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Edited Transcript of SWP.TO earnings conference call or presentation 20-Mar-20 4:00pm GMT

Q4 2019 Swiss Water Decaffeinated Coffee Inc Earnings Call

Mar 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Swiss Water Decaffeinated Coffee Inc earnings conference call or presentation Friday, March 20, 2020 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Frank A. Dennis

Swiss Water Decaffeinated Coffee Inc. - President, CEO & Director

* Iain Carswell

Swiss Water Decaffeinated Coffee Inc. - CFO

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Conference Call Participants

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* Douglas S. Weiss;DSW Investment;Principal and Managing Member

* Maksym Levytskyy

Clarke Inc. - Investment Associate

* Thomas Dixon;225Research;Analyst

* Hassan El Essawi;E8 Research;Editor

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Presentation

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Operator [1]

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Good day, ladies and gentlemen. And welcome to the Swiss Water Decaffeinated Coffee Update Conference Call.

Before the conference call starts, we are required to remind you that certain information on today's presentation is forward-looking in nature. Any such forward-looking information or statements are based on assumptions that are considered reasonable at the time of 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 or 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 the Swiss Water Decaffeinated Coffee Inc.'s Management's Discussion and Analysis posted on SEDAR and Swiss Water's website for a full discussion regarding forward-looking statements and the risks therein. (Operator Instructions)

At this time, it is my pleasure to turn the floor over to your host for today, Mr. Frank Dennis. Sir, the floor is yours.

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Frank A. Dennis, Swiss Water Decaffeinated Coffee Inc. - President, CEO & Director [2]

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Thank you, Jess. Good morning, everyone, and thanks for taking the time to join us. These are difficult times, and we really appreciate your attendance. I'm Frank Dennis, President and CEO of Swiss Water Decaffeinated Coffee Inc. With me today is Iain Carswell, our CFO.

Before we begin, let me express our hope that you and your families are all staying safe and healthy and -- as we work our way through the immediate situation the novel coronavirus has created.

Iain and I are here today to discuss Swiss Water's financial results for the fourth quarter and year ended December 31, 2019. I'll begin with a brief review of our results and explain why our Board has made the difficult decision to spend our dividend despite the strong growth trajectory Swiss Water has demonstrated over the past few years and the long-term growth we see ahead for the company. I will also talk about the COVID-19 pandemic and its potential impact on our operations. Then Iain will provide more detail about our financial performance before I return to tell you more about our longer-term plans and expectations. And after that, we'll be happy to take your questions.

Looking now at our results. Through 2019, we continued to increase our market share and win new business. Industry participants and coffee consumers are increasingly moving away from chemical decaffeination in favor of clean, chemical-free processes like ours.

At the same time, growing demand, including new product developments from existing customers, is fueling robust organic growth. As a result, our total borrowings were up by 16% for the year, which is a record in terms of percentage year-over-year growth. This robust growth builds on the trend that began in 2017 when we saw volumes grow by 5%, and 2018 when volumes grew by further 11%. So over the last 3 years, we have grown our total volumes by 34%, all while holding our gross margin steady at an average of 50%.

Looking beyond the immediate challenges presented by the COVID-19 pandemic, we are confident that demand for our proprietary SWISS WATER Process decaffeinated coffees will continue to grow at double-digit rates well into the future. This is adding to the longer-term pressure on our production infrastructure.

The build-out of our new state-of-the-art production facility in Delta, BC is complete, and commissioning of the line is well underway and, so far, going according to plan. If we are able to stay on track, we should be in a position to begin shipping commercially from the new plant in the second quarter of this year.

So if the long-term future is as positive as we say, why have we suspended payment of our dividend? Fundamentally, our view of the longevity of the Burnaby site has changed. Due to the sale of our Lake City Way production site to a new owner on February 14, we have had to reevaluate the likelihood and risk profile of a final 5-year term extension beginning 2023.

While our lease on the Burnaby property, which expires in June 2023, provides an additional 5-year extension to 2028, this is at the sole discretion of the landlord. Under the terms of the lease, the owner has until June 2021 to inform us of their intentions, just 2 years before we have to vacate should an extension not be granted.

In assessing the impact of this change of ownership, we have concluded that the potential timing risk of additional capacity expansion it poses to our ability to continue operations at the Burnaby site is unacceptable.

Accordingly, in order to provide the capacity, we will need to meet future demand for our coffees. We are moving forward immediately with preparations to build a second production line in Delta. Our goal would be to complete this new project before our lease in Burnaby expires.

This development has prompted our Board of Directors to make the decision to suspend dividend payments to our shareholders. We believe that by redeploying the funds we have previously paid out in dividends to help us build a second new line more rapidly than we had anticipated, we will be able to create superior value over the longer term.

The simple fact is we cannot risk any interruption or reduction in our ability to meet the demand for our coffees and our clean proposition as we continue to attract new business and retain the confidence of existing customers. To do so would seriously undermine the business and expose it to competitive incursion with lasting effect.

Turning now to the COVID-19 outbreak. Our primary concern is for the health and safety of our employees, their families and everyone who interacts with Swiss Water Decaffeinated Coffee and Seaforth Supply Chain Solutions.

We are also sharply focused on maintaining the continuity of our business and the businesses of our customers and suppliers. To do so, we are closely monitoring the pandemic's potential impact on our supply chain and operations while implementing the appropriate risk management procedures. As we all know and have heard many times, the situation is dynamic and changing day-to-day, if not hour-by-hour. So far, the operational impact is restricted to inflationary pressure on outbound freight rates to Asia. This is being driven by a fall in shipping traffic across the Pacific and a resulting reduction in container availability for our exports to this region.

Looking ahead, we may well experience other disruptions to our supply chain and business operations. We may also see delays in the commissioning of our Delta facility. For example, as a significant number of our employees or commissioning contractors or employees of our customers or suppliers are quarantined and unable to work, there will be serious disruptions and delays in our ongoing business or in the start-up of the plant at Delta. We will continue to closely monitor the situation and do everything possible to mitigate its effects.

On the positive side, our production facilities are highly automated and our customers are well diversified from premium specialty to large commercial operations. Coffee is a nearly essential product to a very large proportion of the world's population. In fact, the Port of Oakland has declared coffee an essential product and prioritized its movement through the crisis. And this morning, the -- through the U.S.A. and the National Coffee Association, food and beverage has also been declared a prioritized product for shipments in the United States. So that will assist our supply chain longer term through this crisis.

If people can't drink coffee in a cafe or restaurant at the moment, they will stock up at the grocery store and enjoy their coffee at home which is, in fact, precisely what we are seeing.

At a time when consumers in the coffee trade are going ever more concerned about the potential effect of a residual buildup in the body of the chemicals and residual buildup in the body of used -- of chemicals used by our competitors to decaffeinate coffee, Swiss Water Decaffeinated Coffee has the right product and is taking the right steps to prepare for the future.

With that, I will turn the call over to Iain to take you through our results.

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Iain Carswell, Swiss Water Decaffeinated Coffee Inc. - CFO [3]

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Thanks. Thanks, Frank, and good morning to everybody. I'll begin my review with volume shipped to customers as this drives all our other results.

As Frank indicated, the Swiss Water delivered very strong volume growth once again in 2019. Our total volumes are up 18% in the fourth quarter and by 16% for the full year. The volume increases came across our customers from -- across our customer base and from every geographic region.

Looking at volumes by customer type. Shipments to roasters, which are those customers who roast and package coffee to sell to consumers in their own coffee shops or from home or for office use, were flat for the quarter or up by 10% for the year. Shipments to importers, those customers who resell our coffees to roasters where and when they need it, were up by even more, growing by 61% in Q4 and by 32% in the year.

Looking at the roasters segment another way. Specialty roaster account volumes grew by 7% in the quarter and by 8% for the full year. And shipments to large commercial roaster accounts were up by 25% in the quarter and an impressive 22% for the year.

Turning to revenues. The significant growth in our volumes had a positive impact on our revenues, which at $25 million for the fourth quarter and $97.2 million for the full year, were up by 9% and 8%, respectively, when compared to 2018. The positive impact of the volume growth as well as higher average U.S. dollar exchange rate and increases in green coffee sales was partially offset by a lower coffee commodity price or NY'C' on an annual basis.

During the fourth quarter, the NY'C' averaged $1.12 per pound compared to $1.09 in Q4 2018. However, for the full year, the NY'C' averaged $1.01 per pound compared to $1.12 in 2018. As most of you know, a substantial proportion of our revenue comprises the amount we charge our customers for green revenue, and as we charge market rates for this coffee, our revenue falls when green coffee costs fall.

Our revenues are also impacted by the U.S. to Canadian dollar exchange rate as the majority of our sales are billed in U.S. currency. In 2019, foreign exchange had a slightly positive impact on revenues. In Q4, the U.S. dollar averaged CAD 1.32, which was the same as in Q4 2018. However, for the full year, averaged $1.33, an increase of 2% over the 2018 level.

Looking now at the cost side. Cost of sales was $20.9 million for the quarter and $80.7 million for the year, up 8% in both periods when compared to 2018. The increase resulted from a combination of higher variable production costs due to the growth in our production volumes and annual labor cost inflation. These impacts were partially offset by the decrease in green coffee cost over the full year.

Another factor in the annual increase in cost of sales was the need to absorb much higher than normal energy costs during the first quarter. As I've discussed in previous calls, this was due to a pipeline explosion in October 2018 and a polar vortex weather pattern that significantly reduced the supply of gas and caused a spike in the spot market during the winter of 2019. Beginning in the second quarter, gas prices normalized for the balance of the year.

Q4 gross profit increased by 10% to $4.1 million as our higher revenues more than offset the increase in our cost of sales. For the full year, gross profit was up by 11% to $16.5 million despite the higher natural gas price, which we absorbed in Q1. Our improved gross profit and margin were primarily a result of our higher overall processing volumes and a higher proportion of regular volumes in our sales mix.

A sharp focus on reviewing and reducing the operating cost of both Swiss Water and Seaforth Supply Chain Solutions, our green coffee logistics business also had a positive effect.

Operating expenses were up by 73% year-over-year to $3.6 million in Q4 and by 22% to $11.3 million for the full year. To put the large percentage increase in context, it's worth noting that in Q4 of 2018, we received a onetime payment of $430,000 in relation to the Canadian Scientific Research and Experimental Development, otherwise known as SR&ED program. This reduced operating expenses for the 2018 comparable period significantly. The absence of a similar benefit in Q4 2019 played a big role in accounting for the year-over-year difference.

In addition, higher occupancy expenses were recorded in Q4 2019 as we began to utilize the office space in our new production facility in Delta, BC. On an annualized basis, inflationary pressure on operating expenses was driven by a series of onetime expenses. These included the decision to restructure our sales and marketing function and increased investment in capacity enhancement and R&D projects. Higher professional fees and moving costs in relation to the consolidation of warehousing activities by our Seaforth Supply Chain Solutions subsidiary also contributed to the increase.

Fourth quarter operating income decreased by $1.1 million or 67% to $0.5 million and was down by $0.5 million or 8% to $5.1 million for the year when compared to the same periods in 2018.

Fourth quarter net income was $700,000 compared to $900,000 in Q4 2018. Full year net income was $2.9 million compared to $4.5 million in 2018. While we achieved a good improvement in gross profit in 2019, this was offset by the increases in both operating and nonoperating expenses.

While I've already discussed the operating expenses, the increase in nonoperating expenses was primarily driven by a loss on risk management activities and the revaluation of an embedded derivative. In addition, we booked higher finance expenses as a result of our adoption of IFRS 16 releases.

As you know, another measure of our financial performance is EBITDA. EBITDA decreased by $600,000 or 29% to $1.5 million in the fourth quarter and increased by $2.6 million or 34% to $10.4 million for the full year compared to the same periods in 2018. The increase in annual EBITDA was largely due to the adoption of new accounting standards related to leases, IFRS 16.

Compared to 2018, EBITDA, excluding the impact of IFRS 16, decreased by $1.3 million or 61% to $800,000 in Q4 and decreased by $400,000 or 5% to $7.3 million for the full year. Operationally, the change in EBITDA was driven by our strong growth in processing volumes, ongoing efforts across the company to enhance cost recovery and an increased financial contribution from Seaforth.

However, as I've already noted, these gains were offset by a series of onetime expenses in 2019. These were specifically related to relocation activities, a temporary increase in natural gas costs absorbed in Q1, investment in sales team initiatives, increased research and development activity, coupled with a lower refund from the government R&D incentive program.

On the financing front, during the fourth quarter, we entered into an asset-based credit facility with the Canadian Bank. The available balance of this facility is based on the lower of borrowing base margins of eligible assets on $30 million. This facility replaced 2 credit facilities that can be drawn on to fund operational and capital initiatives. And at the year-end, a total of $3.5 million was drawn on this facility.

Finally, turning to dividend. Subsequent to the end of the quarter, on January -- on the end of the year, on January 15, we paid a quarterly cash dividend of $0.0625 per share to shareholders of record on December 31, 2019.

And we announced yesterday, and Frank has explained, Swiss Water's Board of Directors has decided to suspend future dividends in preparation for the construction of a second new production line at our Delta, BC facility. Frank also explained some of the potential operational impacts Swiss Water may experience due to the current COVID-19 pandemic.

For an accounting -- from an accounting perspective, it may also impact expected credit losses on amounts due from customers and whether Swiss Water continues to meet the criteria for hedge accounting. For example, if a hedged forecast transaction is no longer highly probable to occur, hedge accounting is discontinued.

While the impact of this -- while the impacts this could have on Swiss Water can't be determined at the moment, they could be material and could include impairments of receivables, inventory and liquidity.

With that, I thank you for your attention. I'll now turn things back to Frank. Over to you, Frank.

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Frank A. Dennis, Swiss Water Decaffeinated Coffee Inc. - President, CEO & Director [4]

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Thank you very much, Iain. At this moment, it seems appropriate to consider the ancient Chinese curse, "May you live in interesting times." Like it or not, we are certainly living in interesting times. They are times of danger and uncertainty, but in the past, they've also proven to be creative times. Looking ahead through the balance of 2020, we all face some daunting challenges in the near term. The impact that COVID-19 pandemic will have on us as individuals and as a company over the next few weeks and perhaps months is uncertain and definitely not positive. However, it will pass, and we must prepare for the future.

Once things begin to return to normal, we expect to quickly regain the strong and sustained growth momentum we've built over the past few years. A desire to drink excellent coffee throughout the day without worrying about caffeine consumption, coupled with a growing concern about methylene chloride and ethyl acetate used by our competitors to decaffeinate coffee, will continue to drive the growth of our business.

With demand growing and chemical-free decaffeination capacity constrained, the competitive landscape is still in our favor. As the world's only branded 100% chemical-free decaffeination process and the only supplier of new capacity coming on stream in the next few months, we believe Swiss Water is ideally positioned to benefit.

As always, our focus remains on growth. Accordingly, we're investing in the sales and production resources we need to generate and to meet the high demand for our products and services that we know lies ahead.

At the same time, we continue to look at every aspect of our operations with the goal to improve our efficiency, control of our costs and enhancement of our margins without impacting product quality, which is paramount to everything we do. We have already begun preliminary engineering work on the second new line we intend to bring on stream there by mid-2023.

With great patience and determination, we are confident that we can create superior value for you and for all of our stakeholders over the next few months and years ahead.

That wraps up our comments for today. And Iain and I would now be happy to answer any questions that you might have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go first to Doug Weiss at DSW Investment.

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Douglas S. Weiss;DSW Investment;Principal and Managing Member, [2]

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I apologize I got -- I lost connection for a minute, so I missed a little bit of your commentary on operating costs. But I'm a little confused or a little unclear on the adjusted EBITDA of $797,000. Could you just explain on a sequential basis why there's such a drop-off from last quarter on the adjusted EBITDA?

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Iain Carswell, Swiss Water Decaffeinated Coffee Inc. - CFO [3]

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Well, there's also a drop-off in the unadjusted EBITDA, so it's largely driven by the reduction -- the increase in our operating expenses within the quarter, which, as I've explained, there were a number of one-offs that we had to absorb in Q4.

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Douglas S. Weiss;DSW Investment;Principal and Managing Member, [4]

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So -- and I apologize, I think that's where I got cut off. But is it possible to just reiterate what the big one-offs are? And are those just for Q4? Or do those continue into next year?

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Iain Carswell, Swiss Water Decaffeinated Coffee Inc. - CFO [5]

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So there was $430,000 of a credit which we received in Q4 of last year which, I guess, makes Q4 last year look more than it should have been. So there is an inflationary effect that appears to be coming through in Q4 of this year as a result of that. We also absorbed some severance costs in relation to the restructuring of our sales and marketing team in -- for ...

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Douglas S. Weiss;DSW Investment;Principal and Managing Member, [6]

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How much was the severance?

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Iain Carswell, Swiss Water Decaffeinated Coffee Inc. - CFO [7]

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That was in the region of $100,000. We also absorbed some expenses in relation to the moving of some of our staff from our current location in Burnaby to the new office in Delta, BC. In addition, we also had to...

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Douglas S. Weiss;DSW Investment;Principal and Managing Member, [8]

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And how much was the staff move-in?

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Iain Carswell, Swiss Water Decaffeinated Coffee Inc. - CFO [9]

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Total moving cost expense absorbed in Q4 was $100,000, but that's not just the cost of moving staff from here to Delta. The lion's share of that cost relates to the consolidation of our Seaforth warehousing operation to a new warehouse, which was -- I'm sure you can imagine, it's quite an undertaking to move over 100,000 bags of coffee to a new warehouse.

And then we also absorbed some professional fees that were higher in Q4 this year versus last year. That was in relation to -- that was $150,000, and that was in relation to largely legal fees but also some banking fees.

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Douglas S. Weiss;DSW Investment;Principal and Managing Member, [10]

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Okay. But if I add those up, I mean, that's a little under $1 million.

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Iain Carswell, Swiss Water Decaffeinated Coffee Inc. - CFO [11]

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That's why you should also -- and within that operating expenses line, we also have our advertising and consumer costs. It was $400,000 inflation year-on-year on that line. That was largely a phasing change. We had much higher activity in Q4 of this year due to the scheduling of our consumer campaign. However, on an annualized basis, we actually spent below our target on A&C for the year. So that was really just a phasing.

So if you add all of those things I talked about together, that comes to about $1.2 million, which is about 80% of the inflation that you're seeing on that line. The balance relates to some additional headcount coming through and some discretionary inflation within that cost base.

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Douglas S. Weiss;DSW Investment;Principal and Managing Member, [12]

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Okay. So I mean how many of those costs would you just exclude for, I don't know, if it's the first quarter or maybe -- I don't know, maybe there's some lingering costs, but how much of those should we really just not view as ongoing expenses?

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Iain Carswell, Swiss Water Decaffeinated Coffee Inc. - CFO [13]

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I think there's about $400,000 of costs, which you could argue are one-off in -- within that Q4, if you assume that the SR&ED -- we will not receive a SR&ED credit in 2020 of $430,000. But please also bear in mind that on an annualized basis, our EBITDA absorbed close to $500,000 in relation to gas inflation in Q1, which is a hit to our gross profit line.

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Douglas S. Weiss;DSW Investment;Principal and Managing Member, [14]

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Which is going away? Or is that sustaining?

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Iain Carswell, Swiss Water Decaffeinated Coffee Inc. - CFO [15]

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Yes. I mean it's -- yes, I mean, the rate in Q1 last year was extremely high, and we're almost through Q1 this year, and we're seeing normalized rates that are in line with our expectations on prior years. So that was sustained.

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Douglas S. Weiss;DSW Investment;Principal and Managing Member, [16]

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So, let's say, it's $400,000 onetime and then $400,000 sort of on timing on advertising, so it sounds like it's reasonable to at least add back $800,000 on a kind of go -- on a kind of look-through basis. Would you agree with that?

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Iain Carswell, Swiss Water Decaffeinated Coffee Inc. - CFO [17]

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Well, I mean, the advertising -- it depends on the phasing of our advertising this year. I mean we really manage our advertising budget on an annualized basis.

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Douglas S. Weiss;DSW Investment;Principal and Managing Member, [18]

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Okay. Got it. Then -- so bigger picture, in terms of your customer base, how much -- what percent of your sales is restaurants? And what's -- obviously, restaurants are closing around the world, especially in the U.S. What is -- how quickly would that -- do you see those sales, to the extent the restaurants are closing, migrating to -- I don't know, if it will be online sales or some other channel?

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Iain Carswell, Swiss Water Decaffeinated Coffee Inc. - CFO [19]

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Generally -- I'll just quickly jump in and give to Frank. Generally, our sales are not direct to restaurants. They are -- we sell to roasters. It's not that we don't have any -- it's not that we don't have exposure to restaurants, but generally, our sales are to roasters who then sell to restaurants.

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Frank A. Dennis, Swiss Water Decaffeinated Coffee Inc. - President, CEO & Director [20]

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Right. Right now, what we're seeing is from an out-of-home basis, which does take up a pretty significant amount of our business that the out-of-home business is essentially switching to takeaway. I'm sure you've seen that. And so if you look at, for example, Canada's largest coffee retailer, where you can still get coffees on a drive-through basis, you can do a walk-in or takeout basis.

And so that is -- will that affect volume from at-a-home basis? Yes. But what we're also seeing is interestingly, and also not surprisingly, a switch to in-home, all of a sudden. Again, take a look at grocery shelves and see what's empty, and part of the areas of grocery shelves that are empty or emptying are coffee for at-home consumption, which, in fact, is almost a bigger consumer because of the drain starts to factor in again, which we sort of like.

So what I have seen in the green coffee trade this week, the conversations, of course, this is top of mind, is that the greater concern for the green coffee trade leading to the roasted coffee trade is more supply disruption than it is demand destruction.

And so we've just heard that California has gone into a lockdown. The port -- as of yesterday, the Port of Oakland said that they were staying open. Is that going to change today? We don't know. That's a bigger issue 8 weeks from now, 12 weeks from now than it is necessarily demand destruction over the very near term.

So we are more focused on supply chain disruption, and we have absolutely no control over that whatsoever. We are very well stocked right now, very well inventoried and importers have pushed a lot of coffee towards warehouses, including Seaforth, because they saw issues not related to COVID, actually. They saw issues related to Central Americans supply of coffees. They were trying to push coffee through as auctions to issues that were showing up in Central American coffees. We're seeing that with a significant increase in coffees in the near term being available for usage, decaffeination and shipment.

Are we going to get shipment? Don't know. I mean, is shipment going to change? I don't know. That's an issue. And also 12 weeks from now, if ports start to shut down now, Port of Houston shut down yesterday, someone showed up with COVID, shut down the entire Port of Houston. We don't get a lot of coffee through Houston, but our customers do. And so that's going to have a knock-on effect 8 weeks, 12 weeks from now, which is a typical supply chain for movement through decaffeination to roasting.

So I'd say, Q2, Q3 are going to be impacted. And I can't make the call on what that supply chain disruption is actually going to look like in terms of volume metrics.

So hopefully, that gives you a little bit of scope in terms of what we're managing. But we are involved in a worldwide supply chain over which we are the 5%. We are not the 95%, which is what regular coffee is. And that's also going to be a focus, too. If there are issues with coffee availability, people will probably -- roasters will probably focus on the 95% and maybe not the 5%, i.e. decaf.

So I don't want to be terribly negative here, but I want to be as transparent as we can in terms of the real time, in terms of what we are seeing from a supply chain point of view.

I hope that helps, but it's kind of what we have.

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Douglas S. Weiss;DSW Investment;Principal and Managing Member, [21]

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Yes. No, that is helpful. And -- so I mean, how many weeks of supply do you have on hand? Or...

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Iain Carswell, Swiss Water Decaffeinated Coffee Inc. - CFO [22]

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Yes, we have in the region of 10 -- approximately 10 weeks of stock in hand.

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Douglas S. Weiss;DSW Investment;Principal and Managing Member, [23]

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That -- because there's a time lag, even if the COVID issues were resolved in 10 weeks, there still could be supply disruptions as sort of on a live basis.

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Iain Carswell, Swiss Water Decaffeinated Coffee Inc. - CFO [24]

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That's the issue. It's more of the supply disruption that shows up in June, July, August. And if -- the supply disruption, as Frank's mentioned, is likely to be driven by quarantining procedures at ports.

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Frank A. Dennis, Swiss Water Decaffeinated Coffee Inc. - President, CEO & Director [25]

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And so one kind of lucky thing, if you can call it that, would be that the supply chain disruption would be in a lower coffee consumption period of the year, summer. So can we come back around for fall, winter? That's what the coffee trade is focusing on. I know -- basically, they're going to focus on what's called the fall roasting season and getting past the summer. So their eyes are already turned into the fall roasting season.

And we can see that through the structure of the futures commodity market right now in terms of how tight what's called the switch of the roll is through the year, which is the coffee, the NY'C' market is streaming for coffee now. And that's why the structure of the market, which usually has a good kind of forward roll or concatenation, has gone into backwardation, which you've seen that in interest rates and various things in other parts of the world. That's gone in the nearby backwardation, which just means the coffee roll is streaming for coffee now. The issue is that, like I said, it's going to be trying to get past the summer into the fall roasting period, and that's what we're going to be focused on.

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Douglas S. Weiss;DSW Investment;Principal and Managing Member, [26]

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Okay. And how is your -- look, I mean, if you have a couple quarters where you don't generate cash, how is your liquidity to make it through that?

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Iain Carswell, Swiss Water Decaffeinated Coffee Inc. - CFO [27]

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Well, I mean, we've got a -- we've got quite a lot of space in our new lending facility that we activated in Q4 of last year. At the end of the year, we withdrawn $3.5 million on a facility that currently has lending space of approximately $17 million. But obviously, asset -- it's asset-backed. So if the coffee price was to increase, the size of that lending capacity would increase in proportion to the increase in our inventory volume.

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Douglas S. Weiss;DSW Investment;Principal and Managing Member, [28]

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All right. Okay. And then you have about $6 million in cash on hand?

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Iain Carswell, Swiss Water Decaffeinated Coffee Inc. - CFO [29]

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Yes.

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Douglas S. Weiss;DSW Investment;Principal and Managing Member, [30]

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Do you need a minimum cash level to then -- I mean, is there a minimum cash level at which you run?

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Iain Carswell, Swiss Water Decaffeinated Coffee Inc. - CFO [31]

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We tend to run with somewhere between $3 million and $5 million cash balance.

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Douglas S. Weiss;DSW Investment;Principal and Managing Member, [32]

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Okay. It also seems like there's going to -- there probably will be some working with banks that is required during this period since it's obviously not a normal -- but that's just a general comment. Okay. Then on the warehouse -- on the issues with the warehouse, so are you in negotiations now with the new owner for a permanent lease arrangement?

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Frank A. Dennis, Swiss Water Decaffeinated Coffee Inc. - President, CEO & Director [33]

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Not with the warehouse specifically. Not -- right now, we have an 8-year lease on that. And I don't...

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Douglas S. Weiss;DSW Investment;Principal and Managing Member, [34]

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I didn't mean the warehouse. I meant the -- your manufacturing facility, the...

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Frank A. Dennis, Swiss Water Decaffeinated Coffee Inc. - President, CEO & Director [35]

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Yes, manufacturing segment.

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Douglas S. Weiss;DSW Investment;Principal and Managing Member, [36]

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Yes.

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Frank A. Dennis, Swiss Water Decaffeinated Coffee Inc. - President, CEO & Director [37]

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Yes. Doug, I'll answer this last question just to kind of give some space for some others to jump in. The answer is we've been working and negotiating and trying to engage and have engaged with the prior owner -- the previous owner for the past 1.5 years looking towards getting a confirmation of an early renewal of that last 5 years. We knew that, that was a highly valuable component for us to access.

Some would say, "Gee, why didn't you just put a big number in front of them to try to get them to agree?" And of course, lots of wise people out there asked us that question many, many times. The answer is that this place is a 20-acre facility that ended up going for $150 million. There was no way that we could put any sort of eye-watering number in front of him to get him to say, "Yes, I'd like to extend for 5 years."

We're in the midst of potentially selling the property. The timing may turn out to be very pressured. But right now, the new owner, we have had very little connectivity with. We do know that in the -- through their due diligence process, they talk to us about an early exit. And so we, of course, know we've got a lease through 2023. But that process, that due diligence process is what brought us to the decision to say, you know what, we can't trust this new owner to extend. Yes, we'll have conversations with them.

We -- from there on -- from that due diligence process, I've heard that they believe that they can get new -- what's the term, new -- any of the bylaws, any of the work done, quickly permitting, that's the term. Permitting then quickly enough for them to move ahead. We were right at a subway station, called -- it's called SkyTrain here, but a subway station. So a very, very valuable piece of property for other things than the coffee decaffeination.

And so yes, we could have conversations about extending, but we lease 1/10 of the space on the property. And so 1/10 is not going to, again, lag the 90%. And that's the scenario in which we find ourselves. And so that's why we've made the decision to focus on ensuring business continuity over the next 5 years. We know how long it takes to build a facility. We have all of the engineering essentially done through what we've just done. There's more work that needs to be done, but we're in a very good position to be able to move forward and execute what we need to execute. Well, Doug, thank you very much. I'm going to let some others pop in and get someone else to ask us questions.

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Operator [38]

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We'll go next to Hassan El Essawi at E8 Research.

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Hassan El Essawi;E8 Research;Editor, [39]

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Could you provide a bit of color as to why our customers drawn to Swiss Water decaf over some of the other chemical-free decaf methods, of note, some of the carbon dioxide plants and also Mountain Water process in Mexico? Are you seeing like margin compression because of those? Like we saw that one carbon dioxide plant in Texas shut down. How are you even -- get -- [stay close]?

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Frank A. Dennis, Swiss Water Decaffeinated Coffee Inc. - President, CEO & Director [40]

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Okay. I missed a little bit of your question, but what I'll do is I'll talk a little bit to the market structure. Right now, there is one major carbon dioxide third-party supplier called Hermsen, or CR3, in Bremen, Germany. They supply a good-quality product to premium and commercial roasters, probably focused more in Europe than North America, but we're also focused there, too. And we know that they, like us, right now, are at capacity but are not adding capacity.

As far as the other -- I'm doing quotation marks in here "chemical-free processors," Mountain Water is not a chemical-free process. As much as they have, believe it or not, organic certification, that organic certification comes with a caveat into the U.S. that they had -- that they can have a minimum -- or sorry, a maximum of 0.05 parts per million of methylene chloride. Now methylene chloride is not allowed or not useful as a processing aid under organic certification, yet it's in that product. And our challenge is to be nice guys but also communicate to the coffee trade, and it takes time and we're still working on it, that, that's the scenario with Mountain Water.

The other issue that we deal with is a product called ethyl acetate, nicely and kindly marketed into the coffee trade for people to see and use as sugarcane. How very nice. So sugarcane is an ethyl acetate product. Yes, you can use sugarcane to create the chemical which is highly explosive and not particularly good for workers who use the product nor is it -- does it burn off in the roasted coffee and, in fact, shows up as a residual in roasted coffee. So consumers as they become aware of the fact that this is, in fact, ethyl acetate not sugarcane, that they're getting residual buildup becomes a problem.

So we have marketing work to do. And so that's why we like to maintain our advertising and consumer levels because we are constantly being attacked, not directly through the consumer, but through the coffee trade who likes to buy cheap things, that loves buying cheap things. We are constantly being attacked by "alternatives" that try to market themselves as chemical-free. And so our challenge is to continue to engineer, stick handle, move around these competitors as they essentially try to misrepresent the product that they have, because you know what, doing actual, real, clean, chemical-free water processing is more expensive, full stop, period.

That is what the consumer desires though. Consumers aren't -- don't really care that there's only a tiny bit of methylene chloride in the cup. You know why? Because they're going to have more than one cup in their life, more than one cup this week, more than one cup this month. So that's the issue that we deal with. Yes, I'm animated about this. It's a big deal for us. We're very, very focused on it, and it's a major competitive, both risk and opportunity.

So, hopefully I've shed some highly biased light on it, but in any case, that's how we see it.

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Hassan El Essawi;E8 Research;Editor, [41]

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Yes, that makes sense. I just have another. Historically, like more than 5 years ago, Swiss Water wasn't generally a company that carried a lot of debt. And then over the past few years as free cash flow has been negative with the opening of the Delta plant, you've chosen to maintain your dividend but financing it through debt. And we're nearing right now, given some of the IFRS 16 changes, leverage now nearing 7x of EBITDA. Is that a concern to you? Like what was really the decision-making there to choose to maintain the dividend and finance it through debt?

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Iain Carswell, Swiss Water Decaffeinated Coffee Inc. - CFO [42]

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Well, I mean, I don't think that debt is the driver of our decision to cut dividend by any means. Our decision to suspend the dividend is driven by the fact that we see -- since 2016, our volumes have increased by 30% -- over 30%. And we see -- we continue to see a huge opportunity. The new capacity that we're bringing online will, at current growth rates, be fully utilized within 3 years.

And at the same time, we've obviously run into a lease challenge. And so we've taken the decision to suspend the dividend in order to help fund the investment in further capacity. It's not going to fully fund the investment in full capacity, but it will certainly make a significant contribution. And yes, it will reduce the likely level of additional capital that we need to put into the business in order to fund that development. But it's -- we're not choosing to suspend the dividend because we're prioritizing debt by any means, if that's what your question is implying.

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Operator [43]

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We'll move next to shareholder [Warren Goldman].

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Unidentified Shareholder, [44]

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Yes. Sorry, a couple of these questions have been answered, but maybe just a bit more color on what you see the -- facility comes on stream now, you've got a base facility. So let's just say you've got 100 units of volume, new facility adds another 40 to 50. Are you going to add a second line? What happens over the next 2 to 3 years with the legacy facility? You start to move pieces of that to the new facility? What that look like in 3 years if you have to leave?

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Frank A. Dennis, Swiss Water Decaffeinated Coffee Inc. - President, CEO & Director [45]

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That's the absolute right question, [Warren], to ask. The key thing for us is because we are at capacity, because we are a 24/7, 365 operation, we essentially need to replace what we have here before we can make decisions on what to do with what we have here. So if you talk about -- and I like your -- kind of used capacity adding, to probably -- it's actually kind of like probably closer to 50 units of capacity that we're adding right now in Delta. That's what we're commissioning right now. And then what we would be contemplating and making preparations for would be another 50 to maybe even 60 units of capacity to, in fact, get up to a capacity that's greater than we are right now, giving us time and room to make decisions on how to use the assets that are in place here.

What we would likely do is identify the major pieces of equipment that can be pulled out and moved to another operation. And those would be the major components, like the dryer, the furnace, several of the coffee tanks and carbon tanks. It probably wouldn't include the green coffee handling system other than the robots, but there are pieces that we would reapply. There is still a lot of typing instrumentation that essentially gets decommissioned and becomes unusable.

So there is a cost to remove and there is a cost to reapply that in the future. We haven't done that cost estimation yet. Right now, our -- because that's an engineering cost. Our engineering cost, the money we want to spend in engineering right now is what does the engineering look like, what does it need to be for our second line in Delta. And that's where we're going to focus on that.

As we get closer to the end -- closer to 2023, i.e., 2022, spend the money then on engineering to figure out what to do next with that. But what that frees us up to do is look at options that are, from a worldwide supply chain point of view, more efficient for our customers, more competitive for us versus our competitors, like East Coast, U.S. or Europe. And that's what our longer-term view would be as opposed to only focusing on Vancouver.

Right now, from an executional point of view, focusing on Vancouver is the only path that we have. And it is still a very, very good path because we have, again, so much asset over in Delta. And one of the great things about, in fact, not having 2 sites between now and -- I don't know, '28 is moving into one site in 2.5 years, has a significant benefit in terms of fixed and variable cost, somewhere in the range of $1.5 million to $2 million. So we're sort of excited about it, actually, in that -- what we see is a great degree of inefficiency in operating 2 facilities, even before the second facility is operating now.

So in 2023, there will be a benefit of $1.5 million to $2 million just from that integration and moving into a one-site scenario in Vancouver. So hopefully, that answers your question, Warren.

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Unidentified Shareholder, [46]

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Yes. And maybe just a follow-up on 2 points. The first one would be just in terms of -- my understanding is that's always been given how the new facility was set up, it's almost a modular component that was easier, i.e. cheaper to add new lines in terms of what you'd be looking to do now. That will be the one question. And then the second question would be just more on the legacy facility. So would it be a case of -- so you build out -- obviously, you're commissioning the first line now. You build up another line for more capacity. And then you look at taking pieces that hopefully would be much cheaper, i.e. having some residual value from the old plant moving into a new facility. Is that kind of the right understanding?

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Iain Carswell, Swiss Water Decaffeinated Coffee Inc. - CFO [47]

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I think it's important to caveat that. It's -- that's an option. There remains the option that you that you fully -- there's still another option which is you fully utilize and fully move the line. The line is still -- the equipment still has -- absolutely still has a useful life and has a value. I think everything that Frank has said is correct, but no decision has been made on that -- on whether that equipment will be moved in part, will be moved in full. I think it's important that, that is acknowledged. And that is a discussion that will be -- a decision that will be made over the coming 3 years or late year.

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Operator [48]

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We'll go next to Max Levytskyy at Clarke Inc.

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Maksym Levytskyy, Clarke Inc. - Investment Associate [49]

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I just want to follow up on the legacy facilities. And let's assume 2023, you got the fourth line operation, and you said that you're going to add like additional 50, 60 units of capacity. So with the third line, you have 110 units of capacity, but you said that by 2023, you will have around 150 of actual demand. So with legacy plans being out of the scope right now, how are you going to manage demand with -- kind of -- does it mean that you will need to add third new line? And do you have a capacity on current site to actually add this line?

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Iain Carswell, Swiss Water Decaffeinated Coffee Inc. - CFO [50]

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I don't think we actually said that the demand would be 150 units. We're just ...

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Maksym Levytskyy, Clarke Inc. - Investment Associate [51]

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I mean my -- sorry, just to cut off, so my understanding is that right now, you're around 100 capacity. And you said that in 3 line -- in 3 years, the third line will be utilized at full capacity. That's what I heard. So for me, it means that you're going to have around 150 demand.

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Iain Carswell, Swiss Water Decaffeinated Coffee Inc. - CFO [52]

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If you assume that the current growth trajectory continues...

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Maksym Levytskyy, Clarke Inc. - Investment Associate [53]

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Yes, yes.

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Iain Carswell, Swiss Water Decaffeinated Coffee Inc. - CFO [54]

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Which is -- which we think is a fair assumption. So I'm not clear on your question.

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Maksym Levytskyy, Clarke Inc. - Investment Associate [55]

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Okay. So let me clarify. So you said that third line will be if you continue -- the trajectory of your growth will continue. But you don't think that it will continue in this as it was before?

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Iain Carswell, Swiss Water Decaffeinated Coffee Inc. - CFO [56]

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I don't think I said that.

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Operator [57]

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We'll move next to Stéphane Dubeau at Dubeau Capital.

I apologize. Hearing no response, we'll move to Thomas Dixon at 225Research.

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Thomas Dixon;225Research;Analyst, [58]

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Can I take up a ton of your time. I was just wondering if you could speak briefly about how you think about capital allocation moving forward? If you've ever kind of looked into a share buyback given the falling stock price recently? And then also, a lot of the excess capital being kind of directed to Delta, the Delta plant as well as the expansion into Europe with the new office in France.

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Frank A. Dennis, Swiss Water Decaffeinated Coffee Inc. - President, CEO & Director [59]

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Yes, I would say, right -- the -- connected to the share buyback, honestly really hasn't kind of come across the transom so far. The declining share price to us, up until, call it, this morning, has been driven primarily by macro events. And that's only been very recent. And so we really haven't contemplated a share buyback under that scenario. But use of capital clearly is in business preservation and business growth at this juncture. And that's really what the focus would be into the future. And I don't think that we would be -- really pursue the buyback under that construct.

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Thomas Dixon;225Research;Analyst, [60]

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And I guess just one additional question. Could you just touch briefly on kind of how the expansion in Europe has been going? I know in your report, you talked about how you see it. It's, obviously, a huge market, and there's a lot of opportunities for growth. And then also, I guess, if you've seen kind of disruptions in the supply chain recently with, obviously, the struggles with the global pandemic?

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Frank A. Dennis, Swiss Water Decaffeinated Coffee Inc. - President, CEO & Director [61]

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Right, right. Europe is proceeding quite nicely. We're seeing significant percentage growth increases. And we are in conversation with larger commercial roasters, which is interesting. But to me, the most interesting thing is, in fact, the point that we are capturing specialty coffee share that has Swiss Water branding on it. France is working well. The U.K. has come back really nicely. We're seeing execution in Spain, which we're very, very happy with. Italy is in good shape and growing, and we're pressing into Eastern Europe as well.

And so we know that our strategy needs to be successful by appealing to the top end of the coffee pyramid, first and foremost. And building execution, building volume with our high-quality product, branded, in front of consumers is critical for commercial rosters ultimately to come around to want to desire our proposition. That's why we've ultimately been so successful in Canada, so successful in the States, so successful in Japan. It's taken several years, for example, for Japan and Asia to grow. That is on a tear right now. Asia is in phenomenal shape. And we're laying the foundation in Europe, but I'm really happy with the percentage of growth we're seeing there and also the type of accounts we're attracting.

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Iain Carswell, Swiss Water Decaffeinated Coffee Inc. - CFO [62]

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I mean our European business almost doubled in 2019, just under 100% growth. We saw a very steep acceleration of growth in Q4, strong triple-digit growth.

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Operator [63]

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And lastly, we'll turn to our follow-up from Doug Weiss at DSW investments.

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Douglas S. Weiss;DSW Investment;Principal and Managing Member, [64]

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So -- and thank you for the detailed answers before. I just wanted to follow up on a question that your -- the concern is more supply disruption or demand disruption. As we sit here today, are you still seeing sales growth, for example, in the first quarter?

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Iain Carswell, Swiss Water Decaffeinated Coffee Inc. - CFO [65]

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I can't comment on Q1 results until we close Q1. What I would say is we're still receiving orders from all of our key customers. We're receiving feedback from them that those that have exposure to grocery trade are seeing very, very strong growth in terms of the supply of -- for home consumption. I think like everybody, probably growth projections are being looked at very carefully. But yes, we're still seeing orders coming through from all of our main customers. Maybe the split or the mix of business and the mix of supply of where that coffee is going to end up because most of those big customers have grocery exposure, but also take-out exposure maybe changing. But yes, we're still seeing -- still taking orders, still demand for us to secure coffee for our key customers.

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Douglas S. Weiss;DSW Investment;Principal and Managing Member, [66]

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And I just wanted to clarify one of the prior questions. And it sounds like you don't have a crystal ball on this at this point, but maybe you could. The cost of a new line in the new facility, if you were to just transfer your equipment from the old facility, would be significantly less than the cost of the first line. Is that accurate?

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Frank A. Dennis, Swiss Water Decaffeinated Coffee Inc. - President, CEO & Director [67]

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Sorry, can you just repeat the question?

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Douglas S. Weiss;DSW Investment;Principal and Managing Member, [68]

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Well, my question is just what it would cost to -- if you could talk about the cost of just moving your line from your legacy facility to the new facility?

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Frank A. Dennis, Swiss Water Decaffeinated Coffee Inc. - President, CEO & Director [69]

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Yes. We -- like we said, we have not done the full complete final engineering on that. The issue, Doug, is in disruption of supply if we were to do that. It's what our estimate from a timing point of view would be, it's still a year -- 9 months to a year to pull the components off of the current site safely and preserving their asset value. And then it's still another 2 years to re-implement all of the infrastructure around which those assets would need to be held in Delta, even if we're focusing on Delta. So it's still a 2.5-year process.

The problem being is that if we only have one line running or one line available at that 2023 point in time, we drop off a cliff and really start to scare a lot of customers away because we lose capacity for 3 years, which -- that's the biggest issue that we're trying to overcome. And that's why we need to do 2 new and then contemplate either whether it's another new or a new plus move or move some 75% with new around it. So that's the -- and that's where we don't want to spend money at now, because know we have a more of a timing issue than we do necessarily just managing capital cost. Timing is of the utmost priority right now.

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Douglas S. Weiss;DSW Investment;Principal and Managing Member, [70]

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That makes sense. But did you give an estimate of what the second line will cost?

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Iain Carswell, Swiss Water Decaffeinated Coffee Inc. - CFO [71]

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We think the second line will cost in the region of $45 million. We can't provide a concrete number because we're still, obviously, working through the engineering on that. But that's our estimate. It's not as closely as possible. It will be a replica, our vision is that it will be a replica of what we've just built.

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Douglas S. Weiss;DSW Investment;Principal and Managing Member, [72]

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All right. $45 million over 3 years?

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Iain Carswell, Swiss Water Decaffeinated Coffee Inc. - CFO [73]

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Yes, give or take.

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Operator [74]

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And gentlemen, with no other questions holding, I'll turn the conference back for any additional or closing comments.

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Frank A. Dennis, Swiss Water Decaffeinated Coffee Inc. - President, CEO & Director [75]

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Just on closing, again, I'd like to extend our hope, desire that you and your families stay healthy and safe, and that we work collectively together through this COVID-19 pandemic. And we're looking forward to the back end of it. And with no other questions, that wraps up our comments. Thank you very much for your time today.

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Iain Carswell, Swiss Water Decaffeinated Coffee Inc. - CFO [76]

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Thank you.

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Operator [77]

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Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect at this time, and have a great day.