Swiss Water Decaffeinated Coffee Inc.

Welcome to the Swiss Water Decaffeinated Coffee Inc. first quarter 2025 conference call. At this time, all participants are in 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. The first Swiss Water Decaffeinated Coffee Inc. 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 of 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 CDAR and Swiss Water's website for a whole discussion regarding forward-looking statements and the risks therein. And I will now turn the conference over to your host, Frank Dennis, CEO at Swiss Water. Frank, you may begin.

Thank you. Good afternoon, everyone, and thank you for joining us today.

I'm Frank Dennis, President and CEO of Swiss Water Decaffeinated. Ian and I are here today to discuss Cliffwater's financial results for the three months ended March 31, 2025. As usual, I'll begin with a brief review of our performance and operating environment. Then Ian will provide more details about our financial results. After that, I will share with some closing thoughts before we take questions. We entered 2025 with solid momentum and delivered a strong operational performance in the first quarter. Demand for our chemical-freeze and caffeination remained healthy, and we continued to serve a broad and growing customer base across North America and internationally. Our strategic inventory positioning was well-received by customers and helped us respond quickly to short-term needs, contributing to growth in volumes over the prior year. From a broader market perspective, volatility continues to shape the environment. Coffee futures remained near record highs, and the U.S. imposed a blanket 10% tariff on most coffee-producing countries. These tariffs will be applicable to Swiss water as well as our competitors. While these factors are contributing to tighter inventory positions and more conscious purchasing behavior in some parts of the coffee trade, we've seen relatively limited price sensitivity so far. Poor impact of these dynamics is likely to be more visible in the months ahead as we are seeing material increases in retail coffee prices in U.S. grocery and resultant declining consumption according to syndicated volumetric data we purchased. Against this backdrop, we remain focused on execution. Our Delta facility continues to perform well with sufficient flexibility to respond to fluctuations in demand. We've taken proactive steps to ensure product availability, including building inventory to support an expected volume in the second quarter. We continue to manage input cost volatility through our hedging, and while hedging resulted in a short-term EBITDA impact due to the current New York futures inverted market structure, it reflects a prudent and structured approach to managing risk. Additionally, we are pricing for these hedging costs in a manner similar to the rest of the industry and expect them to be recouped over the year. Overall, we're encouraged by how the business is performing. We expect some variability throughout the year. As we navigate a very dynamic market environment, our brand remains well positioned and our customer relationship remains strong. We're operating in a complex market, but we feel confident in our ability to navigate it with discipline and focus. With that, I'll turn the call over to Ian to walk through the financials. Ian? Thank you, Frank. From a financial perspective, Q1 reflected steady operating performance and disciplined execution in a volatile market. We saw continued volume growth, and while revenue benefited from higher coffee prices, margin performance was influenced by both our hedge position and broader input cost dynamics. Our cost structure remained stable, and we made targeted investments to support volume delivery in future quarters. We also began repayments on our long-term construction borrowings which is an important step in reducing interest expense and gradually improving leverage. During the quarter, we drew on our credit facility to support working capital, primarily related to inventory. We expect some of that to unwind over the next few quarters as loans flow through the system. Financial results this quarter also reflect the impact of rolling hedge positions forward in the sustained inverted market, something I'll speak to in more detail shortly. Total volume shifts increased by 6% in the first quarter. The increase in volumes in Q1 2025 was driven by renewed customer purchasing activity. Many roasters have been carrying linear inventories in recent quarters and began restocking in response to ongoing volatility, NYC, uncertainty around upcoming changes to import costs. Thanks to our strategic inventory position, we were able to meet this demand and maintain consistent delivery to customers. Looking at volumes by customer type, shipments to importers, those customers who resell our coffees to roasters where and when they need it, were up by 18% in the quarter. While 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 7% in the first quarter. Looking at the roaster segment another way, Specialty roaster volumes were up by 24% in Q1. These accounts for the out-of-home consumer primarily in cafes and restaurants in our key geographic markets. Commercial roaster volumes were down 7% in the quarter. Overall, we consider the growth in year-over-year volumes to be encouraging results within the context of elevated NYC pricing, the evolving tariff landscape, and the increased pressure on consumer consumption being reported by some of our customers. Q1 revenue was up 61% to $62.3 million compared to $37.7 million in Q1 2024. The primary driver of the increase in revenue for the first quarter is the NYC, the effect of which flows through our green coffee revenue. However, this is amplified by the 6% increase in volume protest during the quarter. Looking at our costs, Q1 cost of sale was $55 million, up 64% year-over-year. The increase in the first quarter was driven by an elevated NYC, increase in volume over the prior year, and a reversal of an inventory provision taken in Q1 2024. That said, our underlying cost structure remains stable, and the consolidation of production into our Delta facility continues to support greater variable cost control and more efficient use of utilities. As for green coffee costs, at an average of $3.73 per pound in the first quarter, the NYC was up 97% from $1.90 per pound in Q1 last year. With coffee futures remaining at near record highs and new U.S. tariffs taking effect, we saw some customers move to secure supply during Q1, while others continued to manage inventories cautiously. These dynamics contributed to variability in ordering patterns during the quarter. Through disciplined resourcing and strategic inventory positions, we were able to meet this demand and ensure uninterrupted delivery across our customer base. We are beginning to see early indicators that sustained elevated coffee prices may be influencing consumer behavior, particularly in price sensitive channels. Exchange rates between the U.S. and Canadian dollar continue to influence our reported results in cash flows. While our revenue is primarily earned in U.S. dollars and a meaningful portion of our costs are incurred in Canadian dollars, we also carry U.S. dollar receivables and payables on our balance sheet. This quarter, fluctuations in the exchange rate led to a foreign exchange loss largely reflecting the revaluation of those U.S. dollar balances at period end. We continue to monitor this exposure and use hedging tools where appropriate to manage our underlying risk. In Q1, the U.S. dollar averaged $1.44, up 9 cents from $1.35 in the same period last year. This appreciation had a positive impact on our revenues when it was converted to Canadian dollars. Q1 gross profit was $7.3 million, up 42% year over year. Gross margin percentage decreased slightly to 12% in Q1 from 13% in the prior year. Turning now to operating expenses. Q4 total operating expenses were $3.4 million, down 10% year-over-year. Administrative expenses decreased by 14% in the quarter, primarily reflecting a non-cash decrease in stock-based compensation driven by the reduction in our share price, partially offset by plant head strength and wage increases and higher professional fees. Sales and marketing expenses were up 4% in the quarter, broadly reflecting the timing of marketing activities. Q1 net income was $515,000 compared to a loss of $900,000 in Q1 2024. Aside from the factors we discussed previously, Q1's increase in non-operating or other Income and expense was driven by a $2.7 million loss on risk management activities, largely due to the timing difference between recognizing the cost of rolling hedge contracts forward in a still-inverted NYC market and the recovery of those costs through customer invoicing. This resulted in incremental realized losses as contracts were extended. All of the inversion losses booked within Q1 are expected to be fully recovered through customer collections within the coming months. We also recorded market-to-market adjustments reflecting commodity price movements and the U.S. dollar strength. These outcomes are consistent with our approach to managing price and volatility, risk exposure, and aligning with our supply commitments. We saw a $2 million increase over Q1 2024 related to the non-cash revaluation of the fair value of the embedded option related to the no-road warrants, driven by fluctuations in our share price and the risk-free interest rate. There was a $570,000 decrease in finance expense, largely attributable to a decrease in the interest on the no-road adventure, which was fully repaid in Q4 2024. In addition, a decrease in interest on long-term borrowings after repayments and decreasing interest rates compared to Q1 2024. Q4 adjusted EBITDA was $2 million, down 780,000 or 28% year-over-year. As with gross profits, fluctuations in adjusted EBITDA were driven by an increase in volumes and fluctuations in the NYC, as well as a positive contribution from C4, our warehousing and logistics subsidiary. These positive impacts were offset by the previously mentioned loss on our replenishment activities, which we expect to be fully recovered through customer collections within the company. Turning now to inventories, during the first quarter, our inventory balance increased to $58.9 million as we intentionally built stock to support anticipated demand and ensure uninterrupted delivery to customers. This increase reflected both the higher volume of green coffee held and the elevated value of inventory types of sustained rise in the NYC. Notably, we saw renewed order activity from smaller roasters with previously deferred purchases due to pricing volatility, and were able to respond quickly thanks to our proactive sourcing and planning. These purchases were funded through a draw of the NYC. conscious decision made in light of the strategic importance of securing supply for our customers. As demand plays out over the coming quarters, we expect inventory levels to normalize and working capital to moderate accordingly. At quarter end, Swiftwater held $5 million in cash compared to $8.5 million at the end of 2024, a net working capital of $4 million. We began making principal repayments on our long-term borrowings in Q1 primarily relates to construction of our Delta facility. This marks a step toward lowering interest expense and improving our leverage position over time. With that, I'll turn the call back to Frank. Thank you. Before we turn to questions, I want to briefly reinforce a few key points. While the coffee market remains volatile, we're staying focused on what we can control, delivering consistently for our customers, managing costs, managing the inverted coffee futures market, and executing against the priorities we set out at the start of the year. With more clarity now around the implementation of a blanket 10% U.S. tariff on coffee-producing countries, we continue to monitor downstream impacts, but our outlook and strategic direction remain unchanged. The team continues to perform well, and we believe we are well positioned to navigate this environment with discipline. With that, we'd be happy to take your questions.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask your 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. For participants using speaker effluent, it may be necessary to pick up your handset before pressing the star key. Once again, please press star 1 on your phone at this time if you wish to ask a question. Please hold while we pose for questions. And the first question today is coming from Anne Marin from ZAC and your line is live.

Thank you. So good afternoon, everyone. So I just want to make sure that the tariff situation is clear. I mean, to the extent that it can be clear. There were no tariffs in the first quarter, so we didn't see the impact of tariffs, although we might have seen an impact in terms of pulling forward some demand. Would that be something that you think we might have seen in the first quarter in terms of order volumes?

That's a good question. The answer would be no.

What drove Q1 was our ability to have capacity and to respond to demands where many of our competitors couldn't. And so that enabled us to fulfill demands at that period. So we... evaluated our kind of total customer portfolio and really didn't see customers bringing coffee forward in advance of tariffs because there was just so much uncertainty as to whether or not they were going to be in place through the actual quarter. No one was really executing on that concept.

Okay. That makes sense. But as of now, there are tariffs in place, but there are... Yeah. They're not, so the concept of the non-transformative, you know, nature of the product remains consistent, but the fact that they're a blanket house means that that will be an impact. So the breakdown, geographic breakdown of your sales volume in the first quarter, I guess the thing that surprised me was, international grew so significantly. Now, do you think that's less a story about international and more about what was going on in the States or, you know, what are you thinking there based on what you're seeing from your customers?

No, it really was not about the States. That is the result of ongoing development efforts that we have in place, quite a bit going on in the Asia market, and also early development of the Middle East. So, yeah, it isn't kind of a rebalancing versus the U.S. at all.

Okay, so basically you're building your customer base, as I think you indicated in the press release. Unless, you know, okay. And the last question for me is how should we think about the embedded option, which I think counted for about $1.1 million in the quarter. So how to think about that going forward?

Well, the movement on that line, Marion, is driven predominantly by movements in our share price. Everything we do is around trying to increase shareholder value, so we're trying to get that as high as possible. If our share price starts to rise, and we think it will, given that we are growing and we're starting to pay down debt, we believe that should be reflected in time within our share price. And so if our share price goes back up, then you would see a reversal of that movement.

Okay, so that is basically, you know, an arithmetic, you know, generative value, and it is non-tax. It is basically the mark-to-market on the options.

Yes, and it's supported. We use a Black-Scholes model for mechanical calculation that we perform exactly the same time, exactly the same way every single quarter.

So there's been no change in the way that we calculate and evaluate that.

Okay, got it. All right, thank you.

Thank you. Thank you. And once again, if there were any questions at this time, please press star 1 on your phone. Once again, if you had a question, please press star 1 on your phone at this time. And we did have another question coming from Richard Rudley from Glenbrook Capital. Richard, your line is live.

Hi, thanks.

Yes. Thanks for taking my questions. Marion, I think, covered some of what I was going to ask anyway, but just concerning the tariffs, I saw in the MD&A that you said that the tariffs would be included on the invoice to your US customers. Is that sort of like what Jeff Bezos was going to do, in the sense that you are actually going to have a line so that people can see the tariff as a separate part of the calculation. But just the second question was, I had a bit of a bad line at the beginning, so I was a little bit confused when you said you were building inventory for the second half, but that higher prices going forward were likely to be a headwind. So I just wondered if you could reconcile that for me. Maybe I misheard. Thank you.

Okay. What we intend to and are just starting to do, and the industry is adapting to this, of course, rapidly. Right now we have Tarix as an all-in price on the invoice, and that's just how we're going to operate because trying to isolate them ends up driving a lot of A lot of additional questions and concerns around keys, does that include freight, does that include inbound, drayage, all of these minor little things which just cause a lot of issues. So what we have is a one outbound number at the bottom of the invoice. As far as pricing in the marketplace, my reference today was that we are seeing the total coffee market is seeing some weakness in U.S. grocery. That's the only place that we capture data, but it's broadly representative of Europe as well, for sure. But we purchase U.S. data. And we are seeing... Number one, increased overall average shelf prices, and we are seeing some decrease in demand in the U.S. And that's the natural rebalancing of a market that's that historic high. And over time, you know, what needs to happen for a market to come back into balance is additional production, i.e., Brazil and Vietnam and Colombia, to some extent, having good crop yields, and some demand reduction. And both of those things are starting to happen. But we don't expect that the futures market, NYC futures market, is going to come back to any kind of historical average within 2025. We see this as more as a potentially a late 2026 scenario. That's just our view, and that's a cautious view or a conservative view, Richard, so that we understand what we're doing and then that's how we have a, manage our risk profile.

Thank you. Sorry, just to return to the tariff, sorry, it's a bit of a bad line, must be my fault, but are you saying you're not going to break out the tariff on your invoices? Right now, we aren't.

You are not. Okay. Okay. Thanks, guys.

Thanks, Richard. Thank you. And there were no other questions from the lines at this time. I'll now hand the call back to Frank Dennis for closing remarks.

Thanks very much.

And so as we move through 2025, our focus remains on building high-quality, chemical-free, decapitated coffee, supporting customers in a volatile pricing environment, and managing operations with financial discipline. While industry conditions remain dynamic, we believe our expanded production capacity, strong customer relationships, and consistent execution position us well through the remainder of the year. Thank you very much for attending our call today, and have a good day.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.