VANCOUVER – Ten Peaks Coffee Company Inc. yesterday (Nov. 13, 2014) reported financial results for the three and nine months ended September 30, 2014.
The three-month period represents the third quarter of the company’s 2014 fiscal year. Ten Peaks is a leading specialty coffee company doing business through two wholly owned subsidiaries, Swiss Water Decaffeinated Coffee Company, Inc. (“SWDCC”) and Seaforth Supply Chain Solutions Inc. (“Seaforth”), the company’s green coffee handling and storage subsidiary.
SWDCC is a premium green coffee decaffeinator located in Burnaby, BC, which employs the proprietary SWISS WATER Process to decaffeinate green coffee without the use of chemicals. It is the company’s primary business, and the results reported here reflect SWDCC’s operating performance.
During the three months ended September 30, 2014, SWDCC maintained the robust sales momentum it recorded in the first half of this year. As a result, the company achieved double-digit growth in its processing volumes, revenues, gross profit, and EBITDA for both Q3 and the year-to-date.
During the third quarter of 2014, processing volumes rose by 21% over Q3 2013. The strong gains were driven by a 51% increase in volumes to specialty regional customers and supported by a 9% increase in volumes to SWDCC’s large national accounts.
During the first nine months of the year, the company’s volumes rose by 16% compared to the same period in 2013, with shipments to specialty regional accounts up by 33% and volumes to national accounts increasing by 9%.
All geographic markets experienced growth, with the most significant gains being generated in the US.
Revenue for the third quarter and year-to-date were both up over the same periods last year, due mainly to SWDCC’s higher volumes.
Third quarter sales grew by 30% to $17.2 million, while nine-month revenue increased by 23% to $46.7 million. Process revenue (the amount customers are charged for decaffeinating their coffee) totaled $4.2 million for the third quarter and $11.6 million for the year-to-date, which represent year-over-year increases of 24% and 22% respectively. In both cases, the increases were related to higher processing volumes and a stronger US$.
Green revenue (the base amount customers are charged for green coffee) grew by 32% to $12.2 million during the third quarter and by 22% to $33.0 million for the year-to-date. In this revenue category, gains were related to a higher NY’C’ (as discussed below) and increased sales volumes.
Distribution revenue (the amount customers are charged for shipping, handling and warehousing) grew by 43% to $0.8 million in Q3 and by 52% to $2.2 million for the year-to-date. Here, the gains reflect the expansion of Seaforth’s business, as well as the increase in SWDCC’s processing volumes.
Cost of sales totaled $14.7 million for the third quarter and $38.6 million for the first nine months of 2014. This represents a year-over-year increase of 24% and 14%, respectively.
In both cases, the increase was mainly due to higher green coffee costs, which were driven by increased processing volumes and the higher NY’C’, as well as rising utilities costs and incremental warehousing charges related to growth at Seaforth.
In addition, the labour dispute at the Port Metro Vancouver in March of this year increased freight and inbound coffee costs for the year-to-date, as it held up green coffee bound for SWDCC for several weeks. In order to make up for the temporary shortfall, SWDCC had to purchase coffee from other warehouses in North America and ship it to the decaffeination facility.
Gross profit increased by 91% for the third quarter and the year-to-date, totaling $2.6 million and $8.1 million respectively. In both periods, the growth was driven by higher sales revenue, which more than offset the increases in cost of sales.
Sales and marketing expenses for the third quarter were $0.3 million and $1.0 million for the year-to-date, which is unchanged from the same periods last year.
Administration expenses rose by 39% to $1.0 million in the quarter, due to higher stock-based compensation. For the nine months ended September 30, 2014, administration expenses were $2.7 million, up by 25% compared to 2013. Higher stock-based compensation and professional fees drove the increase.
SWDCC enters into coffee futures contracts to manage the effects of changes in the NY’C’ between the time the company commits to buy coffee at a fixed price and the time it sells that coffee at the then-current market price.
In addition, it enters into foreign exchange forward contracts to mitigate the effects of changes in the US-Canadian dollar exchange rates. Realized gains and losses on these derivative instruments are recorded when they mature.
In addition, as Ten Peaks does not use hedge accounting, unrealized gains and losses are also recorded at the end of the reporting period, calculated using the market values of the NY’C’ and the US$ at quarter-end.
In the first nine months of this year, losses on commodity futures partially offset the higher gross profit. Most of the impact occurred during the first quarter, when the rapid rise of the NY’C’ generated significant losses on the company’s commodity hedges.
During the second and third quarter, losses on coffee futures were limited, such that the increased gross profit more than offset losses on derivative instruments during the period.
The US$ appreciated in the third quarter, which resulted in unrealized losses on foreign exchange forward contracts being recorded in the period. In addition, as Ten Peaks is a net borrower of US$, the rise in the value of the US$ generated losses on US$ denominated debt in the quarter. These reduced the overall earnings in the period.
Ten Peaks generated net income of $0.2 million and $1.3 million in the three and nine months ended September 30, 2014, respectively, compared to $0.6 million and $1.3 million in the same periods last year.
EBITDA rose in both periods this year, increasing by 26% to $1.3 million in Q3 and by 32% to $4.0 million for the year-to-date. In both cases, the significant increase in gross profit drove the gains in EBITDA.
For the nine months ended September 30, 2014, Ten Peaks generated $3.2 million in cash from operations before changes in non-cash working capital.
This was down from $3.7 million for the same period last year. Increases in inventory (owing to a higher NY’C’ and a stronger US$) consumed cash in the current year-to-date, and accounts receivable rose in tandem with growing revenues.
As a result, the burden on Ten Peaks’ working capital increased. As at September 30, 2014, net debt (bank indebtedness less cash on hand) was $5.8 million. This represents an increase of $3.6 million since the beginning of the year.
The company made significant gains during the first nine months of 2014, and management expects to continue growing the business during the balance of the year. The rate of growth in the fourth quarter is expected to be somewhat slower by comparison than what was seen for the year-to-date, as the fourth quarter of 2013 was particularly strong.
Seaforth Supply Chain Solutions, the company’s coffee handling and warehousing subsidiary, is also expected to continue performing well in the months ahead.
So far this year, Seaforth has seen its handling and storage volumes increase substantially, despite the labour dispute at Port Metro Vancouver which negatively impacted results in the first quarter.
Accordingly, management believes that Seaforth will continue to make a positive, albeit modest, contribution to the company’s financial results this year and beyond.
Payment of Quarterly Dividend
On October 15, 2014, the company paid an eligible quarterly dividend of $0.0625 per share to shareholders of record on September 30, 2014.