UBS Securities analyst Kaumil Gajrawala said Cott Corp “performed above expectations on a number of fronts

UBS Securities analyst Kaumil Gajrawala said Cott Corp “performed above expectations on a number of fronts

Despite a slide in first-half profits and increasing pressure from high commodity costs, a predicted improvement in the US pricing environment means Cott Corp's future may start looking more positive.

On Wednesday (3 August), Cott reported a 1.5% slide in first-half profits to US$33.3bn. The firm said it faces continued commodity and fuel cost headwinds.

Prices of some raw materials are expected to stay higher for longer than anticipated, as well as fall slower than forecast a few months ago. In particular, the rising cost of resin is expected to cost Cott $45m this year, up $15m from the $30m it had projected in the last quarter.

Cott Corp's CEO, Jerry Fowden, told analysts on its earnings call this week that, looking into 2012, "it's clear aluminum, high fructose corn syrup, sugar and energy will all post significant increases over 2011".

There is no doubt that the company has also felt some pressure from national brands, which have used synergies available to them to partially offset the need to raise prices. Cott has said that it expects branded soft drinks and juice producers to raise prices in the second half of the year.

Nonetheless, it is not all bleak for the soft drinks firm. Cott's second-quarter profits topped market estimates, driven by growth in North America and the UK. Net profits rose by 22% to $27m, or 28 cents per share. Analysts on average were looking for earnings of 27 cents per share, according to Thomson Reuters.

UBS Securities analyst Kaumil Gajrawala said that Cott, which is the world's largest supplier of retailer branded soft drinks, "performed above expectations on a number of fronts, and the future is looking positive due to pricing trends.

"Recent commentary from branded competitors points to an improved pricing environment in [the second half] of 2011," he told The Financial Post. "As Cott progresses through 2011 with the bulk of the integration behind it, the company is positioned to benefit from customer cross-selling opportunities, increased negotiating power with customers and better purchasing power with suppliers."

Despite the continual rise in commodity costs, Gajrawala believes two positive factors for Cott going forward are industry pricing and a decline in promotional activity.

Combine this with Cott's focus on delivering another year of significant cash generation, and the future for the soft drinks maker looks more positive than one might assume.