Ten Peaks Coffee Company Reports Results for Second Quarter and First Half of 2016; Expanded Margins Boost Gross Profit, Net Income

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| Source: Ten Peaks Coffee Company Inc.

VANCOUVER, BRITISH COLUMBIA--(Marketwired - Aug. 11, 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 and six months ended June 30, 2016 today, August 11 at 9:00 am Pacific Time 12:00 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 August 25, 2016 at 1-800-408-3053 (toll free) or 905-694-9451 (GTA and international) passcode: 2236603.

Ten Peaks Coffee Company Inc. ("Ten Peaks" or "the company") today reported financial results for the three and six months ended June 30, 2016. The three-month period represents the second 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.

The company's gross profit, operating income and net income were all up for the three and six months ended June 30, 2016, with margin expansion more than offsetting a decline in processing volumes. EBITDA was flat in the quarter, and was down for the first half.

Reduced orders from a limited number of national customers weighed on the quarter. Orders from a large customer lagged after it was acquired earlier this year. Orders from this customer have resumed somewhat, but total volumes are still below last year's levels. Volumes were also impacted by a number of customers rebalancing their inventory positions by deferring orders and consuming inventory on hand due to a rising coffee commodity price (or "NY'C'"). Volumes in the second half of 2016 are expected to be stronger, as SWDCC is already seeing increased orders now that customers' inventory positions require replenishment.

The table below shows Ten Peaks' financial results for the three and six months ended June 30, 2016, as well as the comparative periods:

(In $000s except per share amounts)
(unaudited)

3 months ended
June 30, 2016
3 months ended
June 30, 2015
6 months ended
June 30, 2016
6 months ended
June 30, 2015
Sales 18,074 20,242 38,726 41,788
Gross profit 2,601 1,986 5,616 4,586
Operating Income 999 198 2,161 1,011
EBITDA(1) 1,000 967 2,355 4,017
Net income (loss) 758 311 1,944 1,068
Cash Flow from Operating Activities(3) 632 1,631 2,081 4,430
Per share(2)
Net income (loss) - basic and diluted 0.08 0.05 0.22 0.16
(1) EBITDA is calculated and defined in the section on 'Non-IFRS Financial Measures' of the company's MD&A for Q2 2016, which will be posted on SEDAR and the company's website on August 11, 2016.
(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.

As mentioned above, SWDCC recorded year-over-year declines in its processing volumes for both the second quarter and first half of this year. National volumes declined by 14% during second quarter, and by 5% for the year-to-date. Orders from SWDCC's specialty regional customers increased by 2% in the second quarter, compared to the same period last year. However, the gain was not sufficient to offset the decline in specialty volumes recorded during the first three months of this year. As a result, total shipments to specialty regional accounts were down by 12% for the first half of this year. Overall, total processing volumes decreased by 9% for Q2 and by 7% for the first half, compared to the same periods last year.

Revenue for the second quarter and first six months of this year was down from 2015, due to the lower processing volumes and a lower NY'C'. The decreases were partially offset by a stronger US dollar ("US$"), as 69% of year-to-date sales were denominated in US currency. During the second quarter and first half of 2016, the US$ averaged $1.29 and $1.33, respectively, compared to $1.23 and $1.24 in the same periods of last year.

Three-month revenues totaled $18.1 million, a decline of 11%, and six-month revenues decreased by 7% to $38.7 million. Notably, process revenue (the amount SWDCC charges its customers for decaffeinating green coffee) remained flat in the second quarter and rose by 3% in the first half, despite lower processing volumes for both periods. This was due to the stronger US$, revenue hedges and margin enhancement on SWDCC's sales. Green revenue (the amount customers are charged for green coffee) for the three and six-month periods was down by 16% and 11%, respectively, due to lower sales volumes and a lower NY'C', compared to the same periods last year. Distribution revenue (the amount customers are charged for shipping and handling of their green coffees) was up 4% for the quarter and 5% for the year-to-date, despite lower volumes; this is also due to margin enhancement for both Q2 and the first half.

Cost of sales for the second quarter totaled $15.5 million, down by 15% compared to the same period in 2015. For the year-to-date, cost of sales declined by 11% to $33.1 million.

In both periods, the decrease was driven by the lower processing volumes and a lower NY'C', which reduced green coffee costs. Cost of sales for the first half was also somewhat higher than it would have otherwise been, as the company took advantage of the first- quarter shutdown of one of its production lines to undertake repairs and maintenance on that line. Normally, these expenses would be spread throughout the year.

Gross profit increased by 31% in the second quarter to $2.6 million, and by 22% to $5.6 million for the year-to-date. In both periods, the year-over-year growth was driven by expanded margins on sales and a stronger US$. In addition, gross profit for the quarter and for the year-to-date increased by $0.2 million and $0.3 million, respectively, due to gains on hedging instruments for sales in the period.

Sales and marketing expenses were $0.5 million and $1.1 million for the three and six months ended June 30, 2016, respectively, which is relatively unchanged from the same periods last year.

Administration expenses fell by 17% to $1.1 million for the second quarter of 2016, and by 7% to $2.3 million for the first half. In both periods, the decrease was related to reduced share-based compensation expense due to a decline in Ten Peaks' share price.

Operating income was also up, rising by 405% to $1.0 million for the second quarter and by 114% to $2.2 million for the first half of this year. Higher gross profit, as well as lower operating expenses, drove the significant year-over-year increases.

The company enters into commodity futures and foreign exchange forward contracts to manage the effect of changes in the NY'C' and US$ exchange rates on the business. On January 1, 2016, Ten Peaks adopted hedge accounting, which allows the company to better align its accounting practices and financial results to the way the business is managed. The company's hedging strategies have not changed with the adoption of hedge accounting. Now, however, the majority of unrealized 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 hedged transaction is realized. This will reduce the earnings volatility historically caused by the revaluation of derivatives instruments associated with its risk management activities.

During the second quarter, Ten Peaks recognized $0.1 million in gains on commodity hedges, compared to gains of $0.2 million for the same period last year. For the year-to- date, it recognized $0.3 million in gains, compared to $1.7 million in the first half of last year. In 2015, the NY'C' declined rapidly over the first half of the year, resulting in large gains, particularly in Q1 of 2015, on the company's commodity hedges. As Ten Peaks was not using hedge accounting last year, all gains and losses on commodity hedges, including those related to coffee purchase commitments and inventory on hand, were recognized in its 2015 income.

During Q2 2016, Ten Peaks also recorded a realized loss of $0.6 million and an unrealized gain of $0.4 million on its revenue and customer-specific hedges. In Q2 2015, the company recorded a realized loss of $0.2 million on revenue and customer-specific hedges, and an unrealized gain of $0.3 million. For the year-to-date, it recorded a realized loss of $0.9 million and an unrealized gain of $0.6 million. In the first half of 2015, it recorded no realized gain or loss, but an unrealized loss of $0.8 million on revenue and customer-specific hedges.

It is important to note that although the adoption of hedge accounting is expected to reduce the volatility in Ten Peaks' financial results, the transitional effect of the adoption will cause increased volatility on its hedges until pre-adoption contracts have matured. The transitional effect is the difference between actual contract rates and the rate in effect at the time of initial adoption of IFRS 9. For the year-to-date, $0.7 million of the $0.9 million loss on Ten Peaks' revenue and customer-specific hedges is transitional, with the remaining $0.2 million loss coming from the undesignated portion of the hedges. For the unrealized gain of $0.6 million, $0.5 million is transitional.

Overall, net income for the second quarter and first half of this year were both up over 2015. Q2 net income rose by 144% to $0.8 million, and year-to-date net income was up by 82% to $1.9 million. In both periods, the increases were driven by higher gross profit due to expanded margins on sales, as well as lower operating expenses.

EBITDA for the second quarter remained flat with Q2 2015. Higher net income during the quarter included finance income and lower non-cash expenses, both of which are excluded in the calculation of EBITDA. For the year-to-date, EBITDA decreased to $2.4 million, down from $4.0 million for the same period last year. In the first half of 2015, Ten Peak's EBITDA included gains of $0.5 million on commodity futures contracts for coffee to be sold in future periods. Such gains are now held on the balance sheet under hedge accounting. In addition, EBITDA for the six months ended June 30, 2015 included $1.0 million in gains on green coffee sales owing to the strengthening US$ between the time SWDCC bought inventory and the time it sold it. By comparison, EBITDA in the current period includes only $35,000 of gains on green coffee sales related to the appreciating US$.

Outlook

Management expects the company's annual consolidated processing volumes to be equal to, or slightly higher than, 2015 volumes. Earnings are also expected to be up, while EBITDA is anticipated to be down from 2015 levels. Certain factors that contributed to EBITDA last year, including the gains on commodity futures, and foreign exchange gains on the sale of green coffee, are not expected to be replicated this year.

Ten Peaks' commitment to 100% chemical free processing, and to preserving the unique quality of fine coffees through the decaffeination process, is already recognized, valued and respected by the coffee trade and its customers. Accordingly, management believes the company's reputation for excellence will continue to drive incremental growth in SWDCC's decaffeination business in the second half of 2016.

"We remain confident that key trends we see in the marketplace will boost our results for the remainder of this year and beyond," said Dennis. "Major players in the specialty coffee industry are beginning to choose health and transparency over less expensive alternatives. Transparency of ingredients, in particular, has become more important than ever to consumers. Our 100% chemical free SWISS WATER® Process helps coffee roaster-retailers deliver on that requirement, while also providing their customers with super premium decaffeinated coffee that's virtually indistinguishable from its caffeinated counterpart.

"Additionally, we believe a recent US FDA ruling against a competitor will motivate many customers to re-evaluate their decaffeination programs and who they choose to partner with. As one of the only 100% chemical free, organically certified decaffeinators in the world, we believe SWDCC is well-positioned to respond to these customers' distinct needs," said Dennis.

Readers may review the US FDA's decision to revoke the organic certification of a competitor of SWDCC, due to the presence of methylene chloride on its organic coffees, via the link below:

https://www.ams.usda.gov/sites/default/files/media/NOP%20AD%20Descafeinadores%20Mexicanos%2012%2007%2015%20Redacted.pdf

Although the competitor's hearing with the US FDA is ongoing, SWDCC has already received orders from customers who have reviewed the ruling (which became public information in July of this year).

In anticipation of substantial growth in the medium term, SWDCC expects to open a new state-of-the-art production facility in 2018. SWDCC is in advanced negotiations of a lease for a build-to-suit facility to be located in Delta, BC. Design work to support necessary development and building permits is well underway. The processing area will accommodate 2 new production lines, and the 100,000 square foot building will also include offices, a state-of-the-art lab, and a coffee warehouse. The land is large enough to accommodate additional growth in the future. The new plant is expected to be operational in mid to late 2018. It will be leased to SWDCC for an initial term of 5 years, and will include 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. Additional details will be provided over the coming months.

Payment of Quarterly Dividend

On July 15, 2016, Ten Peaks paid an eligible quarterly dividend of $0.0625 per share to shareholders of record on June 30, 2016.

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, one-time costs, 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 our 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 will be more difficult. As such, management believes that cash from operations before changes in working capital accounts is a more reliable measure of cash flows, year-over-year.

The reconciliation of net income to EBITDA is as follows:

(In $000s)
(unaudited)


3 months ended
June 30, 2016


3 months ended
June 30, 2015


6 months ended
June 30, 2016


6 months ended
June 30, 2015
Income for the period $ 758 $ 311 $ 1,944 $ 1,068
Income taxes 200 105 606 347
Income before tax 958 416 2,550 1,415
Finance (income) expense (64 ) 25 (139 ) 38
Depreciation & amortization 533 386 931 780
Unrealized (gain) loss on foreign exchange forward contracts (411 ) (309 ) (628 ) 825
(Gain) loss on foreign exchange 27 97 (226 ) 446
Share-based compensation (43 ) 352 (228 ) 513
One-time costs - - 95 -
EBITDA $ 1,000 $ 967 $ 2,355 $ 4,017

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 and six months ended June 30, 2016.

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 August 11, 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 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.

Contact Information:

Ten Peaks Coffee Company Inc.
Sherry Tryssenaar
Chief Financial Officer
604.444.8780
stryssenaar@tenpeakscoffee.ca
www.tenpeakscoffee.ca