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.

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