Swiss Water Decaffeinated Coffee Inc.

Good day and welcome to the Swiss Water Decaffeinated Coffee, Inc. conference call. At this time, all participants are on a listen-only mode. After management's prepared remarks, there will be a question and answer session. Before the Swiss Water Decaffeinated Coffee, Inc. conference call starts, they are required to remind you that certain information in today's presentation is forward-looking and in nature. Any such forward-looking information or statements are based on the assumptions that they are 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 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. Please go ahead.

Thank you, Kelly. 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. With me is Ian Carswell, our CFO. Ian and I are here today to discuss Swiss Water's financial results for the three and 12 months ended December 31, 2023. As usual, I'll begin with a brief review of our performance. Then Ian 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 last few earnings calls, 2023 was a transitional and, in fact, a transformational year for Swiss Water. It brought about the culmination of a multi-year project to relocate, modernize, and expand the capacity of our production assets and returned all operations to a single site, our newly expanded state-of-the-art facility in Delta, B.C., As those of you who follow our story will recall, 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 second and third quarters. This transitional period stretching from April through August was expected and carefully planned for. Several months beforehand, we began working proactively with all our customers and suppliers to ensure that they were aware of what to expect from Swisswell. We also built up our inventory to enable us to meet customer demand. Throughout the year, our sales and logistics teams worked tirelessly to manage our capacity and the allocation of available production. Anticipating the transitional constraints, our team successfully front-end loaded significant customer demand into Q1 before our Burnaby shutdown, enabling balanced customer service through Q3 and facilitating an acceleration of sales during Q4. A key milestone was achieved in August when production on our new Delta Line 2 began. Soon it was producing decaffeinated coffee of Swiss Water branded quality. Predictably, the second and third quarter capacity constraints had a negative impact on our volumes and financial performance. And in addition, a number of significant one-time costs related to the shuttering of our old Burnaby facility affected our 2023 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 the Swiss Water demonstrated over several quarters leading up to our transition out of our legacy Burnaby facility. By the fourth quarter, with the Burnaby exit and temporary capacity restraints behind us, the positive momentum was apparent. With all our production consolidated at one location in Delta, we began to regain our volume trajectory as we continued to ramp up production on our new second line. The numbers tell the story. Fourth quarter volumes were up 17% from 2022 levels, and we saw strong growth from all customer categories. Our key profitability metrics were improving Our inventory levels were favorable, and the outlook for 2024 and beyond was positive. Now, before I tell you more about what we see ahead for this year and beyond, let me turn the call over to Ian to take you through our financial results.

Ian? Thank you, Frank. 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 expected, with the temporary capacity constraints resulting from the shutdown of the two lines at our legacy Burnaby facility behind us, Swiss Water's processing volumes recovered nicely during the fourth quarter. Taken together, volume shipped to customers in all categories were up by 17% in the quarter when compared to Q4 of 2022. However, the capacity constraints we experienced during the second and third quarter transition resulted in a 7% decline in volumes for the full 2023 fiscal year. Looking at volumes by customer types, 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 up by 16% in the fourth quarter and by 2% for the year. While shipments to importers, those customers who resell our coffees to roasters, where and when they need it, were up by 20% in the quarter, but down by 17% for the 12 months. Looking at the roaster segment another way, specialty roaster account volumes were up by 8% in the quarter and down by 15% for the year. These accounts serve the out-of-home consumer primarily in cafes and restaurants in our key geographic markets. Shipments to large commercial roasters recovered strongly in Q4, rising by 26% compared to the fourth quarter of 2022. However, for the full year, shipments to these customers were essentially flat, declining by 1% from the 2022 level. Turning now to revenues, fourth quarter revenue of $41.2 million was down by $2.8 million, from Q4 of last year, while annual revenue of 166.3 million was down by 10.7 million from the 2022 level. As with volumes, the drop in annual revenue was an expected result of the temporary reduction capacity we experienced during the second and third quarters as we transitioned production out of Burnaby. Higher than normal volume shipped in the first and fourth quarters helped mitigate the impact of this temporary capacity constraint. A decline in the NYC and in coffee differential margins also contributed to the year-over-year decrease in both periods. As recovery of the cost of the green coffee we resell to customers comprises a significant portion of our revenue. Looking at the cost side, our fourth quarter cost of sales was $34.3 million down by $3.9 million or 10% compared to Q4 of 2022. For the year, cost of sales was $147.5 million, a decrease of $3.4 million, or 2% from 2022. The decrease in Q4 was primarily driven by a lower green coffee price and lower coffee differentials, while the capacity constraint and resulting reduction in volumes during the transition from Burnaby had a more considerable impact on the annual number. Full year cost of sales was also partially offset by a one-time incremental depreciation expense of 2.5 million booked during the first half of the year. This resulted from the write-down of production assets at our Old Burnaby facility. A reduction in freight activity also had an impact. As to green coffee costs, the NYC was down slightly from $1.77 US per pound in Q4 2022 to $1.74 US in the fourth quarter of 2023. However, for the full year, the NYC was down by 42 cents, or 20%, averaging $1.72 per pound compared to an average of $2.14 per pound in 2022. Foreign exchange rates can also have a material impact on our profitability in cash from operations. This is because the majority of our revenues are generated in US dollars, while a significant portion of our costs are incurred in paid 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 2023. At an average of $1.36 Canadian in Q4, the US dollar was unchanged from the same period in 2022. However, at an average of $1.35 Canadian for the full year, US dollar was up by 5 cents from $1.30 Canadian in 2022. This appreciation had a positive impact on our annual revenues when they were converted to Canadian funds. Fourth quarter gross profit was $6.9 million, an increase of $1.2 million when compared to Q4 of 2022. For the full year, gross profit was $18.8 million. down by 7.3 million from the 2022 result. The fourth quarter increase in gross profit was primarily due to higher volumes and efficiencies of scale leveraged from within our production process. During Q4, the consolidation of all production into a single facility also began to generate savings from reduced building maintenance, utilities consumption, staffing and transportation between locations. These savings will become more evident in future quarters now that we are operating from a single location. As anticipated, the drop in annual gross profit was largely due to the temporary production constraint during our transition out of Barnaby, as well as materially lower green coffee differential margins and a one-time non-cash depreciation expense of $2.5 million. In addition, we had to contend with inflationary pressures on our variable production costs, including natural gas, carbon and labour, as well as on freight and storage costs. Looking at the expense side, our fourth quarter operating expenses were $3.5 million, up by $600,000 when compared to Q4 of 2022. For the full year, operating expenses were $13.2 million, up by $500,000 from the 2022 level. The administrative portion of operating expenses was up by 32% in Q4 and by 2% for the year, largely due to general inflationary pressure and slightly increased headcount in salaries. As with the quarterly improvement in gross profit, these increases were partially offset by efficiencies resulting from consolidation of all our operations in Delta. The sales and marketing component of operating expenses was unchanged in the quarter and up by 300,000 or 8% for the year. As expected, our sales and marketing costs continue to gradually increase due to a return to normal travel and trade show activity within the coffee industry. Q4 operating income of $3.4 million was up by $580,000 from the fourth quarter of 2022. Full year operating income was $5.6 million, a decrease of $7.8 million from 2022's result. Again, the big drivers of the drop in annual operating income were the reduction in production capacity during the transition out of Burnaby, 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 net income of $1 million for the quarter compared to a loss of $254,000 in Q4 last year. For the year, we recorded a net loss of $500,000, down by $2.9 million from net income of $2.4 million in 2022. As with gross profit and operating income, The drop in annual net income was largely a result of the same factors as well as material increase in finance expense associated with increased borrowings and higher interest rates under our debt facilities. These negative factors are partially offset by improved 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. Fourth quarter net finance costs of $1.8 million were up by $400,000 or 31% over Q4 2022. For the year, finance expenses were $6.6 million, up by $1.6 million from the 2022 level. The increase was primarily due to a higher outstanding balance on our construction loans and credit facility, as well as higher variable interest rates. Fourth quarter adjusted EBITDA of $5 million was up by $1.9 million from Q4 of 2022 and for the year we recorded adjusted EBITDA of 13.4 million down by 3.3 million from the 2022 result. The quarterly increase reflects the return to normal and in fact higher production volumes as well as efficiencies of scale. The decrease in annual EBITDA was mainly driven by our lower volumes due to the transitional capacity constraints and the reduced green coffee differential margin. As Frank noted earlier, we built up inventory levels during the first quarter to ensure that we had sufficient coffee on hand to meet customer demand during the transition from Burnaby when our production capacity was temporarily constrained. However, during the second half of the year, the commissioning of our second production line in Delta led to an acceleration in raw material usage and increased shipments of finished goods. As a result, inventories closed 2023 at their lowest levels since Q1 of 2021, This generated the material release of working capital back into the business. By the end of the fourth quarter, the value of inventory on hand had dropped to 30.3 million from 60.2 million at December 31st, 2022. This provided an opportunity for us to pay down some $17 million of our debt while leaving adequate inventory on hand to support operations and near-term growth. With the construction of our new production assets now complete and fully paid for, Debt reduction is a priority and focus for Swiss Water going forward. Under the terms of our agreement with Mill Road Capital, we are scheduled to fully repay the $15 million debenture with warrants held by Mill Road in October of this year. Having finished the 2023 fiscal year in a strong liquidity position with over $11 million cash on hand, We expect to be able to fund this obligation with a combination of available cash reserves and proceeds from future operations. With that, I thank you for your attention, and I'll now turn things back to Frank.