Swiss Water Decaffeinated Coffee Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 11, 2023

There are 4 speakers on the call.

Operator

Before Swiss Water Decaffeinated Coffee, Inc. 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 are 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 cause actual results to differ materially from those expressed in Forward looking information. Swiss Water Decaffeinated Coffee, Inc.

Operator

Does not assume responsibility for the accuracy and completeness of its 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. Please refer to the Swiss Water Decaffeinated Coffee Inc. Management discussion and analysis posted on SEDAR and Swiss Water's website a full discussion regarding the forward looking statements and the risks therein, it is now my pleasure to turn the floor over to your host, Frank Dennis, President and CEO of Swiss Water Decaffeinated Coffee Inc. Sir, the floor is yours.

Speaker 1

Thank you, Matthew. Good morning, everyone, and thanks for taking the time to join us again. I'm Frank Dennis, President and CEO of Swiss Watery Caffeinated Coffee Incorporated. With me is Ian Carswell, our CFO. Ian and I are here today to discuss Swiss Water's financial results for the 3 months ended March 31, 2023.

Speaker 1

As usual, I'll begin with a brief review of our performance, then Ian will provide more detail about our As outlined in yesterday's press release and in our MD and A, Ian and I are pleased to report that the strong performance Swiss Water achieved during 1st quarter revenue was $49,000,000 a 28% improvement over Q1 last year, while adjusted EBITDA also increased by the same percentage to $5,000,000 As always, volumes were the key driver of our performance with total volumes growing by 21% in the quarter. It's particularly encouraging that volumes delivered in North America, which is our largest geographic market, were up by 35% in the quarter. In addition to organic growth, volumes delivered to the new customers and brands we've added in recent quarters are increasingly contributing to our North American business. Looking at international markets together, volumes were down 16% when compared to Q1 of last year. In the Asia Pacific region, this was mainly due to order timing issues, and we expect volumes there to increase over the balance of the year.

Speaker 1

While in Europe, strong inflationary pressure and excess roaster inventories are limiting resupply in that region. Speaking of timing, a high percentage of our overall growth in the Q1 was due to an increased concentration of customer volume in advance of the planned shutdown of our Burnaby production facility. As I'm sure you know by now, we must be out of the Burnaby site by early June due to the expiry of our lease there. We decaffeinated our last bag of coffee in Burnaby April 19 and have now consolidated all of our production at Since commissioning of this new Delta Line 2 project will not Completed until the end of August, we are now in a transition period during which our production capacity is temporarily constrained. We have been very proactive in alerting our customers that this transition was coming and have encouraged them to incorporate it into their production planning.

Speaker 1

Anticipating and understanding this, many of our customers move the timing of their orders up into the Q1 to ensure that they would have sufficient inventory on hand to bridge the transitional gap. We have also built our own inventory to enable us to meet customer demand through this transition. The shutdown of Burnaby has also had an effect $100,000 compared to net income of $1,400,000 versus year ago. The quarterly loss this year was due to a $2,100,000 onetime non cash depreciation charge or write down on the plant and equipment that was not salvageable at the Burnaby site. As I've explained previously, in preparing to shut down for the facility and vacate the site, we undertook a detailed analysis of our Burnaby assets with the help of an outside engineering consulting firm.

Speaker 1

This process carefully considered the potential future use, costs and benefits and related cash flow impacts involved in removing I will give you more detail on our Burnaby exit plan later in this call. Strong operating results we achieved in 2022 and in Q1 of this year were achieved despite the inflationary pressures that all businesses face today because of a number of positive factors that are benefiting Swiss Water. The first and most important of these are the recovery of demand from the vital out of home coffee market the food service economy everywhere returns to normal and more and more people return to their offices and workplaces, Q1 was the final quarter to lap the heavy North American outlets in our key markets adapt to increasing environmental responsibility and food safety requirements. Coffee roasters and coffee consumers are increasingly choosing chemical free water processed like ours, over coffee decaffeinated with methylene chloride or ethyl acetatesugarcane, particularly the premiums at specialty end of the market as first and fast adopters. The normalization of the out of home coffee market helped us increase volume shipped to our higher margin specialty roaster by 16% during the Q1.

Speaker 1

Adding to this was a 24% quarterly increase in volume shipped to our large commercial roasters to serve the in home coffee market primarily through the grocery channel. In both roaster categories, the strong volume growth reflected Not only the front loading of orders I've outlined, but also growing demand for the PCAP generally, as well as an increasing number of industry participants converting to our chemical free process. Now before I tell you more about the progress of the Delta Line 2 project and our exit from the Burnaby site as well as 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 2

Thank you, Frank, and good day, everyone. As always, I'll begin my review with volumes shipped to customers as this The key metric that drives our financial performance. As Frank indicated, Swiss Water's processing volumes continue to grow 3 months to March 31. Taken together, volumes shipped to customers in all catch fleets were up by 21% in the quarter. While organic growth with existing customers played a role, The big factor here was a concentration of volume in advance of the shutdown of our legacy production facility in Burnaby.

Speaker 2

As Frank explained, we've been very proactive in communicating with customers about the temporary production constraints we will be under during the transition between our exit from Burnaby and the full and final commissioning of our Delta Line 2 in the Q3. Knowing this, many of our customers pulled their orders forward into the Q1. 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 up by 44% in the quarter, while shipments to importers, those customers who resell our coffees to roasters where and when they need it or unchanged from the Q1 2022 level. Looking at the roaster segment another way, as Frank noted, Specialty roaster account volumes continue to trend upward, growing by 16% in the quarter. These accounts serve the out of home consumer primarily And the strong annual growth here reflects the strength of traffic to cafes and restaurants in our key geographic markets.

Speaker 2

Shipments to large commercial roasters were also up significantly, growing by 24% in the quarter. As we've noted, a lot of this growth was due to Customers adding inventory in preparation for the temporary reduction in our production capacity during the second and third quarter as we transition all production out of our Burnaby facility to Delta. Turning now to revenues. 1st quarter revenue of $49,000,000 was up by $10,600,000 or 28% from Q1 of last year. The revenue increase was due to the growth in our volumes as well as the appreciation of U.

Speaker 2

S. Dollar when compared to the same period in 2022, record levels of activity and an increased financial contribution from our Seaforth Coffee Handling and Logistics subsidiary also had a positive impact. Looking at the cost side, Our first quarter cost of sales was $44,200,000 an increase of $11,500,000 or 35% compared to Q1 last year. The increase was mainly driven by our increased production volumes, the significant one time increase in depreciation expense associated with the write down of non salvaged assets at our Burnaby location and to a lesser extent inflationary pressure on our variable production and freight costs. As to green coffee costs, while remaining at historically high levels, the NYC was down from US2.35 dollars per pound in Q1 2022 to US1.74 dollars in the Q1 of this year.

Speaker 2

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, our exposure to changes in the exchange rate is managed in part through derivative financial However, all other factors being equal, we benefit when the U. S.

Speaker 2

Dollar appreciates as it did during the Q1 of this year. In Q1, the U. S. Dollar averaged CAD1.35 up CAD0.08 from CAD1.27 in the first First quarter gross profit was $4,900,000 a decrease of $900,000 when compared to Q1 of 2022. And gross profit percentage decreased from 15% last year to 10% in the Q1 of this year.

Speaker 2

The drop in gross profit was primarily driven by $2,100,000 increase in depreciation expense. As with the $2,500,000 impairment charge we took in the Q4 2022, this is a one time non cash expense resulting from an assessment of the salvageable assets at our Burnaby production facility in advance of the lease expiry there in June of this year. To a much lesser extent, inflationary pressure on our variable production of freight costs also had a negative impact. 1st quarter operating expenses were $3,500,000 up by $600,000 when compared to Q1 2022. The administrative portion of operating expenses was up by 28% in Q1 due to general inflationary pressure, higher insurance fees The increased headcount and salaries as well as the costs associated with operating 2 facilities, including depreciation and rental expenses.

Speaker 2

The sales and marketing component of operating expenses was unchanged from Q1 of last year. As we move Through the balance of 2023, we expect our sales and marketing costs to increase over last year's level due to higher headcount and salaries as well as I'll return to normal travel and trade activity trade show activity. Q1 operating income was $1,400,000 compared to $2,900,000 in the Q1 Again, the big driver of the drop in operating income was the increase in depreciation expense and to a lesser extent the inflationary pressure on our variable production and freight costs. Turning to net income. We reported a net loss of $700,000 for the quarter compared to net income of 1,400,000 dollars in Q1 last year.

Speaker 2

As with operating income, the drop in quarterly net income was largely a result of the $2,100,000 increase in depreciation expense. In addition, we incurred a $1,000,000 non cash loss on the revaluation of Swiss Water's embedded option within our debentures with warrants. These negative factors were partially offset by the positive impact of the strong volume growth we achieved during the quarter. 1st quarter net finance costs of $1,400,000 were up by $300,000 or 23% over Q1 of 2022. The increase was primarily due to higher outstanding balances on our construction loans and credit facility as well as higher variable interest rates.

Speaker 2

Despite inflationary pressure during the quarter, we achieved a significant improvement in adjusted EBITDA. 1st quarter adjusted EBITDA of $5,000,000 It's up by $1,100,000 or 28 percent compared to Q1 of 2022. Operationally, our adjusted EBITDA improvement was driven by our Strong volume growth during the period. As I've noted, these positive impacts were partially offset by inflationary impacts and the incremental Labor and production expense associated with operating at 2 standalone facilities. Now that we are consolidating all production at our Delta location, The resulting efficiencies will bring down our operating costs going forward.

Speaker 2

With that, I thank you for your attention. And now I'll turn things back over to Frank.

Speaker 1

Thanks, Ian. As Ian and I have indicated, we're encouraged by the fact the positive momentum we saw building across the business in 2022 Forward into the Q1 and net roaster customers have worked with us to preload some inventories ahead of our summer capacity restriction. As we look ahead into the balance of 2023, we are continuing to see a strong order book, particularly for late Q3 and early Q4. And while trading conditions are generally favorable in our key markets, as ever more industry participants move away from chemical decaffeination in favor of chemical free processes, 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 it by raising interest rates. The ongoing war in Ukraine has disrupted the global order and continues to create a lot of uncertainty in Europe and around the world. And here at Swiss Water, while the supply chain disruption to the last few years have eased, we continue to experience some delays in coffee deliveries from certain regions. As we've noted, we are experiencing very significant inflationary pressure on virtually all of our input costs from natural gas to freight to labor. These risks and increasing costs demand our close attention and may require further mitigation measures.

Speaker 1

Right now, we are sharply focused on completing and initiating production on Delta Line 2, the 2nd new decaffeination line here at our Delta, BC location, while preparing our Burnaby site for return to the landlord in June. Looking at operations, During most of the Q1, we ran both decaffeination lines in Burnaby on a 20 fourseven basis. As I noted earlier, we ceased production at this facility in April.

Speaker 2

Here at

Speaker 1

Delta, the initial decaffeination line, which we designate Delta Line 1, operated smoothly and efficiently, also on a 20 fourseven basis throughout Q1. Since its start up, we have been gradually increasing the processing speed of Line 1 as we work to optimize and maximize its production. As I noted earlier, we expect to be producing commercial grade coffee from this new line by late Q3. While our production capacity will be temporarily constrained until then, the inventory of green coffee we have on hand together with the front loaded orders we on behalf of our customers in Q1 and the uninterrupted capacity on Delta Line 1 should be sufficient to meet demand during the transition period. This transition marks the culmination of a nearly 10 year project to relocate, modernize and expand the capacity of Swiss Water's production assets.

Speaker 1

The consolidation of all production in Delta will provide us with a number of operational efficiencies as well as capacity for intermediate term growth. As I've noted before many times based on engineering reports from a 3rd party engineering firm, we expect that 2 new lines in Delta together will have a target End capacity of at least 40% greater than the old Burnaby facility as a standalone facility. The curtailment in volume during the transition will Temporarily reduce our sales and likely lead to lower earnings year over year when we report results for the 2023 fiscal year. However, Swiss Water will be much better positioned for the future when the process is completed. As to budget, The preliminary cost estimate for design and construction of the Line 2 project in Delta was approximately $45,000,000 plus commissioning costs of around $2,000,000 During the second half of twenty twenty two, the impact of global macroeconomic pressures, including inflation, building trades disruptions, poor sub trade efficiencies And supply chain issues became more acute in terms of their impact on our project budget and schedule.

Speaker 1

Given the impact of these factors, We revised the Line 2 construction budget to a total of $53,000,000 The original $2,000,000 commissioning budget remains unchanged. The revised cost estimate reflects the inflationary factors realized or projected to date. There are also material costs involved in shutting down our legacy Burnaby facility, Salvaging whatever equipment was deemed economical and vacating and preparing the site for return to the landlord. The preliminary budget to complete our exit From Burnaby was $1,500,000 and we have estimated a 20% contingency set aside for this project. With last year's incremental $12,000,000 expansion of our senior term credit facility, along with our existing available credit Projected internally and generated cash flow, we have sufficient funds to complete both Delta Line 2 and the Burnaby exit plan.

Speaker 1

That wraps up our comments for today. Ian and I would now be happy to answer any questions that you might have.

Operator

Certainly. At this time, we'll be conducting a question and answer session.

Speaker 3

Hello. Just a question about the Land that you have for the Delta site, now my understanding is that you're leasing this, but you have an option to purchase. What is the duration of your current lease on that site?

Speaker 2

So we signed a 30 year lease or we signed a lease with It was initial 10 year term with options to renew beyond that. But yes, the lease runs to a maximum of 30 years.

Speaker 3

And you also have an option to purchase on it, right?

Speaker 2

Yes, option to purchase At various increments throughout that 30 year period.

Speaker 1

All

Speaker 3

right. Those would be 10 year renewals if you take them?

Speaker 1

Yes, it's at the 10 year period. So basically, Lyle, yes, that's a critical difference and obvious one obvious key learning That we had to apply into the new Delta facility was the difficulty in moving A massive production facility out of Burnaby. In fact, you can't really move it while still producing at capacity. And so the option to buy was not built in and we have Sorry, it was not built into Burnaby ever, and of course, it's been built into Delta. And we have prescribed

Speaker 3

right. Thank you.

Operator

Thank you, Thank you. That concludes our Q and A session. I'll now hand the conference back to our host for closing remarks. Please go ahead.

Speaker 1

Okay. Well, if there are no further questions, I'll conclude today's call. And Ian and I wish you a great day, and thank you for joining us.

Operator

Thank you, everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.

Powered by Quartr
Earnings Conference Call
Swiss Water Decaffeinated Coffee Q1 2023
00:00 / 00:00