Swiss Water Decaffeinated Coffee Inc.

Hi, everyone. Welcome to the Swiss Water Decaffeinated Coffee, Inc. First Quarter 2026 Conference Call. At this time, all participants have been placed on a list-only mode, and the floor will be open for questions and comments after the presentation. Before Swiss Water Decaffeinated Coffee, Inc. Conference Call starts, there are required to remind you that there are certain information in today's presentation that is forward-looking in nature. Any such forward-looking information or statements are based on assumptions that they consider reasonable at the time that 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 the subsequent events or circumstances, except as required by law. Please refer to Swiss Water Decaffeinated Coffee Thinks Management Discussion and Analysis posted on CDAR and Swiss Water's website for full discussion regarding forward-looking statements and the risk therein. It is now my pleasure to turn the floor over to your host, Frank Dennis, the CEO of Swiss Water. The floor is yours.

Thank you, Kelly. Good afternoon, everyone. Thank you for joining us today. I'm Frank Dennis, President and CEO of Swiss Water Decaffeinated Coffee. Joining me on the call is Ian Carswell, our CFO. We're here today to discuss Swiss Water's financial results for the three months ended March 31, 2026. 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 with a few closing thoughts before we open the line for questions. The coffee market remained complex through the first quarter, but we're beginning to see some of the most extreme dynamics ease Forecasts are pointing to a very strong Brazilian harvest this year, which has been a significant driver in the movements we've seen in the NYC. C came off its record highs, peaking around $3.75 U.S. per pound in January and ended March at $2.98 U.S. per pound, compared to a high of $4.23 U.S. and an average of $3.83 U.S. in 2025. The futures curve has become less inverted frequently, and while the overall cost environment remains elevated, the direction is encouraging. As we've been consistent about saying throughout 2025, that shift in market structure matters. When prices are rising sharply and the curve is heavily inverted, customers stay lean. When prices stabilize and the inversion eases, customers begin to refill pipelines, and we're starting to see that. Against that backdrop, Swiss Water delivered a solid first quarter. Total volumes were down 2% year over year, but that really comes down to one discrete event, an unplanned 10-day downtime in January on one of our production lines following an equipment failure. The disruption was contained. It was resolved quickly and is behind us. Once we were back online, the facility operated at or near full capacity for the balance of the quarter. In fact, March was the strongest production month we've had. From a customer perspective, what we're seeing is encouraging. We are almost fully booked for the second quarter and booking new business out into late summer. That's a very different picture from last year when customers were staying lean and keeping forward coverage short. Roasters are restocking, extending their booking horizons, and that gives us good visibility in the back half of the year. On tariffs, the situation has evolved significantly. The tariffs that created so much uncertainty through 2025 have been removed. And like the rest of the industry, we are now working through the process of recovering tariffs that were paid while they were in place and returning them to our customers. That process takes time, but we're engaged in working through it. Operationally, the Delta facility continues to perform well into Q2. We're seeing continued improvements in consistency, quality, and throughput, and we have the capacity to support growth as demand rebuilds without near-term constraints. Our spot inventory position remains deliberate. We want to be in place where we can respond quickly to customers in a market that still has volatility in it. And we continue to make progress on the balance sheet, reducing debt and improving our financial flexibility. Those fundamentals haven't changed. More broadly, the long-term fundamentals of our business remain intact and continue to strengthen. The decaf category itself is growing. More consumers are making deliberate choices to reduce caffeine, driven by a broader focus on health, sleep, and overall wellness. That's expanding the total market. And within decaf, we're seeing a continued shift toward chemical-free processes as consumers become more label-conscious and more aware of how their coffee is made. As a leading chemical-free decaffeinator, we're well-positioned to capture that demand as market conditions continue to normalize. With that, I'll turn the call over to Ian to walk through the financials. Ian?

Thank you, Frank. Just a reminder that all the figures that I'm going to talk about are in Canadian dollars unless otherwise stated. As Frank mentioned, Q1 results reflect solid underlying performance and improved profitability compared to the same period last year, despite an unplanned downtime on one of our production lines in January. Total volume shipped decreased by 2% in the first quarter compared with Q1 2025. As noted, that decline is largely attributable to the 10-day downtime on one of our production lines in January. Once the line was back up, throughput was strong for the remainder of the quarter and customer demand held up well. 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 6% in the quarter. Shipments to roasters, those customers who roast and package coffee to sell to consumers in their own coffee shops or for home and office consumption, were down 10% in the first quarter. Looking at customer channels another way, Specialty volumes were down 4% in Q1. These accounts served the out-of-home consumer primarily in cafes and restaurants in our key geographic markets. Commercial volumes were flat in the quarter. Q1 revenue was down 8% to $57.5 million compared to $62.3 million in Q1 2025. The primary driver of the decrease in revenue in the quarter is the NYC, which flows through our green coffee revenue. With the NYC declining through the quarter, the year-over-year revenue comparison looks different than what we saw through much of 2025, when elevated prices were a driver of revenue growth. As we have said consistently, we are careful not to over-interpret revenue movements in either direction. What matters more is how we are executing and what we are generating at the profitability and cash flow levels. Looking at our costs, Q1 cost of sales is $49.5 million. down 10% year-over-year. The primary drivers in the corridor were lower green coffee costs reflecting the decline in NYC, partially offset by an increase in activity at seaforth. On the cost side, the Delta facility continues to deliver efficiency, is up, and the underlying cost structure remains stable. As for green coffee costs, at an average Of $3.16 per pound in the first quarter, the NYC was down 15% from $3.73 per pound in Q1 last year. The declining price environment, while still elevated relative to historical averages, is encouraging for the industry and is influencing customer purchasing behavior, as Frank mentioned previously. Customer ordering patterns in the quarter reflect the gradual normalization we have been expecting. we saw roasters beginning to extend inventory coverage and importers returning to more active purchasing positions, which is consistent with a less inverted, declining price environment. That shift in behavior, while still early, is encouraging. Change rates between the U.S. and Canadian dollar continue to influence our reported results in cash flows. As a reminder, our revenues are primarily earned in U.S. dollars, while a meaningful portion of our cash flows are in Canadian dollars. We also carry U.S. dollar receivables and payables on our balance sheet. This quarter, fluctuations in exchange rates 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 hedge to manage our underlying currency risk. In Q1, the U.S. dollar averaged $1.37 Canadian compared to $1.44 Canadian in Q1 2025. This depreciation had a negative impact on our revenues when converted to Canadian dollars. Q1 gross profit was $7.9 million, up $600,000, or 9% year over year. Turning now to operating expenses, Q1 operating expenses were $4.3 million, up 27% year over year. led by administrative expenses, which increased by 33% to $3.2 million, reflecting non-cash stock-based compensation movements driven by changes in our share price, and in addition, higher professional fees. Sales and marketing expenses were up 10% in the quarter to $1.1 million, broadly reflecting the timing of marketing activities. Q1 net income was $1.4 million compared to $515,000 in Q1 2025. Aside from the items we've discussed, the improvement in net income reflects lower risk management losses. On risk management, with the NYC declining through the quarter and the curve becoming less inverted, the losses associated with rolling hedge positions forward were significantly lower than we saw through much of 2025. We recorded a loss on risk management activities of 600,000 in the quarter compared to a loss of 2.8 million in Q1 2025. As we've been consistent about saying, we price for the cost of inversion in line with the rest of the industry, and we continue to recover those costs through customer collections. We also recorded mark-to-market adjustments reflecting commodity price movements and U.S. dollar fluctuations. consistent with our structured approach to managing pricing volatility and staying aligned with our supply commitments. Last year, we reached an agreement with Mill Road Capital to repurchase and cancel their outstanding warrants. The repurchase price was $675,000. As a result of that cancellation, we no longer recognize a gain or loss in the fair value of the embedded option. There was a $300,000 decrease in finance expenses, primarily reflecting continued principal repayments on our long-term borrowings and lower interest rates compared to Q1 2025. Q1 adjusted EBITDA was $4.3 million, up 113% compared to $2 million in Q1 2025. The improvement was driven by stronger gross profit and a lower loss on risk management activities compared to the same period last year. Turning now to inventories, Our inventory balance decreased by $5.4 million in the first quarter. With the NYC declining, the value of green coffee held on our balance sheet is beginning to reflect lower replacement costs, which over time will support a reduction in working capital as volumes flow through. Inventory management remains a core part of how we operate. We continue to take a deliberate, forward-looking approach to holding stock in order to support anticipated customer demand and ensure delivery continuity. At quarter end, Swiss Water held $4.8 million in cash compared to $6.6 million at year end 2025. Networking capital was $38.3 million. During the quarter, we made total debt repayments of $6.4 million, made up of $5 million of repayments on our operating credit facility and $1.4 million of principal repayments of long-term borrowings related to construction of our Delta facility. This represents continued progress toward reducing interest expense and improving our leverage position over time. With that, I turn the call back to Frank.

Thank you, Ian. Before we open the line for questions, I'll share a few closing thoughts. The coffee market remains complex, but our business is performing well. The 10-day outage in January was a real disruption in the context of a single quarter, but the team managed through it, and the facility is back operating at our near-full capacity quickly. The underlying business delivered solid results, improved net operating income and EBITDA, and continued progress on debt reduction. We're also encouraged by the direction of the market. The NYC has come off its highs, the curve is less inverted, and we're seeing customers begin to refill pipelines and extend their booking horizons. We're moving in the right direction, and the business is well-positioned for what comes next. Our focus remains on what we can control, consistent operations, disciplined working capital management, and strengthening of the balance sheet. We believe we're well positioned to support our customers as conditions continue to normalize to build the progress we've made. With that, Frater, Kelly, please open the line for questions.

Certainly. The floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset as listening on a speakerphone to provide optimum sound quality. Please hold for just a few moments while we pull for questions. Your first question is coming from M. Marin with Sachs Investment Research. Please pose your question. Your line is live. Thank you.

So it's very encouraging to see that the NYC looks like it's finally starting to stabilize. You also said, I think, in your prepared remarks that you have the capacity to support growth. but you also said that you're operating your production lines or operating, you know, near or at full capacity. Do you think that you can continue to try to develop new business in existing markets and open, you know, new geographic markets, which I think has been part of the strategy in the past with the kind of production capacity you currently have online?

Yes.

Thanks for that question. Good question.

What we're seeing, I think, is some pipelines refill into Q1 and Q2 as we're looking at our order book. Inventories were super lean, especially with importers last year who didn't want to suffer the cost of inversion. and reduce their inventories. And that's, I think, partially why we see the importer number in the segmented numbers come back so much and roasters maybe a little bit less. And so we absolutely have room for growth. I think we are just seeing kind of a reversion, hopefully, directionally back to normal through kind of the first half of the year. and absolutely we have room to continue to look for new business. I think as we've mentioned in the past, we have for somewhat limited amounts of capital expense the ability to expand our operation here in situ. and we continue to evaluate when and where we might execute that, but it's a reasonably simple process. Some deep bottlenecking needs to be done, and so that will enable us for growth certainly into 2027 and beyond.

Okay, great. Thanks. And then one follow-up. You said that Because the, you know, NYC is starting to stabilize, there's a sense that there'll be a record harvest out of Brazil. And some customers are starting to feel a little bit more confident about, you know, extending their booking horizon. Can you put that in context, you know, you're seeing some visibility into, you know, the back half of this year. Before all of the noise that we've seen over the past several quarters with the tariffs and with really, you know, skyrocketing NYC prices, when the industry was, you know, operating under a more, I guess I would call it normalized basis, would that be considered, you know, what you would have expected being able to see in May? visibility on what demand would be through the back half of the year or, you know, shorter or longer time horizon, you know, under normal circumstances.

Yeah, that's also a good viewpoint to contemplate. And, yes, I mean, last year we talked and our team internally talked constantly about customers, roasters, purchasing hand-to-mouth. I mean, we would be midway through the month and not exactly sure what the numbers were going to be two weeks later. And that was extremely abnormal. Just because of the length of the supply chain for coffee, we do typically see longer horizons It's much more, or sorry, it's much less expensive to purchase forward, to book copies forward, and, you know, plan in a way that's much more thoughtful than buying, you know, for immediate delivery on the spot market, as you can imagine. And so we're absolutely starting to see that return increase. to just some forward visibility of customers going, yeah, I can book some spreads and why don't we look at some deliveries across these two or maybe even three futures periods and we price those costs in, we execute those, we execute the coffee for them, they know their costs coming forward and they aren't as worried about where The market might go, you know, there is some differential pressure short-term right now in Colombia. And so those types of things will continue to happen. But absolutely, we're seeing better visibility.

Okay, great. Thanks. And then if I may just ask one last question, and then I'll hop out of the queue. In the past, you've cited the grocery prices. supermarket prices for coffee, just sort of as a benchmark. Now, I can imagine that there's a lag between seeing NYC come down and seeing any kind of impact on prices at the grocery. But to what extent do we actually see that you know, give back to the end consumer at the retail level. I would think that there'd be some stickiness at the higher price point, but I just, you know, I'm wondering what you see.

Yeah, that's another good question and good insight.

Experience tells us that we'll see, you know, six months, nine months of kind of elevated prices just because of the length of supply chain. And still the market is pricing for inversion. That's still in place. And so that brings with it additional risk that's being priced into the market. So although the sea is down, certainly inversions are absolutely being priced for it. going forward. So, you know, looking kind of, if I think back to, I think, 2014, you know, when there was a big run-up in the sea and roasters were, you know, able to ultimately price for that, it was, you know, a good amount of time before, you know, there was a real kind of drift back in terms of pricing because on the front side, I think roasters are you know, always kind of caught out when the sea runs up and they haven't been able to price through. And so there's a, I guess, a rebalancing, if you will, of how they view it. But, again, I'm not a roaster. I don't price to the end grocer, but that's just kind of experientially what we've seen.

Okay. Thanks very much.

You're welcome. Thank you.

Your next question is coming from Richard Rutchley with Glenbrook Capital. Please post your question. Your line is live.

Oh, hi, guys. Yeah, obviously, but I just wanted to ask about caffeine as a bioproduct in terms of how likely it is that you would pursue that, and if so, what kind of costs are involved and over what period of time would we look at that unfolding? Thank you.

Well, the recovery and sale of caffeine from a water process is notoriously difficult. I think we've thought about this for about 40 years, honestly. and the ability to execute is developmental at this point at best, and to be able to point directionally with certainty to capital cost and timing I think is simply too early, but we continue to work on it as an ongoing project, and that's really all I can comment on at this point.

Your next question is coming from Mark Prince with Coffee Geek. Please touch your question. Your line is live.

Hi, Frank. It's good to connect with you again. And hello, Ian. We haven't met yet, but I've been following the transition at Delta closely. I have a primary question and then a follow-up. Frank, I remember touring the old Burnaby facility with you and seeing everything now consolidated and running at such high level, and Delta is a notable change, especially seeing the adjusted EBITDA double-discord was really good. A previous caller touched on the expansion, which was going to be my original question, so let me shift to the conversion pipeline. We've seen significant movement lately in clean conditions filed at the FDA just this past March and April to remove a methylene chloride as a permitted solvent in other food-related categories. So, given the regulatory heat, what happened with the EPA last year, are you seeing an increase in trial runs and onboarding inquiries from major NCUs and roasters now that the Delta facility is fully operational? And after the brief downtime in January, confident the facility is now kind of battle-tested enough to flip the switch on these large-scale commercial conversions immediately.

Yeah. Hi, Mark. Great to hear from you again. So to answer kind of the big question, which, you know, impacts the broader – decaf universe. Yeah, there was something filed in March around oleoresins, methyl chloride being used for, I think, turmeric and paprika and one other basically powder. I can't remember what it was. In any case, I don't know if that's going to extend into decaffeination or Um, certainly it's, it's not that far away, is it really, to be thinking about, you know, um, removing methane chloride from, uh, you know, common, common household, um, spices, um, to think about that extending into, uh, the decapitated segment. Um, I think that, uh, the, our view going forward is that, um, those types of filings will concern some roasters, you know, increasingly over time. And, you know, I think that we have for several years, Mark, had increased interest and conversion rates. Because of the noise that's coming through consumers, it is being picked up by the EPA, as you mentioned. It's being picked up by the FDA in other categories. And it certainly is buoying, it's supporting long-term the conversion from a methylene chloride and potentially even ethyl acetate over to, you know, clean products. decaffeination that we've said forever the consumer prefers. It's pretty simple. And so, yeah, we are seeing increased demand and we have a view to how we can add additional capacity. I think that the, you know, coming back to the January thing, I think we already were Bible tested. I mean, you know, when a when a small little motherboard goes on a blower, um, you know, weird things like that'll happen. So I don't want to, we, you know, in our, in our releases, we've been kind of very, you know, high level in terms of what went on, but basically it was a, a very small issue that just had, you know, um, a bit of an outage on one line. So that doesn't, it doesn't fuss us at all. Those things over the past, you know, 25 years that I've been doing this has, you know, periodically happened and we just work right through them. Um, And that's what's great about having two operating lines, for sure. So, the big answer is, yeah, we are absolutely tracking and being as close as we possibly can, as close as we can get to the FDA, which isn't very close at all, but certainly tracking what they are looking at. You know, I'd certainly like the National Coffee Association in the United States to be a little bit more forthright with the industry in terms of what they're seeing. I think that would be positive, and it behooves them to do that. And so from here, yeah, we watch and we prepare for additional capacity expansion. Perfect. And so...

Yeah, that's really helpful. And for my follow-up, it's on branding. Swiss water really is the only decaf process that consumers actually recognize by name. It's a brand name that you folks have been developing for well over 25 years. But we're now seeing sugar cane process, in quotes, which is the main process out of Columbia, and other natural sending methods popping up everywhere. So my second question is this. How do you plan to really lean into the Swiss Water brand to make sure that you are staying ahead and capturing new market potential? I just heard Ian mentioning a 10% increase in marketing budget in his talk on this call. Is there a push to get the logo on more bags or do more to let the average person know that Swiss Water is the actual gold standard compared to these other processes? Part of the reason I'm asking this question is I'm right now staring at a bag of coffee from Social Coffee out of Ontario. The Somniac decaf processed Swiss water. There's no logo on the bag for Swiss water.

Yeah. Yeah.

Yeah, we want to have our logo as well as the wordmark. You know, am I as satisfied with wordmark as I am logo? No. Can I convince every roaster to use the logo? Even though they are, you know, spending more for it, we do our very best. We've relaunched an online marketplace for our customers' decaffeinated coffee, and that has taken some time. The reason we wanted to do that is because the biggest question that comes to consumers when we are advertising our brand, because we don't have an end brand, we're a sub-brand, the biggest question that comes is, where can I get the coffee? And our difficulty has always been Well, you can maybe go to this store or go to that store or whatever, but they really couldn't find out. And so we've created an excellent online marketplace that has a lot of functionality now. And in the back part of this year, we are going to be building that marketplace and advertising the brand slash marketplace to help consumers understand that we are the best, the highest quality, clean decaffeination process. And through doing that, that's how we encourage roasters to use the brand, use the logo. They're paying more for it, and often they won't, oh, it's too hard, or I don't want to change my packaging, I don't want to change my film. We encourage them to do that, and depending on the size of the roaster, we will actually provide support or support for that, as we always have. It's not just a contractual basis, but we will, in fact, provide marketing support to do conversions as and when necessary and as and when they come to us. As you can imagine, Mark, there's hundreds if not thousands of roasters in the United States and Canada, and managing with a small marketing team of five people, thousands of grocers. All we can do is essentially try to provide the online services and access and licensing agreement. There is a licensing agreement that's necessary to enable them to use our brand, and certainly we encourage that. But the most important thing is, in fact, to get to the U.S. consumer about our brand, and that will be ramping up in the back part of this year. We've been sitting tight on that because a couple of reasons. We didn't have the marketplace completely developed and in good shape in 2025, plus we also had a bit of a difficult year. Now we're looking at a much more kind of positive outlook and looking forward to getting back to rebuilding that brand.

Okay. Just one tiny little follow-up. The 10% increase in marketing that Ian mentioned, is that primarily involving the website, or is there actual marketing towards the end consumer?

The 10% is basically a timing thing. The back part of this year is when we're going to be heading up direct-to-consumer.

Okay, perfect. Thank you. That was helpful. All right, Mark. Nice talking to you.

There are no further questions in queue at this time. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.