Swiss Water Decaffeinated Coffee Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 9, 2023

There are 3 speakers on the call.

Operator

And welcome to the Swiss Water Decaffeinated Coffee Incorporated Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. Before Swiss Water Decaffeinated Coffee Incorporated Since the call starts, they are required to remind you that certain information in today's presentation is forward looking in nature.

Operator

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, uncertainties and other factors outside our control that could Call actual results to differ materially from those expressed in the forward looking information. Swiss Water Decaffeinated Coffee, Inc. Does not assume responsibility for the accuracy and completeness of the forward looking information. 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.

Operator

Please refer to Swiss Water Decaffeinated Coffee Incorporated Management Discussion and Analysis posted on the SEDAR, FEDAR and Swiss Water's website for a full discussion regarding forward looking statements and the risks therein. I will now turn the conference over to your host, Mr. Frank Dennis, President and CEO. You may begin.

Speaker 1

Thank you, Jamie. Good morning, everyone, and thank you 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, 2023.

Speaker 1

As usual, I'll begin with a brief review of our performance, and Neil will provide more detail about our financial results Before I return to tell you about our longer term plans and expectations. As outlined in yesterday's press release, In our MD and A and on our recent earnings calls, the Q3 of this year fell within a transitional period for Swiss Water. As such, our financial performance during the quarter and 1st 9 months of this year was not typical of what we have delivered in recent periods nor of what you can expect going forward. We decaffeinated the last bag of coffee at our legacy production facility in Burnaby, BC in April as we prepared to permanently shut down our 2 decaffeination lines there and vacate the site on the expiration of our lease in June. As the Burnley assets ceased production before our new second decaffeination line at our Delta facility was fully operational, We began bridging a short period of capacity constraint during the quarter.

Speaker 1

This transitional period stretching from April through August This year was expected and carefully planned for. Several months ago, we began working proactively with all of our customers and suppliers to ensure that they were aware of what to expect from Swiss Water regarding the production of coffee leading up to the Burnaby exit. During the period of lower production capacity Before the new decaffeination line in Delta began producing a commercially viable product. I'm happy to tell you this important milestone was achieved in August And our new Delta Line 2 is now producing decaffeinated coffee of very high quality. The optimization of Line 2 is ongoing as we continue to ramp up its production.

Speaker 1

Knowing that our capacity will be temporarily constrained during the second and third quarters, many of our customers moved the timing of their orders forward into the Q1 to ensure they had sufficient copy on hand to bridge the transition. We also built up our own inventory to enable us to meet customer demand. This had a very positive impact on our Q1 volumes and financial performance. Congratulations goes to our sales and logistics teams who performed admirably throughout the transition as they successfully manage the temporary disruption and allocation of available production capacity. Predictably, the second and third quarter Capacity constraints had an offsetting negative impact on our volumes and financial performance for both quarters and the year to date.

Speaker 1

In addition, a number of significant one time costs related to the Shustering of our old Burnaby facility impacted this year's financial results. It's important to emphasize that this was a temporary disruption of the upward trend in the Our business and in the strong performance this quarter demonstrated over the previous several quarters. Now that we have put the Burnaby access Behind us and consolidated all over production in Delta, we expect to regain our volume trajectory as we ramp up production on our second new line. Now before I tell you more about the Delta Line 2 projects and our outlook for the rest of the year, let me turn the call over to Ian to take you through our financial results. Ian?

Speaker 1

Thanks, Frank. Good day, everyone. As always, I'll begin my review with volumes shipped to customers, as this is the key metric that drives our financial performance. As a result of the temporary capacity constraints resulting from the shutdown of the two lines at our legacy Burnaby facility, Swiss Water's processing volumes were down as expected during the Q3 year to date. Taken together, volume shipped to customers in all categories were down by 31% in the quarter.

Speaker 1

For the 9 months, total volumes were down by 14%. 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 We're down by 33% in the 3rd quarter, up by only 2% for the 9 months. While shipments to importers, Those customers who resell our coffee Easter roasters where and when needed were down by 29% in the quarter by 27% for the year to date. Looking at the roaster segment another way, specialty roaster count volumes were down by 40% in the quarter and by 22% 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 1

Shipments to large commercial roasters were also down in Q3, shrinking by 25% compared to the Q3 of last year. However, 9 months shipments were less impacted, dropping by just 8% this year. Turning now to revenues. 3rd quarter revenue of $32,600,000 was down by $13,500,000 or 29% from Q3 of last While year to date revenue of $125,000,000 was down by $7,900,000 or 6% from last year's As with volumes, the drop in revenue for both peers was partially due to the temporary reduction During the transition from Burnaby's. The coffee commodity price also played a major role as the cost of green coffee we sell Customers comprise a significant proportion of our revenue.

Speaker 1

For the year to date, these negative impacts were partially offset by the exceptionally strong volumes we put through in Q1 as well as a higher U. S. Dollar exchange rate. Looking at the cost side, Our Q3 cost of sales was $29,100,000 down by $10,500,000 or 27% compared to Q3 last year. The quarterly decrease was due to the lower green coffee price and the capacity constraint and resulting reduction in volumes during the transition from Burnaby.

Speaker 1

For the year to date,

Speaker 2

the cost of sales was

Speaker 1

$113,200,000 an increase of just $600,000 substantially level with the 1st 9 months of last As to green coffee costs, the NYC was down from 2.19 per pound in Q3 2022 to $1.56 in the Q3 of this year. Foreign exchange rates can also have a material impact on our profitability and cash from operations. This is because the majority of our revenues are generated in U. S. Dollars, while a significant portion of our costs are incurred and paid in Canadian funds.

Speaker 1

Our exposure to changes in the exchange rate is managed in part through derivative financial instruments. However, all other things being equal, we benefit when the U. S. Dollar appreciates as it did during the Q3. In Q3, the U.

Speaker 1

S. Dollar Averaged CAD1.34 up CAD0.03 from CAD1.31 in the Q3 last year.

Speaker 2

As I noted, this appreciation had

Speaker 1

a positive impact on our revenues when they were converted to Canadian funds. 3rd quarter gross profit was $3,600,000 A decrease of $3,000,000 when compared to Q3 of 2022. For the 9 months, gross profit was 11,900,000 down $8,400,000 from last year's results. And gross profit percentage decreased from 15% last year to 10% in both periods this year. The drop in 9 month gross profit was primarily driven by lower volumes and a reduced green coffee differential margin.

Speaker 1

In addition, our Profitability was impacted by a one time non cash incremental depreciation expense of $2,500,000 resulting from the write down of non salvaged There was no such charge in the 1st 9 months of last year. Inflationary pressure on our variable production costs including natural gas And labor as well as on freight and warehousing also had a negative impact. 3rd quarter operating expenses were $2,900,000 Up by $500,000 when compared to Q3 2022. For the 9 months, operating expenses were $9,600,000 down by $100,000 from The administrative portion of operating expenses was down by 25% in Q3 and by 6% for the 1st 9 months of this year, largely due to a material reduction in professional fees. You may recall that last year, we incurred higher professional fees related to the refinancing of our debt The year over year benefit was partially offset by general inflationary pressure and higher insurance fees as well as the absence of credits from scientific research and experimental development this year.

Speaker 1

The sales and marketing component of operating expenses was up by $100,000 For the Q1, it turned by $300,000 for the 9 months. As expected, our sales and marketing costs continue to gradually increase over last year's level due to a return to normal travel and trade show activity as well as a slightly higher headcount and salaries. Q3 operating income of $758,000 was down by $2,500,000 from the Q3 of 2022. 9 month operating income was $2,300,000 a decrease of $8,300,000 Again, big drivers of the drop in operating income were reduction production capacity during the transition out of Burnaby, materially lower green coffee differential margins, the one time increase in depreciation And to a lesser extent, the inflationary pressure on our variable production and freight costs. Turning now to net income.

Speaker 1

We reported a net loss $400,000 for the quarter compared to a loss of $200,000 in Q3 last year. For the year to date, we recorded a loss of $1,500,000 This was down by $4,100,000 from net income of $2,600,000 in the 1st 9 months of 2022. As with gross profit And operating income. The drop in quarterly and year to date net income was largely the result of the same factors as well as a material increase in finance expense associated with increased borrowing under our debt facilities. These negative factors were partially offset by improvements in risk management activities, a revaluation of Thanks.

Speaker 1

3rd quarter net finance costs of $1,800,000 were up by $600,000 or 40 percent over Q3 of 2022. For the year to date, finance expenses were $4,800,000 up by $1,100,000 or 31% from last year's level. The increase was primarily due to higher outstanding balances on our construction loans and credit facility as well as higher variable interest rates. 3rd quarter adjusted EBITDA of $1,500,000 was down by $2,800,000 from Q3 2022. And for the 1st 9 months of this year, we recorded adjusted EBITDA of $8,300,000 down by $5,200,000 from the same period last year.

Speaker 1

The decrease in both periods was mainly driven by our lower volumes due to the transitional capacity And the reduced green coffee differential margin. With that, I thank you for your attention and I'll turn the call

Speaker 2

over to Paul.

Operator

Thank you

Speaker 1

very much, Ian. As we look ahead into the balance of 2023, we have a We are seeing a strong order book as some orders have been backlogged awaiting a return to normal operations and new capacity. In general, trading conditions remain favorable in our key markets as ever more industry participants move away from chemical decaffeination in favor of chemical free processes like ours. However, caution continues to be called for. Like businesses everywhere, Swiss Water is not immune to current and emerging macroeconomic risks.

Speaker 1

Inflation is becoming increasingly entrenched and economies around the world are struggling to get a grip on by raising interest rates. 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. Here at Swiss Water, while the supply chain disruptions of the last few years have eased, we continue to experience minor delays in coffee deliveries from certain origins. Last summer's labor dispute and temporary shutdown of the Board of Vancouver was another illustration of the brittleness of the international supply chain. And as we've noted, Swiss Water is experiencing very significantly inflationary pressure on virtually all of our input costs from natural gas to freight and to labor.

Speaker 1

These risks and increasing costs demand our close attention and may require further mitigation measures. We're seeing our operations during the 1st 9 months of the year. Until the shutdown in late April, we ran both decaffeination lines in Burnaby on a 20 fourseven basis. Q and Delta, the initial decaffeination line, which we designate Delta Line 1, operated smoothly and efficiently also on a 20 fourseven basis throughout the 1st 9 months of the year. And beginning in August, With the first bag of saleable coffee coming off Delta Line 2, our newest production asset is now gaining speed and efficiency with everyday capacity.

Speaker 1

As for the Delta Line 2 project budget, as previously disclosed, the Line 2 construction budget totaled $53,000,000 plus a $2,000,000 commissioning budget. The project was completed within this budget and final invoices will be settled in Q4. There were also material costs involved in shutting down our legacy Burnaby facility, Salvaging whatever equipment was deemed economical and vacating and preparing the site for the return to the landlord. Preliminary estimate to complete our exit from Burnaby was $1,500,000 and the final cost was lower at $1,300,000 It's important to note that the curtailment in volume we absorbed in Q2 and Q3 of this year and the one time costs related to vacating Brinavie will likely lead to lower earnings year over year when we report results for the full 2023 fiscal year. However, Swiss Water is now much better positioned for 2024 and the years ahead.

Speaker 1

Having now completed the exit from Burnaby, we are once again operating from a single site and are moving forward with new state of the art production facilities. The consolidation of all of our production in Delta will provide us with a number of operational efficiencies as well as capacity for immediate turn growth. This transition marks the culmination of a 10 year project to relocate, modernize and expand the capacity of Swiss Water's production assets. That wraps up our comments for today. And Ian and I would now be happy to answer any of the questions that you might have today.

Operator

Thank you very much. At this time, we will be conducting our question and answer is coming from Richard Rodgely from Glenbrook Capital. Richard, your line is live.

Speaker 2

Hi, guys. Thanks for taking my A question a few questions. First of all, I just wanted to maybe I missed it. What was the dollar amount The final depreciation at Burnaby, please.

Speaker 1

Yes. The one off charge that we $5,000,000 $2,500,000 Yes.

Speaker 2

Okay. And that was equipment, if I recall correctly from previously that you decided It made no sense to move it anywhere or is this half a little bit behind. Is that correct?

Speaker 1

Yes. We worked with a 3rd party engineering firm to assess the viability Of retaining that equipment and it was judged that the right decision was to retire some of

Speaker 2

Okay. And let's say, so you had a net loss of €1,500,000 for the year to date, right, for the 1st 9 Months. And so and you're saying there's 2,500,000 Year to date or in total? So I'm not still not quite with you.

Speaker 1

Yes. The majority of that $2,500,000 charge hit during Q1 and there was a small balance came through in the beginning of Q2. But, yes, I think what you're asking is if you were to reverse out that one off charge, what would your net income be? So, yes, it would Approximately $1,000,000,000 if we hadn't had to absorb that charge on a year to date basis last year.

Speaker 2

Okay. Got it. Thank you. Yes. The thing is, we've been shareholders for at least 15, maybe 20 years.

Speaker 2

We're still biased, but Obviously, you've been in and very hard to buy. I don't know if you have any thoughts on daily volume. I mean, it's never been That large, but I'm just wondering, I know, obviously, it's long time since you paid the dividend and you probably lost some Shareholders at that juncture. But I just wonder if you had any ideas on Doing something more in terms of our activity to because it's obviously a great story and as you can tell, we're still buying After 15 years, so we believe in it as well. Just wondering if there's anything we could do to get the sort of word to go wider.

Speaker 1

Yes. Richard, hi. It's Frank.

Speaker 2

Hi, Frank.

Speaker 1

I think that we have Gone through a transition here, which has it took up a vast amount of Time and focus for us. And you are absolutely correct. The story does remain very positive and significantly more positive now that we know exactly The total capital costs to do the exit, which was partially planned, partially unplanned In terms of timing, we knew we need to do it over time. But now we have a chunk of debt on our balance sheet that we are very focused On bringing down and happy to see that we are driving EBITDA Very nicely despite some of the capacity constraints through this fall. But we continue to pick up new customers, new major customers and business development is very, very positive and we've got capacity to grow.

Speaker 1

And so building a better IR outreach is something that has definitely been in the back of my mind for the last year or so. And I think it is something that would be worthwhile. I think it's whether it's Roadshow work or whether it's just more kind of standard maybe retail investor IRR, I'm not exactly sure yet. But I would agree with you that Improving our IR outreach now that we know exactly where we stand and what we're doing and now And shortly, we'll have more options in front of us is the right thing to do.

Speaker 2

Okay. That's good to hear. And Maybe we can talk another time about how we might be able to help with that. I don't know if you thought about an OTC listing as well since a lot of your Business is in the U. S.

Speaker 2

As well. That's funny. We actually did think about that

Speaker 1

about a year and a half ago, 2 years ago and we stopped that because we were involved in this whole transition. So thanks for bringing that back up again. Yeah.

Speaker 2

Okay. And also on a slightly different note, I was going to ask if you, how it's dealt with new customers, how it's going really well. So I Wondered if you could give us some geography and size of those customer brackets that You're going to more people. And I just wondered if because you do have the exceptional products in the market, As we've thought about hiring a branding firm, this again is something we could talk about another time too, if you're Interested. Maybe we have some ideas on that, but I just wonder what your thoughts are at the moment.

Speaker 1

Sure. We're very, very focused on U. S. And Asia, Japan, Japan, Korea. This is where some of our most important opportunities are.

Speaker 1

Over the past month, we have hosted 2 major Customer presentations here, which will turn positive in the coming months and probably years. Some of these many of our large customers take year, year and a half to develop and convert Just because of their how their supply chains work. So from a major customer point of view, there is Increasingly interest in our proposition because of the risks of having methylene chloride residual in coffee. And roasters are becoming very Attune to that as consumers are asking questions about residuals, regardless of how small they are, because they drink more than one decaffeinated coffee A year. They drink it every day and residuals build up.

Speaker 1

And so consumers are coming to that realization and roasters are coming to that realization and brand owners. I'm thinking specifically of a major box store chain in the U. S. Who we've had recently and is beginning to convert their Coffee to our process, which is terrific and is driving growth, as is the same story in Korea. In terms of branding, we do have branding firms.

Speaker 1

What you are seeing, I believe you are you're in Toronto, right, Richard?

Speaker 2

No, I see you. I'm quite a year. I'm based in Victoria and Salisbury.

Speaker 1

Okay, Victoria. All right. So, anyways, our branding work that we do is focused on U. S. We focus Brand awareness development in 12 major metropolitan areas all online, and our brand awareness has been increasing significantly, which Helping drive our business development in the U.

Speaker 1

S. You wouldn't see anything in Canada. It's not an investment market for us.

Speaker 2

Understood. So you mentioned that you've got some these new customers can take Maybe 18 months sometimes to transition. But you mentioned 1 in the U. S, but will you be publicly disclosing Through that Internet, it's in what country do you envisage doing so?

Speaker 1

I always like to have Some form of confirmation approval from our customers before we dialogue on names, particularly from Their own confidentiality point of view. But I think more importantly is that you'll see That work reflected in our volume, especially going into 2024 and that's an exciting Period for us for sure.

Speaker 2

Okay. Well, that's good to know. And I also, obviously, the stock price is Depressed, the volume is low. You're trading through about half of Procore, I think even less. So Would you think about doing a buyback, because it seems extremely undervalued?

Speaker 1

I would agree with your assessment that the stock is undervalued for sure. I think that we have a big chunk of debt That we're going to be focused on paying down. In 2024, we have a very, very important date in October, where we must meet A debt obligation, which right now is looking very, very positive in terms of meeting that. And our belief and the Board's belief is That through paying down debt and demonstrating that we are capable of that, we will be demonstrating more options and more optionality in the future, Which should help assist our share price as well as you mentioned some of the IR activities that we may be undertaking.

Speaker 2

So you're saying you'd rather focus solely on paying down debt Then doing a concurrent buyback, do you mean you don't have any covenants that disallow you from doing

Speaker 1

I think our primary focus is right now is to focus on deleveraging and Reducing the level of debt. No alternative options as We as management and the Board see them emerging. It will be discussed. But Yes. I think Frank is correct.

Speaker 1

I think the focus on the leverage reduction is the primary focus Yes. I think give us 12 months Richard and maybe ask us some of those questions then. But I appreciate your questions and I'm going to ask maybe that we go to the queue now and see if there are other questions. And you can give us a callback and we can have further dialogue. We'd be happy to do that.

Speaker 2

Okay. Sounds good. I'll let you go. Thank you. Excellent.

Speaker 2

Thank you, Richard. Appreciate it.

Operator

Thank you very much. Okay. We don't appear to have any further questions in the queue. I will now hand back over to Frank for Any closing remarks?

Speaker 1

Certainly. Well, we appreciate the fulsome questions from Richard Rutzer today. And being there's no other questions today, we will conclude today's call. Thank you very much for joining us and we will see you at the next quarter.

Operator

Thank you very much. This does conclude today's conference call. You may disconnect your phone lines at this time. Thank you for your participation.

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Swiss Water Decaffeinated Coffee Q3 2023
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