Swiss Water Decaffeinated Coffee Q3 2024 Earnings Call Transcript

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Provided by Quartr
November 6, 2024

There are 6 speakers on the call.

Operator

Good day. Before Swiss Water Decaffeinated Coffee Incorporated Conference Call starts, they are required to remind you that certain information in today's presentation is forward looking in nature. Any such forward looking information or statements are based on assumptions that they considered reasonable at the time the information was prepared. Such information involves known and unknown risks and uncertainties and other factors outside our control that could cause actual results to differ materially from those expressed in the forward looking information. Swiss Water Decaffeinated Coffee Incorporated does not assume responsibility for the accuracy and completeness of the forward looking information.

Operator

Similarly, they do not undertake any obligation to publicly revise this forward looking information to reflect subsequent events or circumstances except as required by law. Please refer to Swiss Water Decaffeinated Coffee Incorporated's management's discussion and analysis posted on SEDAR and Swiss Water's website for a full discussion regarding forward looking statements and the risks therein. I would now like to turn the floor over to your host, Frank Dennis. Sir, you may begin.

Speaker 1

Thank you, Holly. Good afternoon, everyone, and thanks for taking the time to join us. I'm Frank Dennis, President and CEO of Swiss Water Decaffeinated Coffee, Inc. And with me is Ian Carswell, our CFO. Ian and I are here today to discuss Swiss Water's financial results for the 3 9 months ended September 30, 2024.

Speaker 1

As usual, I'll begin with a brief review of our performance, then Ian will provide more details about our financial results before I return to tell you about our longer term plans and expectations. We continue to see growing demand for our chemical free decaffeinated coffee offerings during the Q3 and 1st 9 months of this year. We are pleased to report volume growth and improved profitability for both periods. When compared to Q3 of last year, total volume grew by 27% and adjusted EBITDA increased by 40%. However, when comparing our quarterly results for 2024 with the same period last year, it's important to note that the distribution of quarterly sales volumes in 2023 did not follow normal seasonality patterns.

Speaker 1

Volumes during the Q3 of last year were lower than normal due to the temporary production constraints we experienced during our scheduled exit from our legacy Burnaby site. This year, except for a short planned maintenance period, both our decaffeination lines and Delta have run generally well on a 20 fourseven basis since January, and we have returned to more normal order patterns. This is borne out by our year to date performance with volumes growing by 4% and adjusted EBITDA increasing by 13% year over year. Consolidation of all our operations in one location has resulted in significant efficiencies and cost savings. Along with the higher processing volumes, these savings helped boost our gross profit by 80% in the quarter and 62% for the year to date.

Speaker 1

Gross margin percentage also showed strong improvement, growing from 10% in the 1st 9 months of last year to 16% this year. We achieved these strong results despite the significant challenges posed by a stubbornly high NYC coffee futures price and renewed disruptions to this coffee supply chain. I'll tell you more about these issues and our outlook for the balance of the year in a few minutes, but first let me turn the call over to Ian to take you through our financial results in more detail.

Speaker 2

Ian? Thanks Frank and good afternoon everyone. As always, I'll begin my review with volume shipped to customers as this is the key metric that drives our financial performance. Taken together, volumes in all categories were up by 27% in the quarter and for the year to date total volumes were up by 4% from the 2023 level. As Frank noted, the year over year differences were expected as the volumes reported in Q3 last year were lower than normal.

Speaker 2

This was due to a temporary capacity constraint we experienced during the period as we exited our legacy production facility in Burnaby and consolidated all operations here in Delta. Looking at volumes by customer type, shipments to roasters, those customers who roast and package coffee to sell to consumers in their own coffee shops or for home or office consumption were up by 40% in the 3rd quarter and by 3% for the 9 months. While shipments to importers, those customers who resell our coffees to roasters where and when they need it were up by 13% in the quarter and by 5% for the year to date. Looking at the roaster segment another way, specialty roasters account volumes were up by 7% in the quarter and by 1% in the 9 months to September 30. These accounts serve the out of home consumer primarily in cafes and restaurants in our key geographic markets.

Speaker 2

Shipments to large commercial roasters were also up significantly in Q3, increasing by 47% when compared to the Q3 of last year. For the 9 months, shipment to these accounts were up by 6% from last year's level. Turning now to revenues. 3rd quarter revenue of $41,800,000 was up by $9,200,000 from Q3 of last year. However, at $123,900,000 9 months revenue was down by 1 $200,000 from the 2023 level.

Speaker 2

The Q3 result was driven by the significant increase in volumes when compared to Q3 last year when our capacity was constrained. The drop in 9 months revenues was primarily the result of changes in our mix of business. During the 1st three quarters of this year, we had higher proportionate wholesale, which do not generate green coffee revenue, but only a processing fee. Looking at the cost side, our 3rd quarter cost of sales was $35,300,000 an increase of $6,300,000 or 22% compared to Q3 last year. The increase was primarily driven by higher volumes and an elevated NYC, partially offset by cost savings associated with consolidation operations at one location and lower utility rates.

Speaker 2

For the year to date, cost of sales was $104,700,000 down by 8,500,000 percent from the 2023 level. The 9 month decrease was driven by cost savings and efficiencies resulting from the consolidation of operations at a single location as well as by higher proportion of toll volumes in our sales mix and a $2,500,000 decrease in one time depreciation expense. As you may recall, in 2023, we incurred a significant one time non cash depreciation expense resulting from the write down of unsalvageable assets at our old Burnaby facility. There was no such charge this year. As to green coffee costs, at an average of $2.46 per pound in the 3rd quarter, the NYC was up by $0.90 from $1.56 per pound in Q3 last year.

Speaker 2

For the year to date, the NYC averaged $2.18 per pound, up by $0.47 from $1.71 last year. With the coffee futures prices at these near record levels, some of our customers are consuming their own inventories and waiting for the market to come back down again before replenishing their stocks. This is a normal market dynamic that is likely to negatively impact our volumes temporarily. Evidence that the high coffee price is beginning to impact consumer demand is also starting to emerge. This is a growing concern that Frank will tell you more about in a minute.

Speaker 2

Foreign exchange rates can also have a material impact on our profitability and cash from operations. This is because most of our revenues are generated in U. S. Dollars, while a significant portion of costs are incurred in Canadian funds. Our exposure to changes in exchange rate is managed in part through derivative financial instruments.

Speaker 2

However, all other factors being equal, we benefit when the U. S. Dollar appreciates as it did as it has this year. In Q3, the U. S.

Speaker 2

Dollar averaged CAD1.36, up CAD0.02 from CAD1.34 in the same period last year. During the 9 months to the end of September, U. S. Dollar averaged CAD1.36 compared to an average of CAD1.35 in 20.23. This appreciation had a positive impact on our revenues when they were converted to Canadian dollars.

Speaker 2

3rd quarter gross profit was $6,400,000 an increase of $2,900,000 or 80% when compared to Q3 of last year. For the year to date, gross profit was $19,200,000 dollars up by $7,300,000 or 62 percent from last year's results. Gross profit percentage increased 15% for the quarter compared to 11% in Q3 of last year. For the 9 months, gross profit percentage was 16%, up from 10% last year. The profitability improvements this year were driven by higher processing volumes, cost savings associated with the consolidation of our operations at one location, lower utility rates and a decrease in one time depreciation expenses.

Speaker 2

These positive factors were partially offset by increased operating expenses. 3rd quarter operating expenses were $3,600,000 up by $900,000 when compared to Q3 of 2023. For the year to date, operating expenses were $11,300,000 up by $1,700,000 from last year. The administrative portion of operating expenses was up by 47% in Q3 and by 26% for the 9 months. The primary driver of the increase in both periods was plant headcount, wage increases, higher professional fees and increased stock based compensation due to a higher share price.

Speaker 2

These negative impacts are partially offset by the cost savings associated with the consolidation of all operations at one location. The sales and marketing component of operating expenses was unchanged in the quarter and down by $100,000 for the year to date, primarily due to changes in the scheduling of our marketing activities. Q3 operating income of $2,800,000 was up significantly from $758,000 in the Q3 of 2023. 9 month operating income of $7,900,000 was also up nicely from $2,300,000 last year. Turning to net income, we recorded a net loss of $791,000 for the quarter compared to a net loss of $417,000 in Q3 last year.

Speaker 2

For the year to date, the net loss was $744,000 compared to a net loss of 1,500,000 in 2023. Last year, the reported losses were largely due to one time costs related to our exit from the Burnaby facility and consolidation of operations in Delta. This year, despite an improved gross margin, higher interest expenses on our construction loans and increased mark to market losses on our risk management activities offset much of the benefit. Non cash losses on the revaluation of Swiss Water's embedded option and mark to market adjustments on stock based compensation also impacted our profitability. The 3rd quarter net finance costs of $1,800,000 were unchanged from Q3 of 2023.

Speaker 2

For the year to date, finance costs were $5,500,000 up by $700,000 or 14% from last year's level. The increase was primarily because following the commissioning of our second decaffeination line in Delta, the interest rates and construction loans for the project could no longer be capitalized. 3rd quarter adjusted EBITDA of $2,200,000 was up by $600,000 from Q3 2023. And for the 1st 9 months of this year, we recorded adjusted EBITDA of $9,400,000 an increase of $1,100,000 compared to the same period last year. As with gross profit, the improvement in adjusted EBITDA in both periods was driven higher processing volumes, cost savings resulting from the consolidation of our operations at a single location, lower utility rates and reduced depreciation.

Speaker 2

These positive impacts were partially offset by the higher operating expenses and by increased losses on our risk management activities because of the near record high coffee futures prices we've had to contend with this year. Turning now to inventories, the second half of twenty twenty three, the commissioning of our 2nd production line in Delta led to an acceleration in raw materials usage and increased shipments of finished goods. As a result, we closed 2023 with inventories at their lowest levels since Q1 of 2021. As planned, we continue to manage our inventory position down during the second quarter and first half of this year. This was in part because we consumed the last remaining coffee inventories we've built up to bridge last year's move out of Burnaby.

Speaker 2

Meanwhile, logistics delays affecting freight passing through the Panama Canals slowed the arrival of coffee into Vancouver during the 1st 9 months of this year. This became a matter of increasing concern. So to offset the risk of delayed deliveries impacting our ability to meet our customer commitments, started to increase our coffee inventories from some origins during the Q3. As a result, when combined with the effect of a rising NYC, our closing 3rd quarter inventory value rose to 38,000,000 from 28,800,000 at the end of the second quarter. At this level, we are confident we have sufficient inventory on hand to support our operations and near term growth.

Speaker 2

As always, we remain focused on optimizing inventory levels and proactively managing our working capital commitments. With construction of our new production assets now complete and fully paid for, debt reduction is a key priority for Swiss Water going forward. We've made significant progress in this regard. Of particular note is that subsequent to the end of Q3 on October 31st and in accordance with our agreement, we fully repaid the debenture with warrants, which was due to Mill Road Capital. The total repayment of $15,900,000 consisted of $15,000,000 of principal and $900,000 of accrued interest.

Speaker 2

Following this payment, all obligations, duties and responsibilities of the parties to the debenture were terminated. That said, the maturity of the debenture did not affect our obligations or the rights of Mill Road under their existing warrant agreement. With this repayment, we have succeeded in paying down a total of $16,000,000 of our debt obligations since the Q3 of 2020 3. Reduction in our leverage will help reduce our net finance costs going forward. And with that, I will turn the call back

Speaker 1

to Frank. Thanks, Ian. Looking forward, interest in chemical free decaffeinated coffee remains high and we are optimistic about the future. We are moving over diversified global customer base, new state of the art production facilities, quality products, growing demand, a strong brand and a proven team. We are working to reduce our debt levels and are once again sharply focused on growing the business.

Speaker 1

All our operations are now consolidated in a single location with 2 modern processing lines. And these assets enable us to optimize our operational processes and produce premium decaffeinated coffee of consistent and high quality. We have sufficient production capacity to meet our current needs and with ongoing optimization along with some modest targeted investments enough capacity to meet our medium term growth needs. The performance of all our Delta production assets has been excellent, and we are optimistic that we can unlock further efficiency gains. We continue to see growing demand as ever more industry participants move away from chemical free or chemically caffeination in favor of chemical free and organic processes like ours.

Speaker 1

However, the New York Sea coffee futures price remained close to an historic peak during the Q3 and evidence is starting to emerge that this is negatively affecting consumer coffee consumption, roaster demand and especially importer inventories. The futures prices remain at elevated levels and the coffee futures market structure continues to be inverted. This may have a negative effect on our ending volume growth in 2024. Adding to the challenges are persistent disruptions of the coffee supply chain. As Ian noted, like all importers, we have had difficulty clearing shipments through the Panama Canal for several months.

Speaker 1

In addition, we have had back to back labor disputes at Board of Vancouver, the latest of which just began on Monday this week with the Foreman strike. When combined with the elevated NYC futures price, the result has been very limited spot availability of coffees to backfill supply chain issues, leading to some shortages. This situation has compelled us to add inventory from some origins during Q3 to ensure our ability to meet our commitments to customers. Finally, like businesses everywhere, Swiss Water is not immune to wider macroeconomic risks. Inflation is not fully abated and economies around the world are struggling to get a grip on it by maintaining high interest rates.

Speaker 1

The ongoing war in Ukraine and the crisis in the Middle East have disrupted the global order and continue to create a lot of uncertainty in Europe and around the world and are certainly the driver of many of the logistical challenges we are facing. Despite these challenges, we are optimistic that we will be able to deliver modest volume growth and improved profitability in 2024. Whatever the future holds, Swiss Water is now much better positioned for the years ahead. That wraps up our comments for today. And Ian and I would now be happy to answer any questions that you might have today.

Operator

Thank you. At this time, we will be conducting a question and answer session. Your first question for today is from John Sartre with Viking Capital.

Speaker 3

Good afternoon. I was wondering what was if you could tell me what the administrative expenses excluding stock based compensation for the Q3?

Speaker 2

Yes. So stock based compensation impact in the quarter was about $500,000

Speaker 3

Okay. Now I actually ran through some math just for fun. So I just annualized your 4th your 3rd quarter and I get revenue of $168,000,000 I get gross margin of $26,000,000 I get then SG and A of £13,000,000 and interest of £7,000,000 So basically, as near as I can see, you're talking earnings before interest and tax of £6,000,000 and CapEx, I'm just used £1,000,000 for the for annualized and then €7,000,000 for depreciation. And you're talking free cash flow about, I don't know, dollars 13,000,000 And I'm curious how that sort of enables you to be focused on reducing

Speaker 1

debt?

Speaker 2

I mean,

Speaker 3

you have you have $70,000,000 worth of debt excluding leases and stuff. So, I mean, it's so the $10,000,000 isn't going to make an awful lot of impact, I don't think?

Speaker 2

Well, we have over $50,000,000 of long term construction debt, which is low priced debt and the balance of our debt is working capital facility. And we just paid down $16,000,000 in a repayment from free cash flow or from cash on hand and to Mill Road Capital. So, there's been a $16,000,000 reduction in the last quarter or in the current on our debt facilities. I would like to have a lower debt balance and we will focus on reducing that as quickly as we can. Okay.

Speaker 2

Thank you.

Operator

Your next question is from Richard Rudley with Glenbrook Capital.

Speaker 4

Hi, guys. Good to hear the results. I just had two questions today. Firstly, I wanted to give us an update on the status of the California legislation regarding Methyl Chloride? And also what's the level of Board interest in developing a U.

Speaker 4

S. Trading market of the stock? Thank you.

Speaker 1

Hi, Richard. The California proposition essentially has been removed. It was tabled in I think April or May, late April basically. And there was a vote and California has decided to remove that from their docket for this year. I think that they will review it for next year.

Speaker 1

The EPA has still bans methylene chloride, however, for general use in the United States. So that's methylene chloride and then the development Board interest in the development of a U. S. Trading market. I think that there is some good interest.

Speaker 1

As you may know, we've just started research coverage with Zacks in the U. S. To begin to develop the market there. In terms of creating a separate offering, I don't necessarily think that that's on the table at this point. I think the view is that through broker accounts, people in the United States can access the marketplace.

Speaker 1

I think that that should answer your question. Hopefully, it does.

Speaker 4

Yes. Just to follow-up, I wanted to show you are you saying that you're not really anticipating a proper ATC listing in the foreseeable future?

Speaker 1

Well, I mean, we've looked at it in terms of an OTC listing. We have looked at it. I think that there is I guess there is just different points of view on it right now basically. I think from a management point of view, I can definitely see some of the value. I think there's other points of view that there's significantly additional costs to manage that and to report in the United States against it that may or may not be true, but there is a view that there is a significantly increased cost in that as well.

Speaker 1

So, anyways, I mean we can still certainly continue to debate that.

Operator

Your next question for today is from Erwin Kleinman, a Private Investor.

Speaker 5

Hello. I have two questions. The first is a follow-up of the first question. Is there do you actually have $13,000,000 of free cash flow? And the second question relates to you have enough capacity for the medium term.

Speaker 5

Can you define medium term? Is that 2 years? Is that 5 years?

Speaker 2

Well, on the first I mean, on the first question, I mean, our cash flow statement is very clear. So you can see what our cash generation is from operations. Obviously, we have we were at the end of the quarter, we were holding a significant amount of cash on our balance sheet that has subsequently been repaid. We are expecting to continue to grow to generate cash flow from operations going forward. And I would expect to see continuing trend of cash accumulation in the business.

Speaker 1

And in terms of when we say medium term, I think we're thinking 3 to 5 years in that range

Speaker 2

with some yes.

Operator

We have reached the end of the question and answer session. And I will now turn the call over to Frank for closing remarks.

Speaker 1

Okay. Well, if there are no further questions for today, we will conclude today's call and wish everyone good health and thank you for joining us.

Operator

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
Swiss Water Decaffeinated Coffee Q3 2024
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