Swiss Water Decaffeinated Coffee Inc.

Good afternoon. 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 CDER and Swiss Water's website for a full discussion regarding forward-looking statements and the risks therein. I'd now like to hand the floor over to President and CEO Frank Dennis. Please go ahead.

Thank you, Matt. Good afternoon, everyone, and thank you for joining us today. 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 and 12 months ended December 31, 2024. As usual, I'll begin with a brief review of our performance, then Ian will provide more details about our financial results before I return to tell you about our longer-term plans and expectations. 2024 was a year of transition and resilience for Swiss Water. While the broader coffee market remained volatile, we continued to execute on our strategy, ensuring consistent supply for our customers, maintaining operational efficiencies, and strengthening our financial position. A key priority throughout the year was reliability and quality in an increasingly unpredictable environment. Global logistics disruptions resurfaced, including blockages in the Suez Canal, reduced crossings at the Panama Canal, and increased cross-docking by steamship lines, all of which slowed coffee shipments worldwide. These factors, combined with elevated coffee futures prices, led to shifts in purchasing behavior, with some roasters carrying additional inventory while others took a more cautious approach. Coffee importers, on the other hand, entirely abandoned inventories due to the coffee futures market levels and inversion of the market structure. Despite these challenges, Swiss Water was able to ensure product availability by leveraging our strong balance sheet to hold additional inventory in key locations, ensuring our customers could access supply when they needed it. This proactive approach allowed us to mitigate the impact of logistics delays and market tightness, providing continuity for our customers, even as broader supply chains face disruptions. 2024 also marked our first full fiscal year operating in our consolidated Delta facility. This transition has allowed us to run more efficiently, reduce prior capacity constraints, and refine our production processes with important improvements in yield leading to higher quality. While we are still optimizing aspects of our operations, the long-term benefits of this move are becoming evident in both cost management and product quality. From a financial perspective, we made further progress in strengthening our balance sheet by repaying the debenture with warrants held by Mill Road Capital, reducing our overall debt burden, and improving financial flexibility. While disciplined capital allocation remains a focus, this repayment provides additional flexibility as we move forward. Looking ahead, we expect continued volatility in the coffee market, particularly as high NYC coffee futures prices and inversion impact purchasing behavior and supply chain efficiency. However, we believe Swiss Water is well positioned to navigate these conditions, supported by our strong customer relationships, expanded production capacity, and a proven ability to manage through changing market dynamics. With that, I'll turn the call over to Ian to walk through our financial results, and I'll return later to discuss our outlook for 2025. Ian?

Thank you, Frank, and good afternoon, everyone. Please report that Swiss Water continues to demonstrate resilience and strong execution in a dynamic and volatile market. Our Q4 and full year 2024 results reflect solid progress in optimizing our operations, strengthening our balance sheet, and maintaining a competitive position in the specialty decaffeination market. With the successful consolidation of all production onto a single site in Delta, we have reduced capacity constraints and achieved meaningful efficiency gains. These improvements, coupled with a strong demand for our chemical-free decaffeination process, have enabled us to maintain processing volumes and enhance profitability despite persistent macroeconomic and industry challenges, while the full repayment of our mill road debt has further fortified our financial flexibility. Total volume shift decreased by 8% in Q4 and remained flat for the full year. The Q4 2024 decrease was expected as Q4 2023 volumes were higher than normal as we caught up on a backlog of orders that had accumulated while we moved from Burnaby to Delta. Q4 2024 represented our second highest quarter ever for volume in the face of significant macroeconomic headwinds. We saw a significant spike in orders during December as customers replenished stock to meet demand in spite of volatility in the NYC. 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 fourth quarter and by 3% for the year. While shipments to importers, those customers who resell our coffees to roasters where and when they need it, were up by 5% in the quarter and also for the year. Looking at the roaster segment another way, specialty roaster volumes were up by 7% in Q4 and 3% for the year. These accounts served the out-of-home consumer primarily in cafes and restaurants in our key geographic markets. Commercial roaster volumes were down 22% in the quarter and by 1% for the year. Overall, we consider maintaining year-over-year total volumes within the context of a major run-up of the NYC to be a significant achievement in 2024. Turning now to revenue. Q4 revenue was up by 19% to $49.2 million, compared to $41.2 million in Q4 2023. Full year 2024 revenue was $173.1 million, reflecting a 4% increase year over year. The primary driver to the increase in revenue for the quarter and year is the NYC, the effects of which flow through our green coffee revenue. This was offset by fluctuations in the volume processed. Looking at our costs, Q4 cost of sales was $42.3 million, up 23% year over year. Full year cost of sales was $146.9 million, which was flat with the prior year. The increase in the fourth quarter was driven by an elevated NYC, partially offset by a decline in volume over the prior year. As previously mentioned, 2023 included a one-time non-cash depreciation expense resulting from the write-down of unsalvaged assets at our old Burnaby facility. There was no such charge this year. Consolidating production into a single facility has allowed us to achieve greater variable cost controls and efficient utilities usage. As for green coffee costs, at an average of $2.83 per pound in the fourth quarter, the NYC was up 63% from $1.74 per pound in Q4 last year. For the year to date, the NYC averaged $2.35 per pound, up 37% from $1.72 last year. With coffee futures sitting at these near record prices, we're seeing some customers work through their existing inventories while waiting for prices to decline before restocking. This natural market cycle has caused some volume fluctuations, but despite an inverted futures market and ongoing supply chain disruptions, our team has successfully navigated these challenges. Through strategic inventory positioning and disciplined sourcing, we've maintained sufficient stock in key locations, ensuring our customers could enjoy uninterrupted access to our high-quality decaffeinated coffees. We're monitoring early signs that these elevated coffee prices are beginning to influence consumer purchasing patterns, which Frank will explore in more detail in due course. Exchange rates between the US and Canadian dollar can significantly impact our bottom line and cash flow. Most of our revenue comes in as US dollars, but we pay a substantial portion of our costs in Canadian funds. We use financial hedging tools to manage some of this exposure. The good news is that when the U.S. dollar strengthens, as it has this year, that works in our favor, all else being equal. In Q4, the U.S. dollar averaged $1.40 Canadian, up 4 cents from $1.36 Canadian in the same period last year. During the year, the U.S. dollar averaged $1.37 Canadian compared to an average of $1.35 in 2023. This appreciation had a positive impact on our revenues when they were converted to Canadian dollars. Q4 gross profit was $7 million, up 1% year over year. Full year gross profit was $26.2 million, up 39% year over year. Gross margin percentage declined slightly to 14% in Q4 and increased slightly to 15% for the full year. Turning now to operating expenses. Q4 total operating expenses were $3.8 million, up 8% year over year. Full year total operating expenses were $15.1 million, up 15% year over year. Administrative expenses increased by 21% in the quarter and 25% for the year, primarily reflecting an increase attributable to salaries and wages associated with the construction of Delta Line 2 no longer being capitalized. and a non-cash increase in stock-based compensation driven by the increase in our share price, as well as planned headcount and wage increases and higher professional fees, to a lesser extent. These increases were partially offset by cost savings and efficiencies we are seeing after consolidating to one location. Sales and marketing expenses were 18% lower in the quarter and 7% lower for the year, reflecting the timing of marketing spend, some of which is now planned for 2025. Q4 net income was $2 million compared to $900,000 in Q4 of 2023. Full year net income was $1.3 million compared to a loss of $500,000 last year. Last year included several one-time costs related to our exit from the Burnaby facility and consolidation of operations in Delta. Q4's decrease in non-operating or other income and expenses was driven by a $460,000 decrease in finance expense, largely attributable to a decrease in the interest on the mill road to venture following its repayment, and a $1.5 million increase in foreign exchange gain. For the year, we saw a $2.6 million increased loss on risk management activities related to the volatility of the NYC. A $1.1 million decrease related to the non-cash revaluation of the fair value of the embedded option related to the Mill Road warrants, driven by fluctuations in our share price and the risk-free interest rate. We saw an increase of $470,000 in finance expenses as the interest on construction loans used for the commissioning of our second production line in Delta are no longer capitalized. And we saw an increase of $1.6 million in foreign exchange gains. in our foreign exchange game. Q4 adjusted EBITDA was $4.9 million, down 2% year over year. Full year adjusted EBITDA was $14.3 million, up 7% year over year. As with gross profit, fluctuations in adjusted EBITDA in both periods was primarily driven by cost savings resulting from the consolidation of our operations at a single location and lower utility rates. Furthermore, C4, our warehousing and logistics subsidiary, once again made a positive contribution to adjusted EBITDA in 2025. These positive impacts were partially offset by fluctuations in processing volumes, 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. During 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 continue to manage our inventory position down during the first half of this year. This was in part because we consumed the last remaining coffee inventories we 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 this year. This became a matter of increasing concern. So to offset the risk of delayed deliveries impacting our ability to meet our customers' 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 fourth quarter inventory volume rose $14.2 million to $44.5 million. 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 down our working capital commitments. Specifically, given the current market conditions, we are focusing on more specific inventory targets to reduce working capital interest expenses. Key milestone in Q4 was the full repayment of the Mill Road capital debenture held of $15.9 million. The total repayment consisted of $15 million of principal and $900,000 of accrued interest. Following this payment, all obligations, duties, and responsibilities contracted to the debenture were terminated. At the year end, Swiss Water held $8.5 million in cash compared to $11.1 million at the end of 2023. With that, I'd like to turn the call back to Frank. Thanks, Ian.