Ten Peaks Coffee Company Inc.
TSX : TPK

Ten Peaks Coffee Company Inc.

November 05, 2015 16:14 ET

Ten Peaks Coffee Company Continues to Report Strong Results

VANCOUVER, BRITISH COLUMBIA--(Marketwired - Nov. 5, 2015) -

Ten Peaks Coffee Company Inc. will hold a conference call to discuss its financial results for the three and nine months ended September 30, 2015 today, November 5 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 November 20, 2015 at 1-800-408-3053 (toll free) or 905-694-9451 (GTA and international) passcode: 7049713.

Ten Peaks Coffee Company Inc. ("Ten Peaks" or "the company") (TSX:TPK) today reported continued strong financial results for the three and nine months ended September 30, 2015. The three-month period represents the third quarter of the company's 2015 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 third quarter of 2015, SWDCC continued to experience strong demand for its SWISS WATER® Process decaffeinated coffees, with processing volumes up by 13% over the same period last year. This contributed to significant year-over-year increases in quarterly revenue, net income and EBITDA. As the third quarter's solid performance extends the strong results Ten Peaks recorded during the first half of this year, the company's year-to-date results were also very good. Nine-month processing volumes grew by a total of 18%, revenue rose by 33%, net income increased by 40% and EBITDA was up by 76%, compared to the same period last year.

In $000s except per share amounts 3 months ended 9 months ended
(unaudited) September 30 September 30
2015 2014 2015 2014
Sales $ 20,454 $ 17,245 $ 62,241 $ 46,724
Gross profit 3,563 2,589 8,148 8,140
Hedged gross profit(1) 4,076 2,055 10,374 6,224
EBITDA(2) 2,974 1,342 6,992 3,963
Net income 818 201 1,884 1,346
Per share amounts:
EBITDA per share 0.36 0.20 0.96 0.59
Net income per share 0.10 0.03 0.26 0.20
(1) See "Non-IFRS Financial Measures" below for details on how hedged gross profit is calculated.
(2) See "Non-IFRS Financial Measures" for details on how EBITDA is calculated.

SWDCC recorded volume gains across its business during the first nine months of this year. Shipments to higher-margin specialty regional accounts grew by 10%, reflecting strong demand for the company's premium coffees. Volumes to national accounts grew by 22%, due to increased sales to existing customers, together with new account wins which occurred late last year. Geographically, SWDCC continued to extend its global reach. Nine- month sales volumes to the US and international markets were both up significantly, reflecting growing awareness of and demand for SWISS WATER® Process decaffeinated coffees around the world.

"We've seen our share of the world's decaffeinated coffee market continue to steadily grow over the past nine months," said Frank Dennis, President and CEO of Ten Peaks. "We believe this is a direct result of our multi-faceted growth strategy, which centers around delivering amazing coffee without caffeine, supported by responsive customer service. We've also benefited from an explosion of consumer interest in "Third Wave", or super- premium, artisanal coffees. As SWISS WATER® Process decaffeinated coffees are unique in their ability to satisfy this highly sophisticated market, we've been able to capture the attention of, and generate sales to, many of the world's finest roaster-retailers."

Third quarter sales totaled $20.5 million, an increase of 19% over the same period in 2014. Process revenue increased by $1.2 million, or 29%, green revenue increased by $1.7 million, or 14%, and distribution revenue was up by $0.3 million, or 32%. In all cases, the growth in revenues reflects SWDCC's higher processing volumes and a stronger US$.

Nine-month revenue totaled $62.2 million, up by 33% on a year-over-year basis. Process revenue rose by 30% to $15.0 million, while green revenue increased by $11.3 million, or 34%. Green revenue was up in part due to orders from national accounts which were price- fixed at a higher NY'C' last year. Some national accounts fix the price of green coffee six to 12 months ahead of when the coffee will be shipped to them. Distribution revenue was up by $0.8 million, or 38%, again reflecting the expansion of Seaforth's business and SWDCC's increased shipments.

As noted above, movement in the US dollar ("US$") affects Ten Peaks' revenues. During the third quarter of 2015, the US$ averaged $1.31, up by 20% from $1.09 in Q3 2014. For the first nine months of this year, the US$ averaged $1.26, an increase of 15% over the same period last year. As 75% of the company's sales for the year-to-date were generated in US$, the currency's appreciation helped boost revenues.

Cost of sales for the three and nine-month periods ending September 30, 2015 rose by 15% and 40%, respectively, over the same periods in 2014. In both cases, the increase was mainly related to higher green coffee costs, which were driven by the growth in SWDCC's volumes, a higher NY'C' in prior periods (when the coffees were purchased), and a stronger US$. The rise also reflects higher freight charges, which increased with the growth in shipments to the United States and outside of North America.

Third quarter gross profit grew by 38% to $3.6 million. Nine-month gross profit was $8.1 million, unchanged from 2014. The company's year-to-date gross profit remained the same as last year due to a decline in the NY'C' this year, compared to an increase in the NY'C' in 2014. Approximately half of the coffee that SWDCC decaffeinates is sold to customers based on the current NY'C'. When the NY'C' declines over an extended period of time, these coffees are sold at a lower commodity price than they were purchased for. In addition, SWDCC buys coffee in US$ and resells it to certain national accounts in Canadian dollars. The rising US$ in the first nine months of this year drove up the green coffee costs for sales to these customers, further reducing gross profit.

Ten Peaks enters into commodity futures contracts and currency forward contracts to offset the impact of these market movements on its earnings and cash flows. The company calculates its hedged gross profit by adding the gains or losses on derivative instruments to gross profit under IFRS (see 'Non-IFRS Financial Measures' below). In Q3 2015, the hedged gross profit was $4.1 million, compared to $2.1 million in the same period last year. For the year-to-date, hedged gross profit was $10.4 million, compared to $6.2 million in the first nine months of 2014. In both periods, the year-over-year increase was due to growth in SWDCC's processing volumes, the appreciation of the US$ (as not all US$ revenues are hedged) and margin improvement on some of its sales.

Third quarter sales and marketing expenses were $0.5 million, up by $0.3 million compared to Q3 2014. Nine-month sales and marketing expenses totaled $1.6 million, up by 60% over the same period last year. In both periods, the increase was related to additional market research and advertising expenditures in support of the SWISS WATER® brand, the launch of a new website, and the addition of sales and customer service resources part way through 2014.

Administration expenses for the third quarter decreased by 9% to $0.9 million. Last year, third quarter administrative expenses were higher due to higher share-based compensation in the period. Nine-month administration expenses were $3.4 million, up by 24% over the same period last year. The year-to-date increase reflects higher stock-based compensation expenses due to a significant increase in Ten Peaks' share price, increased staffing and staff-related expenditures, and higher professional fees.

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 rate. Realized gains and losses on these derivative instruments are recorded when they mature. Unrealized gains and losses are recorded at the end of the reporting period, calculated using the market values of the NY'C' and the US$ at quarter-end.

For the year-to-date, Ten Peaks recorded net gains on coffee futures contracts of $2.5 million, compared to net losses of $1.8 million during the same period last year. Ten Peaks also recorded a realized loss on US$ forward contracts of $0.3 million, compared to a loss of $0.1 million for the first nine months of 2014. This year, Ten Peaks' realized gains on forward contracts to buy US$ in respect of green coffee purchases were more than offset by realized losses on forward contacts to sell US$ in respect of its US$ revenues. In addition, unrealized losses of $2.2 million (related to forward contracts that will mature up to 36 months after period-end) reduced Ten Peaks' net income for the year-to-date. Unrealized losses on foreign exchange forward contracts are non-cash items, and are not included in hedged gross profit or EBITDA in the period.

Third quarter EBITDA was $3.0 million, more than double the $1.3 million recorded last year. Nine-month EBITDA totaled $7.0 million, up from $4.0 million in 2014. The increase in both periods reflects higher sales volumes and gains on commodity futures contracts, partially offset by increased cost of sales and higher operating costs.

Ten Peaks generated $7.1 million in cash from operations before changes in working capital accounts during the first nine months of this year, compared to $3.4 million in the same period last year. $5.5 million was used for inventory purchases to support business growth and $0.8 million was used for capital expenditures. A further $1.3 million in cash was used to pay quarterly dividends.

Outlook

For 2015, Ten Peaks annual consolidated processing volumes are expected to increase by between 10% to 14% over last year owing to steadily rising demand for SWDCC's premium quality coffees.

Due to solid execution of its well-diversified growth strategy, SWDCC has succeeded in recording strong gains in processing volumes for each of the past five years. This strategy has enabled SWDCC to consistently win new accounts, while increasing volumes delivered to existing customers. This positive trend is expected to continue into the future.

The sustained growth in SWDCC's processing volumes has made it necessary to invest in additional production capacity in order to ensure that the company can continue to meet rising demand for its coffees. Accordingly, an expansion initiative was first announced in May 2015. Since then, some production capacity has been added at SWDCC's existing Burnaby, BC decaffeination facility. The balance of the planned expansion at the Burnaby plant is expected to be completed in the first quarter of 2016.

Ten Peaks has also completed preliminary engineering work for a new facility, including a new decaffeination production line, and is currently seeking a site for the new plant in the Metro Vancouver area. Construction of the new facility is expected to begin in 2016 and to be completed approximately 18 months later.

Both of these initiatives are expected to be financed in part from the proceeds of the Q3 share issuance which generated net proceeds of $18.3 million (details below). Ten Peaks also anticipates funding the new facility and production line with new long-term debt, as well as with cash from operations.

Equity Issue

On July 28, 2015, Ten Peaks closed a bought-deal equity financing, raising gross proceeds of $17.6 million through the issuance of 2,000,000 common shares at a price of $8.80 per share. On August 19, 2015, the company issued a further 250,000 common shares through the over-allotment option pertaining to the equity financing, raising additional gross proceeds of $2.2 million. The net proceeds of the offering are expected to be used for growth opportunities, including a plant expansion at SWDCC's current facility, the construction of a new facility and production line, and for general working capital.

Payment of Quarterly Dividend

On October 15, 2015, the company paid an eligible quarterly dividend of $0.0625 per share to shareholders of record on September 30, 2015.

Non-IFRS Financial Measures

Hedged Gross Profit

The reporting of hedged gross profit is intended to assist readers in the performance of their own financial analysis. Specifically, it is designed to offset the volatility in the company's reported gross profit that arises due to fluctuations in the NY'C' and the US-Canadian exchange rate, such that year-over-year comparisons of financial results are more reflective of the growth in the business. However, since this measure does not have a standardized meaning prescribed by IFRS, it is unlikely to be comparable to similar measures presented by other entities.

Management defines hedged gross profit as: revenues plus the realized gain (loss) on foreign exchange forward contracts that were entered into to hedge US$ denominated revenues, less cost of sales, plus the net gain (loss) on coffee futures contracts which were entered into to offset the commodity price risk associated with a change in the NY'C', plus realized gains (losses) on foreign exchange forward contracts which were entered into to hedge coffee purchases that are sold in Canadian dollars. The calculation is shown below:

(In $000s)
(unaudited)
3 months ended 3 months ended 9 months ended 9 months ended
30-Sep-15 30-Sep-14 30-Sep-15 30-Sep-14
Revenue $ 20,454 $ 17,245 $ 62,241 $ 46,724
Realized loss on foreign exchange forward contracts - revenue hedges (1) (601) (137) (1,308) (363)
Non-IFRS Hedged Revenue 19,853 17,108 60,933 46,361
Cost of sales (16,891) (14,656) (54,093) (38,584)
Net gain (loss) on coffee future contracts 768 (457) 2,484 (1,831)
Realized gain on foreign exchange forward contracts - coffee purchase hedges (2) 346 60 1,050 278
Non-IFRS cost of sales (15,777) (15,053) (50,559) (40,137)
Hedged gross profit $ 4,076 $ 2,055 $ 10,374 $ 6,224
(1) Economic hedges entered into to offset changes in US$ denominated process revenues.
(2) Economic hedges entered into to offset changes in US$ denominated coffee purchases that are sold in Canadian dollars.

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, unrealized gains/losses on foreign exchange forward contracts and provision for income taxes. Ten Peaks' definition of EBITDA reflects realized gains and losses on foreign exchange forward contracts, which offset the currency risk of its US$ denominated revenues and coffee purchases which are resold in Canadian dollars. It also includes gains and losses on coffee as it is sold, together with the offsetting gains and losses on the commodity futures trading account.

Management uses EBITDA as one measure of Ten Peaks' 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. As Ten Peaks does not use hedge accounting, its reported results under IFRS are heavily influenced by changes in the closing market values of the NY'C' and the US-Canadian dollar exchange rate, and thus can be difficult to interpret quarter-by- quarter. Ten Peaks' measure of EBITDA takes the cash flow impact of its currency and commodity hedges into account, and it represents cash flows that can be reasonably forecast and affected through growth initiatives and operational cost controls.

The reconciliation of net income to EBITDA is as follows:

(In $000s)
(unaudited)
3 months ended 3 months ended 9 months ended 9 months ended
September 30, 2015 September 30, 2014 September 30, 2015 September 30, 2014
Income for the period $ 818 $ 201 $ 1,884 $ 1,346
Income taxes 243 48 590 518
Income before tax 1,061 249 2,474 1,864
Finance income (39) (25) (104) (61)
Finance expenses 24 59 128 149
Depreciation & amortization 323 396 1,103 1,125
Unrealized loss on foreign exchange forward contracts 1,346 308 2,171 294
Loss on foreign exchange 231 181 678 214
Share-based compensation 28 174 542 378
EBITDA $ 2,974 $ 1,342 $ 6,992 $ 3,963

Additional Information

A more detailed discussion of Ten Peaks' recent financial results and management's outlook can be found in the company's Management's Discussion and Analysis ("MD&A") for the three and nine months ended September 30, 2015. 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 November 5, 2015.

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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