Greetings. Welcome to the Swiss Water Decaffeinated Coffee Inc conference call. At this time, all participants are in listen-only mode. A Q&A session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. Please note, this conference is being recorded. Before we begin today's call, we would like 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 Inc. 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 Inc.'s Management Discussion and Analysis posted on SEDAR on, and Swiss Water's website for a full discussion regarding forward-looking statements and the risks therein. I will now turn the conference over to your host, Iain Carswell, CFO at Swiss Water. Ian, you may begin.
Thank you, Paul, good day, everyone, and thanks for taking time to join us. I'm Iain Carswell, CFO of Swiss Water Decaffeinated Coffee Inc. Frank Dennis, our President & CEO, is away and unable to attend today's call, so I will carry the ball this time. I'm here to discuss Swiss Water's financial results for the 3 and 6 months ended June 30, 2023, which were released yesterday. I'll begin by taking you through our financial results, then I will tell you more about our longer-term plans and expectations. After that, I'll be happy to take your questions. As outlined in yesterday's press release, in our MD&A and on our Q1 earnings call in May, the Q2 of this year fell within a transitional period for Swiss Water.
As such, our financial performance during the quarter was not typical of what we have delivered in recent periods, nor of what you can expect going forward. In April, we decaffeinated the last bag of coffee at our legacy production facility in Burnaby, B.C., as we prepared to permanently shut down our 2 decaffeination lines there and vacate the site on the expiration of our lease in June. As the Burnaby asset ceased production before our new 2nd decaffeination line at our Delta facility was fully operational, we began bridging a short period of capacity constraints during the Q2. This transitional period, stretching from April through August of this year, was expected and carefully planned for.
Several months ago, we began working proactively with all our customers and suppliers to ensure that we were aware of what to expect from Swiss Water regarding the production of coffee leading up to the Burnaby exit. During the period of lower production capacity and before the new decaffeination line in Delta begins producing a commercially viable product. Knowing that our capacity would be temporarily constrained during the 2nd and Q3s, many of our customers moved the timing of their orders forward into the Q1 to ensure that they had sufficient coffee on hand to bridge the transition. We also built up our own inventory to enable us to meet customer demand. This had a very positive impact on our volumes and, as a result, our financial performance during Q1. Predictably, the capacity constraints we experienced during the Q2 had an offsetting negative impact on our volumes.
The temporary reduction in volumes, combined with a number of significant one-time costs related to the shuttering of our old Burnaby facility, negatively impacted our financial performance for the 3 and 6 months ended June 30th. When we look at the H1, the strong results we achieved during Q1 helped offset some of the impact of the Q2 transition. It's important to emphasize that this was a temporary disruption of the upward trend in the growth of our business and in the strong performance that Swiss Water has demonstrated over the past several quarters. That said, the curtailment in volume we absorbed in Q2 of this year and the one-time costs related to vacating Burnaby will likely lead to lower earnings year-over-year when we report results for the full 2023 FY.
In July, subsequent to the end of Q2, construction of the 2nd line in Delta was completed, and the first bag of trial coffee was decaffeinated on the new line. We expect to begin producing commercial-grade product from Delta Line 2 before the end of the Q3 this year. Now that we have put the Burnaby exit behind us and consolidated all production in Delta, we expect to regain our volume trajectory as we ramp up production on our 2nd new line. With that context, let me now take you through our financial results. As always, I'll begin my review with volume shipped to customers, as this is the key metric that drives our financial performance. As a result of the temporary capacity constraints resulting from the shutdown of the 2 lines at our legacy Burnaby facility, Swiss Water's processing volumes were down as expected during the Q2.
Taken together, volumes shipped to customers in all categories were down by 25% in the quarter. For the H1, volumes were down by just 5%, largely due to the front loading of orders into the 1st quarter. Looking at volumes by customer type, shipments to roasters, those customers who roast and package coffee to sell to consumers in their own coffee shops or for home or office consumption, were down by 18% in the 2nd quarter, but up by 27% for the 6 months. Shipments to importers, those customers who resell our coffees to roasters where and when they need it, were down by 46% in the quarter and by 26% for the H1.
Looking at the roaster segment another way, specialty roaster account volumes were down by 35% in the quarter and by 13% in the 6 months to June 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 down in Q2, shrinking by 17% compared to the Q2 of last year. H1 shipments were comparable to 2022, growing by 1% this year. Turning now to revenues. Q2 revenue of CAD 43.4 million was down by CAD 5 million, or 10% from Q2 of last year, while H1 revenue of CAD 92.4 million was up by CAD 5.6 million, or 6% from last year's result.
As with volumes, the drop in quarterly revenue was largely due to the temporary reduction in production capacity during the transition from Burnaby. For the H1, this negative impact was offset by the strong volumes we put through in Q1. Looking at the cost side, our Q2 cost of sales was CAD 40 million, down by CAD 500,000 or 1% compared to Q2 last year. The quarterly decrease was due to the capacity, constraint, and resulting reduction in volumes during transition from Burnaby. For the H1, cost of sales was CAD 84.1 million, an increase of CAD 11 million, or 15% from the 2022 level.
The H1 increase was mainly driven by our increased production volumes during Q1, the significant one-time increase in depreciation expense associated with the write-down of non-salvaged assets at our Burnaby location, and to a lesser extent, an inflationary pressure on our variable production and freight costs. As to green coffee costs, while remaining at historically high levels, the NYC was down from $2.25 per pound in Q2 2022 to $1.85 per pound in the Q2 of this year. With coffee prices now on a downward trend, we can expect some of our customers to sit on the sidelines and wait for the market to bottom out. Foreign exchange rates can also have a material impact on our profitability and cash from operations.
This is because the majority of our revenues are generated in US dollar, 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 did during the Q2 of this year. In Q2, U.S. dollar averaged CAD 1.34, up CAD 0.06 from CAD 1.28 in the Q2 last year. As I noted, this appreciation had a positive impact on our revenues when they were converted to Canadian dollars. Q2 gross profit was CAD 3.4 million, a decrease of CAD 4.5 million, 57% when compared to Q2 of 2022.
For the H1, gross profit was CAD 8.3 million, down CAD 5.4 million, or 39% from last year's result. The gross profit percentage decreased from 16% last year to 9% in the Q2. The drop in gross profit was primarily driven by lower sales volumes, reduced green coffee differential margins, and one-time incremental depreciation expenses, CAD 400,000 in the Q2 and CAD 2.5 million for the H1. As with the CAD 2.5 million impairment charge we took in the Q4 of 2022, this one-time non-cash expense resulted from an assessment of the salvageable assets at our legacy Burnaby facility in advance of the lease expiry there in June. To a much lesser extent, inflationary pressure on our variable production and freight costs also had a negative impact.
As we've explained previously, in preparing to shut down the facility and vacate the site, we undertook a detailed analysis of our Burnaby assets with the help of an outside engineering consulting firm. This process carefully considered the potential future use, costs and benefits, and related cash flow impacts involved in removing and repurposing equipment, and determined that only a portion should be salvaged and the rest written off. Q2 operating expenses were CAD 3.4 million, up by CAD 200,000 when compared to Q2 of 2022. For the H1, operating expenses were CAD 6.8 million, up by CAD 400,000 from last year. The administrative portion of operating expenses was down by 15% in Q2 of this year, largely due to a material reduction in professional fees.
You may recall that in Q2 of last year, we incurred higher professional fees related to the refinancing of our debt structure. For the H1, administrative expenses were up by 5% due to general inflationary pressure and higher insurance fees, as well as the depreciation and rental expenses associated with operating 2 facilities prior to shuttering Burnaby. The sales and marketing component of operating expenses was up by CAD 200,000 for both the quarter and the H1. As we move through the balance of 2023, we expect our sales and marketing costs to increase over last year's level due to slightly higher headcount and salaries, as well as return to normal travel and trade show activity. Q2 operating income of CAD 100,000 was down by CAD 4.3 million from the Q2 of 2022.
H1 operating income of $1.5 million, a decrease of $5.8 million from last year's result. Again, the big drivers of the drop in operating income were the reduction in production capacity during the Q2 transition, materially lower green coffee differential margins, the increase in depreciation expense, and to a lesser extent, the inflationary pressure on our variable production and freight costs. Turning now to net income. We reported a net loss of $400,000 for the quarter, compared to net income of $1.5 million in Q2 last year. For the H1, we recorded a loss of $1.1 million, down by $3.9 million from net income of $2.8 million in the first 6 months of 2022.
As with gross profit and operating income, the drop in quarterly net income was largely a result of the same factors, as well as a material increase in finance expense associated with increased borrowings under our debt facilities. These negative factors were partially offset by gains on risk management activities, a revaluation of Swiss Water's embedded option within our debentures with warrants, higher finance income, reduced loss on foreign exchange, and lower income tax expense. Q2 net finance costs of CAD 1.6 million were up by CAD 300,000, or 25% over Q2 of 2022. For the H1, finance costs were at CAD 3 million, up by CAD 500,000 or 24% from last year's level. The increase was primarily due to higher outstanding balances on our construction loans and credit facility, as well as higher variable interest rates.
Q2 Adjusted EBITDA of CAD 1.8 million was down by CAD 3.5 million from Q2 2022, and for the 6 months of this year, we recorded Adjusted EBITDA of CAD 6.8 million, down by CAD 2.4 million from the H1 last year. The decrease in both periods is mainly driven by our lower sales volumes and reduced green coffee differential margin. As we look ahead into the balance of 2023, we are continuing to see a strong order book, particularly for late Q3 and early Q4. Encouragingly, H1 sales volume to our North American customers, our largest market, remained level with 2022, despite the Q2 capacity constraints and general economic headwinds.
Although international sales volume decreased, this was not unexpected, and we are cautiously optimistic this can be partially offset by higher sales volume during the H2 of this year. In general, trading conditions remain favorable in our key markets as ever more industry participants move away from chemical decaffeination in favor of chemical-free processes like ours. However, caution continues to be called for. Like businesses everywhere, Swiss Water is not immune to current and emerging macroeconomic risks. Inflation is becoming increasingly entrenched, and economies around the world are struggling to get a grip of it by raising interest rates. The ongoing war in Ukraine has disrupted the global order and continues to create a lot of uncertainty in Europe and around the world.
Here at Swiss Water, while the supply chain disruptions of the last few years have eased, we continue to experience some delays in the coffee deliveries from certain origins. The recent labor dispute and temporary shutdown of the Port of Vancouver was another illustration of the brittleness of the international supply chain. As we've noted, Swiss Water's experienced very significant inflationary pressure on virtually all of our input costs, from natural gas to freight to labor. These risks and increasing costs demand our close attention and may require further mitigation measures. Looking at operations during the H1 of this year, until the shutdown in late April, we ran both decaffeination lines in Burnaby on a 24/7 basis.
Here in Delta, the initial decaffeination line, which we designate Delta Line One, operated smoothly and efficiently, also on a 24/7 basis throughout the first 6 months of this year. Having fully optimized the production from Line One, we are now sharply focused on ramping up production on Delta Line 2, our 2nd new decaffeination line. As I noted earlier, we decaffeinated the first trial bag of coffee on Line 2 in July and expect to be producing commercial-grade coffee from this new line before the end of the current quarter. We have now completed the exit from Burnaby and are moving forward in our new state-of-the-art production facilities. This transition marks the culmination of a multi-year project to relocate, modernize, and expand the capacity of Swiss Water's production assets.
The consolidation of all production in Delta will provide us with a number of operational efficiencies as well as capacity for future term growth. As we've noted before, based on analysis from a third-party engineering firm, we expect the 2 new lines in Delta together will have a targeted end capacity at least 40% greater than the old Burnaby facility. As to the Delta Line 2 project budget, the preliminary cost estimate for design and construction was approximately $45 million, plus commissioning costs of around $2 million. During the H2 of 2022, the impact of global macroeconomic pressures, including inflation, building trades disruptions, and supply chain issues, became more acute in terms of their impact on our budget and schedule. Given the impact of these factors, as previously disclosed, we revised the Line 2 construction budget to a total of $53 million.
The original $2 million commissioning budget remains unchanged. There were also material costs involved in shutting down our legacy Burnaby facility, salvaging whatever equipment was deemed economical, and then vacating and preparing the site for return to the landlord. As I noticed, we developed this exit plan with the help of a third-party engineering consultant, that the budget to complete our exit from Burnaby was $1.5 million, and we are not anticipating any costs beyond this. With last year's incremental $12 million expansion of our senior term credit facility, along with our existing available credit and projected internally generated cash flow, we have sufficient funds to cover both the Delta Line 2 project and the Burnaby exit plan. That wraps up my comments for today. I would now be happy to answer any questions you might have.
Thank you. At this time, we will be conducting a Q&A session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. We request that in the interest of time today, participants limit themselves to 1 question before getting back in queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, please press star 1 if you wish to ask a question at this time. One moment, please, while we pull for questions. We did have 1 question in queue. Once again, please press star 1 if you wish to enter the Q&A queue to ask a question.
The question today is coming from Richard Rudgley from Glenbrook Capital. Richard, your line is live.
Thank you. Yes. Concerning Delta 2, I just wondered when you envisage the logistically full capacity available, and also when do you perceive demand for running that one 24/7 as well? Thank you.
Thanks for your question. As, as I talked about earlier, we are anticipating that we'll be running that line commercially before the end of Q3. Within the next few weeks, we are expecting to get commercial product off that line. It is a new line. With all new lines, it, it does take time to to kind of get, get them up to full, full operational capacity. And in the short term, we're expecting to have excess capacity on that line. You know, speaking to my operations director, he doesn't have any concerns about our ability to satisfy demand between now and the end of this year.
We'll be, we'll be running that, that line, as, as fast as we feel comfortable, between now and the end of this year. In terms of how, of how quickly we'll be running that, that line on a 24/7 basis, I would expect to be running that line at somewhere between 70%-80% capacity fairly quickly. Then, you know, depending on how demand plays out over the next couple of years, we'll determine, determine how quickly, you know, we're gonna, we're gonna fill, we're gonna fill the line up. Obviously, we'll also be looking at efficiency, small efficiency tweaks that we can make to squeeze additional capacity out of that line as, as, as we move forward. It's kind of a, you know, it's kind of an unknown right now.
You know, how strong, how strong demand is gonna be, going, going forward. We certainly expect strong growth to come back into the business now that we have excess capacity.
Okay, understood. Was I correct when you said that Delta One plus Delta 2 is 40% more capacity than the old Burnaby facility?
Yeah, it would be at least 40% more capacity.
If, if you're gonna be running hopefully, 70%-80% fairly quickly, if, if, the business, you know, which has been very good for many years, I mean, is it possible you, you'll be at, full capacity and perhaps not have enough capacity to meet demand in, in the next, few years?
I mean, we're. The rationale for building the 2nd line was to, to build enough excess capacity to service our growth in the intermediate term. The reality is that if our business continues to grow at strong double-digit rates as it has done for, for the last few years, yeah, there will be another capacity discussion that we'll be that, that we'll need to have at some point further down, further down the line. That's something that management and the board are acutely aware of, and, and we, we talk about whenever we meet.
Is there enough space on-site for that? Because I haven't had a chance to, to, to visit. We've been shareholders for over 20 years I think so, I haven't seen the new facility, so I was just wondering if there is room on site for Delta 3 down the line.
Yeah, we have, we have room for up to 2 additional production lines, on, on site here. Yeah, we're not constrained by, by space as, as we were in our former site in Burnaby.
Okay. Can I just shift the question, and correct me if I'm wrong, but I think roughly your debt's just over CAD 100 million in total, and that will be paid off in 10 or 11 years. Do you think there's a chance, 'cause we've, we've been shareholders, as I say, for a long time, so we remember the days of the dividends? I just wondered if, if you envisage, and if so, at what juncture, the dividends returning to shareholders?
I mean, it's, it's something that, again, is, is something that is discussed, internally, and, certainly speaking as CFO, it's something that, you know, I would like to target. I think the board and management will make an assessment of the most appropriate time.
Okay. Thanks, Ian.
Thank you.
Thank you. The next question is coming from Graham Starco, and Graham is a private investor. Graham, your line is live.
Yeah, hi there. Now that you've reached substantial completion at the Delta facility, can you give us an idea of what you think the maintenance CapEx spend is gonna look like going forward, maybe into 2024?
Yeah, I mean, generally, maintenance CapEx runs at about CAD 300,000 per line. I, I would expect we're running 2 lines. I would expect that to be the path forward. I mean, obviously, these are brand new, both brand new asset. Well, one is 3 years old, but the other one is brand new. You know, you'd expect maintenance spend to be, you know, not be excessive in the first few years of life. Yeah, I, I'm not expecting any material increase in maintenance spend.
Okay, great. That's, that's $300,000 per line, per quarter or per annum?
Per annum. That's, that's generally what we're running at.
Okay, great. Thank you.
Historically.
Thank you. The next question is coming from Richard Whiting. Richard is a private investor. Richard, your line is live.
Hi. Yes, hello. Could you comment on your business from importers? It seems to be quite a bit weaker than the business from other customer types. And could you comment, is, is there something going on there competitively? Are you losing market share or has competitive conditions changed there? It looks like the decline is bigger than would be accounted for just a shift in business temporarily.
I think there's I think it's across the entire market, the coffee market. We're in a period where the coffee price is coming down. We're also coming out of a period of significant supply chain disruption for the coffee market. As a result of that, some customers will have held higher stocks than normal through last year, over the last kind of 12 to 18 months. I think what we're seeing is that as, as prices fall, companies are looking to kind of rebalance their, their, their stock, the stocks in their warehouse, in their warehouses. I think that's contributing to it. I don't think...
I think that is, that's just a natural consequence of the, of the cycle that, that the industry has, has been moving through, probably starting in the Pandemic, and then, then moving through beyond that and, and dealing with some quite significant supply chain disruptions for coffee out of origin.
You don't see any change in competitive conditions or, you don't feel you're losing market share there in, in any way?
I don't feel we're losing market share there, no.
Okay, thank you.
Thank you. There were no other questions from the lines at this time. Ian, I will hand it back to you for closing remarks.
Okay. Well, thank you, everybody. If there are no further questions, I'll conclude today's call. I wish you all a good day, and thank you for joining us.
Thank you. This does conclude today's conference. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.