Greetings, and welcome to the Swiss Water Decaffeinated Coffee Incorporated Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. 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 the SEDAR, S-E-D-A-R, 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, Mr. Frank Dennis, President and CEO. You may begin.
Thank you, Jenny. Good morning, everyone, and thank you 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, 2023 . As usual, I'll begin with a brief review of our performance, and Iain will provide more detail about our financial results before I return to tell you about our longer-term plans and expectations. As outlined in yesterday's press release, in our MD&A, and on our recent earnings calls, the third quarter of this year fell within a transitional period for Swiss Water.
As such, our financial performance during the quarter and first nine months of this year was not typical of what we have delivered in recent periods, nor of what you can expect going forward. We decaffeinated the last bag of coffee at our legacy production facility in Burnaby, BC, in April, as we prepared to permanently shut down our two decaffeination lines there and vacate the site on the expiration of our lease in June. As the Burnaby asset ceased production before our new second decaffeination line at our Delta facility was fully operational, we began bridging a short period of capacity constraint during the quarter. 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 of our customers and suppliers to ensure that they 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 began producing a commercially viable product. I'm happy to tell you that this important milestone was achieved in August, and our new Delta Line 2 is now producing decaffeinated coffee of very high quality. The optimization of Line 2 is ongoing as we continue to ramp up its production. Knowing that our capacity would be temporarily constrained during the second and third quarters, many of our customers moved the timing of their orders forward into the first quarter to ensure 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 first quarter volumes and financial performance. Congratulations goes to our sales and logistics teams, who performed admirably throughout the transition as they successfully managed the temporary disruption and allocation of available production capacity. Predictably, the second and third quarter capacity constraints had an offsetting negative impact on our volumes and financial performance for both quarters and the year to date. In addition, a number of significant one-time costs related to the shuttering of our old Burnaby facility impacted this year's financial results. 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 demonstrated over the previous several quarters.
Now that we have put the Burnaby exit behind us and consolidated all of our production in Delta, we expect to regain our volume trajectory as we ramp up production on our second new line. Now, before I tell you more about the Delta Line 2 project and our outlook for the rest of the year, let me turn the call over to Iain to take you through our financial results. Iain?
Thanks, Frank, and good day, everyone. 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 two lines at our legacy Burnaby facility, Swiss Water's processing volumes were down, as expected, during the third quarter and year to date. Taken together, volumes shipped to customers in all categories were down by 31% in the quarter. For the nine months, total volumes were down by 14%. 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 33% in the third quarter, but by only 2% for the nine months.
While shipments to importers, those customers who resell our coffees to roasters where and when needed, were down by 29% in the quarter, by 27% for the year to date. Looking at the roaster segment another way, specialty roaster account volumes were down by 40% in the quarter and by 22% 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 down in Q3, shrinking by 25% compared to the third quarter of last year. However, nine-month shipments were less impacted, dropping by just 8% this year. Turning now to revenues.
Third quarter revenue of $32.6 million was down by $13.5 million, or 29% from Q3 of last year, while year-to-date revenue of $125 million was down by $7.9 million, or 6% from last year's result. As with volumes, the drop in revenue for both periods was partially due to the temporary reduction in production capacity during the transition from Burnaby. During the quarter, coffee commodity price also played a major role as the cost of green coffee we sell to customers comprises a significant proportion of our revenue. For the year to date, these negative impacts were partially offset by the exceptionally strong volumes we put through in Q1, as well as a higher U.S. dollar exchange rate.
Looking at the cost side, our third quarter cost of sales was CAD 29.1 million, down by CAD 10.5 million, 27% compared to Q3 last year. The quarterly decrease was due to the lower green coffee price and the capacity constraint and resulting reduction in volumes during the transition from Burnaby. For the year to date, cost of sales was CAD 113.2 million, an increase of just CAD 600,000, so essentially level with the first nine months of last year. As to green coffee costs, the NY 'C' was down from $2.19 per pound in Q3, 2022 to $1.56 in the third quarter of this year. 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 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 things being equal, we benefit when the U.S. dollar appreciates, as it did during the third quarter. In Q3, the U.S. dollar averaged 1.34 Canadian, up 3 cents from 1.31 Canadian in the third quarter last year. As I noted, this appreciation had a positive impact on our revenues when they were converted to Canadian funds. Third quarter gross profit was CAD 3.6 million, a decrease of CAD 3 million when compared to Q3 of 2022. For the nine months, gross profit was CAD 11.9 million, down CAD 8.4 million from last year's result.
Gross profit percentage decreased from 15% last year to 10% in both periods this year. The drop in 9-month gross profit was primarily driven by lower volumes and a reduced green coffee differential margin. In addition, our profitability was impacted by a one-time non-cash incremental depreciation expense of CAD 2.5 million, resulting from the write-down of non-salvaged assets at our old Burnaby location. There was no such charge in the first 9 months of last year. Inflationary pressure on our variable production costs, including natural gas and labor, as well as on freight and warehousing, also had a negative impact. Third quarter operating expenses were CAD 2.9 million, up by CAD 500,000 when compared to Q3 2022. For the 9 months, operating expenses were CAD 9.6 million, down by CAD 100,000 from last year.
The administrative portion of operating expenses was down by 25% in Q3 and by 6% for the first nine months of this year, largely due to a material reduction in professional fees. You may recall that last year we incurred higher professional fees related to the refinancing of our debt structure. The year-over-year benefit was partially offset by general inflationary pressure and higher insurance fees, as well as the absence of credits from Scientific Research and Experimental Development this year. The sales and marketing component of operating expenses was up by CAD 100,000 for the first quarter and by CAD 300,000 for the nine months. As expected, our sales and marketing costs continued to gradually increase over last year's level due to a return to normal travel and trade show activity, as well as a slightly higher headcount and salaries.
Q3 operating income of CAD 758,000 was down by CAD 2.5 million from the third quarter of 2022. 9-month operating income was CAD 2.3 million, a decrease of CAD 8.3 million. Again, big drivers of the drop in operating income were a reduction in production capacity during the transition out of Burnaby, materially lower green coffee differential margins, a one-time increase in depreciation expense, and to a lesser extent, inflationary pressure on our variable production and freight costs. Turning now to net income. We reported a net loss of CAD 400,000 for the quarter, compared to a loss of CAD 200,000 in Q3 last year.
For the year to date, we recorded a loss of CAD 1.5 million, down by CAD 4.1 million from net income of CAD 2.6 million in the first 9 months of 2022. As with gross profit and operating income, the drop in quarterly and year-to-date net income was largely the result of the same factors, as well as a material increase in finance expense associated with increased borrowing under our debt facilities. These negative factors were partially offset by improvements in 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. Third quarter net finance costs of CAD 1.8 million were up by CAD 600,000, or 46% over Q3 of 2022.
For the year to date, finance expenses were CAD 4.8 million, up by CAD 1.1 million, or 31% 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. Third quarter Adjusted EBITDA of CAD 1.5 million was down by CAD 2.8 million from Q3 2022, and for the first nine months of this year, we recorded Adjusted EBITDA of CAD 8.3 million, down by CAD 5.2 million from the same period last year. The decrease in both periods was mainly driven by our lower volumes due to the transitional capacity constraints and the reduced green coffee differential margin. With that, I thank you for your attention, and I'll turn it over to Iain.
Thank you very much, Iain. As we look ahead into the balance of 2023, we are seeing a strong order book, as some orders have been backlogged, awaiting a return to normal operations and new capacity. 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 on it by raising 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.
Here at Swiss Water, while the supply chain disruptions of the last few years have eased, we continue to experience minor delays in coffee deliveries from certain origins. Last summer's 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 is experiencing very significantly inflationary pressure on virtually all of our input costs, from natural gas to freight and to labor. These risks and increasing costs demand our close attention and may require further mitigation measures. Looking at operations during the first nine months of the year, until the shutdown in late April, we ran both decaffeination lines in Burnaby on a 24/7 basis.
At Delta, the initial decaffeination line, which we designate Delta Line 1, operated smoothly and efficiently, also on a 24/7 basis throughout the first nine months of the year. Beginning in August, with the first bag of salable coffee coming off Delta Line 2, our newest production asset is now gaining speed and efficiency with every day that passes. As to the Delta Line 2 project budget, as previously disclosed, the Line 2 construction budget totaled CAD 53 million, - CAD 2 million commissioning budget. The project was completed within this budget, and final invoices will be settled in Q4. There were also material costs involved in shutting down our legacy Burnaby facility, salvaging whatever equipment was deemed economical, and in vacating and preparing the site for the return to the landlord.
The preliminary cost estimate to complete our exit from Burnaby was CAD 1.5 million, and the final cost was lower at CAD 1.3 million. It's important to note that the curtailment in volume we absorbed in Q2 and Q3 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 fiscal year. However, Swiss Water is now much better positioned for 2024 and the years ahead. Having now completed the exit from Burnaby, we are once again operating from a single site and are moving forward with new state-of-the-art production facilities. The consolidation of all of our production in Delta will provide us with a number of operational efficiencies as well as capacity for immediate term growth.
This transition marks the culmination of a 10-year project to relocate, modernize, and expand the capacity of Swiss Water's production assets. That wraps up our comments for today, and Ian and I would now be happy to answer any of the questions that you might have today.
Thank you very much. At this time, we will be conducting our question-and-answer session. If you would like to ask a question, please press star one on your phone keypad now. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For any participants using speaker equipment, it may be necessary to pick up your headset before pressing the keys. Please pause a moment while we poll for questions. As a reminder, it's star one on your phone keypad to ask a question. Thank you. Your first question is coming from Richard Rudgley from Glenbrook Capital. Richard, your line is live.
Oh, hi, guys. Yeah, thanks for taking my question. Well, actually, I have a few questions. The first one I just wanted to... Maybe I missed it. What was the dollar amount of the final depreciation at Burnaby, please?
Yeah, the one-off charge that we worked with during this year was $2.5 million.
At CAD 2.5 million?
Yes.
Okay, and that was equipment, if I recall correctly from previously, that you decided it made no sense to move it anywhere or so you just had to leave it behind. Is that correct?
Yeah, we worked with a third-party engineering firm to assess the viability of retaining that equipment, and it was judged that the right decision was to retire some of that equipment. That would be associated with the charge.
Okay, let's say, so you had a net loss of CAD 1.5 million for the year to date, right? For the first nine months. And so you're saying that's CAD 2.5 million year to date or in total? So I'm not, still not quite with you.
Yeah, the majority of that CAD 2.5 million charge hit during Q1, and there was a small, small balance came through in the beginning of Q2. But yeah, I think what you're asking is if you were to reverse out that that one-off charge, what would your net income be? So yeah, it would be approximately CAD 1 million if we hadn't had to absorb that charge on a year-to-date basis last year.
Okay, great. Thank you. I think it's great. We've been shareholders for at least 15, maybe 20 years. We're still buyers, but it's obviously very thin and very hard to buy. I don't know if you have any thoughts on daily volume. I mean, it's never been that large, but I'm just wondering, I know obviously, long time since you paid a dividend, and you probably lost some shareholders at that juncture. But I just wondered if you had any ideas on, you know, getting something more in terms of IR activity to, Because it's obviously a great story, and as you can tell, we're still buying after 15 years, so we believe in it as well. Just wondering if there's anything you could do to get the sort of word to go wider.
Yeah, Richard. Hi, it's Frank.
Hi, Frank.
You know, I think that we have gone through a transition here, which has. It took up a vast amount of kind of time and focus for us. You are absolutely correct. The story does remain very positive and significantly more positive now that we know exactly, you know, the total capital costs to do the exit, which was, you know, partially planned, partially unplanned in terms of timing. We knew we need to do it over time, but now we have, you know, a chunk of debt on our balance sheet that we are very focused on bringing down, and happy to see that we are driving EBITDA very nicely, despite some of the capacity shorts or constraints through this fall.
But we continue to pick up new customers, new major customers, and business development is very, very positive, and we've got capacity to grow. And so, you know, building, I think a better, IR outreach is something that has definitely been in the back of my mind for the last year or so, and I think it is something that would be worthwhile. I think it's, you know, whether it's roadshow work or whether it's just more kind of standard, maybe retail investor IR, I'm not exactly sure yet, but I would agree with you that, you know, improving our IR outreach now that we know exactly where we stand and what we're doing, and now and shortly we'll have more options in front of us, is the right thing to do.
Okay, well, that's good to hear. And, you know, maybe we can talk another time about how we might be able to help with that. I don't know if you've thought about an OTC listing as well, since a lot of your business is in the U.S. as well.
That's funny, that's funny. We actually, we actually did think about that, about 1.5 years ago, 2 years ago, and we stopped that because we were involved in this whole transition. So thanks for bringing that back up again. Yeah.
Okay. And also on a slightly different note, I was gonna ask if you how it's going with new customers. Sounds like it's going really well. So I just wondered if you could give us some geography and size of those customer brackets that you've you know gained some more people. And I just wondered if you know because you do have the exceptional products in the market if you've thought about hiring a branding firm, which again is something we we could talk about another time too if you're interested. Maybe you have, We have some ideas on that, but I just wondered what your thoughts are at the moment.
Sure. We're very, very focused on U.S. and Asia, Japan. Japan, Korea. This is, this is where some of our most important opportunities are. Over the past month, we have hosted two major customer presentations here, which will turn positive in the coming months and probably years. Some of these, well, so many, many of our large customers take a year, year and a half to develop and convert just because of their, How their supply chains work.
So from a major customer point of view, there is increasingly interest in our proposition because of the risks of having methylene chlorided residual in coffee, and roasters are becoming very attuned to that as consumers are asking questions about residuals, regardless of how small they are, because they drink more than one decaffeinated coffee cup a year. They drink it every day, and residuals build up. And so consumers are coming to that realization, and roasters are coming to that realization, and brand owners. I'm thinking specifically of a major box store chain in the U.S., who we've had recently and is beginning to convert their coffee to our process, which is terrific and is driving growth, as is the same story in Korea. In terms of branding, we do have branding firms.
What you are seeing, I believe you are, You're in Toronto, right, Richard?
No, I see quite a year. I'm based in Victoria, in Victoria.
Okay, Victoria. So anyways, our branding work that we do is focused on U.S. We focus brand awareness development in 12 major metropolitan areas, all online. And our brand awareness has been increasing significantly, which is helping drive our business development in the U.S. You wouldn't see anything in Canada. It's not an investment market for us.
Understood. So you mentioned that you've got some of these new customers can take nearly 18 months sometimes to transition. But you mentioned one in the U.S. So will you be publicly disclosing who that is, and if so, when do you envisage doing so?
I always, I always like to have some form of confirmation or approval from our customers before we dialogue on names, particularly from, you know, their own confidentiality point of view. But I think more importantly is that you'll see that work reflected in our volume, especially going into 2024. And that's an exciting period for us for sure.
Okay. Well, that's good to know. And also, you know, obviously the stock price is depressed, the volume's low. You're trading for about half of stock or I think even less. So, would you, would you think about doing a buyback? Because it seems extremely undervalued.
I would agree with your assessment that the stock is undervalued, for sure. I think that we have a big chunk of debt that we're gonna be focused on paying down in 2024. We have a very, very important date in October where we must meet a debt obligation, which right now is looking very, very positive in terms of meeting that. And our belief and the board's belief is that through paying down debt and demonstrating that we are capable of that, we will then be demonstrating more options and more optionality in the future, which should help assist our share price, as well as you mentioned, some of the IR activities that we may be undertaking.
So, you're saying you'd rather focus solely on paying down debt than doing a concurrent buyback. You mean you don't have any covenants that disallow you from doing a share buyback, do you?
I think our primary focus right now is to focus on deleveraging and reducing the level of debt. You know, alternative options as we, as management and the board see them emerging will be discussed. But yeah, I think Frank is correct. I think the focus on leverage reduction is the primary focus right now.
Yeah. I think give us, give us 12 months, Richard, and maybe ask us some of those questions then. But I appreciate your questions, and I'm gonna ask maybe that we go to the queue now and see if there are other questions. And you can give us a call back and we can have further dialogue. We'd be happy to do that.
Okay. Sounds good. I'll let you go. Thank you.
Excellent. Thank you, Richard. Appreciate it.
Thank you very much. Just a reminder, if anyone does have any remaining questions, please press star one on your phone keypad now. Okay, we don't appear to have any further questions in the queue. I will now hand back over to Frank for any closing remarks.
So if not, we appreciate the fulsome questions from Richard Rudgley today. And being as there are no other questions today, we will conclude today's call. Thank you very much for joining us, and we will see you at the next quarter.
Thank you very much. This does conclude today's conference call. You may disconnect your phone lines at this time. Thank you for your participation.