Swiss Water Decaffeinated Coffee (TSX:SWP) Q3 2026 Earnings Call

0:00 Good afternoon, ladies and gentlemen. Welcome to the Swiss Water Decaffeinated Coffee Inc. Third Quarter 2026 Conference Call. Before the conference call starts, they are required to remind you that certain information in today's presentation is forward-looking in nature. Any such forward-looking information or statements are based on assumptions that they considered reasonable at the time the information was prepared. Such information involves known and unknown risks and other factors outside our control that could cause actual results to differ materially from those expressed in the forward-looking information. Swiss Water Decaffeinated Coffee Inc. does not assume responsibility for the accuracy and completeness of the forward-looking information. Similarly, they do not undertake any obligation to publicly revise this forward-looking information to reflect subsequent events or circumstances except as required by law. Please refer to Swiss Water Decaffeinated Coffee Inc.'s management's discussion and analysis posted on CDAR and Swiss Water's website for a full discussion regarding forward-looking statements and the risks therein.

1:07 At this time, all participants are in a listen-only mode, and we will open the floor for your questions after the presentation. If you wish to join the queue to ask a question at any time, you may press star 1. Should you wish to remove yourself from the queue, press star 2. It is now my pleasure to turn the floor over to your host, Frank Dennis, CEO. The floor is yours.

1:28 Thank you, Joanna. Good afternoon, everyone. Thank you for joining us today. I'm Frank Dennis, President and CEO of Swiss Water Decaffeinated Coffee Inc. Joining me on the call is Iain Carswell, our CFO. We're here today to discuss our results for the three and nine months ended September 30th, 2026. As usual, I'll give a brief overview of our performance in the operating environment. Iain will then walk through the financials in more detail and I'll return with a few closing thoughts before we open the line for questions. The third quarter extended the momentum we've built through 2026. Volumes were up, gross profit increased significantly, and trailing adjusted EBITDA reached the highest level in our history, all while we continued to pay down debt. Demand has now reached the point where our next priority is clear.

2:16 We're investing approximately $6.2 million within our existing building to expand capacity by approximately 15%. We expend to fund it primarily from internally generated cash flow and have capacity online in mid-2027. We're in a position to make that investment because Swiss Water is a different company from the one it was a few years ago. We spent the better part of a decade building Delta and then carried the business through the most difficult coffee market on record. That build is behind us. Our margins are improving, our operations continue to mature, and the cash the business generates is now funding both our growth and our debt reduction. What you see in this quarter's results is that investment is starting to pay back. And that payback starts with volume. Processing volumes were up 16% over the third quarter of 2025 and 11% year-to-date.

3:07 Our established customers continue to grow with us, spot orders remain healthy, and new customers added incremental volume. Customers are now booking into the first half of 2027, which gives us good visibility as we plan production for next year. The market around us has also moved. A year ago, the NYC averaged US$3.37 per pound and was still climbing. The futures curve was deeply inverted, and a 50% US tariff on Brazilian coffee had just been announced. Grocers bought only what they needed, and holding inventory was costly for everyone in the supply chain. Since then, a large Brazilian harvest has brought prices Off The Peak, and The Coffee Trade is properly pricing the current market inversion into forward offers. That has given our customers the confidence to rebuild their coverage.

3:53 The NYC averaged US $3.09 per pound this quarter, about 8% below the same period last year. Because green coffee is largely a pass-through for us, that lower price flows straight into revenue. This quarter, high volumes more than offset it, and headline revenue was up 5%. We don't read too much into revenue in either direction. We measure this business by volume, gross profit, and adjusted EBITDA, cash generation, and our recovery of carrying costs, and each of those continue to move in the right direction this quarter. On a trailing 12-month basis, adjusted EBITDA reached $18.7 million, a new high for the company. Delta's cost base is largely fixed, so as more volume moves through the plant, a greater share of each additional pound reaches earnings. over the first nine months of the year that has translated into solid cash generation from operations.

4:43 Cash flow in any single quarter will move with working capital as coffee prices and volumes change, but we've applied the cash the business generates through paying debt, and our borrowings are meaningfully lower than they were at the start of the year. With Delta operating year capacity and our order book extending well into next year, the case for expansion is clear. This investment will increase capacity by roughly 15%, for about 5% of what Delta originally cost. It allows us to grow with our existing customers and take on new ones in North America and Asia where more roasters are looking to add chemical-free decaffe. The shift toward chemical-free decaffeination continues to gain ground. Regulators in the U.S. are reviewing solvent-based processes, consumers increasingly read labels, and large roasters are asking about our capacity.

5:29 In our experience, those conversations turn into volume over time. As a global leader in chemical-free decaffeination, we're well positioned as that shift continues and as demand builds, our Delta site gives us room to keep growing. That shift also plays to what sets Swiss Water apart. Ours is the only decaffeination process that consumers know by name, and when a roaster puts our logo on the bag, it helps sell their coffee. We've relaunched our U.S. online marketplace featuring the brands that use Swiss Water so that consumers looking for our name can find it. Every bag sold there is a sale for one of our customers and for us. None of this means the market is settled. Coffee futures remain volatile. An inversion is still being priced into both Arabica and Robusta. Our priorities stay the same, though. Run the plan efficiently, price appropriately for the market, and for the cost of carrying coffee in inventory, and apply our free cash flow to debt reduction.

6:23 As we move through the fourth quarter and into 2027, we have a strong order book, high utilization, and a clear plan to grow capacity. I'll now turn the call over to Iain for a closer look at the financial results.

6:33 Iain. Thank you, Frank, and good afternoon, everyone. Just a reminder that all the figures I'm going to discuss are in Canadian dollars, unless otherwise stated. As Frank mentioned, the third quarter reflected continued growth in volumes, significantly stronger gross profit, and continued improvement in the balance sheet. Total processing volumes increased by 16% in the quarter and by 11% for the nine months of 2026 when compared to the same periods last year. Capacity utilization was very high during the quarter, supported by strong demand from established customers, solid spot order flow, and incremental sales to new customers. Looking at volumes by customer type, shipments to importers, those customers who resell our coffees to roasters where and when they need them, were up 34% in the quarter.

7:23 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 up 3% in the quarter. Looking at customer channels another way, specialty volumes were up 8% in the quarter. These accounts served the out of home consumer primarily in cafes and restaurants in our key geographic markets. Commercial volumes were up 24% in the quarter. Q3 revenue was $65.9 million, up 5% from $62.7 million in Q3 2025, driven by higher volumes and improved inversion expense recovery, partially offset by lower NYC coffee futures prices. Revenue for the first nine months was $189.3 million, down 2% from $192.7 million in the same period last year.

8:15 The primary drivers of the decrease were the lower NYC coffee futures price, partially offset by the increase in volumes. As we said consistently, we're careful not to over-interpret movements in revenue because the value of green coffee flows through both revenue and cost of sales. In this quarter, we continue to see the increase in volumes partially offset by the impact of a significantly lower NYC. Moving on to our costs, Q3 cost of sales was $55.9 million, down slightly year over year from $56.3 million in Q3 2025. The decrease was primarily driven by lower NYC coffee futures prices, the elimination of U.S. tariff expense, direct labor efficiencies, and lower utility usage and rates.

9:00 These factors were partially offset by the increase in volumes and higher activity in green coffee logistics and storage services at our subsidiary C4C. As for green coffee costs, the NYC averaged US$3.09 per pound during the quarter, compared with US$3.37 per pound in Q3 2025, a decrease of 8%. For the first nine months, the NYC averaged US$3.01 per pound, compared with US$3.57 per pound in the same period last year, a decrease of 16%. Customer purchasing behavior continued to improve during the quarter, with coffee futures prices well below their 2025 highs and the inversion narrowing. Customers continued to replenish inventories and extend their purchasing horizons to a degree. We continue to see caution because the futures market remains volatile, but the ordering environment is much stronger than it was throughout 2025.

9:58 Exchange rates between the US and Canadian dollar continue to influence our reported results in cash flows. As a reminder, most of our revenues are earned in US dollars, while a meaningful portion of our costs are incurred in Canadian dollars. We also carry US dollar receivables and payables on our balance sheet and use hedging tools to manage our underlying currency exposure. In Q3, the US dollar averaged Canadian $1.40, compared with $1.38 in Q3 2025. For the first nine months, it averaged $1.39, compared with $1.40 in the prior period. Q3 gross profit was $10 million, up 3.6 million or 55% year-over-year from $6.4 million. Gross profit for the first nine months was $28.1 million, up $9.1 million or 48% from $19 million. The improvement was driven by higher volumes, improved recovery of inversion expenses, higher green coffee differential margins, improved operating efficiencies, including direct labor and lower utility usage and rates.

11:04 and Favorable Foreign Exchange compared with Q3 2025. Turning now to operating expenses, Q3 operating expenses were $5.7 million, up 34% over last year, led by administrative expenses at $4.3 million, up 29% year-over-year. The increase was primarily driven by higher non-cash share-based compensation associated with the increase in our share price from $4.41 to $8.26 per share. Sales and marketing expenses were $1.4 million, up 56%, primarily affecting the timing of sales and marketing activities in 2026. Q3 net income was $900,000 compared with $200,000 in Q3 2025. Net income for the first nine months was $4.2 million compared with $400,000 in the same period last year.

12:01 Aside from the items we discussed, the improvement in net income reflects lower financing costs. The nine-month comparison also reflects the elimination of the embedded option revaluation following the repurchase and cancellation of the Mill Road warrants in 2025. The prior year period included a $1.7 million gain on that revaluation, which was not present in 2026. On risk management activities, we recorded a loss of $1.5 million in the quarter, compared to a loss of $700,000 in Q3 2025. For the first nine months, the loss was $3.2 million, compared with $4.7 million in the prior year period. These losses reflect the realized cost of operating in an inverted coffee futures market, along with mark-to-market movements in commodity and foreign exchange instruments.

12:56 The market was substantially less inverted in 2026, particularly compared with the first half of 2025. As we've consistently said, we price to recover the cost of inversion as the associated coffee is shipped and invoiced, although there can be a timing difference between when those costs are recognized and when they're recovered from customers. Net finance expense was $1 million for the quarter and $3 million year-to-date, compared with $1.2 million and $3.9 million in the same period. The improvement primarily affects lower average loan balances and more favorable variable interest rates. Q3 adjusted EBITDA was $4.9 million, up 1.6 million or 50% compared with $3.3 million in Q3 2025.

13:48 Adjusted EBITDA for the first nine months was $14.5 million, up $7.4 million, or 104% from $7.1 million. The improvement was primarily driven by the increase in gross profit, partially offset by higher operating expenses and higher losses on risk management activities in the quarter. Year-to-date, adjusted EBITDA also benefited from lower losses on risk management activities compared with 2025. On a trailing 12-month basis, adjusted EBITDA was $18.7 million, the highest in the company's history. Turning now to inventories, our inventory balance decreased by $5.6 million, or 12% from December 31, 2025. The decrease primarily reflects the movement in the value of the NYC offset by a slight increase in the pounds held.

14:40 We remain committed to carrying sufficient spot inventory to ensure that coffee is available for immediate customer needs and we expect inventory volumes to remain at or close to current levels in the near term to support continued spot demand. We will also continue to charge for the carry costs we incur in holding and hedging those inventories. At quarter end, Swiss Water held $2.1 million in cash, compared with $6.6 million at year end. and net working capital was $38.2 million compared with $42.3 million. Net cash used in operating activities was $3.6 million in the quarter and net cash generated from operating activities was $12.6 million for the first nine months compared with $12.6 million generated in Q3 2025 and $3.1 million generated in the first nine months of 2025.

15:31 The changes were driven by higher net income and changes in working capital. During the first nine months of the year, we repaid $9 million on our operating credit facility, $4.2 million of construction debt, and $1 million on the EDC credit facility. The outstanding balance on our operating credit facility was $31 million at September 30th, down from $38.4 million at December 31st last year. The operating credit facility matures on June 23rd, 2028, We were in compliance with all financial covenants at quarter end. During the quarter, we exercised our option to extend the lease on our Delta warehousing facility, which added $8 million to both right of use assets and lease liabilities.

16:22 This is a non-cash item. Also during the quarter, we repurchased and cancelled 3,000 common shares under a normal course issuer bid. Our focus remains on using the cash generated by the business to reduce debt, More interest expense and improved financial flexibility while retaining the ability to support future growth initiatives, including our planned capacity expansion. With that, I'll turn the call back to Frank for some closing remarks.

16:49 Thank you, Iain. A few thoughts before we take your questions. Three quarters into 2026, the pattern in our results is clear. Volumes are higher, trailing adjusted EBITDA is at a record, and debt is lower than it was a year ago. No single quarter tells the whole story, but taken together, these results show a business that has moved past its investment cycle and into a period of growth. The decisions we made through 2025 are a large part of that. We kept coffee available when others stepped back from holding it. We priced for the cost of inversion, and we protected the balance sheet. We did the hard work when conditions were at their worst, and we're now growing from a much stronger base. That strength gives us flexibility on capital. We're adding capacity because the demand is there to fill it, and we continue to retire debt with the cash we generate. Over the coming quarters, our attention stays on serving our customers, running Delta reliably, and delivering the expansion.

17:38 We're confident in where Swiss Water is heading into 2027. With that, Joanna, can you please open the line for questions? Thank you. The floor is now open for questions. If you wish to join the queue to ask a question at this time, please press star 1. We do ask if listening on speakerphone today, please pick up your handset while asking your question to provide optimal sound quality. Once again, please press star one on your phone at this time to join the queue to ask a question. Please hold a moment while we pull up questions. First question from Marla Marin at Zax. Please go ahead. Thank you.

18:17 So very, very strong quarter, and it's consistent, I think, with what you had, you know, said while things were not as strong in 2025. So the need to expand capacity is obviously a really good thing. But what I'm wondering is, do you anticipate that there could be any short-term interruptions or disruptions in production capacity that would keep you from being at the level you currently are as the new capacity comes online?

18:57 Thanks, that's a good question and happy to answer that. The expansion that we're doing just for, I guess, ease of understanding, when we built Line 1 in Delta, we, looking forward, back in 2017 or 18, knew that it would be easier for us to hang a few additional green coffee tanks and some carbon tanks, but we did not hook those up. So we didn't add the pumps and some of the additional stainless connectivity to it. So that is the main thing that we are doing in this expansion is we're hooking up kind of a preview on capacity that we had So, on one of the lines, we will probably have about a two-week shutdown, which actually falls essentially within what would be a normal maintenance window.

19:59 So, pretty happy to say that we can continue our ongoing, very, very strong capacity delivery so that we can meet needs as they pile up into 2027. So, The plan to answer that simply is no.

20:19 Okay, great. Thanks. One more question, if I may. It's sort of a two-part question. So you have, as you had said, visibility into what the pipeline looks like, the order of pipeline looks like. Given how strong demand has been now that prices have started to come down, Do you feel that roasters and other end customers have their inventory levels back to a more normalized level? And with the expectation that weather patterns could be disrupted because of El Nino and other factors, are you thinking there might be another, based on hearing feedback from your customer base, are you thinking there might be another non-seasonal uptick

21:15 So our information, which is never perfect, is that roasters have been adding some coverage kind of through the summer. And I think that some of the weakness even over the past couple of weeks is enabling them to maintain or maybe even slightly add to coverage versus where they were a year ago. I think that maybe it's still below weeks of sales coverage that you might envision if the C was $1.75, but that being said, unless we saw a major precipitous drop like that, I wouldn't really expect a lot of additional We are not forecasting an additional pipeline fill. What we really are seeing is tight capacity in the chemical free space and that has roasters wanting to get slots Thank you for joining us today.

23:02 Long story short, I don't think we're going to see really an uptick. I think we're just seeing, you know, good demand from a tight capacity marketplace.

23:09 Okay. Thank you.

23:11 You're welcome. Thank you. Next question from Luke Hannon with Canoco Atrenuti. Please go ahead.

23:19 Thanks. Good afternoon, everyone. Frank, I wanted to go back to the topic of order visibility. I think I had heard you correctly about that. It's through the front half of 2027 that you have visibility on orders and demand. I'm curious to know how that shape up as far as, you know, if you're to do a look back, typically how much visibility have you had? And then secondly, the conversations that you're having with those larger roasters right now, can you just confirm, are those existing customers that are looking to increase their volumes or are they conversations with new customers altogether?

23:56 So we typically don't have visibility this far out. It's always been something that we look at. Typically, when there's more spot capacity, not spot coffee, but spot capacity available, we won't have orders on the books as far out. So this feels different. We are absolutely getting additional strong order patterns from primarily existing customers who understand the supply chain and understand the need to We're also cycling new customers too that would have come on over the past 12 months or a year ago. Those newer customers are building in volume.

25:21 I can also happily say in kind of the smaller end of town, we're constantly getting additional new business as we perform extremely well in the service and logistics side of our business. That's a really important strong suit for us is the ability to service, the ability do what we say we're going to do, which is sometimes actually a little bit rare in our industry, believe it or not. So, you know, we're picking up some business on a competitive point of view through better execution.

26:04 That's great. Thanks. And then for my follow-up, I guess I'll ask you to prognosticate a little bit. I realize there's been a decline in in the NYC and spot coffee prices, which is great to see, obviously, for your business. I'm curious to know, though, based on where the market stands as of today and based on what you can see in the industry data for projections in the relative near future, is there anything that you're seeing that would suggest that the unwinding of the inversion, or we'll call it the normalization of that curve, wouldn't continue to take place?

26:41 Well, I mean, we... What we're seeing is the overall, like the kind of the full year market structure, which is a good way to look at it across the full five futures periods, is kind of net lower than it was this time a year ago. But what also happens still now is that there are big, big trading houses who will make last minute moves approaching first notice day which really drive up the front period inversion and that continues to kind of be a mode that large trade houses are in so we see that strength and the other The third area that we look at is certified stocks, which are staying very low, very low historically, 200,000,240,000 bags.

27:48 There may be a major grading coming up coming into December. There's a rumor that related to the EUDR transition coffees. But we really aren't getting that close to tenderable parity. So certified stocks are staying low. and despite a large Brazil crop, there's still not a lot of coffee at consumption. It's still at origin and producers are staying firm on their expectations and so that is keeping coffee away from tenable parity and definitely keeping certified stocks low. As we look into 2027, we're pricing as if and for a continued inversion.

28:42 We, like the rest of the market, have figured out how to price for inversions, as well as pricing for carry, pricing for freight, which of course freight rates are increasing significantly due to diesel. As a service provider, we price along all of those components. We price our warehousing. We price our freight. We price for inversion. We price for carry, which has disappeared. So that's overall been positive for our margin structure.

29:19 That's great. Thank you very much.

29:22 Thank you. Thank you. We have no further questions on the line. Ladies and gentlemen, 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.