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Edited Transcript of SWP.TO earnings conference call or presentation 7-Nov-19 5:00pm GMT

Q3 2019 Swiss Water Decaffeinated Coffee Inc Earnings Call

Nov 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Swiss Water Decaffeinated Coffee Inc earnings conference call or presentation Thursday, November 7, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Iain Carswell

Swiss Water Decaffeinated Coffee Inc. - CFO

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Swiss Water Decaffeinated Coffee Third Quarter 2019 Earnings Conference Call. (Operator Instructions)

At this time, it's my pleasure to turn the floor over to Mr. Iain Carswell, CFO. Sir, the floor is yours.

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Iain Carswell, Swiss Water Decaffeinated Coffee Inc. - CFO [2]

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Thanks, Tom. Good morning, everyone, and thanks for taking the time to join us today. I'm Iain Carswell, Chief Financial Officer of Swiss Water Decaffeinated Coffee. Normally, Frank Dennis, our CEO, would be on the call with me. However, Frank is currently meeting with our customers and prospective customers in Japan, Korea and elsewhere in Asia, which is becoming an increasingly important geographic market for us. Due to the time difference between Frank and us, he will not be on the call today.

I'm here to discuss SWISS WATER's financial results for the 3 and 9 months ended September 30, 2019, which comprise the third quarter and first 9 months of our current fiscal year. I'll begin with a brief review of some of the factors that are driving steady growth of our process volumes and helping us improve our financial performance. Then I'll take you through the results and talk a bit about our plans and expectations going forward before taking your questions.

Looking at the big picture. Since the beginning of the year, we've continued to win market share from our competitors and to increase sales to our existing customers. As a result, our total processing volumes were up 8% in the third quarter and by 16% in the first 9 months. The volume increases came from across our customer base and from our -- every geographic region.

Looking at volumes by customer type, shipments to roasters, those customers who roast and package coffee to sell to consumers in their own coffee shop or for home or office use, were up 9% in the quarter and 13% for the year-to-date. The increase in business came in 2 ways. First, we sold more decaf coffee to existing roaster accounts, as they grew their own businesses either by adding new stores or distribution channels or by expanding their product offerings. We also gained new roaster customers, some of whom had previously sourced their decaffeinated coffee from 1 of 2 legacy CO2 plants that shut down last year.

As we've noted before, these plant closures have tightened the supply side of the chemical-free decaffeination market at a time when demand is growing. This should help us to more rapidly utilize the new production capacity that we have coming online when we commission our new plant later this year.

Shipments to importers, those customers who resell our coffees to roasters where and when they need it, were also up nicely, growing by 6% in Q3 and 23% for the first 9 months. Looking at the roaster segment another way, specialty roaster account volumes were down slightly in the third quarter, dropping 3% compared to a very robust Q3 last year. However, for the year-to-date, shipments to the sector were up a healthy 9%.

Finally, shipments to large commercial roasters were up 14% in the quarter and 21% in the first 9 months of this year when compared to 2018. Our steady volume growth is also related to some positive trends at both the trade and consumer level. The overall market for decaffeinated coffee is expanding and continues to outpace the growth of the U.S. coffee market as a whole. Sales of specialty decaf coffee, like our premium SWISS WATER Process coffees, are particularly strong, especially in out-of-home markets. Consumers simply want to drink better coffee and are prepared to pay for it.

An overall trend towards healthier eating and an aversion to chemicals and additives are also helping to drive up demand for our coffees. Of particular impact is the growing awareness and concern by the health and environmental hazards associated with methylene chloride, the main chemical used by our competitors to decaffeinate coffee.

This is driving more and more coffee roasters and importers and consumers to move away from chemical decaffeination in favor of chemical-free processes like ours. To better position SWISS WATER to benefit from these trends and leverage the strength of the SWISS WATER brand, we're expanding our geographic reach, strengthening our sales teams, growing our production capacity and focusing our efforts on emerging opportunities. All of these initiatives are designed with one goal in mind, to enable us to continue growing our volumes, and thus, our profitability.

Turning now to our financial performance. I'll begin with revenues. The significant growth in our volumes had a positive impact on revenues, which at $23.6 million for the first -- for the third quarter and $72.7 million for the first 9 months were up 2% and 8%, respectively compared to last year. The benefit of volume growth on revenues was partially offset by lower coffee futures price or NY'C' this year.

As most of you know, a substantial portion of our revenue comprises the amount we charge our customers with green coffee. And as we charge market rates for this coffee, our revenue falls when green coffee costs fall. During the third quarter, the NY'C' averaged USD 1 per pound, down from USD 1.04 in Q3 2018.

For the 9 month period, the NY'C' averaged $0.98 per pound compared to $1.14 last year. As the majority of our sales are billed in U.S. currency, our revenues are also impacted by the U.S. to Canadian dollar exchange rate. This year, foreign exchange had a positive impact. In Q3, the U.S. dollar averaged CAD 1.32. For the first 9 months, it was CAD 1.33, an increase of 1% in the quarter and 3% for the year-to-date compared to 2018.

Looking now at cost side. Our third quarter cost of sales was $18.9 million, up 1% over Q3 last year. For the year-to-date, cost of sales was $59.8 million, up 7% from the 2018 level. In both periods, the increase was consistent with the growth of our business. Impacting factors included higher variable production cost due to the significant increase in our processing volumes and annual labor cost increases due to inflation. These are partially offset by the decrease in green coffee cost due to the lower NY'C'.

Another factor that impacted the 9-month result was a significantly higher cost for natural gas in Q1 of this year. As we've indicated previously, a pipeline explosion in Northern B.C. in October of 2018 and an unusual polar vortex cold weather pattern in March of this year resulted in significant supply constraints and higher gas prices. These are onetime factors that have abated and are not expected to impact gas prices going forward.

Q3 gross profit was up by 7%, $4.7 million, as higher revenues more than offset the small increase in our cost of sales. For the 9 months, gross profit was up by 10% to $12.4 million despite the higher natural gas price last winter that we absorbed in Q1. Our improved gross profit in both periods was primarily the result of our higher overall processing volumes and a higher proportion of regular versus total volumes in our sales mix.

A continued focus on reviewing and reducing the operating costs at both SWISS WATER and Seaforth Supply Chain Solutions, our green coffee logistics business, also had a positive impact. In particular, we've had a good deal of success improving Seaforth's performance since the first half of 2018. On a warehouse expansion cost, operating cost declined significantly. Seaforth made a positive financial contribution throughout the first 9 months of this year, and we expect things to continue improving.

During the third quarter, we consolidated all of Seaforth's operations from 2 separate facilities into 1 expanded site. This year's third quarter operating expenses decreased by 3% to $2.8 million, largely due to lower sales and marketing expenses compared to Q3 of last year. For the 9 months, operating expenses were up 8% to $7.8 million. The increase in year-to-date expenses was due to higher staffing and staff-related expenses as well as increased research and development activity during the second quarter of this year. Operating income showed significant improvement in both periods this year, growing by 19% or $400,000 to $2.3 million in the third quarter, and by 15% or $600,000 to $4.6 million for the 9 months.

For the third quarter, SWISS WATER reported net income of $900,000 compared to net income of $1.8 million in Q3 of 2018. Year-to-date, net income was $2.2 million compared to $3.6 million in the first 3 quarters of last year. This year, our higher operating income was offset by increases in our nonoperating expenses, which had a significant impact on our net income. These included the revaluation of an embedded derivative and losses on some of our risk management activities. Higher finance expense in relation to interest on leases due to our adoption of IFRS 16 also played a role.

As you know, another measure of performance is earnings before interest, tax, depreciation and amortization or EBITDA. SWISS WATER's EBITDA for the third quarter was $3.5 million, up by $800,000 or 28% over Q3 of 2018. 9-month EBITDA was $8.9 million, up by $3.2 million or 56% over the same period last year. In both periods, a significant increase in EBITDA was partly due to our adoption of the new accounting standards related to leases. Operationally, EBITDA was also enhanced by strong growth in volumes, our ongoing efforts to enhance cost recovery and an increased financial contribution from our Seaforth subsidiary.

Now turning to dividends. Subsequent to the end of the quarter, on October 15, we paid a quarterly cash dividend of $0.0625 per share to shareholders of record on September 30, 2019.

Looking ahead to the balance of 2019. We expect to maintain our positive momentum and once again record strong growth in our annual volumes. With concern about chemical decaffeination processes growing and chemical-free decaffeination capacity constrained, the competitive landscape has shifted in our favor. As the world's only branded 100% chemical-free decaffeination process and the only supplier with new capacity coming onstream in the next 12 months, we believe SWISS WATER is ideally positioned.

As always, our focus remains on growth in both the immediate and long term. Accordingly, we're investing in the resources we need to generate increased sales volume as we respond to heightened demand. Those of you who have been following our story know that over the past several quarters, we've been expanding our sales efforts and strengthening our presence in Europe and other overseas markets.

And since opening our new sales office in France in January, we've seen strong growth in sales to European customers, with 9-month volumes there up 56%. We're also making great progress in the Asia Pacific region, with volume sold to customers there up 55% so far this year. As we continue to expand our business in Europe and elsewhere overseas, we expect revenues from our international markets, which now comprise 56 different countries, will continue to grow in both dollar and percentage terms.

At the same time, we're expanding our ability to target specific customer groups by selectively adding to our sales and marketing team in the U.S., which at nearly 50% of sales, remains our largest single market by far. Again, these efforts are bearing fruit, with sales in the U.S. up 9% in the first 9 months of this year.

While these initiatives are increasing our expenses somewhat, they are beginning to generate the increased sales orders we needed to begin filling the new capacity we have coming onstream over the next few months. At the same time, we continue to look at every aspect of our operations, with a goal to improve our efficiency, control our cost and enhance our margins without impacting product quality, which is paramount to everything we do.

Finally, construction of our new state-of-the-art decaffeination plant in Delta, B.C. is progressing on target toward commissioning next month. We expect to be in the position to begin shipping commercially from the new plant by the end of the first quarter of 2020.

In summary, our outlook is bright. Demand for specialty decaf coffee continues to grow and SWISS WATER has the best product, the specialized knowledge and experience, and the operational infrastructure to respond successfully.

That wraps up my comments for today, and I would be happy to answer any questions you might have.

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Operator [3]

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(Operator Instructions) Mr. Carswell, there appears to be no questions at this time.

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Iain Carswell, Swiss Water Decaffeinated Coffee Inc. - CFO [4]

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Okay. On that note, thanks for your interest and attention. We look forward to reporting to you again at the end of the fourth quarter. Thank you for your time.

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Operator [5]

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Ladies and gentlemen, this does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time and have a great day.