Ten Peaks Coffee Company Inc.
TSX : TPK

Ten Peaks Coffee Company Inc.

March 17, 2016 16:05 ET

Ten Peaks Coffee Company Declares Quarterly Dividend and Reports Record Results for 2015

VANCOUVER, BRITISH COLUMBIA--(Marketwired - March 17, 2016) - Ten Peaks Coffee Company Inc. (TSX:TPK) -

Ten Peaks Coffee Company Inc. will hold a conference call to discuss its financial results for the three months and year ended December 31, 2015 today, March 17 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 April 1, 2016 at 1-800-408-3053 (toll free) or 905-694-9451 (GTA and international) passcode: 6616836.

Ten Peaks Coffee Company Inc. ("Ten Peaks" or "the company") today reported financial results for the three months and year ended December 31, 2015. The three-month period represents the fourth 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.

2015 was another solid year for Ten Peaks. Processing volumes at SWDCC grew by 13% over 2014, the company generated record revenues of more than $83 million, hedged gross profit increased by 21% and EBITDA rose by 14%. This is the sixth year in a row that SWDCC has achieved year-over-year volume growth, with total processing volumes now up by 57% over 2009 levels.

In $000s except per share amounts 3 months ended 12 months ended
December 31 December 31
2015 2014 2015 2014
Sales $ 21,401 $ 19,456 $ 83,641 $ 66,180
Gross profit 3,166 3,221 11,313 11,361
Hedged gross profit(1) 2,695 4,533 13,068 10,757
EBITDA(2) 1,043 3,109 8,034 7,070
Net income (572 ) 1,672 1,312 3,017
Per share amounts:
EBITDA per share 0.12 0.46 1.04 1.06
Net income per share (0.06 ) 0.25 0.17 0.45
(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.

"2015 was another excellent year for Ten Peaks," said Frank Dennis, President and CEO of Ten Peaks. "In addition to growing our share of the specialty coffee market and recording strong financial results, we successfully raised nearly $20 million via an equity offering. These funds will allow us to expand production capacity at our current decaffeination plant in the near term and to construct a brand new facility and production line, leaving us well-positioned to meet anticipated ongoing growth in demand for our amazing coffees without caffeine."

During 2015, demand for coffees decaffeinated using the SWISS WATER® Process grew steadily. Volume increases came from across the business, with SWDCC experiencing substantial growth within its existing customer base, as well as strong gains in its market share in the US and overseas. The record revenue results reflect SWDCC's high sales volumes coupled with a strong US dollar ("US$").

SWDCC's large national customers accounted for the majority of the company's volume gains in 2015, with shipments to this segment growing by 16% over 2014. The increases were largely related to a growing trend, which sees large food service companies working to respond to heightened consumer demand for high-quality foods. Sales to specialty regional customers also continued to grow during the year, but at a slower pace. After several years of rapid, double-digit growth, processing volumes to these customers increased by 5% in 2015.

Fourth quarter sales totaled $21.4 million, an increase of 10% over the same period in 2014. Process revenue increased by $0.7 million, or 15%, while green revenue increased by $1.1 million, or 8%. In both cases, the rising US$ drove the growth in revenues. Distribution revenue was up by $0.2 million, or 16%, reflecting the growth of Seaforth's business and the stronger US$.

For the full year, revenue totaled $83.6 million, up by $17.5 million, or 26%, over 2014. All three revenue categories - process revenue, green revenue and distribution revenue - recorded double-digit gains in 2015. Process revenue and green revenue both rose by 26% due to the strong volume growth and the appreciation of the US$. Distribution revenue was up by $0.9 million, or 30%, again reflecting the expansion of Seaforth's business and increased shipments during the year.

Cost of sales for the three months and year ended December 31, 2015 rose by 12% and 32%, respectively, compared to 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.

Fourth quarter gross profit decreased by 2% to $3.2 million compared to Q4 2014 and annual gross profit was $11.3 million, which was unchanged from the previous year. The flat gross profit reflects the effect of a declining coffee commodity price, or NY'C', the rising US$ and increased operating expenses in 2015. 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 2015 drove up the green coffee costs for sales to these customers, further reducing gross profit. In addition, operating costs such as freight and warehouse expenses, production labour and packaging all increased during 2015 to support SWDCC's significant year-over-year volume growth.

To offset the impact of market movements in the NY'C' and the US$ on its earnings and cash flows, Ten Peaks enters into commodity futures contracts and currency forward contracts. However, as the company did not use hedge accounting prior to January 1, 2016, it could not include offsetting gains and losses on its derivative instruments in its reported gross profit. Therefore, Ten Peaks also reports hedged gross profit, which takes these derivative instruments into account (see 'Non-IFRS Financial Measures' below). In Q4 2015, the hedged gross profit was $2.7 million, compared to $4.5 million in the same period of 2014. For the full year, hedged gross profit was $13.1 million, compared to $10.8 million in 2014.

Fourth quarter sales and marketing expenses were $0.8 million, up by $0.3 million compared to Q4 2014. For the full year, sales and marketing expenses totaled $2.3 million, up by 56% over the same period in 2014. The increase this year was related to additional market research and advertising expenditures in support of the SWISS WATER® brand, the addition of sales and customer service resources part way through 2014, the launch of a new website, and the cost of an innovative "pop-up" (or temporary) coffee studio in New York City.

"For 10 days this past fall, we set up a chic, colourful pop-up shop in Soho, which served a variety of excellent coffees decaffeinated with SWISS WATER® Process, educated visitors about our 100% chemical free process - and told people where to buy our amazing coffee without caffeine," said Dennis. "The reaction was incredible, with online social media sites buzzing and more than 80 national and international news outlets picking up the story. As these included extremely popular organizations, such as Good Morning America, ABC World News Now, NPR, BBC News, the Washington Post and Jezebel, we're confident the initiative worked to substantially grow awareness of the SWISS WATER® brand."

Administration expenses rose by 24% to $1.6 million for the fourth quarter and by 24% to $5.0 million for the full year. In both periods, the increases reflect higher stock-based compensation expenses due to a significant increase in Ten Peaks' share price. For the full year, administration expenses were also higher due to increased staffing and staff-related expenditures, and higher professional fees. Included in administration expenses were $0.3 million in one-time costs for professional fees related to the planned expansion of capacity, strategic initiatives, and Ten Peaks' planned adoption of hedge accounting under IFRS.

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 full year, Ten Peaks recorded net gains on coffee futures contracts of $2.3 million, compared to net losses of $0.5 million during 2014. Ten Peaks also recorded a realized loss on US$ forward contracts of $0.6 million, compared to a loss of $0.1 million in 2014. In 2015, Ten Peaks' realized gains on forward contracts to buy US$ in respect of green coffee purchases were more than offset by realized losses on forward contracts to sell US$ in respect of its US$ revenues. In addition, unrealized losses of $2.9 million (related to forward contracts that will mature up to 36 months after period-end) reduced Ten Peaks' net income for the year. Unrealized losses on foreign exchange forward contracts are non-cash items, and are not included in hedged gross profit or EBITDA in the period.

Fourth quarter EBITDA was $1.0 million, compared to $3.1 million in Q4 2014. The decrease in the quarter reflects the lower hedged gross profit and increased sales and marketing expenses. For the full year, EBITDA totaled $8.0 million, up from $7.0 million in 2014. The increase reflects higher sales volumes and margin expansion, partially offset by increased sales and marketing expenses and higher administrative costs.

Ten Peaks generated $9.1 million in cash from operations before changes in working capital accounts during 2015, compared to $6.3 million the previous year. Capital expenditures were $2.2 million in 2015, up from $0.6 million in 2014. Capital costs included investments in preliminary engineering to support SWDCC's expansion plans as well as capacity upgrades to its current facility to accommodate anticipated ongoing growth in demand.

Outlook

The coming year is expected be a transitional year for Ten Peaks, as management focuses on establishing a solid foundation for future growth.

"The rapid increases in our processing volumes over the past few years have made it necessary to reinvest in our business," said Dennis. "While we expect our 2016 processing volumes to grow more slowly than in 2015, we do believe that demand for our coffees will continue to rise steadily over the long term. Therefore, our key goal for the coming year is to build our short and long-term production capacity, in order to support and drive further profitable growth in our business."

As noted previously, work is currently underway to expand production capacity at SWDCC's existing facility. This project is scheduled to be completed by the end of March 2016. The company also expects to break ground on a new production plant later this year, with construction expected to take approximately 18 months. Currently, negotiations regarding an agreement for the new site and construction of the facility are underway. Updated information will be provided to shareholders once an agreement is reached.

"In addition to supporting our business growth, we intend to look closely at the effectiveness of our end-to-end supply chain. We believe an in-depth analysis will enable us to enhance our already exceptional customer service by reducing delivery times, improving our operating efficiencies and maintaining our excellent order fulfillment rates. Similarly, we will be implementing additional lean manufacturing initiatives throughout our business, in order to reduce waste, streamline our operations and improve our overall financial results," Dennis added.

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 will 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 January 15, 2016, the company paid an eligible quarterly dividend of $0.0625 per share to shareholders of record on December 31, 2015.

In addition, the company today announced that its board of directors has declared an eligible dividend of $0.0625 per share, to be paid on April 15, 2016 to shareholders of record on March 31, 2016.

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. In addition, hedged gross profit is reported here to assist readers in comparing these results to those that will be reported in future periods. Effective January 1, 2016, Ten Peaks has adopted the hedge accounting provisions of IFRS 9. However, as the company cannot restate prior periods under IFRS 9, the presentation of hedged gross profit will help provide a reasonably comparative figure when analyzing different periods.

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.

While the hedged gross profit reported here offsets much of the impact that arises from fluctuations in the NY'C' and the US$, it is not identical to what will be reported in 2016 under IFRS 9. The primary difference is that with the adoption of hedge accounting, gains and losses on coffee futures contracts will be held on the company's balance sheet to match its inventory position and coffee purchase commitments (not yet received into inventory), such that gains and losses on derivatives flowing through gross profit will match revenues and costs of sales in the period. Presently, all gains and losses on coffee futures are reported in hedged gross profit.

(In $000s)
(unaudited)
3 months ended 3 months ended 12 months ended 12 months ended
31-Dec-15 31-Dec-14 31-Dec-15 31-Dec-14
Revenue $ 21,400 $ 19,456 $ 83,641 $ 66,180
Realized loss on foreign exchange forward contracts - revenue hedges (1) (544 ) (216 ) (1,852 ) (579 )
Non-IFRS Hedged Revenue 20,856 19,240 81,789 65,601
Cost of sales (18,235 ) (16,235 ) (72,328 ) (54,819 )
Net gain (loss) on coffee future contracts (162 ) 1,354 2,321 (477 )
Realized gain on foreign exchange forward contracts - coffee purchase hedges (2) 236 174 1,286 452
Non-IFRS cost of sales (18,161 ) (14,707 ) (68,721 ) (54,844 )
Hedged gross profit $ 2,695 $ 4,533 $ 13,068 $ 10,757
(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 has not used hedge accounting prior to 2016, 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)
3 months ended 3 months ended 12 months ended 12 months ended
December 31,
2015
December 31,
2014
December 31,
2015
December 31,
2014
Income for the period $ (572 ) $ 1,672 $ 1,312 $ 3,017
Income taxes (57 ) 650 533 1,168
Income before tax (629 ) 2,322 1,845 4,185
Finance income (51 ) (18 ) (156 ) (78 )
Finance expenses 7 58 135 207
Depreciation & amortization 357 402 1,460 1,526
Unrealized loss on foreign exchange forward contracts 743 263 2,913 556
Loss on foreign exchange 213 62 892 276
Share-based compensation 403 20 945 398
EBITDA $ 1,043 $ 3,109 $ 8,034 $ 7,070

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 months and year ended December 31, 2015. This document, along with Ten Peaks' audited financial statements, will be posted on SEDAR (www.sedar.com) and on the company's website (http://www.tenpeakscoffee.ca) on March 17, 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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