Q3 2021 Farmer Bros Co Earnings Call
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Welcome to the Farmer Brothers company to three physical of 2020 earnings Conference call. My name is the net and I'll be your operator for today's call.
At this time all participants are in of listen only mode. Later, we will conduct a question and answer session. During the two N. A session. If you have a question. Please press. The Star then one on your Touchtone phone I will now turn the call over to Jennifer Milan.
Thank you and good afternoon, everyone. Thank you for joining farmer brothers third quarter of fiscal 20th 21 earnings Conference call. Joining me today is the romance Rang, President and Chief Executive Officer, and Scott Drake Chief Financial Officer earlier today. The company issued its earnings press release, which is available on the Investor Relations.
[noise] section of Farmer brothers website at Www Dot Farmer brothers Dot Com. The press releases also included as an exhibit to the companies form 8-K and is available on the company's website and all of the severity of an exchange Commission's website at www. The S. E C Dot Gov, a replay of the audio on the webcast.
Will be available approximately two hours after the conclusion of this call. The link to the audio replay will also be available on the company's website.
Before we begin the call. Please note the all of the financial information cause that's the.
Unaudited in that various remarks made by management during this call about the companies the future expectations plans and prospects may constitute forward looking statement for purposes of the safe Harbor provision under the federal Securities laws and regulations. These forward looking statements represent the companies abuse only as of today and should not be real.
Light upon as representing the company's views as of any subsequent date results could differ materially from the forward looking statements additional information on factors that could cause actual results in the urban to differ materially from those forward looking statements is available on the company's press release and public filings.
On today's call management will offer you certain non-GAAP financial measures, including adjusted EBITDA and adjusted EBITDA margin and the first thing the companies operating performance reconciliation of these ma'am GAAP financial measures to the most directly comparable GAAP measures is also included in the company's press release.
I will now turn the call over to the girl. The girl. Please go ahead. Thank you Jennifer and good afternoon, everyone.
Thanks for joining us today.
Our third quarter would call added by continue execution of our business optimization the.
Including the doubling of capacity at our Dallas Fort Worth Texas facility.
The formal shutdown of our Houston, Texas facility and the opening of Bull ramp up of our new West Coast distribution facility and Rialto, California.
Spot the seasonality impact because historically had in our physical third quarter, we've experienced encouraging trends in our D. S. The business in recent weeks, which sells beginning to stabilize down into the mid to high twenties on the average compared to pre COVID-19 levels.
In fact, the week of March 29th was the best one we've had since the onset of COVID-19 with cells down only 25 per cent compared to pre COVID-19 levels. Further the month of March was the best month, we've had in terms of sales performance since the pandemic took effect, which drove the strongest gross and operating profit we've had.
This fiscal year.
Despite the anticipated choppy rebound from the pandemic of cross both markets and customer says we're pleased to see the business responding well now that we're consistently under the down 30 per cent Mark.
It's a good sign as our country continues to recover.
Geographically speaking.
Still filling the impacts and some of our eastern markets.
But we see encouraging data and our southern and mid western regions.
In the spot lagging reopening in California, and recent outbreaks in Oregon are most concentrated western markets of possibly contributed to a recovery.
And according to the Governor of California, and the Mayor of New York City, We can expect to see where you openings and those key areas as early as June 1st.
Overall, the fact that our D. S. D sales are down only around 25 per cent compared to pre COVID-19 levels is reassuring.
With respect to our in markets recovery trajectory varies from customer set.
The beginning to see consist of weekly improvements in our c-store markets and to even of greater extent within our restaurant segments how.
However, as you might expect we will still see headwinds and health care as.
Is waiting rooms, and cafeterias are still largely shut down the lodging and casino markets are also slower to ramp up in hotels and casinos have yet to resume serving breakfast or coffee.
While the recovery in these markets may take time, given the behavioral component of these activities.
The until.
We expect the segments to help drive cells and upcoming quarters as businesses reopen.
As we follow the path of sales recovery, it's important to remind everyone that with many of our optimization initiatives now of complete we believe that we don't have to generate the same top line numbers as we did pre COVID-19 to deliver comparable EBITDA.
That's due to the considerable and scalable efficiencies, we put in place that will benefit us tremendously Ah sales improve.
Let's turn to an update on our footprint optimization efforts.
As you recall when COVID-19 hit our initial objective was to stabilize the business.
Which was accomplished pretty quickly net.
<unk> returned to accelerating the execution of our turnaround through restructuring certain parts of the business, which is also now essentially complete.
Now with the most significant initiatives within our optimization plan in place we're zeroing in on smaller but important the items that will better position us as volume return.
Or west coast distribution fulfill the in Rialto is now fully operational.
We're pleased.
With the speed at which we open and fully ramped up production, which was completed the head of plan.
Rialto is currently exceeding our expectations in terms of total transactions per day and now shipping 6000 cases of per day vs. The 2000 cases, it was shipping per day, when we first open.
This facility is also now servicing thirty-three of our branches.
With the Rialto now fully ramped we've turned to our production optimization as we continue to modernize our facilities and work through some COVID-19 related challenges such as work force shortages and supply chain management.
While we experienced some one time caused the score associated with the process. We're now beginning to see the benefits of these efficiencies we designed into our plans, which will become more apparent as businesses rebound in the coming quarters.
It's also worth noting that we're currently undergoing consolidation of some regional facilities assets in Rialto or Santa Fe Springs sent to enter in Rialto branch facilities have been moved to held for sale and we will be consolidated throughout the next quarter.
Ultimately the cell of these assets will provide additional cash liquidity and further strengthen our balance sheet.
Turning to our now shuttered Houston facility.
The facility itself and the related land were sold in 2019.
And we have now successively auctioned off any of its remaining assets the auction exceeded our initial expectations and we will officially turned the building over to the landlord this month.
Additionally.
While any equipment or items from the facility that we don't need have been sold anything we do need from the facility has been transitioned into north Lake and is now fully installed.
The challenges. We're currently facing are ramping up our skilled workforce and increasing our scale of DFW as we work to balanced production as efficiently as possible across on manufacturing network.
As you probably know the nation is facing work force shortages in some sectors due to the lingering disruption from COVID-19.
And we're certainly not immune <unk>.
Further while we've avoided match the outbreaks at our facilities throughout the pandemic. Unfortunately, we've recently experienced some smaller COVID-19 sparks internally.
Which will continue to manage and balance going forward.
There are also some other macro challenges we're working through.
We're managing our product Lee tons of as best as we can and got ahead of most of the commodity pricing issues. We've seen creeping up we're still experiencing some supply chain delays.
With the COVID-19 related manufacturing shutdown in China, and the Suez Canal delay the shipping industry is putting of strain on our supply chain of.
As such some of our coffee brewing of equipment has been delayed and thus some installations.
We believe these issues will dissipate in the midterm, but expect to continue to feel the effects for the next 12 months or so.
We're pleased with how far we've come with our optimization plan and have now primarily reached are foundational near term objectives. However.
However, we're still working to optimize our production and Madaras our other facilities.
We've had our head down on staffing and getting people back to work which of proved to be of challenging endeavor.
We take pride in having some of the most skilled technicians and sales representative in the business and there is of training curve for new folks. So it takes time to bring them fully on board. However that time is well spent and our efforts.
Ultimately payback later.
Further we've strategically reviewed compensation to ensure we are competitive and attracting top talent.
Before turning the call over to Scott to run through our financials I want to quickly touch on R. e-commerce initiatives during the quarter, we launched our third E Commerce site for our China Misbrand.
With the ecommerce sites already up and running for public domain and Boyd's, we're now beginning to ramp up our marketing efforts to target retail customers directly.
Again this channels still makes up only a fraction of ourselves.
But we have plans to integrate ecommerce capabilities across the whole business.
So testing and learning all we can from these launches will be critical to the long term success of R. E Commerce business.
Lastly, we believe that the changes will be made over the past 12 months have significantly improve the underlying fundamentals of our business and are increasingly doing so however.
However at present.
There is still too much of uncertainty in the trajectory of recovery to provide meaningful guidance.
As vaccinations are increasingly made available the country become safer we are optimistic that we'll see increasing stabilization ultimately leading to recovery.
Once we begin to move toward of new normal will be in a much better position to provide color on what the new farmer brothers looks like from both a margin and performance perspective and.
In the interim we're focusing on completing the full optimization of our network.
Especially at of Rialto of Northlake facilities to drive incremental efficiencies that will benefit us as of business recovers.
With that I'd like to turn the call over to Scott Scott.
Thanks to rule the.
The three months ended March 31, 2021, we continue to make progress against pandemic headwinds.
While we reported declines in our DSD and direct ship sales channels compared to the prior year period. The results show encouraging sequential sales improvements in our DSD business compared to free COVID-19 levels.
Most recently in April average weekly DSD sales were down 27% compared to pre COVID-19 levels, which are the most robust sustained DSD sales levels, we've seen since the start of the pandemic.
For the third quarter average weekly DSD sales were down 36% compared to free COVID-19 levels.
As expected the most significant DSD revenue declines in terms of dollar impact, we're from restaurants hotels and casino channels, which of been slower to recover.
Overall, the trends have been heading in the right direction over the past 12 months, even with the seasonality. We've historically felt during this period.
We are now seeing significant improvements over the trough in April of 2020, when DSD sales were down by approximately 65% to 70%.
Our direct ship sales declined 23% in the quarter compared to the prior year period due to lower coffee volume related to COVID-19, and the impact of coffee prices for our cost-plus customers.
This was partially offset by improved volume from a retail business key grocery stores under their private labels and third party e-commerce platforms.
We also experienced a bit of of sales shift into the month of April with limited customers.
Our net sales in the third quarter of fiscal 2021, where $93 $2 million representing of decline of $36 million, 428% from the prior year period.
As a result of the continuation of reduced volumes from our DSD business are gross margin decreased to 25, 6% from 29, 4% year over year.
However.
The physical third quarter gross margin continued the trend of sequential improvement in each quarter of this fiscal year, which we expect will continue throughout the remainder of the fiscal year.
Net loss was $13 $7 million in the third quarter of fiscal 2021 compared to of net loss of 39 $8 million and the prior year period.
Adjusted EBITDA in the third quarter was negative $800000 compared to adjusted EBITDA of six $6 million and the per year period.
Note that the curtailment of the gain related to our Postretirement Medical plan is now complete.
With the plan sunsetting as of December 31, 2020, the amortization and gain has now ended.
As a result, we no longer benefit from the $7.2 million quarterly benefit that we have experienced in each of the previous COVID-19 impacted quarters.
As a reminder.
EBITDA EBITDA margin adjusted EBITDA, and adjusted EBITDA margin or non-GAAP financial measures.
You can find the reconciliation to the comparable GAAP measures at the end of the queue three financial results press release that we issued earlier today.
Our total operating expenses decreased by 48 $8 million to $34.3 million in the third quarter.
Compared to $83 $1 million in the same period of the per year.
These declines were attributable to of nine $2 million decrease in selling expenses and the absence of $42 million of goodwill and intangible asset impairments.
This was partially offset by of $2.2 million increase in general and administrative expenses due to bonus reversals in the prior year's third quarter and of $200000 increase in net losses realized from the sale of assets.
As the rural noted earlier, we also experienced some additional cost this quarter related to the new Rialto distribution center and the exit of our Houston facility that will not recur.
We have made considerable efficiency improvements in our operations as diverse as detailed and we expect those to materialize in our financial results as sales volumes continue their recovery.
It's worth noting that the most significant go forward cost savings will flow through our cost of goods sold and not our SG&A.
Which is one reason that we're confident that we'll see margin expansion over the next few quarters.
Notably as volumes do come back. We also expect some expenses to return as we bring back people to operate our round the end facilities.
However, the net impact will be margin accretive and we are looking forward to see what of fully optimized farmer brothers can do once the country as a whole reaches its new normal and fully open status.
Our capital expenditures for the nine months ended March 31 of 2021 declined 45, 6% from the prior year period to $12.8 million.
Which includes lower maintenance capital spend of five $8 million, partially offset by other capital spending of $7 million that was.
Primarily dedicated to key initiatives completed during the fiscal year.
The spending reductions were driven by several key initiatives, including of focus on refurbished CBE equipment to drive cost savings and reductions across some capital categories due to additional cost controls implemented during the pandemic.
This is the second consecutive quarter with reductions of roughly 50% in our year over year maintenance spend which were driven by the recent refurbishing trends.
Over 80% of our equipment was refurbished during the quarter vs less than 20% that was bought new.
In past years, this ratio was around 70% new equipment and 30% refurbished equipment.
However, we do expect the continued recovery in the U S and that will begin to limit our supply of refurbish of old equipment, and we think that will settle into of normal mix of around 70% refurbished equipment and 30% new in the longer term.
Regarding our third party CBE initiative to begin developing revenues from our service capabilities. We've also made strong headway and.
And with our new CBE back office infrastructure now built we've now started pilot testing and more markets.
The next steps of this test includes setting up detailed third party contracts with key relationships and building of dedicated website to help drive demand.
Turning now to our balance sheet.
We successfully completed of new financing agreement during the quarter, which includes $80 million asset back revolving credit facility and of 47 $5 million term low.
The completion of this new arrangement will provide us with greater flexibility and leveraging our assets at a lower cost of borrowing further solidifying R capital structure, and allowing us to return our focus to our customers operations and other strategic growth initiatives.
Ah revolvers outstanding balance was $88 million at quarter and representing of decline of $34 million since June 30th of 2020.
Our cash balance decreased the eight $5 million as of March 31, 2021, compared to $60 million as of June 30th 2020.
These changes resulted from the repayments on a revolver completed under the terms of our amended credit facility in July of 2020.
As of April 26th 2021, our total debt was $93 million and we had unrestricted cash of eight $2 million and $23 million of availability under our new credit facilities.
We also had restricted cash on hand of four $5 million used to collateralize or letters of credit on the old facility until the issue of the letters of credit on the new credit facility.
Overall, we're pleased with the progress we've made and we're looking forward to finishing our fiscal year in a stronger position.
We also look forward to providing you with better insights into the business hopefully in the near future. Once we gained better insight into how are now optimize business operates and of stabilized post COVID-19 environment.
Thank you and I will now turn the call over to deferral for closing remarks deferral. Thanks, Scott and thanks to all of you who tuned in for our call. Today. We're pleased with the recent trends in our business and excited to see greater benefits from all we've accomplished as the country continues to rebound in the coming months.
With government representatives announcing plans to fully reopen soon in certain markets. We look forward to updating you shortly on the substantial and fundamental efficiencies that will become increasingly evident as our volumes continue to recover and our efficiency scale.
We also look forward to reflecting on all of the hard work our team has put into affecting our turnaround plan and demonstrating the underlying strength of our business.
Thank you again and I am now I'll turn the call back over to the operator to field any questions operator.
Thank you we will now be begin the question and answer session.
If you have a question. Please press the Star then line on your Touchtone phone, if you wish to be removed from the queue. Please press the pound sign onto the hash key issue are using a speakerphone you may need to pick up the handset first before pressing the numbers. Once again, if you have a question.
Police price Star then one on your touch tone phone.
Will be a slight pause before the first question.
Okay.
Okay and.
Our first question is from Karen Anderson with B Riley Security go ahead.
Okay.
Hello, Karen.
And thanks for taking the machine and.
Can you start off is it possible.
The revenue impact from.
There were different day as in David versus.
The fourth quarter.
And then it had on the.
Sorry, not quite quite of your second corner.
Third quarter.
Yes, you are actually.
Which quantified as the the numbers game, the we put as the unusual item in there, but really it was more of a the Dallas area. Since our plans of based here. It was about a week long disruption of one kind or another.
And then we had obviously a little period of of recovery after that but I think it was more of a timing issue than it was really direct impact to revenues. It just caused us to have to move things around and doing a little bit of catch up but it did impact us a little more on the cost of that.
I guess I missed that in the release.
On the DSD business down 36 per cent I think from pre pandemic levels in the corner as a whole.
Can you or did you discuss how marks it kind of comparing April.
Given that you stayed in Michael.
Okay.
Yeah actually we we put the numbers in the the best way to think of it really we don't talk a lot about months, but if you were to break the Q3 months apart really January and February they look exactly like November December timeframe did the the impact of COVID-19 was really the same as we had the resurgence.
In kind of early to mid November all the way through February It was March where we really had the recovery and had much better performance within the business and it has continued in April so we talked about how in April of running down 27% to free COVID-19 levels and it wasn't quite that good in March obviously, it was still in the the thirties or so.
Okay, but much better than the turn of the floor is clearly 40, the low forties the of the month before that.
I understand and then in the direction of business.
There was a pretty big sequential change in the green pounds bold.
More than what I would expect for of seasonality can you talk about that.
Yes, yes, absolutely that was another one that would probably should've, maybe called out a little more plainly because of the number of discussions internally. We realized that was something maybe we didn't dress fully but you are right there isn't seasonality impact in there but on top of that we're also starting to the cycle. The exit of some of those customers we've talked about a day.
<unk> came on looked at the business and he interest in time to give the looking at the business. This is that timeframe, where some of those customers were in the last year's the results as direct ship or national account customers and they weren't in this year's results, but in the script. We also talk a little bit about how we had a little bit of of shift of of some of those sales just strict timing between.
March and April so again, it kind of got overstated in this third quarter here, a little bit because of that timing a little bit of which was due to the weather that we just spoke of.
And then I think cost-plus customers was another one where year over year, there was a little bit of a price deflation on some of those as well.
Alright, I understand that the.
Customers that are cycling out of like more of the customers. The also in the second one day, then and maybe like Rolling off think of large program Sir.
Yes, yes, some of the more and there were a couple of them are decent size that we're in the second quarter, yes.
Okay. So we're we're moving we're kind of hitting that anniversary of when the exited the business just out of your gourd just under your day.
Got it and then.
Any of that in giving guidance, but.
Okay threshold for when the <unk> get back to the attorney percentage of turning gross margin range that we can think about from the revenue perspective.
Yeah, it's really dependent on the pace of the recovery of.
Obviously hopeful that we'll get there sooner than later and we're very confident we'll get there. It's really a matter of a couple of key events that are coming up soon will give us some good information and one of those is obviously the the.
The opening this kind of plan for California. The third of June and then out East I think they are starting to look of dates around the start of July and kind of the drill noted in the script. The other parts of the country are really outperforming its the eastern the west that the.
Are still they're better than they were of certainly performing better, but they're still lagging behind the other parts of the country. So we're looking to those two key dates obviously, unfortunately, we won't get a lot of great information by the end of the queue four of it will start to see some of that in June and then obviously once we get that kind of of what we speak to the next few quarters, we think there'll be this kind of down.
He'll run with with both sales and Martin.
Got it and then this black the housekeeping question the breakout per copy revenue.
And the quarter.
Yes, so roasted coffee as the percent of the.
Total sales with 65, 2% for the quarter.
Great that day for me. Thank you.
You bet, Thank you and take care.
Okay.
And we have a question from Sam now Mary of Ridgewood infection.
Hello, I just wanted to follow up on the last part of the question that asked was.
Can you break out the places that are has been fully open.
Sales and the DSC business have been comparatively the pre COVID-19.
Sam I appreciate the question, but we haven't historically broken it out by region or branch publicly and don't plan to provide that level of information other than what we do with the level of that we've been providing.
Okay.
Okay and you just have an historically done it yet.
Competing of reasons.
Where the owner of the company talking.
Got it okay, but you mentioned like it's outperforms may be can you give a little more color of of what you mean by outperformed.
Yeah, just the the recovery rates are stronger and I just had the south of the Midwest.
This is kind of core areas of the country.
If you look at the adult net.
Whole decline they had during cogan.
Not only are they performing better the percentage of that the percentage of of.
They're just further back to where they were originally than the east and the west areas and obviously, it's primarily due to just the reopening trajectory of the states in areas and Geography's and of <unk>.
<unk> do here more fully or of falling as compared to the far east and West coast.
Specifically in New York and kind of the California.
Okay.
Okay.
Good for me I appreciate it.
Thanks.
Okay and with that we are concluding today's conference. We thank you ladies and gentlemen for participating you may now disconnect.
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