May 7, 2014
Executives
Robert Meyer - Jerry S. G.
Fowden - Chief Executive Officer and Director Jay Wells - Chief Financial Officer and Vice President
Analysts
Perry Eugene Caicco - CIBC World Markets Inc., Research Division Judy E. Hong - Goldman Sachs Group Inc., Research Division Bryan C.
Hunt - Wells Fargo Securities, LLC, Research Division William Schmitz - Deutsche Bank AG, Research Division Mark D. Swartzberg - Stifel, Nicolaus & Company, Incorporated, Research Division Amit Sharma - BMO Capital Markets U.S.
Jesse Reinherz - Stifel, Nicolaus & Company, Incorporated, Research Division
Operator
Welcome to Cott Corporation's First Quarter 2014 Earnings Conference Call. [Operator Instructions] The call is being webcast live on Cott's website at www.cott.com and will be available for a playback there until May 21, 2014.
We remind you that this conference call contains certain forward-looking statements reflecting management's current expectations regarding future results of operations, economic performance and financial conditions. Such statements include, but are not limited to, statements that relate to estimated volumes, and SG&A.
This conference call also includes forward-looking statements reflecting the company's business strategy, the payment future dividends, the refinancing of our 2018 senior notes. The reduction of interest expense and investment inorganic and bolt-on opportunities, goals and expectations concerning our market position, future operations, and estimated capital expenditures, working capital, commodities, taxes and free cash flow.
Forward-looking statements are subject to certain risks and uncertainties, which could cause actual results to materially differ from current expectations. These risks and uncertainties are detailed from time to time in the company's securities filings.
The information set forth herein should be considered in light of such risks and uncertainties. Certain material factors or assumptions were applied in drawing conclusions or making forecast or projections reflected in the forward-looking information.
Additional information about the material factors or assumptions applied in drawing conclusions or making forecasts or projections reflected in the forward-looking information is available on the company's press release issued earlier this morning and its quarterly report on Form 10-Q for the quarter ended March 29, 2014. The company does not, except as expressly required by applicable law, assume any obligation to update the information contained in this conference call.
A reconciliation of any non-GAAP financial measures discussed during the call with the most comparable measures in accordance with GAAP is available on the company's first quarter 2014 earnings announcement released earlier this morning, as well as on the Investor Relations section of the company's website at www.cott.com.I'll now turn the call over to Robert Meyer, Cott's Director of Investor Relations.
Robert Meyer
Good morning, and thank you for joining our call. Today, I am accompanied by Jerry Fowden, our Chief Executive Officer; and Jay Wells, our Chief Financial Officer.
Jerry will start this morning's call with some introductory remarks to include a discussion of our results of our latest strategic review before turning the call over to Jay, for a discussion of our first quarter 2014 financial performance. Jay will then turn the call back to Jerry, who will complete the call with his perspective on our first quarter 2014 performance, as well as a discussion of business drivers and expectations for the remainder of 2014.
Following our prepared remarks, we will open up the call for questions. With that, let me now turn the call over to Jerry.
Jerry S. G. Fowden
Thank you, Rob. Good morning, everyone.
Before Jay reviews our financial results, I wanted to comment on our first quarter's performance, and update you all on our strategic review, and plan as we go forward. As you can see, the first quarter of 2014 was challenging, and reflected the landscape we outlined in our fourth quarter 2013 call.
With continuing declines in the North American CSD category, and aggressive national brand promotional activity in retail channels, driving narrower private label price caps which led to lower North American volume, gross margin and hence, lower EBITDA. The global filled beverage case volume, excluding concentrate sales decline of 5% in actual cases, and 8% in 8oz equivalent cases was in line with the indications we gave at the time of our fourth quarter earnings call.
While we expect to see volume declines continuing during the second quarter, we see volume trends improving a little in North America as we move towards the back end of the year. It's against this backdrop of our continuing decline in the North American CSD category, and aggressive national brand promotional activity that we undertook as part of our normal business planning approach, a strategic review, in which we look out over the next 3, 5, 7 and 10 years to evaluate whether there are alternatives available to Cott, that would either complement our strategy of organic growth and growth through diversification or otherwise enhance shareholder value.
During this review, we examined all aspects of the markets, segments and geographies, in which we currently operate and explored multiple strategic options from one end of the spectrum, such as selling the company to the other end of the spectrum, such as strategic combinations and transformational acquisitions. As well as balance sheet actions and enhancing our operational effectiveness.
As a result of this review, a number of key facts and trends emerged that are worthy of highlight. The large North American carbonated soft drink and shelf-stable juice markets are mature and continue to structurally decline.
The excess industry capacity that results from this decline is likely to continue to pressure margins. National brand promotion and pricing activity in pursuit of volume predominantly in carbonated soft drinks, in the large-format retail channel, is reducing the price gap to private label.
Such pricing activity is not a sustainable solution to the CSD market decline we've been seeing, and will not restore long-term growth to the carbonated soft drink category. Ultimately, capacity rationalization and beverage innovation better align to consumer's needs and wants, along with a meaningful shift in product mix is required.
Additionally, we see large format retail store and supermarket consolidation continuing. The center stores sales come under pressure, alongside ongoing growth in discount and small store formats.
All of these broader market trends have become more evident at the same time, as the debt and financing markets have materially improved. Against these macro trends, our review also confirmed that Cott has many strong and positive attributes, that are also worthy of highlight.
We have a very high asset turn, high sales per employee and superb quality versus many of our peers, demonstrating our strong operating control and philosophy. We have best-in-class SG&A leverage.
We have a strong balance sheet having achieved our debt reduction targets during 2013. Remember, we redeemed $200 million of our 2017 notes in quarter 4, and the remaining $15 million in February.
We also have a very attractive corporate tax structure and low cash tax expenditure. Strong cash generation and a high cash yield versus almost all comparable peers.
However, despite our recent efforts to diversify our business, 60% of our business is still concentrated in the mature and declining carbonated soft drink and shelf-stable juice segments. Now, after taking into account these macro factors, and the many positive Cott-specific attributes just discussed in connection with our review of multiple strategic alternatives, we have determined to implement the following 5 elements, as part of our go-forward strategy to best drive future shareholder value, and ensure we continue our high cash generation.
First, we will continue with our 4 C's approach including tight operating and capital controls, with an ongoing focus on cash generation. Second, we will increase our allocation of new and dedicated resources against contract manufacturing, which has been showing considerable growth.
Third, we aim to refinance our 2018 senior notes in parallel with an expansion of our overall debt capacity and a reduction of our interest rate. Fourth, based on our current view of the operating environment, increase our return of funds to shareholders to up to 50% of our free cash flows over the next 12 months, via an increase in our opportunistic stock repurchase plan and the continuance of our $0.06 quarterly dividend that will be denominated in U.S.
currency as we go forward. And finally, and most importantly, fifth, accelerate in both pace and scale, our acquisition-based diversification, outside of CSD's and shelf-stable juices with a focus on other beverage categories and beverage adjacencies.
As well as on driving our channel mix beyond large format retail and supermarket stores. While ensuring leverage is not overstretched, and our transactions are accretive and value creating.
I believe these changes and the faster diversification of our business alongside expansion of contract manufacturing will put us in a stronger position as we go forward. I'll comment more on this, and our performance by each business unit later in the call.
But now, on a separate note, I'm pleased, our Board of Directors renewed our discretionary share repurchase program and approved our quarterly dividend and its denomination in U.S. currency, thereby removing the adverse foreign exchange impact of the U.S.
dollar strengthening against the Canadian dollar since the dividend was introduced. On this note, let me hand the call over to Jay, to cover our financial metrics, our quarterly dividend, and the renewal of our share repurchase program in more detail.
Jay Wells
Thank you, Jerry. Total filled beverage case volume, excluding concentrate sales was lower by 5% in actual cases, and 8% in 8oz equivalents.
The volume decline was due primarily to prolonged aggressive promotional activity from the national brands in North America, the general market decline in the North American carbonated soft drink category, as well as the exiting of case pack water. Offset in part by a combination of increased hot fill and juice volumes with additional contract manufacturing wins and the addition of the Calypso business.
Our U.S. contract manufacturing volumes increased by 170% in 8oz equivalents and our hot fill volumes increased by 4%, relative to the first quarter of 2013.
Revenue was lower by 6%, 7% excluding the impact of foreign exchange, at $475 million. The revenue decline was due primarily to lower North American CSD volumes, offset in part by a combination of increased hot fill and juice volumes with additional contract manufacturing wins and the benefit of our Calypso acquisition.
Gross profit as a percentage of revenue was 10.6%, compared to 11.2%. The gross margin decline was due primarily to the competitive environment and lower North American volume, alongside additional freight and operating costs caused by inclement weather in North America.
SG&A expenses were higher by 2% at $42 million compared to $41 million. The increase in SG&A was due primarily due to an increase in employee-related costs.
The slight increase was consistent with the expectations noted during our 2013 fourth quarter earnings call, during which we explained that we would be reestablishing on target employee incentives for 2014. As a reminder, we continue to believe that our total SG&A for 2014 will remain in the 7% to 8% range as a percentage of revenue, which is considerably less than most companies in our industry.
We believe this level of SG&A reflects our low-cost philosophy. During the quarter, we incurred approximately $3.8 million in charges related to plant closures.
The costs associated with these closures are expected to have an approximate payback period of 2 years. Jerry will discuss these closures in more detail later in the call.
Interest expense for the quarter was lower at $9.8 million compared to $13.3 million in Q1 2013. The $3.5 million reduction in interest expense was primarily a result of the redemption of $200 million of our 2017 senior notes in Q4 2013.
And to a degree the redemption of the $15 million aggregate remaining principal balance in February of this year. Other income net was $2.3 million in the first quarter compared to $0.3 million, due primarily to a favorable legal settlement of $3.5 million in Q1 2014, partially offset by $0.9 million of bond redemption costs, associated with redeeming the remaining $15 million of our 2017 senior notes.
Adjusted net loss and adjusted loss per diluted share were $2.5 million, and $0.03 respectively. Compared to adjusted net income of $0.4 million and adjusted earnings per diluted share of 0 in the prior year.
Adjusted EBITDA was $34 million compared to $40 million. The additions in computing adjusted EBITDA consisted of bond redemption costs of $0.9 million, restructuring and impairment charges associated with our plant closures of $3.8 million, tax reorganization and regulatory costs of $0.1 million, acquisition and integration costs of $1.1 million, and a reduction of $3.5 million as a result of the favorable settlement associated with one of our prior acquisitions.
Although some aspects of our performance were disappointing, we continue to focus on our 4 C's and saw free cash flow in the quarter, $18 million favorable to Q1 2013. We continue to manage CapEx tightly, reducing our property, plant and equipment expenditures to $9 million from $20 million in the first quarter of 2013.
And we had lower employee cash bonus costs in the quarter. Turning to our balance sheet, cash on hand at the end of the quarter was $41 million, net debt was $482 million and our unused borrowing availability was $141 million.
As Jerry mentioned, part of our go-forward strategy is to accelerate investment behind diversification, and based on our current view of the operating environment, return up to 50% of our free cash flow over the next 12 months to shareholders. We believe the most effective means of doing so is through maintaining our quarterly dividend, now denominated in U.S.
currency, supplemented by an increase in our discretionary opportunistic share repurchase program. Thus, as announced this morning, our Board of Directors approved a quarterly dividend of $0.06 per share in U.S.
currency, payable on June 18, 2014. Our board has also approved the renewal of our discretionary share repurchase program, which gives management the authority to opportunistically repurchase shares in line with the objectives Jerry outlined in our go-forward strategy.
With that, I'll will now turn the call back to Jerry.
Jerry S. G. Fowden
Thanks, Jay. I'll now review the performance in each of our reporting segments.
In North America, revenue was lower by 12% for the quarter and filled beverage case volume was lower by 10% in actual and in 8oz equivalent cases. The decrease in volume was due primarily to lower private label market share, within the overall CSD category.
As a result of narrowed price gaps, caused by prolonged national brand promotional activity in the retail channel. Examples of this can be seen everywhere, and just to bring things to live, when I popped out just a couple of weeks ago to 3 of the very largest retail chains in Florida near our office, one was selling national brand, 12 packs for $3; another was selling four 12 packs for $11, all the equivalent of $275 each and the third was selling national brand 12 packs, buy 1 get 1 free.
The price gap to our private label in these stores was effectively reduced to $0.08 or 3% per 12-pack compare to our normal 35% to 40% price gap. This national brand promotional and pricing activity alongside exiting of case pack water adversely impacted our volume and was offset in part, by increased hot fill and juice volumes and significant progress within our contract manufacturing business.
Cott's U.S. hot fill and juice volumes were 4% higher in the first quarter of 2014, relative to the first quarter of 2013, in our juice category that declined 1.4%.
In addition, our North American contract manufacturing volume increased by 170%, relative to the first quarter of 2013, with an 8oz equivalent case volume moving from below 3 million cases to over 7.5 million cases. As the overall U.S.
CSD market remains difficult with volumes down a further 1.6%, and value down another 3%, excess capacity continues to grow, which is driving aggressive promotional activity in pursuit of volumes. Until greater capacity rationalization takes place, we'll continue to see increased pressure on margins and a heightened competitive environment.
As you may be aware, as a part of our strategic planning process mentioned earlier, we undertake an annual review of our manufacturing footprint. Its efficiencies and capacity utilization, and to assess this versus transport and freight costs to supply our major customers distribution center, thus identifying the best landed or delivered cost into these distribution centers, and hence, the best manufacturing footprint for us to operate.
The net result of this process was a decision to close 2 of our smaller manufacturing plants, during 2014. Employees at these 2 plants have been communicated with and both are scheduled to close at the end of our second quarter.
Now, turning to the U.K., Revenue increased 19%, 12% excluding the impact of foreign exchange, and filled beverage case volume increased 9%, and 4% in 8oz equivalents cases. This strengthening performance was driven by the bolt-on acquisition of Calypso Soft Drinks, which continues to perform well with like-for-like revenue up 9% and EBITDA up over 50%, demonstrating the benefit of diversification into different products, packages and channels.
As we look to the rest of the year, we continue to expect improved EBITDA and financial performance in the U.K. from a combination of the Calypso acquisition, increasing capacity from speciality line installations, tight cost controls and high capacity utilization.
At the same time, we are being more cautious on our forward view of volumes in the U.K., given recent commentary from other beverage companies and our view of the competitive landscape. It's also worth remembering the July heatwave last year, after a wet and cool first 6 months of 2013, and NASA volumes may reflect some comparable ups and downs from quarter-to-quarter.
Turning to what we have recently named our all other reporting segment, which now includes our Mexico operating segment, Royal Crown International operating segment, and other miscellaneous expenses, but is of comparison with updated prior information to reflect this change in our reporting segments. Revenue was flat at $15 million due to increased sales to new RCI customers, offset by lower concentrate sales and the exiting of low gross margin business in Mexico.
While revenues held steady, earnings increased due to an improved mix of business, made up of higher finished goods sales to new customers in our RCI operating segment, and a much improved business mix within our Mexico operating segment, where we have won some more attractive new speciality business. As we summarize the first quarter, and look to 2014 as a whole, we continue to expect the North American beverage landscape especially carbonated soft drinks to remain challenging in 2014.
With continuing pressure on CSD volumes, as well as on margins from excess capacity and increased promotional pricing. At the same time, we expect to continue to grow our hot fill and juice volumes and our outlook for contract manufacturing remains positive, as we look to the balance of the year.
It's against this background, that we outlined the 5 strategic priorities as we go forward, which to recap are #1, continue with our 4 C's approach, including our tight operating management and capital controls with an ongoing focus on cash generation; #2, increase our allocation of new and dedicated resource, against our growth in contract manufacturing; #3, refinance our 2018 senior notes in parallel with an expansion of our overall debt capacity, but at the same time, a reduction of our interest rate. Based on our current view of the operating environment, #4, increase our return of funds to shareholders to up to 50% of our free cash flow over the next 12 months, by an increase in our opportunistic stock repurchase plan just approved, and the continuance of our $0.06 quarterly dividend that will be denominated in U.S.
currency as we go forward. And finally, #5, accelerate in pace and scale our diversifying acquisitions, outside of carbonated soft drinks and shelf-stable juices with a focus on other beverage categories and beverage adjacencies, as well as a focus on driving our channel mix beyond large format retail and supermarket stores.
I believe these changes and the faster diversification of our business alongside expansion of our contract manufacturing business will put us in a stronger place. Now alongside these 5 strategic priorities, on the operations front, we will maintain our tight capital control with 2014 CapEx in the $50 million to $55 million range and we continue to expect our cash taxes to be minimal.
As a short update on commodities, little has changed since our last report. Aluminium, in combination with the Midwest premium, remains high, but stable.
PET resin has shown some recent softness, but it's too early to say if this will last. Corn has firmed a little and is now in the $5 a bushel range, and very little has changed on fruit juice front, except the emergence of significantly higher prices on certain smaller fruits such as lemon, lime and prune.
That's all in all, while the environment especially, the North American carbonated soft drink remains difficult. We expect to continue to make progress in hot fill and contract manufacturing, and will continue to run the business tightly focusing on cash generation, low-cost and high service, while accelerating our acquisition-based diversification and return of funds to shareholders over the next 12 months.
Before I turn the call back to Rob, I'd like to let you know that this is Rob's last conference call as Gerard Langen will be taking over Investor Relations over the next quarter. I'd like to take this opportunity to thank Rob for all his hard work.
With that, back to Rob.
Robert Meyer
Thank you, Jerry and Jay. [Operator Instructions] Thank you for your time.
Operator, please open up the lines for questions.
Operator
[Operator Instructions] Our first question is coming from Perry Caicco of CIBC World Markets.
Perry Eugene Caicco - CIBC World Markets Inc., Research Division
Jerry, I probably know the answer to this question, but I'm kind of wondering, how North American volume has been in Q2, so far? And what the pricing outlook is for Memorial Day, I mean, can it get any worse?
Jerry S. G. Fowden
Perry. Just looking at things, you were just about kind of spot on the bull's eye from where the quarter would come out.
So let's try and continue to keep you well informed, so you can be that accurate. I think, as we said in the script, we pretty much see quarter 2 tracking the same way as quarter 1 at the moment.
And we do believe in North America, we could see things improving a little as we get to the back end of the year with our growth in contract manufacturing, and the aggressive national brand promotional activity started in quarter 3 last year. So, that will start to lap.
But whether it's Memorial Day or any other day, there were some reports that the national brand activity had eased off on January 8, but frankly, I think there was about a 1-week gap ever since then, whether it's one of the national brands or the other, we've had these $0.99 to $1 or $3 or below 12-pack pricing everyday of the week. So we're saying we don't see that changing as we look out over the balance of the year, and we see the landscape for CSDs in North America remaining challenging.
Perry Eugene Caicco - CIBC World Markets Inc., Research Division
And Jerry, when we consider your ongoing cost review that resulted in the 2 plant closures, so what are the other types of activity should we look for?
Jerry S. G. Fowden
Well, we'll continue to keep our SG&A costs as low as possible, as you know, we normally strive to offset any inflation in that each year through efficiencies. Our footprint review is something we do every year on an annual basis.
And we tend to do it about the same time. We do the work back end of one year, early part of a next, and then make our decisions out of it.
And we have also done some restructuring, whereby, we've combined certain SG&A management roles together. But, really it's a continuation of that.
And I think, Jay has got something he'd like to add as well.
Jay Wells
When you look at our CapEx, every year, a portion of our CapEx is dedicated to improving the efficiencies of our plant, so we don't really call them out during these calls. But, every year, we have a long list of efficiency projects that we're working on and investing behind that all of them gave us a couple year payback also.
So, there's many things we always have working.
Perry Eugene Caicco - CIBC World Markets Inc., Research Division
And Jay, what are capital spending needs of the core business for this year or next?
Jay Wells
Yes. Jerry said, we're looking at $50 million to $55 million overall as our CapEx for this year.
Perry Eugene Caicco - CIBC World Markets Inc., Research Division
And how much of that goes towards the efficiency projects and how much of that is maintenance?
Jay Wells
Yes, I mean, it vary, but I would say ...
Jerry S. G. Fowden
Probably $20 million to $25 of that would be on cost down projects. Perry.
Operator
Our next question is coming from Judy Hong of Goldman Sachs.
Judy E. Hong - Goldman Sachs Group Inc., Research Division
Just following up on the North American pricing environment. I guess, there is a sort of continued disconnect between what you're seeing and what you're commenting about the national brands promotional activity and then what they're alluding to in terms of the pricing being relatively rational.
So hoping to just drill in a little bit more into kind of the disconnect whether it's being -- it's being driven by some of the markets and the channel differences or whether you think it's being driven by more retailer as opposed to manufacturers, just trying to really understand why there's continues to be a bit of a disconnect in terms of what we're hearing from you guys versus what they're saying?
Jerry S. G. Fowden
Good question. And I guess, as we look at the Nielsens, and we look at the Nielsens for the whole kind of retail channel in that sense.
I think the -- we've got the exact description somewhere for the Nielsen channel if you look at...
Jay Wells
How I look at it is it's retail excluding convenience is really how we look at the Nielsens.
Jerry S. G. Fowden
Which is where we operate. The CSD market in that category in the quarter was down 1.6% in volume and down another 3% in value.
So you clearly can see in the Nielsens data for the entire channels of business we operate in, that there's been further value disruption during that period of time from the pricing. So I'm guessing one of the largest elements would be the national brands might be talking about their total business, but concentrate price increases that they continue to push through every year, and you've obviously got the fountain dispense, gas, drug, et cetera.
That's not really part of our business. But the external data shows the market was down another 3% in value, and we do weekly price checks of all the major retail stores within the U.S., and I can very clearly say, we've seen kind of $1 2-liter and $3 below 12-pack cans, every week through the quarter from something like January 16.
Judy E. Hong - Goldman Sachs Group Inc., Research Division
Okay. And then, Jerry, just as you've kind of went through the strategic review that you've undertaken.
You'd pulled out some of the options, you've looked at including selling the company, just curious, kind of what conclusions you really sort of drew from the review of this year that may have been somewhat different from the prior years and I guess, if I'm understanding correctly at this point, it sounds like really the difference is going forward, you've got kind of a cash return strategy that you're setting 50% of your free cash flow to be returned to shareholders, and you're really -- and you're closing down 2 plants, and then, hoping that you can really accelerate your portfolio shift through different types of acquisitions in -- outside of the CSDs and juices. Is that kind of the right sort of conclusion from the review that you've taken?
Jerry S. G. Fowden
Yes, Judy, I think that is the right tone. I mean, I guess the large point, and obviously, we've got volumes and volumes of work that we'd done on this, but the largest points to bring out is we are saying that the North American CSD and shelf-stable juice markets are mature, but they're in structural decline.
And I know some other beverage companies would perhaps see that differently, but that's the conclusion we've come to. We believe that the excess industry capacity that's created by that is likely to pressure margins in the sector for some time to come because it normally takes companies 2, 3, 4 years to adjust capacity.
So that kind of structural change. Therefore, we fear, although we don't think it's rational and sustainable, that the current national brand pricing will go on for some time indeed.
And that capacity rationalization will eventually follow, but we probably got a challenging 2 or 3 years until we get there. And then when you couple that with the much talked about center store pressure on sales, and growth more around the periphery, they are the main themes that we would pull out as either having cemented change or increased their influence on our strategic view as we look forward that have come out of this review.
And it's against that, that we've laid out 5 priorities, of which 1 is really a reconfirmation of our whole operating philosophy, the first one which is to stick to our 4 C's, but then the other 4 items are all a shift in our emphasis, we've seen good initial uptake of our focus towards contract manufacturing, we're comfortable with the way that's going, the volumes are growing well and we're comfortable with the whole economics around that. So we're going to allocate even more resource behind our growth in contract manufacturing.
We're going to refinance our 2018 notes and based on the current attractive debt markets, likely pursue that a little bit earlier than we might have otherwise. And within that, we'll increase our overall debt capacity at the same time as reducing our interest rates, thereby creating the availability of funds to support the other elements of our strategic plan, which is to increase our return of funds to shareholders to up to 50% via the maintenance of our dividend, which would convert it to U.S.
dollars, as well as an increase in our opportunistic stock repurchase plan. But then, I guess, most importantly, accelerate our pace and scale in diversifying acquisitions.
And that's really about growing parts of the business where we're either not represented today. Whether that be other channels like food service, whether that be other product forms like hot beverages, powdered beverages, chilled beverages, we believe there's a lot of opportunity from diversification where the landscape of those segments is more attractive, and we've even seen that in a small way, in the small bolt-on that we did with Calypso last year, where our like to like revenues are running up 9% and our EBITDA is up over 50%.
So, we'll allocate more of our funds, both of our free cash flow and from the increased debt capacity that we bring on board with our refinancing towards that acceleration of acquisition-based diversification.
Judy E. Hong - Goldman Sachs Group Inc., Research Division
So if I can just follow-up on that, it seems like that's probably the biggest upside opportunity in really shifting your portfolio more quickly. So I'm just curious in terms of the visibility that you have in some of the pipelines of assets out there that you could potentially acquire, and sort of your willingness to perhaps use your balance sheet more aggressively, and to the extent that the opportunity doesn't materialize would you be willing to then just return more cash to shareholders beyond sort of that 50% of the free cash flow?
Jerry S. G. Fowden
I mean, based on our view of things at the moment, and that old phrase, its never over till -- I probably shouldn't say this, "It's never over till the fat lady sings" at the end of the opera. We do believe we have sufficient opportunity in the pipeline for diversifying acquisitions.
And therefore, we think this balanced approach of return to shareholders and accelerating the diversification is a good dual approach. At any point in time, could you increase one side a little bit, reduce the other side a little bit or vice versa.
Yes, of course, we could do that kind of adjustment to the tiller as we go forward. But we do believe there are attractive opportunities out there, we run a tracker and an active dialogue with multiple companies.
There will be some 15 to 20 companies on that tracker that doesn't mean any of them, one of them or 3 of them might come off because we are saying we'll continue to be disciplined on our leverage level, and do all the appropriate due diligence such that our confidence that these will be value creating acquisition is high. But, I would have thought for the moment, the best thing Judy is, we see sufficient in the pipeline that this balanced approach between accelerating diversification and return to shareholders is a good balance and is executable that way.
Jay?
Jerry S. G. Fowden
And that is why when Jerry was talking about our go-forward strategy, we specified based on current business conditions, we'll return up to 50% of our free cash flow over the next 12 months. So let's work on the diversification.
Let's see where we go and then in 12 months, we'll reevaluate as part of our strategic planning every year.
Operator
Our next question is coming from Bryan Hunt of Wells Fargo.
Bryan C. Hunt - Wells Fargo Securities, LLC, Research Division
Jerry, in your discussion around the multiple beverage products that you're all, may go after to diversify your business, you didn't mention anything about branded? Does the potential exist for you to add brands to your arsenal of growth as well as is fresh juices in there, because it appears there's a big trend to fresh, organic or natural, and as you mentioned the outskirt [ph] side of the store is growing much more rapidly than the center store, and I've got a follow-up.
Jerry S. G. Fowden
Yes, I wouldn't preclude either of those. If you think about Calypso bolt-on last year, a reasonable proportion of Calypso was in the value branded space, they are the brand leader in ice-pops with the Mr.
Freeze brand. The brand leader in home freezables in Tetra, with the Jubbly brand.
And they have a number of brands specifically targeted at children through schools, that are in the school approved program. But they are all value brands that very much fitted through the kind of business system that we have.
So we would not rule out value brands in that sense that fit with our business system, which is full tracks, large-scale distribution, not direct-store-door type DSD operations. And then your other comment, chilled, yes basically we're saying, if it's not carbonated soft drinks and shelf-stable juice, then it's not wholly and solely focused on large format retail, all 3 of those being areas where we have high concentration, we would find that other space attractive and would then go into more detailed diligence.
But we would not rule out things going through the chilled or frozen channels at all as we look at them. And in fact, some of the things that are on our tracker are in those spaces.
Bryan C. Hunt - Wells Fargo Securities, LLC, Research Division
And then my follow-up is, when you look at returning cash to shareholders, as well as your acquisition strategy. How do you balance credit metrics going forward with these 2 strategies?
Are you looking at coverage or leverage and or both, as your guidepost to manage the balance sheet. I was wondering if you could just give us an idea of where your limits maybe?
Jay Wells
Yes. I'll take that one, if that's okay.
Look in prior quarters, we said that our goal was to achieve 2x EBITDA leverage, and that's where we pretty much ended 2013. However, as we're talking about increasing the speed and scale of diversification, similar to like we did with the Cliffstar acquisition 4 years ago, we will increase our debt levels on a short-term basis in order to diversify at a more rapid pace.
But at the same time, as we solve the Cliffstar acquisition, will see our leverage go down quickly post acquisition because we expect strong free cash flows that we're currently generating plus strong free cash flows from the acquisition, and increase in earnings from the acquisition, but, as Jerry said, we never going to outstretch our leverage. And stay -- I would, I never see as hitting 4x debt-to-EBITDA.
So somewhere in the 3s is the maximum leverage we'd ever flex up to do a deal. But then focus on paying it down as we did with prior acquisitions.
Operator
And our next question is coming from Bill Schmitz of Deutsche Bank.
William Schmitz - Deutsche Bank AG, Research Division
Can you, first to start off with. Did you said what your capacity utilization is, and where you kind of want to get it to?
Jerry S. G. Fowden
We haven't said that. The reality is, you have to look at it really line by line, geography by geography, pack size by pack size.
But, broadly our capacity utilization is high compared to industry standards. We have high asset turn and relatively high capacity utilization, and we'll do our manufacturing review bill every year, and when we do find opportunities that are cost-effective and attractive to trim that back, we will do so.
With -- like with the 2 plants we've announced the closure of this year. But I would say overall, on PET we are very fully utilized, on hot fill juices we're running a high level of utilization, and we have some spare capacity on can lines.
But if you think most soda plant Bill, is at least 1 can line plus 1 PET line. So if you're full on the PET line, apart from flexing crews down on the can line, there's not a lot you can do.
William Schmitz - Deutsche Bank AG, Research Division
Okay. I mean, so how does that explain the big sort of negative variances you saw this quarter.
Because obviously, [indiscernible] seemed like they were favorable in the quarter by and large, so where does all that negative variance come from on a leverage side?
Jerry S. G. Fowden
Yes. I think the overall competitive market and environment and can capacity, in particular, it's in quarter 3 and 4, it was predominately 2 liter, that was being promoted by the national brands and really from January this year, we've seen awful lot of 12-pack can promotional activity.
And that's kind of impacted our can business more so than our PET business.
Jay Wells
And we've already seen volume declines and we have fixed costs that are fixed, and therefore, we're seeing that the leverage across up lower volumes.
William Schmitz - Deutsche Bank AG, Research Division
And then sort of change in the dialogue you're having with your big customers about sort of the prominence of private label and kind of where it fits in the merchandising strategy, because I know you get sort of different size of all stories to the same story. But it seems like as everyone kind of exhausted in this call, like the big branded guys claim to be very rational.
So how much of this is through the retailer sort of defocusing private label, especially if they can shrink those price gaps. And then, I'm sneaking a second question here, that's not related, and that's are you guys permanently doing the naturally sweeten Dr.
Pepper contract filling because I have a can of it, that said it was made by Cott?
Jerry S. G. Fowden
Let me come on with the first one first. On private labels overall, with food and in beverages, I think it's still a very attractive area for retailers to build their brand image and enhance their profitability as well as provide customers, with great quality at a value price.
And I don't see this fundamentally changing. Having said that, if you step outside the fundamentals and you look at where we are last quarter, this quarter, I think it's fair to say, if you can buy the famous brand CSDs, the same or close to the same retail price, as private label, a lot of that proposition is undermined.
And that's what we are seeing at the moment. I think, we can all listen to all the commentary we want, but if you just pop out to a few stores yourself, you will find national brands at $3 on 12 packs, and you will find a load of 2-liter soda at $1 dollar.
And when we are $268.84, that's not much of a price gap, and that's what we're seeing. Now it's very difficult for me to work out, one of this is being down on the retailer's dime versus the brand owner's dime, but certainly, if you look at the Nielsens within our sector, you'll see that for one of the brand owners the gap between volume and value is reasonably narrow and for other major national brand company, the gap between volume and value is very wide indeed.
And with that gap being very wide, it's very hard to imagine that it's all being funded by the retailers. And on the individual customer staff, as you know, we don't talk about individual customers, I'm sorry about that one, Bill.
Operator
Our next question is coming from Jesse Reinherz and Mark Swartzberg of Stifel.
Mark D. Swartzberg - Stifel, Nicolaus & Company, Incorporated, Research Division
Jerry, kind of continuation of the style like we're having here in the Q&A, and it relates to kind of where the strategic review might go beyond '14. You've said that the carbonated is mature, and that has certain longer-term implications and it's clear you are closing these plants here, this year.
You've been disciplined on CapEx this year but as u think beyond '14, can you give us some flavor for where you are in terms of peak utilization rates right now? Where the thought that's really underlying that what I'm trying to understand is, kind of what opportunity remains in the footprint to have it shrunk, and what opportunity remains even if you don't shrink the footprint to reduce CapEx relative to your current level of sales?
Jerry S. G. Fowden
And I think, as we try to expand on our call last time, the key element that we need to look at in our capacity utilization is the equivalent of the landed or delivered cost to our retailers, which is a combination of their plant's capacity utilization and efficiency plus the freight cost. And therefore, when we do close a plant, being in the contract manufacture or private label business, we need to very much, understand the higher freight cost in maintaining that business by servicing it from a plant that's further away because just closing the plant down, if you then lost the business and did not pick up that business in another plant, because the freight cost was too high, would not pan out economically attracted.
And therefore, it's as much about ensuring we keep our footprint with good freight lanes, counterbalanced by needing a reasonable enough level of capacity utilization that comes into our analysis. So if we had to disregard freight or could disregard freight, there is no doubt that there probably been another couple of plants that could have been rationalized within our business.
But that's not the right way to look at it, as you go forward. And we will look at it every year to make those kind of adjustments as appropriate.
Jay Wells
And as I said earlier, I mean, outside of plant closures you look at our strategic 3-year plan, on just driving efficiencies, and cost savings in our organization. And we have a very long list that would deliver significant savings over the next 3-year period without closing the plant at the same time.
Mark D. Swartzberg - Stifel, Nicolaus & Company, Incorporated, Research Division
Great. And if I could follow on that, CapEx, 50% to 55% that's clear from a 14% perspective, but can you give us some sense about whether there's opportunity from a longer term perspective with that number to come down?
Jay Wells
I think, within the business that we've got today. So if you exclude whatever the impact of any acquisitions might be, that kind of 50%-55%range is probably something that we see as being in about the right spaces we look out over the next 2 to 3 years for each of those years.
And at the same time, as we look out over the next several years, we also feel comfortable that our cash tax cost will stay at that kind of minimal level as well. So we see that as being place that's so tightly controlled, and puts us in a relatively good spot.
Mark D. Swartzberg - Stifel, Nicolaus & Company, Incorporated, Research Division
If there's a queue remaining, I'll hop back in that for one more.
Operator
Our next question is coming from Mr. Amit Sharma of BMO Capital Markets.
Amit Sharma - BMO Capital Markets U.S.
Jay, you mentioned cold manufacturing as quite a bright spot, and all our trends in and one of the strategic initiatives, also, but if I'd tried to tie it with your capacity utilization comment that you made earlier, how much room do we have to increase your are cold manufacturing volumes before we run into some capacity constraints?
Jerry S. G. Fowden
Yes, I think, we might have mentioned externally once before, but we saw something like 30 million to 50 million cases of viable, middle of the ground potential for us to win in contract manufacturing over the next 3 or so years. And a view that we could probably achieve 10 million of that during 2014.
I think, we're off to a good start, as you heard in 8oz equivalents from under 3 million to over to 7.5 million in quarter 1. So we feel comfortable that, that 10 million for 2014 is looking reasonable.
And I don't think anything has changed our outlook of 30 million to 50 million over the next 3 years or so. At the moment, now when we talk contract manufacturing, that's obviously across all our plants, all our package types, and it's is in different areas and different geographies.
And if there was an a contract manufacturing opportunity where we did not have the exact amount of capacity that's available, as long as there's a binding contract to go with that, and the supplier contribution either through price or in the capital itself, then we would make some adjustments to facilitate that kind of contract. And what's normally the case is it's a relatively small or minor adjustment to an existing line somewhere to facilitate it to be able to pick up that kind of business.
Jay Wells
And, I mean, Jerry said, we're well utilized, but I think we have, definitely the capacity to pick up that much without having to install a new line or anything because definitely see the capacity in our lines to pick up that much.
Amit Sharma - BMO Capital Markets U.S.
And then, can you remind us the margin structure on cold manufacturing, is it in line with your consolidated operating margins?
Jerry S. G. Fowden
Yes, as we've mentioned in the past in percentage terms, it's certainly the same. But, you've got to remember, it's often a conversion cost, we're dependent on the customer, some customers will provide all of the packaging materials and all of the ingredients, some other companies might want us to supply the packaging materials, and they supply the ingredients.
And we even do some, where we supply everything. So the revenues can vary significantly from what would be a full finished case of goods.
But in percentage margin, it's very much equally attractive business as our cold business.
Amit Sharma - BMO Capital Markets U.S.
And if I may ask just quick one, quick follow-up. Jay, you mentioned that weather was the impact on gross margin for the quarter, can you quantify that for us please?
Jay Wells
Yes. I mean, you really look at it, there was cost one we had to close several plants up North for a day or 2, which in order to keep our stock going, we actually had to incur some additional freight costs.
Also just had additional cost of snow removal, utilities labor, miscellaneous and other things. So when you look at the overall effect of weather, all built in with also we didn't build that much inventory as we did at safety, roughly about $1 million that had cost us in Q1.
Operator
Our final question today is follow-up coming from Jesse Reinherz and Mark Swartzberg of Stifel.
Jesse Reinherz - Stifel, Nicolaus & Company, Incorporated, Research Division
So, the follow-up is just a technical question, and if you've addressed it, I apologize, but the share repurchase windows, can you remind us kind of when those are, and I'm looking at my data stream here. I don't know if I have the right data here, but I'm pretty sure, you've bought shares in the recent -- in the last few years, and they're kind of like $758 range.
So if that's kind of public info, can you tell us what your historical practice on repos been?
Jerry S. G. Fowden
I'll pickup a bit on what we built last year, and then ask Jay, to cover the technical side of going forward. We -- and I might get this wrong by $0.5 million because I have not got that in front of me somewhere, but last year we returned, I think, in total about $32 million through our share owners around $10-ish million, $9 million or $10-ish million of that was through share repurchase program with the balance being through stake or dividend.
I can't remember the exact prices, but I know in 1 quarter, we told people that our average purchase price for that quarter was in the $790 somewhere or $801, $802, but we do file a 10/5 trading plan to do this. So that it can operate both in the open and the closed period when we do it.
And that trading plan has a number of tiered stock price levels and purchases against those tiers. So that's the kind of technical system.
But I know we have to renew some of those filings, Jay?
Jay Wells
Yes I think, Canada, you can only have a one-year share repurchase plan. So you will see us on an annual basis this time, every year.
We will renew our share repurchase for the maximum amount, really allowable under Canadian corporate law. But doesn't mean we're going to buy back that much, so we say, our board approves the 5% of that standing shares, but that doesn't mean we have the intent to do so.
And then as a part of our strategy discussion as we said, we're returning up to 50% of our free cash flow, that's really what management's intent to do with the authorization the board has given us on an annual basis. Is that clear.
Jesse Reinherz - Stifel, Nicolaus & Company, Incorporated, Research Division
That's great,
Operator
Thank you. At this time, I would like to turn the floor back to management for any additional or closing comments.
Robert Meyer
Thank you very much for joining our call today. This will conclude Cott Corporation's First Quarter 2014 Call.
Thanks for attending.
Operator
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference.
You may disconnect your lines at this time and have a wonderful day.