Jarrod Langhans - Cott Corp. (Canada) Jeremy S.

G. Fowden - Cott Corp.

(Canada) Jay Wells - Cott Corp. (Canada) Thomas J.

Harrington - Cott Corp. (Canada)

Peter K. Grom - JPMorgan Securities LLC Amit Sharma - BMO Capital Markets (United States) Mark Petrie - CIBC World Markets, Inc.

Derek Dley - Canaccord Genuity Corp.

Good morning, thank you for joining our call today, as we present to you from Barcelona, where Eden Springs is headquartered. So, we apologize in advance for any background noise.

Today, I'm accompanied by Jerry Fowden, our Chief Executive Officer; Jay Wells, our Chief Financial Officer; and Tom Harrington, Head of our Route Based Services segment. Jerry will kick things off by providing his thoughts on our operational performance during the second quarter relative to our expectations as well as our full year 2018 outlook.

He will then discuss our recently announced senior leadership changes before turning the call over to Jay for a discussion of our second quarter consolidated financial performance, as well as the results and expectations of our Coffee, Tea and Extract Solutions segment. Tom will then discuss the results of our Route Based Services segment as well as provide his vision of our company over the next few years.

Tom will then hand the call back to Jerry for some closing comments, before moving to Q&A. With that, let me now turn the call over to Jerry.

Thank you, Jarrod, and good morning, everyone. Before I comment on our planned leadership changes – congratulations to Tom, by the way – I wanted to provide my perspective on our strategy, performance, competitive advantages and the wider trading environment we've seen so far this year, in addition to some of the key plans we have designed and will implement as we look to the balance of 2018 and 2019, in order to continue our good top line momentum and successfully accommodate various macro factors such as inflation associated with higher transport and SG&A costs, the strengthening of the U.S.

dollar, recently enacted tariffs and the green coffee commodity environment. First, let me just remind everyone of the key attributes and competitive advantages of New Cott, and the strategic objectives we seek to deliver on in order to drive sustained value creation for our shareholders.

New Cott's attributes are: a service company, focused on the growth-oriented, better-for-you segments of water, coffee, tea and filtration solutions; with a largely subscription-based or reoccurring revenue business model, that has strong infrastructure based barriers to entry; very low customer concentration; and attractive cash flow conversation rate; and an attractive free cash flow outlook of $115 million-plus in 2018 and $150 million-plus in 2019; alongside a strong balance sheet with long-term fixed coupon debt, which alleviates any exposure to rising interest rates, plus the opportunity to execute overlapping value creating tuck-ins as well as larger more strategic transactions to fuel further growth and value creation; and an attractive capital deployment strategy, which includes a stable dividend, continued investment in innovation and organic growth, a plan to accelerate our right value creating tuck-ins; and an opportunistic share repurchase program, which bought back around $16 million of stock during the first quarter. This set of attributes and Cott's combination of organic growth and accelerated tuck-ins should drive a 3% to 4% revenue growth in 2018, and set us up well for attractive revenue growth in 2019.

So, now let me turn my attention to our Q2 performance. I'm pleased to report our business is performing well, and we've continued to demonstrate attractive top line momentum during Q2 with revenues of $604 million, up 4% versus the prior year.

In addition to good top line revenue growth, Q2 also saw gross profit increase 5% to $301 million, and adjusted EBITDA increase 2% to $83 million. Now, within Route Based Services, where we saw 7% top line growth, we're starting to see the benefits of our high-density area or HDA strategy, and the investment in over 100 additional sales people within DS Services start to come through in both organic new customer additions and the channel mix of those new customers.

Our Route Based Services segment added 16,000 net new organic customers during the quarter with both DS Services and Eden Springs showing net new organic customer growth, of which a good proportion were those all-important independent commercial customers. In addition, I'm pleased to report our lowest customer quit rate that we've ever recorded.

I believe this record improvement in quit rate is a clear reflection of the work undertaken by our route drivers to improve customer service, as well as the benefits from our U.S. National Customer Care Center, which is performing excellently, and has delivered best-in-class service metrics on things like speed to answer, and first-call resolution.

Moving to our Coffee, Tea and Extract segment, Q2 saw revenues lower by $8 million with half of this due to the pass-through of lower green coffee commodity cost per pound, and the other half reflecting lower coffee volumes versus Q2 last year, which, if you recall, was a very tough comp to lap with 13% coffee volume growth in Q2 last year. You can see this in the fact that S&D's two-year coffee volume growth is up 8%; that's Q2 2018 over Q2 2016.

I believe we're set up well for success as S&D continues to win market share, bring on board new customers, grow it's cold coffee, liquid and extract business, and execute additional plans to continue to improve its cost structure and operating efficiencies. As we look to the second half of the year, I'm pleased to report that the second phase of our synergy capture is on track, and will come on stream, and that S&D has signed an agreement with a well-recognized national chain to replace their existing coffee supplier in around 1,200 outlets that will provide over 2 million incremental pounds of coffee per year starting in December 2018.

Overall, we're pleased with the performance of S&D, and believe we're on track to deliver against our acquisition model and growth expectations. So, with our underlying business performing well, let me just spend a little time on the plans we're putting in place, so that we continue to deliver against our growth objectives.

As we've stated in the past, one of the many positive attributes of New Cott's business model is our low customer concentration, and our low exposure to the retail channel. This business model and customer mix provides us with significant flexibility to adjust pricing across our customer base when factors such as the macro items mentioned warrant such action.

Thus, we have started to communicate carefully planned and specific price increases and price adjustments to our U.S. Route Based Services customers.

These various pricing actions and price adjustments are being phased in between August and December 2018, and are designed to fully offset the increased costs discussed today. These Route Based Services pricing actions coupled with the next phase of S&D synergies being implemented alongside our organic growth, new customer wins and tuck-in activity as well as the many other innovation and efficiency programs we've discussed in the past, means we're confident that we can continue with our positive top line and EBITDA momentum.

So, with a solid quarter behind us, and a clear path and set of actions to continue to grow in the second half of 2018 and in 2019, let me now turn to our planned leadership changes announced this morning. First, I'd like to congratulate Tom, and again say how pleased I am to see him being given the opportunity to take over the reins of our company beginning in fiscal 2019 as we continue to execute against our strategy.

Tom's selection as Cott's future CEO has been the result of a thorough and thoughtful succession process undertaken by Cott's board over the last couple of years, which concluded that Tom was the best choice to lead Cott into the future. As an accomplished results-oriented leader with significant industry knowledge and operational experience, we're confident that with the support of our leadership team, including Jay sitting next to me today, Tom as CEO, will continue to execute our strategy and operate our business with the same drive, passion, discipline and dedication that we've seen from our leadership team over the last 10 years.

As you've read in our press release this morning, I will remain with Cott as Executive Chairman. In this new role and capacity, I look forward to working with Tom and the tremendous leadership team at Cott in order to provide a smooth and seamless transition.

My, the board's and Tom's objective is to undertake this transition, so that Cott continues to execute against its goal of being the preeminent international route-based, direct-to-consumer water, coffee, tea and filtration service provider, with strong organic growth, superior shareholder returns and strong free cash flow. With that, let me now also thank Dave Gibbons on behalf of the board for his leadership and tremendous service to Cott, and for being such an excellent Chairman over the past 11 years, and for steering our company and its strategy so wisely.

So, on that note, let me hand the call over to Jay to walk through our consolidated results.

Thank you, Jerry, and good morning, everyone. Consolidated revenue from continuing operations increased by 4% to $604 million.

Revenue growth was driven by general growth within our Route Based Services segment, as well as the acquisition of Crystal Rock and some favorable foreign exchange. This growth was partially offset by the items Jerry just noted within our Coffee, Tea and Extract Solutions business.

With the number of moving parts this quarter, let me break out the various components of our revenue growth for the second quarter of 2018, and provide some modeling expectations as we look out to the remainder of the year. First, we have Route Based Services revenue growth of $27 million, which includes $5 million of favorable foreign exchange, approximately $13 million of benefit from the addition of Crystal Rock, net of the PCS sale, as well as growth within HOD Water and Retail sales.

As we look out for the back half of the year, we would continue to expect our Route Based Services segment to generate around 3% top line growth alongside around $10 million of additional quarterly revenue from the Crystal Rock transaction, net of the PCS sale. This would then be offset in part by a foreign exchange headwind of around $3 million per quarter using the exchange rates that existed at the end of July.

Our Coffee, Tea and Extract Solutions segment provided a $8 million offset to our Route Based Services revenue growth with half coming from reduced cost of coffee as the benefit of which has passed through to our customers. As we've stated in the past, the business model for our Coffee, Tea and Extract Solutions business is one in which we basically add a fixed fee on top of the cost of coffee.

So, with green coffee commodity market prices in decline, we have seen some reduction to our top line, but an offsetting reduction in cost of goods sold. We'd expect to see a similar trend in both the third and fourth quarters of this year and into the first quarter of 2019, when we would then begin to lap the lower cost of green coffee.

The other half of the $8 million came from reduced coffee volume that was the result of lapping a 13% growth quarter in the prior year, which included a pipeline fill for new customers. We expect to return to coffee volume growth in the second half of 2018 and into 2019.

When you add up all the pieces, you get an increase of 4% or in excess of $20 million of net top line revenue growth for the second quarter of 2018, and we remain confident in being able to continue to drive 3% to 4% top line growth in the back half of the year. Gross profit increased 5% to $301 million during the quarter, driven primarily by overall revenue growth, offset in part by increased costs within our Route Based Services segment.

Interest expense from continuing operations was $19 million in the quarter. As a reminder, our $450 million 5.5% euro debt will fluctuate based on the latest euro to U.S.

dollar exchange rates, as with the U.S. dollar interest expense associated with this debt.

With that said, we continue to expect around $19 million of interest expense per quarter, based on current foreign exchange rates. Adjusted EBITDA from continuing operations increased to $83 million with general top line growth from our Route Based Services segment and the acquisition of Crystal Rock being partly offset by lower coffee volume, and increased costs within our Route Based Services segment, including around $2 million of freight cost, as well as some increased costs from the additional head count associated with the investment in our commercial sales force expansion.

As we look out for the back half of the year, we expect to continue to see some level of increased cost, which Tom will cover as well as the levers that we will utilize to offset these items. Turning to income tax, income tax expense was $2 million compared to a $2 million tax benefit.

With regard to cash taxes, we still expect our cash taxes to be in the $7 million to $10 million range in 2018 and for a number of years to come. On a full year basis, I would suggest that you model income tax expense to be in the $5 million to $10 million range.

Adjusted free cash flow from continuing operations was $12 million for the quarter, compared to $37 million, as we had interest payments on both of our senior notes in the second quarter of 2018, which accounted for over $19 million of additional cash usage relative to the prior year, as well as some timing around working capital. With two interest payments in the second quarter, we would not have an interest payment in the third quarter, which will benefit our free cash flow.

As it relates to our full year 2018 and 2019 expectations, we remain committed to achieving our targets. That means $115 million to $120 million, and $150-plus-million of adjusted free cash flow for 2018 and 2019 respectively, which includes CapEx of $115 million to $120 million.

Let me now cover the operating performance of our Coffee, Tea and Extract Solutions segment. On a year-to-date comparable period basis, we saw positive coffee volume growth, and we continue to see the key drivers of our growth during the year coming from a variety of areas, including ongoing growth from our customer base within the on-the-go coffee and tea market, capturing additional market share within the on-the-go foodservice channels, growth in new channels such as hospitality, government offices and hospitals, and increased penetration into the menus of our current customers in the areas of cold brew coffee, extracts, ingredients and additional specialty product offerings.

We have a robust pipeline of potential new business, and have recently seen a number of wins including picking up the large national chain that Jerry discussed, increase in production for one of our larger customers, and national liquid cold coffee and extract production wins, to name a few. In addition, over the last year, we've started to see requests from our customers to participate in discussions and proposals for the broader international market, whereby we could provide either our expertise or various extracts and concentrates, which are easily transported overseas.

It is our strong liquid extract coffee growth and the robust pipeline, plus the recent wins just noted alongside other opportunities such as these, that allow us to remain confident in our EBITDA and free cash flow growth goals for this year and into the future. I'll now hand the call over to Tom to cover our Route Based Services segment.

Thank you, Jay, and good morning, everyone. Before I spend a few minutes on the recent leadership changes, I'd like to walk through the operations of our Route Based Services businesses which saw revenue increase 7%.

For the quarter, key drivers of revenue growth in addition to Crystal Rock included 5-gallon water growth, HOD PET growth, and growth within our Retail division. Gross profit increased 7% to $258 million, driven primarily by revenue growth, offset in part by increased cost, including freight, which we discussed on last quarter's results call.

On that note, let me give you an update on some of our other 2018 initiatives and investments. During the quarter, we placed over 40,000 Storm coolers in the U.S.

and Canada, and we're making good progress with our combined water and Keurig-authorized single cup dispenser in the U.S., in addition to working on a new and improved design. And we are in the process of completing a European model, which will include a single served component that is popular within the European community.

These new products should launch sometime around the middle of 2019. As Jerry noted, we saw a good net increase in our customer base in the quarter, driven by a number of efforts, including an investment in sales head count dedicated to growing our commercial customer base in the U.S.

We've increased this head count threefold since 2017 to over 150 associates. And although this increase in head count comes with a cost, we believe that it is the correct action to take for a couple of reasons.

First, it begins to better balance our mix of customers between commercial and residential accounts. And second, it will benefit us in the long term as commercial customers are not only our most profitable accounts, but they are also our longest lived accounts.

As we noted earlier in the year, in conjunction with the expansion of our commercial sales force, we have also redesigned our approach to residential marketing, including our retail booth program. In essence, we are taking the high-density area, or HDA, approach that our European operation is implementing, and we are applying this to our U.S.

based residential marketing efforts, where we are focusing on the regions that were able to provide the best customer service in return on investment, which are tied to the distribution centers, where we have the greatest routes and customer density. As a result, we are concentrating our residential marketing activity within HDAs and in turn reducing our cost in certain regions that we do not find as attractive.

In addition, our high-density efforts – area focus in Europe continues to progress well. In most of our key markets, we enjoyed customer growth and continue to see a reduction in our overall customer churn, which is instrumental in driving sustained growth over the coming years.

As an update to Crystal Rock, in May, we successfully transitioned the Crystal Rock business over to our IT platform, and we're well on our way to fully integrating the business. I want to thank the associates that have worked so hard to complete this integration in short order.

The Crystal Rock acquisition remains on track to hit the original acquisition model projections provided on our last call. And we've begun to review opportunities within the region, as it relates to small tuck-in acquisitions as well as in working with some of our partners, as we now have a broader reach in the northeastern part of the United States.

Looking at some of the key macroeconomic factors that we've seen this year, as well as what we see for the back half of 2018 and into 2019, I would say the two key items would be inflation and tariffs. Let's start with inflation, which has been affecting Route Based Services businesses to varying degrees during the first half of this year, primarily in the form of increased costs associated with utilizing long-haul third-party carriers.

This is something that in a wider market will moderate over time, but will remain with us in the short term. As a reminder, 90% to 95% of our U.S.

transportation costs are linked to our routes and our route sales representatives, who drive the local delivery vehicles. Here, we have an energy surcharge on customers' invoices that increases or decreases each period based on the Department of Energy on-highway diesel price, and in effect acts as a pass through mechanism both up and down for changes in the cost of energy.

Our route sales representatives are paid primarily in the form of a commission, which allows for their annual compensation to increase as we grow our revenues and add customers to their routes. And they are well aware of this, as these associates generate around 25% of our new customer additions annually.

As a result, we've not seen incremental inflation related increases amongst this category of associates. The other 5-plus-percent, a much smaller element of our transportation cost, is a longer haul or freight lanes between regional production centers and distribution centers.

Here, unlike other businesses, we use many more in-house long-haul drivers and use fewer third-party carriers. Thus, the impact on us from the current spike in third-party carrier cost has been much smaller than the impact of many other companies.

We began the year by increasing wages to these associates in order to better compete within the market, and avoid the increased costs associated with the third-party carrier costs. Although we filled some of these positions, we have begun to contract with third-party carriers for a number of lanes to avoid the significantly increased costs associated with spot rates.

We are, thus, likely to continue to incur higher costs in the back half of 2018 and into 2019, as a result of contracting out these lanes. In looking at our second quarter results as well as our expectations for the back half of the year and into 2019, we are beginning to see some market inflation within our P&L from areas such as wages, health and wellness cost increases, and incremental costs associated with our head count expansion in commercially-focused sales positions.

As many of our peers have already noted, and as we have discussed in our recent marketing and conference calls, with unemployment around 4% nationally, inflationary pressures are not surprising. As a result, we have developed and put into action a plan to increase prices across our customer base.

The phasing and implementation, which started in the third quarter, of the different elements of the plan were designed to fully offset these transport and other inflationary costs discussed. In an effort to maintain a competitive advantage, we're going to refrain from providing specific details around which end customers will be impacted and at what level.

But the information has started and has been put through a thorough vetting process. In addition to pricing, we'll also continue to move forward on several cost efficiency programs such as the implementation of new logistics and customer service related tools that have been designed to increase the density of our routes, and allow us to provide a higher level of customer service, which in turn should drive increased efficiency and longer customer lives.

Turning to the recently announced tariffs on Chinese related imports, we currently procure a variety of our coolers from China. Thus, as things stand today, we may have a modest increase of $2 million to $3 million in CapEx exposure in 2018, although we're still working through the terms and definitions of the newly enacted tariffs and have filed for product exemptions.

In an effort to get ahead of this situation, we are working towards increases in our cooler rent, as an offset to these potential costs. As a remainder, our coolers have around a seven-year life, thus it would be a relatively modest rental increase per month required to offset the tax.

We're also looking at a number of initiatives that we've been working towards as well, which includes looking at alternative suppliers and updating our refurbishment policy to increase the useful life of the coolers. While we'd prefer not to see these types of costs impact our business, we understand that these external factors come and go with time.

And with our recurring revenue model, customer service focus, lack of customer concentration and pricing power, we're well positioned to manage these types of issues, especially when comparing us to the broader market in general and, as a result, we remain confident in delivering on the expectations we have set for ourselves. As it relates to the leadership changes that we announced this morning, I wanted to start by thanking Jerry and the Board of Directors for the confidence they have in me.

As DS Services was the first key transaction in the transformation of Cott over the last five years, I've been privileged to be a part of this transformation. Jerry and I are very much aligned, and I welcome the opportunity and appreciate the trust that Jerry and board have placed in me to continue to build upon the successes already achieved at Cott.

I'm excited about continuing to work with Jerry and Cott's senior leadership team, including those members sitting with me today, to further build our leadership positions with a goal of being the preeminent international route based direct-to-consumer water and coffee solutions service provider. As the Head of our Services Business, I've been a little deeper in the operations of our business over the last few years.

And therefore, I've incorporated some of the key concepts and focuses from our operating segments into what I see as our equation for creating shareholder value. That being through reliable, recurring and predictable growth in revenue and free cash flow generation by, one, becoming our customers' favorite direct-to-consumer beverage service provider and premier water coffee and filtration company through an enhanced customer experience, which includes ongoing analytics of changing consumer behavior, implementation of new and relevant customer touch points through our web and mobile platform, continued cost efficiency initiatives and instilling a service oriented culture across our businesses.

Two, innovating with products and services across our leading platforms, through the utilization of current technologies that deliver the appropriate customer experience, as well as effective sustainability practices and stewardship. And third, investing in our associates, the lifeblood of our organization with effective development, career progression, competitive compensation, and the appropriate work-life balance, which empowers our associates to drive sustainable customer satisfaction and growth.

With this as our guide, I believe we are set up to grow well into the future as we continue on our path of shareholder value creation. As I work towards taking on my new responsibilities in 2019, I want to assure you that the DS Services business, which is close to my heart, will be in good hands.

Dave Muscato joined our team as President of DS Services business beginning in April of this year. Dave is an excellent executive that has extensive experience in the HOD Water segment.

He previously worked as President of a Home and Office Oil Delivery (00:33:46) business, as well as President of Schwan's Home Delivery business segment. Prior to that he spent 20 years with Nestlé's Home and Office Water business here in the U.S., where he led the U.S.

Home and Office Water business. So, I can safely say Dave is one of the few key executives in the U.S.

with as much experience, industry knowledge and passion for Home and Office Water as I have. So, on that note, I'll now turn the call back to Jerry.

Thank you, Tom. As I move towards the end of our call and our Q&A session, I'd like to spend a little more time on the key drivers of New Cott and our outlook for 2018 and beyond.

Cott has undergone a significant transition from a mature, low margin private label carbonated soft drink business with high big box retail customer concentration to a growth oriented higher margin business with much lower customer, product and channel concentration. In essence, although we operate within the consumer sector, we are now a service-based business that no longer mirrors the exposures of the CPG market.

This diversification strategy was focused on building leadership positions and platforms in growing categories including water, coffee, tea and filtration services, with the benefits of our new business including predominantly re-occurring revenues, strong infrastructure based barriers to entry, low customer concentration and strong cash conversion. These business attributes, along with a very full and attractive pipeline of small-to-medium tuck-in acquisitions that we are currently working on, plus the balance of our capital deployment strategy, which supports investment in innovation and growth, alongside a stable dividend and an opportunistic share repurchase program, positions us well for the future.

In addition, we have the balance sheet to be able to execute, on large scale, complementary transactions as well. We continue to look at and review multiple opportunities, particularly in the water space, where we see the greatest number of opportunities for transactions and the highest potential for overlapping synergies.

That said, we have been and we'll continue to be disciplined in our approach, and all such opportunities. We will not execute anything unless it meets our stated financial and strategic objectives.

And looking out to the balance of 2018, and the full year with the plans and actions outlined today, including the pricing that we're implementing this quarter, we remain confident in reaching our $2.35 billion plus revenue goal as well as our 2018 and 2019 adjusted free cash flow goals. We're excited about the growth prospects of both our Route Based services and Coffee, Tea and Extract Solutions segments, and believe in the prospect New Cott offers it shareholders for value creation as we execute against our plans.

So, on that note, I will now turn the call back to Jarrod.

Thank you, gentlemen. During the Q&A, so that we can hear from as many of you as possible, we would ask for a limit of one question and one follow-up per person.

Thank you for your time. Operator, please open up the line of questions.

Thanks. And good morning, or I guess good afternoon for you, guys.

So first, Jerry and Tom congratulations, wish you guys both the best of luck.

Thank you very much indeed.

Thank you very much.

And sorry for background noise that came across too bad. It's pretty busy here in the center of Barcelona.

No worries at all. So, you guys discussed pricing actions designed to mitigate freight and general inflation in your Route Based business.

So, how should we think about the consumer response, and would you expect any impact in consumption or new customer growth? And then, second, are you seeing or hearing anything from your competitors on the pricing strategy?

Thanks.

Yeah, I'll make a few comments, and then I'll pass over to Tom. I think the first thing to highlight is, as I mentioned on the call, we've just had our lowest ever rate of customer quits across our Route Based business, that's both in North America as well as in Europe.

So, we think we're in a pretty good place when it comes to the satisfaction of our customers with the service that we offer. When you couple that with the new customer wins we've been getting as we increase our sales force in that area from around 50 to over 150 with a strong bias there towards these independent commercial customers rather than residential customers that are long-lived higher margin customers, we feel that our customer pipeline is looking pretty attractive.

And we are seeing not just within the water space, which I think one analyst mentioned in his note today that prices are going up, we are seeing price increases in other service related companies. So, we think the consumer expects it, our customers in a good place with our lowest quit rate ever, and we're making customer gains.

But, Tom, more specifically on the pricing and the phasing in of this?

Yeah, we've discussed in the past that component of pricing is one of the three levers in our revenue growth. So, we have a long history of regular price increases to our customers.

So, our confidence level is high , driven especially by, to Jerry's point, lower quit rate, higher retention in 2018 thus for.

So...

Great. Thank you.

...hopefully that fits the bill. But any follow on that?

No, That's it. That's very helpful.

Thanks.

Thank you.

Hi. Good morning, everyone.

Good morning, Amit. I think it might have been you that put in your note that perhaps there was pricing in other bulk water companies, but I may have got it wrong.

Anyway, what's your question, Amit?

No, we've definitely seen that or at least heard it from industry sources that one of your biggest competitor is taking pricing there. Just on that, Jerry and Tom both, so clearly, the impact of inflation is coming through in this quarter, right?

You can look into your gross margin and SG&A, how should we think about the cadence of – as you get pricing through, how will it flow through to your P&L in back half and then 2019? Can you just help us frame that?

Yeah, I mean Tom can maybe comment in a bit more detail, but we did start to communicate to our customers, one of the elements of this increased pricing during July and that element will go into effect in August. There are other elements to this pricing, and they're very specific in their nature and they've been well planned and vetted by our team including, for example, Tom mentioned the plans to make some small pricing adjustments with regards to coolers, given that relatively modest potential tariff impact.

And there, we're still working out whether there are ways around some of that as well, and we have filed for exemptions. So, there is a number of areas for this pricing, each one will be communicated to our customers with an advanced lead time, and they will phase in such that they will all be implemented by December of this year.

So, the actual effect of the price going up is phased in between August and December, and the communication that they will be going up is from July through to November. So, everyone gets advance notice, and so far from the communications we've made in July.

And I think, Amit, you've seen our call center, where we track calls every which way, but loose, we have not seen a significant increase in customer calls related to the first piece, the first phase of that pricing. Tom, I probably said too much already, but over to you.

I think Jerry did a good job covering that. The first leg of the stool is the 5-gallon returnable customer base.

Those customers have, in fact, been communicated to. And we would expect to see that flow through over the course of the middle of the third quarter by the time it's completed.

And to Jerry's point, we certainly get a few more calls, but it's not anything that's a meaningful impact in the center. So, we're pleased with the early start of that.

And then, I would – I will tell you that we need to do more work on understanding the impact of the tariff that we've suggested, when we understand the full potential impact of that, then we'll execute pricing increases on core customers, before the year is over.

And we'll give you, Amit, and everyone more guidance. At the moment, this tariff space is moving around a bit.

Tom and his team is doing a great job of looking up whether we can buy certain of them from other countries and that is viable on a number of the models. So, as we kind of were able to dot the i and cross the t there, given it's a very small item, we think maybe $2 million to $3 million for 2018.

We'd like to see that amount be even lower. And we're working on various things to achieve that.

Got it.

The other thing with regards to the pricing is, I think what's clear here is, while we have a business where we can take price, we are taking this price in order to offset those transport and other inflationary costs we've discussed. And if unemployment's staying around this 3.8% to 4% level, as you mentioned, Amit, it's not just going to be us; this is going to be across industry in general.

Got it. And then, Jay, just a quick one for you.

The new coffee customer when starting in next year, and then as you look at next year also start to lap some of the volume headwinds that we are facing from a comp prospective, can you just walk us through the rest of the year, how does coffee look like, and then – is 4% still the growth for next year given that you're getting a pretty significant win in terms of new customer?

No, I mean – first of, thanks for the question, Amit. Keep in mind, when you look at the back half of last year, not as much as we saw in Q2 of last year, but back half of last year, we did have 8%, 9% volume growth in the back half of last year.

So, we still are lapping very good comps from pipeline fills and bringing on new customer wins over the year. But with green coffee pricing, keep that in mind I did talk about that.

We're still expecting a 1% drag on consolidated top line revenue. But again, as I say, we back-to-back it to our customers.

Really shouldn't have any type of significant drag on our profitability, but it will be roughly a $6 million per quarter just top line headwind and the low end of our COGS. As I mentioned, we have the 9% growth that we're lapping in the back half of the year, but we're still looking for 3% coffee volume growth, and it really – as you know we've got good growth in liquids, good growth in extracts, and really continuing to grow.

And just one last one...

So, the only thing I'd add to that, Amit, and Jay mentioned the good growth in liquid and extracts, I wouldn't be surprised as we look out over the next kind of 12, 24, 36 months, the mix of our growth comes with a greater leaning towards this cold brew coffee liquids and extracts, where certainly we're seeing good double digit growth in that area, as you know, for the last couple of years. And there are a couple of things bubbling up in that new customer win pipeline that are particularly biased towards that side of the business.

So, overall, we are still looking forward to volume growth in S&D albeit we've got some tough comps to lap this year, but nothing's changed with that kind of long-term vision of 3% sort of volume growth. It may just come with a bit more of a bias to cold brew coffee, liquids and extracts.

And that is generally a better margin business for you, isn't it?

I mean, certainly, on average, it is, albeit that our margin across our roast and ground coffee varies wildly depending on the segment or sector you're serving, as to whether it's that 10%, 11%, 12% of our business that's route based, where the margins are high or whether you're a big national customer where the volumes are much higher and, therefore, the pricing is more competitive.

Just one more, if I may, so just on that, Jerry, I see you're not changing your 2019 free cash flow guidance, but if we read through the comments, lots of positive things happening. Pricing coming through which – the headwind is this year, pricing is coming next year.

Coffee, new customer win, perhaps shift to higher margin business, customer adds looks pretty solid. I mean why shouldn't we expect that 2019 maybe (00:48:05) some upside to you what the outlook has been?

Well, I think as Oliver Twist once said, more please is always a good statement. But I think my fair response, Amit, would be we're not changing it up, and we're not changing it down.

And we did have an odd question I think within the last few hours from someone about helping them bridge our 2018 free cash flow. Surprised we've not had it yet, but I know Jay has all the numbers ready in case that helps anyone.

No, I mean, Amit, with your question, as we always say, it's a little bit too early in the year to update our guidance for next year, but we will do it as we get into next quarter. But one question we did get a little bit is, the first half of the year, our free cash flow has been a little late, and it's a combination of interest payments falling more into the first half of the year than the second half, just with how they end right at the end of the quarter.

And we've had some negative working capital that should reverse. But to bridge people in case that question is out there, if you look at – even looking at last year's adjusted EBITDA, we should have growth upon that, but if you take about $155 million of adjusted EBITDA on the back half, you minus $55 million to $60 million of CapEx, about $14 million of interest, and about $3 million of cash taxes, then we should see about a $20 million, $25 million reversal in working capital.

That will give us about $100 million of free cash flow generation in the back half of the year.

Got it. Thank you so much.

Thank you, Amit.

Hi. Good morning.

And I'll add my congrats to Jerry and Tom. I just want to follow up on...

Thank you.

Thank you, Mark.

Yeah. I just wanted to follow up on the discussion around the Water business, and clearly you're having success with the increased focus on higher density markets.

So, a couple things on that, I guess just mostly to clarify. Of the net customer adds of 16,000 in Q2, was that all commercial?

And do you see that as a reasonable run rate for growth? And I guess, was it all organic or was part of that from tuck-in acquisition?

All of that 16,000 was organic. We had obviously customer tuck-in acquisitions with Crystal Rock and some very small ones on top of that.

That 16,000 was purely net new organic customer growth. And it was – I won't get this right, Mark, but it was 10,000-ish in North America and 6,000-ish in Europe, something like that.

No, it was not all commercial because, as Tom mentioned, 25% of our new customers come through our route guys, and that's from across their whole customer base, but we clearly saw a good lift in these independent commercial customers within that, and a good share of the mix. And we've also seen, as the last three or four months have unfolded, the productivity for each of these new commercially focused sales people, increase.

And by productivity, I mean, how many organic independent commercial customers do they each sign up on average each day, week or month. And when they were brand new in February and March, their productivity rate was – and Tom will know the exact figure.

I know he showed me something yesterday, but it was kind of less than half of where their productivity rate was last month as their experience and confidence grows.

Yeah. And further clarity, the Eden growth is principally commercial, because we don't have a developed business yet today in on the continent.

The DS growth, I would think of it as 50/50, so half commercial, half residential, so in aggregate, about two-thirds was commercial, which is where we said we would spend our energy, but we still like residential, so we need them to be a part of our mix.

Okay. That's helpful.

Thanks. And I guess just to follow up on that, does the success of that effort from a sales perspective, does that affect your – and I guess, maybe the focus in general on the higher density areas, does that affect your pipeline for tuck-in deals at all or sort of how you think about tuck-in deals?

It has not to-date. So, we're opportunistic, we focus tuck-ins certainly on our best ability to execute, but we've not had an interruption or a collision of tuck-ins versus organic, if you will.

And remember that the tuck-ins generally – this will be overly general – are commercially focused, right? So, we have more residential customers in our base than a typical tuck-in.

So, it's a lot easier for us to execute them in that footprint.

No, and I think, as I said on the prepared remarks, Mark, we are working on a relatively full tuck-in pipeline at the moment. There's a spread in there from ones that are absolutely tiny to ones that Jay would call that chunkier sort of tuck-ins.

Can never tell till everything's done whether they all come through, but we do feel comfortable and confident about that kind of ongoing vision we have of more than doubling up on our rate of tuck-ins.

Okay. That's great.

Thank you. And then, I guess just one other question.

Around your comment about opportunities in cold brew and extracts and international, understanding that you could fulfill part of that from your existing assets, but is that an area where you could prioritize M&A? And is there anything any sort of insight you can offer or provide in terms of the market structure or consumer preferences in Europe versus what we see in North America?

It is something that we could do by M&A. But I think it would be wrong to say that that's our current priority.

It's always impossible to fully un-pick (00:54:19) the path towards growth in these high growth categories, whether that was energy during five, six, seven years ago, craft beers two, three, four years ago or cannabis in Canada this year, what you often find in these areas is tons of new capacity gets laid down. Transactions are done at inflated multiples.

The market settles out, multiples comes down. We have very attractive existing infrastructure in this area.

We have also developed over the past 12 months. Good partnerships with operators where we provide the knowhow and the coffee, and they have some capacity for the conversion.

So, we believe between our own operations between these partnerships where it allows us to kind of cost share, but have much more flexibility in ramping up our production capability, we're well set to carry on with this increased growth in that liquid and extract area.

Okay. That's excellent.

Thank you very much.

Thank you.

Thank you.

Thank you.

Hey, guys.

Hi, Derek.

Good morning. Just wondering can you guys break down the organic growth at RBS in terms of pricing, consumption and new customers, whether it's still roughly like a third, a third, a third across the board.

Tom, I mean from the data that I've seen, and then you can chip in, I think our underlying North American growth was somewhere in the – if you adjust for PCS this is, somewhere in the upper 2% sort of level, something like 2.8%, 2.9%. Now, within Aquaterra, there was a smidge of foreign exchange, so if you wanted to take Aquaterra out of there, you might say the DS Services in the U.S.

was, I don't know, 2.3%, 2.4%, 2.5%, somewhere around there. I would say, in this quarter, the new customers, despite us being very pleased that the 16,000, because they came in phased during the quarter, if you exclude, Crystal Rock or tuck-ins, the new customers were phasing in this quarter.

So, you get more benefit next quarter and the quarter afterwards, because we only took those commercial sales people on in February, March, and their productivity was improving. I would say you have a little bit more in volume, and a little bit more in price than you have in new customer wins compared to that normal a third, a third, a third, but...

Yeah.

Jay has been trying to look at that numbers.

Yeah, I mean, I called it out on my prepared remarks, and really where we saw the growth is in each of the 5-gallon volume, and in the Retail area. So I would say, it was probably heavier towards the volume side this quarter than a little bit of price, but heavier on the volume side.

Yes. And I think, they had a better quarter on the PET that we sell to those HOD customers off our route trucks as well.

Yes.

So, hope with us all chipping in there, Derek, we got to a reasonable answer in the end.

No, that was perfect, that's perfect. And then just in terms of S&D, can you guys – like is it possible to disclose or a rough estimate of what your volume growth would have been, if you could adjust it for that large customer fill last year?

I think the easiest way to look at that, and I try to get people what I'd call an easier proxy. As you know, I'll go with S&D is 3% plus volume growth.

And as we look out over the years, we're comfortable with that. It might come a bit more in liquids and extracts versus roast and ground, but when you look at Q2 2018 over Q2 2016, i.e., you're taking out of the equation that issue of blackening a 13% growth quarter, the two-year growth is 8%.

So, I think that's a very fair way of looking at it. Over two years on a normal quarter Q2, 2016 versus a normal quarter Q2, 2018, you've had 8% growth.

Now, whether you want to call that 4% each year or 4% – or a 5% and a 3%, kind of up to you, but I think it shows things are pretty much on track.

Okay. That's great.

Thank you very much.

Thank you, Derek.

Thank you very much for joining our call today. This will conclude Cott Corporation's second quarter 2018 call.

Thanks for attending.