Feb 24, 2015
Executives
Jarrod Langhans - Director, IR Jerry Fowden - CEO Jay Wells - CFO
Analysts
Perry Caicco - CIBC World Market Bill Schmitz - Deutsche Bank Bryan Hunt - Wells Fargo John Faucher - JP Morgan Chase Kevin Grundy - Jefferies
Operator
Welcome to Cott Corporation's Fourth Quarter and Fiscal Year 2014 Earnings Conference Call. All participants are currently in listen-only mode.
This call will end no later than 11 a.m. The call is being webcasted live on Cott's website at www.cott.com and will be available for playback there until March 10, 2015.
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 condition. Such statements include but are not limited to statements that relate to company's business strategy, the redemption of preferred shares and anticipated leveraging, investment in organic and acquisitions including expected synergies and financial impact related thereto goals and expectations concerning our market position, future operations and estimated volumes, revenues, gross margin, EBITDA, leverage ratios, capital expenditures, commodities and taxes.
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 are making forecast or projections reflected in the forward-looking information is available in the company's press release issued earlier this morning and its annual report on Form 10-K for the quarter ended January 3, 2015. 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 fourth quarter and fiscal year 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 Jarrod Langhans, Cott's Director of Investor Relations.
Jarrod Langhans
Good morning and thank you for joining our call. Today I'm accompanied by Jerry Fowden, our Chief Executive Officer; and Jay Wells, our Chief Financial Officer.
I would like to remind everyone that we have a number of presentations on our website which include an extensive amount of information regarding our acquisition including modelling information for 2015 and beyond. We will provide some updates to our already published materials, as part of our call today, but we have not updated the presentations on our website.
We'll do our best to fully explain the various elements contributing to what was a busy quarter and we've provided a number of schedules within the press release that we issued this morning in order to help everyone separate the significant items and charges relating to M&A activity and 53rd week, debt issuance in financing cost as well as other items. With that said, Jerry will start this morning's call with some broad introductory comment, before turning the call over to Jay for a discussion on our fourth quarter and fiscal year 2014 financial performance.
Jay will then turn the call back to Jerry who will complete the call with his perspective on our 2014 performance including an overview of our business units, a discussion of business drivers and expectations for the future. Following our prepared remarks, we will open the call up for question.
With that, let me now turn the call over Jerry.
Jerry Fowden
Thank you, Jarrod. Good morning and thank you everyone for joining our call today.
Before Jay comments on our 2014 financial year as well as our recently completed fourth quarter. I wanted to spend a little time looking back over the past year and discuss our achievements in what generally speaking, is been a challenging environment of carbonated soft drinks and sugar sweetened beverages as a whole.
It was less than a year ago in May, 2014 that we laid out Cott's five strategic priorities following our extensive strategic review and analysis. Just to remind us all, these five strategic priorities were to continue to follow our business philosophy of implementing the four C's of customers, cost, CapEx and cash with a specific focus on cash generation.
Dedicating increased commercial resources behind growing our contract manufacturing business. With the goal of achieving $15 million to $18 million serving equivalent cases of growth in 2014 and $50 million to $80 million serving equivalent cases of growth by 2017.
Third, refinancing our 2018 senior notes in parallel with an expansion of our debt capacity, while simultaneously reducing our interest cost and increasing our return of funds to shareholders to up for 50% of free cash flow over 12-month period through our opportunistic share repurchase program and our staple dividend. And finally fifth, accelerating in both the pace and scale.
Our acquisition based diversification outside of carbonated soft drinks and shelf stable juices. While continuing to diversify our channel mix or reduce our channel concentration.
So here we are, nine months later at the start of 2015 about to look back of our 2014 performance. And I thought it's appropriate to first review the progress made in support of these five strategic priorities.
On the four C's, this continue to place the highest priority on customer service and customer relationships and we're pleased who have been awarded the 2014 Grocer Gold Own-Label Supplier of the Year Award for all and any private label categories in the UK. As well as receiving awards for Walgreens and Publix here in the US alongside being named as the top 10 private label supplier to Walmart and being designated their category captain for the mixer category.
As part of our four C's, we also managed CapEx tightly. Coming in below $50 million and we delivered our sixth straight year of $100 million plus adjusted free cash flow.
On the second of the five strategic priorities that of increasing our contract manufacturing business, we more than doubled our North American contract manufacturing volume, growing $24 million serving equivalent cases or over 110%. Thus putting us ahead of our 2014 goal, on well on our way to achieving our three-year goal of $50 million to $80 million serving equivalent cases.
When you add in the 13 million to 16 million cases of recent wins. On refinancing, we redeemed our $375 million of eight and one-eight 2018 notes and successfully issued $525 million of five and three-eight notes.
Increasing our debt capacity by $150 million, while actually lowering our cash interest cost by a further $2 million. On shareholder return, we continued our staple dividend converted it from Canadian currency to US Dollars.
Thus providing an effective dividend increase and we repurchased $11 million of stock at an average price of $6.89 and finally on the acceleration of our pace and scale of diversifying acquisitions outside of carbonated soft drinks and shelf stable juices. We acquired Aimia Foods in the UK, on May 30, and completed the transformative transaction of acquiring DS Services here in the US on December, 12.
The combination of these various actions in support of our five strategic priorities have resulted in Cott being a more diverse, lower risk, higher margin business that retains its high cash flow characteristics. Thus overall Cott is now a much more balanced business with approximately $3 billion of revenues and $350 million of EBITDA.
With less than 20% of its revenues in carbonated soft drinks and less than 50% of revenues in the large format retail channel. Our focus going forward will be to first redeem the preferred shares issued as part of the DS Services transaction and then rapidly deleverage such that by the end of 2018, we should have a debt to EBITDA ratio in the low three's and should have transferred $4 plus per share from debt to common equity holders.
Additionally, I believe the new diversified Cott is a business better place to grow more in line with the total liquid refreshment beverage market. That being, allowing 1% in volume, 2% in revenue and 3% in EBITDA.
With lower specific risk from reduced product in customer concentration. Also with the recent DS Services acquisition Cott has the potential to participate further in the value creating roll-up of home, office water and coffee services.
Given the multiple independent operators that exists in these markets and the attractive post synergy multiples such transactions offer. At this point, I think that's enough said on our five strategic priorities.
Let me now turn the call over to Jay to go through our full year and quarter four 2014 financial performance in more detail and I'll come back later to comment on our business unit performances including DS Services, the current carbonated soft drink promotional and pricing environment, and our 2015 outlook.
Jay Wells
Thank you, Jerry and good morning, everyone. Total volumes excluding the impact of DS Services increased 10% in servings.
Excluding the impact of DS Services and the extra week we had in the fourth quarter, as a result of having a 53rd week in the 2014 fiscal year. Total volume increased 4% in servings, as we saw sequential improvement in volume trends as a result of additional contract manufacturing volumes, the addition of Aimia Foods and growth in juice and drinks and concentrates volume, alongside a slightly less aggressive national brand promotion and pricing environment.
Revenues in the fourth quarter were higher by 13% at $544 million compared to $482 million. Excluding the impact of the 53rd week and foreign exchange, revenue increased by 8% primarily due to the addition of two weeks of DS Services revenue.
Revenue associated with the addition of the Aimia Foods business and increased volume, partially offset by price mix. The gross profit margin for the quarter was 13.2% compared to 12.5%.
The gross margin increase was due to the addition of a higher margin DS Services in Aimia Foods business all set apart by an increase in cost of goods sold. Cost of goods sold was positively impacted by our cost efficiency program during the quarter, but also face some headwinds including the negative impact of our commodity hedges, declining foreign exchange rates against the US Dollar and increased cost in our UK operations, as we're holding more inventory with third parties, as we're implementing a warehouse management system.
In addition, as we incorporated the DS Services account structure into our consolidated results. We made a reclassification of amortization associated with Cott's historic customer list from cost of goods sold to SG&A, to both 2013 and 2014.
In order to align the location of amortization associated with customer list between DS Services and our historic business. This reclassification was for approximately $5.5 million in both Q4, 2013 and 2014 as well as approximately $23 million in both fiscal year 2013 and 2014.
This reclassification where we made for all periods included in our 10-K and has been made on all schedules included in our press release. We continue to believe that we will be able to grow our margin by approximately 50 bps per year over the next two years within our historic business as a result of a number of factors including, but not limited to the additional volume and fixed cost absorption associated with the growth in sparkling waters, mixers and juice and drinks business.
Wins in contract manufacturing and further channel diversification. Progress in our ongoing focus to reduced production cost by $30 million over three years by improving procurement practices, increase in operational efficiencies and eliminating waste and reducing packaging cost.
And the potential easing of North American CSD volume declines as an if, the national brands move to a more normal or historic promotional level. In addition, as we wear in cost synergies associated with the DS Services acquisition, we would expect to see margin growth at DS Services over the next couple of years.
SG&A expenses for the quarter excluding $38 million of acquisition and integration cost was $66 million while prior year SG&A expenses excluding $1 million of acquisition and integration cost were $44 million. The increase in adjusted SG&A expenses above the previously guided $45 million to $48 million was due primarily to $15 million of SG&A expenses associated with the addition of DS Services business and the reclassification of $5.5 million of customer list amortization from cost of goods sold to SG&A.
Turning to taxes, the tax benefit in the quarter was due primarily to the release of a valuation allowances as a result of the DS Services acquisition which will allow us to utilize net operating loss carry forwards that might have otherwise expired and were therefore included with an valuation allowance each year. Looking at taxes for 2015, cash taxes should in the $4 million to $6 million as we are starting to become a tax payer in the UK with the acquisition of Aimia and we will be paying approximately CAD3 million or CAD6.1 tax on our preferred dividends.
With respect to our effective tax rate for 2015. Depreciation associated with the step up in asset basis due to purchase accounting is going to result in our pre-tax income being low in 2015.
Which makes it difficult to simply provide a forecasted effective tax rate for 2015? Based in our current estimates, I would just use the lower end of $20 million to $25 million range of tax benefit discussed on our November, DS modelling call.
Adjusted net income and adjusted earnings per diluted share for the quarter were $34 million and $0.37 respectively compared to $4 million and $0.04 in the fourth quarter, 2013. Adjusted EBITDA was flat at $43 million and on an FX neutral basis adjusted EBITDA was up at $44 million.
Adjusted EBITDA benefitted from the including of Aimia, two weeks of DS Services operations as well as 53rd week. Offset by an increase and traditional Cott SG&A expenses as a result of the lower employee related incentive cost and the reversal of certain long-term incentive accruals in 2013.
Now turning to 2014 fiscal year, total volume excluding the impact of DS Services increased 2% in servings and volumes were flat, if we exclude both DS Services and the 53rd week. Volumes were negatively impacted by the competitive pricing environment.
However, we saw a sequential improvement in volume trends as the year progressed as a result of growing contract manufacturing volumes, the addition of Aimia Foods and growth in concentrates volume. Alongside a slightly less aggressive North American National brand CSD promotional environment in the later part of the year.
Revenue of $2.1 billion was slightly higher than the prior year, slightly lower excluding the impact of foreign exchange. Revenue increased as a result of the addition of the Aimia Foods and DS Services businesses in 2014.
The Calypso Soft Drinks business acquired in 2013, as well as the 53rd week, which was offset by the competitive pricing environment and a product mix shift into contract manufacturing. The gross profit margin for the fiscal year was flat at 13.2%.
increases in gross margin in the addition of the higher margin DS Services and Aimia Foods businesses were offset by an increase in cost of goods sold as a result of lower fixed cost overhead absorption earlier in the year, due to reduced volumes as well as the previously noted negative impact of our commodity hedges and increased cost in our UK operations in the fourth quarter. For the fiscal year, SG&A expenses excluding $41 million of acquisition and integration cost which were $214 million, while prior year SG&A expenses excluding $3 million of acquisition and integration cost were $180 million.
The increases in adjusted SG&A expenses were due primarily to expenses associated with the addition of The Calypso, Aimia Foods and DS Services business. Lower employee related incentive cost and the reversal of certain long-term incentive approvals in 2013 and the addition of 53rd week.
Adjusted net income and adjusted earnings per diluted share were $57 million and $0.60 respectively compared to $38 million and $0.40 in the prior year. Adjusted EBITDA was $180 million compared to $198 million.
The reduction in adjusted EBITDA was due primarily from the competitive pricing environment and an increase in SG&A expenses. Somewhat offset by the partial year additions of the Aimia Foods and DS Services businesses, growth in our North American contract manufacturing business and full year of our Calypso business.
Although, we were operating in a very competitive pricing environment in 2014. We continue to focus in our four C's and control CapEx by managing projects straightly [ph] and rigorously manage working capital.
This allowed us to deliver our six straight year of strong free cash flow, with our adjusted free cash flow for fiscal 2014 being $107 million. Free cash flow has been adjusted to exclude the cash impact of bond financing cost, DS Services acquisition cost, interest payments associated with the 53rd week and cash collateral that was provided as part of the acquisition DS Services related to certain DS Services self-insurance programs with the collateral being returned in January once new letters of credits were issued.
Turning to DS Services, if we were to look at DS Services on a standalone basis. It ended the year with approximately $982 million of revenues and $174 million of adjusted EBITDA.
As a result of purchase accounting adjustments associated with the DS Services acquisition. Inventory was stepped up by $5.4 million with $1.7 million of the step up flowing into the P&L in Q4, 2014 and the remainder will flow through Q1, 2015.
As discussed a number of times, over the past few months. The transaction is expected to be EPS diluted in the first year as a result of purchase accounting adjustments that should then become accretive going forward.
In addition, we continue to expect the acquisition of DS Services to be accretive to free cash flow per share in 2015. With adjusted free cash flow per share growing at an overall CAGR in the mid to high teens from 2016 through 2018.
With that, I'll now turn the call back to Jerry.
Jerry Fowden
Thanks, Jay. I'll now review the performance in each of our reporting segments, during the fourth quarter.
So let's start with DS Services. Overall revenues were $29 million for the two weeks stub period in which DS Services was included within our consolidated results.
On a standalone basis over the full quarter four, DS Services revenue and customers were up 7% and 2% respectively. Which is somewhat above the forecast run rate within our acquisition model, but as explained during our November, DS modelling call.
Current revenue run rates are benefiting from the convergent of the free note customer base onto the DS route infrastructure. And we anticipate this benefit being completed around the end of the first quarter.
The gross margin associated with DS Services in our two weeks stub period, was 45%. As a result of the step up in inventory and additional depreciation from the step up of DS fixed assets due to purchase accounting, as Jay mentioned.
The stub period DS Services adjusted EBITDA was around $5 million and based on what we've seen in our first couple of months of ownership and as we look out over the course of 2015, we're pleased with the DS transaction. On synergies, our assumptions were to achieve $25 million of synergies over the first three years with around $6.2 million of this benefit being achieved in year one.
As thing stand today, we still believe this level of synergy and phasing is appropriate and we will update you every quarter with regards to our implementation progress and the cost associated with delivering these synergies. Overall, we remain confident in the model that was provided during the DS modelling call.
In our traditional North American business, our fourth quarter 2014 volumes were up 10% in serving, 4% if you exclude the 53rd week. Driven by our strong growth in contract manufacturing and higher juice and drinks volume, which alongside are slightly less aggressive national brand promotional and pricing environment in the quarter, more than offset our and the markets carbonated soft drink decline.
Overall, we were pleased with our ability to stabilize our North American volumes as the year progressed. Revenues were also higher by 2% or 3% excluding the impact of foreign exchange of $347 million for the quarter.
A gain assisted by our contract manufacturing and juice and drinks growth, but as we've noted in many of our recent discussion, revenue associated with contract manufacturing are typically lower per case, as they do not include a charge for ingredients and packaging, as the customer provides these commodities. Revenues were also assisted in the quarter, by the addition of 53rd week and by the slightly more rational national brand pricing environment.
As mentioned, our shelf stable juice and drinks performance picked back up in the quarter; with volume growth of 15% in servings and our contract manufacturing business continue to show good overall momentum with growth of $6 million serving equipment casings or over 110% in the quarter. As we mentioned in an earlier earnings release, we won two large contract manufacturing wins towards the end of last year, but will provide between $13 million and $16 million serving equivalent cases on an annual basis and we're pleased to note, that we started the production of one of these during the fourth quarter and we just recently began production on the second of these contracts.
However, the carbonated soft drink environment remain difficult and our CSD volumes declined 4% to 5% excluding the 53rd week despite the slightly less aggressive national brand promotional and pricing environment. Although, this performance did continue to show an improving trend versus prior quarter.
All in all, we continue to believe our North American business is in a more stable position. Now turning to the UK, we had another good year overall in the UK, even though the weather and exchange rates tried their best to hamper the total beverage category, as the year progressed.
Our UK volumes rose 11% in servings, 5% excluding the impact of the 53rd week and revenues increased 22% excluding the impact of foreign exchange. This performance was driven by the acquisition of Aimia Foods as well as the benefit of having Calypso Soft Drinks for full year.
Both of which I'm pleased to say are tracking to our acquisition models. Across the balance of our UK business, the private label and value energy categories continue to suffer from narrower price gaps to the national brands.
In addition, we saw increased freight and third party warehousing cost during the fourth quarter, which will continue into quarter one as we hold more inventory with third parties, in order to provide better stock as we move onto a new warehouse management system. Overall, as we look out to 2015 we like others see a more challenging UK environment.
Due to a combination of competitive pricing, they're much written about performance of many of the UK's large super market groups and declining foreign exchange rates. Now turning to our all other reporting segments.
This segment contains our Mexico and Royal Crown International businesses which together account for less than 5% of our pro forma revenue and operating income. While we saw a 6% growth in servings and a 1% growth in revenue, we continue to see profitability growth at a higher rate, with operating income up 25% in the quarter.
Which was due to a combination of new customer wins and improved product mix in the Royal Crown International business as well as a continued shift in Mexico's business from bulk low margin products to more contract manufacturing of alcohol, energy and other specialty beverages? Alongside a continue focus on operating efficiencies and cost.
Now looking to 2015, as I mentioned earlier I expect the North American beverage landscape especially carbonated soft drinks to remain challenging in 2015, even at a slightly more national brand promotion and pricing outlook persist. Which with a return to $3 12-pack can promotional pricing, a couple of weeks ago is by no means a certainty?
Overall though, we believe our North American business unit is set up for stability in 2015. As contract manufacturing wins and growth in certain new age juice and drinks segments should largely offset the expected declines in private label CSD and the CSD category as a whole.
Alongside this North American volume stability, we will continue to focus on the implementation of the balance of our global program of $30 million of cost reduction over three year period alongside our tight control of SG&A. In our traditional north American business, our fourth quarter 2014 volumes were up 10% in servings, 4% if you exclude the 53rd week driven by our strong growth in contract manufacturing and higher juice and drinks volume, which alongside are slightly less aggressive national brand promotional and pricing environment in the quarter, more than offset our and the markets carbonated soft drink declines.
Overall we were pleased with our ability to stabilize our North American volumes as the year progressed. Revenues were also higher by 2% or 3% excluding the impact to foreign exchange of $347 million for the quarter, a gain assisted by our contract manufacturing and juice and drinks growth, but as we've noted in many of our recent discussions revenue associated with contract manufacturing are typically lower per case, as they do not include the charge for ingredients and packaging as the customer provides these commodities.
Revenues were also assisted in the quarter, by the addition of 53rd week and by the slightly more rational national brand pricing environment. As mentioned, our shelf stable juice and drinks performance picked back up in the quarter with volume growth of 15% in servings.
And our contract manufacturing business continue to show good overall momentum with growth of $6 million serving equivalent cases or over 110% in the quarter. As we mentioned in an earlier earnings release, we won two contract manufacturing wins towards the end of last year, but will provide between $13 million and $16 million serving equivalent cases on an annual basis and we are pleased to note, that we started the production of one of these during the fourth quarter and we just recently began production on the second of these contracts.
However, the carbonated soft drink environment remained difficult and our CSD volumes declines 4% to 5% excluding the 53rd week, despite the slightly less aggressive national brand promotional and pricing environment. Although, this performance did continue to show an improving trend versus prior quarters.
All in all, we continue to believe our North American business is in a more stable position. Now turning to the UK, we had another good years overall in the UK even though the weather and exchange rates tried their best to hamper the total beverage category as the year progressed.
Our UK volumes rose 11% in servings, 5% excluding the impact of 53rd week and revenues increased 22% excluding the impact of foreign exchange. This performance was driven by the acquisition of Aimia Food as well as the benefit of having Calypso Soft Drinks for full year.
Both of which, I'm pleased to say are tracking to our acquisition models. Across the balance of our UK business, the private label and value energy categories continue to suffer from narrower price gaps to national brands.
In addition, we saw increased freight and third party warehousing cost, during the fourth quarter which will continue into quarter one, as we hold more inventory with third parties in order to provide buffer stock as we move onto a new warehouse management system. Overall, as we look out to 2015, we like others see a more challenging UK environment, due to a combination of competitive pricing, the much written about performance of many of the UK's large super market groups and declining foreign exchange rates.
Now turning to our all other reporting segment, this segment contains our Mexico and Royal Crown International businesses, which together account for less than 5% of our pro forma revenue and operating income. While we saw a 6% growth in servings and a 1% growth in revenue, we continue to see profitability grow at a higher rate with operating income up 25% in the quarter.
Which was due to a combination of new customer wins and improved product mix in the Royal Crown International business as well as continued shift in Mexico's business from bulk low margin products to more contract manufacturing of alcohol, energy and other speciality beverages alongside a continued focus on operating efficiencies and cost? Now looking to 2015, as I mentioned earlier.
I expect the North American beverage landscape especially carbonated soft drinks to remain challenging in 2015, even at a slightly more rational national brand promotional and pricing outlook persists, which with a return $3 12-pack can promotional pricing, a couple of weeks ago is by no means a certainty. Overall, though we believe our North American business unit is set up for stability in 2015.
As contract manufacturing wins and growth in certain new age juice and drinks segments should largely offset the expected declines in private label CSDs and the CSD category as a whole. Alongside this North American volume stability, we will continue to focus on the implementation of the balance of our global program of $30 million of cost reduction over three year period alongside our tight control of SG&A.
In order to help offset inflation and ensure, we stay a low cost provider. In addition, our four C's approach to global CapEx indicates expenditures of around $50 million the Cott's historical business in 2015 and $65 million to $70 million for DS Services as outlined in our analyst modelling calls.
With the additional one-time DS Services integration CapEx items of $5 million in 2015. As it relates to cash taxes and as Jay mentioned, we continue to expect our cash taxes to be minimal in 2015, but some $4 million to $6 million, which is inclusive of the $3 million of taxes linked to the payment of the dividend on the preferred shares as a result of Canadian part 6.1 tax.
On commodities, it's pleasing to see 2015 as a year-end commodities overall are not a headwind and once foreign exchange, higher niche food cost as well as our advance coverage's and hedges and all added up, we're likely to see total commodities flat year-over-year. At this point, it's worth reminding ourselves that DS Services had relatively little commodity exposure.
However, their energy surcharge introduced in 2012 effectively acts as a monthly pass through mechanism, up or down based on the published price of diesel. So this alongside cost traditional business, where most of our private label volume is transported by our customers means that lower gas price has a limited impact on Cott's cost structure and financial results.
Even though, it was slightly lower DS Services revenue run rate by about $5 million to $10 million as the diesel price reduction gets pass through. As an update to FX and consistent with comments made by many of the national beverage companies.
Our global EBITDA will be adversely impacted by FX in 2015, by roughly $1 million for every cents, the US Dollar strengthens against the British Pound and Canadian Dollar together on a full year basis. As things stand today, the adverse foreign exchange impact would be just under 1.5% on revenues and the EBITDA headwind from both transactional and translational elements would be approximately $10 million to $12 million.
So overall, while both 2014 and 2013 were challenging years, I believe we managed the business tightly and focused on the implementation of our strategic priorities, which has helped for the business in a more stable position. Where contract manufacturing growth and a potentially slightly less aggressive national brand promotional environment points towards stability within Cott's traditional business.
Which when added to DS Services more predictable and dependable performance with both top and bottom line growth, plus the delivery of synergies over the next three years, should position new Cott's performance to be more in line with the overall growth in the liquid refreshment beverage industry. In addition, our focus on the four C's and cash generation should allow rapid deleveraging between now and the end of 2018, such that when you put together a more dependable business.
Modest growth and strong cash generation to support deleveraging. I believe new Cott's valuation should move closer to that of its peer overtime.
I'd now like to turn the call back to Jarrod.
Jarrod Langhans
Thank you Jerry and Jay. During the Q&A, so that we can hear from as many of you as possible, we would ask for one question and one follow-up question, per person.
Thank you for your time. Operator, please open up the lines.
Operator
[Operator Instructions] our first question comes from the line of Perry Caicco of CIBC World Market. Please go ahead with your question
Perry Caicco
Thank you, Jerry. Can you comment on the synergies between DS and Cott, the timing of those and any changes you may have made and how you perceive the two companies working together?
Jerry Fowden
I think you might recall as we noted in our conference call, that we held for DS a couple of months ago, where we laid out synergies and expectation. We were looking at synergies $25 million over three years with about $6.2 million of those coming in the first year.
We've had DS a couple of months now, the good news is, we've not found any skeletons in the closet and we still think, both the quantum of those synergies and their phasing of some $6 million in the first year is appropriate. The kind of structural side of things working with DS, we are very much putting in place an approach that we think really does minimize any integration risk, whereby the customer phasing elements and the manufacturing elements of DS Services pretty much, they're kind of standalone operating business and we're concentrating our efforts on the synergies and integration in the various back office areas, that way we think we can gain a maximum amount of synergies at the lowest potential risk, Perry, but I don't know if that picks up sufficiently well on your question.
We will provide a quarterly update on how the synergies are going and we'll also let people know, what our various costs are as execute those synergies as we go forward.
Perry Caicco
Yes, that works thanks. Just as a follow-up.
Is the two weeks results from DS any sort of indicator of the core dynamics of the business? I mean, you mentioned a little bit about them, but should we discount those are kind of you're relevant at this point?
Jerry Fowden
I mean for a number of reasons, you know a two week stub period purchasing, accounting implications and the fact that it was over the Christmas period, when many offices are shut mainly, but I wouldn't do any formal extrapolation over those two weeks. I think the most telling in best way to look at DS is, for the full quarter on a kind of standalone basis, it had revenue growth of 7% and customer growth of 2% and obviously the gap between the revenue growth and customer growth is both higher consumption within those customers as well as pricing.
So against our acquisition model, 7% revenue growth and 2% customer growth is a very comfortable out term.
Operator
Our next question comes from the line of Bill Schmitz with Deutsche Bank. Please go ahead with your question.
Bill Schmitz
How is currency going to impact free cash flow for 2015 and maybe you said it and I missed it? Can you guys take a stab at what you think the free cash flow number is going to be?
Jerry Fowden
Let me update, on some of the comments we made on currency and expand that, while I'm doing that Jay, can just check whether it does neatly flow right down to cash flow. If you look at our two main geography, where foreign exchange is part of our business model.
It's really the GB Pound and the Canadian Dollar and for every $0.01 those two currencies together move adverse to the US Dollar, EBITDA is adversely impacted by about $1 million. Now as we stand here today, looking at our view at foreign exchange rates and they could change, Bill.
We reckon that's an adverse implication for the full year of somewhere in the $10 million to $12 million of EBITDA range and it would dampen our revenue by just under 1.5%, but obviously exchange rates can keep moving. Jay, in regards to cash flow.
Jay Wells
First [indiscernible] way to EBITDA, so basically first mean, it will fall through cash flow from our core business roughly it's not an exact science, so the answer to your question is, yes. And one thing, I want to also hit on free cash flow since you asked us, when our November modelling call for DS.
We did say we're still comfortable with DS delivering about $95 million to $105 million of unleveraged free cash flow on top of what the core business is and we'll continue to run the business tightly for cash and work our best to continue to deliver above $100 million free cash flow that we've done over the last six years.
Bill Schmitz
Okay, you want to give us a combined free cash flow target for the company for 2015?
Jay Wells
I'm still slightly suffering from the scars [ph] of when I gave full different free cash flow forecast in one year, but I think the core business will continue to run in the same way. So try and maximize the cash flow out of the core business and we still feel very comfortable for DS in the cash flow guidance that we previously gave for 2015 as well as 2016 and that overall I think from a foreign exchange, the fact that we have some 80% of our EBITDA in US currency and DS was a big addition in the US, comparative challenges many face, while it's a headwind it's not a headwind that should blow us too far of course.
Bill Schmitz
Okay, got you and then you still think, combined pro forma gross margin, once all the purchase accounting and inventory step up noise is kind of in the base is sort of in that, sort of 30% to 32% range, is that still a good number because this quarter obviously came well below our model, but I think there were lot of puts and takes?
Jay Wells
Yes, one thing I would say, as part of the purchase accounting. There is reclassifications going on between gross margin and SG&A.
So I think, we've previously guided our EBITDA margin should be around 17% and I think that's the better number to look at versus gross margin because as you said, we just moved some amortization down for the legacy Cott business, you know that's more how we do and as we final, as purchase accounting we will give you a little bit more clarification on that.
Bill Schmitz
Got you and then one last quick one. On the 7% growth in DS revenue, that doesn't include the actual week, does it?
So that's like a real sort of apples to apples, number.
Jay Wells
That's true apples to apples and it was 7% in revenue which was aided 2% growth net new customers.
Bill Schmitz
Okay, that's great. Thank you guys.
Jay Wells
Sorry, Jarrod just corrected me. I said 17% adjusted EBITDA margin.
It's 12%. Thank you, Jarrod.
Operator
Our next question comes from the line of Bryan Hunt with Wells Fargo. Please go ahead with your question.
Bryan Hunt
Jerry, there's been besides the changes in promotional strategy at the big guys, the red and the blue. They have also introduced a lot of new packaging specifically smaller cans.
Can you talk about maybe one the cost and two the opportunities to chase different packaging? Particularly is CSD's this year and then second along the lines of promotions.
What's your confidence level in Coke and Pepsi maybe acting a little bit more rational in the promotional front?
Jerry Fowden
Okay, I'll do my best to pick up those and if when I get to the end, there's a follow-up, Bryan that kind of works well. I believe the approach the national brand are taking towards small packs and much more effort behind the overall price pack architecture is a very appropriate strategy for them to be taking and I think, we've seen in some of their results, it is working.
So I think that's obviously for them, that's positive for the industry and that's positive for the consumer in terms of the additional range of pack sizes and price points that offers. It's not something that is currently one of Cott's priorities to follow in that area and I think as you know, we like to try and do a few thing and by a few things, I always say, three, four or five try and do a few things well, when you've accomplished those restart that list of few priorities and then pursue those.
And with synergies, integration of DS, our driving of contract manufacturing, the extracting the benefits and the top line growth of Aimia and Calypso, while running up core business tightly for cash flow, that's enough on those kind of core priorities. So we're not going to chase after that smaller pack price architecture, but I do believe it's positive for the national brands in the industry.
On the promotional environment in quarter four, we sold a $1 for two-liter pricing in big box retail, be present for about 50% of the time. In the quarter prior, you might recall there was only one or two weeks that did not have that $1 for two-liter and in the quarter before that, the second quarter, it was every single week of the quarter.
So we had seen the amount of $1, two-liter pricing in big box retail half within quarter four and actually across November and December, we saw very little to none of the $3, 12-pack pricing activity despite the holiday season. Albeit, we did see that re-emerge about two weeks ago, so it's too early to say that it's kind of gone.
Our view as we look forward, is we see that kind of quarter four reduced level of $1 and $3 pricing activity in big box retail being more indicative of the landscape that we expect, so still more challenging than it was a couple of years ago, but much better than it was for the majority of 2014. Now I've got the feeling the Bryan, I've mixed one-third of your questions.
Bryan Hunt
No, you dissected it will, Jerry. Thank you and then my follow-up would be.
I would say, the growth out of shelf stable juice and alternative beverages definitely accelerated in Q4, can you talk about the drivers behind that or that you expect that to continue into 2015? And I will get back in the queue after that.
Thanks for the time.
Jerry Fowden
If you recall, which is why I always try and be cautious. In Cott, 2014 was a bit lumpy, bumpy and I'll get some of these numbers wrongs for shelf stable juice, but it will be the right kind of indication.
Simply with something like plus 4%, plus 14% flat and then plus 15%. Therefore, overall as a year, we were looking at some kind of 7%, 8%, 9% average growth in our shelf stable juice business on a serving equivalent case.
We do see that as an area, where there is a bit more momentum. We do see as an area where we, would hope to continue to see further growth.
Albeit, I wouldn't model out kind of 15% growth on that going forward. I think in the past, we'd say, we might hope that we chip in something like a 4% growth there on an average rate.
Bryan Hunt
And can you talk about the driver behind that acceleration?
Jerry Fowden
Combination of factors, one there was a massive spike in apples concentrates cost two years to three years ago. We passed all of that on, that led to a significant price increase at the retail level for apple and apple is very important for our shelf stable juice business and as apple commodities have come back closer to $8 mark for the concentrates, we've been in the position that we've seen apple business rebound and our private label apple business has been up over the past few quarters.
So we're kind of re-emergence of apple as a value from any shelf stable juice, has been one key driver in that. Plus as we grow contract manufacturing volumes, it would be fair to say that something like two-thirds of the contract manufacturing growth we're seeing is in that, juice and drink areas, which is also a contributor to that performance.
So we see it continuing a growth that maybe more like that 4-ish percent level on an average basis, but I'm guessing it will stay lumpy, bumpy too.
Operator
Our next question comes from the line of John Faucher with JP Morgan Chase. Please go ahead with your question.
John Faucher
One sort of follow-up on the pricing environment and then one DS related question. So the first question on pricing is, given your comments about the $0.99 two-liter, is it safe to say that we're seeing in terms of some of this improved pricing commentary is really, it's not rate as much in terms of what we're seeing from the category, it's more just a reduction of a little bit high low that we've seen, I guess my real question behind that, is that more sustainable as we look at a more favourable raw material environment, in terms of less discounting is more likely to sustain in a way?
And then the second question on DS, you talked about 2% customer acquisition. Can you talk with us a little bit about how customers chose to go with DS as a platform?
What's the attractiveness there and then how does really the sales model work from that standpoint? Thanks.
Jerry Fowden
Okay and on the first one, I mean the improved pricing environment is a combination of two factors. Much more success amongst the national brand and driving small pack size, alternative pack sizes, their price pack architecture and I really applaud the effort they're doing there to improve consumer choice and I believe that is contributing to an overall average increase in the cost per mill or cost per standard case of the national brands and secondly, as I mentioned roughly half of quarter four, had that $0.99 or $1 two-liter versus more like 90% of quarter three.
So the combination of those two factors slightly less of the $1 two-liter and the $3 12-pack and a good focus on driving price pack architecture has led to the average increase in price per liter, what the national brands have seen. I think that's an appropriate strategy for the consumer, for retailers, for the industry.
Therefore, I would imagine that is more likely to continue. I think also we all saw the excessive periods where every weeks had those very low $1, $3 pricing.
Frankly did little for the total market volume. Therefore, overall I think people have learnt that was value destructive and therefore better to try and approach this a different way to the price pack architecture.
So for both of those reasons, I see that being a more sustainable, sensible way to look forward and we'll have to wait and see how it pans out because none of us have a crystal ball, John. On DS, seek to win new customers by a number of ways.
They have sales people that literally knock on doors and present their service, they do press advertising mainly in weekend media and local media to display the offer that DS Services can bring. They try and cross sell water, to their coffee customers.
Coffee to their customers. They have online activity, whereby you can literally sign up online and hire some special offer, if you sign up a new period.
We have launched a friends and family program to all our associates with special friends and family pricing and as mentioned, during the recent road shows, they started about two years to three years ago, a relationship with Costco, where they put booths in about 75 Costco's every weekend to display their service and their product offering and that is been an attracted new channel for signing up customers, good customers, customers with above average income that are very well positioned as appropriate for the DS Services. So we see overall customer growth probably running in the 1.5% to 2% level with consumption per customer again running in 1.5% to 2% level.
We explain, when coupled with pricing and the primo benefit that continues into 2015 and will make revenues in the front half of 2015, a bit stronger than the back half. We see overall DS revenues probably running up in the 5% to 6% sort of area versus the 7%, but it's currently tracked at for quarter four.
And Jarrod, just made a good point. I did mention in the prepared remarks that some people might miss it.
DS has an energy surcharge mechanism, but basically tracks the government public price of diesel fuel and obviously with falling diesel prices that leads to a lower energy surcharge on each monthly bill, it's about $3 out of $40 monthly bill is the energy surcharge and when diesel falls, that goes down $3, $2.90, $2.80 etc. and as diesel price rises that will go up.
As we see things today, the impact of the lower diesel cost. We'll probably take some $5 million to $10 million of DS revenue.
So maybe reduce it by about 1%, but has no impact on EBITDA because ineffective to pass through mechanism up or down, John.
Operator
Our next question comes from the line of Kevin Grundy with Jefferies. Please go ahead with your question.
Kevin Grundy
So I wanted to come back to North American covering softer in pricing, but I guess ask it a little bit differently. I think everyone is kind of on the same page with pricing rationalities, is a good thing for the industry, but Jerry would you say how good is a visibility that you guys have with respect to the price gaps and I guess I ask that in the context based on the data that we have, it seems like there is been a little bit of decoupling between the year-over-year change in the price gaps and private label's market share and I guess I'd say unfavourably, so were historically the price gaps widen and you saw a share get meaningfully better in certain cases, but that haven't really been the case.
So I was curious, if you guys were seeing the same thing and again it sort of speaks to what kind of visibility did you guys have with respect to volumes and where they may go given current price gaps and then I have a follow-up. Thanks
Jerry Fowden
Very good, question. Kevin and let me try and explain.
I mean, most people in the market would look at whether it's Nielsen or IRR's average pricing which tends to divide price by liter's 192-ounce case equivalence to come up with the average price and that's why you get the comment, maybe 4% improvement in price mix. For our business, our soda business which is big box retail business.
Frankly it's the price of two-liter soda and 12-pack, 12 ounce cans in big box retail, that drives our price gap and that drives our relative volume performance and what we do, rather than look at IRI and Nielsen on that, but we do get, we track weekly. For 24-pack, 12-pack cans two-liter.
Colas separately from flavours, East Coast US, Central US, West Coast US and look at all of that pricing in the major retailers compared to our pricing and it's from that, that we can see where the price gap is moving, on those packages and in those customer channels that really make the difference to our performance.
Jay Wells
And you asked a thing about coupling, I mean how we look at it by looking at all of our, the different national brands is, for us all we need is one of them on promotion to match up against private label to keep our share down versus when you look at on an overall more higher basis, you might not see that one week, one is on promotion. On colas next week, a different one on flavours, but when you drill down to that.
We're still seeing one of the national brands competing against us versus looking at the bigger picture probably the numbers that you're looking at.
Jerry Fowden
And what we have chosen to do, looking at the elasticity of our business from some extensive modelling work we did with the consultant. I must admit, a number of years ago now because we're a low cost company and we don't spend money on that, too frequently, but we are pretty clear that trying to chase that price down for our business with our margin structure is not economically attractive.
So we've chosen to kind of buckle down, batten down hatches and kind of [indiscernible] on carbonated soft drinks and put our real effort behind driving juice and drinks, new age sparkling waters and contract manufacturing and we think, with the point where the growth in all of those areas at this current slightly less aggressive national brand sizing in sodas, the growth in all of those areas exceeds the decline from CSD's and that we saw for the first real-time in quarter four and we believe that we have the ability to deliver that stability as we look forward at 2015. Stable to slightly positive traditional business, overall volumes.
Stable to slightly negative traditional business revenues because we don't charge for the ingredients and the packaging on contract manufacturing with overall EBITDA stability albeit in the end will depend exactly where foreign exchange for that traditional business and then, we have the DS business on top, with its more predictable and dependable revenue streams, top line growth and bottom line growth, plus the synergies phasing in. That's really how we're looking at the overall business environment in this current pricing landscape.
Kevin Grundy
Understood and a quick follow-up, thanks for that. Profitability in the quarter, I was curious and again there is the extra week in DS etc., so there is a lot of going on this quarter.
How did profitability come in the quarter relative to your expectations, where there is a lot of sort of puts and takes, was there any benefit in the corporate line that you would call out and then the last piece to it, Jay. Anything you call out in terms of benefit or cushion you may have in your outlook with respect to lower resin prices that have pulled back here recently?
And that's it from me, thanks guys.
Jerry Fowden
I'd say, trying to strip out all the noise, the DS, the extra weeks all the kind of acquisition costs are underlying business was within $1 million, $1.5 million either sides of where we internally expected, was now we continued to see the SG&A drag on that traditional business before all the acquisition in our activity because of the removal of those 2013 short-term bonuses as well as the removal of accruals for multiyear long-term incentives in 2013. So our 2014 SG&A was higher than 2013 because of those removals.
Now I think, we'd explain that all before, so the underlying business really plus or minus $1.5 million either side. Jay?
Jay Wells
I think your question was all on overall commodities. As Jerry said in his remarks, we really don't see it as a headwind, but I don't think I would say we have a cushion at all because you got to factor in, the different FX rates, we are seeing higher cost in certain niche fruits as in prune and lemon and we have advance coverage in hedges.
So overall, taking everything into account. We kind of see commodities flattish with no real cushion being built in to next year for commodities and I think Jerry more than explained diesel and how we don't really see any benefit from diesel, next to either combination of the energy surcharge at DS and the fact that our customers basically pick up that plans.
Operator
Thank you. Ladies and gentlemen there are no further questions at this time.
I would now like to turn the floor back over to management for closing remarks.
Jarrod Langhans
Thank you very much for joining our call. This will conclude Cott Corporation's fourth quarter fiscal year 2014.
Thanks for attending.
Operator
Ladies and gentlemen. This concludes our Cott teleconference for today.
You may disconnect your lines at this time. Thank you for participation and have a wonderful day.