, Jay. On DS Services, we expect to continue to deliver both customer and top-line growth as we move through 2016 with a stronger second half revenue and EBITDA performance as the year progresses. On Aquaterra, the integration is going well, and results are in line with our acquisition model. As you may recall, our plan was to use 2016 as a base year to get Aquaterra fully on to the DS Services operating platform and systems before extending our other DS Services programs and small tuck-in acquisitions to Canada.

As it relates to our traditional business, we expect the North American beverage landscape, especially CSDs, to remain challenging. But overall, we believe our North American business unit can maintain stable case volumes by a growth in contract manufacturing and sparkling waters and mixers, which alongside capital controls should allow us to deliver strong and stable free cash flows.

In the UK we'll remain focused on implementing our three-phase cost and efficiency program, which alongside continued growth in Aimia Foods should generate the same high levels of free cash flow in 2016 as we achieved last year.

On a consolidated basis, we continue to believe revenue is not the best leading indicator, given the ongoing mix shift within our traditional business towards contract manufacturing and the current adverse foreign exchange environment. To assist you with modeling revenue and its various contributory elements, we have included detailed schedules for the quarter within our press release and continue to believe that the revenue bridge on our website from our February Earnings Call remains in line with our expectations.

Jay has already updated you on FX, its impact within the quarter and the revised outlook for the full year. On commodities we continued to see a year in which on a net basis commodities inclusive of our advanced coverages and hedges are fairly benign.

As we look to the future, we believe our current performance, organic actions and the Eden Springs and S&D transactions, along with our strong free cash flow generation and attractive compound annual growth in free cash flow to a range of $225 million to $275 million by the end of 2019 should put us in a very good position to create value and rapidly delever. We have been following a very clear strategy, one that we have widely communicated and one that we have been executing with purpose. Our strategy has focused on the diversification of our business towards cash generative higher growth and/or higher margin businesses while continuing to follow our 4Cs and generate strong free cash flow from our traditional business, such that the Cott's overall business profile progressively becomes more predictable and dependable, and we become a lower risk company that should trade more in line with other CPG and service industry peers.

So in closing, we were pleased with many aspects of the company's performance this quarter, such as the significant strategic progress made in changing the shape and profile of the company, as well as the continued strong free cash flow generation achieved despite increased FX headwinds. As we look forward, we are aware there can always be unexpected issues and bumps in the road, such as Brexit, but we believe our 2016 free cash flow will remain in the $135 million to $145 million range. We estimate our 29 free flow outlook is in that $225 million to $275 million range, and that we will have reduced our leverage by the end of 2019 to the low three-times adjusted EBITDA level.

So on that note I'd like to turn the call back to Jarrod to open up for question-and-answer.

Jarrod Langhans - Director-Investor Relations & Corporate FP&A

Thank you, Jay, Jerry and Tom. During the Q&A, so we can hear from as many of you as possible, we would ask for a limit of one question and one follow-up per person. Thank you for your time. Operator, please open up the line for questions.

Question-and-Answer Session

Operator

Thank you. We'll take your first question from Derek Dley from Canaccord Tenuity Corp.

Derek Dley - Canaccord Genuity Corp.

Hey, guys. Congratulations on another great acquisition here.

Jeremy S. G. Fowden - Chief Executive Officer & Director

Thank you, Derek.

Derek Dley - Canaccord Genuity Corp.

I was just wondering – you're welcome. I was just wondering if you could put some numbers just around the market share that S&D has in some of its key channels? Where you see some class selling opportunity between S&D and DS? And what your outlook is in terms of the growth rate at S&D? Should we still expect it to slightly outperform the overall coffee and tea market like it's done over the last three years?

Jeremy S. G. Fowden - Chief Executive Officer & Director

So let's just recap there, Derek. Market share, cross selling and then growth rate. Three good questions, all in one. Let's see what we can do to help, Derek.

Derek Dley - Canaccord Genuity Corp.

It was a three-part question.

Jeremy S. G. Fowden - Chief Executive Officer & Director

On market share, this is a business that predominantly looks at convenience retail, food service, restaurants, hospitality, areas like that. As you know, Derek, it's much, much harder to track market share in some of those channels versus the more traditional kind of retail grocery area. But if you kind of said they had a 15% to 20% sort of market share across those channels that would be a pretty good indication of where they are with regards to market share.

On cross selling, and maybe I'll pick up that question slightly differently. I think the most attractive area of cross pollination of activity between S&D and our current business is the fact that their tremendous capability in roasting and grinding can be used to supply the products that today DS Services uses with its customers. And not only will that provide a higher quality, vertically integrated cost benefit, it will also provide a broader range of products that can be sold. On top of that, S&D has done a great job in recent years growing its specialty Extract & Ingredient business. And if you think like me, every time you wander into a restaurant these days, there's a new flavor of some iced, frozen kind of beverage, many of which are in the coffee space, while S&D is a leading extract and ingredient supplier behind that trend. And when you look at their ability to continue to grow that, and the infrastructure that we have in our international and global concentrate sales division, the opportunity to take those ingredients and extracts and sell them outside the U.S. to additional markets is very attractive.

And then on growth, I think here's a business that over the last couple of years or so has done about 3% top-line growth and 7% EBITDA compound growth, the market is growing in that 3% to 4% range. So I think as we look to the future, we are able to see ourselves replicating that recent performance in that market growth opportunity.

So I hope that's tried to pick up those three questions, Derek.

Derek Dley - Canaccord Genuity Corp.

Thank you very much.

Jeremy S. G. Fowden - Chief Executive Officer & Director

Thank you.

Operator

We'll near next from Mark Swartzberg from Stifel, Nicolaus & Co.

Mark Swartzberg - Stifel, Nicolaus & Co., Inc.

Yes. Thank you, and good morning, everyone. A question on DS...

Jeremy S. G. Fowden - Chief Executive Officer & Director

Hello, Mark.

Mark Swartzberg - Stifel, Nicolaus & Co., Inc.

Good morning, Jerry. A question on DS, and it's good to hear your outlook for the second half being for improved organic growth there, I think a couple questions. This pace of customer additions is huge, right? 36% is a huge pace of addition, and wondering how that compares to your experience. There's an offsetting factor there. By definition you're losing other customers, and you're saying as you slow spending for new customers you still expect overall organic growth to improve. So I'm just trying to understand what your experience says about your ability to see that improvement? And I'm sure it's happening, because we're already into the second half here, but I'm just trying to understand the underlying mechanics, if you will, behind that outlook?

Jeremy S. G. Fowden - Chief Executive Officer & Director

Yes. And I'll make a couple of comments. And when you talk about experience, the fact that we have Tom here with us, there's hardly more experience in here in the U.S. industry than with Tom. So I'll ask him to chip in afterwards, Mark.

Mark Swartzberg - Stifel, Nicolaus & Co., Inc.

Great.

Jeremy S. G. Fowden - Chief Executive Officer & Director

As you know, last year we undertook a lot of integration activity. There were about 50 heads that were saved in back office and SG&A. We consolidated three call centers into one in Lakeland, Florida in our call center quality and service, and answer times have all improved. But obviously when you go through that kind of activity, you get friction and churn and noise. And if you actually look back, our rate of customer additions in the second half of last year, were slower than we might have liked at the time, but not surprising given all the integration activity that was going on. You know this year we've come out with these record-setting growth 20,000 net new customers added in quarter one, which meant quarter one exceeded all of the net new customer additions of entire 2015; 30,000 additional net new customer adds in Q2. So I think we've now exceeded, Tom will know the detail, our budget for the full year after two quarters. And yes, we're going to slow down some of our investment in the back half of the year to really concentrate on serving customers over the busy summer months and in the back end of the year.

But I think when you contrast record-beating growth front end of this year, and we have those customers' revenue towards the back end of the year, versus a softer customer growth that we saw in the back half of last year, you can see why our outlook for the second half we are signaling what we improved. But I'd like Tom to expand on this whole area that I think you're also getting at, Mark, because there's adds and then there's quits.

Mark Swartzberg - Stifel, Nicolaus & Co., Inc.

Great.

Thomas J. Harrington - Chief Executive Officer-DS Services, Cott Corp. (Canada)

Hello, Mark. How are you?

Mark Swartzberg - Stifel, Nicolaus & Co., Inc.

Hey, Tom. Good morning.

Thomas J. Harrington - Chief Executive Officer-DS Services, Cott Corp. (Canada)

If you look back historically to 50,000-plus of net growth is the best we've ever had. The best year prior to that would have been in the order of 30,000 two or three years ago. And importantly, the most important part is the adds are growing at the double-digit rate, and those customers are sticking. So if you think about the friction and the work we did last year in terms of the call center created and backed a few bumps in the road for us, is that now it's a more stable environment, albeit not yet perfect. But we're seeing stabilization in the quit (49:15) rate. As you know, if you think about the HOD water business as a subscription based business, you typically have a higher churn with this amount of new customers. And we'll actually have a better retention rate this year than we did last year. In terms of go-forward, we want to make sure that we live up to our commitments as it relates to the basic service commitment to our customers. So while it is slow, it continues to grow. But we want to make sure that we're answering (49:47) and that our route sales reps are delivering on commitment to the customers.

Mark Swartzberg - Stifel, Nicolaus & Co., Inc.

That's' great. That's very helpful. And thank you, and encouraging too. Could I – one quick one on S&D, the 20% that's direct route, is that growing faster than the other 80%? And when you think about the opportunity to take that 20% number up, how significant is that? I mean you're saying it's a synergy opportunity, but is it a large source of synergy? Can you get the 20% to 50%, 60%, 70% over some period of time? I'm just trying to get a sense of what you bring as an infrastructure to that direct route opportunity for S&D.

Jeremy S. G. Fowden - Chief Executive Officer & Director

On the first part, and we've got Ron with us, but we did say we would let him off the hook of being put in the firing line this morning, given we only signed this sometime late yesterday. But I'm sure in individual follow-ups over the next few weeks and months everyone will get a chance to meet Ron. And we're looking forward to working with him. The benefit of that is he's already whispered in my ear in those couple of seconds, Mark, and the growth rates, the 20% versus the 80% is pretty much the same. It's just a different way of delivering product to what is by and large a common national customer base. Yes, there are regional customers in different places, but it's the delivery mechanism that gets the product there.

Mark Swartzberg - Stifel, Nicolaus & Co., Inc.

Got it.

Jeremy S. G. Fowden - Chief Executive Officer & Director

With regards to the potential as we look forward, I think as Tom did call out, that is one of the attractive areas where there's both a complimentary nature, the on and one is 2.5, as well as the straightforward fiscal synergy benefit. And with $12 million of synergies against a business with a base EBITDA of $40 million, you've got a kind of 30% ratio of synergy to base EBITDA. That's a pretty attractive and high ratio. And as we all know through life you do some transactions where you know you're going to have to work jolly hard to get those synergies. If anything, the thinking of us here is as time passes, hopefully we will achieve and exceed those synergies. We see lots of areas where the overlapping nature of this business provides opportunity. But we're going to have a dedicated headwork on the kind of integration of both Eden Springs and S&D Coffee. And we'll update you obviously all as we go forward, but we do see lots of areas. Just think of every time you've got to refurbish a coffee brewer. Well, we've got a refurbishment center in DS and a refurbishment center in S&D. Think of the depots from which that product is being delivered. Well, there's all of S&D's depots as well as DS's. Some will be in overlapping geographies. So we do see a lot of opportunity there, Mark, from the combination of these two businesses.

Mark Swartzberg - Stifel, Nicolaus & Co., Inc.

Very helpful. Well, thank you. And congratulations.

Jeremy S. G. Fowden - Chief Executive Officer & Director

Thank you, Mark.

Operator

We'll hear next from Bill Schmitz with Deutsche Bank.

Bill Schmitz - Deutsche Bank Securities, Inc.

Hey, guys. Good morning.

Jeremy S. G. Fowden - Chief Executive Officer & Director

Good morning, Bill.

Bill Schmitz - Deutsche Bank Securities, Inc.

Hey, how much bandwidth do you guys think you have on the acquisition front? Because obviously you've done a bunch of deals in quick succession. So I'm just trying figure out how much time you have to spend sort of running the shop versus getting the deals integrated? And kind of how the teams are separated? And things like that?

Jeremy S. G. Fowden - Chief Executive Officer & Director

Yeah. Let's pick that up with a two-part answer to that question, Bill. First and I think as we said on the prepared remarks, I'd like to reiterate it. We are very, very pleased indeed with the opportunities to get Eden Springs and S&D done. But we have clearly laid out that our utmost priority now is organic growth, the integration of those businesses and really bringing the business together as one to capture those synergies and drive the business forward, generating free cash flow and rapidly deleveraging. So we are not looking at any other mid-to larger scale acquisitions as we look out over the kind of next year or two. So I think that's the first point.

Two, we have identified a couple of key executives that will be committed towards really the process management of the overall integration of these businesses, bringing the different teams together and driving forward that ongoing monitoring of those integration and synergy activities. One of those will even be full time embedded within one of the businesses, the other working across the pair. So we've got dedicated resource against that.

And third, we've got Tom here on the call, and we're a year and three-quarters or whatever into our combination with DS, and every single one of Tom's top team is here with us, and we're jolly glad of that or we wouldn't be able to keep up with this pace of customer acquisitions. And Ron and Ron's top team from S&D have already signed up to be with us as a complete team. So in terms of bandwidth I'm delighted with the strong management team we've added. We have dedicated resource of the integration and planning and go-forward now the focus is on organic performance, integration and driving the cash flow and deleveraging.

Bill Schmitz - Deutsche Bank Securities, Inc.

Okay. Can you just – I just have a follow-up for that and then one more question. How are the employment contracts structured? And how long are they typically in duration? And then a question about modeling the new acquisition. So how do we think about coffee prices and how that impacts the model, as obviously the commodity does fluctuate quite a bit? And then if there's any customer concentration there?

Jeremy S. G. Fowden - Chief Executive Officer & Director

Okay. Hopefully Jay can remind me on some of these and we'll pass them out. But the first one is, as you know, we tend to drive a scenario whereby there are both some retention payments and some long-term incentive programs behind management remuneration. And we have already agreed a set of retention and long-term incentive programs with the S&D management that take us through the end of 2019. So it covers the next 3.5 years. And then there's be some overlapping elements to those programs, but before we get to 2019, we'll have stuff in place that goes past 2019. So I feel very comfortable about that.

Jay Wells - Chief Financial Officer

Price of coffee affecting the modeling.

Jeremy S. G. Fowden - Chief Executive Officer & Director

Jay, will you cover that?

Jay Wells - Chief Financial Officer

I'll cover that. You know the thing is you're accurate, when you look at the price of coffee, it will affect I would say the top line and the COGS penny-for-penny or dollar-for-dollar. Really when you talk to the guys at S&D, it's really when it comes to coffee pounds sold, and it's the pounds sold in gross is really the top-line metrics you have to watch, because if coffee goes down, overall the revenue will go down, costs will go down, your EBITDA will be the same. If coffee goes up, vice versa, but it's really the profitability, the EBITDA gross with increased pounds sold.

Bill Schmitz - Deutsche Bank Securities, Inc.

Okay. That's helpful. Then just lastly on the customer concentration, then I'll hand it over.

Jeremy S. G. Fowden - Chief Executive Officer & Director

Customer concentration was the third.

Jay Wells - Chief Financial Officer

And I mean there's close to no overlap between the S&D customer profile and the traditional Cott profile being a food service, restaurant and convenience business. And as you know, Cott's Achilles Heel historically was – we're in the very competitive big-cost channel, and we were not in all of the other channels that other soft drink companies benefited from. And then within S&D, it's a good spread of customers where within S&D's revenue, the largest would be somewhere just over 10%, and it trails down to smaller customers, with maybe 50% of our revenue in the top 10 class customers, something like that, and the average 10-year life in terms of the customer relationships of those top customers. But then you're talking about them as if they're one blob of customers. If you consider within the top five customers alone, I think there's two restaurant chains, two convenience chains, and one distributor. So even these customers are in very, very different channels, that make up that top customer list.

Bill Schmitz - Deutsche Bank Securities, Inc.

Okay. Great. Thanks so much.

Jay Wells - Chief Financial Officer

Thank you.

Operator

We'll move next to Judy Hong from Goldman Sachs.

Judy E. Hong - Goldman Sachs & Co.

Thank you. Good morning.

Jeremy S. G. Fowden - Chief Executive Officer & Director

Good morning, Judy.

Judy E. Hong - Goldman Sachs & Co.

So first the question around I guess Brexit impact and it was helpful to get the color on translational and transaction impact but wanted to just get a little bit more color around the potential impact in terms of the underlying health of the business, both on the traditional Cott in the UK as well as the Eden Springs and how much the potential weakening environment in the UK and the broader Europe, potentially impacts your businesses there?

Jeremy S. G. Fowden - Chief Executive Officer & Director

Yeah. And I'll pick up on a bit and then maybe have Jay expand on any of the more kind of a financial side of that. But for the UK business, we feel very comfortable that the business has no real underlying impact from Brexit. The economy hasn't really changed. There's a lot of uncertainty. If the economy does change and actually becomes a tougher economy, a recessionary environment then as you know our traditional businesses tend to prosper slightly, on average do a little bit better in tough economic times because we're at the value-end of the beverage range. So Brexit, from an underlying impact on the business, we don't see any concern. And then you have the financial elements. Within Eden, I think what Jay was trying to say is, you're using, and let's pick any country, Germany, you're using water out of German wells filled by German workers, going on German trucks, delivered to German customers, and the only thing that might get imported is a €0.07 cap on a five-gallon bottle of water. So there's negligible kind of transactional impact within that business. And as we look at exchange rates today, I believe our overall view would be that maybe a $2 million sort of impact on Euros to dollars. But look, the euro was €1.06 in mid-December. It got up to 1.17. It's been in that kind of $1.10 to $1.13 range. Actually you could say any time over the last several months we could look at euro versus dollar favorably or advert. It's not moved very much, and only 7% of our global revenues – 4% of our global revenues are actually in Euros, because there's also the zloty (1:01:09), shekels, other currencies that are not euro based.

Jay Wells - Chief Financial Officer

But the 72% is U.S. dollars, based on the pie charts we've put online.

Jeremy S. G. Fowden - Chief Executive Officer & Director

So small impact. And then, Judy, 95% of the purchase price of Eden Springs was covered by the issuance of long-term euro debt of 5.5%. And then equity was issued, which has allowed us to do S&D using ABL and cash on hand. So in effect we've built a natural hedge that more or less fully covers the Eden Springs business, and we benefit from very low financing costs ABL wise against the S&D transaction.

When you look at those two businesses together, the EBITDA margins of those two businesses are pretty much consistent with where cost was before both of the transactions. One is higher margins, the other one is higher growth. Together they provide growth and the same EBITDA margins. Jay?

Jay Wells - Chief Financial Officer

Pretty much covered almost everything. I mean just to do a quick summary, you look at our traditional business, the bulk of their purchase is in pounds, but certain commodities aren't really driven by the pound. They're driven by more U.S. dollar pricing, for example aluminum. So as some of our foreign contracts roll of, we will see some increase in costs associated with the devalue of the pound. And that's really the transactional side, as Jerry said. We really don't see much transactional side on Eden. And then it really is the translational side, and that's why on our website we have provided pie charts on a pro forma basis, the breakdown of our revenue and EBITDA based on currency to help you model that out.

Judy E. Hong - Goldman Sachs & Co.

I think the currency impact is pretty clear. I guess I'm just wondering about maybe some – not having followed the HOD business both in the U.S. and in Europe over the long history, how does a weakening environment from a business standpoint potentially impact – I guess in the broader Europe the customer additions, retentions and your ability to generate positive growth?

Jeremy S. G. Fowden - Chief Executive Officer & Director

Yeah. And the Eden Springs business is spread over 18 markets. Within those we have some quite high growth markets for elements of this business, where the infrastructure, think Russia, think Poland, municipal infrastructure not as strong. And you have some other more mature markets. And when we put all of that together, we feel comfortable, even looking at the economic environment we're in, this kind of 1.5% sort of growth, because you have growth in the 5%, 6%, 7% percent and some of those more underdeveloped markets and you have kind of that flat to plus one or two as we mentioned in the more mature market.

Jay Wells - Chief Financial Officer

I mean, we did a lot of work on Eden and I think we talked about it during the – even the announcement call that we had. And even during significant recession that we saw a couple of years ago Eden still did very well, you know they might have seen some decline in consumption at their customers as employment went down. But they really reduced their marketing spent, increased between and acquisitions and continued to grow through tough times. So I think Eden has a proven record of, you know, across many different geographies managing through good times and bad and you know, have been able to grow the business through both.

Jeremy S. G. Fowden - Chief Executive Officer & Director

And I think, a couple of points, just as I think about this and maybe to close on this question, Judy. One, in our free cash flow guidance that we have given and updated today for this year and for 2019, we have already factored Brexit into that. And two, we have announced that we will do a modeling call on August 17 where I think these very kind of detailed outlooks year-by-year of what impact there might be, what the different drivers of customer versus consumption might be within that model. We will pick up on August 17 and we'll cover details there for Eden Springs as well as for S&D.

Judy E. Hong - Goldman Sachs & Co.

Okay. That's helpful. And then if I can just follow-up on one last question around your free cash flow guidance and maybe we'll get details on the modeling call. But obviously the fiscal 2019 outlook looks pretty meaningful step up from the current base and just wanted to get a little bit color on the building blocks of how we go from $135 to $145 to $250 at the midpoint.

Jeremy S. G. Fowden - Chief Executive Officer & Director

I mean we had previously given guidance for before Eden and S&D for 2018 to be $165 to $185 million range. And really, on top of that, you have to add the additions of both Eden and S&D and the synergy capture associated with that transaction and that will, pretty much (1:06:17) you know, the refinancing was already given in our previous guidance. So really, it's adding S&B and Eden in the synergy captures on top of the previous guidance we have provided on top of what we're adding one more year to it, in addition to growth and our existing business.

Judy E. Hong - Goldman Sachs & Co.

Got it. Okay. Thank you and congratulations.

Jeremy S. G. Fowden - Chief Executive Officer & Director

Thank you.

Operator

David Hartley from Credit Suisse, your line is open.

David Hartley - Credit Suisse Securities (Canada), Inc

Yeah. Good morning.

Jeremy S. G. Fowden - Chief Executive Officer & Director

Hi, David.

David Hartley - Credit Suisse Securities (Canada), Inc

Hey. How you doing, Jeremy? Jeremy, just thinking about the business as a whole now. Is it the company's intention to maintain its presence in all verticals in the beverage industry that you've attained today, or is there some thought perhaps given to maybe potentially exiting one of those verticals, or two of those verticals? There's been a lot of talk about that in the market. Just thought I'd see if I could get your view on that.

Jeremy S. G. Fowden - Chief Executive Officer & Director

Yeah. And I think most of the discussion, David, has been around our traditional business which as you know from free cash flow generation is a very, very attractive business. But I think it's a fair question and one where there's a lot of interest. Most people, I think, on this call will know we go through a pretty extensive strategic plan update and we do that each year, where we look up three years, five years, seven years, and 10 years, and we tend to do that work over the back half of the year. So we have already kicked off that process and set the schedule and the time line for that. And within that we are very willing to look at all areas of value creation for our shareholders, both whether that be in additions of exiting certain areas of the business, but we want to be very clear and mindful that if we look at any alternatives, it has to generate value equal to or over and above the free cash flow generated from the businesses we've got, and as you know they're very attractive, strong, free cash flow generating businesses, David.

David Hartley - Credit Suisse Securities (Canada), Inc

Great. That's good to know. Thanks. And just, you've put together some great disclosure. We really appreciate that. It seems to me, though, that you're building in a lot of great options in the business now, not just around actual cash flow and everything else, which is obviously very important, but around management and your brands. It appears that you've got a great stable of management now that's come on board through these recent transactions, and you now have, dare I say, a few brands to think about over time, in terms of focusing on perhaps fewer as time goes on. Could you perhaps provide some color on that as well?

Jeremy S. G. Fowden - Chief Executive Officer & Director

First I'd like to, I think, thank you very much for making that comment on the management. We have been both for the core business and with the acquisitions we've done, working very hard to make sure that everyone had a very clear and focused role to do, that it was an attractive environment for them, and I'm very pleased with the retention, the kind of capable management team we've got across our business. And I know some people have raised questions about bandwidth as we do transactions, but the effort was put into both developing our original management team and retaining the strong management teams with the acquired businesses that are a large part of our overall company today is something we've focused a lot on. So thanks for highlighting that.

And then as it goes forward, and you mentioned brands, I mean let's think of the UK business, which is one I know you know fairly well. About half of our gross margin in the UK comes out of brands and other parts of the business that have on average higher margins than the rest. And our goal as we went forward and set out on this strategic plan several years ago was not to be a branded business, but it wasn't to be a private label business, and it wasn't to be a contract manufacturing business. It was to be a business that had more diversification across products, channels and broad capabilities to please our customers. Thereby when one thing is going well it can offset something else that might be under a bit of pressure. So we're pleased that we have managed to build that portfolio made up of a better mix of things, and we're very comfortable that we can continue with different elements of the business where we have focused and dedicated management teams behind them and driving them. So I think we are getting to a shape where the overall profile of the business now is pretty close to the strategic vision we set out. That's why we've tried to signal on this call organic growth, integration, maybe a few tiny small tuck-in acquisitions that are very value creative, cash and deleverage is the priority on everyone's agenda as we're looking out over the next one year, two years, three years, David.

David Hartley - Credit Suisse Securities (Canada), Inc

Yeah. That's great, Jerry. And certainly there's some potential opportunity for further value creation through there as you consolidate all that. Last question if I may, then I'll jump off. Just as we go through different economic times and markets, it seems to me that the business has also become more diversified with a lot of value offering, as you mentioned, but also as I mentioned other brands and so on. How comfortable are you right now with your line up? With your ability to travel through economic cycles? Do you feel that going through a strong cycle or a weaker cycle you'd be equally well positioned? Or not?

Jeremy S. G. Fowden - Chief Executive Officer & Director

Yeah. With many more countries, currencies and economies within the business, we have more broad scale diversification that should be lower risk and more resilient to changes in economic times. Having said that, look, if there was another massive global recession/depression like we had in 2007 and 2008, the business would be impacted. I'll give you my promise, and I know its (1:13:23) with the rest of the management team, we track cash and tight operating control, really I'd say harder than anyone else I know. If something that large was coming up, we will, as you've seen us do in the UK beat our expectation for the last three quarters having batten down the hatches, really taken a tough grip of costs such that so far this year we're actually up in pound-sterling rather than down, even though we've had pressure on that top line. So if something like that were to occur, we are mindful of it. But as you know, we hold the cash levers here are very tight, and we have modeled the scenario, downturn scenarios, we do that as part of our strategic plan. And if something horrid like that was to happen, we can still pay our dividend, we can still delever, it just wouldn't be delevering as fast as we might have wished in an adverse environment like that.

David Hartley - Credit Suisse Securities (Canada), Inc

Very good. Thanks a lot, guys.

Jeremy S. G. Fowden - Chief Executive Officer & Director

Thanks, David. And I think we're carrying on? Okay.

For a couple more minutes.

Operator

We'll hear next from Amit Sharma from BMO Capital Markets.

Amit Sharma - BMO Capital Markets (United States)

Hi. Good morning, everyone.

Jeremy S. G. Fowden - Chief Executive Officer & Director

Hi, Amit. You're lucky there. I was just about to say we're out of time and you're cut out. Then Jarrod told me it was a miss, so we thought we better take the call.

Amit Sharma - BMO Capital Markets (United States)

Oh, thank you. I appreciate it. I'll be really, really quick. Jerry, so on the DS customer acquisition, another strong quarter. Just wanted to make sure that the margin profile of the customers that we are adding are similar to what you talked about in the first quarter?

Jeremy S. G. Fowden - Chief Executive Officer & Director

Yeah. And Tom's here, so it's not that I don't know the answer, but he's closer to everything. I'll ask Tom to pick it up.

Thomas J. Harrington - Chief Executive Officer-DS Services, Cott Corp. (Canada)

Yeah. It's generally what we've experienced in the past. The benefit we're seeing now is that these customers are stickier. They'll – actually, we have that roughly four-year average life of a customer looks to be expanding a little bit, because the customer base is above (1:15:31) higher quality, which enhances obviously the economics of each individual customer transaction.

Amit Sharma - BMO Capital Markets (United States)

Got it. And then, Jerry, one (1:15:44) question on S&D, I mean we saw that they increased some capacity internally a couple of years ago. Could you talk about where are they in terms of utilization? And as you realize some of these synergies; is there any need for them to put incremental CapEx behind that to expand capacity?

Jay Wells - Chief Financial Officer

It's Jay. How are you doing, Amit? One thing we really enjoyed when we reviewed S&D, they have shown very good historic growth, continued growth, and they have built the company. And you've seen the CapEx to build add roasters, add packaging, add capabilities, and really have a plan to continue to do that over every year we've looked at. So they more than within their existing structures have the ability to add roasters within the capital plan and with what we modeled to add roasters to keep building, adding roasters, adding packaging, to keep up with the growth. So very happy with the current footprint and the ability and the plan to continue to grow.

Jeremy S. G. Fowden - Chief Executive Officer & Director

Yeah. I think one comment I'll make on that, Amit and either Tom or Ron can kind of chip in, but you added a new facility, how many years ago, Ron?

Ron Hinson - Chairman & Chief Executive Officer, S&D Coffee, Inc.

About three years ago.

Jeremy S. G. Fowden - Chief Executive Officer & Director

And that facility was bought at a time of some distress in the region it was in. It's a fabulous facility. It's quite large and something like half plus of the space within it is still available for the addition of additional roasters. So when you think of the costs associated with keeping up with the growing business, you've got the building itself, often a third of the cost, the utilities and infrastructure often a third of the cost, and then the actual production equipment, roasting or grinding or packaging. And they had the building, they had the infrastructure, they had the spare space that was all set up for the time when they could take advantage of some depressed economic situations to get this attractive new facility three years ago. So you're talking about just adding some roasting as you win new contracts rather than having to add all of the infrastructure, which is great.

Amit Sharma - BMO Capital Markets (United States)

That makes perfect sense. And Jerry, one last one for you. It's, I think for us, it's really important to hear you focus in the next couple of years, a little bit more on execution and integration. What's the outcome of that? I mean, we are very familiar with how you communicated the cash flow story, but as you focus more on integration, should we start to pay a little bit more attention on the top line as well, or cash flow still is the best measure to see your performance?

Jeremy S. G. Fowden - Chief Executive Officer & Director

I think cash is by far and away the best measure to measure any business' performance personally, because any changes to accounting roles or anything else has no difference on cash by and large. So I think cash is very important.

Jay Wells - Chief Financial Officer

Yeah. I mean, Amit, the traditional business in North America is still going to continue to see the mix shift in our business from private label CSD to co-packing. So that's going to continue to pressure the top line, not affect the overall profitability as we have discussed. And even with S&D, as I commented previously, yes, they will continue to grow pounds, the revenues will be affected up or down by the price of coffee. So again, revenue I still do not consider as the best measure. Let's continue to grow profit. Let's continue to grow cash. And I think those are still the two key metrics for this company.

Amit Sharma - BMO Capital Markets (United States)

Got it. Thank you very much.

Jeremy S. G. Fowden - Chief Executive Officer & Director

Okay. Thank you, Amit. One more question I believe?

Operator

Your last question for today will come from Mark Petrie from CIBC.

Mark Petrie - CIBC World Markets, Inc.

Hey. Good morning, guys.

Jeremy S. G. Fowden - Chief Executive Officer & Director

Good morning, Mark.

Mark Petrie - CIBC World Markets, Inc.

Good morning. I think you've covered pretty much everything. But I did just have one follow-up question as it relates to S&D. And based on the CAGRs you guys disclosed for the last few years, it kind of looks like about 20 basis points to 25 basis points of EBITDA margin leverage over that timeframe. Just wondering if there were certain initiatives over that timeframe that drove that? Or if that's kind of what we should expect in terms of leverage from a 3% top line?

Jeremy S. G. Fowden - Chief Executive Officer & Director

Yeah. As we mentioned earlier, Mark, we've set I think its 10:00 on August 17 for our modeling call for S&D and Eden Springs. And what we're going to try and do, a bit like we did on I think it was November 18, 2014, in providing more granular information for DS then. We're going to do the same on this call coming up. But the biggest driver of margins as you look forward within S&D is obviously going to be the synergy generation, and that's about 30% of the base EBITDA. And we say we get to a high six, it's about 6.8 times post synergy EBITDA. But that's this year's EBITDA plus the 12 million of synergies, there will be organic growth in addition to that within the business as it goes forward, just like it's had in the past with the same management team leading it. But we'll give you some more granular information on August 17.

Mark Petrie - CIBC World Markets, Inc.

All right. Sounds good. Thanks.

Jay Wells - Chief Financial Officer

Thanks.

Jeremy S. G. Fowden - Chief Executive Officer & Director

Thanks, Mark.

Operator

And at this time I would love to turn the conference back over to Mr. Langhans for any further comments or closing.

Jarrod Langhans - Director-Investor Relations & Corporate FP&A

Thank you all for joining our call today. This will conclude Cott Corporation's Second Quarter 2016 Call. Thanks for attending.

Operator

And that does conclude today's teleconference. We thank you all for your participation.

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