Welcome to the Swiss Water Decaffeinated Coffee Inc first quarter 2025 conference call. At this time, all participants are in a listen-only mode. A Q&A session will follow the formal 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 Inc's 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, 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 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. I will now turn the conference over to your host, Frank Dennis, CEO at Swiss Water. Frank, you may begin.
Thank you. Good afternoon, everyone, and thank you for joining us today. I'm Frank Dennis, President and CEO of Swiss Water Decaffeinated Coffee Inc, and with me is Iain Carswell, our CFO. Iain and I are here today to discuss Swiss Water's financial results for the three months ended March 31, 2025. As usual, I'll begin with a brief review of our performance and operating environment. Iain will provide more details about our financial results. After that, I will share some closing thoughts before we take your questions. We entered 2025 with solid momentum and delivered a strong operational performance in the first quarter. Demand for our chemical-free decaffeination remained healthy, and we continued to serve a broad and growing customer base across North America and internationally.
Our strategic inventory positioning was well received by customers and helped us respond quickly to short-term needs, contributing to growth in volumes over the prior year. From a broader market perspective, volatility continues to shape the environment. Coffee futures remained near record highs, and the U.S. imposed a blanket 10% tariff on most coffee-producing countries. These tariffs will be applicable to Swiss Water as well as our competitors. While these factors are contributing to tighter inventory positions and more conscious purchasing behavior in some parts of the coffee trade, we've seen relatively limited price sensitivity so far. Full impact of these dynamics is likely to be more visible in the months ahead, as we are seeing material increases in retail coffee prices in U.S. grocery and resultant declining consumption, according to syndicated volumetric data we purchase. Against this backdrop, we remain focused on execution.
Our Delta facility continues to perform well with sufficient flexibility to respond to fluctuations in demand. We've taken proactive steps to ensure product availability, including building inventory to support expected volume in the second quarter. We continue to manage input cost volatility through our hedging, and while hedging resulted in a short-term EBITDA impact due to the current New York futures inverted market structure, it reflects a prudent and structured approach to managing risk. Additionally, we are pricing for these hedging costs in a manner similar to the rest of the industry and expect them to be recouped over the year. Overall, we're encouraged by how the business is performing. We expect some variability throughout the year as we navigate a very dynamic market environment. Our brand remains well positioned, and our customer relationships remain strong.
We are operating in a complex market, but we feel confident in our ability to navigate it with discipline and focus. With that, I'll turn the call over to Iain to walk through the financials. Iain?
Thank you, Frank. From a financial perspective, Q1 reflected steady operating performance and disciplined execution in a volatile market. We saw continued volume growth, and while revenue benefited from higher coffee prices, margin performance was influenced by both our hedge position and broader input cost dynamics. Our cost structure remained stable, and we made targeted investments to support volume delivery in future quarters. We also began repayments on our long-term construction borrowings, which is an important step in reducing interest expense and gradually improving leverage. During the quarter, we drew on our credit facility to support working capital, primarily related to inventory. We expect some of that to unwind over the next few quarters as volumes flow through the system. Our financial results this quarter also reflect the impact of rolling hedge positions forward in a sustained inverted market, something I'll speak to in more detail shortly.
Total volume shifts increased by 6% in the first quarter. The increase in volumes in Q1 2025 was driven by renewed customer purchasing activity. Many roasters have been carrying leaner inventories in recent quarters and began restocking in response to ongoing volatility, NYC, uncertainty around upcoming changes to import costs. Thanks to our strategic inventory position, we were able to meet this demand and maintain consistent delivery to customers. 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 by 18% in the quarter. While shipments to roasters, those customers who roast and package coffee to sell to consumers in their own coffee shops or for home or office consumption, were down by 7% in the first quarter. Looking at the roaster segment another way, specialty roaster volumes were up by 24% in Q1.
These accounts serve the out-of-home consumer primarily in cafes and restaurants in our key geographic markets. Commercial roaster volumes were down 7% in the quarter. Overall, we consider the growth in year-over-year volumes to be an encouraging result within the context of elevated NYC pricing, the evolving tariff landscape, and the increased pressure on consumer consumption being reported by some of our customers. Q1 revenue was up 61% to CAD 62.3 million compared to CAD 37.7 million in Q1 2024. The primary driver of the increase in revenue for the first quarter is the NYC, the effect of which flows through our green coffee revenue. However, this is amplified by the 6% increase in volume processed during the quarter. Looking at our costs, Q1 cost of sales was CAD 55 million, up 64% year-over-year.
The increase in the first quarter was driven by an elevated NYC, increase in volume over the prior year, and a reversal of an inventory provision taken in Q1 2024. That said, our underlying cost structure remains stable, and the consolidation of production into our Delta facility continues to support greater variable cost control and more efficient use of utilities. As for green coffee costs, at an average of CAD 3.73 per pound in the first quarter, the NYC was up 97% from CAD 1.90 per pound in Q1 last year. With coffee futures remaining at near record highs and new U.S. tariffs taking effect, we saw some customers move to secure supply during Q1, while others continued to manage inventories cautiously. These dynamics contributed to variability in ordering patterns during the quarter.
Through disciplined sourcing and strategic inventory position, we were able to meet this demand and ensure uninterrupted delivery across our customer base. We're beginning to see early indicators that sustained elevated coffee prices may be influencing consumer behavior, particularly in price-sensitive channels. Exchange rates between the U.S. and Canadian dollar continue to influence our reported results in cash flow. While our revenue is primarily earned in U.S. dollars and a meaningful portion of our costs are incurred in Canadian dollars, we also carry U.S. dollar receivables and payables on our balance sheet. This quarter, fluctuations in exchange rate 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 use hedging tools where appropriate to manage our underlying risk. In Q1, the U.S.
Dollar averaged CAD 1.44, up CAD 0.09 from CAD 1.35 in the same period last year. This appreciation has a positive impact on our revenues when it is converted to Canadian dollars. Q1 gross profit was CAD 7.3 million, up 42% year-over-year. Gross margin percentage decreased slightly to 12% in Q1 from 13% in the prior year. Turning now to operating expenses. Q4 total operating expenses were CAD 3.4 million, down 10% year-over-year. Administrative expenses decreased by 14% in the quarter, primarily reflecting a non-cash decrease in stock-based compensation driven by the reduction in our share price, partially offset by plant headcount and wage increases and higher professional fees. Sales and marketing expenses were up 4% in the quarter, broadly reflecting the timing of marketing activities. Q1 net income was CAD 515,000 compared to a loss of CAD 900,000 in Q1 2024.
Aside from the factors we discussed previously, Q1's increase in non-operating or other income and expense was driven by a CAD 2.7 million loss on risk management activities, largely due to the timing difference between recognizing the cost of rolling hedge contracts forward in a still inverted NYC market and the recovery of those costs through customer invoicing. This resulted in incremental realized losses as contracts were extended. All of the inversion losses booked within Q1 are expected to be fully recovered through customer collections within the coming months. We also recorded mark-to-market adjustments reflecting commodity price movements and the U.S. dollar strength. These outcomes are consistent with our approach to managing price and volatility, risk exposure, and aligning with our supply commitments.
We saw a CAD 2 million increase over Q1 2024 related to the non-cash revaluation of the fair value of the embedded option related to the Mill Road warrants, driven by fluctuations in our share price and the risk-free interest rate. There was a CAD 570,000 decrease in finance expense, largely attributable to a decrease in the interest on the Mill Road debenture, which was fully repaid in Q4 2024. In addition, a decrease in interest on long-term borrowings after repayments and decreasing interest rates compared to Q1 2024. Q4 adjusted EBITDA was CAD 2 million, down CAD 780,000, or 28% year-over-year. As with gross profits, fluctuations in adjusted EBITDA were driven by an increase in volumes and fluctuations in the NYC, as well as a positive contribution from C4, our warehousing and logistics subsidiary.
These positive impacts were offset by the previously mentioned loss on our risk management activities, which we expect to be fully recovered through customer collections within the company. Turning now to inventories, during the first quarter, our inventory balance increased to CAD 58.9 million as we intentionally built stock to support anticipated demand and ensure uninterrupted delivery to customers. This increase reflected both a higher volume of green coffee held and the elevated value of inventory tied to a sustained rise in the NYC. Notably, we saw renewed order activity from smaller roasters who had previously deferred purchases due to pricing volatility and were able to respond quickly thanks to our proactive sourcing and planning. These purchases were funded through a draw-out operating line, a conscious decision made in light of the strategic importance of securing supply for our customers.
As demand plays out over the coming quarters, we expect inventory levels to normalize and working capital to moderate accordingly. At quarter end, Swiss Water held CAD 5 million in cash compared to CAD 8.5 million at the end of 2024 and net working capital of CAD 4 million. We began making principal repayments on our long-term borrowings in Q1, primarily related to construction of our Delta facility. This marks a step towards lowering interest expense and improving our leverage position over time. With that, I'll turn the call back to Frank.
Thanks, Iain. Before we turn to questions, I want to briefly reinforce a few key points. While the coffee market remains volatile, we're staying focused on what we can control, delivering consistently for our customers, managing costs, managing the inverted coffee futures market, and executing against the priorities we set out at the start of the year.
With more clarity now around the implementation of a blanket 10% U.S. tariff on coffee-producing countries, we continue to monitor downstream impacts, but our outlook and strategic direction remain unchanged. The team continues to perform well, and we believe we are well positioned to navigate this environment with discipline. With that, we'd be happy to take your questions.
Thank you. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speakerphone, it may be necessary to pick up your handset before pressing the star keys. Once again, please press star one on your phone at this time if you wish to ask a question. Please hold while we poll for questions. The first question today is coming from Marla Marin from Zacks. And, your line is live.
Thank you. Good afternoon, everyone. I just want to make sure that the tariff situation is clear, I mean, to the extent that it can be clear. There were no tariffs in the first quarter, so we did not see the impact of tariffs. Although we might have seen an impact in terms of pulling forward some demand, would that be something that you think we might have seen in the first quarter in terms of order volumes?
That's a good question. The answer would be no. What drove Q1 was our ability to have capacity and to respond to demand where many of our competitors could not. That enabled us to fulfill demand at that period. We evaluated our kind of total customer portfolio and really did not see customers bringing coffee forward in advance of tariffs because there was just so much uncertainty as to whether or not they were going to be in place through the actual quarter. No one was really executing on that concept.
Okay. That makes sense. As of now, there are tariffs in place, but they're not, so the concept of the non-transformative nature of the product remains consistent.
That's right.
Okay. The fact that there are blanket tariffs means that that will be an impact. The geographic breakdown of your sales volume in the first quarter, I guess the thing that surprised me was international grew so significantly. Now, do you think that's less a story about international and more about what was going on in the States, or what are you thinking there based on what you're seeing from your customers?
No, really, it was not about the States. That is the result of ongoing development efforts that we have in place, quite a bit going on in the Asian market and also early development of Middle East. Yeah, it isn't kind of a rebalancing versus the U.S. at all.
Okay. So basically, you're building your customer base, as I think you indicated in the press release.
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Okay. Last question for me is, how should we think about the embedded option, which I think accounted for about CAD 1.1 million in the quarter? How to think about that going forward?
The movement on that line, Marin, is driven predominantly by movements in our share price, which, I mean, we don't—it's hard.
Yeah.
Obviously, everything we do is around trying to increase shareholder value. We are trying to get that as high as possible. If our share price starts to rise, and we'd like to think it will, given that we are growing and we're starting to pay down debt, we believe that should be reflected in time within our share price. If our share price goes back up, then you will see a reversal of that movement.
Okay. So that is basically an arithmetic generative value, and it is non-cash. It is basically the mark-to-market on the option.
Yes. We use a Black-Scholes model. It's a mechanical calculation that we perform exactly the same time, exactly the same way every single quarter. There's been no change in the way that we calculate and value that.
Okay. Got it. All right. Thank you.
Thank you.
Thank you. If there were any questions at this time, please press star one on your phone. If you had a question, please press star one on your phone at this time. We did have another question coming from Richard Rudgley from Glenbrook Capital. Richard, your line is live.
Hi. Thanks. Yes. Thanks for taking my questions. Marla, I think, covered some of what I was going to ask anyway. Just concerning the tariffs, I saw in the MD&A that you said that the tariffs would be included on the invoice to your U.S. customers. Is that sort of like what Jeff Bezos was going to do in the sense that you are actually going to have a line so that people can see the tariff as a separate part of the calculation? The second question was I had a bit of a bad line at the beginning, so I was a little bit confused when you said you were building inventory for the second half, but that higher prices going forward were likely to be a headwind. I just wondered if you could reconcile that for me. Maybe I misheard. Thank you.
Okay. What we intend to do and are just starting to do, and the industry is adapting to this, of course, rapidly. Right now, we have tariffs as an all-in price on the invoice. That's just how we're going to operate because trying to isolate them ends up driving a lot of additional questions and concerns around, "Gee, does that include freight? Does that include inbound drayage?" All of the minor little things which just cause a lot of issues. What we have is one outbound number at the bottom of the invoice. As far as pricing in the marketplace, my reference today was that we are seeing the total coffee market is seeing some weakness in U.S. grocery. That's the only place that we capture data, but it's broadly representative of Europe as well, for sure. We purchase U.S. data.
We are seeing, number one, increased overall average shelf prices, and we are seeing some decrease in demand in the U.S. That is a natural rebalancing of a market that is at historic highs. Over time, what needs to happen for a market to come back into balance is additional production, i.e., Brazil and Vietnam and Colombia to some extent, having good crop yields and some demand reduction. Both of those things are starting to happen. We do not expect that the NYC futures market is going to come back to any kind of historical average within 2025. We see this more as potentially a late 2026 scenario. That is just our view, and that is a cautious view or a conservative view, Richard, so that we understand what we are doing, and that is how we manage our risk profile.
Thank you. Sorry, just to return to the tariff. Sorry, it's a bit of a bad line. Must be my phone. Are you saying you're not going to break out the tariff on your invoices?
Right now, we aren't.
You are not.
Okay. Okay. Thanks, guys.
Thanks, Richard.
Thank you. There were no other questions from the lines at this time. I'll now hand the call back to Frank Dennis for closing remarks.
Thanks very much. As we move through 2025, our focus remains on delivering high-quality, chemical-free decaffeinated coffee, supporting customers in a volatile pricing environment, and managing operations with financial discipline. While industry conditions remain dynamic, we believe our expanded production capacity, strong customer relationships, and consistent execution position us well for the remainder of the year. Thank you very much for attending our call today, and have a good day.
Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.