Q1 2022 Farmer Bros Co Earnings Call

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Thank you for standing by I'll walk up to the farmers brother Company Q1 fifth of 2022 Ernie topic call at this time, all participants on a listen only mode.

After the speaker's presentation there'll be a question and answer session.

To ask a question at that time. Please put starred in one on your Touchtone telephone.

As a reminder, today's conference call is being recorded.

How would I like trying to come up with your host mechanical Mallette Nancy may begin.

Trading performance reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measures is also included in the country's press release I will now turn the call over to Deborah <unk>. Please go ahead.

Thank you Jen.

Good afternoon, everyone.

Thanks for joining us today.

The first quarter of fiscal 2022 represented the fifth consecutive quarter of sequential improvement and three critical measures for farmer.

<unk> sales volume.

Gross margin expansion and production at our DFW facility.

Starting with the top line sales continued to trend favorably.

With total net sales up 11, 4% year over year as volumes in both of our core channels continued to recover.

The structural and operational changes we've implemented into the business led to 600 basis points of gross margin expansion year over year, and 200 basis points sequentially to 29%.

We are experienced our best DSD volumes during the quarter since the onset of the Covid and those trends have continued to improve in recent weeks.

PST sales were down around 25% compared to pre COVID-19 levels in our fiscal first quarter.

This compares to down 41% in the corresponding period of last year and down 27% in the previous quarter.

We're very pleased with the sequential improvements materializing, our topline numbers and gross margin.

Especially considering the headwinds presented by the Delta variant and the lingering effects of the pandemic.

Such as inflationary freight costs labor shortage.

And other challenges elevated coffee prices and the yet to come full normalization of consumer behaviors.

Despite these challenges and the fact that we're still operating under significantly reduced DSD volumes compared to pre COVID-19 levels. It is clear that the improvements we have executed are demonstrating the leverage opportunity in our business model as market conditions gradually improve.

Our gross margin is now just below 30%. Despite the continued reduced volumes, we're operating under so we're eager to see how the business responds once our volumes fully recover and even start to grow beyond that.

Our pre Covid historical range hovered in the low to mid thirties.

We're also seeing improvements materialize within our operating expenses.

Although that's progressing slower than our gross margin recovery.

<unk> due to the elevated labor and freight cost with.

With the bulk of the turnaround initiatives behind us and volumes continuing to recover our focus remains on right sizing our expenses against our sales levels.

Prioritizing the most impactful expenses and continuing to implement new cost control procedures, such as restructuring our internal invoicing processes.

The consistent and sequential improvements in our gross margin speaks volumes to the optimization efforts, we've been communicating and executing on over the past year.

With increasing green coffee prices.

Elevated ocean shipping and trucking freight costs rising labor costs and shortages, both internally and those that are pass through higher wages and increased input costs.

Which are largely impacting our allied products.

Incredible to see how we proactively been able to mitigate much of the headwinds to date.

With very minimal upfront investment.

With our inventory now fully optimized we continue to see incremental improvements in the Q and in our throughput and are now finding new ways to optimize packaging such as the utilization of more efficient packaging solutions, such as Super sacks.

It's great to see our efforts starting to meaningful take hold in our manufacturing capabilities, mainly because much of the margin expansion. We've seen over the past few quarters has been driven by our footprint and network optimization initiatives.

Aside from our footprint.

We're also seeing our efforts in shifting our customer and inventory mix, helping drive margin expansion as we mentioned on our last call. We began rationalizing our product skus and optimizing our customer base for profitability in 2019.

Since then we successfully reduced our SKU count by nearly 50%, resulting in a more profitable product portfolio overall.

On the customer mix side would continue to make progress on our <unk> initiative.

We've now exited a meaningful amount of less profitable tier five DSD accounts and continue to look for new more profitable ways to repurpose tier four accounts.

Peru on some ready to drink coffee products.

Further we began to pilot testing new plant based beverage with our institutional foodservice channels during the first fiscal quarter.

And partnered up with Clypeate farms to launch a plant based Creamers and joined forces with sugar Rx on a new low class Hemic sugar product as.

As we move forward, we continue to look for new partnerships and opportunities to leverage our national network and footprint as well as other ways to solidify ourselves as a specialty beverage distributor.

Lastly, we continue to make inroads in our coffee brewing equipment servicing operations or CBE.

In fiscal Q1, we officially branded or CBE offering to revive service and restoration from now on we'll be referring to all things CBE as such.

Revived will operate as an independent arm of farmer brothers and will provide equipment servicing to both rds and our DSD customers.

In addition to marketing their service capabilities beyond our current customer base.

We've already launched pilot programs in five geographic regions. We believe this official rebranding and restructuring of our equipment servicing offerings will allow our technicians to provide better servicing to our existing customers enhance our equipment technology and provide additional revenue opportunities as we bring new external.

First quarter with direct ship sails down five 7% on a year over year basis.

Unfortunately, the fallout from the pandemic and the associated supply chain complexities put downward pressure on some of our customer's businesses.

As such we optimized our direct ship customer base and exited several of our less profitable accounts throughout our fiscal 2020, and 2021 years, which has created tougher year over year topline comparisons, but it's the right decision for the business as we look to drive profitability improvement.

It's also worth noting that these exits are largely already accounted for and the most challenging year over year comps are now behind us.

The good news is that the declines continue to be partially offset by rising volumes, including significant new customer wins as our newly refined sales strategy continues to produce tangible results in both the direct ship and DSP businesses.

Looking ahead any large swings we experienced within our direct ship volumes will likely be from our core optimized customer base.

Our net sales in fiscal Q1, where $108 million, representing an increase of about $11 million or 11, 4% from the prior year period.

Net sales increased primarily due to the continued volume recovery within our DSP business as we processed and sold more green copy and benefited from improved allied product volumes.

Our gross profit in Q1 fiscal twenty-two was $32 million, representing an increase of $9 million from the prior year period.

At the same time or gross margin continued to expand and was 29% at quarter end compared to 23% in a year ago period.

As <unk> mentioned are gross margin has improved sequentially in each of the past five quarters.

Despite the reduced volumes were still operating under we essentially matched our pre COVID-19 gross margin from two years ago, which was 29, 3% and Q1 of fiscal year 2000.

We're pleased to see that all the structural improvements and efficiencies we've put in place continue to positively impact our margins and help to offset and mitigate some of the cost pressures we're managing through.

The prior year period.

As a percentage of net sales this equates to roughly 31% compared to approximately 35% of net sales and Q1 of last year.

The improvement in our operating expense was primarily driven by a $5.2 million quarterly increase in net gains from the sales of two branches.

Which was mostly offset by a $2.5 million increase in selling expenses and a $2.1 million increase in general and administrative expenses.

The cumulative increase in our SG&A expense was primarily due to higher payroll related expenses as we continue to bring back more employees as sales volumes recover.

More specifically.

In Q1, compared to an ending balance of roughly $10 million in the prior quarter.

The cash used was primarily on inventory as we ramped up our levels ahead of our peak season and payouts on our fiscal 2021 employee incentive plan.

These were partially offset by cash proceeds from the sale of two branch properties during the quarter.

Our net debt, which we define as the gross amount borrowed on the revolver and term loan balances less cash and cash equivalents was $83 million at the end of fiscal Q1 compared to $81 million at 2021 fiscal year end.

Thank you and I'll now turn the call over to the operator to answer any questions.

Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press Star then one on your Touchstone telephone.

<unk> asked the question request Star then one.

We have a question from Gerry Sweeney of Roth Capital. Your line is open.

Hi, Good afternoon deferral, Scott Thanks for taking my call.

Thanks, Jeff.

I was curious if you could maybe describe how much of an impact.

Yeah.

And to all the mitigation on cost avoidance that we're having as we manage our supply chain.

Ocean freight and transportation freight I'll turn it to Scott for any other maybe specifics that he can give you yes.

Definitely impacted us and as we've talked about we just did our year end release in September and so at that point. The Delta variant was still pretty strong. So I think the only thing I would really add to what <unk> said was that as we've more recently seen the delta variants of case counts really fall away.

We've also seen a similar acceleration in our DSD recovery. So it's definitely been tied to the Delta caseload.

I will tell you we'll continue to see we're continuing to see our best weeks and in fact, we've seen some of our best reported days.

That would be the best days of sales that we've had since the outbreak of Covid and that continues each week as we progressed through so we're very hopeful with all the work that everyone is doing and specifically.

Across our country on a federal state and local level.

<unk> pockets that we're seeing a lot more recovery and then we're still seeing some still lag and haven't totally return and then as you saw in her prepared remarks, we still see.

Ponant.

On channels of distribution.

Where theyre showing up more progressive we still haven't seen breakfast come back in full view and all hotels, even though hotel occupancy continues to be an all time high. We're just now starting to see conventions in concerts come back at more of a normal level. Thus the products that we sell into those channels.

Or having a <unk>.

Slow recovery C stores are rebounding better now that they've taken the coffee and tea from behind the register and put it back out into the bars.

With so much burden on the RSR and that is a absolute balancing act each and every other day.

What we're really trying to do is just make sure that we focused heavily on.

On the health and wellbeing of our team members and making sure that.

We're doing as much as we can given the peaks that are occurring in any one of these good markets, but we will watch that we know that thats a key statistic.

And the question Youre, asking we expect it to continue.

To be an area, we will not go back to the same structures that we had pre COVID-19 that we've set to the street, we will continue to say that and we feel very good about that.

And so it will be a different organization as we continue but we'll layer cost back in as we absolutely knew too. So that we can continue to grow DSD sales at the frontline.

Got it.

And then one other question I know you've touched upon it inflationary.

Adams.

So there's a lots of pack in the prepared remarks, but.

Could you go over some of the levers.

Obviously, you have pricing power I am not sure how often.

How hard it is to increase price or how often thank.

Thank you also even have fuel surcharges available in the past.

Yes.

Plus some other items, maybe describe a little bit more detailed these levers that you can use to manage it.

Now first and foremost alternatives to Scott I don't want to give a couple piece of context, it's a very pointed question.

Unprecedented time that I haven't seen in my 35 years and that being said.

<unk>, a 401k cash match those types of things as well so that was a little bit of incremental costs quarter over quarter. That's in the P&L, but still we're making sure we control those costs and keep them in line with the rest of the P&L. So that we're still getting contribution gains to the bottom so.

So that was one key point I think the other key point I would make and I think you called it out in one of your research notes and it was a great way to lay it out I think it is very true. So all kind of a firm. It for Ya is you talked about how you think we have pricing power. We can put in these fuel and free surcharges into our business, but it may lag a bit with the actual cost.

Coming in the business and I think that we're currently in a mode, where we're seeing those costs, obviously come in and come in rapidly in some cases, but we are instituting.

New surcharges, and some new pricing as well, but we're in the process of rolling that out so that will kind of continue and really be impacted.

Fully impactful by the end of the quarter, but we're kind of in the process now, whereas the costs are really here first so there is a little bit of a lag between that catch up but we're trying to manage that is closest we care.

Got it okay.

Great.

I think a lot of people are trying to see what you guys can do is.

Come back so great quarter. Thanks for thanks for taking my question.

Back in line.

Thanks, Jerry I appreciate it.

Okay.

I'm showing no further questions. It's time to turn the call back over to the Royal National Bank, So any closing remarks.

Thank you operator, and thanks to all of you who tuned into our call. Today. We are pleased with our continued quarter to quarter improvements as we navigate COVID-19.

The recovery as.

As you can see is progressing in our strategy, having the impact we expected.

Yeah.

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