Q1 2023 Farmer Bros Co Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the Farmer brothers fiscal first quarter 2023 earnings Conference call.
At this time all participants are in a listen only mode.
Here, we will conduct a question and answer session and instructions will follow at time.
If anyone should require operator assistance during the conference call. Please press Star then zero on your Touchtone telephone.
As a reminder, this call is being recorded.
Joining me today are the raw math, Ryan 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 section of farmer Brothers' website at Www Dot farmer Bros. Stockpile.
The press release is also included as an exhibit to the company's form 8-K and is available on the company's website and on the Securities and exchange Commission's website at Www Dot FCC Darko.
A replay of this audio only 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 Companys website.
Before we begin the call. Please note that all of the financial information presented.
The audited.
And that 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 help me relied upon as representing the companys views as of.
Any subsequent date.
Could differ materially from those forward looking statements.
Information on factors that can cause actual results and other events to differ materially from those forward looking statements 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 and especially on the Companys operating performance reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measures is also included in the Companys press release.
I will now turn the call over to Darryl.
Please go ahead.
Thanks, operator, and Hello, everyone.
Our fiscal first quarter results showed continued good progress on rebuilding sales momentum post pandemic.
With revenue up 12% against an uncertain macroeconomic environment.
And I am encouraged by the traction, we're getting with new customers and some of our catalytic growth initiatives.
<unk>, they're in a moment.
On the downside.
Our performance reflects significant declines in gross margin and profitability levels in the quarter.
There is a complex set of factors at play here that I'll walk you through.
But while we're disappointed with the performance the impacts are largely very short term in nature and already beginning to reverse.
Along with that we are excited about the opportunities we have in front of us and are optimistic about our potential in fiscal 2023.
Let's start with a summary of sales performance and the external factors impacting the quarter.
Scott can fill in some of the details.
Our total sales came in at $121 million.
12% year over year.
So down slightly from $123 million in our seasonally stronger fiscal Q4.
Both DSD and direct ship sales were up approximately 12% year over year.
DSC is executing well on all Rollouts of recent new customer wins in the convenience and QR <unk> spaces.
We've also had a good quarter and customer renewals and maintain a robust pipeline of new opportunities that our sales teams are pursuing.
While we're certainly pleased with the sales growth and customer momentum margins did not keep pace due to a combination of pricing.
Seasonal and inflationary pressures.
Our gross margin percentage was down significantly in fiscal Q1 relative to Q4.
Both national accounts and DSD were impacted.
Roughly in equal measure.
There were several key factors at play.
First looking at direct ship.
While we have been seeing the benefits of our price increases in recent months.
The contractual increases for several of our large national accounts are continuing to follow behind cost inflation as their hedge costs have been accelerating will rapidly in recent months.
We already are starting to see the benefit of higher pricing and our current December quarter.
Additionally, a number of these direct ship customers, we're working off prior inventory builds in the quarter, which impacted our volumes.
Total pounds produced were down 13% on a year over year basis in the quarter.
With more than two thirds of the decline coming on the direct ship National account side.
Second.
CSD pricing increases are starting to come through but did not keep up with inflation in the quarter.
At the same time, we experienced the impacts of rising coffee costs at the same time, our hedges were beginning to roll off.
Astra abating the margin impact.
Third we have also seen higher average production costs due to economic factors.
Recessionary impacts on demand and longer harder summer added to the normal seasonally weaker consumption patterns in the business.
This along with the inventory drawdown I mentioned, a moment ago factors led to Underutilization in our production facilities.
These impacts were most pronounced in July in the first half of August but began recovering in September and through October .
Put these factors together and you have an unusual quarter that we do not believe will repeat.
What I would call the coffee related pressures.
Timing of recognizing price increases inventory draw downs and seasonal impacts.
Our already alleviating in the December quarter Scott.
Scott will share more but we believe we can recover more than a third of the year over year margin decline reported today during the December quarter.
However, we still face inflationary pressures like many businesses.
In our case those include reduced hours at certain customer locations.
<unk> shortages that are hurting food and other services businesses and ongoing supply chain issues.
As we reported to you today coffee prices have softened significantly from the fiscal Q1 levels.
Assuming these trends hold we will be in a much more favorable position as we move through the latter part of our fiscal year from a margin standpoint.
Below the gross margin line, we've done a very good job managing our optimized cost structure over the past couple of years.
But inflationary pressures raise the bar that much more.
We'll continue to take pricing warranted and be nimble in identifying and acting on cost opportunities as we move forward.
Further as you saw in August we completed a favorable refinancing that effectively recapitalize the company.
We're now moving full steam ahead on a company wide initiative with two primary objectives.
One working capital optimization, which will enable us to put more cash to work in the business and to executing on our roadmap to put in place the tools systems and processes, we need that will enable us to manage the business with more agility and better navigate industry complexity.
These like those impacting our Q1.
While we work toward margin recovery. The good news is we are winning in the marketplace and executing on multiple growth vectors.
As I talked about last time, we define our growth opportunities in two categories recovery base.
As our post pandemic customer base comes back to life, and as new customers and partners engaged with us and new opportunities that we call catalytic growth.
These include high growth Adjacencies that leverage our network, including alternate beverage initiatives and our revised business.
I want to start with revised.
Which is our vehicle for driving our express a program and also contribute as a white glove equipment maintenance and service businesses.
Revive is in growth mode now driving past mid six figure revenues per month demand is strong.
We are actively in discussion for various levels of warranty and field support with several large coffee equipment manufacturers and.
In recent months there has been a clear formalization of what was previously just indicated demand.
And that is validating.
Our job now is to implement our plans for ramping the hiring of service technicians.
We are ramping up our tech support staff and plan to double our team within the next year.
We're getting created there, including working with technical schools to accelerate the sourcing quality talent.
We have several exciting additional catalytic growth opportunities in various stages with Dol, including a few alternate beverage programs that I can talk about today.
The first is our partnership with Lotus plant energy, which produces a line of plant based energy drinks with natural flavoring and Kathy.
We're introducing four skus into our DSD network as we speak.
Research shows significant crossover between coffee and tea drinkers into energy drinks.
And these projects skewed toward millennial and Gen Z consumers.
We believe they fit very well with what we're selling into channels like coffee houses <unk> hospitality and more.
A second partnership with New Zealand surplus company shop.
Should be in launch mode by the end of the year.
<unk> has been a huge hit in Australia, and New Zealand.
Disrupted sharps product built from juice space and without artificial colors or flavors.
The sugars and flavors come from a higher juice concentration than used and typical served however, the real innovation is that they can do this in a shelf stable product that does not require refrigeration.
We're working with shot in New Zealand on manufacturing and supply chain logistics and should be ready to test launch this product in two U S markets before year end.
Finally in the back half of our fiscal 2023, we expect to launch a third partnership with a cold brew concentrate manufacturer.
Think of it as a concentrate that can be used in a multitude of coffee drinks like ice lataif americanos, Nacho dispensing and coffee milkshakes.
One other application that is phenomenal and espresso martinis, which potentially opens the product to be the fine dining and bar categories.
These are all beverages, where hot espresso does not work as well and because the product is shelf stable and in concentrate form. It can also be a more effective cold brew option for strength coffee drinkers.
We're completing work on manufacturing logistics and should be ready to test launch in the first part of calendar 2023.
As I wrap up growth opportunities like these are big part of the reason I joined farmer brothers.
We have the scale and the network to deliver disruptive products that can help drive topline performance and ultimately show the operating leverage we've built into farmer national footprint.
At the same time, we also know we're operating in a really tough environment and are focused on managing short term pressures.
We continue to also prune our portfolio when necessary and.
In the September quarter, we sold two branches for an attractive gain and we also decided to pause investment in our public domain brand in Oregon.
This was primarily an online brand and until we complete work on a consolidated backend e-commerce fulfillment infrastructure. It did not make sense from a cost protected to operate the brand on a larger scale than needed.
As we look ahead, we're cautiously optimistic I don't want to sugarcoat, the near term inflationary and recession uncertainty, but we do expect fairly rapid gross margin recovery over the next couple of quarters as we flipped the script on the near term pricing impacts.
We'll also be very focused on managing our costs prudently.
And Scott more on what we're also working on to improve our working capital position.
Before turning the call over to Scott I wanted to dress the news about our changes at the board level announced this week.
We greatly appreciated the ongoing input and engagement with our large shareholders, who have supported us on the journey of restoring farmer brothers operations and setting a foundation for profitable growth.
We reached an amicable agreement with two of our largest investors and look forward to welcoming two new members to our board, including Brad right up here in the immediate term.
As we complete the fiscal year. We are also saying goodbye to highly valued board members and Charles Marcy and Chris Marr, and we greatly appreciate their service and contributions.
No one wants to create value for shareholders more than this management team and the board. So we look forward to working with our new colleagues toward that objective.
With that thanks.
Thanks, again to all of you and here's Scott.
Thanks to all my comments today will focus on the first quarter fiscal 2023 financial performance, our margin and how we're managing the balance sheet along with some more color on the key initiatives you mentioned.
Overall net sales in the first quarter of fiscal 2023 were $121 4 million, an increase of $13 million or 12% from the prior year period the.
The growth in net sales primarily reflects increased customer pricing on both our DSD and direct ship networks, both of which generated similar sales increases.
These results were partially offset by lower volume in both DSD and national accounts compared to the prior year and the lag in recognition of price increases in the direct ship business.
That said DSD and National account revenues in the current quarter do reflect some of our historic pricing actions and that is helping offset decreased volume.
Volumes as deferral highlighted were down 13% year over year.
More than two thirds of this decline was on the direct ship side.
And of that amount two thirds was attributable to continuing customers and the rest to exited customers.
With continuing customers a healthy portion of the decline is attributable to inventory drawdowns within just a few of our key accounts.
Additional factors impacting volumes include the seasonally weaker summer months as well as recessionary pressures on consumption.
In the first half of the quarter, our COVID-19 resurgence impacted staffing levels and opening status at a number of customers within the DSD businesses that we support.
As <unk> noted the DSD business has recovered aggressively over the last two months and in fact during October we experienced our highest sales weeks since the start of the pandemic in about three years.
Week to week DSD sales are noticeably improved from our first quarter reported results.
Breaking down sales a little further DSD revenue was up nearly 13% year over year. As we saw continued sales channel success and benefits from the price increases that we had implemented in the prior quarters.
So these increases were not able to keep up with inflation and the most recent quarter.
We began implementing additional price and fee increases in our DSD business and the benefits of those will start to materialize in the current fiscal quarter.
Our direct ship channel sales also improved nearly 11% during the first quarter of fiscal 2023 compared to the prior year period.
We expect that Q1 will be the low point of our fiscal year on the margin front and we are already seeing recovery.
For perspective.
I'll share that of the Q1 year over year gross margin decline a little more than half was attributable to inflationary pressures on DSD margins and the remainder was attributable to the contractual delay in price increase recognition from national accounts.
The pricing and margin actions across the business now coming through are expected to drive at least a 200 to 300 basis point improvement in the December quarter with more to come in the latter half of our fiscal year.
Hedging impacts and outcomes, which are not core to our operations are the only other material wildcard that I see as I look forward at our margin recovery story.
Further <unk>.
Softening of coffee prices in recent weeks should that continue would provide a further tailwind for margins as we would finally face deflation to a key component of our cost structure.
In the first quarter of fiscal 2023, our operating expenses decreased by $2 3 million or 7% to $30 9 million from $33 2 million in the prior year period.
As a percentage of net sales our operating expenses decreased by over 500 basis points to 26% compared to 31% in the prior year period.
This decrease was due to modestly higher selling and G&A expenses offset by net gains from the sale of two branch locations during the quarter.
The increase in selling expenses was primarily due to an increase in payroll facility and fleet inflationary related costs.
The decrease in general and administrative expenses was primarily due to a gain on purchase of assets as a result of the settlement related to the Boyd's acquisition, which included the cancellation of preferred shares and settlement of liabilities.
This was partially offset by an increase in contract services.
Even when excluding all gains on the sale of assets and preferred shares from this quarter and prior year. The result still leads to meaningful improvement in the operating expense to sales ratio year over year.
Adjusted EBITDA.
Was a loss of $4 9 million in the first quarter of fiscal 2023 compared to income of $3 5 million in the prior year period.
And the adjusted EBITDA margin was negative 4% in the first quarter of fiscal 2023 as compared to three 2% in the prior year period.
Our capital expenditures for the three months ended September 32022 or $3 million an.
An increase of $400000 compared to the prior year period.
This was primarily due to higher CPE, our coffee brewing equipment related capital spend compared to the prior year period, as we position our revised business to capitalize on its growth momentum.
As of September 32022, the outstanding principal on our revolver and term loan credit facilities was $114 million.
An increase of $5 4 million from June 32022.
Our cash balance was $7 6 million as of September 32022, a decline of a little over $2 million.
Yeah.
Our net reduction in liquidity during the quarter was due to the continued impact of higher product and operating costs.
These uses of cash were partially offset by cash proceeds from the sale of branch properties during the quarter.
I would also note that despite inventory purchases and inflationary impacts our overall inventory balance was down in September compared to our June fiscal year end level.
We noted our attention will turn to working capital efficiencies. Once we completed our work on the debt structure. So it is nice to see improvement and I will comment more on this in a moment.
But first as announced in late August we completed a successful refinancing of our ABL credit facility, consisting of a new five year of $47 million first lien secured credit facility with increased covenant flexibility.
This refinancing was structured as a low cost transactional amendment to our previously amended facility and is expected to provide the company with approximately $2 million in cash savings per year compared to the cost of our previous debt structure.
In addition to lowering the interest rate and extending the maturity the refinancing eliminates the minimum adjusted EBITDA Covenant and allows for 15 year amortization on principal payments.
This structure gives us enhanced flexibility as we prepare for a number of the growth initiatives that <unk> highlighted today.
It is also set the stage for the comprehensive companywide working capital and systems improvement initiative that deferral headlined earlier.
Just to add a little more color when we complete this work, we'll be able to substantially improve our working capital management with access to critical tools data and new processes needed to manage the natural swings in pricing and cost that are inherent in the coffee business.
This project FX operating procedures metrics reporting practices contracts and agreements with customers and vendors and closely tied into our it roadmap work, which includes defining our requirements for the systems we use.
And we'll be using to operate the business well into the future.
Thus, we also expect some efficiency benefits as all of this is fully implemented over the coming quarters.
As an initial step to these efforts in the coming days, we're bringing online a new operations planning and ordering tool.
Which will allow for simultaneous users and collaborative workspaces that will provide improved data documentation visibility and clarify all responsibilities and a low cost stable environment.
We think the timing of this project works in our favor as margins recover from Q1 levels, providing the opportunity to focus more on reducing our leverage.
We will gain valuable information that will help to accelerate our previously noted and ongoing optimization efforts.
Wrapping up on paper this was clearly a tough quarter, but we view the impacts on margin and profitability is largely short term in nature and that view is supported by positive trends. We're seeing here in the first part of our fiscal Q2.
We do not think that our progress towards higher sales higher margins and higher profitability has been derailed only delayed by the factors noted.
We continue to execute on profitable growth initiatives from customer growth to new products and achievement of internal operating efficiencies and working capital improvement.
Of course, the additional headwinds for macro uncertainties will play a role in our performance looking forward, but we're confident that we're in a good position to again build positive momentum into the business as we move through fiscal 2023.
With that I'll now turn the call back over to Darryl.
We will now begin the question and answer session.
To ask a question press Star then one your telephone keypad using.
Using a speakerphone please pick up your handset before pressing the keys.
And withdraw your question please call <unk> at.
That's the primary pause momentarily to assemble our roster.
Our first question will come from Gerry Sweeney with Roth capital.
You May now go ahead.
Good afternoon, Darryl Scott Thanks for taking my call.
Hi, Jerry.
I wanted to start on the margins, obviously, a little bit of a disappointment there and I know you spent a little bit of time on the call on it and I think you said half DSD and direct ship.
Just wanted to understand it a little bit more clearly it sounds as though.
And correct me if I'm wrong.
That there were hedges I'm not sure if the hedges begin to roll off but even at that point.
The hedges reduced your cost of goods sold so when they did fall off.
Costs of your coffee went up.
And this was not.
I guess.
And that increase in cost was not accounted for in higher pricing with your customers at that given point.
Did I summarize that correctly.
Yeah, Yeah, Jerry you did you get that right and just the easier side like the national account side, where it's just a contractual delay youre exactly right with the hedges were basically maturing people are using their hedges over the last year and so if you imagine that because coffee prices have been in that $2 20 to $2 40 range for quite a while we have many.
<unk>.
If you had hedged like most people do in a six month nine month 12 month window.
And what was happening is really until very very recently, you know Q4, and Q1, you were effectively because of your hedges, having much lower priced cost of coffee the.
The hedging program worked and really what we're trying to portray there is the acceleration of that cost was has been much more dramatic. So that's the impact before we can pass that through to those accounts.
So the key question here is I think people will probably want to understand is why does it stop working because the hedges rolled off and what that you was that the customer.
Just some kind of mechanics in the contract.
The contract rolled over because it was a new year and there was a cap this is.
So I'm trying to.
Figure this all out yes, let me let me answer it this way.
Let's just get right to cut to the chase what was a surprise for us and it really was prescribed on margin to the question Youre asking it really comes back to one was on the volume side large national account businesses, we're working off inventory in the queue.
If you remember gearing that Q.
We had a lot of national customers and companies.
I'd taken on additional inventory.
<unk> product and then they got long and the demand was not yet there in early July and August it Didnt start to come back until the back half of the kit. So the recession was impacting now the reduction in orders was a surprise for us and the volume we projected didn't come through and we'll need to re platform that.
Current reality, if that continues and we're watching that incredibly closely.
Chip prices.
And the pricing as Scott just alluded to was.
It was reflected the hedges rolling off and then we're now in one case, our largest impacted customer that we serve.
Impacted us and didn't get the price change per the contractual arrangement until October 15th and so now we're seeing that and we will make that up in the coming Q as reflective of what occurred in the last year.
So those were the two things that.
We didn't think would happen to the level they did.
However have and we are now reacting and doing many of the things that Scott pointed out in his comments.
In the prepared remarks, and then just plain and simple on the DSD side, Jerry its hedging as a part of it but we.
We simply didn't keep pricing ahead of all the inflationary pressures in coffee and all the other things we're facing like everyone else has as well it was just a simple fact.
Yes.
So we have new pricing going in in November and effective December four so let me let me just say another thing Jerry I'll, probably ask this question I think it's imprudent. It would just get out there and share direct fire away.
How is how are these margins going to trend throughout the rest of the fiscal 'twenty three which obviously has a tag on to the question. You are asking units. We believe recovery is underway based on the data and the information we're looking at in the current Q and volumes as we said in prepared remarks, we had our best week in DSD literally pre.
Pre pandemic, we expect to be back on our targeted trajectory exiting this fiscal year into Q3 and four.
I will caveat that by.
Macro uncertainty, but we're going to have to take.
Pricing and we've got a pricing move.
Coming up in this current month.
<unk>.
We have other levers in place that we are working through it.
If the economic picture darkens.
Further, but the overall impacts of accounting are still somewhat unclear and we realize that we're going to have to play knowing that that's the case until it reverses and we see more pickup on the inflationary side, meaning that inflationary reduces.
Got it.
Sure.
Are you seeing any let up on the inflationary side, obviously green coffee beans.
Any let up on inflationary side, yes, we had seen some trucking rates.
Fuel to a degree but I know you watch the news closely as we do and we're watching this diesel impact.
Given that we're at the lowest levels of diesel in the U S and who knows how long that impact is obviously concerning so.
So we're looking at options to from rail, but then you know post the mid terms, we let's see what we see in the rail situation in the country. We're hopeful that that doesn't go in a negative way or trucking.
Surcharges increased because diesel deciding to take a further run up which would impact and also.
The other thing that we're really positive on that will help mitigate some of those let's say U S. Inflationary impacts is the fact that for the first time, just as we've seen coffee break.
And come down we saw 169 literally in the last two weeks it came back up over the last couple of days.
We're expecting that to continue to trend in that until the harvest comes in but here's the other big impact is we know that differentials had been historically at the all time high and we saw massive breaks and differentials in the recent weeks.
Towards the downside, which is also going to be helped to a large portion of our cost basis. So those are couple.
Got it how long does it take for lower coffee prices.
I think you screen being green coffee.
[noise] prices to work into the fifth Yep.
Yeah. So that's an interesting one.
I'll break it into two parts because on the national account or the direct ship side, we work with those customers and its really their book each of them, we help them with the trading and with the industry insights in the market insights, but they all kind of build the book to their own specification. So it's a variable answer on that side of the business, but again, even if prices fall will follow.
The contractual norm. So we will always beyond kind of the historical cost structure of the prior 90 days as we go forward that keep rolling that forward. So there'll be a just like there was a lag in the pricing going up there'll be a lag in the pricing coming down some of those customers will start to see the benefit of lower pricing within.
I would say are just one or two quarters some of them. It's much further some of them have hedged out nine months, even 12 months. So it will be a longer tail on those customers.
For us personally on our DSD account.
Have been kind of trending the market closely and U K.
Oh, Hey, there.
Scott.
Yeah.
Okay.
Pardon me Scott deferral.
We may have lost him there Mr. Operator, iron will reconnect them just one moment.
Please wait one moment of a reconnect the speaker line.
Sure.
Okay I've joined the Speaker line Bakken Jerry Your line is still open Hey, Scott I lost you at DSD.
You went through a direct ship cofferdam apologies apologies system I don't know what happened maybe a power issue in the building or something but we got dropped.
What we will do already so yeah.
Yeah. So DSD you can tell if you look closely at the materials that are in our Qs that the amount of hedges, we have out there, but effectively what I can say is that based on market conditions and what we've been seeing recently is that we've been shortening up our hedge book quite a bit. So we will have benefit from these lower cost if the lower cost continue in the back half of the.
Fiscal year <unk>.
Won't have to wait for six 912 months.
Fitness and a back half of this fiscal years have sorry, yeah. Yeah. So the March quarter. The June quarter will start to have some good benefit from the lower cost or if they continue.
Okay.
Switching gears to maybe the gross side revive.
You made a comment about doubling workforce I think over the course of the year.
Now revive is a new business per se right. Your white label that are maybe not necessarily in your business, but how many tax do you have in that business. Because you did have tax before your white labeled it so.
I'm just curious as to what really that baseline is on the doubling of the on the <unk>.
Yes, Youre right.
And it's not a new business, but it's new in the context that we're expanding.
Third party areas that previously were offered out to third parties, it's new in the context that we're adding new manufacturers across the board that we we did not provide service and support for and it's also new in the context that we're adding.
Accounts that.
Our coffee type customers.
Have equipment that can be serviced and that we're servicing that our current baseline of 120.
At the present roughly.
And growing weekly.
We have exited demand that we are covering as we add new techs in key markets, where the demand is incredibly strong unmet.
And that's what gives us excitement that leaves <unk>.
Avenues of increasing the current amount that we have been.
Handling, we know is real and it's profitable and it's accretive to the business and it will make our overall network both on the BSD side and customers. We serve there today that were served heavily to third party will be able to add those.
With a revived tech and then add.
Non DSD farmer brothers accounts.
Be it manufacturers or other clients that want to service. So it's very exciting and will start continuing to report more and more as this is becoming a substantial substantial impact to our overall network.
I think you said in my.
Prepared remarks mid.
Six digit.
Is six digit type revenue on a monthly basis for our revive correct.
Yes, Joe.
Right.
Right.
You have a 120 tax of that 120 only partner you're some of them a lot of those texts or a portion of them are servicing your DFT or existing clients and that revenue is baked into coffee prices.
That there's clients pay for so that does not admit that a six digit revenue doesn't.
Certainly reflect that so.
If you double your.
Base of <unk>.
Tax that's projecting I'm assuming that's.
For this that's going to project that is going to be substantial type of revenue opportunity.
Yes, you understand what I'm, saying, absolutely we agree with you on that point and I would also tell you that with the new.
General manager, we brought in to lead this business to really take it to the next level. He would tell you that even on existing DSD customers that we're starting to change the way.
<unk> the service of those with a kind of a platinum gold silver approach some cases selling them equipment, some cases than selling them a service contract that equipment. Some cases, having a service contract only or in large accounts that.
<unk> volume in the traditional way, we're providing that service, but we're also changing the frequency by which we service.
On a.
Periodic basis for maintenance and and if it's something that comes in and it's a one off.
They're asking for a frequent service in their machine is in good good order, but somehow it. It continues to break we're looking at ways to charge for those services, where it becomes.
Well above the cost basis of what we had projected so lots of different.
Work, we're doing to model this out but to your point.
It's going to be higher protect that we add in total revenue per technician as we go forward and get to this.
Potential of dubbing doubling here in the next 12 months so it should become.
We're seeing it now and as we've not reported in the past.
How big we think revive can be where we are much more pro in terms of the size.
The overall margin impact it can have to the business. So we're we're not yet prepared to give you a range of just how big it can be but we're trying to start to tee that up as we've done the last two quarters and give you a better sense and we will get deeper and deeper into that to give you more.
Information as we continue to grow it and right now we just land one of our first largest manufacturing contracts that we're executing and that's really exciting and we expected more of those or are here to come and if we have the techs to service it.
<unk> is already there.
Got it how about I know you don't want to protect on how big it can get but.
Profitability.
Yeah, the beauty of that model as we've talked about a little bit is the core cost of that business is already in our financial numbers. It's been a part of the business because of DSD for many years. So all of the incremental dollars that we add you know primarily in tax we're adding.
Because they are accretive to the business so.
I'd like to think of it as a highly leveraged model and yes, we will have some cost increases, but they're they're more than justified by the revenue increases and again as Daryl said, we're in this kind of unique spot that we.
We're very fortunate.
Is we are fulfilling demand, we're not having to identify and chase demand. We're literally at this point fulfilling demand as quick ones, we can with tax.
What kind of keep you abreast on when that changes, but we think thats quite a runway for the next several quarters at least of just being in that mode. So the obvious question that most people ask us well with labor the way it is today.
Do you think are even going to get one additional tech much less doubling of your current over the next 12 months and the rally is we're going to we changed our.
Recruiting model, which is effectively working right now is 0.1 0.2.
We're working with a large tech service school here or will be actually.
Training and minting new techs.
Through a technical school with our curriculum in their curriculum combined and then given these folks a job as soon as they come out of that.
Of the Tech school, and then into the workforce with a training program.
Our new <unk>.
Head of learning and development training is helping develop.
That's why we have some assurance it we're very bullish on revive in the present structure, because we crack the code and I think even in this environment. We know we can win and we're going to do everything in our power keys.
And better than having a.
A piece of your business that youre not chasing demand. The demand is there if you can learn to fill it and execute against it with good margins and higher margins because of the cost base that Scott just alluded to.
That will be leveraging that.
Fixed asset the chair today.
Got it.
I'll jump back in line I appreciate it guys.
Alright, great. Thank you Gerry.
It appears there are no further questions Gerry do you have any follow ups you may present them now.
I appreciate it thank you.
Okay.
This concludes our conference I would like to turn it back over to <unk> for any closing remarks.
Well, thanks for the questions I'll close by saying that while we're disappointed with the outcome of the quarter.
That gives a format.
<unk> proved short lived.
Near term, we're recapturing momentum as we get through the lag impact of our price increases and we believe that we are positioned well heading into lower cost coffee price environment with a shorter hedge position and our book most important for the long term, we have not been distracted from foundational initiatives underway to achieve.
Farmers potential.
Those initiatives include the obsolete the optimization, we've made to our business operations, winning new customers broadening and monetizing the product portfolio, we pushed through our national distribution footprint.
And investing in the systems that will make us more nimble.
All of these initiatives along with better data and insights should drive higher levels of performance. We appreciate.
At our investors' interest and support and look forward to keeping you posted on our progress.
Have a great evening.
Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
Okay.
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