Swiss Water Decaffeinated Coffee Inc.

Good afternoon. I do apologize for the delay in today's start time. There was a technical issue with our dial-in phone number that has now been resolved. Once again, thank you for your patience, and we do apologize for the delay in today's start time. Welcome to the Swiss Water Decaffeinated Coffee, Inc. Third Quarter 2025 Conference Call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. Before 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 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 CDAR and Swiss Water's website for a full discussion regarding forward-looking statements and the risks therein. It is now my pleasure to turn the floor over to your host, Frank Dennis, President and CEO of Swiss Water Decaffeinated Coffee Inc. Frank, the floor is yours. Thanks, John.

Good afternoon, everyone, and thank you for joining us today. I'm Frank Dennis, President and CEO of Swiss Water Decaffeinated Company, Inc., and with me is Ian Carswell, our CFO. We are here today to discuss Swiss Water's financial results for the three and nine months ended September 30th, 2025. As usual, I will 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 just share some closing thoughts before we take your questions. We delivered another solid quarter with 7% volume growth versus Q3 last year, supported by strong demand for our chemical-free decaffeinated coffee and disciplined operations. Improved profitability this quarter reflects effective pricing and cost management, some favorable foreign exchange movements, and continued focus on execution across the business. Our approach to managing inventory continues to serve us well, enabling us to meet customer needs consistently in a market where importers are maintaining leaner inventory positions and customers are looking to us to provide immediate available coffee. That reliability has helped us reinforce long-standing relationships and establish new ones as more customers look for supply assurance. Overall, demand for ArtiCafe coffee remains strong. As a benchmark, grocery volume in the United States has declined markedly due to extremely elevated retail prices, while our volumes have grown. That outperformance reflects the quality of our coffee, strength of our customer relationships, and our ability to respond quickly to shifting market dynamics. The coffee futures market remains extremely volatile. The NYC futures market softened early in the quarter before retracing all of the losses again toward quarter end. The market inversion continues to drive timing and further cost pressure across the industry.

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Sorry folks, a couple of technical issues today. In any case, I'll pick up where I left off, where operationally the Delta facility continues to perform well. It provides the flexibility we need to manage production efficiently through variable order timing and mix, delivering solid throughput and cost performance. As part of our risk management strategy, we continue to actively manage input cost volatility through our commodity and foreign exchange hedging programs. The NYC futures market remained inverted through the quarter, resulting in ongoing short-term EBITDA impacts as hedge positions were rolled forward. These timing differences are expected to continue while the inversion persists. Our approach remains structured and consistent with the rest of the industry as we continue to price for the cost of inversion and expect recovery through customer pricing actions over the coming months and into 2026. Looking ahead, we expect fourth quarter performance to be broadly consistent with the same period last year. The market remains volatile, and we expect the inversion to persist into 2026, but our underlying business fundamentals are strong. Our disciplined execution and ability to meet customer needs reliably continues to differentiate us in the complex environment. As market conditions normalize, our focus will remain on retaining new customers, maintaining price discipline, and continuing to strengthen the balance sheet. Overall, for the quarter, our business continued to perform well, operations are running efficiently, and our team continued to execute with focus and discipline. The spot inventory strategy we put in place has proven effective, allowing us to capture opportunities and maintain reliable supply in a volatile market. The consistency of our performance, together with ongoing efforts to strengthen the balance sheet through debt reduction, demonstrates the resilience of our model and the value of our long-term customer relationships. We're confident that our approach is working and positions us well to continue delivering steady results in a complex and dynamic market. With that, I'll turn the call over to Ian to walk through the financials. Ian. Thanks, Frank. Firstly, we continue to strengthen our balance sheet in the quarter, generating cash from operations and making further progress on debt reduction. These actions, together with improved profitability, have enhanced our financial flexibility. Trucking capital levels remain elevated but in line with expectations, reflecting both the value of green coffee inventories and timing of customer collections. We expect this to normalize over the next few quarters as higher seasonal sales volumes flow. Our focus remains on maintaining sufficient inventory to support demand while continuing to reduce leverage in a disciplined way. Total shipped volumes increased by 7% when compared with Q3 last year and 4% year-to-date. The increase in volumes was driven primarily by our strategic approach to spot inventory availability, which continues to position us to capture demand in a market where importers are holding leaner inventory levels due to ongoing NYC volatility and inversion. Maintaining readily available product allowed us to respond quickly to customer needs and ensure steady supply. This approach, combined with strong demand from our established customers and steady throughput in our regular coffee business, supported overall volume growth during the quarter. Looking at volumes by customer type, shipments to importers, those customers who resell our coffees to roast for square and when they need it, were up 16% in the quarter, 8% year-to-date. Our shipments to roasters, those customers who roast in packaged coffee to sell to consumers and their own coffee shops or for home and office consumption, were down by 4% in the third quarter, 2% year-to-date. Many of our customers have moved towards a more just-in-time operating model. Looking at our customer channels another way, specialty volumes were up 24% in Q3 and 11% year-to-date. These accounts served the out-of-home consumer primarily in cafes and restaurants in our key geographic markets. Commercial volumes were down 4% in the quarter, 2% year-to-date. Q3 revenue was up 50% to $62.7 million, compared to $41.2 million in Q3 2024. The primary driver of the increase in revenue for the third quarter is higher volumes and elevated coffee prices, with the NYC continuing to trade well above historical averages, which flows through our green coffee revenue. The impact was further amplified by inversion and tariff cost recovery and increased contributions from our logistics subsidiary, Seaforth. Looking at our costs, Q3 cost of sales was $56.3 million, or 59% year-over-year. The increase primarily reflects the elevated NYC, increased volumes, appreciation of the US dollar, and the ongoing impact of tariff costs associated with our sales to US customers. These factors were partially offset by operating cost efficiencies. As for green coffee costs, at an average of $3.37 per pound in the third quarter, the NYC was up 37% from $2.46 per pound in Q3 last year. While still elevated, this reflects a modest decline from the Q2 2025 average of $3.59. Customers continue to remain cautious with inventory management in response to sustained high coffee futures and ongoing tariff uncertainty. As previously noted, ordering patterns continue to vary through the quarter. Customer mix shifted with importers increasing volumes as they rebuilt inventory positions, a change from prior periods when roasters represented a larger share of activity. This shift contributed to ongoing variability relative to historical ordering patterns. Exchange rates between the U.S. and Canadian dollar continue to influence our reported results in cash flow. While our revenues are primarily 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 exchange rate led to a foreign exchange gain 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 Q3, the U.S. dollar averaged $1.38 Canadian up from $1.36 Canadian in the same period last year and consistent with the Canadian reported in Q2 of this year. This decrease of the U.S. dollar has a negative impact on our revenues when they are converted to Canadian dollars. Q3 gross profit was $6.4 million and consistent with the prior year. Turning now to operating expenses, Q3 operating expenses increased 16% year-over-year to $4.2 million. Administered expenses were up 22% driven by a higher non-cash stock-based compensation driven by an increase in our share price during the quarter. Q3 net income is $216,000 compared to a net loss of $791,000 in Q3 2024. Aside from the factors we discussed previously, Q3's increase in non-operating or other income and expenses is driven by a $728,000 loss on risk management activities primarily related to timing of rolling hedge contracts forward in a persistently inverted NYC market. This timing difference between recognizing the cost of rolling positions and the recovery of those costs through customer invoicing results in incremental realized losses during the quarter. As Frank mentioned, we continue to price for the cost of the inversion consistent with the industry practice and expect these costs to be covered through customer collections over the coming months and into 2026. We also recorded mark-to-market adjustments reflecting commodity price fluctuations and the U.S. dollar strength. These results are consistent with our structured approach to managing pricing volatility, mitigating risk exposure, and maintaining alignment with our supply commitments. As you may recall, during Q2, we reached an agreement with Mill Road Capital to repurchase and cancel their outstanding warrants. As a result of that agreement and subsequent cancellation, we no longer recognize a gain or loss in the fair value of the embedded option during Q3. There was a $659,000 decrease in finance expense. largely attributable to the elimination of the interest related to the Mill Road debenture, which was fully repaid in Q4 2024. In addition, decrease in interest on long-term borrowings after repayments and decreasing interest rates compared to Q3 2024. Q3 adjusted EBITDA was $3.3 million, up $1.1 million. or 52% year-over-year. In addition to the factors I mentioned affecting gross profit, fluctuations in adjusted EBITDA were driven by the previously mentioned loss on our risk management activities, which we expect to be fully recovered through customer collections and disciplined management of operating expenses over the balance of this year and early 2026. Turning now to inventories, our inventory balance increased slightly to $51.4 million in third quarter, primarily affecting higher green coffee costs due to elevated NYC. However, this was offset by a reduction in the hedge accounting component of inventory. Inventory management remains an essential component of our strategy. We continue to take a deliberate, forward-looking approach to holding inventory in order to support anticipated customer demand to ensure delivery continuity. We continue to see renewed order activity from smaller roasters with commitments to cover previously deferred purchases due to pricing volatility. In addition, this quarter saw increased ordering from importers within our regular coffee business as the NYC moderated during the first half of the quarter before rising again toward quarter end, prompting some to replenish inventories ahead of further price movements. At quarter end, Swiss Water held $3.9 million in cash compared to $8.5 million at the end of 2024, a net working capital of $38.8 million compared with $4 million. The change in net working capital is driven primarily by the reclassification of our operating credit facility to non-current borrowings as a result of the renewal during the quarter. We made total debt repayments of $11.9 million in Q3 made up of principal repayments on our long-term borrowings primarily related to construction of our Delta facility and on our operating credit line. This represents continued progress towards reducing interest costs and strengthening our leverage position over time. With that, I will turn the call back to Frank. Thank you, Ian. Before we turn to questions, I'd like to share a few closing thoughts. The coffee market remains very complex at the moment, but our business continues to perform well. The strategy we've put in place is doing what it's designed to do, helping us manage volatility, support customers, and deliver consistent results in a very challenging environment. Our inventory management approach, a key component of that strategy, continues to create value by providing flexibility and reliability across the supply chain. We also maintain strong operational execution throughout the quarter and continue to build financial strength and flexibility through discipline management. Looking ahead, we expect volatility in coffee markets to persist, but we're confident in our positioning and our ability to manage through it. The fundamentals of our business remain strong, our customer relationships are solid, and our team continues to execute with focus and discipline. We believe we're well-positioned to continue delivering stable results and to build on the progress we've made this year. With that, we'd be happy to take your questions.

Thank you. The floor is now open for questions. If you wish to join the queue to ask a question at this time, please press star 1 on your telephone keypad. We do ask if listening on speakerphone today that you pick up your handset while asking your question to provide optimal sound quality. Once again, please press star 1 on your telephone keypad at this time if you wish to join the queue to ask a question. Please hold a moment while we poll for questions. And we have a question from Richard Rudley from Glenbrook Capital. Richard, your line is live. Please go ahead.

Hi, guys. Yes, I read in the news release, but I'm not sure if you mentioned it when you were speaking about the situation to do with the Brazilian tariffs. I just wondered if you could perhaps expand on that a bit and let us know how you think it's going to impact things overall. Thank you.

Yeah, that's a great question, Richard. So the U.S. imports maybe 15% of Brazil's Brazil's annual output, and of course Brazil is the largest coffee-producing nation in the world. What happens in Brazil is what happens in the futures market. They are intertwined perfectly. So with a 50% tariff rate on Brazilian coffees going into the U.S., many, but not all, many roasters are essentially racing to find replacements. And these would be coffees that would come from, let's say, Uganda, maybe some from Vietnam, as well as some of the Central American roasters. coffee producing nations, Nicaragua, El Salvador, Honduras. So that's certainly causing some, it's just dislocation. It's rearranging blends. It's, you know, changing supply chains quickly. Not only supply chains, just maybe suppliers or, you know, paths that coffee gets to roasters very, very quickly. And so there's a large group of roasters that are basically avoiding Brazilian coffee. There are others who have blends that are, you know, very reliant on a particular profile. These would be, like, large, you know, directed to consumer organizations that have coffee prepared brewed coffee that they want to keep that profile exactly the same. And so they're taking that Brazilian coffee and they're pricing for it. So we're seeing those that are trying to avoid Brazilian coffees and find alternatives. There are those that are saying, boy, I mean, we've got a customer franchise here that's built on a particular profile. We're just going to have to price for it. We saw significant increases in the data that we watch for U.S. grocery sales. In terms of overall pricing per pound, which increased very rapidly, and a lot of that was tariffs, and in particular Brazil through Q3, although it was still the NYC as well that's driving. pricing around the world. So, net, what's happening is that Brazilian coffee is now flowing off to places like China or places like Russia. And they're picking up what could be potentially cheaper Brazilian coffee. Certainly, more Brazilian coffee is coming to Canada for roasting here. But, you know, it's just yet another dynamic that's happening in the marketplace, and so we're changing, you know, the copies that we are going to put in position to supply the U.S. into next year right away, starting kind of, you know, Jan, Feb, we'll be getting, you know, probably more Central American copies in place to supply. you know, to supply kind of those that are avoiding Brazilian coffee. But like I said, there are others that are just saying, nope, we have to take it. We're going to keep it. We have a profile that's important for the consumer, and we'll just price for it. So there's the dynamic, basically. Richard?

Thanks. Just to follow up. I'm just wondering because sometimes, as you know, these tariffs get reversed quite swiftly. Would that just cause logistical problems for you? As you say, you're rearranging the early part of the year to get coffee from elsewhere. But what if things are reversed in the interim? And then just a sort of follow-up question on future pricing. From my understanding, and obviously you know better, it seems like the concerns about the Vietnam crop It looks like the weather damage is minimal, and so that shouldn't be something that's going to affect the price in a negative way by pushing it higher.

Yeah, that's right. So we're putting on – reasonably light coverage as an alternative to Brazil going into the first couple of months of the year, and we'll kind of see how that goes, because you're absolutely right. The Brazil 50% number could change next week, could change over the weekend. Who knows? So, however, we do know that if that number does change, there will be a significant swift response in the NYC futures market now. So it would be... a wonderful thing, really, if that tariff was to be changed. But, yeah, I mean, there is, like I said, there's a lot of tariff arbitrage going on. There are those that are, you know, trying to find coffees from, you know, non-tariff markets. Mexico, for example, has no tariff on its coffee. You know, amazingly, of course, the crop is sold out. So, you know, I think that we're just going to continue to see A very elevated C, certainly with the Brazil tariffs in place and with a thing we don't talk very much about, which is certified stocks, which are at record lows. Certified stocks essentially support the entire market. And until we start seeing certified stocks come to about a million bags, we are going to remain in an inverted elevated market. So, yeah, complex.

Okay, that's all my questions. Thank you.

Thanks, Richard. Thank you. And this is a reminder, if you wish to join the queue to ask a question, you may press star one at this time. Once again, it's star one. And your next question is coming from Grover Wickersham from Glenbrook. Grover, your line is live. Please go ahead.

Yes. Well, first, guys, you know, we don't do this on purpose to, you know, give you guys the impression that a lot of people are listening. I hope they're or at least a few who are listening aren't Richard and Grover. But first of all, you know, congratulations. I think there's a really great quarter. I think, you know, there was an awful lot of suspense, you know, waiting to see how you guys did under the tariffs. And it's, you know, it's a relief that you did, you know, extraordinarily well. And I think you'd be congratulated from that. And I also think that getting out from underneath the commitment to the warrants on Mill Road was also, you know, that was also a real milestone for the quarter, which, you know, obviously that was something that we were trying to encourage. You know, just a couple of comments. As you know, we think the stock is really undervalued. We'd really like to see you do more to cultivate a market in the United States and, you know, maybe even at some point that would open up enough capital that you could avoid tariffs completely by possibly having a facility in the Pacific Northwest or somewhere convenient to Vancouver. You know, in discussing the company, I do get questions from time to time about the CO2 method, and I'm wondering, I know you've talked to me about that before, but could you perhaps, you know, give some more color on what you see as being the competitive, nature of CO2 processing, not from a cost standpoint, and also possibly from a consumer and regulatory acceptance standpoint?

Sure, yeah. If we want to focus specifically on CO2, we can definitely do that, Grover. CO2 is essentially coming from one source only on a third-party basis out of – Bremen, Germany. It's a plant that's been producing CO2 for many, many years with an expansion probably about 10 years ago. CO2 is a method that is good quality. Pricing is kind of similar to where we are at. We've seen that overall kind of chemical-free pricing is balancing in around a kind of a specific band or range, which is overall, I think, good. And the product itself is essentially limited in that the capital cost of CO2 expansion is significantly higher than any other chemical-free method, and there is a more limited lifetime of the plant due to the fact that they are using supercritical or just sub-critical pressures, which is very, very high pressures, and so the pressure vessels do have a lifetime. CO2 basically is capped out at the number that it's at right now. That plant is sold out and kind of remains that way. They have a good base of customers that are loyal and that use the product, but we aren't really seeing growth there. We're probably seeing growth maybe in some of the other processes or methods, competitors.

All right, okay. But in terms of competition, do you see that as a competition going forward?

Yeah, I mean, CO2 is always a competitor. I think, you know, other water processes are probably more on a growth trajectory than CO2. We've got the caffeine water process. out of Germany that is on the market in the past few years. And, you know, they have done well in that kind of part of the world. Europe primarily, maybe some in the eastern U.S., but Europe is their focus market. And that's probably more where our attention is focused on is, you know, how we remain competitive and in a market that honestly, you know, was, you know, much more methylene chloride dominated, and although the methylene chloride has not left the marketplace at all, we are seeing expansion in kind of the chemical-free slash natural marketplace for sure.

Yeah, I mean, I think hopefully, especially with the FDA under the current management, hopefully in the states, and I also don't understand why it hasn't become an issue in California, but hopefully there's going to be more awareness and maybe a regulatory intervention, at least in terms of labeling, so that people out in the community understand the difference. Then if I could, just like one other, I don't know if it's a question or an observation, but as you know, we've got probably one share less than 10% or, you know, we're close to 10% of the company. I mean, I don't know exactly where we are, but we, you know, we buy when it's, you know, when we see the opportunity to buy, we always add. But I noticed that, you know, properly, I believe they filed a notification that they're over 12%. So, I don't, you know, I'm not sure exactly what, maybe you guys know exactly what percentage they are, but I seem to recall 12%. So I would just say, so between them and us, we're, you know, we're well into the 20%. I think, you know, if we were a group, we would be, you know, large shareholders and, you know, frankly, with you and Frank, you know, two of you guys, we would, you know, probably be well over 30. But I would just suggest that it might be a good time to, you know, look at the constituency of the board, and it might be a good time for Mill Road to, you know, continue riding off into the sunset, so to speak, and have possibly have new, you know, have representation. And we would be quite happy to see somebody from properly in Calgary have one of them, Mark, or one of the other guys involved with that, you know, join the board. You know, I would think they, would represent all the shareholders. I'm sure I would feel represented by them. But, you know, I just encourage that as something, you know, when you get around to thinking about the board, something you guys should possibly, you know, find R2 cents worth on that subject. But, you know, nothing against The former Mill Road fellow is on the board, and I don't know. I think there's one or two. I apologize for not having all the details. But, you know, having shareholders without some skin in the game would, you know, certainly when you're talking to kind of those kind of percentages, that would seem to be – Appropriate, but anyway, I don't know if you there may not be something you guys can comment on. I'm just saying that that we would request that that be. You know it's something you consider when it comes time to nominate board members.

Yeah. Fair enough Grover, I did. Point well taken. I think that. No road still has an ownership position. And, you know, to be fair, you know, the folks that have served or are serving on our board have added value. I mean, I have good, you know, input from them. However, we also understand your point. I think our chair also understands that and absolutely will be given consideration for sure. recognizing kind of your view in terms of representation.

Yeah. Yeah, I don't know if you've met with them. We had a chance to talk to Mark, who's part of that group, and had a few conversations with him. And also we, as you're probably aware, we're on Salt Spring Island, and it seems like That's kind of like Baja Canada, and it attracts a lot of Calgary Albertans that prefer the weather. And so, you know, we know of Dan Mark and his investors. You know, we know of them through other friends on Salt Spring Island, and they have a really good reputation.

Yeah, no, they do, for sure.

I have no aspersions on any of the other board members, with the exception of not being a huge amount of love lost with no road, no offense, or actually moderate offense intended.

All right. Thank you very much, Robert. Yeah, we'll take that into consideration. Thanks very much. Are there any other questions today?

There are no further questions in queue at this time, and I'd like to pass the floor back to management for closing remarks. Thanks, Tom.

If there are no further questions, we will conclude today's call, and thank you very much for joining us. Have a great weekend.

Thank you. This does conclude today's conference call. You may disconnect your lines at this time and have a wonderful day. Thank you once again for your participation.