February 8, 2008 / 1:02 PM / in 10 years

Cott loss balloons as costs up, demand down

OTTAWA (Reuters) - Cott Corp (BCB.TO) reported a surprisingly big fourth-quarter loss on Friday, as the world’s No. 1 private-label soft drink maker was hurt by swelling costs and one-time charges, coupled with weaker demand.

Cott, which counts Wal-Mart (WMT.N) as a customer, said it fell short of its 2007 goals because of surging commodity prices, drooping soft drink demand and internal difficulties.

But the company remains confident its turnaround plan can “significantly” improve its 2008 performance.

Analysts said that another round of disappointing results served to underscore the significance of Cott’s problems.

“Same story, different quarter,” said a UBS note, while Stiffel Nicolaus research was titled “Seeking Signs of Dawn.”

Cott’s fourth-quarter net loss ballooned to $76.8 million, or $1.07 a share, from $29.6 million, or 41 cents a share, in the same period a year ago.

Restructuring and asset impairment charges rose to $66.4 million from $23.5 million.

The operating loss grew to $75.2 million from $40.3 million. Absent charges, Cott said it would have swung to an $8.8 million operating loss from a profit of $6.5 million.

Morgan Stanley estimated the operating loss at about 20 cents a share, well off its forecast for a profit of 3 cents a share.

“The fourth quarter continued the same trend, as historical operating income declined, however, there is clear evidence that our strategy is beginning to take hold,” Chief Executive Brent Willis said on a conference call.

He pointed to improved net revenue and lower costs per case of pop in the quarter, and the launch of higher-margin beverages such as teas and energy drinks.

Revenue for the period ended December 29 climbed 3.1 percent to $412.4 million, while volume rose 13 percent.

International growth of 41 percent, driven by bigger sales in advance of a pending price hike, was partly offset by a 4.8 percent drop in North America, which was hurt by weaker demand for carbonated soft drinks.

In an effort to improve its results, Cott is cutting costs and increasing prices, while trying to sell more high-margin beverages and improve profit for its U.S. bottled water business with new equipment.

“We have revisited our strategy and frankly revalidated it as absolutely appropriate and timely for Cott to carve out its sustainable position and deliver superior and sustainable profitable growth,” Willis said.

Cott maintained its target of 16 percent gross margin by the end of 2009. The fourth-quarter margin rose to 8.7 percent from 7.5 percent, but would have declined had one-time charges been excluded from the year-ago period.

The most recent margins were hurt by higher ingredient and packaging costs.

Cott has taken fixed-cost positions on some key commodities, such as aluminum, but analysts say that ongoing, widespread cost increases pose a big risk.

The company’s shares slipped nearly 2 percent to C$5.60 on the Toronto Stock Exchange and about 1 percent to $5.60 on New York. The stock has dropped about 68 percent since May.

“Despite the significant falloff over the last nine months we are not convinced that the shares have hit bottom,” said Morgan Stanley analyst Bill Pecoriello in a note outlining an array of risks.

($1=$1.00 Canadian)

Reporting by Susan Taylor, additional reporting by Jonathan Spicer in Toronto; Editing by Rob Wilson

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