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Cott Corporation reports Q4 and full year results --->[]

2009 CTVglobemedia Publishing Inc. All Rights Reserved.

A turnaround has relied on cost cuts and debt reduction. Now the company sets its sights on selling more pop

'''Cott Corp. is one of this year's top turnaround stories, with a cleaned-up balance sheet, a profitable bottom line and shares that have jumped 600 per cent. With the company's see-saw record, however, it's too soon to declare long-term success.'''

Cott bills itself as "the world's largest retailer brand soft drink company," which means it makes the no-name carbonated beverages sold in stores at lower prices than megabrands like Pepsi and Coke.

Simple enough. Cott, however, has a history of aspiring to be more - then screwing things up, burning its investors in the process. After a red-hot first year as a public company in the early 1990s, the stock collapsed amidst allegations about its accounting and a multimillion-dollar restructuring. More recently, an effort to push branded beverages, coupled with executive suite chaos, more losses and liquidity concerns, wiped out 97 per cent of the share value from 2005 to early 2009.

"Every time the company tries to be more than it is - a solid manufacturer for third parties - it gets itself into trouble," said David Hartley, an analyst at BMO Nesbitt Burns.

Instead, '''Cott is succeeding in the short term through cost-cutting and debt reduction. It's added nearly five percentage points to its gross margin''' - revenue minus the cost of goods sold - this year, going to 16.1 per cent in the first three quarters of 2009 from 11.4 per cent in the prior-year period. Cuts in selling, general and administrative expenses have added another couple of percentage points to operating margins.

'''The company has used nearly all its free cash flow this year to strengthen its balance sheet. An asset-backed line of credit that had $107-million outstanding at the beginning of the year was down to zero on Sept. 30.'''

Cott remains highly dependent on commodity costs, particularly high-fructose corn syrup and aluminum, and sharp drops in the price of some of its raw materials this year have driven recent gross-margin improvements. The company has locked in costs on at least half the volume of those two major goods for 2010, meaning it's protected from most, but not all, potential price rebounds.

Most concerning, though, is the company's relationship to its No. 1 customer, Wal-Mart Stores Inc., which represented one-third of Cott's revenue in the first nine months of the year. In January, Wal-Mart gave notice that it's terminating its exclusive deal with Cott, resulting in a gradual decline in its obligations to use Cott over the next three years. (Wal-Mart did not respond to a request for comment.) What company will step up, however, to provide Wal-Mart with private-label pop? The bottlers of Coke and Pepsi? The makers of Dr. Pepper (who, Mr. Hartley says, already use outside bottling companies)? A hodgepodge of small independents?

'''"What Wal-Mart wants to do is make sure it's having an honest discussion with its suppliers," Mr. Hartley said. "Private-label soft drinks are still a desirable business. What are the other options [besides Cott]? Very few, maybe none."'''

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