Q1 2020 Earnings Call
For fiscal 2020 earnings conference call.
At this time, all participants are in listen only mode.
Later, we'll conduct a question and answer session and instructions will follow what that's all.
If anyone should require operator system during the conference call. Please press Star then zero on your touched on telephone.
As a reminder, this call is being recorded I would now like to turn the call over to your host Rachel Goldman. Please go ahead.
Thank you good afternoon, everyone. Thank you for joining farmer brothers first quarter fiscal 2020 earnings conference call participating on today's call, our double mastering president and CEO , and Scotland interim principal financial and accounting officer.
Earlier today the company issued its earnings press release, which is available on the Investor Relations section a farmer brothers website at Www Dot Farmer brothers Dot com.
The press release. It also included as an exhibit to the company's form 8-K available on the company's website and on the Securities and exchange Commission's website at Www Dot SBC dotcom.
A replay of the body only webcast will be available approximately two hours. After the conclusion of this call.
The only to the audio replay will also be available on the company's website.
Before we begin the call. Please know that all the financial information presented as unaudited and not various remarks made by management. During this call about the company's future expectations plans and prospects may constitute forward looking statements for purposes of the safe Harbor provisions under the federal Securities laws and regulations.
These forward looking statements represent the company's views only as of today and should not be relied upon as representing the company's views as it any subsequent date.
Results could differ materially from those forward looking statements.
Additional information on factors that could cause actual results and other events to differ materially from those forward looking statement is available in the company's press release and public filings.
On today's call management will also use certain non-GAAP financial measures, including adjusted EBITDA and adjusted EBITDA margin.
I think the company's operating performance.
Reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measures. Its also included in the company's press release.
I'll turn the call over to Dibrom Deborah. Please go ahead.
Thank you Rachel.
Good afternoon, everyone and thanks for joining us.
It's a privilege to be with you today My first earnings call as President and CEO Farmer brothers.
We got started.
I like to thank Chris monitor for his leadership during his time as interim CEO and we'll like to acknowledge all great recent work.
Accomplished by the team.
During this transition period the team laid the foundation for the company's turnaround.
Established a strong framework to return farmer brothers to growth and profitability.
My first weeks that CEO I've worked to pick up where Chris and the team worked off and initiate a deep dive into the into our business.
I'm honored to join the company at this important juncture.
Borgata to some of my initial observations for my first weeks as CEO I'll speak to my background and why chose.
The lead the team here at Farmer brothers.
I will then cover my main areas of focus should provide a sense of where we're headed.
That all handed over to Scott to get in more detail.
The quarter and our financials.
So with that let me start off by saying that neither challenges we face a farmer brothers, nor the opportunities I see ahead of the company.
Our unknown or unfamiliar to me.
32, plus years of experience a blood multiple company internally.
Majority of my career has been focused on global supply chain transformation, creating shared service structures in integrating transportation and distribution groups long with leading various business units.
Importantly, I have a deep experience in the food and beverage industry.
My experience in direct store delivery, all that Pepsico, what am I coffee knowledge acquired world, leading Starbucks global supply chain.
Or service well hear a farmer brothers.
Most recently I was hoping to lead a successful turnaround at Earthbound farm organic the led to the known being able to the best business itself to larger strategic player in the space.
The team and I were able to return the company to profitability and achieved record operational execution metrics unique challenges faced by former organic for very similar to the once I've witnessed thus far the farmer brothers.
Hi, Doozy athlete came to farmer brothers, because I believe the company had a great deal of potential and wants to see it succeed.
The company has a deep and rich history within the coffee industry.
What's the person has the opportunity to work in coffee.
That's in your blood and you desire to return if an opportunity presents itself.
The other reality is a copy industry trends or a tailwind and not a headwind.
I believe we have valuable assets and a strong platform.
And importantly, we have dedicated and talented group of team members as motivated to see the company thrive.
Throughout the company turnarounds I've experienced I believe that the foundation for success. It always starts with people can culture as a team I understand that we have work to do and I'm confident in our ability to grow long term.
I've spent my initial days a farmer brothers.
Talking to our key customers learning the business listening to our lives leaders and meeting with team members across the organization.
I've also assessed our current strategy and reflected on past business decisions.
I recognize we're at a critical in flux important and I'm aware of the complexity of the industry and which we operate like I said, Chris and the team have already taken important steps to reposition the company and I'm ready to get to work to continue our forward progress.
Last quarter's call Chris out one five near term operating priorities on the organization how to executed against in the recent months.
I've worked with Chris the rest of the board and management team in refining these priorities and setting strategic initiatives that we will focus on moving ahead.
These strategic initiatives are.
Executing our supply chain optimization.
Elevating our execution.
Enhancing our service capability and building upon our competitive advantage with our coffee broom equipment program.
Evolving our product portfolio through innovation.
And engaging or Cowen and refocusing on culture.
All these strategic initiatives will help us with not only customer attention, but also adding new customers.
And of course at the same time, we focus on these improvements in our operations prudent cash management and debt reduction will continue to be important financial objectives.
I like to take a moment to dive into each of these initiatives in more detail.
First.
Executing our supply chain optimization is essential to the turnaround.
We're taking a closer look at our manufacturing rushing and distribution network to optimize operations across both direct ship and DST customers.
More specifically, we're continue to build upon the steps we've taken already with the sale leaseback, the Houston plant and as discussed last quarter. We're currently in the process of rebalancing volume from Houston plant to our other roasting facilities to improve EBITDA.
We also will continue to re route and optimize our route cells represented.
In service Dexter improve our on time and pool and equipment service metrics.
Making these changes gives us the right to have self discussions around new innovation.
Product marketing to improve margin and meet customer needs.
Today, we have been forced to have discussions around execution due to the fact, we have been below acceptable levels.
As part of the supply chain optimization effort, we will continue to refocus on inventory management and reducing scrap to consistently reach as near 100% on time and in full rate.
Go as possible, which Chris touched upon last quarter.
Second, we're making great progress in improving our systems and processes.
I will ultimately result in elevating our overall execution.
We're already seeing positive results from a business intelligence too, which is providing the basis for setting ourselves objective.
In addition, whenever a primary near term objectives as piloting and upgrading the handheld technology for our route sales representatives.
We're excited about this new technology politicians underway and expect our upgraded systems have significant positive impact on the DSD network.
Further Chris mentioned last quarter that we had commented a 24 by seven customer call Center, which provides customers with immediate assistance I'm pleased to share. They were now in the beginning stages of the national rollout of this tool and are already hearing positive feedback.
Additionally, our field employee call center that provides assistant to employees with product supply issues as artery proved to be a success.
Right in this process being establish a customer can have waited for several weeks and not had the problem solving chosen to seek out a competitor thus creating customer churn.
Now they can call. It 911, 24 by seven number and have the problem solved.
Within many cases within a day.
Turning to our third party weird digitally working on enhancing our service capability and belief on our competitive advantage with our coffee brewing equipment program.
The coffee brewing equipment refurbishment project allows us to be cost competitive.
This initiative is focused on further driving utilization of our own restored equipment.
Ultimately this contributes to an overall goal of optimizing cost and driving overall program profitability.
The program reduces our capital need and also provides a compelling sustainability story for our customers and team members to be proud of.
Fourth I'm determined to reinvigorate the organization by evolving our product portfolio are encouraging a return to innovation.
In order to differentiate our product portfolio and establish a competitive advantage that will allow us to increased product margins improved customer attention.
The new customers, we need to focus on building or product innovation capabilities as well as effective product management capabilities.
Versus traditional brand management.
In this area, we're continuing to work already underway on SKU rationalization and optimizing our assortment.
Finally, and most importantly, I recognize that engaging our talent and refocusing on culture are the foundation of every company.
And that is especially the case of the company in the mid summer turnaround.
One of our main near term objective is to reinstall, a winning culture and when the hearts and minds dedicated and talented team we have your farmer brothers.
This company has an incredible hundred plus your legacy and I'm proud to be a new member of his team.
Far afield employs the average tenure is approximately 25 years.
Which is a testament to the strong culture dedication teamwork that has already been established here.
As part of this goal of engaging our challenge I'm excited to announce that Rouven unimportant does is joining the farmer brothers family and the role of Chief supply chain Officer effective November 15th.
A critical component of this turnaround is riding our supply chain operation and I'm confident he is the right person to lead the suffering more specifically he will be responsible for leading our manufacturing logistics procurement quality engineering and innovation teams.
Rubin brings deep operations and leadership experience to our team.
Most recently he was chief operations Officer for Jr. To 86.
Global leader in sporting goods industry.
Energy, our Judy 86, Rubin held various technical and leadership roles with Abbott care International Oracle and U.P.S. among others I'm looking forward to closely working with Rubin as we work to enhance our operations and optimize our supply chain.
As we focus on these five strategic initiatives moving forward.
I'd also like to share more detail on some of my initial views of our direct ship business and our DSD network.
During the first quarter. The DSD sales channel was impacted by decline in volume because of lower inventory fill rates and continued customer attrition.
These challenges were similar to what the company experience in fiscal 2019, and while it would take time and effort to turn these metrics around.
We are seeing gradual improvement.
As for I direct ship business coffee volume grew in the quarter, although sales declined on favorable customer mix shift and the impact of lower year over year copy commodity prices.
Taking a closer look at our direct ship business.
As Chris noted last quarter, we see growth opportunities with our midsize and smaller customers, which don't require significant incremental investment of capital and people.
These customers come to us for product development equipment expertise and additional services, allowing us to achieve better margins.
We'll also continue to pursue large national customers will be focused on balancing revenue and margin inline with our efforts to drive improved EBITDA for the company overall.
Finally, I'd like to acknowledge that while our financial results are still not where we they need to be they showed continued progress from the fourth quarter.
The entire team is focused on our key strategic initiatives in order to improve our results.
The team has already made progress since last quarter and I believe we're taking the right additional steps to improve our operational and financial performance I look forward to being able to provide updates on our continued progress on future earning calls.
Before I turn the call over to Scott I like to mention our CFO transition with David Robinson.
Departing the company on behalf of the entire company I want to thank David for his years of service, a farmer brothers and wish him the best in the future.
As we conduct a search for permanent CFO , we're fortunate to have Scott step in on our interim principal financial accounting officer.
Scott Joint Farmer brothers in July 2018, as an assistant controller under served in the role of corporate controller since October 2018.
Scott brings over 10 years upon its experience, including more than five years of management experiments in both public accounting and global public companies.
Since joining our team Scott has proven himself to be valued leader within our finance organization and I'm confident he will continue to make strong contribution to the company during this transitional period.
With that I'd now turn the call over to Scott for more detailed review or financial results.
Thanks to rural I'm excited to take on the role of interim principal financial and accounting officer and work closely with the rest of the management team and our board to build on the company's progress now let me walk through our first quarter results.
Beginning with coffee volumes Green coffee processed and sold in the quarter increased by 500000 26 million pounds, a 2% increase over the prior year period.
The mix of coffee volumes processed and sold during the quarter was approximately 8.3 million pounds or 32% of the total volume through our DSD network, while direct ship customers represented approximately 17.4 million pounds, a green coffee processed and sold or 67%.
The volume.
300000 pounds were 1% of the total volume was through distributors.
The increase coffee volumes reflect new volume from the ramping up our new large global convenience store retailer, we began shipping earlier in fiscal 2019 and incremental volume on other direct ship customers offset by declining volume within our DSD network and the sale of our office coffee.
Business in July of this year.
Turning to the income statement.
Net sales for the quarter Rone hundred 38.6 million, which is an increase of 8.8 million.
Our 6% from 147.4 million reported in the same period a year ago.
The decline in net sales was driven primarily by lower sales of coffee in Allied products sold through our DSD network unfavorable customer mix within our direct sales channels.
Non recurring sales of industrial suit based products associated with the boys acquisition, which we stop selling last year and impact from lower coffee prices for our cost plus customers.
Sales through our DSD network were impacted by the sales of our office coffee business.
Our customer attrition and lower inventories build rates associated with downtime at our Houston plant, which is similar to what we experienced last year.
Well, our direct ship sales channel grew in terms of coffee pounds in the quarter sales declined on favorable customer mix shift and the impact of lower year over year coffee commodity prices.
Gross profit in the first quarter fiscal 2020 was 40 point Sixmillion, an increase of 7.6 million from the prior year period.
Gross margin decreased to 29.3% from 32.7%.
The decrease in gross profit was primarily driven by lower year over year net sales unfavorable customer mix higher production cost associated with certain aging production infrastructure and higher scrap expense.
This was partially offset by lower coffee brewing equipment, and labor and lower green coffee prices.
I'd like to discuss a few of these items now in more detail.
It's a slow moving inventories remained a challenge in the first quarter, resulting in higher inventory markdowns and scrap expense as we continue to work through excess product.
We also continued to see elevated costs from inefficiencies at our Houston plan. However, inventories have declined and are in line with historical levels.
The higher manufacturing costs, we reported in the fourth quarter continued into the first quarter negatively impacting gross profit.
As we announced last quarter, we expect the sale leaseback of our Houston facility will enable us to rebalance volume across or roasting facilities, which intern should reduce future manufacturing downtime.
We also expect the future proceeds from the sale will give us increasing liquidity and flexibility.
We realized favorable reductions in coffee brewing expenses during the quarter as initiatives. We began late last year are taking hold.
This reduction in cost is the result of increase controls we put in place late in the fourth quarter fiscal 2019.
We expect to see further improvements throughout the remainder fiscal 2020 as the controls and process changes fully take hold.
Turning to operating expenses.
Our operating expenses for the quarter decreased 16 point Sixmillion to 33.7 billion from 50.3 million.
As a percentage of net sales operating expenses declined 24.3% compared to 34.1% of net sales in the first quarter a year ago.
The decrease in operating expenses was primarily due to net gains from sales assets.
Absence of restructuring and other transition expenses.
The conclusion of Boyd's coffee integration at the beginning of October 2018.
Head count reductions and other efficiencies realized from DSD route optimization.
This was partially offset by increased severance costs associated with reduction in force, which occurred during the current quarter.
Net gains from sale of assets are primarily associated with the sales of our office coffee assets and the Seattle Office branch property, a 7.2 million and 6.8 million respectively.
Interest expense in the quarter decreased 300000 from the prior year period to two point sixmillion, principally due to lower pension interest expense.
Other net in the first quarter decreased by 500000 200000 in the quarter compared to 700000, the prior year period.
This was primarily due to reduced employee post retirement benefit gains, partially offset by lower mark to market losses on coffee related derivative instruments not designated as accounting hedges.
Turning to income taxes, we reported an income tax benefit of 100000 in the first quarter fiscal 2020 as compared to income tax benefit of 1.3 million in the prior year period.
The lower tax benefit is primarily due to the previously recorded valuation allowance and reduction of our estimated deferred tax liability during the first quarter fiscal 2020 as compared to the prior year period.
As a result of these factors net income was 4.7 million in the first quarter as compared to a net loss of 3.0 million in the prior year period.
Net income available to common stockholders was 4.5 million or 26 cents per diluted common share in the first quarter fiscal 2020 compared to net loss available to common stockholders of 3.1 billion or 18 cents per diluted common share in the prior year period.
Adjusted EBITDA was 4.0 million in the first quarter fiscal 2020, as compared to 11 million in the prior year period.
Our adjusted EBITDA margin declined to 2.9% for the quarter compared to 7.4% for the same period last year.
Now turning to the balance sheet.
Overall, we continue to strengthen our financial flexibility by reducing debt levels and managing our working capital more efficiently.
These efforts have led to improved free cash flow.
At the ended the quarter, we had 7.4 million in cash and we had 85 million borrowed on our revolving credit facility or 77.6 million in debt net of cash. This compares favorably to debt net of cash of 85 million at June 32019.
As of September 32019 availability under our credit facility was 63 million compared to 56 million in availability as of June 32019.
During the quarter, our accounts receivable balance increased 2.3 million 57.5 million compared to 55.2 million at the end of the fourth quarter.
And was down 5.0 million from 62.5 million at the end of the prior year period.
Our inventory levels also increased during the quarter by 3.8 billion to 91.7 million compared to 87.9 million at the end of the fourth quarter as we prepare for busy busy season.
Inventories were down to $23.9 billion from 115.6 million for the prior year period.
Accounts payable decreased during the quarter to 71.8 million compared to 72.7 million at the end of the fourth quarter and are down 2.1 million from the prior year of 73.9 million.
Turning to capital expenditures Capex for the first quarter was 5.3 million with 4.4 million related to maintenance.
Depreciation and amortization expense was 7.6 million in the first quarter versus 7.7 million in the same period for the prior year.
We expect maintenance capital to range between 17 to 20 million a decrease from fiscal 2019 maintenance capital of 21 million.
The reduction in fiscal 2020 maintenance capital from the prior years due to lower planned spending on new coffee growing equipment and an increase in our use of refurbished coffee brewing equipment, which has a lower cost per unit.
We anticipate our depreciation and amortization expense will be approximately 7.5 million to 7.8 billion per quarter and the remainder of fiscal 2020 based on our existing fixed asset commitments in the useful lives of our intangible assets.
We expect minimal cash and accrued tax expense in fiscal 2020.
We expect our debt net of cash to continue to decline throughout fiscal 2020 from 85 million at the end of fiscal 2019 to approximately 75 million to 80 million by December 31 2019.
We are focused on the strategic initiatives to grow outlined in the entire organization is committed to returning farmer brothers to growth and profitability.
And with that I'd like to open the call up for questions.
Operator.
Thank you ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone.
If your question has been answered or you wish to move yourself. Please press the pound key.
One moment.
[noise] <unk> first question comes from the line of Kara Anderson with B. Riley. Your line is now open.
Hi, good afternoon.
Afternoon.
I'm, sorry, if I missed it but given much tainted and leadership just wondering if you could provide actually an update on that directional outlook for fiscal year 2020.
Yeah.
Karen Thanks for the question, what I'd say in regards to guidance at this point would still be early days.
We're in the midst of this turnaround and currently focused on the five strategic initiatives outlined.
Paired remarks and at this point, we're not going to be provided guidance at this time and we look forward to sharing.
Ongoing progress the as the quarters and Paul.
Okay, and then on how to try on the DSD business, just wondering if you're seeing any change in the pace of customer attrition.
You know from a perspective, a BSD, here's here's what I would say.
You know as we look at DST and then as I said earlier you know it's the early days.
You are getting out about and looking at the operation.
Clearly focused on execution and forecasting on on time in full and customer attrition is incredibly important and optimizing our network and get other distribution network balanced and where we need to be is important and then focusing on innovation, which is obviously going to help us from a DSD perspective.
Yes so.
No winning new business and seeing improvement in churn.
In select markets were experiencing and I would tell you you know and our national sales meeting we work with Charlie from each of the yes the markets.
Across the country you know I was really encouraged by the fact that you know our best the most improve.
Really was built around the fact that they own those branches and when they feel like they own those branches, they're delivering the results and we're not seeing the churn in the attrition and those branches and that's what we're going to continue to focus and my question. His leadership in the field will be out and working on that.
We continue to make those visits across.
The country.
I've been to several I can tell you we're going to continue to work on that incredibly hard and continue to win back business.
Kind of on the same point I guess in their prepared remarks, you talked about.
Rerouting sales reps as part of the supply chain optimization priority can you can you elaborate on that a little bit more for me.
Make sure I understood could you just state that first part of the question in regards to my.
Earlier buyers, but then in your prepared remarks, you talked about rerouting sales reps I think as you know kind of what he said in terms of I guess a priority within the supply chain optimization efforts. Just wondering if you can elaborate on on that I guess, that's you're talking about owning the branches and.
Just curious like what you mean by that comment.
Yeah, I think you're referring to route optimization in the prepared remarks, we're really talking about.
Optimization across the distribution network in terms of branches.
And.
The season, optimizing those relative to our overall network footprint, we have gone through a rerouting exercise we've done that we that's a part of the day to day business that we do on ongoing basis in that particular area. The business. So as the opportunities persists will continue to route optimized with end.
The branch structure, but we don't have an active initiative at this point, we've actually can.
Done that work and then as an ongoing based as we continue to do that.
As we see change in routes, but we need to.
Got a route or reduce the route.
Thank you that does clarified it for me and then just wondering if you can elaborate some on what's happening with unfavorable mix and direct ship and second to that whether that is expected to be a drag for a couple more quarters.
Yeah in regards to direct ship, specifically currently doing a deep dive into that business segment, we see growth opportunities with mid and small sized customers as we talk in the prior quarter and we'll continue to pursue those large national accounts and as I've said, we're focused on balancing revenue in may.
Arjun with an eye toward improving EBITDA.
Okay, and then I guess last question for me last quarter.
It was talked about some head count reductions and 7 million and thinking I think directly related to that just.
How much of that contributed to the quarter and if you're recognizing that at this point if you could comment on that thanks.
Yes, Hey, Gary This is Scott Yeah, we did realize some savings this quarter.
If you look at our Opex expenses.
And I think you should focus on our on our current expenses this quarter in the last couple quarters that we've seen to develop our current our current rather wait run rates that were experiencing right now.
Great. Thank you.
Thank you and as a reminder, if you'd have a question. Please press star then one.
Well.
[laughter].
I'm showing no further questions at this time I will now turn the call back over to CEO deferrals vast array for closing remarks.
Yeah.
Thanks, Andrew now, while it's still early in the days and time and CEO I'm already see great potential and farmer brothers and what we can accomplish together I'm focused on leading this company become more profitable more forward thinking the an inch leader and have a clear vision of what needs to be done to get there and I look forward to continuing market.
Thank you review of the company and sharing our ongoing progress in the future quarters. I'd also look forward to meeting each of you and members of the investment community and person as well, which we have many of those plan and thank him to join US today and for your continued interest and support farmer brothers. Thank you.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating and you may now disconnect.