By M. Marin
READ THE FULL SWP.TO RESEARCH REPORT
Strong 1Q25 results despite price volatility, market uncertainty
Swiss Water Decaffeinated Coffee Inc. (OTC:SWSSF) (TSX:SWP.TO), a leading specialty coffee company and premium green coffee decaffeinator focused on producing chemical-free decaffeinated coffee, reported 1Q25 results and provided a business update yesterday. Despite a difficult economic and industry backdrop, the company generated strong volume sales and revenue growth. We believe this underscores the appeal of the company’s natural decaffeination process, benefits of SWP’s strategy to build inventories in order to remain well positioned to satisfy customer demand and fulfill deliveries and the benefits of its efficiency measures.
Moreover, we believe the topline strength also reflects the benefits of the company’s strategy to expand its geographic reach and customer base. Swiss Water indicated that it is seeing growing demand from new and existing customers, including in Asia and the Middle East, among other markets.
Key Takeaways
- We believe the company’s 6% and 61% respective advances in volumes and revenue underscore the appeal of the company’s natural decaffeination process, benefits of SWP’s strategy to build inventories to remain well-positioned to satisfy customer demand and of its efficiency measures and strategy to expand its geographic reach and customer base.
- The 61% y/y revenue advance partially reflects new customer accounts added during the quarter. SWP’s development efforts in Asia and the Middle East are yielding strong results.
- Commodity prices remained volatile and SWP believes this volatility could persist in the near-term. In 1Q25, the NY’C’ average was US$3.73/lb versus US$1.90/lb in the prior year 1Q. Volatility in the NY’C’ affects SWP’s volumes, revenues, cost of sales and working capital needs.
- The company’s results include significant non-cash ‘noise’ related to hedging activities and mark-to-market adjustments on certain securities. Most non-cash costs are expected to reverse over time.
Tariffs / commodity prices
Swiss Water’s exports to the U.S. were not subject to tariffs in 1Q25. Subsequently, however, the U.S. announced that it would implement a 10% blanket tariff on most imports from Canada effective April 5, 2025. In terms of tariffs, the company’s decaffeination process is classified as non-transformational and therefore its shipments to international customers retain the designation of the country of origin. Therefore, the blanket tariffs that the U.S. has imposed on trade with Canada – but not additional industry specific tariffs – likely will be applied to the coffee SWP ships to the U.S. The tariff rules likely apply to SWP’s international competitors, as well.
Moreover, commodity prices of the coffee beans plays a significant role in prices to consumers, demand and order volumes. In 1Q25, the NY’C’ average was US$3.73/lb versus US$1.90/lb in the prior year 1Q, representing a near doubling in price (up 97% year-over-year). The quarterly price peaked at US$4.25/lb in February. Volatility in the NY’C’ affects SWP’s volumes, revenues, cost of sales and working capital needs.
Volumes, revenue and gross profits up substantially y/y
SWP’s 1Q25 volume sales were 6% higher compared to 1Q24. This, along with higher prices, contributed to a 61% year-over-year revenue increase to C$62.3 million. The company expects growth in consumption of decaffeinated coffee to continue, although there might be some short-term disruptions based on volatile commodity prices and uncertainty. SWP believes it remains well-positioned for continued growth and that its growth has outpaced that of the overall decaf market over the past 25 years, at about 5% compared to 1-2% for the market.
With strong results also pointing to growing traction in markets that are relatively new for SWP
The company recorded higher revenue from all of its key markets in 1Q25, as illustrated below. However, growth in international markets outpaced that of its domestic market and to the U.S., with sales to international territories nearly doubling compared to 1Q24 to C$16.7 million.
North America and Europe are key markets for coffee consumption generally and therefore for Swiss
Water. At the same time, the company is engaged in development efforts to boost sales in additional markets.
The company added new accounts during the quarter and attributes the growth in international markets to its proactive measures to expand its customer base, particularly development efforts in the Asian market and early development efforts in the Middle East. According to Food & Hosp8tality Asia (FHA), “[t]he Asia-Pacific region is estimated to be the fastest-growing specialty coffee market in the world.”
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