Ten Peaks Coffee Company Inc.
TSX : TPK

Ten Peaks Coffee Company Inc.

March 15, 2017 20:36 ET

Ten Peaks Coffee Company Reports Results for Fourth Quarter and Full Year 2016

Record Volumes in Q4 Push Up Revenues, Gross Profit, Operating Income, Net Income and EBITDA; Quarterly Dividend Declared

VANCOUVER, BRITISH COLUMBIA--(Marketwired - March 15, 2017) - 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 31st, 2016 tomorrow, March 16th at 9:00 am Pacific Time (12:00 pm Eastern Time). To participate, please dial (866) 682-6100 (toll free) or (862) 255-5401 (international) approximately five minutes before the call and provide the company name. A replay will be available through March 30, 2017 at (877) 481-4010 (toll free) or (919) 882-2331 (international) passcode: 10281.

Ten Peaks Coffee Company Inc. ("Ten Peaks" or "the company") today reported financial results for the three months and year ended December 31, 2016. The three-month period represents the fourth 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 three months ended December 31st, 2016, Ten Peaks recorded its highest quarterly processing volumes ever. Fourth quarter volumes grew by 9% over the same period in 2015, driving year-over-year increases in quarterly revenues, gross profit, operating income, net income and EBITDA.

Strong volume growth in the fourth quarter significantly offset the volume declines SWDCC experienced during the first nine months of the year. As a result, annual processing volumes and revenues were down by 2% compared to 2015. Volumes were strong in 2015 in part due to a declining coffee futures price (or "NY'C'"), which prompted customers to increase their inventories at historically low prices. By comparison, the NY'C' rose for most of 2016. This suppressed demand, with customers postponing new orders and consuming coffee inventories on hand.

Additionally, the industry saw significant demands for extended payment terms by major roasters during 2016. The longer carrying periods squeezed coffee importers, which resulted in inventory reductions and reduced ordering throughout the year. Despite these challenges, the company's success in improving margins led to higher gross profit, operating income and net income, compared to 2015.

"Given the tough market conditions we experienced through most of 2016, we are pleased with our recent financial results," said Frank Dennis, President and CEO of Ten Peaks Coffee Company Inc. "While our volume growth was constrained for much of the year, a very strong fourth quarter, combined with good margin enhancement, enabled us to record solid overall results for 2016. The record-setting processing volumes we achieved in the fourth quarter were the direct result of the capacity expansion we undertook in the first quarter of the year. This gives us confidence that we are well-positioned to respond to anticipated strong demand for our coffees during the next two years, while we build our new decaffeination facility in Delta, BC."

3 months ended 3 months ended 12 months ended 12 months ended
December 31, 2016 December 31, 2015 December 31, 2016 December 31, 2015
Sales 22,448 21,401 81,927 83,641
Gross profit 3,216 3,166 12,050 11,313
Operating income 1,526 753 5,017 3,874
EBITDA(1) 1,998 1,043 5,772 8,034
Net income (loss) 1,328 (572 ) 4,149 1,312
Cash flow from operating activities(3) 3,153 2,401 9,235 9,121
Per share(2)
Net income (loss) - basic and diluted 0.15 (0.06 ) 0.46 0.17
(1) EBITDA is calculated and defined in the section on 'Non-IFRS Financial Measures' below.
(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 fourth quarter, SWDCC saw volumes to its specialty regional customers grow by 28% over Q4 2015. Shipments to its large national customers were also up for the period, rising by 1%. For the full year, volumes to specialty regional accounts fell by 7%, while volumes to national customers were flat.

SWDCC's customers can also be categorized into two groups - coffee importers and coffee roasters - by the nature of their business. Coffee importers act like grocery stores to roasters, sourcing and importing green coffee from various origins and carrying a selection of different origins and quality levels for roasters to choose from. Importers buy coffee from SWDCC in order to resell it to roasters when and where they need it. Roasters are in the business of roasting and packaging coffee for sale to consumers in their own coffee shops, or for home or office use. Roasters either buy directly from SWDCC, or they buy from an importer. They generally carry lower inventories of green coffee than importers, as roasters tend to take delivery of green coffee shortly before roasting it. During the first nine months of 2016, SWDCC recorded an 18% decline in volumes to importers. The negative trend reversed during the fourth quarter, with shipments to importers increasing by 30%. This suggests the importers reduced their inventory levels while the NY'C' was high, and then replenished their stocks during the last months of the year, when the NY'C' fell. Overall, annual volumes to importers declined by 7% compared to 2015.

Revenue for Q4 2016 was $22.4 million, an increase of 5% on a year-over-year basis. Process revenue (the amount SWDCC charges its customers for decaffeinating green coffee beans) increased by $0.4 million, or 8%, while green revenue (the amount SWDCC charges its customers for the green coffee purchased for decaffeination) increased by $0.7 million, or 4%, in the fourth quarter. In both cases, the higher revenue was related to higher volumes. Distribution revenue (shipping, handling and warehousing charges billed to customers) was unchanged from Q4 2015.

For the full year, revenues declined by 2% to $81.9 million, primarily due to lower processing volumes. Although volumes declined, process revenue rose by $0.4 million, or 2%, due to a positive hedge accounting adjustment on revenue hedges. Green revenue decreased by $2.2 million, or 4%, reflecting lower sales volumes and the sale of coffee that had been price-fixed by customers at a lower NY'C'. Distribution revenue rose by 2% for the year, reflecting growth in Seaforth's business, partially offset by lower volumes.

Ten Peaks' financial results reflect the company's adoption of hedge accounting effective January 1, 2016, which allows the company to better align its accounting practices with the way the business is managed. Now, only gains and losses on hedged transactions that occur in a fiscal period are recorded in that period. Gains or losses on derivatives that hedge future transactions are held on the balance sheet or in other comprehensive income for future periods. The adoption of hedge accounting reduces Ten Peaks' earnings volatility, and provides gross profit that reflects the costs/benefits of its risk management activities.

Cost of sales totaled $19.2 million during Q4 2016, up by 5% compared to the same period in 2015. The increase was due to a combination of higher green coffee costs, increased packaging and processing charges, and higher depreciation on manufacturing equipment following the expansion of one of SWDCC's processing lines in the first quarter. For the full year, cost of sales declined by 3% to $69.9 million. Costs declined with the lower processing volumes and green coffee costs. Lower freight charges, due to lower volumes and savings on shipping costs, also contributed to the decline.

Gross profit for the fourth quarter grew by 2% to $3.2 million, due to the higher revenue in the period. For the full year, gross profit grew by 7% to $12.1 million, as lower cost of sales more than offset lower revenues.

Sales and marketing expenses for the fourth quarter were $0.7 million, down by $0.1 million, compared to Q4 2015. Annual sales and marketing expenses totaled $2.4 million, which was largely unchanged from 2015.

During 2016, administration expenses fell by 38% to $1.0 million for the fourth quarter and by 9% to $4.5 million for the full year. In both periods, the decreases reflect lower stock-based compensation expenses due to a decline in Ten Peaks' share price, as well as lower accrued bonuses in the period. This was partially offset by increased staff-related expenditures and higher professional fees.

Overall, operating income rose significantly in 2016, growing by 103% to $1.5 million in the fourth quarter and by 30% to $5.0 million for the full 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 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 helps minimize the earnings volatility historically caused by the revaluation of derivatives instruments associated with SWDCC's risk management activities. This contributed to the reduction in losses on financial instruments, year over year, and thus improved Ten Peaks' net income in 2016.

Net income rose in both periods, to $1.3 million in the quarter (compared to a loss of $0.6 million in Q4 2015), and to $4.1 million for the year. Improved margins and a reduction in expenses contributed to the increases.

EBITDA for the fourth quarter doubled to $2.0 million, due to the higher processing volumes and revenues, as well as lower expenses. However, the strong performance in the fourth quarter was not sufficient to offset declines in EBITDA recorded earlier in the year. As a result, EBITDA for the full year fell by 28% to $5.8 million. Of note in 2015, Ten Peaks' results were boosted by $1.8 million in gains on green coffee sales, which related to a rising US$. No similar gains were recorded in 2016.
Ten Peaks generated $9.2 million in cash from operations before changes in working capital accounts during 2016, compared to $9.1 million in 2015.

Outlook

According to market research firm STUDYLOGIC, in the 12 months ended January 31, 2017, total decaffeinated coffee sales in the United States were up year-over-year. Additionally, specialty decaffeinated coffee is growing faster than the coffee market as a whole, especially in out-of-home markets. Premium specialty decaffeinated coffee is also growing faster than regular coffee in the made-to-order and single-serve formats. In fact, growth in the sales of decaffeinated coffee is offsetting declines in regular (caffeinated) coffees(1).

SWDCC is well-positioned to benefit from growth in the decaf category, as its proven commitment to 100% chemical free processing, and to preserving the unique quality of fine coffees through the decaffeination process, is already well recognized, valued and respected by the coffee trade and its customers. Accordingly, the company's processing volumes are expected to increase in 2017, with growth skewed to the second half of the year.

"As the market leader in premium quality, 100% chemical free decaffeinated coffee, we will continue to invest in growing the category, and in ensuring that roasters and consumers know that they have a choice in decaffeination processes and coffee quality," said Dennis. "When consumers become aware that they can have Amazing Coffee Without Caffeine any time of the day or night, they choose to drink more coffee. This enables roaster retailers, in turn, to extend their coffee sales later into the day and thus, grow their business. Our key objective for 2017 is to focus on executing our expansion plan, while growing our market share in the US and internationally."

As announced previously, Ten Peaks is preparing to build a state-of-the-art production facility, which is expected to be operational by mid to late 2018. During 2016, management finalized a lease for the build-to-suit facility, to be located in Delta, BC. The new processing area will accommodate up to two production lines, and the 100,000 square foot building will also include offices, a state-of-the-art lab, and a coffee warehouse. Importantly, the site is large enough to accommodate growth well into the future. The new facility will be leased to SWDCC for an initial term of five years. The lease agreement includes multiple renewal periods, as well as multiple options to purchase the land and building at specified future dates. As this will be a purpose-built facility, the lease will be accounted for as a financing lease.

(1) STUDYLOGIC report February 2017

Quarterly Dividends

On January 16, 2017, Ten Peaks paid an eligible quarterly dividend of $0.0625 per share to shareholders of record on December 31, 2016.

On March 14, 2017, the company declared an eligible dividend of $0.0625 per share, to be paid on April 17, 2017 to shareholders of record on March 31, 2017.

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, 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 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. 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 are more difficult. As such, management believes that cash from operations before changes in working capital accounts is a more reliable measure of year-over-year cash flows in 2016.

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, 2016 December 31, 2015 December 31, 2016 December 31, 2015
Income for the period $ 1,328 $ (572 ) $ 4,149 $ 1,312
Income taxes 590 (57 ) 1,593 533
Income before tax 1,918 (629 ) 5,742 1,845
Finance (income) expense 192 (44 ) 4 (21 )
Depreciation & amortization 596 357 2,053 1,460
Unrealized (gain) loss on foreign exchange forward contracts (609 ) 743 (1,756 ) 2,913
(Gain) loss on foreign exchange (66 ) 213 (91 ) 892
Share-based compensation (33 ) 403 (180 ) 945
EBITDA $ 1,998 $ 1,043 $ 5,772 $ 8,034

Additional Information

A more detailed discussion of Ten Peaks' recent financial results and management's outlook can be found in the company's MD&A for the three months and year ended December 31, 2016. 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 15, 2017.

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 amazing 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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