Mr. Iain Carswell reports

SWISS WATER REPORTS SECOND QUARTER RESULTS AND COMPLETION OF SECOND PRODUCTION LINE IN DELTA, BC

Swiss Water Decaffeinated Coffee Inc. has released its 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, B.C., in April and all production was consolidated at the company's new Delta, B.C., 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 per cent compared with the same period in 2022. First-half revenue was $92.4-million, an increase of $5.6-million or 6 per cent. 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 per cent for the quarter and by 5 per cent for the six months, compared with 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 with 2022, despite the temporary capacity constraint.
• Swiss Water recorded a net loss of $400,000 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, B.C.
• Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) 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.

"We are pleased to report that Swiss Water's performance during the second quarter, although softer than recent periods, was in line with our expectations and that all our production assets operated at maximum capacity during the quarter. As I have previously discussed, it is important to note that from April through August, we are managing capacity limitations due to the short gap between the retirement of our Burnaby production assets and the full and final commissioning of our second production line in Delta," said Frank Dennis, Swiss Water's president and chief executive officer. "As we look forward into the balance of 2023, we expect to see a recovery of volumes as we initiate commercial operations on our second production line in Delta and overall production capacity increases. However, the temporary curtailment in volume we absorbed in Q2 will likely lead to lower earnings year over year when we report results for the full 2023 fiscal year. We are particularly pleased to report that our new production line was completed shortly after the end of Q2 and the first trial batch of coffee was decaffeinated before the end of July. This milestone marks the culmination of a decade long project to relocate, modernize and expand the capacity of Swiss Water's production assets. Moving forward, this extra capacity will help enable more roasters to respond to consumer demand by accelerating their migration to chemical-free decaffeinated coffee," Mr. Dennis added.

Operational highlights

The attached table shows changes in trading volumes during the three and six months ended June 30, 2023, compared with the same periods in 2022.

Total volumes decreased by 25 per cent in the second quarter and by 5 per cent in the first half when compared with the same periods in 2022. In anticipation of the consolidation of all production in Delta, the company was pro-active 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 pro-active 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 per cent of the company's sales were to customers in the United States, 25 per cent were to Canadian customers and the remaining 20 per cent were to international markets.

As noted, during the second quarter, Swiss Water continued construction of a second production line at its facility in Delta, B.C. 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 per cent when compared with the same period last year. First-half revenue was $92.4-million, an increase of $5.6-million or 6 per cent. 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 with 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 with 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 $400,000 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 $400,000 for the quarter and $1.1-million for the first half, a decrease of $1.8-million and $3.9-million, respectively, compared with 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.

Adjusted EBITDA

Swiss Water defines adjusted EBITDA as net income before interest, depreciation, amortization, impairments, share-based compensation, gains/losses on foreign exchange, gains/losses on disposal of property and capital equipment, fair value adjustments on embedded options, loss on extinguishment of debt, adjustment for the impact of IFRS 16 -- Leases, and provision for income taxes and other non-cash gains related to a remeasurement of asset retirement obligation. The company's definition of adjusted EBITDA also excludes unrealized gains and losses on the undesignated portion of foreign exchange forward contracts.

To help readers better understand Swiss Water's financial results, the attached table provides a reconciliation of net income, an IFRS (international financial reporting standards) measure, to adjusted EBITDA.

Swiss Water is a leading specialty coffee company and a premium green coffee decaffeinator that employs the proprietary Swiss Water process to decaffeinate green coffee without the use of solvents such as methylene chloride. It also owns Seaforth Supply Chain Solutions Inc., a green coffee handling and storage business. Both businesses are located in the city of Delta, B.C., Canada.

Additional information

A conference call to discuss Swiss Water's recent financial results will be held on Thursday, Aug. 10, 2023, at 10 a.m. Pacific Time (1 p.m. Eastern Time). To access the conference call, please dial 1-888-506-0062 (toll-free) or 1-973-528-0011 (international), participant access code 250209.

A replay will be available through Aug. 25, 2023, at 1-877-481-4010 (toll-free) or 1-919-882-2331 (international), passcode 48866.

A more detailed discussion of Swiss Water's recent financial results is provided in the company's management's discussion and analysis filed on SEDAR+ and Swiss Water's website.

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