Swiss Water Reports Decline in Revenues for Second Quarter and Completion of Second Production Line in Delta

By: Alexis Rubinstein, Managing Editor - Coffee Network

Wed, 16 Aug 2023, 17:01

Alexis Rubinstein

Managing Editor

CoffeeNetwork (New York) - Swiss Water Decaffeinated Coffee Inc. (TSX: SWP). a leading specialty coffee company and premium green coffee decaffeinator, today reported financial results for the three and six months ended June 30, 2023.

2023 Second Quarter Financial and Operational Highlights

Swiss Water decaffeinated its last bag of coffee at its legacy production facility in Burnaby, BC in April and all production was consolidated at the Company’s new Delta, BC location. In June, the Burnaby site was returned to the landlord on the lease expiry date.
In July, subsequent to the end of the quarter, construction of the Company’s second production line in Delta was completed and the first bag of trial coffee was decaffeinated on the new line. It is anticipated that commercial production will commence before the end of Q3 2023.
Revenue for the second quarter was $43.4 million, a decline of $5.0 million, or 10%, compared to the same period in 2022. First half revenue was $92.4 million, an increase of $5.6 million or 6%. The decline in Q2 revenue was expected and resulted from temporary capacity constraints which negatively impacted volumes while all production was consolidated in Delta before the second new production line there was operational. The impact on the year-to-date result was partially offset by increased business during Q1 from customers in preparation for the transition.
Volumes shipped to customers decreased by 25% for the quarter and by 5% for the six months, compared to the same periods last year. The drop in volumes was the expected result of a temporary reduction in production capacity between April and August of this year. This is the transition period between the retirement of Swiss Water’s Burnaby facility and the full and final commissioning of its second new production line in Delta. As with the revenue result, the impact on first half volumes was partially offset by customers front loading orders during the first quarter to ensure they had sufficient inventory on hand to bridge the transition. Encouragingly, North American sales volumes remained flat during the first half when compared to 2022, despite the temporary capacity constraint.
Swiss Water recorded a net loss of $0.4 million for the quarter and $1.1 million for the first half, representing a decrease of $1.8 million and $3.9 million, respectively from the 2022 result. The decrease was due to lower sales volumes, reduced green coffee differential margins, higher finance expenses associated with elevated company borrowings, and one- time incremental depreciation expenses associated with retired assets located at the Company’s vacated facility in Burnaby, BC.
Adjusted EBITDA was $1.8 million for the quarter and $6.8 million for the six months, representing a decrease of $3.5 million and $2.4 million, respectively from the 2022 result. The decrease was driven mainly by lower sales volumes and reduced green coffee differential margin.

Operational highlights:

Total volumes decreased by 25% in the second quarter and by 5% in the first half when compared to the same periods in 2022. In anticipation of the consolidation of all production in Delta, the Company was proactive in its communications with customers and suppliers regarding the production of coffee leading up to the Burnaby exit, during the estimated period of lower production capacity, and before the new line in Delta begins producing a commercially viable product. As a result, many of Swiss Water’s customers moved orders ahead into the first quarter to ensure they would have sufficient coffee on hand to bridge the transition. To date, this proactive communication regarding the transition period has minimized disruption to the Company’s business and its customers.
Swiss Water’s largest geographical market by volume in the first half of the year continued to be the United States, followed by Canada, and international markets. By dollar value, 55% of the Company’s sales were to customers in the United States, 25% were to Canadian customers, and the remaining 20% were to international markets.
As noted, during the second quarter, Swiss Water continued construction of a second production line at its facility in Delta, BC. The preliminary cost estimate for this project was approximately $45.0 million, plus commissioning costs of approximately $2.0 million. During the second half of last year, the impacts of global macroeconomic pressures, including inflation, building trades disruptions, and supply chain issues, became more acute in terms of project budget and schedule. As previously disclosed, a final cost of $53.0 million is now projected for the second production line in Delta. This revised budget factors in the realized inflationary impacts to date, and there is no change to the original commissioning budget.
Inflationary pressure within Swiss Water’s variable cost structure also remains intense and is being carefully managed in order to limit the impact on the Company’s operational effectiveness and on its trading partners.

Financial Highlights

Second quarter revenue was $43.4 million, a decrease of $5.0 million or 10% when compared to the same period last year. First half revenue was $92.4 million, an increase of $5.6 million or 6%. The decrease in Q2 revenue is the result of an expected period of reduced sales volume due to capacity limitations caused by the exit from the Burnaby site and the completion of the second production line at Delta. This was partially offset by increased volume demand from customers in the first quarter of this year. In addition, green coffee prices were lower when compared to the same periods in 2022.
Gross profit was $3.4 million for the quarter and $8.3 million for the first half, a decrease of $4.5 million and $5.4 million respectively, compared to the same periods in 2022. The decrease in gross profit was driven by lower sales volumes, reduced green coffee differential margins, and one-time incremental depreciation expenses of $0.4 million for the quarter and $2.5 million for the first half. In addition, the Company experienced some inflationary pressure on variable production costs, including natural gas and carbon, as well as freight.
Net income was a net loss of $0.4 million for the quarter, and $1.1 million for the first half, a decrease of $1.8 million and $3.9 million respectively, compared to the same periods in 2022. The decrease was driven by the same factors that impacted gross profit, as well as an increase in finance expenses associated with the Company’s borrowings. These factors were partially offset by gains on risk management activities, higher finance income, a change in the fair value of the embedded option within Swiss Water’s debenture with warrants, reduced loss on foreign exchange, and lower income tax expense.
Adjusted EBITDA was $1.8 million for the second quarter and $6.8 million for the first half, representing a decrease of $3.5 million and $2.4 million, respectively from the 2022 result. The decrease was driven mainly by lower sales volumes and reduced green coffee differential margin.

Alexis Rubinstein

Coffee

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