Ten Peaks Coffee Company Inc.
TSX : TPK

Ten Peaks Coffee Company Inc.

May 13, 2015 16:05 ET

Ten Peaks Coffee Company Reports Excellent Results for Q1 2015 and Announces Planned Capacity Increase

VANCOUVER, BRITISH COLUMBIA--(Marketwired - May 13, 2015) -

Ten Peaks Coffee Company Inc. will hold a conference call to discuss its financial results for the three months ended March 31, 2015 today, May 13 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 28, 2015 at 1-800-408-3053 (toll free) or 905-694-9451 (GTA and international) passcode: 8239085.

Ten Peaks Coffee Company Inc. (TSX:TPK) ("Ten Peaks" or "the company") today reported financial results for the three months ended March 31, 2015. The three-month period represents the first 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 three months ended March 31, 2015, SWDCC continued to build on last year's substantial business growth. As a result, first quarter processing volumes grew by 27% over Q1 2014 driving significant increases in the company's revenues, gross profit, net income and EBITDA for the period.

In $000s except per share amounts 3 months ended
(unaudited) March 31
2015 2014
Sales $ 21,547 $ 13,482
Gross profit 2,602 2,116
EBITDA(1) 3,043 123
Net income 758 (673 )
Per share amounts:
EBITDA per share 0.45 0.02
Net income per share 0.11 (0.10 )

(1) EBITDA is defined in the company's Management's Discussion and Analysis, which will be posted on SEDAR on May 13, 2015.

SWDCC's strong first quarter sales growth came from across the business. Processing volumes to the company's higher-margin specialty regional accounts grew by 28% and shipments to its large national accounts increased by 26% year-over-year. Volumes were also up across all geographic regions, with sales to the United States and international markets growing significantly. While a trucking strike at the Port Metro Vancouver constrained SWDCC's sales volumes in the comparative quarter last year, the significant increase in this year's volumes also reflects additional shipments to existing customers.

"We are very pleased to see the strong sales momentum we generated last year continue into 2015," said Frank Dennis, President and CEO of Ten Peaks. "During the first quarter, we recorded substantial growth in all areas of our business, with sizable volume increases to established customers. Quite clearly, our strategy of consistently delivering amazing coffee backed by highly responsive service is paying off. The investments we have made in growing our business over the past few years are generating significant returns for our shareholders."

Increased volumes boosted revenues in the quarter, even though the coffee commodity price, or NY'C', declined. In early 2015, coffee prices began to fall as heavy seasonal rains eased concerns about the quality and quantity of this year's coffee crops. As a result, the NY'C' declined by 20% during the three months ended March 31, 2015, from US$1.66 to US$1.33. All else being equal, a lower NY'C' will decrease the value of green coffee included in Ten Peaks' revenues, as well as its cost of sales.

Revenues for the three months ended March 31, 2015 were also boosted by a strengthening US dollar ("US$"), as 77% of the company's sales were generated in US$. During the first quarter, the US$ averaged $1.24, up by 13% from $1.10 in Q1 2014.

Overall, first quarter sales grew by 60% to $21.5 million. Process revenue (the amount customers are charged for decaffeinating their coffee) grew by 35% to $4.7 million, with growth related to higher processing volumes, a stronger US$ and continued volume growth with SWDCC's higher-margin specialty regional accounts. Green revenue (the base amount customers are charged for green coffee) grew by 69% to $15.9 million, also due to the stronger US$ and increased volumes. Distribution revenue (the amount customers are charged for shipping, handling and warehousing) grew by 58% to $0.9 million. Here, the gains reflect the expansion of Seaforth's business, as well as the increase in SWDCC's processing volumes.

Cost of sales totaled $18.9 million for the quarter, up by 67% over the same period in 2014. The increase was mainly related to higher green coffee costs, which were driven by higher processing volumes and a higher NY'C' in prior periods (when the inventory was purchased). It also includes higher freight charges, which increased with the growth in shipments to the United States and outside of North America.

Quarterly gross profit increased by 23% to $2.6 million. The year-over-year growth was driven by higher sales revenue, which more than offset the increases in cost of sales.

Sales and marketing expenses were $0.6 million for the quarter, which is up by $0.3 million compared to the same period in 2014. The increase is related to market research and advertising, which began in Q4 2014 in support of the SWISS WATER® brand, as well as the addition of sales resources part way through 2014.

First quarter administration expenses rose by 28% to $1.1 million. The increase here reflects higher stock-based compensation expenses, increased staffing and staff-related expenditures, as well as higher professional fees and ongoing consulting costs related to the adoption of a new enterprise resource planning system last year.

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. As Ten Peaks does not use hedge accounting, 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.

Ten Peaks recognized $1.5 million in net gains on coffee futures contracts during the first quarter of 2015 owing to the declining NY'C', compared to a net loss of $1.3 million in Q1 2014 when coffee prices were rising. These gains were offset in part by unrealized losses on the company's forward contracts, due to the appreciation of the US$ in the quarter. The company also recorded foreign exchange losses of $0.3 million for the first three months of 2015, compared with losses of $0.2 million in Q1 2014.

EBITDA increased to $3.0 million during the quarter, up significantly from $0.1 million for the same period last year. The gain was driven by higher gross profit and net gains on commodity futures, partially offset by increased operating expenses. Similarly, net income rose to $0.8 million, compared to a loss of $0.7 million in Q1 2014.

Finally, Ten Peaks generated $2.8 million in cash from operations before changes in working capital accounts. The company used $1.6 million to repay debt in the quarter, and the company's net debt (bank debt less cash on hand) declined by $2.3 million during the quarter.

Outlook

Management expects that SWDCC's decaffeination business will continue to grow during 2015, but at a more normalized rate than seen during 2014. To help manage the steady growth in demand for its premium chemical free coffees, the company intends to invest more resources in its people and its capital assets this year.

"The rapid growth we have experienced over the past several quarters has highlighted the need to invest strategically in customer service, logistics, business intelligence, and human resources," said Dennis. "Accordingly, we recently added staff positions to ensure we can continue to provide the knowledgeable, timely service that our customers value and appreciate.

"We have also begun the engineering work needed to increase our production capacity so that we can keep pace with growing demand for our SWISS WATER® Process coffees. When we added our second production line about 10 years ago, it was designed to be modular so that we could increase our capacity without building an entirely new line. We expect to move forward with the expansion of this production line in 2015, utilizing our existing debt facilities."

Payment of Quarterly Dividend

On April 15, 2015, the company paid an eligible quarterly dividend of $0.0625 per share to shareholders of record on March 31, 2015.

Additional Information

A more detailed discussion of Ten Peaks' first quarter financial results and management's outlook can be found in the company's Management's Discussion and Analysis ("MD&A") for the three months ended March 31, 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 May 13, 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 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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