Ten Peaks Coffee Company Inc.
TSX : TPK

Ten Peaks Coffee Company Inc.

November 13, 2014 16:28 ET

Ten Peaks Coffee Company Reports Significant Year-Over-Year Growth for the Third Quarter and Year-To-Date

Processing Volumes, Revenue, Gross Profit and EBITDA All Up Over 2013

VANCOUVER, BRITISH COLUMBIA--(Marketwired - Nov. 13, 2014) - Ten Peaks Coffee Company Inc. ("Ten Peaks" or "the company") (TSX:TPK) -

Ten Peaks Coffee Company Inc. will hold a conference call to discuss its financial results for the three and nine months ended September 30, 2014 today, November 13, 2014 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 27, 2014, at 1-800-408-3053 (toll free) or 905-694-9451 (GTA and international) passcode: 7917408.

Ten Peaks Coffee Company Inc. today reported financial results for the three and nine months ended September 30, 2014. The three-month period represents the third quarter of the company's 2014 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 September 30, 2014, SWDCC maintained the robust sales momentum it recorded in the first half of this year. As a result, the company achieved double-digit growth in its processing volumes, revenues, gross profit, and EBITDA for both Q3 and the year-to-date.

In $000s except per share amounts 3 months ended 9 months ended
(unaudited) September 30 September 30
2014 2013 2014 2013
Sales $ 17,245 $ 13,217 $ 46,724 $ 38,079
Gross profit 2,589 1,354 8,140 4,263
EBITDA(1) 1,342 1,066 3,963 3,010
Net income 201 559 1,346 1,312
Per share amounts:
EBITDA per share 0.20 0.16 0.59 0.45
Net income per share 0.03 0.08 0.20 0.20
(1) EBITDA is defined in the company's Management's Discussion and Analysis, which will be posted on SEDAR on November 13, 2014.

During the third quarter of 2014, processing volumes rose by 21% over Q3 2013. The strong gains were driven by a 51% increase in volumes to specialty regional customers and supported by a 9% increase in volumes to SWDCC's large national accounts. During the first nine months of the year, the company's volumes rose by 16% compared to the same period in 2013, with shipments to specialty regional accounts up by 33% and volumes to national accounts increasing by 9%. All geographic markets experienced growth, with the most significant gains being generated in the US.

"We are very pleased with our results for the year-to-date," said Frank Dennis, President and CEO of Ten Peaks. "Several years ago, we committed to a 'quality-first' strategy, with the goal of consistently producing 'amazing coffee without caffeine'. We also enhanced our customer-service initiatives, which are designed to help our customers do better in their own businesses. We believe the strong volume growth we have achieved is a direct result of these initiatives, as well as our ongoing efforts to grow both trade and consumer awareness of our coffees and their unique qualities."

Revenue for the third quarter and year-to-date were both up over the same periods last year, due mainly to SWDCC's higher volumes. Third quarter sales grew by 30% to $17.2 million, while nine-month revenue increased by 23% to $46.7 million. Process revenue (the amount customers are charged for decaffeinating their coffee) totaled $4.2 million for the third quarter and $11.6 million for the year-to-date, which represent year-over-year increases of 24% and 22% respectively. In both cases, the increases were related to higher processing volumes and a stronger US$. Green revenue (the base amount customers are charged for green coffee) grew by 32% to $12.2 million during the third quarter and by 22% to $33.0 million for the year-to-date. In this revenue category, gains were related to a higher NY'C' (as discussed below) and increased sales volumes. Distribution revenue (the amount customers are charged for shipping, handling and warehousing) grew by 43% to $0.8 million in Q3 and by 52% to $2.2 million for the year-to-date. Here, the gains reflect the expansion of Seaforth's business, as well as the increase in SWDCC's processing volumes.

The coffee commodity price, or "NY'C'", was relatively high during the first nine months of 2014 due to a drought in Brazil which drove concern about global coffee supplies. During the third quarter, the NY'C' averaged US$1.81, up by 53% over Q3 of last year. The NY'C' averaged $1.73 for the first nine months of 2014, an increase of 32% over the same period last year. In both periods, the higher NY'C' increased SWDCC's revenues and, to a lesser extent, its cost of sales.

A strong US$ also contributed to the company's revenue growth this year. During the third quarter, the US$ averaged $1.09, up by 5% from $1.04 in Q3 2013. For the first nine months of the year, the US$ averaged $1.09, an increase of 7% over the same period last year. This boosted revenues in the current year-to-date, as 72% of the company's sales were generated in US$ during the first nine months of this year, up from 62% for the same period last year.

Cost of sales totaled $14.7 million for the third quarter and $38.6 million for the first nine months of 2014. This represents a year-over-year increase of 24% and 14%, respectively. In both cases, the increase was mainly due to higher green coffee costs, which were driven by increased processing volumes and the higher NY'C', as well as rising utilities costs and incremental warehousing charges related to growth at Seaforth. In addition, the labour dispute at the Port Metro Vancouver in March of this year increased freight and inbound coffee costs for the year-to-date, as it held up green coffee bound for SWDCC for several weeks. In order to make up for the temporary shortfall, SWDCC had to purchase coffee from other warehouses in North America and ship it to the decaffeination facility.

Gross profit increased by 91% for the third quarter and the year-to-date, totaling $2.6 million and $8.1 million respectively. In both periods, the growth was driven by higher sales revenue, which more than offset the increases in cost of sales.

Sales and marketing expenses for the third quarter were $0.3 million and $1.0 million for the year-to-date, which is unchanged from the same periods last year.

Administration expenses rose by 39% to $1.0 million in the quarter, due to higher stock-based compensation. For the nine months ended September 30, 2014, administration expenses were $2.7 million, up by 25% compared to 2013. Higher stock-based compensation and professional fees drove the increase.

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 rates. Realized gains and losses on these derivative instruments are recorded when they mature. In addition, as Ten Peaks does not use hedge accounting, unrealized gains and losses are also recorded at the end of the reporting period, calculated using the market values of the NY'C' and the US$ at quarter-end.

In the first nine months of this year, losses on commodity futures partially offset the higher gross profit. Most of the impact occurred during the first quarter, when the rapid rise of the NY'C' generated significant losses on the company's commodity hedges. During the second and third quarter, losses on coffee futures were limited, such that the increased gross profit more than offset losses on derivative instruments during the period.

The US$ appreciated in the third quarter, which resulted in unrealized losses on foreign exchange forward contracts being recorded in the period. In addition, as Ten Peaks is a net borrower of US$, the rise in the value of the US$ generated losses on US$ denominated debt in the quarter. These reduced the overall earnings in the period.

Ten Peaks generated net income of $0.2 million and $1.3 million in the three and nine months ended September 30, 2014, respectively, compared to $0.6 million and $1.3 million in the same periods last year.

EBITDA rose in both periods this year, increasing by 26% to $1.3 million in Q3 and by 32% to $4.0 million for the year-to-date. In both cases, the significant increase in gross profit drove the gains in EBITDA.

For the nine months ended September 30, 2014, Ten Peaks generated $3.2 million in cash from operations before changes in non-cash working capital. This was down from $3.7 million for the same period last year. Increases in inventory (owing to a higher NY'C' and a stronger US$) consumed cash in the current year-to-date, and accounts receivable rose in tandem with growing revenues. As a result, the burden on Ten Peaks' working capital increased. As at September 30, 2014, net debt (bank indebtedness less cash on hand) was $5.8 million. This represents an increase of $3.6 million since the beginning of the year.

Outlook

The company made significant gains during the first nine months of 2014, and management expects to continue growing the business during the balance of the year. The rate of growth in the fourth quarter is expected to be somewhat slower by comparison than what was seen for the year-to-date, as the fourth quarter of 2013 was particularly strong.

"Our success is driven by our dedication to delivering decaffeinated coffees of the highest integrity and our commitment to providing excellent customer service," said Dennis. "To ensure we can continue to meet these objectives, we have recently expanded our procurement, customer service and logistics teams. Two positions were added in our head office in Burnaby, BC and another two were added in our sales office in Seattle, Washington. We opened our Seattle office earlier this year, giving us a stronger presence in the US market, where we have recorded double-digit volume growth over the past few years."

Seaforth Supply Chain Solutions, the company's coffee handling and warehousing subsidiary, is also expected to continue performing well in the months ahead. So far this year, Seaforth has seen its handling and storage volumes increase substantially, despite the labour dispute at Port Metro Vancouver which negatively impacted results in the first quarter. Accordingly, management believes that Seaforth will continue to make a positive, albeit modest, contribution to the company's financial results this year and beyond.

Payment of Quarterly Dividend

On October 15, 2014, the company paid an eligible quarterly dividend of $0.0625 per share to shareholders of record on September 30, 2014.

Additional Information

A more detailed discussion of Ten Peaks' third quarter and year-to-date 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, 2014. 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 13, 2014.

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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