Swiss Water Decaffeinated Coffee Inc

TSX:SWP

Earnings Call Transcript

[Operator]

Good afternoon. Before the Swiss Water Decaffeinated Coffee Incorporated Conference Call starts, they are required to remind 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, unknown risks and uncertainties and other factors outside of our control that could cause actual results to differ materially from those expressed in the forward-looking information. Swiss Water Decaffeinated Coffee Inc. does not assume responsibility for 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.Please refer to Swiss Water Decaffeinated Coffee Inc. 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, the floor is yours.

[Frank A. Dennis, President, CEO & Director]

Thank you, Katherine. Good morning, everyone, and thanks for taking the time to join us. I'm Frank Dennis, President and CEO of Swiss Water Decaffeinated Coffee Inc.With me today is Iain Carswell, our CFO. Iain and I are here today to discuss Swiss Water's financial results for the 3 months ended March 31, 2021, our first quarter. I'll begin with a brief review of our results, then Iain will provide more detail about our financial performance before I return to tell you more about our longer-term plans and expectations. After that, we'll be happy to take your questions.As we reported to you during both our third and fourth quarter 2020 conference calls, Swiss Water's overall volumes have proven to be much more resilient than we'd anticipated when the COVID-19 pandemic first hit some 14 months ago. In fact, during the first quarter of this year, business has shown very positive growth, with total volumes growing by 14% year-over-year. While the volume growth was notable in all our trading areas, Europe really stood out, posting a 275% increase over Q1 of last year. In the Asia Pacific region, where volumes grew by 14% in Q4 2020, we saw first quarter volumes grew by 11% when compared to the first 3 months of last year. And in North America, volumes were up by 4% in the quarter. We see the strong recovery of demand in our international markets as a positive leading indicator of what is likely to happen in North America as the COVID-19 pandemic is brought under better control. Since 43% of our current business is in the U.S. and 33% in Canada, this is where we expect to see the bigger overall growth to come from.The aggressive vaccination programs now underway around the world, and particularly in the U.S., give us hope that a return to more normal market conditions is on the horizon. In many of our most important regional markets in the U.S., previously shuttered cafes and restaurants have now reopened. The relaxing of restrictions in the U.S. and elsewhere helped us increase volume shift to our higher-margin specialty accounts by 19% during the first quarter. We see this as another positive indicator of a broader recovery in demand from the vitally important out-of-home coffee market.Throughout the pandemic, demand from the retail grocery channel serving the in-home coffee market has remained strong as consumers worked at home. However, demand from customers serving the out-of-home market has been choppy as food service lockdowns have been imposed, then relaxed and then imposed again in reacting to upsurges in COVID cases.Over the coming weeks and months, as wider vaccination of populations is completed, the expectation is that additional jurisdictions will be able to open up more fully. So with what you -- with what we see year-to-date, we are becoming optimistic that our volumes will continue to rebound as the balance of the year unfolds.Before I tell you more about our outlook and the balance of the year and our preparation for the future, let me now turn the call over to Iain to take you through our financial results.

[Iain Carswell, Chief Financial Officer]

Thanks, Frank, and good morning, everybody. As before, I'll begin my review with volume shipped to customers as this is the key metric that drives our other results. As Frank indicated, Swiss Water's processing volumes have remained remarkably resilient despite the significant challenges brought by the pandemic. Total first quarter 2021 volumes were up by 14% when compared to Q1 of last 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 3% in the first quarter.Shipments to importers, those customers, who resell our coffees to roasters, where and when they needed, were up by 34% in Q1. Looking at the roaster segment another way, specialty roaster account volumes were up by a healthy 19% in the quarter. These accounts serve the out-of-home consumer primarily and the growth here reflects the actual or anticipated reopening of cafes and restaurants in a number of our geographic markets during the quarter. Shipments to large commercial roasters were also up, growing by 10% compared to the first quarter of last year.Looking now at revenues. First quarter revenue of $25.7 million was up by $3.9 million or 18% from Q1 of 2020. The revenue increase was due to the growth in volumes, and a higher green coffee price during the first quarter of this year.Looking at the cost side now. Our first quarter cost of sales was $22.1 million, an increase of $4.5 million or 26% compared to Q1 of last year. The quarterly increase was driven by higher green coffee costs as well as by increased depreciation charges and incremental production costs. For comparison, the NYC coffee commodity price averaged $1.27 in Q1 of this year versus $1.11 in the first quarter of 2020. While the additional depreciation expense from our new manufacturing facility in Delta, BC adding $900,000 to our cost in the quarter.Finally, because the Delta, BC line was fully operational this year, labor and production costs were higher. First quarter gross profit was $3.6 million, a decrease of $700,000 or 16% compared to Q1 of 2020. The change was due to softening of coffee quality differentials, as well as the increased depreciation expense and incremental production cost from our delta facility during the quarter. These negative factors were partially offset by our higher volumes as well as by the positive impact of changes in Swiss Water's customer mix and improved supply chain efficiencies at our Seaforth coffee handling and storage facility. All of these factors were expected by the organization.The first quarter operating expenses were $2.8 million, an increase of $0.6 million over Q1 of last year. The comparative increase was primarily due to the fact that in the first quarter of 2020, there was a significant recovery of share-based compensation costs due to a drop in share -- Swiss Water share price. In the first quarter of this year, there was no comparable cost recovery. And in fact, a small expense was recorded.The share-based compensation were excluded from the calculation. This year's first quarter operating expenses would have been $200,000 lower than in 2020. Q1 operating income was $738,000, down from the $2 million recorded in the first quarter of 2020. Net income for the quarter was a loss of $96,000 compared to income of $1.4 million in Q1 2020. The year-over-year difference in first quarter income reflects the combination of changes in gross profit and in both operating and nonoperating expenses.Last year, first quarter nonoperating expenses were reduced by the revaluation of embedded derivative as a result of a lower share price, offset by a slight loss on our risk management activities. During the same period this year, there was a much smaller revaluation effect and a significant increase in finance expense. Borrowing costs related to our delta facility were capitalized in Q1 last year, and expensed in the first quarter of this year following the commissioning of our plant in Q4 last year.First quarter EBITDA was $2.7 million, up by $100,000 or 2% from Q1 of last year. EBITDA this year was driven by Swiss Water's revenue growth and an increased financial contribution from our Seaforth subsidiary. These positive impacts were offset by the increase in green coffee costs and softer coffee quality differentials when compared to the first quarter of 2020.With that, I thank you for your attention, and I'll now turn things back to Frank.

[Frank A. Dennis, President, CEO & Director]

Thank you very much, Iain. As Iain and I have indicated, we are very encouraged by the return to year-over-year growth in our volumes that we saw in the first quarter. In particular, we believe that the increases in business we've seen recently in the Asia Pacific region and in Europe as well as the growth in volume shipped to our specialty accounts are all leading indicators of an emerging, if early, post-pandemic recovery in the broader coffee market in the U.S. and elsewhere. Operationally, we continue to run both decaffeination lines on our legacy production facility in Burnaby, BC and the new line at our facility in Delta, BC is operating smoothly and efficiently on 24/7 basis throughout the first quarter, and we continue to migrate more of our production here. We have been very pleased with the quality of coffee coming from the line in Delta. The product shows very good quality organically and customer satisfaction is strong. As those of you who follow our story know, we must relocate all remaining production from Burnaby by June 2023 due to the coming expiry of our lease there. Accordingly, in order to ensure that our ability to deliver on customer orders is uninterrupted and to meet the growth in demand, we see ahead we need to build additional new production capacity before we depart our legacy Burnaby site.Planning for the financing, design and construction of a second line in Delta is now well underway with a targeted completion date before the 2023 lease expiry in Burnaby. Based on engineering reports from a third-party engineering firm, when both are completed, we expect the 2 new lines in Delta together will have a targeted end capacity at least 40% greater than the current Burnaby facility. The preliminary cost estimate for the design and construction of the second new production facility in Delta is approximately $45 million plus commissioning costs of around $2 million. These estimates are preliminary and like all major design and construction projects are dependent on local and global economic factors. And it's with all plans these days subject to the potential negative impact of the COVID-19 pandemic on costs and timing. We are in the process of finalizing the financing program for the project and expect to have this wrapped up within the very near future.That wraps up our comments for today. Iain and I would now be happy to answer any questions that you might have.

[Operator]

[Operator Instructions] Your first question is coming from Blake Pelham.

[Blake Pelham]

Congratulations on the improved revenue numbers. Just a little concern about inflation and building materials. And how do you see that playing out for the second line? And do you have any further comments on that, I guess, going forward?

[Iain Carswell, Chief Financial Officer]

Yes, that's a good question. So far, what we've been seeing generally as we've been looking at and diving deep into the equipment purchases so far is that generally, we've seen some ups and we've seen some downs. We were worried about how that was going to come through as we were bidding out equipment over the past 6 months, but it's generally been in line. Now that being said, we have not gone and done the major construction bid mechanical contracting bids yet. And that's where, of course, structural steel sits. And we're watching steel prices as anyone who's constructing anything right now probably is. And that's -- it is a question mark as we go into this bid process over the next 8 to 12 weeks. So I mean, we will see where that comes to, and we are very aware of, particularly where steel prices are and are looking at 6 or 7 different manufacturers or fabricators to manage that as best we can, but it is absolutely a question mark, probably.

[Operator]

[Operator Instructions] You have a follow-up coming from Blake Pelham.

[Blake Pelham]

Just one question in terms of the admin expenses. And I know you touched briefly on that, but they increased from $1.38 million to $1.71 million. Could you just maybe define that a little bit closer for me there?

[Iain Carswell, Chief Financial Officer]

Yes. I mean, there's 2 things going on within that space. The first is that last year, in Q1, there was an adjustment to our -- effectively a credit to our admin expenses in relation to share-based compensation, which was a noncash adjustment in relation to the significant reduction in our share price towards the end of Q1 last year. So the year-on-year impact of that is about $800,000. It's probably also worth noting that there were some one-off nonrecurring costs that were booked in Q1 of this year. And like $200,000 worth relation to some structural changes that we made to our sales and marketing team.

[Operator]

We have no further questions from the lines at this time.

[Frank A. Dennis, President, CEO & Director]

Okay. So hearing that there are no further questions, we will conclude today's call. And Iain and I wish you all good health. And thank you very much for joining us. Thank you.

[Operator]

Thank you. Ladies and gentlemen, this does conclude today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.