Cott Corp. to Lose Wal-Mart Exclusive

Cott Corporation (COT) announced that Wal-Mart (WMT) has decided to terminate its existing 10-year old exclusive supply agreement for carbonated soft drinks.  This action gives Wal-Mart the option to transition to other suppliers over time: up to one third of its requirements can be moved this year and up to two thirds can be moved next year.

While the ultimate outcome is unclear and discussions between Cott and Wal-Mart are reported to be ongoing, this is certainly not good news for Cott.  Wal-Mart represents 35%-40% of Cott’s sales.  If Wal-Mart were to move its business to other suppliers, Cott could have difficulty servicing its debt.

This risk was highlighted in my previous articles on Cott.  The last article, entitled “Mysterious Silence from Cott Corporation,” argued that Cott’s silence was an indication that something was up.  It raised the potential that the company had received an acquisition offer, but also focused on the risks associated with Wal-Mart, saying, “Wal-Mart’s reduction of Cott’s shelf space last year may have been the first step toward reducing its exposure to Cott.  The next logical step would be to split the business, or maybe even go all the way and switch suppliers….”

It does not seem likely that Wal-Mart would transition all of its Cott business to other suppliers.  It is more plausible that this action will result in some split of the business, a reduction in pricing, or both. (The most likely beneficiaries are DPS and FIZZ.) This move by Wal-Mart enhances Wal-Mart’s bargaining leverage by introducing greater competition among suppliers.  It would not be in Wal-Mart’s best interest for Cott to go out of business.

This situation is complicated by Cott’s high leverage.  Debt plus other long-term liabilities totaled $430.6 million as of September 27, 2008, which was approximately 4.6x LTM adjusted EBITDA, and over 7x adjusted EBITDA less normalized capital expenditures.  Sales to Wal-Mart were 35.8% of Cott’s total sales for the nine months ended September 27th.  This implies that Wal-Mart represents approximately $600 million of Cott’s annual sales.  Products not covered by the exclusive supply agreement comprise some of this amount.  The annual sales covered by the agreement might be approximately $500 million.  If Cott were to lose 25% of this business, the impact on EBITDA would be $25 million, assuming a contribution margin of 20% (just a “swag”).  This would be nearly 50% of adjusted EBITDA less normalized capital expenditures.

I have previously estimated the fair value of the company’s stock to be in the range of $1.00 to $1.50 per share, based on EBITDA multiples and discounted cash flow analysis.  Until we have better visibility into the status of Cott’s relationship with Wal-Mart, it will be difficult to develop a revised cash flow forecast and fair value estimate.  As a placeholder, I have cut my previous range in half to $0.50 to $0.75 per share.

(Disclosure: The author has no positions in Cott Corp. stock as of this writing)

Copyright © 2008-2009 by John G. Appel. All rights reserved. You may link to any Content on this website. You may not republish, upload, post, transmit or distribute any Content without prior written permission. If you are interested in reprinting, republishing or distributing Content, please contact John Appel via the e-mail address shown on this website to obtain written consent. Modification of Content or use of Content for any purpose other than your own personal, noncommercial use is a violation of our copyright and other proprietary rights, and can subject you to legal liability. Disclaimer: This website is provided for informational purposes only. Nothing on this website is intended to provide personally tailored advice concerning the nature, potential, value or suitability of any particular security, portfolio or securities, transaction, investment strategy or other matter. You are solely responsible for any investment decisions that you make. Terms of Use: By using the site, you agree to abide by the Terms of Use, which includes further copyright information and disclaimers.
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Mysterious Silence from Cott Corporation

Cott Corp. (COT) should be in crisis-mode: it is overleveraged, underperforming, and lacking both a permanent CEO and a compelling growth strategy.  With an activist investor and some seasoned executives on the Board to shake things up, one would expect dramatic action, but it seems like little has been accomplished to date.  Have they really been that ineffective, or have they perhaps been distracted?  Shareholders need to know what is happening.  If there is any material news, we should not have to wait for the next earnings call.

Last year, things began to look encouraging when:

  • the company parted ways with its CEO and initiated a search for a successor;
  • activist investor Crescendo Partners purchased an 8% stake and installed four new directors; and
  • the company embarked on a turnaround plan targeting over $40 million of cash flow improvement (there was still no real growth strategy, but presumably that would come with a CEO).

With accomplished investors and executives on Cott’s board (although only one has beverage experience), one would have expected rapid change.  Instead, we have had more of the same:

  • revenue and EBITDA still trended downward as of September 27th, as Coke and Pepsi promoted aggressively, Wal-Mart cut-back shelf space, and initial savings from the turnaround plan were offset by other costs;
  • net debt was unchanged in September versus June;
  • the Interim CEO has discussed the need to invest in growth, but has not outlined a strategy; and
  • there is still no permanent CEO.

On the last earnings call on November 6th, the company’s Interim CEO, David Gibbons, said that he expected a decision on a new, permanent CEO by year-end. The end of the year has passed, yet there is no news.

COT 12 Mo. Stock PricesThis is frustrating, and begs the question of whether there is something else going on at Cott.  Crescendo’s CEO, Eric Rosenfeld, joined Cott’s board as Lead Independent Director, and I doubt that he would sit idle while things drag on.  Cott hired a respected search firm to help identify a CEO, and Crescendo also had at least one candidate lined up.  It is possible that the board has not been able to agree on a candidate.  It is also possible that they had a big fish on the line but that it got away at the last minute.  However, it is also possible that the board slowed down the process to deal with something else.  This is sheer speculation, but one reason to delay the process, and the only good reason I can think of, would be a potential sale of the company.

Has a Potential Buyer Heeded My Call?

Last October, I wrote an article entitled, “Cott Corp. – Could go Far, But Somebody Needs to Grab the Wheel.”  The article included this call to action directed at potential buyers: “Now is the time for action by an industry acquirer, or a private equity group with the ability to capitalize Cott properly.”  I said that the most likely strategic buyers are National Beverage (FIZZ), Dr Pepper Snapple Group (DPS), and Polar Beverages.

My article seemed to create a stir at Cott and in other beverage circles. The morning that the article was posted on Seeking Alpha, a Cott executive contacted me and asked about my background and affiliations, and how I came to know so much about the company.  But he also gave me positive feedback on the article.  I later learned from reliable sources that each of Cott’s directors had received the article.  I also heard from several industry executives who thought that my article was right on target.  I had assumed that the kudos had to do with my emphasis on getting back to basics and hiring an effective CEO, but perhaps there was more to the feedback….

If the Company Were Sold, What Would Be a Fair Price?

Absent an acquisition, my estimate of Cott’s fair value is $1.00-$1.50 per share.  I get to this figure by applying discounted market multiples to my estimates of 2008 and 2009 EBITDA.  I get to the same figure through a discounted cash flow analysis that factors in a turnaround over the next three years (but shows little top-line growth).  This value estimate is higher than price targets from some reputable sell-side analysts.  For example, an analyst at a well-known global bank (which also owned over 5% of Cott’s common shares as of the last proxy statement) had a price target of $1.00 per share as of this writing, which was lowered from $1.25 per share in November (he also used EBITDA multiples and a DCF analysis). In calculating my fair value estimate, I discount my EBITDA multiples, and add a risk premium to my DCF discount rate[1], because of two significant risks the company faces: high leverage and customer concentration.  Absent these risks, my valuation would be in the range of $2.00-$2.50 per share.

A strategic acquirer that could realize synergies might value the company in the range of about $2.50 to $3.50 per share.  I have done enough fairness opinions in my career to feel comfortable that Cott’s board would be advised that such a price was fair. The chart below shows the implied enterprise value and EBITDA multiples for various share prices.

The above fair value estimates and estimates of an acquisition price would all be much higher if Cott had better growth prospects.

The Board is Unlikely to Accept an Offer Today

While $2.50 to $3.50 per share may be a fair value, it is unlikely that Cott’s board members would agree.

Following its purchase of 5.9 million Cott common shares last year, Crescendo Partners had four new directors named to what is now an 11-person board.  These new directors and at least three others have a strong incentive to block a change of control.[2]  Thus, a firm that owns only 8% of the company’s common shares is effectively in a position to block Board approval of any transaction it does not like.

Crescendo purchased its shares at an average price of $2.84 per share (see 13D filing).  It is clear in hindsight that things at Cott were worse than they appeared last spring when these purchases were made, and that Crescendo overpaid.  While Crescendo might be happy just to get its investment back, it is much more likely that they would want to put in a new CEO and let that person attempt to build value for a few years before selling.

A Long and Bumpy Road Ahead

If an investor or competitor does not (or cannot) “grab the wheel” by purchasing Cott, and shareholders have to rely on a new CEO to navigate the company out of its current situation, we should be prepared for a difficult journey.  The problems faced by the company are not easily fixed.  Yes, retailers should now have a greater interest in building their private label programs, but Cott’s area of expertise – carbonated soft drinks – is going to be a tough place to find growth.  Cott knows this and is expanding into other areas, such as water and noncarbonated drinks, but these are markets in which Cott has numerous competitors with ample capabilities.

COT Leverage RatiosCott’s high leverage means that it cannot afford to make a mistake. The chart to the right shows Cott’s net debt as of September 27th, and how this compares to various measures of cash flow.

Given the difficulty of executing a turnaround, I would not expect lenders to have patience in the event of a default.  If things go South, I believe there will be little left for common shareholders.  A savvy investor would be able to purchase Cott’s 8% Senior Subordinated Notes for pennies on the dollar in that scenario and end up owning the company through a Chapter 11 reorganization.

Even if management executes well, it will take a long time to deleverage the business.  Subtracting interest and capital expenditures from EBITDA leaves only about $20-$30 million per year to pay down debt.  If management decides to try to grow its way to success instead of cutting costs to the bone – which is probably the best strategy for the long term – there will be even less cash flow available to repay debt until the growth starts to generate profits.

A risk that may never go away is the company’s dependence on Wal-Mart (WMT). Wal-Mart represents 36% of Cott’s sales, and I believe it has been Cott’s cash cow. I can say from experience as a private equity investor who has looked at thousands of companies, that when a customer represents nearly 40% of sales it often represents well over 50% of profits (sometimes over 100%), even if that customer is known for driving a hard bargain.  The substantial benefits of long and efficient production runs, along with freight efficiencies, typically more than offset lower unit prices.

I warned in my last article that Cott’s customers might be concerned about the company’s viability.  The customer I had in mind was Wal-Mart. Wal-Mart’s reduction of Cott’s shelf space last year may have been the first step toward reducing its exposure to Cott.  The next logical step would be to split the business, or maybe even go all the way and switch suppliers (an extreme event that I would like to think is improbable).  Analysts have asked Cott about its relationship with Wal-Mart on recent earnings calls, and management has responded with assurance that the relationship is fine.  I do not have reason to doubt management’s statements, but I remain concerned about this risk.

Given Wal-Mart’s share of U.S. beverage sales, Cott should not address this risk by reducing the percentage of its sales that go to Wal-Mart.  The better approach is to do what it takes to make sure that Wal-Mart is satisfied – not just with the terms of its relationship but also with Cott’s viability and stability as a long-term partner.  In a normal capital markets environment, I would recommend an equity infusion to fund growth and reduce debt.  In the current environment, meaningful deleveraging and growth capital would almost certainly require a change of control.

Time for Action

Cott is vulnerable, and one should not assume that customers and competitors are sitting still.  The Interim CEO seems capable but has no beverage experience.  This is no time for the company to drag its feet, and no time to keep shareholders in the dark.  Cott’s board should let us know what is going on, and, more importantly, DO something!

The company should also ensure that its board is structured to encourage decisions that are fair.  Putting an 8% shareholder in a position to call the shots on a change of control transaction does not strike me as consistent with board members’ fiduciary obligation to look out for all shareholders.  If Cott is ever presented with the opportunity to enter into discussions with a potential buyer, the board should form a special committee, made up of truly independent directors, to make key decisions.  And shareholders should be informed.

Financial Summary

A summary of the company’s historical financial performance and my projections for 2008 and 2009 follows below.  As previously discussed, I assume that it takes several years to achieve management’s turnaround objectives.  I assume that revenue growth is flat in 2009 (i.e., that price increases equally offset volume reductions), and that gross margin improvements from prices increases are offset next year by unfavorable variances from a stronger dollar.  I include $20 million of cost savings from the water project, but assume that G&A savings are offset by investments to maintain, and eventually grow, the business – mainly “market development funds.”

COT Projections (JGA)

Footnotes:

[1] This may offend CAPM purists, but it is a lot easier than calculating an unlevered beta.

[2] Cott Corp.’s Board of Directors is comprised of Chairman David Gibbons, George Burnett, Stephen Halperin, Betty Jane Hess, Philip Livingston, Andrew Prozes, Graham Savage, and four new directors appointed in connection with Cott’s agreement with Crescendo: Eric Rosenfeld, Mark Benadiba, Mario Pilozzi, and Greg Monahan.  Their bios are on Cott’s website.  Other than the Crescendo parties (Rosenfeld and Monahan), those with the least incentive to approve a change of control would appear to be:

  1. David Gibbons.  He makes $725,000 per year plus incentive awards as Cott’s Interim CEO, and approximately $100,000 more per year as a director.  He would lose this income upon a change of control.
  2. Stephen Halperin.  He is the brother of the company’s former chief legal counsel, Mark Halperin, and has been on the board since 1992.  Cott’s most recent Proxy Statement discloses that his firm provides services to Cott “on a regular basis,” which services would likely be discontinued after a change of control.
  3. Philip Livingston.  He earns over $100,000 per year as a Cott director.  His role on Cott’s Audit Committee is featured prominently on his personal website.
  4. Mario Pilozzi.  He was likely brought on because his former role as CEO of Wal-Mart Canada may leave him with important ties to Wal-Mart.  These same ties would create a bias toward Cott remaining an independent company, which would benefit Wal-Mart.
  5. Mark Benadiba.  Mark probably would like to be CEO of Cott himself.  As long as this remains a possibility, he will have a bias against a transaction that would take that possibility away.

(Disclosure: The author is long COT common stock)

Copyright © 2008-2009 by John G. Appel. All rights reserved. You may link to any Content on this website. You may not republish, upload, post, transmit or distribute any Content without prior written permission. If you are interested in reprinting, republishing or distributing Content, please contact John Appel via the e-mail address shown on this website to obtain written consent. Modification of Content or use of Content for any purpose other than your own personal, noncommercial use is a violation of our copyright and other proprietary rights, and can subject you to legal liability. Disclaimer: This website is provided for informational purposes only. Nothing on this website is intended to provide personally tailored advice concerning the nature, potential, value or suitability of any particular security, portfolio or securities, transaction, investment strategy or other matter. You are solely responsible for any investment decisions that you make. Terms of Use: By using the site, you agree to abide by the Terms of Use, which includes further copyright information and disclaimers.

Cott Corp. – Could go Far, But Somebody Needs to Grab the Wheel

Cott Corp. is the world’s largest supplier of retailer brand soft drinks, and the fourth largest nonalcoholic beverage maker.  Given the recent growth trends in private label, Cott should be doing well.  Unfortunately, in 2006, when faced with slowing growth and shrinking margins, instead of striving to become a better and more efficient producer, the company abandoned its historical business plan and entered the uncharted territory of enhanced waters and energy drinks – with its own brands.  This plan failed miserably: Cott alienated its core retail customers; healthy profits turned to losses; and debt mounted to the point that the company can barely service it.

In May 2006, Cott’s board pushed out its CEO, John Sheppard, who had built EBITDA to roughly $200 million through acquisitions and a focus on efficient manufacturing, and brought in a new CEO, Brent Willis, to execute the new plan.  From then until March 2008 when Willis departed, Cott’s stock dropped from $15 to $2 per share, wiping out nearly $1 billion of equity value.  Today, it trades at around $1.00 per share, less than tangible book value.  As I explain below, this could be an $8.00 stock if the company successfully implements its plan to cut costs and return to its roots.  But it is a long, long way from here to there.  If the company does not get capable leadership soon, it may never get there.

Crescendo Shakes Things Up

Activist investor Crescendo Partners must have seen the upside opportunity when it purchased 8.7% of the company’s stock between March and May of this year.  Crescendo installed four new directors and proposed that the former VP of Canadian Operations and Global Sourcing for Cott, Csaba Reider, become CEO.  Crescendo then pushed the company to slash costs and get back to basics.  On June 19th, the company announced its plan to increase cash flow by $39-43 million by refocusing on its core business, cutting G&A expense, and improving the efficiency of its bottled water operations.  The cost cuts started with the elimination of several senior executives.

Unfortunately, the damage done by Cott’s management may have been worse than even Crescendo realized, and the path to profitability looks pretty long and bumpy.  It may take complete board control, not just the influence of an activist investor, to steer this company back into the clear.

Highly Leveraged – The Natives Must Be Restless

With debt approaching 5x run-rate EBITDA – and 8x run-rate EBITDA less normalized CapEx[1] – the company’s balance sheet may force some sort of recapitalization, or reorganization, before the company is able to execute this plan.  Cott’s $269 million of 8% Senior Subordinated Notes are due in just over three years.  Its new ABL facility ($131 million drawn as of 6/28/08 ) also comes due at that time if the 8% Notes are not refinanced before then. The 8% Notes, which were recently downgraded by both S&P and Moody’s and trade at a significant discount, will not be easy to refinance.

A patient lender, with confidence in management, would give the team the runway to execute a turnaround.  But who would trust this team?  The quality, consistency and transparency of its financial reporting, the reliability of its communications to investors, and the execution of its current turnaround plan have all been disappointing.

Crisis of Confidence

It’s hard to believe in a company when you can’t rely on its financial statements.  Cott’s auditors have sited significant internal control issues affecting the accuracy of its financial statements, and state that “management oversight… could not be relied on to mitigate [these issues].”[2]   Recent events indicate that despite management changes earlier this year, things have not gotten better.

In its second quarter earnings call on July 31st, management said that it expected “adjusted operating profit” for 2008 to be 50% to 70% above 2007’s figure of $36.3 million.  On the call, an analyst challenged this assertion, stating that given that adjusted operating profit for the first six months was approximately zero, “something fairly heroic has to happen in the next six months” to meet those projections.  Management defended its position.  However, less than a month later, on August 26th, the company said it would not hit these targets and revised its 2008 guidance downward dramatically, saying that adjusted operating profit would range from down 5% to up 28% versus 2007. I think this is still optimistic.[3]

On July 31, management said that the reduction in shelf space at Wal-Mart didn’t seem to be having a material negative impact on sales; that they were on track to deliver their cost savings plan; that their “water project,” which was to deliver over half[4] of the roughly $40 million in cash flow increase from the turnaround plan, was going smoothly; and that they and a commodity cost advantage over their competition this year.  By August 26th, they said that the sales decline was more severe than anticipated due to heavy promotional activity by competitors; their savings targets for this year would not be met; the water project was hampered by cost overruns and delays; and commodity costs were squeezing margins.

If management gives us positive news on the October 25th Q3 conference call, will they retract it a few weeks later? [Update – I have been told the call will now be in November]

The Clock is Ticking – With Lenders And Customers

Cott needs to move immediately to assure its customers that it is a capable, long-term partner, and assure its lenders and investors that it has a handle on its business.  This means hiring a CEO who will inspire confidence, and making the other management changes necessary to insure that the company can provide some reliable visibility into its future performance.  It is not clear that Crescendo’s CEO candidate is the right person for this situation.  Rather than somebody with no prior CEO experience, I would like to see a seasoned company leader with real turnaround experience at the helm.

If the company does not act quickly, its customers and lenders will lose confidence completely, taking the company into a downward spiral from which it may not be able to recover.  Its retailer customers need a manufacturer for their store brand beverages, but Cott is not their only choice for private label production.  Dr Pepper Snapple Group (NYSE: DPS) and National Beverage (Nasdaq: FIZZ)[5] also have meaningful private label operations and capacity.  It is not clear if they have enough capacity to service Wal-Mart and all of Cott’s other customers, but if Cott were to lose Wal-Mart, DPS and National Beverage could buy whatever additional capacity they needed from Cott’s lenders for pennies on the dollar.

Low Stock Price Does Not Mean Good Value

At $1.00 per share, Cott’s total equity value is about $72MM and the enterprise value is approximately $500MM, as shown below.  (This value assumes that any discount one could get on the company’s 8% subordinated notes is offset by non-debt liabilities not included in this enterprise value calculation.)

Enterprise Value at $1.00 Share based on 6/30/08 Balance Sheet ($MM):


At this price, the enterprise value is 5.4x my estimate of adjusted EBITDA for the twelve months ended 6/28/08, and 5.7x my estimate of run-rate adjusted EBITDA (see “Financial Summary” below for EBITDA calculations). If one believes in the turnaround, the price is low, because it is only about 4x pro forma adjusted EBITDA after turnaround savings.  If one has completely lost faith in management, the price is high and does not reflect negative sales trends and significant default risk.  The current market price seems to suggest that the turnaround upside and default risk downside roughly offset each other.

Current Stock Price Still has Big Downside Risk

If confidence is not restored soon, default risk may become the dominant issue, in which case the stock price should go below $0.50 per share.  At $0.50 per share, the company would be valued at about 5x adjusted EBITDA.  One could argue that even this multiple is high, and that the company is not worth more than its debt, but I won’t go that far.  The replacement value of its manufacturing assets and the value of its rights to the RC Cola brand internationally should put a floor on the equity value.

G&A Needs Further Cuts

Cott needs $40-$50 million of additional EBITDA right away just to get its leverage down to a comfortable level.  Thus, the maximum $40+MM of savings from the turnaround plan MUST be achieved ASAP.  To make success more certain, Cott should target deeper cuts in the primary controllable cost: G&A.  Instead of sizing G&A to where the company wants to be, it should size it to where it is headed today.  The planned G&A cuts should be $30MM, not $20MM.  This will provide more certainty that the total savings can be achieved soon even if the operational/COGS fixes take longer than planned.

The company needs to adjust not only head-count, but also salaries and board fees.  Last year, the board of directors paid itself a whopping $1.8 million in cash director’s fees.  The interim CEO, David Gibbons, is being paid at a rate of $850,000 per year (including directors fees), plus a grant of 720,000 shares of stock.  Their current CFO made $800,000 in total comp for 2007. How can this be justified?

Crescendo’s CEO candidate has agreed to work for a salary of $625,000 and a bonus of up to 100% of salary.  How about a salary of about $400,000 and a performance-based bonus plus stock options to make up the difference?  Cott needs a leader who will bet his paycheck on his performance.

The Upside – Possibility or Pipe Dream?

With $40-$50MM of additional cash flow – initially driven by G&A cuts and later by the “water project” and improvements in the company’s business model – EBITDA could get to $120-130MM and debt would be reduced to below 3.5x EBITDA (see “Financial Summary” below).  With a return to growth and profitability taking the EBITDA multiple up to 8x, the company’s stock could be worth $8.00.

But without new leadership, this seems like a pipe dream.  The way things are going, it seems more likely that weak revenues and cost overruns lead to a cash crunch, which could lead to a death spiral.

Great Meal for a Vulture

Now is the time for action by an industry acquirer, or a private equity group with the ability to capitalize Cott properly.  Several other firms have circled Cott in recent years, but now this deal may have gotten too small for them.  Likely strategic buyers are National Beverage and Dr Pepper Snapple Group.  DPS is still highly leveraged after its “demerger” with Cadbury and has a number its own issues to deal with, so FIZZ, which has no debt, is probably the better acquirer at the moment.  Cott would also be a great fit with Polar Beverages, which has a strong position in the Northeast.  Ralph Crowley, Polar’s CEO, has a good eye for a bargain.

The Numbers

Below is a summary of historical income statement data, along with my estimate of run rates as of 6/30/08, including adjusted operating profit, and my view on adjusted EBITDA.  I have added a pro forma run rate adjusted EBITDA figure, factoring in management’s expected savings from the turnaround plan. The market seems to be anticipating adjusted EBITDA in the mid-$80MM range, but an EBITDA of $125MM or more seems to be within reach.  If Cott had the right leader, it would be a lot easier to imagine that possibility.  At the moment, it seems easier to imagine a restructuring.

______________________

(a) Annualized by applying 6-month growth rate to 2007 full year figure.
(b) Annualized revenue multiplied by the ratio of LTM COGS to LTM revenue.
(c) Equal to LTM figure.

______________________

[1] In the Q2 earnings call, management said that capital expenditures should be $30-$35 million next year, excluding the “water project.”  I assume this is “normalized” capex.

[2] In its 10-K filing for 2007, the company states that it had “material weaknesses” in its internal controls, “… affecting the financial statement balances of cost of sales; selling, general and administrative expenses; accounts receivable; amortization; income tax (benefit) expense; accounts payable; intangible assets; deferred income tax assets and shareowners equity recorded in the financial statements as of December 29, 2007.”  It also said that, ”… management oversight within the financial close process … could not be relied on to mitigate the segregation of duties internal control deficiencies.”

[3] In my Financial Summary, I estimate the run-rate adjusted operating profit to be approximately zero as of 6/30 based on year-on-year trends.  Given the lack of progress on operational improvements and continued deterioration in revenue, I think that 2008 adjusted operating profit is more likely to be down 100% than down 5% as predicted by management.

[4] Cott management said that the “water project” would take their water business, equal to 17% of North American revenue, from a zero gross margin to a “fair” gross margin.

[5] If one wants to be long in this sector but does not have the stomach for Cott, National Beverage could be an interesting pick.  It has steady cash flow and no debt, and trades at about 7x EBITDA….

(Disclosure: the author is long COT stock)

Copyright © 2008-2009 by John G. Appel. All rights reserved. You may link to any Content on this website. You may not republish, upload, post, transmit or distribute any Content without prior written permission. If you are interested in reprinting, republishing or distributing Content, please contact John Appel via the e-mail address shown on this website to obtain written consent. Modification of Content or use of Content for any purpose other than your own personal, noncommercial use is a violation of our copyright and other proprietary rights, and can subject you to legal liability. Disclaimer: This website is provided for informational purposes only. Nothing on this website is intended to provide personally tailored advice concerning the nature, potential, value or suitability of any particular security, portfolio or securities, transaction, investment strategy or other matter. You are solely responsible for any investment decisions that you make. Terms of Use: By using the site, you agree to abide by the Terms of Use, which includes further copyright information and disclaimers.