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 Swiss Water Decaffeinated Coffee, Inc. conference call starts, they're 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, 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, Tom. Good afternoon, everyone, and thanks very much for taking the time to join us. I'm Frank Dennis, President and CEO of Swiss Water Decaffeinated Coffee Inc. And with me is Ian Carswell, our CFO. Ian and I are here today to discuss Swiss Water's financial results for the three months ended March 31, 2024. So, 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. We continue to see strong and growing demand for our chemical-free decaffeinated coffee offerings during the first quarter of this year. 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. In particular, Swiss Water reported much stronger than normal volumes and financial results during the first quarter last year. And this was mainly due to the front loading of customer orders in anticipation of a period of production constraint during the second and third quarters. 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 of last year as we prepared to permanently shut down our two decaffeination lots there and vacate the site on the expiration of our lease last June. As the Burnaby assets ceased production before our new second decaffeination line at our Delta facility was fully operational, we began bridging a short period of capacity constraints stretching from April through August of last year. Anticipating the transitional constraints, our team successfully front-end loaded significant customer demand into Q1 last year before our Burnaby shutdown, enabling balanced customer service through Q3 and facilitating an acceleration of sales during Q4. A key milestone was achieved last August when production on our new Delta II began, Delta Line 2. Soon, the line was producing decaffeinated coffee that met our high-quality expectations. The optimization of Line 2 continued through the fourth quarter last year and the first quarter of this year as we ramped up its production. And as a result, we experienced no capacity constraints during Q1 as we ran both lines in Delta on a 24-7 basis, save for a planned two-week maintenance shutdown on Line 1. While production consolidated in Delta and both lines running smoothly and efficiently, we once again have sufficient capacity to meet our medium-term growth ambitions. Looking at first quarter sales volumes, while they were down 18% when compared to the front-loaded Q1 of 2023, they reflect the return to normal order patterns in our business. Quarterly revenue and EBITDA also are down year over year, again due to the volume difference. However, gross profit was up for the quarter because we are now experiencing the cost savings and general efficiencies that come from consolidation of all our production at one location. Now, before I tell you more about what we see ahead, let me turn the call over to Ian to take you through our financial results.

Ian? Thanks, Frank, and good afternoon, everybody. As always, I'll begin my review with volume shipped to customers during the quarter, as this is the key metric that drives our financial performance. As Frank noted, the year-over-year comparison of results is skewed by the fact that many customers moved orders forward into the first quarter of 2023, in anticipation of the impending capacity constraint caused by our transition out of Burnaby prior to the full commissioning of our Delta Line 2. Taken together, volume shipped to customers in all categories were down by 18% in the quarter when compared to Q1 of 2023. 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 13%. While shipments to importers, those customers who resell our coffees to roasters where and when they need it, were down by 25% in the quarter. Looking at the roaster segment another way, specialty roaster account volumes were down by 25% in the quarter. 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, falling by 17% compared to the exceptionally strong Q1 of 2023. Turning now to revenues, first quarter revenue of $38.7 million was down by $10.3 million from the same period last year. As with volumes, the year-over-year drop in quarterly revenue was an expected result of the normalization of order patterns this year compared to a period of volume loading during Q1 last year. Looking at the cost side, Our first quarter cost of sales was $33.6 million, down by 10.5 million, or 24%, compared to Q1 of 2023. The decrease was primarily driven by our lower volumes and a drop in depreciation expense, as well as cost savings resulting from consolidation of our operations at a single location. In the first quarter of last year, we recorded a one-time incremental depreciation expense of $2.1 million related to the write-down of salvageable production assets at our Old Burnaby facility. There was no such charge in Q1 of this year. As to coffee futures, the NYC was up from $1.74 per pound in Q1 of 2023 to $1.90 per pound in the first quarter of this year. 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 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. At an average of $1.35 Canadian Q1, the US dollar was unchanged from the same period in 2023. First quarter gross profit was $5.1 million, an increase of $200,000, or 5%, when compared to Q1 of 2023. The increase was largely the result of the cost savings and efficiencies generated by consolidation of operations at a single location. By closing Burnaby and bringing all production into our Delta facility, we have reduced our costs for building maintenance, utilities consumption, staffing, and transportation between locations. The positive impact of the $2.1 million year-over-year decrease in depreciation expense on gross profit was largely offset by the lower volumes and reduced green coffee differential margin. In addition, we continue to contend with inflationary pressures on our variable production costs, including natural gas, carbon, and labor, as well as on freight and storage costs. Looking at the expense side, First quarter operating expenses were $3.7 million, up by $400,000 when compared to Q1 of 2023. The administrative portion of operating expenses is up by $100,000 due to slightly increased headcount and salaries, partially offset by savings from the consolidation of operations in Delta. The sales and marketing component of operating expenses is up by $300,000 or 8% for the quarter. As expected, our sales and marketing costs continue to gradually increase due to return to normal travel and trade show activity. The timing of marketing activities also played a role in the Q1 expense. Q1 operating income of $1.4 million was unchanged from Q1 of last year. Turning now to net income, we reported a net loss of $900,000 for the quarter compared to a loss of $700,000 in Q1 last year. The higher net loss was driven by an increase in finance expense associated with higher interest rates on our construction loans, as well as increased mark to market losses on our risk management activities and the higher operating expenses I've previously discussed. These negative factors were partially offset by cost savings from the consolidation of our operations and gains on foreign exchange. First quarter net finance costs of $1.8 million were up by $400,000. or 31% over Q1 of 2023. First quarter adjusted EBITDA of $2.8 million was down by $2.2 million from Q1 last year. The quarterly decrease reflects the comparative drop in volumes and a reduced coffee differential. As we've noted previously, we built up inventory levels during the first quarter of 2023 to ensure that we had sufficient coffee on hand to meet customer demand during the transition from Burnaby. However, during the second half of last 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 level since Q1 of 2021. During the first quarter of 2024, inventory levels dropped further as we consumed the last remaining coffee inventories we had built up to bridge the transition from Burnaby. This enabled us to continue reducing our debt by paying down a further $2.9 million in the quarter. With construction of our new production assets now complete and fully paid for, debt reduction is a key 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. As at the end of the first quarter, Swiss Water is in a strong liquidity position with $13.6 million cash on hand. Accordingly, we expect to be able to fund this obligation with Mill Road with a combination of available cash, reserves, and proceeds from operations, supplemented with drawings on our existing bank debt facilities as needed. With that, I thank you for your attention, and now I'll turn things back to Frank.