Swiss Water Decaffeinated Coffee Inc.

Please stand by. Good day, ladies and gentlemen, and welcome to your Swiss Water Decaffeinated Coffee Incorporated conference call. All lines have been placed in a listen-only mode and the floor will be open for your questions and comments following the presentation. As a reminder, today's call is being recorded. If you should require assistance throughout the conference, please press star, then zero. At this time, it is my pleasure to turn the floor over to your host, Frank Dennis, President and CEO. Sir, the floor is yours.

Thank you, Belinda. Good morning, everyone, and thank you very much for taking the time to join us. I'm Frank Dennis, President and CEO of Swiss Water Decaffeinated Coffee Incorporated, and with me today is Ian Carswell, our CFO. Ian and I are here today to discuss Swiss Water's financial results for the three and nine months ended September 30, 2020. I'll begin with a brief review of our results. I will also update you on the COVID-19 pandemic's impact on our operations. Then Ian 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. Looking now at our results, we are pleased to report that our overall volumes have proven to be much more resilient than we'd anticipated when the COVID-19 pandemic first hit us and everyone else toward the end of the first quarter. In fact, when compared to a very strong Q3 last year, our third quarter volumes are down by only 1%. And for the nine months to the end of September, they are only off by 6%. When you consider the headwinds we are already facing coming into the year due to nearly unprecedented spikes in the coffee commodity price last December and the near total shutdown of the world economy this past spring and early summer, our business model has performed extremely well. It's also important to remember that in each of the 12 quarters prior to the onset of the pandemic, we consistently won new business and increased volumes as coffee industry participants migrated away from solvent-based decaffeination in favor of our chemical-free Swiss water process. In addition to the consistently high quality of our products and services, the resilience Swiss Water has demonstrated is largely due to the high degree of customer diversification we've built into our business. We serve a broad spectrum of the coffee trade in over 65 countries around the world. This diversification has certainly served us well as we look back over the past couple months. During the early stages of the pandemic, we experienced strong short-term volume pull from those customers that serve the retail grocery trade. This was driven by consumers loading their pantries in anticipation of quarantines and supply disruptions or simply consuming their coffee at home. As things have unfolded, the at-home coffee market has remained strong but has leveled off from the initial spike in demand. Meanwhile, our customers who serve the out-of-home coffee market through cafes and restaurants have been much more susceptible to serious disruption as health authorities around the world have declared widespread or targeted food service shutdowns to combat upsurges in COVID cases. Despite this turbulence, some coffee outlets have stayed open throughout the pandemic to serve takeaway and drive-through customers. However, traffic to those locations has dropped significantly as more and more coffee consumers work from home rather than by stopping by on their morning coffee commute or office coffee break. In May and June, many jurisdictions lifted their lockdowns and the out-of-home channel began to recover as food service outlets reopened, albeit with significantly reduced seating. This helped bring volumes shipped to our specialty customers back up, driving an 8% increase to this important segment during the third quarter. Now, many countries and regions have started to experience a second wave of COVID-19 and have reinitiated lockdowns. These include a number of states and major cities in the U.S., our largest geographical segment. Given the uncertainty regarding the timing and widespread availability of a vaccine, we can't reliably predict the ultimate impact the pandemic will have on our business, particularly our business with the out-of-home coffee market. Accordingly, the risk remains that Swiss Water may well report an overall volume decline in 2020. However, we are cautiously optimistic that after a stronger than expected Q2 and Q3, our volumes have shown good resiliency and may continue to recover faster than we originally anticipated. We are in continuous contact with customers in all of our markets and are well-positioned with sufficient green coffee inventory and production capacity to respond as the situation demands. As we announced in September, we are now producing commercial-grade coffee at our new technically advanced decaffeination facility in Delta, B.C., Initial production from this line is destined for growing international markets focused on the rapidly growing ready-to-drink coffee segment. We also continue to operate both production lines at our legacy plant in Burnaby, BC on the normal 24-7 basis, as well as our Seaforth coffee handling subsidiary, while taking all necessary measures to protect the health and safety of our employees, customers, and other stakeholders. At the same time, we are moving ahead strategically to repair the company for resumption of the strong growth trajectory we'd firmly established prior to the pandemic. Before I update you on plans for the future, I'll now turn the call over to Ian to take you through our results in more detail. Ian?

Frank, good morning, everybody. As always, I'll begin my review with volume-shift customers. As Frank indicated, Swiss Water's processing volumes have remained remarkably resilient, despite the significant trading challenges wrought by the pandemic. It continued to strengthen during the third quarter. When compared to a very strong 2019, total Q3 volumes were down only 1%, and nine-month volumes were down just 6%. When compared to the 16% drop in year-over-year volumes we recorded in the first quarter and the 9% drop we saw for the first half, you can see a favorable trend as the year has unfolded. 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 5% in the third quarter and down by 4% for the first nine months of the year. Shipments to importers, those customers who resell our coffees to roasters where and when they need it, were down 11% in Q3 and by 10% for the year to date. Looking at the roaster segment another way, specialty roaster account volumes were up 8% in the quarter and down by 6% for the nine months. And shipments to large commercial roasters, which were down by 6%, were down by 6% for both periods. Looking now at revenues, third quarter revenue was 24.9 million, an increase of 5% over Q3 of 2019. Nine-month revenue was broadly comparable to last year at $73.1 million, reflecting an increase of 1%. Revenues remained strong despite the decrease in processing volumes because of the positive impact of changes in customer mix, which resulted in higher process revenue, higher coffee quality differentials, and increased freight revenue. Looking at the cost side, our third quarter cost of sales was 21.5%. 4 million, an increase of 2.5 million, or 13% from Q3 of last year. The quarterly increase was driven by higher green coffee costs, as well as by increased depreciation charges following the commissioning of our new manufacturing facility in Delta, BC in September. For the first nine months of the year, our cost of sales increased by $400,000, or 1%, to $60.3 million. A slight increase in the nine-month period reflects our operating activities so far this year. Quarterly gross profit was $3.4 million, a decrease of $1.3 million compared to Q3 2019. The change was due to the higher cost of sales during the period. For the nine months, gross profit was $12.8 million, an increase of $400,000 from the 2019 level. The year-to-date improvement was driven by positive changes in our sales mix, stronger than expected coffee differential gains, improved supply chain efficiencies, and lower natural gas costs in the first half of this year. Third quarter operating expenses were $2.8 million, an increase of $400,000 over Q3 2019. Nine-month operating expenses of $7.8 million were comparable to last year. Quarterly increase was driven by a combination of timing of marketing expenditure, higher professional fees, and the inclusion of engineering salaries and expenses this year. In Q3 of last year, during the construction of our new Delta BC manufacturing facility, we were able to capitalize engineering salaries. The higher quarterly expenses were partially offset by lower than expected travel and recruitment fees due to pandemic restrictions. while nine-month expenses were reduced by recovery of stock-based compensation costs during the first half as a result of a lower share price. Q3 operating income was $600,000, a decrease of 75% from the same period last year. However, the nine months to the end of September, operating income increased by 9% to $5 million. Net income for the third quarter increased was $100,000 compared to $900,000 in Q3 2019. Nine-month net income was 3.3 million compared to 2.2 million last year. The year-over-year difference in net income during both periods reflects the combination of changes in gross profit and both operating and non-operating expenses. This year's non-operating expense was reduced by the revaluation of an embedded derivative as a result of our lower share price, partially offset by a slight loss on risk management activities. Moving forward, we expect net income to continue to be negatively impacted by higher depreciation and overhead expenses following the completion of our new manufacturing facility. However, in time, these expenses should be offset by higher sales volumes. Third quarter EBITDA was $2 million, a decrease of 1.4 million, or 42% from the 2019 level. For the first nine months of the year, we recorded EBITDA of $7.9 million, a decrease of $1 million, or 12% from last year. EBITDA, excluding the impact of IFRS 16, decreased by 1.4 million, or 50%, to $1.3 million in Q3, and by $700,000 or 11% to 5.9 million for the first nine months of this year. We had expected the drop in quarterly EBITDA for a couple of reasons. Firstly, although gains on coffee quality differentials had a positive impact on our nine-month results, they softened remarkably during the third quarter. This combined with the timing of our overhead spending and marketing investments brought down our EBITDA for both periods. It is normal that coffee quality differential gains will temporarily soften following a period of strength. We do not expect the negative impact on EBITDA reported in Q3 to be repeated in Q4. With that, I thank you for your attention, and I'll now turn things back to Frank.