Ten Peaks Coffee Company Inc.
TSX : TPK

Ten Peaks Coffee Company Inc.

May 11, 2016 17:02 ET

CORRECTION FROM SOURCE: Ten Peaks Coffee Company Reports Results for Q1 2016; Earnings Per Share Up and Production Capacity Added in the Quarter

VANCOUVER, BRITISH COLUMBIA--(Marketwired - May 11, 2016) - A correction from source is being issued with respect to the Ten Peaks Coffee Company Inc. release that was disseminated May 11, 2016 at 16:05 ET. Cash Flow from Operating Activities for Q1 2016 was reported at 2,104 but should have read 1,449, and the company generated $1.4 million in cash from operations before changes in working capital accounts during the first quarter, not 4.0 as previously reported. The complete and corrected release follows.

Ten Peaks Coffee Company Inc. will hold a conference call to discuss its financial results for the three months ended March 31, 2016 today, May 11 at 2:30 pm Pacific Time (5:30 pm Eastern Time). To participate, please dial 1-800-952-4972 (toll free) or 416-340-8527 (GTA and international) approximately five minutes before the call and provide the company name. A replay will be available through May 31, 2016 at 1-800-408-3053 (toll free) or 905-694-9451 (GTA and international) passcode: 6709648.

Ten Peaks Coffee Company Inc. ("Ten Peaks" or "the company") (TSX:TPK) today reported financial results for the three months ended March 31, 2016. The three-month period represents the first quarter of the company's 2016 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 past two years, SWDCC has recorded a combined increase of 26% in its processing volumes. Consequently, the company is now implementing a multi-year plan to build a scalable foundation to support future growth. During Q1 2016, the company undertook significant upgrades at its Burnaby, BC facility which were designed to increase production capacity. This required a shutdown of one production line for most of March, temporarily reducing the company's ability to decaffeinate coffee. As a result, some orders were pushed into the second quarter, which led to a 4% decrease in SWDCC's overall processing volumes.

"Given the rapid growth of our volumes over the past two years, it was imperative that we add production capacity at our decaffeination plant," said Frank Dennis, President and CEO of Ten Peaks. "The expansion work we completed during the first quarter provides the additional capacity we need to serve our growing customer base for the next two years. Now, we can turn our focus to the construction of a second facility, which we expect to complete in 2018."

Ten Peaks' results also reflect management's adoption of hedge accounting effective January 1, 2016. The adoption of hedge accounting allows the company to better align its accounting practice and results with the way the business is managed. Starting on January 1, 2016, gains or losses associated with hedging instruments entered into to manage Ten Peaks' exposure to the coffee commodity price ("NY'C'") and to US dollars ("US$"), will be reflected on the statement of income directly with cost of sales and revenue. The adoption of hedge accounting will reduce Ten Peaks' earnings volatility, and gross profit will reflect the costs/benefits of its risk management activities.

"We are pleased with the prospect of reporting in a manner consistent with how we manage our business," said Sherry Tryssenaar, Chief Financial Officer of Ten Peaks. "However, it will be challenging to make direct comparisons with prior periods throughout 2016. We are therefore providing investors and analysts with additional information to ease the transition."

Investors are encouraged to read Ten Peaks' Management's Discussion and Analysis ("MD&A"), and Frequently Asked Questions about Hedge Accounting sheet, both of which are available on the company's website at www.tenpeakscoffee.ca. In addition, the table below shows key performance metrics for Q1 2016 and 2015, and the impact (currently and going forward) of the company's adoption of hedge accounting.

(In $000s except per share amounts)
(unaudited)
Q1 Q1 Expected Effect of Hedge
2016 2015 Accounting on Annual 2016 Results
Sales 20,653 21,547 Reduction in volatility
Gross profit 3,017 2,602 Significant reduction in volatility
Operating Income 1,162 814 Significant reduction in volatility
EBITDA(1) 1,358 3,043 Significant reduction in volatility
Net income (loss) 1,188 758 Significant reduction in volatility
Cash Flow from Operating Activities(3) 1,449 2,795 No Impact
Per share(2)
Net income (loss) - basic and diluted 0.13 0.11 Significant reduction in volatility
(1) EBITDA is calculated and defined in the section on 'Non-IFRS Financial Measures' of the company's MD&A for Q1 2016, which will be posted on SEDAR and the company's website on May 11, 2016.
(2) Per-share calculations are based on the weighted average number of shares outstanding during the period.
(3) Excluding movements in non-cash working capital.

During the month-long shutdown of one production line at SWDCC's decaffeination plant, the majority of available capacity was dedicated to fulfilling orders for SWDCC's larger national accounts. As a result, first quarter sales to these customers grew by 5% over Q1 2015. Sales to specialty regional accounts declined by 26% for the period, mainly because these customers represent a large proportion of SWDCC's toll business (in which customer-owned green coffees are decaffeinated for a fee). Normally, toll orders represent approximately 20% of total processing volumes; in Q1 2016 toll orders declined to 11%, as many specialty regional toll orders were deferred until the second quarter. Management anticipates specialty regional sales will return to normal levels in the coming periods.

International sales volumes increased by 20% over Q1 2015, reflecting growing demand for SWDCC's coffees on a global scale. As such, they were an important element of total processing volumes in the first quarter. Volumes to Canadian customers declined by 2% in the quarter, owing to reduced specialty regional sales. US volumes declined by 13%, reflecting lowered sales to specialty regional customers, as well as a lack of orders from a large national customer that was acquired during the period.

Consolidation in the coffee industry can impact SWDCC's processing volumes, quarter to quarter. Over the past two years, a number of the company's customers have been acquired. When this occurs, there is typically a temporary reduction in orders from the acquired business, which lasts for several months.

Revenue for Q1 2016 was $20.7 million, down by 4% from the same period last year. This reflects SWDCC's lower processing volumes and the lower coffee commodity price ("NY'C'"), partially offset by a stronger US dollar ("US$"). During the first quarter, the coffee commodity price, or NY'C', averaged US$1.20. This was down by about 21% from US$1.52 in Q1 2015. The US$ averaged $1.37 in Q1 2016, up by 11% from an average of $1.24 in Q1 2015.

Notably, process revenue (the amount SWDCC charges its customers for decaffeinating green coffee) increased by $0.3 million despite the company's decline in processing volumes. The gains were driven by a stronger US$ and improved margins. Green revenue (the amount customers are charged for green coffee) decreased by $1.2 million, or 7%, due to a lower NY'C' and reduced sales volumes. Distribution revenue (the amount customers are charged for shipping and handling of their green coffees) remained about the same as in Q1 2015.

Cost of sales for the first quarter declined by 7% to $17.6 million. This largely reflects lower green coffee costs owing to a lower NY'C'. In addition, cost of sales were somewhat higher than they would have otherwise been, as management took advantage of the shutdown of one production line to undertake repairs and maintenance on that line. Normally, these expenses would be spread throughout the year.

During the quarter, Ten Peaks' gross profit rose by $0.4 million, or 16%, to $3.0 million, due to margin enhancement.

Sales and marketing expenses were $0.6 million for the first quarter, which is unchanged from the same period in 2015. First quarter administration expenses rose by 9% to $1.2 million. The increase reflects higher staffing and staff-related expenditures, professional fees, and training, which were offset by a decrease in share-based compensation expense, due to a decline in Ten Peak's share price.

Overall, first quarter operating income rose by $0.3 million, or 43%, to $1.2 million, due to the higher gross profit year-over-year.

SWDCC enters into commodity futures and foreign exchange forward contracts to manage the effect of changes in the NY'C' and US dollar exchange rates on the business. The company's hedging strategies have not changed with the adoption of hedge accounting. Now, however, the majority of unrealized gains/losses on derivative instruments are deferred on the balance sheet (for fair value hedges) or in other comprehensive income (for cash flow hedges) until the hedge transaction is realized. This will minimize the earnings volatility historically caused by the revaluation of derivatives instruments associated with SWDCC's risk management activities.

During the first quarter, the company recognized $0.2 million in gains on coffee futures, compared to gains of $1.5 million for the same period last year. In the 2015 period, the NY'C' declined rapidly, resulting in large gains on coffee futures. As Ten Peaks was not using hedge accounting last year, all gains and losses on futures, including those related to coffee purchase commitments and inventory on hand, were recognized in income in 2015.

During Q1 2016, the company also recorded a realized loss of $0.3 million and an unrealized gain of $0.2 million on its US$ forward contracts. This compares to a realized gain of $0.2 million on US$ forward contracts, and an unrealized loss of $1.1 million on these contracts in Q1 2015.

Overall, net income for the first quarter rose by 57% to $1.2 million. With the adoption of hedge accounting, net income better reflects the operating performance of the business, as it is not subject to the same volatility in earnings resulting from changes in the NY'C' and US$ that the company experienced in previous periods.

Earnings per share also increased in the quarter to $0.13, up from $0.11 in Q1 2015. The growth in earnings exceeded the increase in the number of common shares outstanding following the company's equity offering in the third quarter of last year.

EBITDA for the quarter decreased to $1.4 million, down from $3.0 million for the same period last year. In 2015, EBITDA was elevated due to significant gains on commodity futures, owing to a rapidly declining NY'C'. As hedge accounting was not used in 2015, all gains and losses on futures, including those related to coffee purchase commitments and inventory on hand, were recognized in income and EBITDA in 2015.

During 2016, EBITDA will be challenging to compare to prior quarters due to the adoption of hedge accounting. Accordingly, management believes that a less volatile measure of cash flows is cash from operations before changes in working capital accounts. The company generated $1.4 million in cash from operations before changes in working capital accounts during the first quarter, compared to $2.8 million for the same period in 2015.

"We were pleased with our financial performance for the first quarter and especially by the gains made in our earnings per share," said Dennis. "While our results were affected by the scheduled shutdown of a production line, we are now well-positioned to handle volume growth for the next couple of years. Similarly, the adoption of hedge accounting, while challenging in the short-term, enables us to report on our results with more clarity and insight as we go forward."

Outlook

SWDCC's annual processing volumes are expected to continue growing in 2016, despite the timing issues that affected the first quarter. Additionally, 2016 growth rates are expected to be slower than what has been recorded for the last two years.

"Operationally, 2016 will be a transitional year for our company," said Dennis. "We've seen double-digit volume growth for the past two years and a 46% jump in sales since 2010. As we expect demand for our amazing coffees without caffeine to continue rising, it's critical our business is prepared for long-term growth.

"Phase one was completing the capacity upgrades at our Burnaby location. Now, we're turning our focus to the new decaffeination facility we're planning to build in Metro Vancouver. Currently, we're in negotiations for a build-to-suit production facility that we will lease. Importantly, we will also have the option to purchase the land and building in the future.

"We have also commenced detailed engineering for a new production line that will be housed in the new facility. We expect to invest approximately $35 million over the next two years in capital equipment for the new production line and associated coffee-handling equipment. We expect to fund this capital expansion through cash on hand, incremental debt, and funds from operations. We will announce further details to our shareholders as the project unfolds," said Dennis.

Work is also underway to improve the company's end-to-end supply chain effectiveness. With improved supply chain management, order times can be further reduced, and operating efficiencies improved. SWDCC aims to maintain its excellent order fulfillment rates as its business grows. At the same time, SWDCC is implementing new lean manufacturing initiatives throughout the business, to better reduce waste, streamline operations, and improve financial results.

Finally, management believes Ten Peaks strong cash flow generation, solid balance sheet and healthy liquidity provide the company with the financial flexibility to execute the initiatives required to support its profitable growth.

Payment of Quarterly Dividend

On April 15, 2016, Ten Peaks paid an eligible quarterly dividend of $0.0625 per share to shareholders of record on March 31, 2016.

Non-IFRS Financial Measures

EBITDA

Management defines EBITDA as net income before interest, depreciation, amortization, impairments, share-based compensation, gains/losses on foreign exchange, gains/losses on disposal of capital equipment, one-time costs, and provision for income taxes. EBITDA also reflects unrealized gains and losses on foreign exchange forward contracts.

Historically, management has used EBITDA as one measure of our financial performance. It is a calculation of cash from operations independent of changes in working capital balances, and thus complements cash flows from operations as reported on the statement of changes in financial position. However, it is impacted by volatility in the NY'C' and the US$/C$ exchange rate. With the adoption of hedge accounting, prior year comparisons will be more difficult. As such, management believes that cash from operations before changes in working capital accounts is a more reliable measure of cash flows, year-over-year.

The reconciliation of net income to EBITDA is as follows:

(In $000s)
(unaudited)
3 months ended 3 months ended
March 31, 2016 March 31, 2015
Income for the period $ 1,188 $ 758
Income taxes 407 242
Income before tax 1,595 1,000
Finance (income) expense (74) 13
Depreciation & amortization 398 384
Unrealized (gain) loss on foreign exchange forward contracts (218) 1,135
(Gain) loss on foreign exchange (254) 349
Share-based compensation (184) 162
One-time costs 95 -
EBITDA $ 1,358 $ 3,043

EBITDA for the first quarter of 2016 was $1.4 million, compared to $3.0 million for the same period in 2015. The decrease is related to lower volumes, and reduced gains on commodity hedges.

Additional Information

A more detailed discussion of Ten Peaks' first quarter financial results and management's outlook can be found in the company's MD&A for the three months ended March 31, 2016. This document, along with Ten Peaks' condensed consolidated interim financial statements, will be posted on SEDAR (www.sedar.com) and on the company's website (http://www.tenpeakscoffee.ca) on May 11, 2016.

Readers are cautioned that the summary information contained in this press release is not a suitable source of information for readers who are unfamiliar with Ten Peaks. This press release should be considered a precursor to, and not a substitute for, reading the financial statements and MD&A, which provide more detailed information related to the company's performance and future prospects.

Company Profile

Ten Peaks is a publicly traded company that owns all of the interests of the Swiss Water Decaffeinated Coffee Company Inc. (SWDCC), a premium green coffee decaffeinator located in Burnaby, BC. It also owns and operates Seaforth Supply Chain Solutions Inc. (Seaforth), a green coffee handling and storage business located in Metro Vancouver.

About SWDCC

SWDCC employs the proprietary SWISS WATER® Process to decaffeinate green coffee without the use of chemicals, leveraging science-based systems and controls to produce coffee that is 99.9% caffeine free. The SWISS WATER® Process is a 100% chemical free water process for coffee decaffeination, as well as the world's only consumer-branded decaffeination process. It is certified organic by the Organic Crop Improvement Association.

SWISS WATER® Process decaffeinated green coffees are sold to many of North America's leading specialty roaster retailers, specialty coffee importers and commercial coffee roasters. SWDCC also sells coffees internationally through regional distributors.

About Seaforth

Seaforth provides a complete range of green coffee logistics services including devanning coffee received from origin; inspecting, weighing and sampling coffees; and storing, handling and preparing green coffee for outbound shipments. Seaforth's warehouse and handling operation is certified organic by Ecocert Canada.

Forward-Looking Statements

Certain statements in this press release may constitute "forward-looking" statements which involve known and unknown risks, uncertainties and other factors which may cause the actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. When used in this press release, such statements may include such words as "may", "will", "expect", "believe", "plan" and other similar terminology. These statements reflect management's current expectations regarding future events and operating performance, as well as management's current estimates, but which are based on numerous assumptions and may prove to be incorrect. These statements are neither promises nor guarantees, but involve known and unknown risks and uncertainties, including, but not limited to, risks related to processing volumes and sales growth, operating results, supply of coffee, general industry conditions, commodity price risks, technology, competition, foreign exchange rates, construction timing, costs and financing of capital projects, and general economic conditions.

The forward-looking statements and financial outlook information contained herein are made as of the date of this press release and are expressly qualified in their entirety by this cautionary statement. Except to the extent required by applicable securities law, Ten Peaks Coffee Company Inc. undertakes no obligation to publicly update or revise any such statements to reflect any change in management's expectations or in events, conditions, or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those described herein.

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