Vancouver / BC. (tpc) Ten Peaks Coffee Company Inc. reported financial results for the three months and year ended December 31, 2017. The three-month period represents the fourth quarter of the company’s 2017 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., the company’s green coffee handling and storage subsidiary. SWDCC is a premium green coffee decaffeinator located in Burnaby, British Columbia. This is the company’s primary business, and the results reported here reflect SWDCC’s operating performance.
Ten Peaks reported strong results for 2017, including record-level revenues and processing volumes. Annual volumes were the highest in SWDCC’s history, growing by 5 percent over 2016. The solid gains reflect a number of factors, including increased overall demand for decaffeinated coffee, a reduction in the number of third-party decaffeinators and SWDCC’s long-established reputation for delivering premium, 100 percent chemical free decaffeinated coffee that is virtually indistinguishable from its caffeinated counterpart. As a result, SWDCC has succeeded in consistently gaining market share against its competitors.
«We continue to witness the evolution of the coffee consumer’s palate towards more interesting and exciting coffees that are prepared well by specialty roasters and retailers», said Frank Dennis, President and CEO of Ten Peaks Coffee Company Inc. «At the same time, we’ve also seen a growing willingness by specialty roasters to mirror their high-quality coffee offerings with premium decaffeinated coffees, which let people enjoy excellent coffee more often through the day, without worrying about their caffeine intake. In this way, our amazing SWISS WATER® Process decaffeinated coffees help our customers grow their business, while also tapping into a pervasive consumer desire for food and beverage that is both sustainable and 100 percent chemical free».
SWDCC’s full-year volumes were up by 5 percent compared to 2016, with a slight year-over-year decline in the fourth quarter. Q4 2016 represented the highest quarterly volumes in SWDCC’s history until the third quarter of 2017, when a new company record for quarterly volumes was set.
On a year-over-year basis, volumes showed strong growth in each of the first three quarters of 2017, before decreasing by 2 percent in Q4.
SWDCC’s specialty accounts recorded solid volume gains in both periods, increasing by 4 percent in Q4 and by 9 percent for full year. Fourth quarter shipments to commercial accounts declined by 5 percent, while full-year commercial shipments rose by 2 percent.
Shipments to roasters (who roast and package coffee to sell to consumers in the roasters’ own coffee shops, or for home or office use) increased by 6 percent in the fourth quarter and by 2 percent for the full year. Shipments to importers (who resell SWDCC coffees to roasters, where and when they need it) were down by 17 percent in Q4 2017, but rose by 11 percent for the full year. In 2016, several months of rising green coffee costs (or a rising «NY’C’») prompted importers to reduce their coffee inventories and delay buying. Then, in Q4 2016, the NY’C’ dropped quickly, prompting an influx of orders as importers rebuilt their inventories. Importers continued to build their inventories through much of 2017, as the NY’C’ declined from US-Dollar 1.37 per pound at the end of 2016 to US-Dollar 1.26 per pound at the end of 2017.
Fourth quarter sales totalled CAD 20.7 million, a decrease of CAD 1.8 million, or 8 percent, from the same period in 2016. Process revenue (the amount SWDCC charges its customers for decaffeinating green coffee) decreased by 1 percent, reflecting the decrease in sales to commercial customers. This was partially offset by hedging gains in the period. Green revenue (the amount SWDCC charges its customers for the green coffee it purchases for decaffeination) decreased by 12 percent, reflecting the drop in the NY’C’ and slightly lower volumes. Distribution revenue (the shipping, handling and warehousing charges billed to customers) rose by 12 percent, due to growth in Seaforth’s warehousing business.
For the full year, sales totalled CAD 83.8 million, an increase of CAD 1.8 million, or 2 percent, over 2016. Process revenue increased by 5 percent, which was in line with the higher annual volumes. Revenue hedges contributed CAD 0.9 million to process revenue, offsetting the impact of a lower average US-Dollar. During 2017, the USD averaged CAD 1.30 Canadian, which was 2 percent lower than in 2016. As the majority of Ten Peaks’ revenues are denominated in US-Dollar, its financial results are affected by changes in the US-Dollar /C CAD exchange rate. Green revenue remained flat, as higher sales volumes were offset by a lower NY’C’. Distribution revenue rose by 14 percent, with higher volumes and growth in Seaforth’s warehousing business driving the increase.
Cost of sales for the fourth quarter declined by 9 percent to CAD 17.5 million. This was primarily due to lower green coffee costs, owing to a lower NY’C’ and slightly lower volumes. Annual cost of sales was CAD 71.2 million, up by CAD 1.3 million, or 2 percent, over 2016. The increase was driven by higher volumes, and a stronger US-Dollar earlier in the year, mitigated by CAD 0.9 million in commodity hedges and customer-specific hedges related to cost of sales.
Gross profit decreased by 1 percent in the fourth quarter, with the decline in revenue for the period slightly exceeding the decrease in cost of sales. Gross profit for the full year increased by 4 percent, as higher revenues and shipments more than offset the increase in annual cost of sales in 2017.
Sales and marketing expenses grew by 11 percent to CAD 0.7 million in the fourth quarter, and by 8 percent to CAD 2.6 million for the year. In 2017, the Company increased investments in increased sales and marketing resources in support of SWDCC’s strategic growth initiatives.
Administration expenses increased by 48 percent to CAD 1.5 million in the fourth quarter and by 13 percent to CAD 5.1 million for the full year. In both periods, the increases reflected higher staffing and staff-related expenses, including stock-based compensation expenses, as well as recruitment expenses for positions filled late in the year.
Operating income was down by 37 percent to CAD 1.0 million for the fourth quarter and down by 4 percent to CAD 4.8 million for the year.
Two non-cash items – a loss on foreign exchange and a loss on the fair value of the embedded option – reduced earnings by CAD 1.1 million in the fourth quarter. Overall, Ten Peaks recorded a net loss of CAD 0.4 million in the period, compared to net income of CAD 1.3 million in Q4 2016. For the full year, net income totalled CAD 4.2 million. This was unchanged from 2016, as last year’s increases in gross profit, gains on risk management activities, and a gain on the embedded option were offset by higher operating costs and financing costs.
Ebitda for the fourth quarter declined by 33 percent to CAD 1.3 million, reflecting lower operating income and reduced gains on risk management activities in the period. On an annual basis, Ebitda rose by 20 percent to CAD 6.9 million, driven by higher processing volumes and operating income, as well as improved performance on risk management activities.
Outlook
Overall, management expects double-digit volume increases in 2018, with a number of factors supporting an expectation of ongoing growth in SWDCC’s (and therefore Ten Peaks’) business. Recent market research from the National Coffee Association1 shows that decaffeinated coffee is the fastest growing segment of the US coffee market. Total decaffeinated coffee sales are up year-over-year, and specialty decaffeinated coffee sales are particularly strong, especially in out-of-home markets.
Additionally, consumers are more conscious than ever of artificial ingredients and chemicals in the production of their food and drink. As a result, SWDCC has seen increased demand for its sustainable, organically certified and conventional SWISS WATER® Process coffees, as more food companies employ its branded coffees in response to this strong market trend.
Changes in the global decaffeination market are also enhancing SWDCC’s growth prospects. An older decaffeination plant in Europe closed recently, reducing the number of chemical free, third-party decaffeinators available. SWDCC has already won some additional business from coffee companies affected by this shutdown, with additional growth expected in the future.
As noted previously, Ten Peaks is building a new state-of-the-art production facility that will enable the company to meet the anticipated long-term growth in demand for its premium decaffeinated coffees. Construction of the facility, which is located in Delta, BC, began in May 2017 and is expected to be completed in 2018. Initially, the plant will house one new production line, although the site is large enough for further expansion to meet growing demand well into the future. The new production line is under construction and is expected to be commissioned in Q2 2019. The additional capacity that was added at Ten Peaks’ Burnaby, B.C. facility in Q1 2016, together with initiatives currently underway to enhance production flow, is expected to be sufficient to meet anticipated growth in demand until the new line is operational.
During the coming year, management’s primary focus will be to position SWDCC for steady future growth, including by securing new business to fill its current capacity and to leverage the new production capacity that will be coming online in 2019. In the second quarter of this year, the company expects to open a European sales office, to better serve customers in the EU – the world’s largest decaffeinated coffee market. In addition, SWDCC is expanding its ability to target specific customer groups by selectively adding to its sales and marketing team. Although these initiatives will increase expenses somewhat, they are expected to generate increased sales orders beginning in the second half of this year.
«We are already experiencing substantial volume growth in the first quarter of 2018, with much of that fuelled by international clients», said Dennis. «In addition to growth from our current customers, we are seeing strong demand from new customers, who were previously ordering chemical-free decaffeinated coffee from the now-defunct CO2 plant in Europe. In order to ensure that we can fulfil this additional demand for our coffees, we are increasing our sales and operational resources. This includes beginning to operate in two different locations once our new facility in Delta is complete. Although these measures will increase our operating costs in the near term, we believe that it’s important to build our team now, so that we can both capitalize on the near-term market gains that are currently available, and support the considerable future growth we anticipate once our new production line is on stream».
