Q2 2020 Earnings Call
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Good afternoon Emad Your conference I'd number.
Yes, its 1757 33.
Thank you may have the spelling of your first and last name.
David D Avi R&D and for our D.R.W. Anda.
And your company.
Hi, it up eight online E on a.
Thank you Sir your calls and progress I'll join you now.
Okay.
Thank.
Here.
For the correct initiatives on which we should focus.
Specifically, we need to reverse the sales decline trend in our DSD business.
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Addressed the significant inefficiencies in our supply chain that creates substantial and unnecessary expense.
And improve the processes.
And our execution throughout the various functional areas of the.
While these challenges will take both time and capital we do not see any fundamental reasons that we cannot execute on them as part of our previously discussed by the turnaround plan.
As a reminder, our five key initiatives are.
Executing our supply chain optimization.
Following our execution.
Enhancing our service.
Ability and building upon our competitive advantage with a coffee brewing equipped program.
And evolving our product portfolio through innovation.
And engaging our talent and refocusing our culture.
And of course, while we focus on these improvements to our operation.
Prudent cash and liquidity management will continue to be important financial.
Objectives.
I'd like to start with a more specifics status update on our progress with these initiatives.
First optimizing our supply chain.
With Rouven at a point is onboard in the role of Chief supply chain Officer, We've conducted a thorough analysis of our manufacturing and distribution footprint to identify the.
Right steps to optimize across both direct ship and DSD network.
We're continuing our efforts to de risk Houston by rebalancing volume from Houston plant to our other roasting facilities with the goal of optimizing our production capacity and assets.
Next.
Given at approximately 40%.
Of our customers are located on the West Coast, we believe that the lack of the West Coast distribution Center has led to inefficiencies in our distribution and transportation network.
We expect a west coast distribution center to help eliminate transportation costs and allow us to more effectively manage and rebalance inventory on a local basis.
In turn we.
Believed this will have an ancillary benefit of reducing scrap expense.
We're currently engaged with an engineering firm to assist us in the design and deployment of a more efficient distribution network.
Additionally, as part of our supply chain optimization initiative, we're continuing to reduce our skew count by consolidating blends by category.
Reducing the number of allied products, skews, and reducing components and packaging options.
Ultimately, we expect that this initiative will help us reach our goal of reducing inventory on the balance sheet and reducing scrap.
We remain focused on our on time and full metrics for our a and b products and substantially increase.
These during the quarter.
We are also focus on improvements in demand planning and sales forecasting.
Deficiencies in our demand planning and sales forecasting of them one of our largest contributors to unacceptable levels of inventory in scrap expense that the company has experienced over the last several years.
Finally, as you know in.
Recent quarters, we've consolidated branches and rerouted our sales representatives and we're also continuing to evaluate additional opportunities to optimize our DSD sales network.
As we continue to optimize our supply chain.
We expect to realize annual expense savings across a number of areas including in procurement.
Action and in distribution.
Our second key initiatives is elevating our execution.
We are continue see positive results from our route handheld technology pilot program that we discussed on last quarter's call and we look forward to fully rolling it out by the end of the calendar year 2020.
Additionally, our improved business.
Alogent store has continued to drive improvements in route productivity inventory management and team sales morale.
And has also lowered system maintenance costs.
We believe that our improved systems and processes will ultimately raise retention rates with current DST customers and allow us to capture new business.
Next our third key initiative is enhancing our service capability.
We are building upon our competitive advantage with a robust coffee brewing equipment program and more specifically.
Our refurbishment program that will allow us to reduce our capital need.
Managed cost and drive efficient capex spend.
We see additional.
I'll opportunity to drive utilization of our own restored equipment.
Ultimately contributing to an overall goal optimizing costs and driving program profitability.
Further the 24 by seven call Center pilot program that I mentioned last score is fully functioning as of January 2020, and running smoothly.
The National program is now.
I was giving us greater centralized information in insight into potential customer issues in the field.
This is already allowed us to be more responsive to any customer request and we believe this proved extremely helpful with retention and customer satisfaction.
We're also working to identify operationally efficient.
Ways to scale, our Roastery direct program and are now servicing approximately 2000 customers through this channel.
As we continued to build out our processes and system initiatives. We believe we will gain enhanced insights and visibility to our key customers and increase our ability to effectively serve them with this program.
Turning to our fourth initiative innovation.
We believe the great opportunities exists with our product portfolio to capitalize on the latest trends and shift in consumer demand.
Since I've joined Farmer brothers, we have identified areas, where we have not been offering our customers the products that they want to buy with a renewed focus on innovation we are optimistic.
We can provide farmer brothers the opportunity to improve same store sales as well as the ability to win new customers.
Im pleased to announce that Natalie Fontanella Outsole has joined a farmer brothers and the role of VP of product marketing and innovation.
She will be a key player in helping us evolve our product portfolio through.
Patient.
Natalie was the VP of marketing and research development and innovation for denote North America.
Now he has 23 years of experience in the food industry, having worked on various food categories.
He was also a member of the executive leadership team and led Earthbound farms marketing and innovation programs.
Natalie built an impressive.
The team of marketing Creative services project management, and research and development professionals, along with external agencies that focused on brand and category managed to improve brand recognition and grew the category through innovation go to market social and digital strategies.
I'm very excited to welcome.
Finally to farmer brothers family and look forward to working closely with her as we reinvigorate the organization through innovation.
In addition, we're making progress on expanding our sustainability of program across our product portfolio and equipment.
Our stellar sustainability practices differentiate farmer brothers, and we intend to continue pursuing.
During these efforts.
Finally, I've always believed that the foundation for success starts with people and culture.
And we have already made great strides in reinstalling, a winning culture here at farmer brothers.
We are in the process of expanding our work regarding culture and team member engagement with the goal of instilling a strong sense of ownership and.
Accountability.
We are committed to continuing to develop and retain talent.
And our also implementing a new recognition and reward program to keep employees engaged and motivated.
Has become very clear that this is a key component in our effort to return to operational efficiency in excellence.
As far as our search for a permanent.
CFO.
We are conducting a thorough search process to make sure we hire the right person for the ROE.
Im pleased to say, we are well into this process and we look forward to providing an update when we have more information to share.
Now turning briefly to our performance in the quarter in direct ship and DSD.
During.
In the second quarter that DSC sales channel was again impacted by decline and volume because of net customer attrition.
We understand the continued trend of declining revenue in our DSD sales channel is unacceptable we.
We are confident we can turn this around improved customer retention through execution of our key initiatives and.
Typically the work were doing and technology and our service capabilities as well as a renewed focus on innovation.
I continue to believe that farmer brothers legacy DSD network is one of our greatest strengths and is critical that we leveraged a network we already have.
As for our direct ship business, we saw direct ship.
Growth in comparison to second quarter of last year.
But revenue remains flat on a continued unfavorable customer mix shift and lower commodity prices.
We have completed a customer by customer profitability analysis.
And see opportunity to improve our pricing structure for certain accounts.
Sure.
Where it may be passed through discontinued the business.
We continue to see growth opportunities with our midsize and smaller customers, which don't require significant incremental investment of capital and people.
As mentioned last quarter these customers come to us for product development.
Whitman expertise and additional services.
Allowing us to achieve better margins.
We also recognize the importance of continuing to pursue our large national customers.
We will be disciplined in our future pricing in this segment of our business.
With an objective to ensure that every direct ship customer is positive contributor to the performance of the company.
Ultimately, we remain focused on balancing revenue and margin in line with our efforts to drive improved EBITDA for the company overall.
Before I turn the call over to Scott I'd like to acknowledge that while there is still a lot of work to be done.
Im confident that we're headed into right direction.
We have clearly defined plan in place to get.
This where we need to go and the progress we have seen to date is encouraging.
As I've said before our goal remains to drive revenue and EBITDA growth.
Looking forward to our performance in the backup for the year I'd encourage you to keep in mind the seasonality of our business. If you look at our historical performance the second quarter.
It is always our strongest and we expect to follow the same cadence through fiscal 2020.
Also as we execute our five strategic initiatives, we expect to make some investments throughout the remainder of the fiscal year to support the rebalancing of our production across our manufacturing network.
Scott will cover this in more detail.
While we may continue to see Choppiness in our results along the way I'm optimistic that initiatives. We are executing will put us in a position of strength for the long term.
I look forward to being able to provide updates on our continued progress on future, earning calls with that I'll now turn the call over to Scott for a more detailed review financial results.
Thanks Deferral now let me walk through our second quarter results, beginning with coffee volumes Green coffee processed and sold in the quarter increased by 2 million to 29.4 million pounds, a 7.2% increase over the prior year period.
The mix of coffee volumes processed and sold during the.
Order with approximately 9.0 million pounds or 31% of the total volume through our DSD network, while direct ship customers represented approximately 19.9 million pounds of green coffee processed and sold or 68% of total volume.
Approximately 500000 pounds or 1% of the total volume.
Was through distributors.
The improvement in coffee volumes reflects higher sales to several direct ship customers, partially offset by declining volume within our DSD network and the sale of our office coffee business in July of this year.
The increase in volume did not translate to higher revenues due to customer mix.
Mix, which I will discuss shortly.
Turning to the income statement net revenues for the quarter were 152.5 million, which is a decrease of 7.3 million or 4.6% from 159.8 million report Didnt same period a year ago.
The decline in net revenues was driven.
Even primarily by lower sales of coffee beverage and allied products through our DSD network due to net customer attrition as well as the sale of our office coffee business in July 2019.
Our direct ship sales were comparable to the prior year period, because the increase in direct ship volume was offset by the impact of coffee prices.
For our cost plus customers and unfavorable customer mix.
Gross profit in the second quarter of fiscal 2020 was 44.0 million a decrease of 9.3 million from the prior year period.
Gross margin also declined from 33.3% to 28.8%.
The decrease in gross profit was primarily driven by lower net sales of 7.3 million between the periods unfavorable customer mix between our DSD and direct ship sales channels and write down of slow moving inventories, partially offset by lower freight costs.
I'd like to discuss a few of these items now in more detail.
Excess slow moving inventories remained a challenge in the second quarter, resulting in higher inventory markdowns and scrap expense as we worked through excess product.
The majority of this expense was the increase our inventory reserve on our balance sheet at December 31.
Inventories continued to decline as we manage our working.
Capital more effectively compared to a year ago.
Our gross profit continues to be negatively impacted by higher costs in our manufacturing network.
As we announced last quarter, we have completed the sale and leaseback of our Houston facility.
This will enable us to rebalance volume across our roasting facilities.
Which intern should reduce future manufacturing downtime and other variable costs.
The proceeds from the sale have given us additional liquidity and flexibility.
Our coffee brewing expenses during the quarter were relatively flat compared to prior year. These costs continued to be a key focus area as part of the five.
Deferral outlined earlier.
We expect to see improvements throughout the remainder of fiscal 2020, as the controls and process changes take hold.
Turning to operating expenses, our operating expenses for the quarter decreased 17.6 million to 35.1 million from $52.7 million.
As a percentage of net sales operating expenses declined to 23.0% compared to 33.0% of net sales in second quarter, a year ago, which was driven by net gains on the sale of assets.
Excluding these gains operating expenses declined 5.8 million due to the.
Since avoids integration expenses decrease in selling expenses from the efficiencies realized on DSD route optimization and decrease in general and administrative expenses due to reductions in third party costs and lower head count as a result of several cost saving initiatives, we implemented this year.
This was.
Partially offset by higher employee incentive costs onetime severance charges and proxy contest expenses.
Net gains from the sale of assets are primarily associated with the Houston manufacturing facility and for branch properties of 7.3 million and 4.1 million respectively.
Interest expense in the quarter decreased 500000 from the prior year period.
To 2.9 million, primarily due to less borrowings on our credit facility.
Better working capital management has led to a decline in our borrowings compared to a year ago.
Other net in the second quarter increased by 700.
Thousand to 1.7 million in the quarter compared to 1.0 million in the prior year period.
This was primarily due to net mark to market gains on coffee related derivative instruments not designated as accounting hedges during the second quarter fiscal 2020 compared to net mark to market losses, a year ago.
Turning to income taxes, we reported an income tax benefit of 100000 in the second quarter fiscal 2020 as compared to an income tax benefit of 2.7 million in the prior year period.
The lower tax benefit is primarily due to previously recorded valuation allowance and change in our estimated deferred tax liability.
During the second quarter fiscal 2020 as compared to the prior year period.
As a result of these factors net income was 7.8 million in the second quarter as compared to a net loss of $10.1 million in the prior year period.
Net income available to common stockholders was 7.6 million.
Were 43 cents per diluted common share in the second quarter fiscal 2020 compared to net loss available to common stockholders of 10.2 million or 60 cents per diluted common share in the prior year period.
Adjusted EBITDA was 7.4 million in the second quarter of fiscal 2020 as.
Period to 12.4 million in the prior year period.
Our adjusted EBITDA margin declined to 4.9% for the quarter compared to 7.8% to the same period last year.
As you heard from deferral, there is a seasonality in our business and we expect adjusted EBITDA in the second quarter to be the highest quarterly adjusted.
The EBITDA, we achieve in the year as it has been historically.
Now turning to the balance sheet.
Overall, we've continued to strengthen our financial flexibility by reducing debt levels and managing our working capital more efficiently over the last 12 months.
At the end of the quarter, we had 9.1.
1 million in cash and 70 million borrowed on our revolving credit facility or 60.9 million in debt net of cash.
This compares favourably to debt net of cash of 85 million at June 32019, and 116.7 million from a year ago, our debt net of cash.
Menus to decline quarter over quarter and is the lowest it's been during the last several years.
As of December 31, 2019, the drawn portion under our 150 million credit facility, including 2 million committed letters of credit was 72 million compared to 94 million as of June 30.
2019.
During the quarter, our accounts receivable balance increased 5.2 million to 60.4 million compared to 55.2 million at the end of the fourth quarter and was down 19.1 million from 79.5 million at the end of the prior year period.
The increase.
Since June 32019 related to higher sales during the second quarter due to the seasonality of our business.
Overall, our age receivables have improved, causing our bad debt reserve to decline since June 32019.
Our inventory levels decreased during the quarter by.
$2.8 million to 85.1 million compared to $87.9 million at the ended June 32019, and are down 30.4 million from 115.5 million from the prior year period.
Accounts payable decreased during the quarter to 59.8 million compared to 72.7 million.
At the end of the fourth quarter and is down 18.3 million from the prior year of $78.1 million.
Turning to capital expenditures.
Capex for the second quarter was 3.7 million of which 3.1 million related to maintenance spend.
Our maintenance Capex has declined.
5.3 million from 7.4 billion a year ago, primarily due to lower planned spending on new coffee brewing equipment and an increase in our use of refurbished coffee brewing equipment, which has a lower cost per unit.
Depreciation and amortization expense was 7.6 million in the second quarter.
Versus 7.9 million in the same period of the prior year.
We expect maintenance capital for fiscal 2020 to range between 17 million to $20 million a decrease from fiscal 2019 maintenance capital of 21 million.
As Daryl mentioned, we expect our expansion capex to increase in the back half of the fiscal.
Year as we focus on our key initiative to rebalance production costs across our plant network and other strategic projects.
These are investments, we're making with the objective of driving EBITDA growth and free cash flow in future periods.
We anticipate our depreciation and amortization expense will be approximately.
The 7.3 million to 7.6 million per quarter during the remainder of fiscal 2020 based on our existing fixed asset commitments and the useful lives are intangible assets.
We expect minimal crude income tax expense and cash payments in fiscal 2020.
We expect our debt net of cash to increased slightly from 60.9 million at the end of second quarter to approximately 65 million to $70 million by March 31, 2020, due to planned expansion capex that I just mentioned.
As we refine the analysis of capital required to implement the different initiatives that deferral and I have.
Discussed on todays call, we're taking into consideration the company's financing needs and will ensure we maintain a conservative liquidity position.
We are focused on executing our turnaround strategy and 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 just press Star then one of your telephone to withdraw your question press the pound key.
Please standby lonely compiled that Kiana Ross I.
Again, if you have a question just press Star then one.
Well.
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Hi, My first question is Tom and Jerry Sweeney with Roth Capital. Please go ahead. Your line is open.
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Good afternoon.
Overall, Scott Thanks for taking my call.
Well Jerry Jen.
I apologize I got dropped for a little bits on maybe I missed some of us.
I had a dial back end.
But.
Wanted to just talk about some of the initiatives that you're looking at.
And in particular, maybe some of the items.
In terms of supply chain and they appear at least from an outsider looking and that they may become a low hanging fruit I want to see where they are when we're seeing any impact on margin improvements or when we can expect it in those two I guess areas would be the.
And rebalance and.
Maybe the SK counts.
Thanks for the question, yes from a supply chain perspective, we're starting to see the early signs of improvement in those areas I'll just add the on the rebalancing Houston.
That is front and center right now in the first component part of that and we'll see that come online by April and then we'll be executing more activity around.
The network from both one manufacturing too.
The DC hardest.
In the West Coast distribution network that we need to put in play to help drive supply chain savings and then there is going to come out and transportation, which will have an impact in regards to network. There. So from an execution perspective on those areas I'm very confident that is this year continues on.
Paul will see results within this year on those areas speaking the skewed as you know.
And Chris modern was in as the interim CEO. He really was pressing on the SKU optimization, we continue that work and we're dead center in the middle of executing many of those.
SKU reductions in I would expect Thats, probably some of the earlier work that we'll see.
Bear some fruit here in the coming months and quarters.
Got it and then on.
Just a follow up on that talking about the west coast distribution it sounds like it's a little bit.
And our medical with the rebalancing et cetera does that mean, a some capital outlay in terms of facilities or does that mean, a sort of restructuring of where facilities are and mapping out some better location or closing matting et cetera.
Any thoughts on that.
Yes.
It's definitely not a rebalancing in the context of utilizing existing infrastructure. We've we've evaluated that but this would be leased facility was some capital bringing that facility up based on the size and scale. We're in the midst of determining where we are.
I have to the network optimization study that will be that were performing which is anywhere from eight to 12 week tough study, we've got that underway and so as we.
Fine with good information and then.
While we are in that process will also be looking for the.
The site that we want to go into.
To assist with 40% of those customers as we mentioned being in the west in the total network. The fact that we bring product off the West Coast to then go right back to the West Coast.
The Northlake, Texas facility.
Has just been incurring a lot of additional transportation.
Since then we should never occur so yes, some amount of the capital over the coming quarters would be placed into that but as for basic things will do.
Lease situation on the facility and then will allow we'll look to further optimize the network from a branch in.
Overall, DC perspective, but it's clear that we need to west coast muscle.
Got it.
And then just switching gears ever to maybe as a direct ship side, if I heard of right on the prepared remarks, you've done a customer review.
That side of the business and it sounds as though you may have had.
Some either contracts or customers that maybe you're supplying coffee to on less than advent advantageous terms is that a fairway of candidates are some.
Opportunity too.
Gained by cutting on the.
Direction, but.
I think the best way.
I appreciate the question the way you're asking it I think the way I'd like to talk about it, especially on rationalizing is to focus first and foremost on topline growth in that category with a heavy focus toward being.
Favorable on an EBITDA basis, and I want to continue to reiterate that.
Thats the way, we're going to look at it and so we're out hunting new customers, we're evaluating exists customers and we're having good success across that category. As you saw we grew direct ship on a total volume bases in the Q over prior which I was happy to see.
And we're going to just continue to.
Along that path and we've got a lot of promise.
That category.
As we are working with our direct ship customers. So.
This is where if I see choppiness in the future you know.
We're going to focus on free cash flow and EBITDA and.
We'll see how.
Thats fair, it's out over the coming core.
And we'll report Laura you see more success in that category.
I appreciate those comments and I'll I'll jump back in queue. Thank you very much.
Thank you Gerry.
Thank you and ladies and gentlemen asset reminder, to ask a question just press Star then one to getting the.
Yes.
Our next question is Tom Kara Anderson with B. Riley FBR. Please go ahead Paul.
Hey, good afternoon guys.
Our goal here.
And I kind of wanted jump back to that traction question and I know you are comping kind of a rather lackluster to last year.
The volume.
And but any particular to call out was it really just two customers are you seeing strength across the board or Jeff is that.
Kind around the decision to target small and midsize businesses. If you could provide more color on that that'd be helpful.
Yes.
Take care this guy you know.
Im not going to comment right now is on specific customers, we delivered volume growth in our direct ship business in the quarter and are focused on continuing to deliver volume growth long term through improvements both our direct ship and DSD businesses. While also remain committed to increase in our EBITDA from from quarter to quarter, We may have.
And takes across customers, but as we mentioned in our prepared remarks, we have completed a customer by customer profitability analysis and see opportunities to improve our pricing structure for certain accounts aware, maybe best discontinue the business.
Lots and I'd say fair on that point is.
We definitely see a.
Thanks of some customers contributing more growth than we expected based on the segment of the industry as our coverage, which has been positive and we're continuing to.
I also think those relationships and of course as our national direction Celsion is outworking and as I've made many.
Sheer northlake, along with those customers along with going through visit customers.
It's clear that we have lots of opportunity across that you know.
Piece of business and we'll continue to focus on the ones again coming back to the ones that drive the most EBITDA topline growth.
Also impacts for cash flow so.
So.
We're continuing to do that bar.
Okay, Thats kind of follow up on that and ill that since you have completed your profitability analysis of the.
Can you just comment on sort of what the pricing environment looks like with respect to direct ship customers than our national customers.
Let me make sure you walk from a pricing environment or from a margin side or pricing environment. For instance are you seeing pressure on prices that you are going out there in bidding new business or even as you think about maybe going back in.
Renegotiating terms, what's the.
Yes, I think the comment the best would surmise that segment.
Or area of the business would be the industry's becoming more rational and we're being more discipline in regards to.
Working with these.
Direct ship customers.
Okay, and just one housekeeping question for me before I.
Bob.
Can you provide the total revenue contribution from roast and ground coffee in the quarter, either as a percentage of sales or just the dollar amount.
Sure so when the quarter, our it was 63%.
Total revenue.
Okay.
Perfect. Thank you.
Thank you care.
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Thank you.
And I'm not showing any further questions I would like to turn to call back to several masking rang raised his final remarks.
Thank you.
As we enter the second half the fiscal year. The entire team is motivated and focused on achieving our objectives and I see great potential and farmer brothers and I'm confident that strategic initiatives that we are focused on of the right. One and also continue to believe that coffee is a tailwind and not a headwind and I'm encouraged by what I've seen thus far in my first few.
[music] months here I look forward to continue to drive toward returning farmer brothers to growth and profitability and I. Thank you for joining us today and thank you for your continued interest in pharma.
And with that thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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