By M. Marin
OTC:SWSSF | TSX:SWP.TO
READ THE FULL SWP.TO RESEARCH REPORT
Despite volatile market conditions, SWP’s 2Q25 processed volumes were stable
We view Swiss Water Decaffeinated Coffee Inc.’s (OTC:SWSSF) (TSX:SWP.TO) 2Q25 results, reported last week, as solid against rising coffee prices, the uncertain industry backdrop, and adjusting for the impact of FX and hedging. The company is a leading specialty coffee company and premium green coffee decaffeinator producing chemical-free decaffeinated coffee.
Coffee futures contract prices are at their highest levels since the early 1970s. The company is managing risk with hedging activities and with the view that NY’C’ volatility will persist throughout 2025 and potentially normalize in 2026.
Coffee Futures
Based on the company’s experience, when the NY’C’ trends upward, SWP’s customers generally tend to draw down their inventories rather than build inventories. Conversely, when the NY’C’ is in a sustained period of decline, customers tend to build inventories. Layering on the current uncertainty around tariffs and their potential impact on trade and the economy adds further complexity to coffee prices and purchasing and inventory decisions.
Despite the volatility, SWP’s processed volumes were relatively stable in 2Q25 compared to 2Q24. We believe this underscores the appeal of the company’s natural decaffeination process, benefits of SWP’s strategy to build awareness in new markets and inventory planning.
Autumn is the seasonally high period for coffee roasters
Industry metrics show that demand for chemical-free decaffeination continues to rise. 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, implying market share gains. SWP has also taken measures to optimize its inventories to be positioned to respond to customer demand.
Uncertain near-term impact of tariffs / commodity prices
Swiss Water’s exports to the U.S. were not subject to tariffs in 1Q25, and 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. However, Trump announced blanket tariffs on Canadian imports. Potential tariff changes could cause further upward pressure on coffee prices. According to the NY Times, “Consumers are already paying more at the grocery store. At the end of May, the average price of one pound of ground roast coffee in the U.S. was $7.93, up from $5.99 at the same time last year, according to the U.S. Bureau of Labor Statistics.”
SWP’s strategy is to retain the operating and financial flexibility to satisfy customer demand in its largest market, the U.S., and other markets. We believe SWP is benefiting from its strategy to expand its geographic reach and customer base. The company continues to pursue growth in international markets and to expand its customer base, particularly development efforts in the Asian market and early development efforts in the Middle East. According to Food & Hospitality Asia (FHA), “[t]he Asia-Pacific region is estimated to be the fastest-growing specialty coffee market in the world.”
Swiss Water indicated that it is seeing growing demand from new and existing customers in Asia and the Middle East, among other markets. SWP expects that, despite potential near-term industry volatility, it remains well-positioned to continue to gain share within the decaffeinated coffee space, reflecting its natural decaffeination process and strategies. The company recorded higher revenue from all of its key markets in 2Q25, as illustrated below. Growth in international markets was a robust roughly 58%. Growth from U.S. sales increased nearly 75% compared to 2Q24.
SWP recently entered into an agreement with Mill Road Capital II, L.P. to purchase the outstanding warrant entitling Mill Road to acquire up to 2.25 million Swiss Water shares at an exercise price of $3.33 per share. The warrants were set to expire on April 30, 2026. Cancellation of the warrants (for C$675k) simplifies the company’s capital structure and eliminates an overhang on the shares. SWP had strengthened its balance sheet earlier with the 4Q24 repayment in full of $15.9 million Mill Road debentures with warrants.
View enhanced liquidity, extended terms from traditional lending sources & elimination of warrant overhang as positives
The company also completed the renewal and amendment of its revolving credit facility, both increasing and extending terms of the prior existing facility. Moreover, SWP obtained an additional $35 million of incremental borrowing capacity, which enhances its liquidity. The additional $35 million consists of $10 million of expanded credit capacity with CIBC and a new $25 million revolving credit facility with Rabobank. The company also extended the expiration on its existing CIBC revolving facility to June 23, 2027, from October 19, 2025, with the option to extend the maturity to June 23, 2028. We view the amended terms and new Rabobank revolver, as well as the company’s elimination of the Mill Road warrant overhang, as positives.
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