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FINAL TRANSCRIPT
Cott Corporation
New Cott Modelling Conference Call
Event Date/Time: September 25, 2017 — 10:00 a.m. E.T.
Length: 39 minutes
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FINAL TRANSCRIPT
September 25, 2017 — 10:00 a.m. E.T.Cott Corporation New Cott Modelling Conference Call
CORPORATE PARTICIPANTS
Jarrod LanghansCott Corporation — Head, Investor Relations
Jay WellsCott Corporation — Chief Financial Officer
CONFERENCE CALL PARTICIPANTS
Amit SharmaBMO — Analyst
Kevin GrundyJefferies — Analyst
Faiza AlwyDeutsche Bank — Analyst
John ZamparoCIBC — Analyst
Hale HoldenBarclays — Analyst
Judy HongGoldman Sachs — Analyst
2
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« Bien que CNW Telbec ait fait tous les efforts possibles pour produire cet audioscript, la société ne peut affirmer ou garantir qu’il ne contient aucune erreur. CNW Telbec ne peut être tenue responsable de pertes ou profits, responsabilités ou dommages causés par ou découlant directement, indirectement, accidentellement ou corrélativement à l’utilisation de ce texte ou toute erreur qu’il contiendrait. »
FINAL TRANSCRIPT
September 25, 2017 — 10:00 a.m. E.T.Cott Corporation New Cott Modelling Conference Call
PRESENTATION
Operator
Greetings, and welcome to the New Cott Modelling Conference Call. At this time, all
participants are in a listen-only mode.
A question-and-answer session will follow the formal presentation.
As a reminder, this presentation is being recorded and will be available for playback on the
Company’s website, www.cott.com, for two weeks following the presentation.
I’d now like to turn the conference over to your host, Jarrod Langhans, Cott’s Head of
Investor Relations.
Jarrod Langhans — Head, Investor Relations, Cott Corporation
Good morning, and thank you, all, for joining us. We would like to remind everyone that
during this call, management will make certain forward-looking statements. Please refer to the
information and safe harbor language regarding these statements on Slide 1 in our modelling
presentation, which can be found on the Investor section of our website, www.cott.com, under
Events and Presentations.
As a background for this call, subsequent to announcing the transaction for the sale of our
traditional manufacturing business, we received a number of requests around understanding the
accounting prior to closing the transaction, as well as for some historical and modelling information
3
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FINAL TRANSCRIPT
September 25, 2017 — 10:00 a.m. E.T.Cott Corporation New Cott Modelling Conference Call
around New Cott. As a result, we are holding this call today in order to assist our analysts and
investors with a number of these queries.
Jay Wells, our CFO, will be walking through the modelling components of the presentation
today, including overview of our new reporting segments, key financial expectations around these
reporting segments, expectations for the consolidated New Cott over the next few years,
seasonality of our new segments, and of course, free cash flow expectations and drivers.
I will then close with an overview of what our income statement will look like prior to
closing the transaction to sell our traditional business before moving to Q&A.
With that, I’ll now turn the call over to Jay.
Jay Wells — Chief Financial Officer, Cott Corporation
Thank you, Jarrod. Good morning, everyone. And thank you for joining our modelling call
today. I hope you have now managed to find the modelling call presentation on our website, as we
will refer to it by page number as we go.
So on Slide 4, let’s take a quick look at the new reporting segments for what we call New
Cott. We will have two key segments, with a smaller yet growing third segment we will call All
Other.
The largest of these reporting segments is our leading Route Based Service business for
water, coffee, tea, and filtration services; and the second segment being our premium Coffee, Tea,
& Extract Solutions segment, which includes the roasting and grinding of coffee and blending of tea
4
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« Bien que CNW Telbec ait fait tous les efforts possibles pour produire cet audioscript, la société ne peut affirmer ou garantir qu’il ne contient aucune erreur. CNW Telbec ne peut être tenue responsable de pertes ou profits, responsabilités ou dommages causés par ou découlant directement, indirectement, accidentellement ou corrélativement à l’utilisation de ce texte ou toute erreur qu’il contiendrait. »
FINAL TRANSCRIPT
September 25, 2017 — 10:00 a.m. E.T.Cott Corporation New Cott Modelling Conference Call
for the quick-serve restaurant, convenience retail, and other channels, as well as the fast-growing
ingredients and extracts portfolio. These segments will have around $2.2 billion in sales in 2017, and
generate between 285 million and $295 million of adjusted EBITDA net of corporate costs, with a
combined EBITDA margin of over 13 percent.
From a CapEx perspective, we would see our Route Based Services segment utilizing
around 7 percent of revenue for CapEx. Our Coffee, Tea & Extracts Solutions segment will utilize
around 3 percent of revenue on CapEx, which may be higher in periods in which we see accelerated
growth within this segment, and add equipment in multiple areas such as roasting and extracts at
the same time.
On Slide 5, we provide some financial modelling metrics for New Cott; that being 2 to 3
percent top-line growth, further synergy capture within and across our multiple platforms, low cash
taxes of roughly $10 million per year, CapEx running in the 115 million to $120 million range per
year. But please note that we are and will continue to review the potential to accelerate some of
our growth CapEx projects subsequent to closing the sale of our traditional beverage manufacturing
business if we believe that the investment will provide us a good cash-on-cash internal rate of
return and strengthen our business.
Cash interest subsequent to the sale of our traditional manufacturing business will be
around $70 million per year, as we have two pieces of fixed debt that we will not redeem as part of
the transaction; that being our €450 million senior unsecured notes at 5.5 percent, which acts as a
5
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« Bien que CNW Telbec ait fait tous les efforts possibles pour produire cet audioscript, la société ne peut affirmer ou garantir qu’il ne contient aucune erreur. CNW Telbec ne peut être tenue responsable de pertes ou profits, responsabilités ou dommages causés par ou découlant directement, indirectement, accidentellement ou corrélativement à l’utilisation de ce texte ou toute erreur qu’il contiendrait. »
FINAL TRANSCRIPT
September 25, 2017 — 10:00 a.m. E.T.Cott Corporation New Cott Modelling Conference Call
hedge against our European operation, and our recently issued $750 million unsecured senior notes
at 5.5 percent. These are nice long-term tranches of debt that we would not look to redeem in the
short term.
As we have previously stated, we will continue to set a goal of some 20 million to $30
million of tuck-in acquisitions per year, which should drive between 4 million to $6 million of EBITDA
per year. But please keep in mind that we expect to have around $150 million in cash after debt pay
down and fees once we close the sale of our traditional business, and in turn, we will look at the
possibility of accelerating our tuck-in opportunities. And we’ll also review our capital deployment
strategy going forward.
And lastly, assuming the transaction closes by the end of 2017, we are projecting around
$115 million of adjusted free cash flow in 2018, which will grow to $150 million in 2019. I’ll provide
some additional information on our free cash flow in a few slides.
Slide 6 shows the seasonality of our new reporting segments. Our Route Based Services
segment is somewhat summer seasonal, with increased consumption during the warmer summer
months. When looking at Coffee, Tea & Extract Solutions, our revenue in this segment is consistent
in the first three quarters of the year, with an uptick in Q4 as we see an increase in on-the-go coffee
and tea consumption as we head into the holiday season. Our All Other segment is consistent during
most of the year, but sees an uptick in revenue and EBITDA during the first quarter, as the Aimia
business has increased sales in hot chocolate and coffee during the winter months.
6
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FINAL TRANSCRIPT
September 25, 2017 — 10:00 a.m. E.T.Cott Corporation New Cott Modelling Conference Call
On Slide 7, we outline the adjusted free cash flow expectations for New Cott in 2019. With
the sale of our traditional beverage manufacturing business, we will more than halve the
outstanding net debt and become a much more focused business.
We believe we will continue to see attractive free cash flow generation and compound
free cash flow growth driven by organic top-line growth, synergy capture, margin expansion, and
tuck-ins. In addition, we will be carrying some additional cost in 2018 subsequent to closing the
transaction that we don’t anticipate having in 2019, which will provide some additional support as
we look to deliver $150 million in adjusted free cash flow in 2019.
Subsequent to 2019, we believe we can deliver a free cash flow growth CAGR of 10
percent from organic top-line growth and small tuck-in acquisitions. These expectations exclude the
utilization of the cash that we will have on our balance sheet subsequent to the sale of our
traditional business, as well as the cash that we will generate in 2018 and going forward, which we
would look to utilize to drive further shareholder value.
I am now going to turn the call over to Jarrod, and then we will move to Q&A.
Jarrod Langhans
Thanks, Jay. Prior to closing on the sale of our traditional business, our financial reporting
is going to change, whereby the businesses that we will be divesting are going to now be
incorporated into an asset held for sale line on our balance sheet, as well as the discontinued
operation line net of taxes on our income statement.
7
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« Bien que CNW Telbec ait fait tous les efforts possibles pour produire cet audioscript, la société ne peut affirmer ou garantir qu’il ne contient aucune erreur. CNW Telbec ne peut être tenue responsable de pertes ou profits, responsabilités ou dommages causés par ou découlant directement, indirectement, accidentellement ou corrélativement à l’utilisation de ce texte ou toute erreur qu’il contiendrait. »
FINAL TRANSCRIPT
September 25, 2017 — 10:00 a.m. E.T.Cott Corporation New Cott Modelling Conference Call
On Slide 9, you will see where we have listed out the various line items from our income
statement on the left side of the page, while noting what operations or components of our business
will be included within continuing operations.
In addition to the New Cott reporting segments that Jay covered, our corporate costs will
also be included within continuing operations. As you can see, our net income will now be three
separate lines; that for continuing operations, discontinued operations, and combined. And our EPS
will now have six EPS figures: three each for basic and diluted EPS tied to the various net income line
items noted on this slide.
One key item that I would like to point out is that although we will be paying off our DS
Services 10 percent secured notes after closing on the sale of our traditional business, this interest
will remain a part of continuing operations, while our 525 million 5.375 percent note interest will be
incorporated within discontinued operations, as well our ABL.
Hopefully this chart provides you with a good picture of how we will be reporting prior to
closing on the sale of our traditional business.
With that, I will now turn the call over to Q&A. Operator, please open the lines up for
Q&A.
Q&A
Operator
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« Bien que CNW Telbec ait fait tous les efforts possibles pour produire cet audioscript, la société ne peut affirmer ou garantir qu’il ne contient aucune erreur. CNW Telbec ne peut être tenue responsable de pertes ou profits, responsabilités ou dommages causés par ou découlant directement, indirectement, accidentellement ou corrélativement à l’utilisation de ce texte ou toute erreur qu’il contiendrait. »
FINAL TRANSCRIPT
September 25, 2017 — 10:00 a.m. E.T.Cott Corporation New Cott Modelling Conference Call
Certainly. At this time, I would like to remind everyone in order to ask a question, press *,
then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q&A
roster.
Your first question comes from the line of Amit Sharma from BMO. Your line is open.
Amit Sharma — BMO
Hi. Good morning, everyone.
Jay Wells
Good morning, Amit.
Amit Sharma
Jay, thanks for the clarity. Can you just go back a little bit and provide a little bit more
clarity on the taxes to begin with, just in terms of how long should we expect this really low tax
rate? And what’s driving that?
Jay Wells
Sure. Thanks for the question. First off, subsequent to the transaction we are burning up
some NOLs related to our traditional business as part of the transaction, but both DS and S&D have
their own net operating losses that we will continue to be able to use subsequent to the
transaction. So that will provide us good cover for a good period of time on the ability to use those
NOLs.
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FINAL TRANSCRIPT
September 25, 2017 — 10:00 a.m. E.T.Cott Corporation New Cott Modelling Conference Call
And the lives of those NOLs will—or those NOLs will last much longer than you would
otherwise think because we’re still a Canadian company. We’re still going to do our tax planning
that prior to the transaction we were getting $50 million-plus of permanent benefits because of that
structuring. It won’t be as big, but it still will be significant subsequent to the transaction. We might
be able to generate 20 million to $30 million of permanent differences every year because of our
international tax planning.
So a combination of these permanent differences and the NOLs that we will be carrying
subsequent to the transaction, I see this type of cash taxes going forward for the next three to five
years easy, if not longer.
Amit Sharma
Okay. And the international tax planning, there’s no risk for that to change, given a lot of
rhetoric, at least in the US, about tax changes?
Jay Wells
No. I mean you look at what Trump has proposed and other individuals, this is really done
by inbound notes and the deduction for interest expense, which really is not something that is being
pursued. And, Amit, as you might recall, my previous life was an international tax partner at
Deloitte, so I’ve seen a lot of these structures. And it’s not a complex. It’s not—it’s a tried and true
structure. So it’s been well tested, we keep it up to date, and nothing in proposed legislation
concerns me about losing those types of benefits.
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FINAL TRANSCRIPT
September 25, 2017 — 10:00 a.m. E.T.Cott Corporation New Cott Modelling Conference Call
Amit Sharma
Got it. And then just one more on the synergies net the target that you laid out. Can you
just provide a little bit more granularity on it what’s driving that? And also update on where we are
versus initial expectations for DS, Eden, and S&D?
Jay Wells
Yeah. On the synergies and overall for S&D and Eden, as we said, to start off we were
planning to get 2 million of synergies from each this year for a total of 4 million. Eden, with
accelerating the movement of their head office from Switzerland to Barcelona, accelerated their
synergy program, and now we’re forecasting to have a total of 7 million of synergies this year.
Looking at next year, we’re still looking to focus on the 12 million for the two. And where
that’s really coming from is, one, procurement, where we’ve gotten some combined agreements
between DS and Eden on the procurement of cups and other products they use in their business;
that will be benefitting us. We get a full year benefit of the move of the office from Switzerland to
Barcelona. And in addition, there are several other procurement and IT-type benefits that we were
seeing.
Same with S&D. Really this coming year we’ll get further benefits related to procurement
synergies. And then moving into 2019 is where we’ll start seeing and see good benefit from
combining distribution centres of DS and S&D, as the leases come up and we’re able to combine
distribution centres really in the northeastern part of the US.
11
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FINAL TRANSCRIPT
September 25, 2017 — 10:00 a.m. E.T.Cott Corporation New Cott Modelling Conference Call
Amit Sharma
Got it. And just one more for me. When you talk about perhaps potential to accelerate on
the CapEx behind growth, what’s the payoff? So I understand you may have to spend more capital,
but what does it do to your top-line growth model? And also the 10 percent free cash flow
generation for 2019 onwards?
Jay Wells
Yeah. No, and you’re spot on of what we look at. I mean what we want to get on any type
of capital deployment is definitely a cash-on-cash IRR better than our cost of equity. So you’re
looking in the low- to mid-teens on a cash-on-cash type of IRR, if not better. A lot of our CapEx has
significantly better IRR than that.
And then what that will provide is to the extent we do see the opportunity to do so, it will
give added growth above what we’ve said both on the top line and the bottom line.
I don’t know if I answered your question there, Amit.
Amit Sharma
No. Just to clarify, I mean is there something in the pipeline that is more visible than
largely a potential at this point?
Jay Wells
No. I mean the things that you’ve seen this year, in the first two quarters you’ve seen
significant growth at S&D, both in the roasted coffee and grinding area for the quick-serve
12
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FINAL TRANSCRIPT
September 25, 2017 — 10:00 a.m. E.T.Cott Corporation New Cott Modelling Conference Call
restaurant and for their extract business, and is there a potential to grow that business even faster if
we invest more behind CapEx. So that’s just one example of just making sure we’re building for
growth within that category. And as you’ve seen to start the year, we’ve had very good growth.
With regards to DS, you look at the Aqua Cafe, which we’re now rolling out, and we’re
seeing very good pick up on that. Do we invest more behind rolling out the Aqua Cafe quicker than
planned?
So those are two examples from two of the different business units. I can give you a
potential increased CapEx in order to grow the top line and the bottom line quicker.
Amit Sharma
And, Jay, you have not mentioned buyback in your capital allocation. Is that part of the
discussion, at least internally?
Jay Wells
No. I mean what we’re going do, first we have to close the transaction. And we’re very
focused on separating the businesses and getting the businesses ready to close the transaction. So
that’s number one. But at the same time, we’re in the middle of our annual strategic planning
process.
We are looking at potential opportunities within water, coffee, tea, and filtration in the
geographies that we are to see is there any other significant synergistic-type transaction for us to
do. And we’re going to look at that, evaluate it.
13
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« Bien que CNW Telbec ait fait tous les efforts possibles pour produire cet audioscript, la société ne peut affirmer ou garantir qu’il ne contient aucune erreur. CNW Telbec ne peut être tenue responsable de pertes ou profits, responsabilités ou dommages causés par ou découlant directement, indirectement, accidentellement ou corrélativement à l’utilisation de ce texte ou toute erreur qu’il contiendrait. »
FINAL TRANSCRIPT
September 25, 2017 — 10:00 a.m. E.T.Cott Corporation New Cott Modelling Conference Call
As I said in my script, we’re going to be carrying about 150 million of cash on our balance
sheet after closing. So would it be cash that we would prefer to hold on for dry powder to get one of
those transactions done, but if we do not see anything in the pipeline that will give us the returns
that we’ve always looked at, we will look to return that cash back to shareholders, whether it be
through opportunistic share buybacks, as we’ve done in the past, or we’ll also look at the dividend.
Amit Sharma
Great. Thank you so much.
Jay Wells
Thank you, Amit.
Operator
Your next question comes from the line of Kevin Grundy of Jefferies. Your line is open.
Jay Wells
Good morning, Kevin.
Kevin Grundy — Jefferies
Hey. Good morning, guys. Good morning. Thanks for doing the call. Quick question, I just
wanted to come back to the cash taxes piece to clean that up a little bit. So, Jay, I think you’ve said
in the past that number is 200 million in NOLs. Is that accurate?
Jay Wells
That’s correct, between DS and S&D post the transaction. Yes.
14
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« Bien que CNW Telbec ait fait tous les efforts possibles pour produire cet audioscript, la société ne peut affirmer ou garantir qu’il ne contient aucune erreur. CNW Telbec ne peut être tenue responsable de pertes ou profits, responsabilités ou dommages causés par ou découlant directement, indirectement, accidentellement ou corrélativement à l’utilisation de ce texte ou toute erreur qu’il contiendrait. »
FINAL TRANSCRIPT
September 25, 2017 — 10:00 a.m. E.T.Cott Corporation New Cott Modelling Conference Call
Kevin Grundy
Okay. That’s helpful. And then one other one on free cash flow. Is there any working
capital improvement that’s embedded in your free cash flow guidance? And if the answer is no, is
there any opportunity, Jay, that you’re looking at there?
Jay Wells
The—no to the first answer. If anything, there is a smidge of increased working capital to
go in line with the growth of the business. And you look at the opportunities that we have, one, the
traditional business was much more of an opportunity to do that with much more significant
procurement of goods and payables. This business we’ve already adopted very good payment terms
that I can’t see that we extend any further. So within our model there is no benefits from working
capital, nor do I see any significant opportunity. And all we’ve built in is a slight use for working
capital to coincide with the growth that we’re forecasting.
Kevin Grundy
Okay. That’s helpful. And just one more; have you seen anything in the business
environment that changes your outlook for the growth of these businesses? It doesn’t seem like
that’s been the case. But is there anything you’re seeing out there that’s at all worrisome with
respect to the growth outlook? Thank you.
Jay Wells
15
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FINAL TRANSCRIPT
September 25, 2017 — 10:00 a.m. E.T.Cott Corporation New Cott Modelling Conference Call
No, not at all. As we talked about, we’re dealing with some short-terms issues thanks to
the hurricanes we’ve been seeing in the southern part of the country. And it’s not—it’s much less
our plants; it’s much more our customers able to receive goods.
But other than the short-term blip of the hurricanes we’ve seen this year, nothing in the
long-term, the markets that we see affecting the growth forecast that we’ve talked about.
Kevin Grundy
Okay. Very good. Thanks, guys. Good luck.
Jay Wells
Okay. Thanks, Kevin.
Operator
Your next question comes from the line of Faiza Alwy of Deutsche Bank. Your line is open.
Faiza Alwy — Deutsche Bank
Yes. Thanks. Good morning.
Jay Wells
Good morning.
Faiza Alwy
So I was wondering if you could give us some additional colour on the gross margins of the
various businesses, the various segments, and just the combined business? And then also additional
colour on the D&A that’s associated with each of these businesses? And to the extent that there’s
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« Bien que CNW Telbec ait fait tous les efforts possibles pour produire cet audioscript, la société ne peut affirmer ou garantir qu’il ne contient aucune erreur. CNW Telbec ne peut être tenue responsable de pertes ou profits, responsabilités ou dommages causés par ou découlant directement, indirectement, accidentellement ou corrélativement à l’utilisation de ce texte ou toute erreur qu’il contiendrait. »
FINAL TRANSCRIPT
September 25, 2017 — 10:00 a.m. E.T.Cott Corporation New Cott Modelling Conference Call
other add-backs, whether it’s stock-based compensation or something else that kind of gets you
through the operating income to the EBITDA, that would be helpful.
Jay Wells
Okay. I’m trying to write down—okay. So there was—were you talking gross margin or
EBITDA margin?
Faiza Alwy
So additional colour on the gross margin—
Jay Wells
Gross margin. Okay. I got gross margin, I got D&A, and what was the third?
Faiza Alwy
Yeah.
Jay Wells
Sorry?
Faiza Alwy
The current adjustment of (phon) other things as we think about the income statement—
Jay Wells
Oh, yes, adjustment—
Faiza Alwy
—going from the operating—
17
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« Bien que CNW Telbec ait fait tous les efforts possibles pour produire cet audioscript, la société ne peut affirmer ou garantir qu’il ne contient aucune erreur. CNW Telbec ne peut être tenue responsable de pertes ou profits, responsabilités ou dommages causés par ou découlant directement, indirectement, accidentellement ou corrélativement à l’utilisation de ce texte ou toute erreur qu’il contiendrait. »
FINAL TRANSCRIPT
September 25, 2017 — 10:00 a.m. E.T.Cott Corporation New Cott Modelling Conference Call
Jay Wells
Yeah.
Faiza Alwy
—income to the EBITDA is—
Jay Wells
Got it. I’m sorry. Okay. Yeah. I’ve got it all now, so sorry, I wanted to make sure I had all
the notes. So with our Route Based Services business, a lot of the costs associated with that
business is not in the COGS, but it’s much more in the SG&A because that relates to the Route Based
Services. So you look at that business, I would say the gross margin would be in the low 60 percent,
60 to 63 percent-type gross margin. And that’s excluding—all these are going to be excluding any
type of corporate cost allocation Jarrod just wrote me a note on. So low 60 percent, be it 61, 62, 63-
type percent for the Route Based Services businesses.
For S&D coffee, which deals with the overall coffee as being a very expensive commodity—
again, it’s more of a back-to-back of our customers—we really don’t look at the coffee itself as being
a key factor in the business, but it does drive down our gross margin. I would look at that margin
much more in the mid 20 percents.
And then when you look at D&A, I mean overall we’ve said D&A is about 185 million. I
would probably say on our Route Based Services—I’m doing some math in my head—it’s probably
about 150 million, 150 million-plus, so 150 million, 155 million for the Route Based Services. And for
18
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« Bien que CNW Telbec ait fait tous les efforts possibles pour produire cet audioscript, la société ne peut affirmer ou garantir qu’il ne contient aucune erreur. CNW Telbec ne peut être tenue responsable de pertes ou profits, responsabilités ou dommages causés par ou découlant directement, indirectement, accidentellement ou corrélativement à l’utilisation de ce texte ou toute erreur qu’il contiendrait. »
FINAL TRANSCRIPT
September 25, 2017 — 10:00 a.m. E.T.Cott Corporation New Cott Modelling Conference Call
S&D, you’re looking in the low 20 million, so 22 million, 23 million, 24-type million for S&D. And
then the rest really relates to our other and corporate-type categories.
For cost, the main adjustments that we do when we talk adjusted EBITDA is we eliminate
out any acquisition integration costs, which is really just related to the big transactions we do. We
back out any noncash gain or loss on disposition of assets because it’s really just an acceleration of
depreciation in my book. And then noncash share-based compensation is really the three main
adjustments that we do.
Faiza Alwy
Okay.
Jay Wells
And Jarrod just wants to add combined gross margin for a consolidated basis to give you—
add up is probably right around 50 percent.
Faiza Alwy
Okay. Great. That’s super helpful. Just one more thing on the taxes. So we’ve historically
had some trouble just trying to model out like the GAAP income statement and figuring out what
the tax rate is. Do you have any thoughts around what’s the best way to—like what’s the effective
tax rate for the Company?
Jay Wells
19
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FINAL TRANSCRIPT
September 25, 2017 — 10:00 a.m. E.T.Cott Corporation New Cott Modelling Conference Call
Yeah. You and me both. It’s—no, no. I mean the issue, it was a very easy computation
before we starting putting valuation allowances on our NOLs. Post-acquisition I’ve yet to determine
whether or not we will continue to place valuation allowances on our NOLs or not. So that’s not a
decision that’s been made, and that makes it a much tougher question at that point in time.
Jarrod?
Jarrod Langhans
The 10 million—
Jay Wells
No, that’s cash taxes. That’s not—for me if I were to model it—and I’m just giving you a
recommendation off the top of head—to be honest, with everything we’re doing on our P&L, taxes
are the one area for reported purposes is where we probably have spent the last point in time. But I
would probably say how we used to model it where you take pretax, you reduce it probably by to be
conservative another 20 million, $25 million for a permanent difference for our tax planning
structure, take that times 35 percent and that’s probably the best way for you and your models
right now for the retained business to come up with tax expense.
Did that make sense?
Faiza Alwy
Yes. That’s super helpful. Yes.
Jay Wells
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« Bien que CNW Telbec ait fait tous les efforts possibles pour produire cet audioscript, la société ne peut affirmer ou garantir qu’il ne contient aucune erreur. CNW Telbec ne peut être tenue responsable de pertes ou profits, responsabilités ou dommages causés par ou découlant directement, indirectement, accidentellement ou corrélativement à l’utilisation de ce texte ou toute erreur qu’il contiendrait. »
FINAL TRANSCRIPT
September 25, 2017 — 10:00 a.m. E.T.Cott Corporation New Cott Modelling Conference Call
And that’s assuming—
Faiza Alwy
And then—
Jay Wells
That’s assuming no valuation allowances going forward. And I would hope that we
wouldn’t have them, but we haven’t come to an agreement on whether or not we’re going to value
them or not. But that would probably be the easiest way for now.
Faiza Alwy
Okay. Got it. And just if I may ask one more, just on the tuck-ins? So you said 20 million to
30 million purchase price, 4 million to 6 million EBITDA every year going forward, so are you saying
this is included in your adjusted free cash flow guidance? And you gave—
Jay Wells
No, go ahead.
Faiza Alwy
No, go ahead.
Jay Wells
On the 150 million, yes, our plan for ’17 and ‘18 and ‘19 is included in our free cash flow
guidance. It’s not in organic growth numbers that we provide, but it is in the free cash flow of the
150 million for 2019 that we provided.
21
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« Bien que CNW Telbec ait fait tous les efforts possibles pour produire cet audioscript, la société ne peut affirmer ou garantir qu’il ne contient aucune erreur. CNW Telbec ne peut être tenue responsable de pertes ou profits, responsabilités ou dommages causés par ou découlant directement, indirectement, accidentellement ou corrélativement à l’utilisation de ce texte ou toute erreur qu’il contiendrait. »
FINAL TRANSCRIPT
September 25, 2017 — 10:00 a.m. E.T.Cott Corporation New Cott Modelling Conference Call
Faiza Alwy
Okay. So the EBITDA is in the free cash flow guidance? And not—
Jay Wells
Yes.
Faiza Alwy
—the purchase price, correct? Okay.
Jay Wells
Yes.
Faiza Alwy
Okay. Great. Thank you very much.
Jay Wells
No, thank you for the questions.
Operator
Your next question comes from the line of John Zamparo of CIBC. Your line is open.
John Zamparo — CIBC
Thanks. Good morning, guys.
Jay Wells
Morning, John.
John Zamparo
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« Bien que CNW Telbec ait fait tous les efforts possibles pour produire cet audioscript, la société ne peut affirmer ou garantir qu’il ne contient aucune erreur. CNW Telbec ne peut être tenue responsable de pertes ou profits, responsabilités ou dommages causés par ou découlant directement, indirectement, accidentellement ou corrélativement à l’utilisation de ce texte ou toute erreur qu’il contiendrait. »
FINAL TRANSCRIPT
September 25, 2017 — 10:00 a.m. E.T.Cott Corporation New Cott Modelling Conference Call
Just a couple quick ones to get out of the way. I just want to clarify when we see either
EBITDA or operating income by segment, does that mean it will not include an allocation of
corporate charges? Have I got that right?
Jay Wells
That’s—yeah. In the deck we have, that does not include corporate charges.
John Zamparo
Okay.
Jarrod Langhans
But once we close the transaction, we will—
Jay Wells
Update.
Jarrod Langhans
—update and do an allocation of corporate charges out to the businesses.
Jay Wells
But on Slide 4 the EBITDA margin does not include corporate allocations.
John Zamparo
Okay. Got it. Is there an estimate of what those are? Ballpark?
Jay Wells
On the same deck we say that they’re about 30 million to 35 million.
23
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FINAL TRANSCRIPT
September 25, 2017 — 10:00 a.m. E.T.Cott Corporation New Cott Modelling Conference Call
John Zamparo
Oh, right—
Jay Wells
And as I said in my script, we do have some, let’s call it, post-transaction dys-synergies that
is making that number a little larger that by 2019 we should be able to whittle it down some to help
deliver on our free cash flow target.
John Zamparo
Okay. That’s helpful. Thanks. And I guess that’s my next question, Jay, is can you give us
some more colour on what those costs are? And how it is they roll off from ‘18 to ‘19?
Jay Wells
Sure. I mean there is a variety of different costs. One, just on the IT side when we first pull
apart we’re going to—they’re basically getting our SAP platform for their traditional business. So
we’re going to have to pay them a service fee to continue on SAP for the duration we are under the
transition service agreement. But then we’re also going to be getting a new IT platform up for RCI
and our concentrate facility. And there’s going to be some double running costs. There’s some
double running of headcount associated with that.
So there is a big part related to just separating Columbus, our RC facility, and our
corporate facility apart from the businesses. So it’s really related to those types of costs that are
double-up. There’s other types of services we’re doing under the TSA that as they fall off, and we’re
24
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FINAL TRANSCRIPT
September 25, 2017 — 10:00 a.m. E.T.Cott Corporation New Cott Modelling Conference Call
doing them for free, we’ll be able to reduce those costs after we get through the transition services
agreement. And as you can tell by duration, I’m referring to the ones that more last six months to a
year, not the concentrate agreement that lasts 18 months.
John Zamparo
Okay. That’s great. And last one for me. The synergies you’re referring to, we just want to
confirm, those are all cost synergies, yes? Or does that include revenue synergies too?
Jay Wells
The synergies on Eden and S&D are pure cost synergies.
John Zamparo
Costs. Okay. Okay. That’s it for me. Thanks very much.
Jay Wells
Okay. Thank you, sir.
Operator
Your next question comes from the line of Hale Holden of Barclays. Your line is open.
Hale Holden — Barclays
Hey. Thanks for taking my call. Jay, I just had one. Can you run through how your COGS
buckets changes going forward? I know diesel is a pass-through and then the bottle costs you’re
capitalizing, but just a way to think of what the main inputs would be on a go-forward basis?
Jay Wells
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FINAL TRANSCRIPT
September 25, 2017 — 10:00 a.m. E.T.Cott Corporation New Cott Modelling Conference Call
Sure. You really look at the Route Based Services, the COGS number one is our facilities.
You look at DS, we have, I think, last I counted, 27 different manufacturer’s facilities where—no.
Jarrod—one got added when I wasn’t looking—Jarrod just corrected me, 28, where we’re producing
our own 5 gallon bottles of water, we’re producing some of our 1 gallon and 2.5 gallon-type
products for retail. So that’s a big part of the COGS.
In addition to within that you have—you might not have the purchase of the bottles, but
you have the amortization of the bottles. You have … Overall you have the cost of the water and the
other products. So I mean that’s really the COGS part of the Route Based Services business, but as I
said earlier, it really is down in SG&A where we have our route delivery and sales teams that the
predominant amount of the costs of those businesses are.
When you look at S&D, you can say almost three-quarters of the COGS is really coffee-
driven; really, the procurement of coffee. And then on top of that, then you get into the other
specialty type beverages, the teas that we buy where the remainder being really related to the
roasting and grinding plant that we operate. But really think of it as coffee for our Coffee business is
predominant, and for the Route Based it really is our plants and just buying our water, caps,
amortization of the bottles, and so forth.
Hale Holden
Is there any of it that you’re hedging on a go-forward basis?
Jay Wells
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FINAL TRANSCRIPT
September 25, 2017 — 10:00 a.m. E.T.Cott Corporation New Cott Modelling Conference Call
With regards to the coffee for our Coffee business, it’s really it’s 90 percent of that
business is back-to-back with our customers. So we do buy forward and hedge on that, but we
hedge that for on behalf of our customers. The other 10 percent we do some type of coffee hedging
and buying forward for our own, but that’s a small part of that business.
When you look at the Route Based Services, really not a significant amount of commodity-
based costs to worry about. You look at diesel is the big commodity, and we have an energy
surcharge and pass that through to our customers where it goes up and down every month. So
there really isn’t a large amount. Really the only thing we may hedge a little bit—I don’t know, we
wouldn’t even do that because on the euro I have euro debt, so I really don’t have a need to hedge
the euro. That’s really providing me with a natural hedge.
So no, I can’t see other than buying forward the coffee anything else that we would be
hedging.
Hale Holden
Great. Thank you so much. And thank you for hosting these calls. We find them helpful.
Jay Wells
No, no. Thank you for the question.
Operator
Your next question comes from the line of Judy Hong of Goldman Sachs. Your line is open.
Judy Hong — Goldman Sachs
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FINAL TRANSCRIPT
September 25, 2017 — 10:00 a.m. E.T.Cott Corporation New Cott Modelling Conference Call
Thank you. Good morning.
Jay Wells
Good morning. How you doing?
Judy Hong
Good. So, Jay, just a couple of questions. On the adjusted free cash flow guidance,
obviously we have the ‘19 numbers, but other than timing of the deal closing, I mean, are there any
considerations that could impact ’17 or ’18? At least maybe the ’18 number, to be more accurate?
Jay Wells
No, I mean the—looking at ’18, it really is timing of the transaction. Our hope and belief is
still that we will close by the end of the year, but if we go to phase two—regulatory approval in the
UK—that will delay it into next year. So it really is UK regulatory approval that could possibly push
closing into next year.
Other than that, the only other thing I mentioned is once we close the transaction we will
have additional monies to invest; are there any other growth projects that we might spend a little
bit more in CapEx than we otherwise currently have in my model? But that’s really the only other
thing that I would see could affect CapEx, could affect free cash flow, but really nothing else is
coming to my mind.
Jarrod? Jarrod’s saying no either. So yeah, timing of close and do we—after we get the
close do we spend a little bit more on growth-type CapEx.
28
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FINAL TRANSCRIPT
September 25, 2017 — 10:00 a.m. E.T.Cott Corporation New Cott Modelling Conference Call
Judy Hong
Got it. Okay. And then if we kind of think about the longer-term free cash flow growth
guidance off of the ’19 numbers, so obviously you would have revenue growth target of 2 to 3
percent; I’d imagine you’ll continue to look for tuck-in acquisitions. In terms of further margin
expansion or working capital or CapEx focus just in terms of thinking about that 10 percent-plus
number, what are some of the drivers that you think you could deliver beyond some of the basic
kind of drivers that you’ve laid out today?
Jay Wells
Yeah. I think when you look at the 10 percent CAGR that I referred to, I think you hit the
main things that’s within our model that we look at as you have the 2 to 3 percent top-line growth
that you do get leverage as you go down the P&L to deliver better EBITDA growth. And on margin
expansion, I would say as our routes get more dense should we see annually 10, maybe in a good
year 20 bps improvement in the overall margin of our Route Based Services business is what I would
look at. And then you add the 4 million to 6 million of EBITDA from annual tuck-ins really gets you to
the 10 percent CAGR that I referred to.
On top of that, the other thing I referred to in my prepared remarks was we will have
about 150 million of cash on the balance sheet after the transaction. We will be generating annually
additional free cash flow. There is other opportunities out there. Whether it be increasing the tuck-
ins, whether it be additional growth CapEx, or whether it be more chunky tuck-ins or a larger-scale
29
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FINAL TRANSCRIPT
September 25, 2017 — 10:00 a.m. E.T.Cott Corporation New Cott Modelling Conference Call
acquisition, those are the opportunities really to get incremental growth above the 10 percent that I
referred to.
Judy Hong
Got it. Okay. And then just lastly on S&D, I know some of your margin targets are
predicated on constant coffee pricing. So just kind of thinking about historically, what’s been the
practice on S&D in a rising coffee cost environment? Is it a pretty standard pass-through of the cost
increases? Any colour that you can give us in terms of what could happen in a rising inflationary
environment?
Jay Wells
Sure. No, you look at, like I said, about 90 percent of their business is truly just they hedge
the coffee on behalf of their customers. It varies between six months and two years, I’d say on
average, the hedge is a year, so it is a back-to-back. So the movement of coffee really does not
affect their overall dollar margin.
And if you really want to look at the effect of what coffee’s going to do on their top line, if
they’re hedging on average a year out, you actually have to look at the movement in coffee prices
from two years versus a year will really give you where coffee price is going to affect their revenue.
But overall on dollar margin, since 90 percent of that is really back-to-back to our
customers, it does not affect our dollar margin. And as I said, the other 10 percent of our business,
which is more through our Route Based system more to the smaller convenience stores or
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FINAL TRANSCRIPT
September 25, 2017 — 10:00 a.m. E.T.Cott Corporation New Cott Modelling Conference Call
restaurants, we do do some buying for it on our own behalf so we would have exposure to that, but
that’s a much smaller part of it.
So yes, you’re right on the percentage margin because as revenue moves up and down it
will affect our percentage, but the dollar margin should not be affected by movement in coffee
prices.
Judy Hong
Got it. Okay. Thank you.
Jay Wells
Thank you.
Operator
And our final question comes from the line of Amit Sharma of BMO. Your line is open.
Amit Sharma
Hi, Jay. Thank you so much for taking the—
Jay Wells
Amit, not only did you get three questions in your first round, you get a second go-round
today. It’s a great day.
Amit Sharma
I really appreciate it, and I’ll make it real quick. So the cash flow guidance includes 4 million
to 6 million EBITDA. Does your top-line goal also include tuck-ins? Or is that—
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"Though CNW Group has used commercially reasonable efforts to produce this transcript, it does not represent or warrant that this transcript is error-free. CNW Group will not be responsible for any direct, indirect, incidental, special, consequential, loss of profits or other damages or liabilities which may arise out of or result from any use made of this transcript or any error contained therein."
« Bien que CNW Telbec ait fait tous les efforts possibles pour produire cet audioscript, la société ne peut affirmer ou garantir qu’il ne contient aucune erreur. CNW Telbec ne peut être tenue responsable de pertes ou profits, responsabilités ou dommages causés par ou découlant directement, indirectement, accidentellement ou corrélativement à l’utilisation de ce texte ou toute erreur qu’il contiendrait. »
FINAL TRANSCRIPT
September 25, 2017 — 10:00 a.m. E.T.Cott Corporation New Cott Modelling Conference Call
Jay Wells
No—
Amit Sharma
—just organic growth?
Jay Wells
Yeah. Our top-end percentages of overall 2 to 3 percent and then the different separate
percentages that we provided all exclude the tuck-in acquisitions. So the top-line numbers that we
provide is pure organic growth, and then, yeah, the free cash flow for 2019, as you said right,
includes the 4 million to 6 million annual add to EBITDA from the tuck-ins.
Amit Sharma
Got it. Okay. Thank you so much.
Jay Wells
Thank you, sir.
Operator
And thank you. This closes out the Q&A portion of today’s call. You may now disconnect.
*****
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