Swiss Water Decaffeinated Coffee Q4 2023 Earnings Call Transcript

Key Takeaways

  • 2023 marked a transformational year with the relocation and expansion to a single state-of-the-art facility in Delta, BC, causing planned capacity constraints from April to August as the legacy Burnaby lines were shut down and the new Seca line ramped up.
  • Fourth-quarter volumes jumped 17% year-over-year, reversing earlier declines, while full-year volumes fell 7% due to the transition, driving Q4 gross profit of $6.9 million, up $1.2 million from 2022.
  • Full-year 2023 net loss of $0.5 million versus $2.4 million net income in 2022 reflected temporary shutdown costs, lower green-coffee differential margins, and higher finance expenses from increased borrowings and interest rates.
  • By year-end, inventories dropped from $60.2 million to $30.3 million, releasing $17 million of working capital used to begin debt reduction, and Swiss Water plans to fully repay a $15 million debenture in October 2024.
  • Looking ahead, Swiss Water expects to leverage its consolidated Delta capacity, diversify its global customer base, and capitalize on growing demand for chemical-free decaffeination, while monitoring inflationary and geopolitical risks.
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Earnings Conference Call
Swiss Water Decaffeinated Coffee Q4 2023
00:00 / 00:00

There are 5 speakers on the call.

Operator

Good day, and welcome to the Swiss Water Decaffeinated Coffee, Inc. Conference Call. At this time, all participants are on a listen only mode. After management's prepared remarks, there will be a question and answer session. Before the Swiss Water Decaffeinated Coffee Inc.

Operator

Conference call starts, they are required to remind you that certain information in today's presentation is forward looking and in nature. Any such forward looking information or statements are based on the assumptions that they 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 the forward looking information. Swiss Water to Caffeine and Coffee, Inc. Does not assume 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 to Caffeine and Coffee Inc. Management 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. Please go ahead.

Speaker 1

Thank you, Kelly. Good afternoon, everyone, and thanks for taking the time to join us. I'm Frank Dennis, President and CEO of Swiss Water Coffee, Inc. With me is Ian Carswell, our CFO. Ian and I are here today to discuss Swiss Water's financial results for the 3 12 months ended 31, 2023.

Speaker 1

As usual, I'll begin with a brief review of our performance, then Ian 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 last few earnings calls, 2023 was a transitional and in fact a transformational year for Swiss Water. It brought about the culmination of a multiyear project to relocate, modernize and expand the capacity of our production assets and returned all operations to a single site, our newly expanded state of the art facility in Delta, BC. As those of you who follow our story will recall, we decaffeinated the last bag of coffee at our legacy production facility in Burnaby, BC in April as we prepare to permanently shut down our 2 decaffeination lines there and vacate the site on the expiration of our lease in June. As the Burnaby asset ceased production before our new Seca decaffeination line at our Delta facility was fully operational, we began bridging a short period of capacity constraint during the second and third quarters.

Speaker 1

This transitional period stretching from April through August was expected and carefully planned for. Several months beforehand, we began working proactively with all our customers and suppliers to ensure that they were aware of what to expect from SwissWel. We also built up our inventory to enable us to meet customer demand. Throughout the year, our sales and logistics teams worked tirelessly to manage our capacity and the allocation of available production. Anticipating the transitional constraints, our team successfully front end loaded significant customer demand into Q1 before our Burnaby shutdown, enabling balanced customer service through Q3 and facilitating an acceleration of sales during Q4.

Speaker 1

Key milestone was achieved in August when production on our new Delta Line 2 began. Soon it was producing decaffeinated coffee of Swiss Water branded quality. Predictably, the second and third quarter capacity constraints had a negative impact on our volumes and financial performance. And in addition, a number of significant one time costs related to the shuttering of our old Burnaby facility affected our 2023 financial results. It's important to emphasize that this was a temporary disruption of the upward trend in the growth of our business and in the strong performance that Swiss Water demonstrated over several quarters leading up to our transition out of our legacy Burnaby facility.

Speaker 1

By the Q4, with the Burnaby exit and temporary capacity restraints behind us, the positive momentum was apparent. With all our production consolidated at one location in Delta, we began to regain our volume trajectory as we continue to ramp production on our new second line. The numbers tell the story. 4th quarter volumes were up 17% from 2022 levels and we saw strong growth from all customer categories. Our key profitability metrics were improving, our inventory levels were favorable and the outlook for 2024 and beyond was positive.

Speaker 1

Now before I tell you more about what we see ahead for this year and beyond, let me turn the call over to Ian to take you through our financial results. Ian?

Speaker 2

Thank you, Frank. Good day, everyone. As always, I'll begin my review with volume shipped to customers as this is the key metric that drives our financial performance. As expected, with the temporary capacity constraints resulting from the shutdown of the two lines at our legacy Burnaby facility behind us, Swiss Water's processing volumes recovered nicely during the Q4. Taken together, volume shipped to customers in all categories were up by 17% in the quarter when compared to Q4 of 2022.

Speaker 2

However, the capacity constraints we experienced during the second and third quarter transition resulted in a 7% decline in volumes for the full 2023 fiscal year. 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 16% in the 4th quarter and by 2% for the year. While shipments to importers, those customers who resell our coffees to roasters where and when they need it were up by 20% in the quarter, but down by 17% for the 12 months. Looking at the roaster segment another way, specialty roaster account volumes were up by 8% in the quarter and down by 15% for the year. 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 recovered strongly in Q4, rising by 26% compared to the Q4 of 2022. However, for the full year, shipments to these customers were essentially flat, declining by 1% from the 2022 level. Turning now to revenues. 4th quarter revenue of $41,200,000 was down by $2,800,000 from Q4 of last year, while annual revenue of 166,300,000 was down by 10,700,000 from the 2022 level. As with volumes, the drop was an expected result of the temporary reduction in capacity we experienced during the second and third quarters as we transitioned production out of Burnaby.

Speaker 2

Higher than normal volume shipped in the 1st and 4th quarters helped mitigate the impact of this temporary capacity constraint. A decline in the NYC and in coffee differential margins also contributed to the year over year decrease in both periods as recovery of the cost of the green coffee we resell to customers comprises a significant portion of our revenue. Looking at the cost side, our Q4 cost of sales was $34,300,000 down by $3,900,000 or 10% compared to Q4 of 2022. For the year, cost of sales was $147,500,000 a decrease of $3,400,000 or 2% from 2022. The decrease in Q4 was primarily driven by a lower green coffee price and lower coffee differentials, while the capacity can strength and resulting reduction in volumes during the transition from Burnaby had a more considerable impact on the annual number.

Speaker 2

Full year cost of sales was also partially offset by a one time incremental depreciation expense of $2,500,000 booked during the first half of the year. This resulted from the write down of production assets at our old Burnaby facility. A reduction in freight activity also had an impact. As to green coffee costs, the NYC was down slightly from US1.77 dollars per pound in Q4 2022 to US1.74 dollars in the Q4 of 2023. However, for the full year, the NYC was down by $0.42 or 20 percent averaging US1.72 dollars per pound compared to an average of US2.14 dollars per pound in 2022.

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 in paid Canadian funds. Our exposure to changes in the 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 during 2023. At an average of CAD1.36 in Q4, the U. S.

Speaker 2

Dollar was unchanged from the same period in 2022. However, at an average of CAD1.35 for the full year, U. S. Dollar was up by CAD0.05 from CAD1.30 in 2022. This appreciation had a positive impact on our annual revenues when they were converted to Canadian funds.

Speaker 2

4th quarter gross profit was $6,900,000 an increase of $1,200,000 when compared to Q4 of 2022. For the full year, gross profit was $18,800,000 down by $7,300,000 from the 2022 result. The 4th quarter increase in gross profit was primarily due to higher volumes and efficiencies of scale leverage from within our production process. During Q4, the consolidation of all production into a single facility also began to generate savings from reduced building maintenance, utilities consumption, staffing and transportation between locations. These savings will become more evident in future quarters now that we are operating from a single location.

Speaker 2

As anticipated, the drop in annual gross profit was largely due to the temporary production constraint during our transition out of Burnaby, as well as materially lower green coffee differential margins and a one time non cash depreciation expense of $2,500,000 In addition, we had to contend with inflationary pressures on our variable production costs, including natural gas, carbon and labor as well as on freight and storage costs. Looking at the expense side, our 4th quarter operating expenses were $3,500,000 up by 600,000 dollars when compared to Q4 of 2022. For the full year, operating expenses were $13,200,000 up by $500,000 from the 2022 level. The administrative portion of operating expenses was up by 32% in Q4 and by 2% for the year, largely due to general inflationary pressure and slightly increased headcount and salaries. As with the quarterly improvement in gross profit, these increases were partially offset by efficiencies resulting from consolidation of all our operations in Delta.

Speaker 2

The sales and marketing component of operating expenses was unchanged in the quarter and up by 300,000 or 8% for the year. As expected, our sales and marketing costs continue to gradually increase due to a return to normal travel and trade show activity within the coffee industry. Q4 operating income of $3,400,000 was up by $580,000 from the Q4 of 2022. Full year operating income was 5,600,000 dollars a decrease of $7,800,000 from 20 22's result. Again, the big drivers of the drop in annual operating income were transition out of Burnaby, materially lower green coffee differential margins, the increase in depreciation expense and to a lesser extent the inflationary pressure on our variable production and freight costs.

Speaker 2

Turning now to net income. We reported net income of $1,000,000 for the quarter compared to a loss of $254,000 in Q4 last year. For the year, we recorded a net loss of $500,000 down by $2,900,000 from net income of $2,400,000 in 2022. As with gross profit and operating income, the drop in annual net income was largely a result of the same factors as well as material increase in finance expense associated with increased borrowings and higher interest rates under our debt facilities. These negative factors are partially offset by improved risk management activities, a revaluation of Swiss Water's embedded option within our debentures with warrants, higher finance income, reduced loss on foreign exchange and lower income tax expense.

Speaker 2

4th quarter net finance costs of $1,800,000 were up by $400,000 or 31 percent over Q4 2022. For the year, finance expenses were $6,600,000 up by $1,600,000 dollars from the 2022 level. The increase was primarily due to a higher outstanding balance on our construction loans and credit facility as well as higher variable interest rates. 4th quarter adjusted EBITDA of $5,000,000 was up by $1,900,000 from Q4 of 2022 And for the year, we recorded adjusted EBITDA of $13,400,000 down by $3,300,000 from the 2022 result. The quarterly increase reflects the return to normal and in fact higher production volumes as well as efficiencies of scale.

Speaker 2

The decrease in annual EBITDA was mainly driven by our lower volumes due to the transitional capacity constraints and the reduced green coffee differential margin. As Frank noted earlier, we built up inventory levels during the Q1 to ensure that we had sufficient coffee on hand to meet customer demand during the transition from Burnaby when our production capacity was temporarily constrained. However, during the second half of the year, the commissioning of our second production line in Delta led to an acceleration in raw material usage and increased shipments of finished goods. As a result, inventories closed 2023 at their lowest level since Q1 of 2021. This generated a material release of working capital back into the business.

Speaker 2

By the end of the Q4, the value of inventory on hand had dropped to $30,300,000 from $60,200,000 at December 31, 2022. This provided an opportunity for us to pay down some $17,000,000 of our debt while leaving adequate inventory on hand to support operations and near term growth. With the construction of our new production assets now complete and fully paid for, debt reduction is a priority and focus for Swiss Water going forward. Under the terms of our agreement with Mill Road Capital, we are scheduled to fully repay the $15,000,000 debenture with warrants held by Mill Road in October of this year. Having finished the 2023 fiscal year in a strong liquidity position with over $11,000,000 cash on hand, we expect to be able to fund this obligation with a combination of available cash reserves and proceeds from future operations.

Speaker 2

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

Speaker 1

Thank you very much, Ian. As we look ahead into the future, we are very optimistic. Swiss Water's production activities are now fully consolidated into one site and the transition away from production assets in Burnaby is complete. We have now begun to reduce our debt levels and are once again sharply focused on growing the business. We are moving forward with a diversified global customer base, new state of the art production facilities, quality products, growing demand, a strong brand and a proven team.

Speaker 1

Looking ahead, the two lines in Delta now provide us with a very good capacity capability over the next several years with limited additional investment required. Optimization is a core skill set at Swiss Water. And through ongoing optimizations, we will service the growing demand for chemical free decaffeination as coffee roaster and consumer demand shift toward transparency in food manufacturing. In general, trading conditions remain favorable in our key markets and we see growing demand as increasingly industry participants move away from chemical decaffeination in favor of chemical free processes like ours. That said, caution continues to be called for.

Speaker 1

Like businesses everywhere, Swiss Water is not immune to current and emerging macroeconomic risks. Inflation has not fully abated and economies around the world are struggling to get a grip on it by raising or at least maintaining high 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. Pure Swiss Water, while the supply chain disruptions of the last few years have eased, we continue to experience some delays in coffee deliveries from certain origins. Last summer's labor dispute and temporary shutdown of the Port of Vancouver was another illustration of the brittleness of the international supply chain, while the current sustained low water levels in the Panama Canal are amongst this year's drivers of coffee delivery delays.

Speaker 1

And as we've noted, Swiss Water is experiencing inflationary pressure on virtually all of our input costs. These risks and increasing costs demand our close attention and may require further mitigation measures. Whatever the challenges the future brings, Swiss Water is now a much better position for 2024 and for the years ahead. That wraps up our comments for today. Ian and I would now be happy to answer any questions that you might have.

Speaker 1

Kelly?

Operator

The floor is now open for questions. There are no questions in queue at this time.

Speaker 3

We do have a question. Sorry.

Operator

I'm sorry. We do have one question from Michelle. Please pose your question. Your line is

Speaker 3

Hi. I'm just an individual investor. And so first of all, congratulations on all the progress you've made. And secondly, I guess I would like to say that, of course, I know that you have in October the massive debt repayment. But then coming down in the future a few years from now, do you predict that the dividend will come back?

Speaker 2

Thanks for your question, Michelle. It's not the first time I've had this question. Yes, we appreciate that we've not paid a dividend for the last number of years. It's something that our board and management constantly review. And so we will continue to review that and as and when we feel the time is appropriate, we'll make that decision.

Speaker 3

Okay. I have one more question. And it's regarding the visibility of Swiss Water Process as a company and a brand, I suppose. I was at my friend's house a while ago and they had some coffee from Costco and it was decaffeinated and it said Swiss Water decaffeinated on it, but it didn't have your logo and it didn't seem to be branded as such as coming from your company. And so I guess I was wondering, are there other companies that are your competition or is it just do you do their business or I guess I'm just wondering like why wasn't your brand on there?

Speaker 1

Yes. So that's a good question, Michelle. Thanks for first of all, thanks for noticing product at Costco. Nice. Assuming you're in Canada, yes, we do that product.

Speaker 1

And basically, every brand owner, so in other words, Costco Kirkland, I guess, would be the brand name, has a choice as to whether or not they tell the consumer that they're using our product or not. And if they tell the consumer, they also have the choice to use the word mark, which would be Swiss Water or the trademark. And some use just the word mark and in Canada, in fact, that's the case. However, happy to say that the Kirkland product, Costco product in the West Coast of the USA in fact does use our trademark, our logo on the front of their package. So that's something that our marketing team constantly works towards is enabling the visibility of our trademark wordmark, preferably the trademark of course.

Speaker 1

And that would be an opportunity for us to have the conversation with Costco Canada and those who supply Costco Canada because there will be different roasters who supply the Western U. S, the Eastern U. S. And Canada. So it comes down to the roaster having the right packaging in place to be able to get that done.

Speaker 1

So at least the good news is that the U. S. Is branding the way we would love to see it and that's something that we can try to enable in Canada. So the good news is that we are building our business with the Kirkland brand and that they see the value of telling the consumer that they're using a chemical free product, which is great. There you go.

Speaker 3

Okay. That's good. Yes, like the one I saw actually came from a Vancouver Island Costco. And so, like I always tell everybody, oh, that it's the people doing the water processor in right in Vancouver, but then they looked at the package and they don't see anything about that. So, I was just wondering.

Speaker 3

I'm glad to hear that it is you guys. And I guess the other question is, when I was in Australia and I was talking to my friends there and they're all coffee fanatics and they knew Swiss Water Process, but I didn't know if you guys do work in Australia or is it a different company down there that is using that process or how does that work?

Speaker 1

Okay. That's another great question. So we do business in about 60 plus-sixty countries around the world. So when you see the Swiss Water brand or someone talks about Swiss Water, it's

Speaker 2

us, it's coming from Vancouver.

Speaker 1

We've had a very, very long relationship with an importer called H. A. Bennett in Melbourne for the last 20 years or so. It's an exclusive relationship which we really enjoy and they have developed the Australian market wonderfully for us in most of the major centers and probably some of the small centers as well. And so that would be us selling through H.

Speaker 1

A. Bennett, the importer and they on sell to roasters throughout Australia, which is terrific. So thanks for checking us

Speaker 4

out there. All my

Speaker 3

Australian friends is Canadian. Right.

Speaker 4

And if you pop over

Speaker 1

to New Zealand, you can tell the same thing too.

Operator

Your next question is coming from Richard Ruxley with Glenbrook Capital. Please proceed your question. Your line is live.

Speaker 4

Hi, guys. Congratulations on finalizing the move over and I'm sure it's a great relief. My first question would be, do you now plan to sort of do more marketing with the brand? I know you've just talked about this a little. And also with Investor Relations because I think now that the move is out of the way, I think it will be wonderful if the stock price could be show the full value of the company, which obviously it's not.

Speaker 4

And so I wonder if you'd comment on that initially?

Speaker 1

Sure, Richard. Thanks for the question. The answer is yes. We continue to build brand development along with our growth. Basically, we try to make sure that our investment in brand essentially has an ongoing kind of percentage of total revenues or however we do that, but it maintains a growing path forward.

Speaker 1

We do a lot of work in the U. S. So you might not see that. That's generally where we focus because the U. S.

Speaker 1

Has such an influence on other jurisdictions. And the work that we've been doing is and continues to be helping develop our business. It helps. For example, our business at Pete's, it helps. The last question that we had, our development at Costco, Kirkland brand and many others.

Speaker 1

So it's very, very critical to us. In terms of Investor Relations, yes, we're now thankfully, finally in a position to redevelop what our storyline going forward is, which is essentially the availability of additional capacity to grow. And we see a lot of interest from the consumer point of view in understanding where their coffee comes from. And again, back to the question from just the previous caller, individual investor following what's happening in the decaffeinated coffee landscape. And we see that increasing significantly, which is part of a very good story for us to rebuild our Investor Relations storyline.

Speaker 1

Now that we have a clear path forward towards growth and we aren't simply funding the replacement even though they are larger but still funding the replacement of current assets.

Speaker 4

Yes. It kind of leads me into my second question because in regard to the unused capacity on the combined lines. What I know you said that's enough for your immediate growth projections, but what sort of percentage of capacity is unused at Delta as a whole?

Speaker 1

So the way that we look at it, Richard, is that we try to run at a very high level of utilization and continue to optimize, which is exactly what we did at Burnaby. We were always running in the kind of the low 90% but then constantly finding ways to essentially add incremental capacity through minor incremental changes that enabled us to grow on the same assets in Burnaby for at least 10 years. Now do we have that same path forward on Delta? Maybe not that number of years, but we have several years of capacity. I know from the how we optimize and how we develop capacity.

Speaker 1

We will make some small incremental investments in some of the assets here to enable that growth. But we always try to work in that kind of high 80s, 90% utilization level, so that we are driving economies of scale, being very, very profitable, while continuously through our engineering and operations team building incremental capacity year over year. And so it's a weird one to answer because essentially the capacity that we have 5 years from now will be significantly larger. I don't know exactly what that number is going to be, but I know that optimization work that we continue to do yields ongoing incremental capacity as we've proven through the past many, many years at Burnaby. So we're very excited about what that growth can bring to us And we're constantly looking for new opportunities, whether it's in the premium specialty end of the marketplace, which is higher margin or maybe some of the more commercial products which help drive our branding, help drive our operational efficiencies.

Speaker 4

Yes. So, I mean, that's obviously got to be good for your margins going forward. I just had one more question. I just wondered if you could clarify what you mean or how it works out when you say that the total I'm just talking 4th quarter 23 versus 22. You say the sales volume increased 17%, but the revenue year over year for the quarter was down $2,800,000 So I wonder if you could just explain that a bit more granularity please?

Speaker 2

Yes, so much of our revenue is weighted towards the underlying commodity price. And as part of that, differential component of the commodity spreads. And there was a negative movement year on year within the commodity price. So that's why there's a disconnect between the volume and the revenue growth. And in the sense that the coffee cost component also flows into cost of sales.

Speaker 2

So, if there is a negative movement on the revenue line in relation to coffee cost, there will also be a negative movement in the cost of sales. I mean, I would yes, we tend to

Speaker 1

focus on gross profit basically from an external reporting point of view and you see that that increase significantly versus a year ago. So revenue, it's interesting, but because the New York Sea futures market is down and also coffee differentials in fact almost collapse well did collapse last year, you'll see a different revenue number, but that really doesn't fuss us very much at all. We focus on gross profit because in that lies where our processing rates exist and we focus on processing rates versus the cost of coffee coming through, if that helps, Richard.

Speaker 4

Yes. Thank you. I think that's all I have. So congratulations. Thanks.

Speaker 2

Thanks, Richard. Thank you.

Operator

There are no additional questions in queue at this time. I would now like to turn the floor back over to Frank Dennis for any closing remarks.

Speaker 1

Thank you, Kelly. If there are no further questions, I will conclude today's call. Ian and I wish you all good health and thank you for joining us.

Speaker 2

Thank you.

Operator

Thank you, everyone. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.