Swiss Water Decaffeinated Coffee Inc.

Good afternoon and welcome to the Swiss Water Decaffeinated Coffee Incorporated fourth quarter 2026 conference call. At this time, all participants are in a listen-only mode and the floor will be open for questions following the 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. Before Swiss Water Decaffeinated Coffee Incorporated 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 statement are based on assumptions that they consider 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 Incorporated does not assume responsibility for the accuracy and the 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 expect as required by law. please refer to Swiss Water Decaffeinated Coffee Incorporated's management's discussion and analysis posted on the SEDAR and Swiss Water's website for a full discussion regarding forward-looking statements and the risks therein. I will now turn the conference over to your host, Frank Dennis, President and CEO of Swiss Water Decaffeinated Coffee. The floor is yours.

Thank you, Jenny, and good afternoon, everyone. Thank you for joining us today. I'm Frank Dennis, President and CEO of Swiss Water Caffeinated Coffee, and joining me on the call is Ian Carswell, our CFO. As usual, I'll begin with a brief overview of our performance and the operating environment. Ian will then walk through the financial results in more detail, and I'll come back at the end with a few closing comments before we open the line for questions. 2025 was an unusually volatile year for the global coffee market. and the fourth quarter reflected that. We dealt with extreme movements in coffee futures prices, a deeply inverted market structure for much of the year, shifting tariff conditions, and as the year progressed, increasing pressure on consumer demand, particularly in the U.S. grocery channel. Despite that environment, the business performed very well, and we delivered solid results for the year. Process volumes were up 2% for the year. small volume decline in the fourth quarter was largely driven by what we saw late in the quarter on the consumer side. Retail coffee prices reached levels where consumers began to push back, and we saw that clearly in third-party U.S. grocery data as consumption softened, purchase frequency declined, and consumers traded down. That consumer behavior flowed back through the supply chain. Roasters became more cautious, inventory coverage shortened, and order timing became less predictable. While we would have preferred a stronger finish to the year from a volume standpoint, the decline was measured, and operationally the business remained stable throughout. From a revenue perspective, results were meaningful higher year over year, driven primarily by the elevated NYC price flowing through green coffee revenue. As we've been very consistent about saying, we are careful not to over-interpret that. In this environment, headline revenue growth is largely a function of commodity pricing rather than a structural change in underlying demand. What matters more to us is execution, how we support customers, how we manage volatility, and how we position the business for when conditions normalize. Operationally, our Delta facility continued to perform in line with our expectations throughout the year. With both production lines now operating at steady state, we're seeing continued improvements in consistency, quality, and throughput. A lot of work over the past year has gone into process control and optimization, particularly around drying and yield. and that's translating into an even higher quality coffee for our customers. From a capacity standpoint, we're well positioned to support incremental growth as demand rebuilds without near-term constraints. Strategic inventory positioning remained a key differentiator for us in 2025. In a market where many importers stepped back from holding coffee due to inversion costs and price risk, our ability to carry inventory and place it where customers needed it allowed us to continue serving both large and small roasters reliably. That reliability continues to matter in volatile markets and remains a core part of our value proposition. Tariffs added another layer of complexity during the year. The escalation of U.S. tariffs on Brazilian coffee in the third quarter caused meaningful disruption across the industry, forcing rapid shifts in sourcing and blend composition. While those tariffs were ultimately removed late in the year, the interim uncertainty affected order timing and contributed to broader market hesitation. Throughout that period, we operated within the applicable framework. Pass-through costs were required and stayed focused on continuity of supply for customers. From a balance sheet standpoint, we continued to make progress strengthening the business. Over the course of the year, we reduced leverage, expanded our operating credit facility, and completed the repurchase and cancellation of the Mill Road warrants. Taken together, those actions improved our financial flexibility and put us in a stronger position to navigate volatility while remaining disciplined on capital allocation. Looking ahead, while market conditions remain dynamic, we are cautiously encouraged by what we're seeing early in 2026. Coffee futures prices have come off recent highs, The front month inversion has flattened significantly, and we're beginning to see early signs of improved purchasing activity as customers start to refill pipelines. That process tends to be gradual, and we expect inventory discipline to remain part of the landscape for some time, but a more normalized future structure is constructive for volume growth over the medium term. More broadly, the long-term fundamentals of our business are being intact. The hand for chemical-free decaffeination continues to build, Consumer awareness continues to increase, and regulatory and health-driven scrutiny of chemical-based processes continues to support the category. Our focus in 2026 is straightforward. Support customers as volumes rebuild with the right copies. Continue to optimize our operations and improve financial flexibility and sustainable profit growth over time. I'll turn the call over to Ian to walk through the financial results in more detail. Ian? Thank you, Frank, and good afternoon, everyone. Just want to remind everybody that all figures are in Canadian dollars unless otherwise stated. As Frank mentioned, Q4 and full year 2025 results reflect steady execution in a market defined by elevated coffee prices, persistent volatility, and tariff-related disruption during the second half of the year. Despite those dynamics and the uneven ordering patterns we saw at times, the underlying business remains stable, supported by consistent operations Delta and continued demand for a chemical-free decaffeination process. Total ship volumes for the quarter decreased by 2% and increased by 2% for the year when compared with the prior year. The decrease in volumes during the fourth quarter reflects the lumpiness we saw across the broader coffee market. With consumer prices rising, roasters continue to cautiously approach the timing of their orders. The increase in volume shipped during the year reflects our strategic approach to inventory and enduring demand for a premium chemical-free coffee through continued volatility and inversion in the NYC. Looking at volumes by customer type, shipments to importers, those customers who resell our coffees to roasters when and where they need it, we're down 10% in the quarter, up 3% for the year. Our shipments to roasters, those customers who roast packaged coffee to sell to consumers and and their own coffee shops, or for home and office consumption, were up by 2% in the quarter, down 1% for the year. As we've previously mentioned, many of our customers have moved to a more conservative, just-in-time operating model for inventory management, and that impacted the distribution of quarterly growth rates in 2025. Looking at our customer channels another way, specialty volumes were down 5% in the quarter and up 6% for the year. These accounts served the out-of-home consumer primarily in cafes and restaurants in our key geographic markets. Commercial volumes were up 2% in the quarter, down 1% for the year. Q4 revenue was up 34% to $66 million, compared to $49.2 million in Q4 2024. Full-year revenue was $258.7 million, up 49%. The primary driver of the increase in revenue in both the quarter and for the year was the elevated coffee prices, with the NYC continued to trade well above historic averages, which flows through to our green coffee revenue. Increased volume shift. Tariff recovery expense and increased distribution revenue, our logistics subsidiary Seaforth, further amplified the growth in revenue for the year. Moving on to our costs. Q4 cost of sales was $58 million, up 37% year-over-year. Full-year cost of sales was $231.7 million, up 58% year-over-year. For the quarter, the increase is primarily attributed to the elevated NYC fluctuations in the US dollar and tariffs, offset slightly by a minor decrease in volume shift. For the full year, the impact of elevated NYC higher volume shift and tariffs was partially offset by fluctuations in the U.S. dollar. Green coffee costs averaged U.S. $3.83 per pound compared to U.S. $2.83 per pound in Q4 2024, an increase of 35%. For the year, green coffee prices averaged U.S. $3.36 per pound compared to $2.35 per pound U.S. in 2024, an increase of 55%. This reflects a modest increase from the Q3 2025 average of $3.37 US. Customers continue to manage inventory cautiously during the fourth quarter, reflecting elevated retail pricing and ongoing volatility in the coffee market. Ordering patterns remained uneven in the quarter as larger buyers, including importers, remained conservative in their purchasing decisions and limited inventory commitments. At the same time, We saw increased activity from smaller and specialty hosts, particularly as pricing stabilized towards the end of the quarter. These customers tend to operate with shorter planning horizons and were more responsive to near-term needs, which contributed to variability in order timing and mix. Overall, customer behavior in the quarter reflected continued discipline around inventory management rather than a change in underlying demand. Exchange rates between the U.S. and Canadian dollar continue to influence our reported results in cash flows in the quarter and for the full year. As a reminder, most of the revenues are earned in U.S. dollars, while a meaningful proportion of our costs are incurred in Canadian dollars. We also carry U.S. dollar receivables and payables on our balance sheet. During the year, movements in the exchange rate resulted in a foreign exchange gain, largely reflecting the revaluation of those U.S. dollar balances at period end. We continue to monitor this exposure closely and use hedging tools where appropriate to manage our underlying currency risk. In Q4, the U.S. dollar averaged $1.39 Canadian compared to an average of $1.40 Canadian in Q4 2024. For the full year, the U.S. dollar averaged $1.40 Canadian compared to an average of $1.37 Canadian in 2024. Turning now to operating expenses, Q4 operating expenses decreased 9% year-over-year to $3.5 million. Full-year operating expenses decreased 1% to $14.9 million. Administrative expenses were down 11% for the quarter, driven by lower non-cash stock-based compensation and a reduction in accrued bonuses. Full-year results were flat with a decrease of 1%. Q4 net income was $1.2 million compared to $2 million in Q4 2024. Full year net income was $1.6 million compared to $1.3 million in 2024. Aside from the items we've just discussed, the increase in non-operating or other loss for the year was driven by a $6.4 million loss on risk management activities. This came down to timing, specifically the lag between the cost of rolling our hedge positions forward and recovering those costs through customer invoicing in the context of a persistently inverted NYC market. We continue to price for the cost of the inversion, consistent with how the industry approaches this. We expect those costs to be recovered through customer collections over the coming months. We also recorded mark-to-market adjustments this year, reflecting both commodity price movements and the strength of the U.S. dollar. Taken together, these results are consistent with our structured approach to managing pricing, volatility, protecting against risk exposure, and staying aligned with our supply commitments. Earlier this year, we reached an agreement with Mill Road Capital to repurchase and cancel their outstanding warrants. The repurchase price was $700,000. As a result of that cancellation, we no longer recognize a gain or loss on the fair value of the embedded option. For the full year, we recognized a $1.7 million gain compared to a loss of $1 million in 2024. There was a $300,000 decrease in finance expense in the fourth quarter, $2.1 million dollar reduction for the year, largely attributable to the elimination of the interest related to the Mill Road debenture, which was fully repaid in Q4 2024. Additionally, there was a decrease in the interest on long-term borrowings, reflecting our principal repayments and decreasing interest rates compared with 2024. Q4 adjusted EBITDA was $4.2 million, down from $4.9 million, or 14% year over year. Adjusted EBITDA for the full year was $11.3 million, down from $14.3 million, or 21% compared with the prior year. Fluctuations in adjusted EBITDA were primarily driven by losses on the risk management activities, which, as we've just discussed, we expect to be fully recovered through customer collections. Turning now to inventories, our inventory balance increased 3% to $46 million compared with the prior year. While volumes held decreased slightly, higher green coffee costs resulted in an increase. The increase was mitigated somewhat by the hedge-counting component of inventory. Inventory management remains a core part of how we operate. We take a deliberate, forward-looking approach to holding inventory, making sure we're well-positioned to the anticipated customer demand and keep delivery running smoothly. At year-end, Swiss Water held $6.6 million in cash, compared with $8.5 million at the end of 2024. Networking capital of $42.3 million, compared with $4 million at the end of 2024. In 2024, the operating credit facility of $35.4 million was classified as current borrowings. In June 2025, the facility was renegotiated, and the balance was reclassified to long-term borrowings. During the fourth quarter, we made total debt repayments of $1.4 million, $5.4 million for the year, made up of principal repayments on our long-term borrowings, primarily related to construction of our Delta facility and on our operating credit line. With that, I will turn the call back to Frank. Before we open the line up for questions, I'll just wrap up. While the coffee market remains volatile, our focus hasn't changed. We're staying disciplined on execution, supporting our customers through a challenging pricing environment, and managing business with a long-term view. The strategy we've put in place, particularly around inventory positioning, operational consistency, and financial flexibility, is doing what it's designed to in a complex market. We're encouraged by early signs that market conditions are beginning to normalize, but we're also realistic about the pace of that recovery. Our approach remains measured. We'll continue to prioritize reliability, competitiveness, and operational efficiency, while staying focused on proven capital allocation and improved balance sheet strength through debt reduction. The long-term fundamentals of chemical-free decarbonization remain intact, and we believe Swiss Water is well-positioned to navigate near-term variability and build on that foundation over time. With that, if we can please open up the line for questions.

No problem. We are now opening the floor for our question and answer session. We do ask that you limit your questions to one per person and you may rejoin the queue for any follow-ups. If you would like to ask a question, please press star 1 on your phone keypad now. A confirmation tone will indicate that your line is in the queue. You may press star 2 if you would like to remove your question from the queue. And for anyone using speaker equipment, it might be necessary to pick up your handset before you press the keys. Please wait a moment as we poll for questions. Thank you. Our first question is coming from Emily Marin of SACS Small Cap. Emily, your line is live.

Thank you. So it seems that The way you laid out, you know, industry dynamics several months ago in terms of continued volatility and likely to persist in 2025 with, you know, optimism that there would be normalization starting in 2026, it seems as if that is playing out the way you originally, you know, sort of expected. Obviously, you know, things could change, but it seems like things are finally moving in the right direction. But in terms of, so you're being very strategic in terms of managing inventory. What I'm wondering is, given the sourcing, your sourcing of coffee and different, you know, geographic locations, regions being more or less subject to potential tariffs in position in the U.S. market and also to, you know, differences just in terms of crop outputs. How much flexibility do you have in terms of, you know, reorienting some of your sourcing if the market doesn't, if the market normalization sort of gets interrupted?

Right.

We move our sourcing quite rapidly when basically availability becomes constrained in a particular origin or if differentials become too high, we can rearrange pathways. I wouldn't necessarily say pathways. I'd just say rebalance what origins we want to focus on. The interesting thing as a decaffeinator is generally the roaster kind of leads us that way anyways. The roaster will be seeing the balance of their business. The other 90% of their business is decaps only 10%, let's say. The other 90% of their business, they're seeing the same thing happen, and they'll say, hey, we want to maybe deprioritize a particular quality level of a Brazilian coffee and move to, let's say, a Central American coffee if it's available. Now, you know, Brazil, of course, representing just so much overall worldwide capacity, it's tough to walk away from Brazil entirely, right? but there are alternatives and there are alternative quality levels. And that's really an important thing for us to focus on is recognize that, you know, roasters can have different quality levels that they might accept at particular price points over time. while others, you know, are very, very firm on exactly the quality level they want to maintain. So it's our job as a decarbonator to be very, very responsive to where the roaster is going, kind of within reason. We still have, you know, a rather lengthy supply chain to get coffee into Vancouver. So, we already have, you know, coffee on the water as it were, but you can still be, you know, within 90 days have made some pretty significant changes if necessary.

Okay. Thank you. I have another question, but I guess I'll get back into queue for that. Okay.

We can probably take your follow-up, Emily.

Okay. Thank you. So, you know, you are, you know, very, you know, conservatively cautioning that while things seem to be normalizing, you are expecting the buyers to remain kind of conservative in their buying patterns, you know. for a while at least until the rebound or the uptick in overall purchase orders is likely to be kind of, you know, a slow one, perhaps. Are you seeing any differences, you know, any kind of market differences in any specific, you know, regional markets or is the buying pattern somewhere, you know, the caution that you're describing, is that across the board?

We're seeing it's quite intense in Europe in terms of the focus on coffee quality levels, pricing, competitive structure. And so there's probably a heightened focus in Europe in terms of cost management and reluctance to carry coffees. I think, you know, North America is slowly starting to kind of pipeline fill. So that's positive. But still, you know, $2.85 futures market is still quite elevated for a lot of banking lines. I mean, that's really what it comes down to. It's how big is your banking line and how high is the futures market? And, you know, not everyone, you know, doubled or tripled their banking lines through this period. So, you know, at 285, there's still constraints for sure.

That makes sense. Okay. Thank you very much for taking my questions.

Thank you.

Thank you very much. Just a reminder there, if there are any further questions, you can still join the queue now by pressing star 1 on your phone keypad. Let's see if anyone else jumps into the queue. Okay, and we have a couple more questions come in. And our first one is coming from Mark Vendraman of Properly Investments. Mark, your line of life.

Thanks, and thanks, guys. Thanks for taking the question today. Just a comment on the front end and then maybe a question afterwards. Great quarter. We really appreciated all the hard work and a really challenging 2025 by the management team and all of our outstanding team members in the Delta British Columbia facility. So, thank you so much. Lots of news over the last six months becoming the largest shareholder of Swiss water and a lot of interest on our position. Just to be clearly and clear on this, we are 100% behind you on this management queue, and again, the wonderful folks in Delta BC. Question for you with regards to the balance sheet. As we've seen the price come down in Q1, how long does that take to start to unwind the working capital on the balance sheet? Can you give us a bit of a sense of that? not so much quantum, but at least direction on the balance sheet.

Thanks for that question, Mark. I mean, generally we're seeing – generally we're running at about eight to ten weeks inventory on our balance sheet. So, you know, it takes probably, I'd say, the best part of three months for us to start seeing a meaningful change. reduction in the levels of inventory sitting on our balance sheet. And I would obviously, that's assuming all things equal, that business is not rapidly growing or rapidly shrinking. So with modest growth, I would expect in a falling coffee price market, you'd start to see some impact coming through after three to six months.

Awesome. And it must be a huge relief

Yeah, for sure. I mean, thankfully, we did a really good job of renegotiating our credit lines in the middle of last year. And so we did have some headroom to support the escalation in price. But yeah, it's great when you see the sea falling and hopefully it gives a lot of our customers a lot more confidence to go a little bit longer in their inventories, which helps us grow faster.

Awesome. Thanks so much for that, Ian, and congratulations again, Frank, and I look forward to seeing us come out of this period here over the next couple of years.

Thank you, Martin.

Thank you very much. And our next question is coming from Emily Marin of . Emily, your line is live.

Thank you. Okay, last question . One of the initiatives that you had been talking about that I think you were really seeing some traction on is opening up new markets or deepening your penetration in new markets. You know, I think you talked about the Middle East being one that was very attractive. drop of the industry that we saw in 2025, given that, you know, buyer purchasing patterns are still somewhat cautious now. Does that translate into a longer than usual sale cycle, meaning, you know, the progress that you're making might not show up as quickly as it would otherwise if we were in a more normal cycle?

Yeah, I don't want to kind of put the Middle East thing into this mix right now, but I would say that an elevated NYC, an elevated futures market, it does slow down development. There's no doubt. And so, yeah, I mean, my history tells me that when the sea is kind of on maybe a downward curve and, you know, a recognized downward curve towards, you know, maybe a lower stable level, that does help our overall development efforts. There's no doubt because of how we have to price coffee and the overall outright price of – coffee we can be much more competitive when we're at lower levels uh there's there's no doubt so um yeah i mean that's that's kind of one of the other reasons that we sort of like a a lower c isn't it's not just because of working capital it's you know we're one of the more expensive decaffeination alternatives uh out there and um with that when you add in you know the cost of coffee um the differences become a little bit more stark. And so, yeah, we'd like a lower NYC.

Okay. Thank you.

Welcome.

Thank you very much. Well, we appear to have reached the end of our question and answer session. So I will now hand back over to the management team for any closing comments.

Okay. Well, thank you very much. Thank you for all of your comments and thank you all for dialing in today. And we will see you at the RQ, one call. Thank you very much.

Thank you so much, everybody. This does conclude today's conference. You may disconnect your phone lines at this time and have a wonderful day. We thank you for your participation.