Swiss Water Decaffeinated Coffee Inc. ($SWP)

Good day, everyone. Welcome to the Swiss Water Decaffeinated Coffee Inc. First Quarter 2026 Conference Call. [Operator Instructions] Before Swiss Water Decaffeinated Coffee Inc. conference call starts, they 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 completed mess 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 Inc.'s Management Discussion and Analysis posted on SEDAR 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, 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 Iain Carswell, our CFO. We're here today to discuss Swiss Water's financial results for the 3 months ended March 31, 2026. As usual, I'll begin with a brief overview of our performance and the operating environment. Iain 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. CE came off its record highs, peaking around USD 3.75 per pound in January and ended March at $298 per pound compared to a high of USD 4.23 at an average of USD 383 in 2025. The futures curve has become less inverted. 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 1 discrete event, an unplanned 10-day downtime in January on 1 of our production lines following an equipment failure. The disruption was contained -- it was resolved quickly and it's 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 months 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 capping driven by a broader focus on health sleep and overall wellness. That's expanding the total market. And within DCAP, 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 freed caffeinator, we are well positioned to capture that demand as market conditions continue to normalize. With that, I'll turn the call over to Iain to walk through the financials. Iain?

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 in one of our production lines in January. Total volumes 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 our customer channels another way. specialty volumes were down 4% in Q1. These accounts serve 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've said consistently, we are careful not to overinterpret revenue movements in either direction. What matters more is how we are executing and what we are generating at the profitability and cash flow level. Looking at our costs. Q1 cost of sales was $49.5 million, down 10% year-over-year. The primary drivers in the quarter were lower green coffee costs reflecting the declining NYC and partially offset by an increase in activity at Seaforth. On the cost side, the Delta facility continues to deliver efficiency is up and underlying cost structure remains stable for green coffee costs at an average of USD 3.6 per pound in the first quarter, the NIC was down 15% from $373 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. Exchange rates between the U.S. and Canadian dollar continued to influence our reported results and cash flows. As a reminder, our revenues are primarily earned in U.S. dollars, while a meaningful portion of our cost in Canadian dollars. We also carry U.S. dollar receivables and payables on our balance sheet. This quarter, fortifications and 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 compared to CAD 1.44 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 noncash 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. And -- 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 conversion 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 on 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. And -- 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. And Net working capital was $38.3 million. During the quarter, we made a 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, Iain. 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 was back operating at or near full capacity quickly. 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 NIC 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 continued strengthening of the balance sheet. We believe we're well positioned to support our customers as conditions continue to normalize to build on the progress we've made. With that said, Kelly, please open the line for questions.

[Operator Instructions] Your first question is coming from Marla Marin with Zacks Investment Research.

So I 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 are operating near or at full capacity. Do you think that you can continue to try to develop new business in existing markets and open new geographic markets, which I think had been part of the strategy in the past with the kind of production capacity you currently have online?

Yes. Thanks for the question. It's a good question. What we're seeing, I think, is some pipeline refill into Q1 and into 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 segments and 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 debottlenecking needs to be done. And so that will enable us for growth certainly into 2027 and beyond.

Okay. Great. And then 1 follow-up. You said that because the 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 extending their booking horizon. Can you put that in context -- you're seeing some visibility into the back half of this year before all of the noise that we've seen over the past several quarters, with tariffs and with really skyrocketing NYC prices. When the industry was operating under a more, I guess, I would call it, normalized basis, would that be considered 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 shorter or longer time horizon on the normal service.

Yes. That's also a good viewpoint to contemplate. And yes, I mean last year, we talked and our team internally talk constantly about customers roasters purchasing handsome outs. I mean we would be midway through the month and not exactly sure what the numbers are going to be 2 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 coffees forward and plan in a way that's much more thoughtful than buying for immediate delivery on the spot market, as you can imagine. And so we're absolutely starting to see that return just some forward visibility of customers going, "Yes, I can book some spreads. And why do we look at some deliveries across these 2 or maybe even 3 future 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 worried about where the market might go. 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. And then if I may just ask 1 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 is a lag between seeing NYC come down and seeing any kind of impact on prices at the gross rate. But to what extent do we actually see that 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 -- I'm wondering what you see.

Yes. That's another good question and good insight experience tells us that we'll see 6 months, 9 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 an additional risk that's being priced into the market. So although the C is down, certainly, inversions are absolutely being priced for going forward. So looking kind of -- if I think back to, I think when there was a big run up in the sea and rosters were able to ultimately price for that. It was a good amount of time before there was a real kind of drift back in terms of pricing because on the front side, I think roasters are always kind of caught out when the C runs up in the -- and they haven't been able to price through. And so there's, 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.

Next question is coming from Richard Rudgley with Glenbrook Capital.

Obviously, but I just wanted to ask about Catena's bio product 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?

Well, the recovery and the 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 all I can comment on at this point.

Your next question is coming from Mark Prince with Coffee Geek.

Frank, it's good to connect with you again. And hello, Iain, we haven't met yet, but I've been following the transition to Delta closely. I have a primary question and then a follow-up. Frank, I remember turning the old Burnaby facility with you and seeing everything now consolidated and running at a such high level in Delta is a notable change, especially seeing the adjusted EBITDA double this quarter was it really did. 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 with the FDA just this past March and April. -- to remove a methylene chloride as a permitted solvent in other food-relage categories. So given the regulatory heat, what happened with the EPA last year, are you seeing an increase in trial runs in onboarding inquiries from major MC using Ross 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.

Yes. Mark, great to hear from you again. So to answer kind of the big question, which impacts the broader DCAP universe. Yes, there was something filed in March around all resins, methane chloride being used for, I think, Temora Africa and 1 other basically powder. I can't remember what it was. In any case, I don't know if that's going to extend into decaffination. Certainly, it's not that far away, is it really to be thinking about removing methylene chloride from common household spices to think about that extending into the decaf dated segment. I think that the -- our view going forward is that those types of filings will concern some roasters increasingly over time. And I think that we have, for several years, Mark, had increased interest and conversion. 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's certainly, it's buying. It's supporting long term the conversion from methylene chloride and potentially even elacitate over to clean decaffeination that we've said forever, the consumer prefers. It's pretty simple. And so yes, we are seeing increased demand -- and we have a view to how we can add additional capacity. I think that the -- coming back to the January thing, I think we already were battle tested. I mean, when when a small little motherboard goes on a blower, were things like that will happen. So I don't want to -- we -- in our releases, we've been kind of very high level in terms of what went on. But basically, it was a very small issue that just had a bit of an outage on 1 line. So that doesn't -- it doesn't fuss us at all. Those things over the past 25 years that I've been doing this have periodically happened, and we just work right through them. and that's what's great about having 2 operating lines for sure. So the big answer is, yes, 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. And 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, yes, we watch and we prepare for additional capacity expansion.

Perfect. And so Yes, that's really helpful. And for my follow-up, it's on branding. SWISS WATER really is the only DCF process the consumer is actually recognized by name. It's a brand in that the folks have been developing for well over 25 years. But we're now seeing sugarcane process, which is the main process at 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 Iain mentioning a 10% increase in marketing budget in his talk on this call. Is there a push to get the logo of more bags or do more to let the average person know that Swiss Water is the actual gold standard compared to these other processes. And part of the reason why I'm asking this question is I'm right now staring at a bag of coffee for social coffee at Ontario. -- the Sonic process Swiss water, there's no logo on the bad to SWISS WA.

Yes. Yes, we want to have our logo as well as the word Mark. Am I as satisfied with Word mark as I am logo? -- convince every roaster to use the logo, even though they are 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 the store or go to that store or whatever, but they really couldn't find out. And so we've created 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/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 want -- 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 dollar support for that as we always have. It's not just not just a contract tool 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 Canada and managing with a small marketing team of 5 people thousands of broasters. 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's -- 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 Iain 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 having up direct to consumer.

Prefect, 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.