Swiss Water Decaffeinated Coffee Inc.

Good afternoon, ladies and gentlemen. Before the Swiss Water Decaffeinated Coffee Conference starts, we 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 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 can cause the actual results to differ materially from those expressed in the forward-looking information. Swiftwater Decaffeinated Coffee does not assume responsibility for the accuracy and completeness of forward-looking information. Similarly, we 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 Swiftwater Decaffeinated Coffee Management Discussion and Analysis posted in CEDAR and Swiftwater website for a full discussion regarding the forward-looking statements and risks therein. At this time, all participants are in place on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Frank Dennis, President and CEO of Swiss Water Decaffeinated Coffee. Sir, the floor is yours. Thank you, Matthew. 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., 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 30th, 2021. As always, I'll begin with a brief review of our performance. Then Ian will provide more detail about our financial results before I turn to tell you more about our longer-term plans and expectations. After that, we'll be happy to take your questions. If you read yesterday's press release and reviewed our quarterly MD&A, you will already know that Swiss Water achieved record volumes and recorded adjusted EBITDA in the third quarter and first nine months of this year, despite the lingering impacts of the COVID-19 pandemic and logistical issues. This strong performance resulted from the combination of a number of positive factors. The first and foremost and most important of these is the recovery of demand from the vital out-of-home coffee markets as the North American and international food service economies continue their return to normal. The second is that as cafes, restaurants, and retail grocery outlets in our key markets adapt to the increasing environmental responsibility and food safety requirements, coffee roasters and coffee consumers are increasingly choosing a chemical-free, warrant-processed decaf over coffee decaffeinated with gasoline chloride or ethyl acetate. The health is clearly visible in our total volumes, which were up 29% in the second quarter and grew by 15% in the first nine months of this year. Meeting this demand enabled us to achieve a high level of capacity utilization from all three of our current production lines, over 85% during the quarter. This, in turn, enabled us to achieve very strong profitability and, in particular, to post adjusted EBITDA for the quarter of $4.0 million tripled the amount for Q3 of last year. Nine-month adjusted EBITDA was also up significantly, growing by 44% to 8.4 million. It already surpassed in 2020's full-year adjusted EBITDA. While the volume growth was notable in all of our geographic markets, with many of our customers ordering on-par or even ahead of pre-pandemic levels, Europe stood out once again, posting an 84% increase over the first nine months of 2020. Business in the Asia-Pacific region was also very strong with volumes up 23% from the year to date, mainly due to organic customer growth. In our largest market, North America, volumes were up 17% in Q3 and by 10% in the first five months of the year. As I've heard before, we see the strong recovery of demand in our international markets as a positive leading indicator of what is unfolding in North America as the food service economy reopens and businesses turn to more normal trading patterns. and as food safety issues become more prominent. Importantly, we see the positive changes in our customer mix as a clear sign of a strong recovery in the vitally important out-of-home coffee market, while at the same time, affluent consumption has remained buoyant. The relaxing of restrictions on food service outlets in the U.S. and elsewhere help to increase volumes to our higher-margin specialty accounts by 21% in the third quarter and 23% in the first nine months of this year. Unusual is that we've achieved this exceptional volume growth across the business in an environment of ever-increasing coffee-sacred prices. For comparison, the NYC coffee future price averaged U.S. $1.80 in Q3, up nearly 50% from U.S. $1.14 in the third quarter of last year. By the end of December, the NYC had hit U.S. $2 and closed yesterday at U.S. $2.11. Normally, when the NYC is rising like this, our customers tend to consume their own inventories rather than buy more coffee as they wait for the price to fall back. However, this year, an unusual double-cross in Brazil, together with the rise and destruction of global supply chains, has created a growing fear of looming coffee shortages among industry participants at all levels. This concern has helped support our volume growth and may even have caused some customers to move their orders forward to ensure that they have sufficient inventory on hand to meet demand. Over the coming weeks and months, we will see how this plays out. Before I tell you more about our outlook for the balance of the year and our preparations for the future, let me turn the now to Oliver Ian, taking you through our financial results. Thanks, Brian, Sharon. Good morning, everyone. As always, I'll begin my review with volume shipped to customers, which is a key metric that drives our commercial performance. As Frank indicated, Swiss Water's processing volume set a new quarterly record in the three months to September 30th, primarily as a result of the ongoing recovery of the food service economy. Total volumes were up by 29% in the third quarter and by 16% for the year to date when compared to the same period last year. Looking at volumes by customer type, shipments by roasters, those customers who roast and package coffee to self-consumers in their own coffee shops, for home or office consumption, divided by 14% in the quarter and 3% in the first nine months of this year. Shipments to importers, those customers who resell our coffee to roasters when they need it, are up much more, going by 49% in Q3 and by 42% in the first nine months of this year. Looking at the roaster segment another way, as Frank noted, specialty roaster account volumes continue to trend upward, going by roughly 21% in the quarter and by 23% for the year to date. These accounts serve the out-of-home consumer primarily, and the strong growth here reflects the reopening of cafes and restaurants in a number of our key geographic markets. Shipments who watch commercial roasters, who serve the grocery market principally, were also well up, going by 34% in the quarter and by 11% for the first nine months of this year. Turning now to revenues, third quarter revenues of $35.5 million, dropped by $10.6 million, up 43% for Q3 of 2020. Year-to-date revenues of $89.9 million was also very strong, increasing by $16.9 million, or 23% for last year's level. The revenue increase in both periods is due to the growth in our volumes, as well as your significantly higher teen coffee prices. Looking at the cost side, our third quarter cost of sales was $29.5 million, an increase of $8 million, or 38% compared to Q3 of last year. For the year to date, cost of sales was $76.7 million, up $16.5 million, or 27% from the 2020 level. The increase in both tiers is mainly driven by higher green coffee costs and our significantly increased production volumes, as well as by increased depreciation due to the inclusion of our new Delta manufacturing facility and incremental labor and production expenses. As Frank noted, the NYC coffee commodity price has been trending sharply upward, hitting an average of $1.1823 versus $1.14 in the first quarter last year. at approximately $1.20 at the beginning of January this year. As you would expect, such a significant rise in coffee prices triggered a major increase in our working capital needs, and the increased value of inventory in our balance sheet is reflective of this. While the additional depreciation and amortization expenses from the Delta facility and finance lease totaled $1 million for the quarter and $2.7 million for the first nine months of this year. Third quarter gross profit was $6 million, an increase of $2.6 million, or 75% in Q3 of 2020. In the nine months to September 30th this year, gross profit was $13.2 million, or $400,000, or 3% from the same period last year. The improvement in gross profit was primarily driven by the record processing volumes we put through our facilities during the third quarter. By utilizing our three production lines at over 85% capacity, we were able to realize significant production efficiencies and generate a higher definition margin. These two factors countably offset the increase in depreciation charges and incremental labor and production expenses following the commissioning of Line 1 at our new Delta facility. Third-year operating expenses were $2.7 million, down by $100,000 from Q3 of last year. From the year to date, operating expenses were $8 million, down by $300,000 from the first nine months of last year. The administrative portion of operating expenses was up by 15% in the quarter and by 14% in the nine months due to the absence of a cost recovery or share-based compensation this year compared to 2020. However, if the marketing component was started sufficiently to offset, this introduced timing differences in advertising marketing activities. and the research and public relations department. Q3 operating income was $3.3 million, up significantly from the $600,000 recorded in the quarter of 2020. Year-to-date operating income was $5.2 million compared to $5 million for the first nine months of last year. Net income for the quarter was $135,000 compared to income of $106,000 in Q3 2020. For the year to date, net income was $255,000 compared to $2.3 million last year. Decline in net income was driven by a variety of factors. These included the negative impact of market-to-market changes in foreign currency exchanges and futures market activities, and increased depreciation expense as well as the increased cost associated with operating at two locations this year. Once we consolidate all production at our Delta location and exit the Lexi-Burnaby facility in mid-2023, the resulting efficiencies will bring down our operating costs significantly. Higher non-operating expenses also had an impact. Non-operating expenses were higher for the quarter in the first nine months of this year due to an increase in finance costs in both our construction loan and private facilities. Third quarter net finance expense of $1 million were up by $300,000 over Q3 of last year. For the year to date, net finance costs were $3.8 million, an increase of $1.1 million compared to the 2020 level. Importantly, in 2017, during construction of Delta Line 1, borrowing costs related to this project were capitalized. Following its commissioning in Q3 of last year, the related borrowing costs started to be recognized as an expense. Another factor contributing to this year's increased non-operating expenses is that last year, our first half non-operating expenses were reduced by the revaluation of an indebted derivative as a result of a lower share price, offset by a slight loss in our risk management activities. During the same period this year, there was a much smaller revaluation effect and a significant increase in finance expense. I should also note that during the third quarter of this year, we structured our debt by amending our convertible debenture with no road capital into a debenture with warrants. This resulted in a one-time, non-cash loss on the extinguishment of the convertible debenture being booked in Q3. Despite the additional cost burdens on the company this year, we achieved a significant improvement in adjusted EBITDA. As Frank noted, third quarter adjusted EBITDA of $4 million would triple the $1.3 million we reported in June last year. And for the year to date, adjusted EBITDA of $8.4 million would top significantly from $5.9 million in 2020. Operationally, our adjusted EBITDA includes and an increased financial contribution from our seashore coffee and its subsidiary. As I've noted, these positive impacts are partially offset by the higher deemed coffee costs we have experienced so far this year. With that, thank you for your attention and I'll make sure everything is selected correctly. Thank you, Ian. As Ian and I have indicated, we are very encouraged by the record volumes achieved in the third quarter. This is built upon the positive trend that has emerged since the beginning of the year as the food service problem continues to return to more normal operations and the decline of methane chloride decarbonization continues. However, we do know that there have been some significant alterations to the roaster order patterns and the NYC future socket is at sustained high levels. Both of these factors could have an effect on early 2022 volumes. Although looking at the balance of this year, we have a strong order book and that includes going into Q1. and our production facilities are running very smoothly. The high-capacity livation we achieved on all three decaffeination lines and at our C4 subsidiary during the third quarter drove solid profitability and gave us a clear view of what can be achieved in the future. That said, some caution continues to be called for. The COVID-19 pandemic is not over, and although we may be learning to live with it, at least in the developed world, further disruptions may well occur. One unfortunate side effect of the economic recovery now underway is the destruction of global supply chains. In our case, we are experiencing logistical challenges in moving coffee from growing regions to our production facilities and then on to markets both in North America and internationally. This is being felt very acutely at the Port of Vancouver. As I noted earlier, a frosty Brazil during July and nearby inventory tightness has driven a sharp rise in the coffee futures price. High coffee prices can also have a destabilizing impact on the efficiency of coffee inventories. They certainly put an additional pressure on our working capital resources. Like most businesses, we are experiencing inflationary pressure on many of our other cost inputs, from natural gas to packaging to freight and delivery. While we always approach our pricing strategy with caution, we may very well have to implement processing price increases in the very near future. Operationally, we continue to run both decaf nation lines at our legacy production facility in Burnaby, D.C. on a 24-7 basis. The initial line at our new facility in Delta, D.C. operates smoothly and efficiently, also on a 24-7 basis throughout the first five months, and we are continuing to migrate more of our production here. As we move through the balance of the year, we expect to gradually increase the processing speed of Delta Line 1 as we work to optimize and maximize its production. If you've been following our story, you'll know that we must relocate all remaining production from Verity by June 2023 to Delta due to the upcoming expiry of our lease. Accordingly, in order to ensure that our ability to deliver on customer orders is uninterrupted and to meet the growth of demand we see ahead, we are in the process of building a new production line in Delta. Financing for the project was arranged in Q2 of this year and the necessary permits were secured over the summer. The foundation has now been completed and we expect to begin above ground construction this month. The project is currently on time and on budget toward a targeted completion date before the 2023 lease expiry in Trinity. As I've noted before, Based on engineering reports from a three-party engineering firm, when both lines are completed, we expect the two new lines in Delta together will have, as part of this end capacity, at least 40 billion greater than the current friendly facility. The preliminary cost estimate for design and construction of the Lines 2 project in Delta is approximately $45 million, with a commissioning cost of around $2 million. These estimates are preliminary, and like all major design and construction projects, are dependent on economic factors. That wraps up our comments for today. Here I would now be happy to answer any questions that you might have. Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. 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Well, then, if there are no questions today, then I will conclude today's call, and I wish you all good health, and thank you very much for joining us.

Thank you, gentlemen. Thank you for your participation.