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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to the Cott Corporation Fourth Quarter and Fiscal Year 2018 Earnings Release. I will now introduce the Vice President of Investor Relations for Cott Corporation, Mr. Jarrod Langhans. Please, go ahead.
Welcome to Cott Corporation's Fourth Quarter and Fiscal Year 2018 Earnings Conference Call. [Operator Instructions] This call will end no later than 11:00 a.m. Eastern Time. The call is being webcast live on Cott's website at www.cott.com and will be available for a playback there until March 8, 2019. This conference call contains forward-looking statements, including statements concerning the company's future financial and operational performance. These statements should be considered in connection with cautionary statements and disclaimers contained in the safe harbor statements in this morning's press release and the company's annual report on Form 10-K and quarterly reports on Form 10-Q and other filings with the U.S. and Canadian securities regulators. The company's actual performance could differ materially from these statements and the company undertakes no duty to update these forward-looking statements, except as expressly required by applicable law. A reconciliation of any non-GAAP financial measures discussed during the call with the most comparable measures in accordance with GAAP is available in the company's fourth quarter and fiscal year 2018 earnings announcements, released earlier this morning or on the Investor Relations section of the company's website at www.cott.com. Today, I'm accompanied by Tom Harrington, our Chief Executive Officer; and Jay Wells, our Chief Financial Officer. As a part of this conference call, we have included a deck online at www.cott.com that was designed to assist you throughout our discussion. With that said, Tom will start this morning's call with some thoughts on our company overall, before turning the call over to Jay for a discussion of our fourth quarter and full year consolidated financial performance, the results of both our Route Based Services segment and our Coffee, Tea and Extract Solutions segment as well as our 2019 expectations, before handing the call back to Tom to comment before moving to Q&A. With that, let me now turn the call over to Tom.
Thank you, Jarrod, and good morning, everyone. Looking at 2018, I'm pleased to report that our results continued to come in as expected, our strategy is working, and we're well positioned for the future. 2018 was a very busy year for us. From a transactional and capital deployment viewpoint, we divested our traditional business, which allowed us to reduce our outstanding debt by approximately $1 billion and in turn, created a business services company focused on growing Better For You categories. We more than doubled up on our tuck-in acquisition efforts, which not only drove customer density across our footprint but also filled the distribution void in the Northeast with the Crystal Rock acquisition and added an American premium brand in Mountain Valley to our portfolio. Both of these transactions have gone well and are tracking at/or ahead of our integration plans, and we believe are great additions to our business. And we returned over $100 million to our shareholders through a combination of share buybacks and dividend. As I look back on 2018, I am proud of what our associates were able to accomplish, even when challenged with a variety of market pressures such as increased freight and transportation cost. Overall, we generated good top line and free cash flow growth, with revenue coming in on track at plus 5% with strong growth in free cash flow, which came in above our projection even when backing out the working capital benefits, and EBITDA coming in within the range that we forecast on our last call, while at the same time, allowing us to accrue additional short-term incentives for our North American Route Based Services business, rewarding them for a job well done. As we look to 2019, we're positioned to benefit from the continuing growth in both the water and coffee categories, with our Route Based Services operating segment leading the charge.We are confident in our ability to meet our expectation of 4% to 5% top line growth, which is shown on Page 6 of the deck that Jarrod referenced, we have achieved over the last 3 years. We are equally confident in our ability to deliver on our forecast of $150-plus million of free cash flow. I will now turn the call over to Jay, who will review more specifics on our performance. Jay?
Thank you, Tom, and good morning, everyone. Starting with the quarter, good top line performance across our Route Based Services segment drove a consolidated revenue increase of 5%; 7%, excluding the impact of foreign exchange and adjusting for the change in average cost of coffee within our Coffee, Tea and Extract Solutions segment. Operating income increased by $4 million, and adjusted EBITDA grew to $72 million, as growth within our Route Based Services segment, inclusive of increased customers, volume, pricing and acquisitions, was partially offset by approximately $5 million of additional short-term incentive accruals that were triggered as a result of meeting certain financial targets and over $2 million of increased freight cost in the quarter. I will go into greater detail on the growth drivers when I cover the operating performance of our Route Based Services segment. But the good momentum we saw in the fourth quarter in our Route Based Services segment is that confidence in delivering on our full year 2019 targets. Turning to cash. Adjusted free cash flow from continuing operations in the quarter was $65 million, which included working capital benefits. The working capital benefit we saw in the quarter resulted from an initiative we implemented to improve our working capital management. The initiative delivered $25 million more in working capital benefits than we expected. With respect to capital deployment, we returned approximately $37 million to shareholders in the fourth quarter through $8 million of dividends as well as $29 million in share buybacks. Off the $29 million of share buybacks in the quarter, $6 million of shares were acquired under the share repurchase agreement approved by our board in May 2018, and the remaining $23 million of shares were acquired under the share repurchase program approved by our board in December 2018. We also acquired Mountain Valley in mid-October, which provided approximately $10 million of revenue during the quarter. We're excited to add to our portfolio this fast-growing, highly recognized, American brand of spring and sparkling water. The transition and integration of Mountain Valley has gone smoothly, and we would expect to fully integrate this business into our Route Based Services segment over the next few years. Moving to the full year, we saw a good top line performance across our Route Based Services segment with consolidated revenue increasing by 5% at $2.373 billion. Operating income grew 34% to $59 million, and adjusted EBITDA grew 6% to $312 million, as a result of growth in revenue and increased route density, partially offset by increased freight and transportation cost of around $9 million. With good top line momentum as we close the year, we feel confident in meeting our 2019 revenue target of over $2.4 billion. Turning to cash. Adjusted free cash flow from continuing operations for the year was $150 million, which included approximately $25 million of working capital benefits, I just discussed. With respect to capital deployment, we divested our traditional business at the beginning of 2018, which allowed us to delever our balance sheet by over $1 billion through debt reduction. We've returned approximately $108 million to shareholders this year through $33 million of dividends as well as $75 million in share buybacks. And with the acquisition of Mountain Valley and Crystal Rock, in addition to several other smaller tuck-in acquisitions, we more than doubled our goal of $40 million to $60 million of tuck-in acquisitions for the year. And looking to 2019, we have the ability to deliver another $40 million to $60 million of tuck-ins as we continue to have a robust pipeline of targets, and we will continue to review other opportunities that would include companies of similar size as Mountain Valley. Let me now cover the operating performance of our Route Based Services segment.Looking at the fourth quarter, route Based Services saw revenue increased 7%; 8% on an FX-neutral basis, driven by a positive mix shift in our North American customer base, growth in our overall customer base and the benefits of our U.S. 5-gallon bottle pricing initiative.Our Route Based Services operating segment saw customers up 5% relative to the prior year with volume up 4%, and average selling price per 5-gallon bottle up 3% in the quarter. Gross profit increased 5% to $240 million, driven primarily by the revenue growth drivers I just mentioned, partially offset by the market inflation that we have discussed throughout the year. Operating income was lower at $7 million as our growth drivers were more than offset by approximately $5 million of additional short-term incentive accruals that were triggered as a result of meeting certain internal financial targets and over $2 million of increased freight cost in the quarter. As we look to 2019, we are set up well for continued growth within our Route Based Services segment through our Customer 4 Life program; carryover of our pricing initiative; ongoing market growth, as consumers continue to migrate toward healthy hydration versus sugary sweetened beverages as well as additional growth through our tuck-in acquisition program. Let me now cover the operating performance of our Coffee, Tea and Extract Solutions segment. Looking at the fourth quarter, we continue to see top line pressure from lower average cost of green coffee, which is essentially a pass-through item for us and does not materially impact our cash profits. Excluding the change in average cost of green coffee, revenue was flat as we saw our volumes stabilize even with the competitive coffee roasting environment, as well as the difficult comps from lapping the outsized coffee and tea volume growth that we experienced in 2017, when we increased our market share and saw new customer pipeline sales. Overall, coffee and tea volume was flat during the quarter, while liquid extract volume increased by 4%. Although gross profit was down year-over-year, operating income was $4 million compared to $3 million as the effect of a price/mix shift into larger quick-serve restaurants was more than offset by liquid extract growth and reduced SG&A costs. As we look to 2019, we are set up well for volume growth on a full year basis, as we began onboarding a new national convenience retail chain in December, which we'll roll out over the course of 2019. We've also secured a number of new SKUs within our current customer base, driven, in large part, by our extract division, including a new cold brew coffee product as well as entered into a new line of service in which we have begun to assist a large multinational quick-serve restaurant in Asia. All of which will come on board throughout 2019, which will result in a steady build-up throughout the year as the various contracts and customers come on board. With that said, the coffee roasting environment is very competitive, and although we have not lost any accounts as part of this process, we have had to sharpen our pencil a few times over the last year, while in turn working with both our customers and our team on cost-down measures. As we move to 2019, we are set up well for volume growth and our full year expectations are very positive, but we will see some pressure during the first half of the year at the timing of a number of cost-down initiatives and new product launches slightly lag some of our pricing concessions and in turn, we would expect to see some pressure on the top and bottom line in our Coffee, Tea and Extract business in the first half of 2019. As a quick summary and looking out to 2019, overall in 2018, we had a good year where we delivered on revenue, EBITDA and cash while navigating through a variety of macro pressures. As we move into 2019, we have built momentum within our Route Based Services segment where we have a number of growth initiatives working effectively and a good pipeline of tuck-in acquisitions setting us up well for 2019. And we have visibility into a number of new contracts and SKUs coming on board within our Coffee, Tea and Extract Solutions business as we look to deliver on our 2019 goals, which incorporate top line growth of 4% to 5% as well as over $150 million of adjusted free cash flow. If you look at the deck that we posted, there is a slide that provides 2019 revenue and adjusted free cash flow expectations. And you can see that when you exclude the sale of our RCI business, that we announced a couple of weeks ago, we are projected to deliver in excess of $2.4 billion of revenue or 4% to 5% revenue growth. This slide also shows how we plan to deliver in excess of $150 million of adjusted free cash flow in 2019 with top line growth, interest savings and synergies providing a $20 million increase in adjusted free cash flow and tuck-in acquisitions providing an additional $5 million to $10 million of incremental adjusted free cash flow. This deck also shows the cadence of our revenue for 2017 and 2018. And looking at 2019, we expect Q1 will be a little lower and Q4 will be a little higher relative to 2017 and 2018, based on what I just discussed with respect to our Coffee, Tea and Extract Solutions segment. I will now turn the call back to Tom.
Thanks, Jay. As CEO, I will maintain continuity of our strategy and goals. I have been a part of this transformation over the last 4 years and was a key member in the decision-making and development of the strategy and therefore, I look at the transition as simply an evolution. With just 3 quarters under our belt since divesting of our traditional business, we've been able to display the attractive attributes of our improved business. One that has reliable, recurring and predictable growth in revenue and free cash flow generation. As we operate the business over the coming years, we will continue to focus on our growth and cash generation by; one, becoming our customers' favorite direct-to-consumer service provider and premier water, coffee and filtration company through an enhanced customer experience, which includes ongoing analytics of change in consumer behavior, implementation of new and relevant customer touch points, through our web and mobile platform, 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. I believe that we are positioned for growth well into the future as we continue on our path of shareholder value creation. Before moving to Q&A, I wanted to briefly touch on a few topics. The first is the information gap that exists within the market and who we are today. The second is our new environmental, social and governance, or ESG, initiative, and the third is key initiatives for 2019. Starting with the information gap. Consistent with the comments that are made on our third quarter call, we continue to meet and speak with investors and analysts who mistakenly have considered us to be a soda company and unfortunately, we continue to see ourselves grouped in with beverage companies as opposed to business services companies. This is understandable as we're in the early days of our improved business model. While this information gap can increase volatility on our stock price, it does provide a great opportunity to investors as we continue to trade lower than our peer group within business services. We remain committed to increasing our investor marketing and communication activities while we will expand to geographies we have not historically visited, attend conferences that we have not historically participated in, and execute other outreach efforts as we look to educate the market on the fact that we are a different business, one that is part of the business service community with products and services in growing categories, with lower customer concentration, reduced exposure to commodity fluctuations and one that has multiple levers to grow the top line, such as customer growth tuck-in or customer-list acquisitions and improving customer satisfaction. Moving to our ESG initiatives. Many of you likely saw the press release that we issued yesterday, in which we announced the Shayron Barnes-Selby was appointed as Vice President of Government Affairs and ESG Programs, reporting directly to me, who will lead our ESG initiatives. Many investors are increasingly integrating ESG into their investment decisions, and we're currently receiving inaccurate ratings on our ESG scores from the third-party rating agencies due, in large part, to information gaps with the information that they're utilizing. As a result, the development of an ESG communication program was one of my top initiatives to begin implementing upon assuming that CEO role. Although we'll have a number of programs and goals that we will implement and achieve over the coming years, we now have a culture and operational expertise focused on social responsibility and sustainability and already have many of the programs that investors look for when deciding to include a company in their indexes or funds associated with the ESG. I see this as a seamless process as the mindset and the programs associated with these practices are embedded within our existing culture. They assist us in driving efficiencies, inspiring further innovation and building platforms for long-term growth and assured supply. With the number of programs already in place, we simply need to bring them to the forefront, and we started to do so as our board's governance committee has taken on the responsibility of overseeing our company-wide ESG initiatives and Shayron Barnes-Selby will lead these initiatives. Over the coming weeks, you will start to see more activity in this area on our website, marketing materials and as a part of our presentations, all of which, we believe, will assist in creating further value for our company. Turning to some of our 2019 initiatives. I'm going to briefly cover our customers' experience, service and growth, our U.S. Route Based pricing initiative and extract and channel expansion within our Coffee, Tea and Extract Solutions businesses. Extracts in Asia. So let's start with the customer initiatives within our Route Based Services segment. Over the last few years, we have successfully implemented a number of initiatives to grow our overall customer base while at the same time, focusing more efforts in growing our commercial customer base. As a result, home and office water delivery customer programs have been executed to meet 2 goals: to drive total organic customer growth and to shift our mix of customers with a greater emphasis on growth of our commercial customer base. As we noted in our last quarter call, we are pleased to report that our mix was now in line with our historical customer mix in North America. As expected, our total company-wide customer base ended the year at around 2.5 million customers. As we look to 2019, our goal is to continue with our focused marketing initiatives designed to drive customer growth and improve our mix. These initiatives include: a continued investment in sales headcount designed to improve our overall North America mix and to drive organic growth; continued investment and focus across our 20-country footprint on our website, the Internet and social media in order to drive growth within our customer base, and reach Millennials and Gen Zers and a continued focus on our high-density area, or HDA program, to improve the return and effectiveness of our custody marketing dollars by focusing on a number of major urban markets where data indicates we can achieve a higher return from our sales and marketing investments. Moving to our customer experience and service. We have spent and continue to spend a significant amount of energy and resources in this area, and it will continue to be a key area of focus and investment going forward. These activities assist in driving a lower quit rate, longer customer life cycle and supports our ability to drive organic customer growth and revenue per customer location. As we noted on our call last quarter, we continue to see historically low churn rate in North America and our European division continues to maintain their consistently low churn rate as well. Customer-related activities will be a key topic when we hold our Investor Day on March 12, where our North American Route Based Services management teams will provide a more in-depth discussion on these initiatives. Turning to pricing. As many of you know, we rolled out a carefully planned and executed price increase initiative to our U.S. Route Based Services customers. These various pricing actions have been phased in, beginning in August, and were designed to fully offset the market inflation that has been present throughout 2018. I'm pleased to say that the pricing actions have come through as expected and were a key driver in offsetting around $9 million of increased freight and transportation cost. As we look to 2019, we will benefit by the rollover of these pricing initiatives, which, in turn, will continue to help us offset market pressures in the areas of increased labor cost, health and welfare cost and company-wide investment with the opportunity for some of the pricing to pass to our bottom line. Moving to coffee, extract and new menu initiatives as well as our channel expansion projects. Our Coffee, Tea and Extract Solutions segment will focus on continuing to grow its core coffee and tea volumes while seeing higher growth in product categories such as coffee extracts. We continue to build out our customers' menus in areas such as cold brew coffee and other extract-related products that have seen significant growth over the last few years, which we expect to continue going forward. We will be launching a number of initiatives in this area in 2019, which gives us confidence that we'll be able to meet our growth expectations for this business. Extract volume increased by 30% in 2018, and we're expecting a similar growth profile in 2019. Additional growth will come from our continued expansion into new channels that we've historically underpenetrated. A recent examples is the assistance that we provided a large multinational quick-serve restaurant, where we leveraged our expertise to assume a coffee program in certain Asian countries. Although we are not benefiting from having this production with our plants, it was the ability to assist our customer with the process and the ongoing management expertise that will drive this channel's revenue as well as further solidify us as an important partner with our customer. We've also seen our customers increase their orders of extracts through overseas shipments going into 2019. Similar to our commentary last quarter, with key initiatives in high growth in the area of extracts and new channels, we would look for our core roasting ground coffee and tea business to deliver a more modest performance whereby collectively, we are able to deliver on our total volume and revenue growth goals across the business as a whole. Before moving to Q&A, I wanted to take a moment to thank a number of individuals. First, Jerry Fowden for all his efforts as our CEO during our transformation. His leadership and guidance were instrumental in navigating Cott and taking the business from one that had operated in categories in decline with many macro factors that challenged the business to a growth-oriented company, focused on healthy hydration with predominantly recurring revenues and multiple scalable platforms. During this process, we not only created a new business model, but we significantly improved our growth profile, shifted our emphasis and business towards Route Based Services and meaningfully reduced our exposure to commodity fluctuations. Thank you, Jerry. With the announcement of our CEO transition in August, we executed a seamless transition in roles for both Jerry and I, and we hit the ground running in 2019. Next, I would like to thank all of the associates within our former RCI concentrate division. As you know, we announced the sale of these businesses just a couple of weeks ago completing the transformation of our business. We wish them well. And last, but definitely not least, I would like to thank all of our associates, the lifeblood of our organization without whom we would've not been able to accomplish everything we did in 2018 as well as everything we plan on accomplishing going forward. So thank you all. I will now turn the call back to Jarrod to move us to Q&A.
Thank you, gentlemen. [Operator Instructions] Thank you for your time. Operator, please open up the lines for questions.
[Operator Instructions] And your first question comes from the line of Nik Modi with RBC.
This is Russell Miller on for Nick. We wanted to ask first on 2019 free cash flow bridge. Are there any more details you could provide on the components of the bridge such as core business growth synergies, tuck-in acquisitions and all of these net of reinvestment back into the business? And what of these components present the biggest risk or could lead to the most upside to the guide? And then I have a follow-up, if you don't mind.
Russ, I'm going to ask Jay to answer that question.
Russ, I mean, I think what you're doing is you're trying to take our previous bridge, add up the 3 parts of growth, interest and synergies to get to the new $20 million in our bridge, is probably what you're trying to work through. When you really look at our old bridge, things that would've changed from that to the current bridge, first off, we did sell the RCI division within the synergy number that we had previously talked about. There was probably $2 million of dissynergies that we were going to capture and take out this year, which we will no longer see those since we have sold that division. On top of that, of the interest savings that you've seen in the bridge, we're probably going to see maybe $2 million less in cash interest savings in the year. So if you adjust those 2 numbers and add it up, you kind of get the $20 million in the middle of the range you would get. Is that helpful?
Yes. And the follow-up question would be on Amazon. So we noticed Amazon posted on their services website that they may soon be offering HOD water delivery services. Could you comment on this to whether you see it as a threat or opportunity?
Yes, Russ, this is Tom. We actually view it -- well not active as another form of growth. So you think, we've articulated in the past 4 or 5 ways that we pursue growth that will be tuck-in acquisitions. It could be on investment in commercial ASRs. It could be our in-store program. The Amazon opportunity to us is another way to attract customers and frankly, in a channel of business that might be new to us. So we would be cautiously optimistic about that opportunity and don't view it as a threat, we view it as an opportunity to expand the business.
Your next question comes from the line of Peter Grom with JPMorgan.
So just a few quick questions from me. So first, can you provide a bit more clarity on the increased incentive accruals? Maybe, help us frame what was included in your original guidance versus the $5 million impact? And what drove the increase versus expectations? And then second, just kind of following up on Russell's question. I mean, when we look at the 2019 free cash flow guidance, can you maybe provide a bit more color on what could help drive the plus in your outlook going forward?
No problem. I'm going to ask Jay to lead those answers.
You look at the guidance we gave on the third quarter call, we gave a range of full year EBITDA of $312 million to $315 million. And when we gave that guidance how we were trending on the pricing, we felt pretty comfortable that we were going to hit the higher end of that guidance, but also gave the range because we knew if we were able to exceed it, it really overdeliver on our pricing initiative. There were certain thresholds that DS had not made yet on their annual bonus. So the good news is, we overdelivered on our pricing initiative. The good news is our employees are getting rewarded for their very hard work but also at the same time that additional accrual, which we were able to do and provide to our employees, thanks to overdelivering, brought us down to the lower end of the EBITDA guidance.
And before Jay goes to the free cash flow, I just want to emphasize that paying out incentives for the work that team did with all the headwinds and challenges they face, we actually think it's important and sets us up, frankly, appropriately, to continue progress into 2019. Jay, you want to take that?
Sure. And on the free cash flow opportunities for upside, well, you look at what we talk about -- we'll grow the top line, its customers, its price, its consumption and its tuck-in acquisitions are really the areas of growth. So opportunities to overdeliver would be increase customer adds, increase consumption as people move to healthy hydration and overdelivering on our current pricing initiatives, I would say. Our key things and then on top of that, I mean, we did 2 larger-scale tuck-in acquisitions last year with Crystal Rock and Mountain Valley. And to the extent we can deliver earlier on those synergies that will provide upside.
Your next question comes from the line of Derek Dley with Canaccord Genuity.
Just wanted to talk a little bit more about the Coffee and Tea Extract business. From what we -- from what I understand, you guys were awarded a new coffee contract, a large coffee contract in Q4. I'm wondering did that come in, in late Q4 like in December and not have a huge impact on the volumes this quarter.
That's correct. It was late December and it will feather in over the course of 2019. So no big impact in the quarter and then a slow roll if you think about it as we move through the new year.
Keep in mind, this isn't a customer going new into coffee. This is a customer transferring their production over to us. So it's only adds each store needs, new coffee and to refill is when we'll start providing for them. So it really will be a slow rollout through '19.
And I think it's important to note, when we talk about new business gains and growth business, they are typically feathered in. So they don't all happen on Monday of Week 3 that they come over time as they get through the -- whichever customer supply chain and ultimately through their stores in many cases.
Okay. That makes sense. You mentioned that you're witnessing a more -- I think, the term you used was more competitive coffee roasting environment. Can you just give us a little bit more color on what you're seeing?
Well, it's a -- we've managed to hold onto our customers and business, but we've done that at some lower pricing based on number of RFPs in a marketplace. So we've seen degradation in the pricing. We kept the customer. We actually performed pretty well, frankly, in the fourth quarter, but particularly as we think about where our extract business is. Good news is, we don't foresee many RFPs in the next year or so. So we're in a pretty good spot in terms of the future as it relates to what has been arguably or the historically most competitive market we've experienced.
Okay. And is that one -- is it driven by one of your larger competitors, you're implementing this lower pricing because from what I understand, this coffee market historically had been very disciplined when it came to pricing.
Yes. We're not going to talk about any particular competitor, but most of the RFPs would have 4 or 5 roasters involved in that. And so that's really the landscape we are faced with. It's not always the same one, sometimes it's others. The fact is, we've been faced with these challenges in a number of RFPs, and I think the team has done a terrific job dealing with that. Jay referenced better managing our cost and the team did that to mitigate the margin pressures we had that we will continue to see over the course of the first couple of months as we build our pipeline and execute our plan.
Yes. But I'd say...
We remain confident -- sorry, Jay, we remain confident in a decent year at S&D Coffee on a full year basis.
And I think I want to reemphasize and Tom said it, I mean you asked us this one, I would say no we have made sure we have secured long-term contracts with all of our major customers and do not see this reoccurring in the near term. So I think, as Tom said, we're set up well moving forward. But as I said, we did have to sharpen our pencils on some of these RFPs in order to make sure we lock in, in the long term.
Okay. And then just last one for me. Just in terms of the pricing, the 3% pricing that was implemented in the Route Based Service division, did you see any customer response to that? Or was it taken pretty well by your customers?
Yes. I think the answer is taken pretty well, and the best measure we have for that is, we've had the best retention rate we've ever enjoyed and the lowest quit rate. So that's a pretty good indication of customer satisfaction and their ability to bear that price increase. So...
Your next question comes from the line of Derek Lessard with TD Securities.
Maybe just coming back to Derek's previous question on the extracts business. I mean, over the last few quarters, you did have the significant growth there and it was holding up 4% in Q4. Maybe can you just hit on what was the driver of that decline in growth?
Yes. I would characterize it as timing and that we have seen the business rebound early in the year, with back on pace with the 30%-plus growth for 2019. So it's just a blip, it's timing in back, so we're pretty confident in how that business is going to perform.
Okay. And maybe just one for me before I requeue. In terms of 2019 guidance, are you going to provide us with an EBITDA range along with your revenue and free cash flow targets?
No, we -- what we've provided is what we plan to provide. We've tried to demystify the cadence with the last 2 years of how it's performed. But our guidance will be the confidence in 4% to 5% top line revenue growth and confidence in $150-plus million of free cash flow.
Your next question comes from the line of Daniel Moore with CJS Securities.
Maybe it's rehashing, so I apologize, but, maybe, we could drill down a little bit into the cadence as it relates to H1 versus H2 for the coffee and tea business kind of both top and bottom lines, key drivers there and the confidence that you have in that coming back in the back half and one follow-up.
Yes. Let me start and I'll try that -- I mean, within my script, I did refer to the consolidated cadence that you will see with fourth quarter of next year maybe being 2% higher than the cadence we saw on those tiers and maybe, Q1 being 2% lower. That's all attributed to what we're discussing on the Coffee, Tea and Extract Solutions segment.
Dan, if you look at the full year, we're confident that the business will perform as expected.
Okay. And then in terms of Mountain Valley, still early days, but maybe just elaborate on any cross-selling or expansion opportunities that you've seen since closing there?
Yes. We haven't implemented the cross-selling in a meaningful fashion. I would tell you that the teams are working on identifying, what I'll call, the white space inside the HOD system. So where are the areas where we could sell and distribute Mountain Valley across the DS platform? That work is in active development. And we're quite happy with the early work and the performance of the business. The management team is stayed in place, and it's going to continue to lead this great American brand on our behalf.
And lastly for me, Tom, in terms of the M&A pipeline, you mentioned opportunities of similar size to Mountain Valley? Are those predominantly in RBS? And any comments you might have around the opportunity set in Route Based North America versus coffee and tea versus Europe?
Yes. So we have a good pipeline, particularly in RBS. So as I think about that pipeline and think of water and coffee, it's with the capital W. So that's our sweet spot. That's the best of our experience on both sides of the Atlantic, and we're pretty confident we'll be able to deliver our commitments on those tuck-ins and all the benefits expected to complement.
Yes. And before you drop off, Dan, I'm actually going to do a follow-up for Derek to provide a little bit of help. We have given free cash follow to one follow-up call that -- question Derek didn't ask well, do you have any CapEx or cash tax guidance. And our guidance for CapEx is $120 million and our guidance for cash taxes is about $5 million. So those 2 types of guidance should help you out in your math. So didn't mean to trump you Dan, but I just wanted to give Derek the answer to some of the things he might be trying to model.
Dan, did you get the answer there?
I think so. Yes.
Our next question comes from the line of Mark Petrie with CIBC.
I just wanted to ask about your assumptions for cost inflation heading into 2019 and that's been an area of, I guess, some surprise at different points and just wanted to sort of understand your assumptions there? And then your comfort with the current pricing that you've got in place and the potential for our other pricing actions through the course of the year?
Yes. I'll take the pricing part and I'll let Jay take your first question second. We're pretty confident in the pricing, so it's stuck. As we said earlier, we implemented in August, there was a slow roll, it was intended to cover that $8 million or $9 million of transportation cost. It did that. It continues to roll through. It should give us some benefit on the bottom line this year. It's in our plan. And of course, we'll look for other pricing opportunities throughout the course of the year. So we're pretty happy with the execution that we did principally in the U.S.-based Route Based system.
And on the cost side, the good thing is the business that we've become, we're a low-commodity-risk business. On any type of resin, our bottles are used 60-plus times. So movement in that isn't a big exposure item for us. On fuel, we have an energy surcharge or similar programs throughout our footprint to offset that exposure. And we -- I've talked about the coffee in my prepared remarks where it's basically a pass-through item to us. That really doesn't affect our profit. So on the pure commodity side, we really have small effect on it. It really is looking at -- Tom just mentioned that the transportation and freight cost. Keep in mind, 90%, 95% of that cost are route sales representatives, in-town drivers, mostly commission-based compensation as we take price, as we grow, as we get more density, they get their raise. It's really much more related to the 5% that goes from plant to distribution center. And that's where the high demand is for those drivers. And that's really what's created the bulk of the $9 million in headwind on transportation we've cost -- this cost we've seen in the year. We're still haven't used some third parties as -- we have raised comp. We have increased our recruiting efforts, but we still have open seats. So we are still seeing the need to use third-party providers. We have secured some dedicated third-party lines to avoid the hike, real overprice. But we're continuing to see it. So will we see that same headwind next year? Yes, let me say that we will see some, not as material as this year. But that's why we've taken the pricing, we've got the rollover benefit to offset that.
Your next question comes from the line of Amit Sharma with BMO Capital Markets.
This is Drew Levine on for Amit. So I first wanted to start circling back to Tom, you said that pricing began rolling through in August in a phased way, and I think last quarter, the pricing impact had been 3% also. So just wondering if you could give any more color on why that 3% number wasn't any higher this quarter.
Well, the 2% was the full year. So yes, actually, it's moved the full year number because of that 3%. I have to look back and see where we were in the first 2 quarters to answer that question. Our revenue has really the 3 components, which is a combination; how many customers you bring in; what's the consumption of volume growth and the price; and the price was more significant in Q3. It is only on 5 gallon, right? So it doesn't affect all of the products we sell. And it was only in the U.S. So it's a piece of a piece of our business narrowly focused, frankly, that pricing activity in August on the 5-gallon -- 5- and 3-gallon container in the U.S.
And keep in mind, I mean, you are looking at the fourth quarter which is a lower-consumption quarter for us. It's really the summer months where we see higher consumption. So the price did take effect in a lower-consumption month. So it wouldn't have as large of a component as you might think?
Okay. And then there wasn't really much talk about this, but I think Coolers got an exemption from tariffs. I know, previously, you said, maybe there was $2 million to $3 million of additional CapEx from that. So wondering if that's any sort of benefit to 2019? If you get any sort of rebate from tariff paid in 2018 and how we should think about that?
So we did benefit on a portion of the tariffs, which was specific to bottled water coolers and we have not yet gotten relief on any filtration coolers or parts, and we expect to get a rebate back from the federal government some time this year for roughly $2 million. And then the headwind is obviously, going to be much lower than we had originally forecasted, but we still see about $2 million in our -- in terms of tariffs in 2019.
Yes. And I would not -- within our current results, we did book the benefit of the tariff refund. So don't book a couple-million-dollar benefit in next year's CapEx because we did book the receivable under reduction of CapEx in the fourth quarter.
Your next question comes from the line of Bryan Hunt of Wells Fargo.
It's Dave Klug on for Bryan. I just wanted to touch on -- there's been significant press around slowing EU economies, just curious to get your thoughts on that. I guess, what, if any, sales trends changes has the company seen in those EU markets in the past couple of quarters?
Yes. We haven't seen any meaningful change in aggregate across the business in terms of top line performance. So it's performed where we thought it would perform at the end of the day.
Yes. I mean, I have not seen any softening in employments stats over in Europe. So that's one key thing we do watch. So employment levels still seem to be good and improving. And that part of our business is a much more commercial-focused type business. So we haven't seen any changes in the workplace that would affect our business over there.
Got you. And then on -- I think as my follow-up, I heard you mention the $40 million to $60 million of contemplated tuck-ins for '19. I guess, regarding your M&A strategy, is it fair to say that you're focusing on those tuck-in acquisitions while also keeping an eye on more transformational transactions? And then, I guess, where would you consider taking leverage up to for a highly strategic deal?
Well, yes, our focus is on continuing to hit that $40 million to $60 million tuck-in pipe. We have a robust pipeline. Said earlier, it starts with a capital W. We've got actionable small targets we can execute and we'll execute this year. We have remained very disciplined on our approach to any larger deals and would not pull any transactions that don't meet our internal financial hurdles. And through '18, we didn't find anything that met the target.
And we've talked before on leverage. So I mean, for the right opportunity, we would take our leverage back up to the 4x. But as we showed in the past, we would become fully focused at that point in time to delever the company.
There are no further questions at this time. I will now turn the call back over to Jarrod Langhans for closing remarks.
Thank you very much for joining our call today. This will conclude Cott Corporation's Fourth Quarter 2018 Call. Thanks for attending.