Good day. Before Swiss Water Decaffeinated Coffee, Incorporated conference call starts, they are required to remind you that certain information in today's presentation is forward-looking in nature. Any such forward-looking information or statements are based on assumptions that they considered reasonable at the time the information was prepared. Such information involves known and unknown risks, uncertainties, and other factors outside our control that could cause actual results to differ materially from those expressed in the forward-looking information.
Swiss Water Decaffeinated Coffee, Incorporated, does not assume responsibility for the accuracy and completeness of the forward-looking information. Similarly, they do not undertake any obligation to publicly revise this forward-looking information to reflect subsequent events or circumstances except as required by law. Please refer to Swiss Water Decaffeinated Coffee, Incorporated's management's discussion and analysis posted on SEDAR and Swiss Water's website for a full discussion regarding forward-looking statements and the risks therein. I would now like to turn the floor over to your host, Frank Dennis. Sir, you may begin.
Thank you, Holly. Good afternoon, everyone, and thanks for taking the time to join us. I'm Frank Dennis, President and CEO of Swiss Water Decaffeinated Coffee, Inc., and with me is Iain Carswell, our CFO. Iain and I are here today to discuss Swiss Water's financial results for the three and nine months ended September 30th, 2024. As usual, I'll begin with a brief review of our performance, then Iain will provide more details about our financial results before I return to tell you about our longer-term plans and expectations. We continue to see growing demand for our chemical-free decaffeinated coffee offerings during the third quarter and first nine months of this year. We are pleased to report volume growth and improved profitability for both periods. When compared to Q3 of last year, total volume grew by 27%, and Adjusted EBITDA increased by 40%.
However, when comparing our quarterly results for 2024 with the same period as last year, it's important to note that the distribution of quarterly sales volumes in 2023 did not follow normal seasonality patterns. Volumes during the third quarter of last year were lower than normal due to the temporary production constraints we experienced during our scheduled exit from our legacy Burnaby site. This year, except for a short planned maintenance period, both our decaffeination lines and Delta have run generally well on a 24/7 basis since January, and we have returned to more normal order patterns. This is borne out by our year-to-date performance, with volumes growing by 4% and Adjusted EBITDA increasing by 13% year-over-year. Consolidation of all our operations in one location has resulted in significant efficiencies and cost savings.
Along with the higher processing volumes, these savings help boost our gross profit by 80% in the quarter and 62% for the year-to-date. Gross margin percentage also showed strong improvement, growing from 10% in the first nine months of last year to 16% this year. We achieved these strong results despite the significant challenges posed by a stubbornly high NYC coffee futures price and renewed disruptions to this coffee supply chain. I'll tell you more about these issues and our outlook for the balance of the year in a few minutes, but first, let me turn the call over to Iain to take you through our financial results in more detail. Iain?
Thanks, Frank, and good afternoon, everyone. As always, I'll begin my review with volume shipped to customers, as this is the key metric that drives our financial performance. Taken together, volumes in all categories are up by 27% in the quarter, and for the year-to-date, total volumes are up by 4% from the 2023 level. As Frank noted, the year-over-year differences were expected, as the volumes reported in Q3 last year were lower than normal. This was due to a temporary capacity constraint we experienced during the period as we exited our legacy production facility in Burnaby and consolidated all operations here in Delta.
Looking at volumes by customer type, shipments, and roasters, those customers who roast and package coffee to sell to consumers in their own coffee shops or for home or office consumption were up by 40% in the third quarter and by 3% for the nine months. While shipments to importers, those customers who resell our coffees to roasters where and when they need it, were up by 13% in the quarter and by 5% for the year-to-date. Looking at the roaster segment another way, specialty roaster account volumes were up by 7% in the quarter and by 1% in the nine months to September 30th. These accounts serve the out-of-home consumer primarily in cafes and restaurants in our key geographic markets. Shipments to large commercial roasters were also up significantly in Q3, increasing by 47% when compared to the third quarter of last year.
For the nine months, shipment to these accounts were up by 6% from last year's level. Turning now to revenues, third-quarter revenue of CAD 41.8 million was up by CAD 9.2 million from Q3 of last year. However, CAD 123.9 million nine-month revenue was down by CAD 1.2 million from the 2023 level. The Q3 result was driven by the significant increase in volumes when compared to Q3 last year when our capacity was constrained. The drop in nine-month revenues is primarily the result of changes in our mix of business. During the first three quarters of this year, we had a higher proportion of toll sales, which do not generate green coffee revenue but only a processing fee. Looking at the cost side, our third-quarter cost of sales was CAD 35.3 million, an increase of CAD 6.3 million, or 22% compared to Q3 last year.
The increase was primarily driven by higher volumes and an elevated NYC, partially offset by cost savings associated with consolidation operations at one location and lower utility rates. For the year-to-date, cost of sales was CAD 104.7 million, down by CAD 8.5 million, or 8% from the 2023 level. The nine-month decrease was driven by cost savings and efficiencies resulting from the consolidation of operations at a single location, as well as by a higher proportion of toll volumes in our sales mix and a CAD 2.5 million decrease in one-time depreciation expense. As you may recall, in 2023, we incurred a significant one-time non-cash depreciation expense resulting from the write-down of unsalvageable assets at our old Burnaby facility. There was no such charge this year.
As to green coffee costs, at an average of $2.46 per pound in the third quarter, the NYC was up by $0.90 from $1.56 per pound in Q3 last year. For the year-to-date, the NYC averaged $2.18 per pound, up by $0.47 from $1.71 last year. With the coffee futures prices at these near-record levels, some of our customers are consuming their own inventories and waiting for the market to come back down again before replenishing their stocks. This is a normal market dynamic that is likely to negatively impact our volumes temporarily. Evidence that the high coffee price is beginning to impact consumer demand is also starting to emerge. This is a growing concern that Frank will tell you more about in a minute. Foreign exchange rates can also have a material impact on our profitability and cash from operations.
This is because most of our revenues are generated in U.S. dollars, while a significant portion of our costs are incurred and paid in Canadian funds. Our exposure to changes in the exchange rate is managed in part through derivative financial instruments. However, all other factors being equal, we benefit when the US dollar appreciates as it has this year. In Q3, the U.S. dollar averaged CAD 1.36, up $0.02 from CAD 1.34 in the same period last year. During the nine months to the end of September, the U.S. dollar averaged CAD 1.36 compared to an average of CAD 1.35 in 2023. This appreciation had a positive impact on our revenues when they were converted to Canadian dollars. Third-quarter gross profit was CAD 6.4 million, an increase of CAD 2.9 million, or 80% when compared to Q3 of last year.
For the year-to-date, gross profit was CAD 19.2 million, up by CAD 7.3 million, or 62% from last year's result. Gross profit percentage increased 15% for the quarter compared to 11% in Q3 of last year. For the nine months, gross profit percentage was 16%, up from 10% last year. The profitability improvements this year were driven by higher processing volumes, cost savings associated with the consolidation of our operations at one location, lower utility rates, and a decrease in one-time depreciation expenses. These positive factors were partially offset by increased operating expenses. Third-quarter operating expenses were CAD 3.6 million, up by CAD 900,000 when compared to Q3 of 2023. For the year-to-date, operating expenses were CAD 11.3 million, up by CAD 1.7 million from last year. The administrative portion of operating expenses was up by 47% in Q3 and by 26% for the nine months.
The primary driver of the increase in both periods was planned headcount, wage increases, higher professional fees, and increased stock-based compensation due to a higher share price. These negative impacts were partially offset by the cost savings associated with the consolidation of all operations at one location. The sales and marketing component of operating expenses was unchanged in the quarter and down by CAD 100,000 for the year-to-date, primarily due to changes in the scheduling of our marketing activities. Q3 operating income of CAD 2.8 million was up significantly from CAD 758,000 in the third quarter of 2023. Nine-month operating income of CAD 7.9 million was also up nicely from CAD 2.3 million last year. Turning to net income, we recorded a net loss of CAD 791,000 for the quarter compared to a net loss of CAD 417,000 in Q3 last year.
For the year-to-date, the net loss was CAD 744,000 compared to a net loss of CAD 1.5 million in 2023. Last year, the reported losses were largely due to one-time costs related to our exit from the Burnaby facility and consolidation of operations in Delta. This year, despite an improved gross margin, higher interest expenses on our construction loans and increased mark-to-market losses on our risk management activities offset much of the benefit. Non-cash losses on the revaluation of Swiss Water's embedded option and mark-to-market adjustments on stock-based compensation also impacted our profitability. The third-quarter net finance costs of CAD 1.8 million were unchanged from Q3 of 2023. For the year-to-date, finance costs were CAD 5.5 million, up by CAD 700,000, or 14% from last year's level.
The increase was primarily because, following the commissioning of our second decaffeination line in Delta, the interest rates on construction loans for the project could no longer be capitalized. Third-quarter Adjusted EBITDA of CAD 2.2 million was up by CAD 600,000 from Q3 2023. For the first nine months of this year, we recorded Adjusted EBITDA of CAD 9.4 million and an increase of CAD 1.1 million compared to the same period last year. As with gross profit, the improvement in Adjusted EBITDA in both periods was driven by higher processing volumes, cost savings resulting from the consolidation of our operations at a single location, lower utility rates, and reduced depreciation. These positive impacts were partially offset by the higher operating expenses and by increased losses on our risk management activities because of the near-record high coffee futures prices we've had to contend with this year.
Turning now to inventories, the second half of 2023, the commissioning of our second production line in Delta led to an acceleration in raw materials usage and increased shipments of finished goods. As a result, we closed 2023 with inventories at their lowest level since Q1 of 2021. As planned, we continued to manage our inventory position down during the second quarter and first half of this year. This was in part because we consumed the last remaining coffee inventories we had built up to bridge last year's move out of Burnaby. Meanwhile, logistics delays affecting freight passing through the Panama Canal slowed the arrival of coffee into Vancouver during the first nine months of this year. This became a matter of increasing concern.
So, to offset the risk of delayed deliveries impacting our ability to meet our customer commitments, we started to increase our coffee inventories from some origins during the third quarter. As a result, when combined with the effect of a rising NYC, our closing third-quarter inventory volume rose to 38 million from 28.8 million at the end of the second quarter. At this level, we are confident we have sufficient inventory on hand to support our operations and near-term growth. As always, we remain focused on optimizing inventory levels and proactively managing our working capital commitments. With construction of our new production assets now complete and fully paid for, debt reduction is a key priority for Swiss Water going forward. We've made significant progress in this regard.
Of particular note is that subsequent to the end of Q3, on October 31st, and in accordance with our agreement, we fully repaid the debenture with warrants, which was due to Mill Road Capital. The total repayment of CAD 15.9 million consisted of CAD 15 million of principal and CAD 900,000 of accrued interest. Following this payment, all obligations, duties, and responsibilities of the parties to the debenture were terminated. That said, the maturity of the debenture did not affect our obligations or the rights of Mill Road under their existing warrant agreement. With this repayment, we have succeeded in paying down a total of CAD 16 million of our debt obligations since the third quarter of 2023. Reduction in our leverage will help reduce our net finance costs going forward. And with that, I will turn the call back to Frank.
Thanks, Iain. Looking forward, interest in chemical-free decaffeinated coffee remains high, and we are optimistic about the future. We are moving towards a diversified global customer base, new state-of-the-art production facilities, quality products, growing demand, a strong brand, and a proven team. We are working to reduce our debt levels and are once again sharply focused on growing the business. All our operations are now consolidated in a single location with two modern processing lines. These assets enable us to optimize our operational processes and produce premium decaffeinated coffee of consistently high quality. We have sufficient production capacity to meet our current needs and, with ongoing optimization, along with some modest targeted investments, enough capacity to meet our medium-term growth needs. The performance of all our Delta production assets has been excellent, and we are optimistic that we can unlock further efficiency gains.
We continue to see growing demand as ever more industry participants move away from chemical-free or chemical decaffeination in favor of chemical-free and organic processes like ours. However, the New York C Coffee Futures price remained close to a historic peak during the third quarter, and evidence is starting to emerge that this is negatively affecting consumer coffee consumption, roaster demand, and especially importer inventories. Futures prices remain at elevated levels, and the coffee futures market structure continues to be inverted. This may have a negative effect on our ending volume growth in 2024. Adding to the challenges are persistent disruptions of the coffee supply chain. As Ian noted, like all importers, we have had difficulty clearing shipments through the Panama Canal for several months.
In addition, we have had back-to-back labor disputes at Port of Vancouver, the latest of which just began on Monday this week with a foreman strike. When combined with the elevated NYC futures price, the result has been very limited spot availability of coffees to backfill supply chain issues, leading to some shortages. This situation has compelled us to add inventory from some origins during Q3 to ensure our ability to meet our commitments to customers. Finally, like businesses everywhere, Swiss Water is not immune to wider macroeconomic risks. Inflation has not fully abated, and economies around the world are struggling to get a grip on it by maintaining high interest rates.
The ongoing war in Ukraine and the crisis in the Middle East have disrupted the global order and continue to create a lot of uncertainty in Europe and around the world, and are certainly the driver of many of the logistical challenges we are facing. Despite these challenges, we are optimistic that we will be able to deliver modest volume growth and improve profitability in 2024. Whatever the future holds, Swiss Water is now much better positioned for the years ahead. That wraps up our comments for today, and Iain and I would now be happy to answer any questions that you might have today.
Thank you. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Your first question for today is from John Sartz with Viking Capital.
Good afternoon. I was wondering if you could tell me about the administrative expenses excluding stock-based compensation for the third quarter.
Yeah. So stock-based compensation impact in the quarter was about $500,000.
Okay. Okay. Now, I actually ran through some math just for fun. So I just annualized your third quarter, and I get revenue of 168 million. I get gross margin of 26 million. I get then SG&A of 13 and interest of 7. So basically, as near as I can see, you're talking earnings before interest and tax of CAD 6 million, and CapEx. I just used one million for annualized and then seven for depreciation. And you're talking free cash flow of about, I don't know, CAD 13 million. And I'm curious how that sort of enables you to, quote, be focused on reducing debt. I mean, you have CAD 70 million worth of debt excluding leases and stuff. So I mean, so CAD 10 million isn't going to make an awful lot of impact, I don't think.
Well, we have over CAD 50 million of long-term construction debt, which is low-price debt, and the balance of our debt is working capital, working capital facility. And we've just paid down CAD 16 million in a repayment from free cash flow or from cash on hand at Mill Road Capital. So there's been a $16 million reduction in the last quarter or in the current quarter on our debt facilities. I would like to have a lower debt balance, and we will focus on reducing that as quickly as we can.
Okay. Thank you.
Your next question is from Richard Rudgley with Glenrock Capital.
Hi, guys. Good to hear the results. I just had two questions today. Firstly, I wanted to give us an update on the status of the California legislation regarding methylene chloride. And also, what's the level of board interest in developing a U.S. trading market for the stock? Thank you.
Hi, Richard. The California proposition essentially has been removed. It was tabled in, I think, April or May, late April, basically. And there was a vote, and California has decided to remove that from their docket for this year. I think that they will review it for next year. The EPA has still banned methylene chloride, however, for general use in the United States. So that's methylene chloride, and then the board's interest in the development of a U.S. trading market. I think that there is some good interest.
As you may know, we've just started research coverage with Zacks in the U.S. to begin to develop the market there. In terms of creating a separate offering, I don't necessarily think that that's on the table at this point. I think the view is that through broker accounts, people in the United States can access the marketplace. I think that that should answer your question. Hopefully, it does.
Yeah. Just to follow up, I wanted to show you, are you saying that you're not really anticipating a proper OTC listing in the foreseeable future?
Well, I mean, we've looked at it in terms of an OTC listing. We have looked at it. I think that there's, I guess, there's just different points of view on it right now, basically. I think from a management point of view, I can definitely see some of the value. I think there's other points of view that there's significantly additional costs to manage that and to report in the United States against it. That may or may not be true, but there is a view that there is a significantly increased cost in that as well. So anyways, I mean, we can still certainly continue to debate that.
Okay. Thanks, guys. I'll leave it there. Thank you very much.
Thank you.
Your next question for today is from Erwin Kleinman, a private investor.
Hello. I have two questions. The first is a follow-up of the first question. Do you actually have $13 million of free cash flow? And the second question relates to, do you have enough capacity for the medium term? Can you define medium term? Is that two years? Is that five years?
Well, I mean, on the first question, I mean, our cash flow statement is very clear. So you can see what our cash generation is from operations. Obviously, at the end of the quarter, we were holding a significant amount of cash on our balance sheet that has subsequently been repaid. We are expecting to continue to grow to generate cash flow from operations going forward. And I would expect to see a continuing trend of cash accumulation in the business.
And yeah, in terms of when we say medium term, I think we're thinking three to five years in that range. Y eah.
Okay, good. Thank you.
Okay.
We have reached the end of the question-and-answer session, and I will now turn the call over to Frank for closing remarks.
Okay. Well, if there are no further questions for today, we will conclude today's call and wish everyone good health and thank you for joining us.
This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.