Comments on: Mysterious Silence from Cott Corporation

By: John Appel

John Appel — Tue, 20 Jan 2009 18:34:13 +0000

Thank you for your note. The 2009 revenue forecast assumes that price increases are offset by continued volume declines. This implies that volume declines come down to the mid-to-high single digits in percentage terms vs. approximately 10% in the first three quarters of 2008. Management’s discussion of September and October trends during the Q3 earnings call may indicate that this assumption is conservative, but I think it is too early to call. COT’s Q4 performance should provide a better sense of volume growth trends.

For gross margins, I considered management’s guidance on commodity prices, as well as recent currency trends. In the Q2 earnings call, management said that COT’s commodity costs were favorable to the industry in 2008, but that they were expected to be in line with the industry in 2009. In the Q3 conference call, management guided to slightly higher commodity costs in 2009 vs. 2008 despite generally favorable trends in basic commodities. In the Q&A, management noted that there could be a lag of about six months between a sustained reduction in oil prices and a sustained reduction in PET prices. The 2009 projections assume that the Q4 slump in the Canadian $ vs. the US $ continues throughout much of 2009 and at least partially offsets US dollar-denominated commodity cost improvements.

I am glad to hear that you have read the reports of “well known Wall Street analysts,” and I hope that others who read my posts do the same. One should always do their own due diligence, and consider my posts to be just one person’s subjective point of view.

By: Sam

Sam — Mon, 19 Jan 2009 20:20:12 +0000

I agree with Ross! This is a great post. Thank you John for providing your analysis. I do, however, have 2 comments: 1) the 2009 forecast needs to be updated to reflect the increase in private label beverage sales in the US market. Since Oct, 2008, sales of private label beverages are up 14-15% per month while branded beverages are lower. The consumer is looking for value with less expensive alternatives and Cott is providing this (see Supervalu’s earnings calls for details on private label success), and
2) also the 2009 forecast assumes consistent 2008 Gross Profit Margins of about 11% which basically does not capture the huge declines in the markets for this beverage suppliers key input costs:
a) corn (HFCS),
b) aluminum,
c) oil (energy), and
d) resins (i.e. plastics).
These 4 categories are likely to make up about 60-70% of Cott’s COS (a recent report by a well known Wall Street analysts documents this % impact and overall trend very well). A return to 2005 or even 2004 Gross Profit Margin levels is likely since the 4 markets above are trading near 2004/2005 levels (I will acknowledge corn is trading a bit higher…).

By: Ross

Ross — Sat, 17 Jan 2009 00:14:42 +0000

This is a very well thought out article and I think essentially on target. One thing that I would ask is whether the cost of raw materials (especially aluminum) that have dropped significantly in the last year has been factored into the potential profitability looking forward? ……. And if so, how do you think the drop in those costs might affect the value of the company to a suitor?