By M. Marin
READ THE FULL SWP.TO RESEARCH REPORT
With an improving pricing environment, customer ordering activities have picked up, as many actively rebuild their decaf inventories after pulling back amid a challenging 2025
Swiss Water Decaffeinated Coffee Inc. (OTC: SWSSF, TSX: SWP.TO) reported 1Q26 results last week and hosted a conference call. Processed volumes decreased 2% in 1Q26 compared to 1Q25, partially reflecting a 10-day unplanned closure of one production line in January. With this disruption and reflecting lower NY’C’ coffee futures prices, revenue fell 8% year-over-year to C$57.5 million in 1Q26.
Industry dynamics and fundamentals appear to be normalizing. The NY’C’ coffee futures price for Arabica coffee declined during 1Q26 compared to prior quarters. Specifically, coffee prices and coffee futures prices were volatile and pressured upward in 2025, reflecting weak crop harvests, tariffs, disrupted trade patterns, recession concerns, and the geopolitical climate, among other factors. The coffee futures contract is the global benchmark for Arabica coffee. Futures contract prices were at their highest levels in 2025 since the early 1970s and were volatile throughout the year.
Prices now appear to be declining, according to Swiss Water and trade publications. The supply outlook for coffee has improved, with a strong crop expected in the next (2026-2027) season. The National Supply Company (Conab) anticipates a significant increase in Brazilian supply, forecasting a 17+% increase in 2026 compared to 2025, with Arabica production up an anticipated 23+%.
Although upward pressure on prices continued into January 2026, as indicated by data from the Federal Reserve, prices peaked at US$3.75/lb in January, and subsequently declined to US$2.98/lb at the end of the quarter. For example, during 4Q25, the NY’C’ averaged US$3.83/lb, up 35% compared to an average of US$2.83/lb in 4Q24 and reaching a quarterly high of US$4.23/lb in November. By comparison, the NY’C’ averaged US$3.16/lb in 1Q26, compared to US$3.73/lb in 1Q25, which represents a 15% decrease.
The company is optimistic that volatility in the global coffee market is starting to abate. The inverted futures curve is narrowing and, as noted, the NY’C’ coffee futures price has declined from the record highs recorded in 2025. However, spot availability of green coffees remains low, and the futures market remained inverted during 1Q26.
Nevertheless, with an improving pricing environment, customers’ ordering activities have picked up. Some roasters remain cautious regarding managing their purchasing activities, but many customers appear to be actively rebuilding their decaffeinated coffee inventories after pulling back amid a challenging 2025. Customer ordering remained strong throughout the quarter, with roasters restocking their pipelines and extending booking visibility into the back half of the year, although, as noted, Swiss Water’s 1Q26 process volumes were down year over year, largely due to a 10-day unplanned downtime on one line in January.
The company believes that had no disruption occurred, it would have delivered strong volume growth in 1Q26. Management estimates that its growth has consistently outpaced that of the overall decaf market over the last 25 years, averaging 5% compared to 1-2%. At the same time, SWP continues to monitor coffee consumption in the US grocery marketplace and expects some fluctuations in consumer demand during 1H 2026 as prices remain sticky at the prevailing higher levels. Thus, SWP’s performance is against a backdrop of ongoing constrained U.S. at-home demand. However, given the growing popularity of coffee beverages – particularly decaffeinated – potential pullback in demand is likely to be short-term, in our view.
Higher coffee prices also impact the company’s costs and margins, which can fluctuate from quarter to quarter. Partially on lower NY’C’, SWP’s 1Q26 gross margin was 13.8% compared to 12.1% in the prior quarter and 11.7% in 1Q25, and gross profit was up 8.6% year-over-year to C$7.9 million, despite the lower revenue. Higher operating expenses – C$4.3 million versus C$3.4 million in 1Q25 contributed to lower operating income of C$3.6 million versus C$3.9 million. Importantly, adjusted EBITDA of C$4.2 million more than doubled (up 113%) compared to 1Q25, primarily driven by the improved gross profit and lower losses on risk management activities, as the NY’C’ coffee commodity market was significantly less inverted when compared to the same period in 2025. Thus, adjusted EBITDA improvement reflects significantly lower inversion expenses and improved inversion cost recovery.
Balance Sheet strengthening measures & enhanced financial flexibility
SWP is focused on optimizing its financial flexibility and also made progress in strengthening its balance sheet in 1Q26. SWP repaid C$6.4 million of debt, consisting of C$5.0 million of the operating credit facility and C$1.4 million of its construction loan as per scheduled principal payment. In addition, SWP has reduced quarterly interest expense by 17% year-over-year. Subsequent to quarter end, SWP’s operating credit facility maturity date was renewed on May 4, 2026, and extended by one year until June 2028.
Cooperation agreement with largest shareholder
SWP’s annual general meeting (AGM) is scheduled for May 21, 2026. In advance of the meeting, the company has entered into a cooperation agreement with its largest shareholder, Properly Investment Company, which holds about 16.4% of the company’s common shares outstanding. Per the agreement, SWP has agreed to nominate Properly Investments’ Chief Investment Officer, Mr. Mark Vendramin, along with an additional slate of six of the company’s current directors.
He has more than 20 years of experience in investments, including capital markets, corporate finance, debt financing, and governance. His participation on the SWP board is expected to help further align SWP’s goals and interests with those of public shareholders to drive operational efficiencies, boost cash flow generation, and financial flexibility through improved balance sheet strengthening measures to generate shareholder value.
SUBSCRIBE TO ZACKS SMALL CAP RESEARCH to receive our articles and reports emailed directly to you each morning. Please visit our website for additional information on Zacks SCR.
DISCLOSURE: Zacks SCR has received compensation from the issuer directly, from an investment manager, or from an investor relations consulting firm, engaged by the issuer, for providing research coverage for a period of no less than one year. Research articles, as seen here, are part of the service Zacks SCR provides and Zacks SCR receives payments totaling a maximum fee of up to $50,000 annually for these services provided to or regarding the issuer. Full Disclaimer HERE.
