Q2 2023 Farmer Bros Co Earnings Call
Okay.
Good afternoon, and welcome to the Farmer brothers fiscal second quarter 'twenty 'twenty earnings Conference call. At this time, all participants are in a listen only mode.
Later, we will conduct a question and answer session and instructions will follow at that time.
If anyone should require operator assistance during this conference call. Please press Star then zero on your Touchtone telephone.
As a reminder, this call is being recorded.
Joining me today are about my thorough president and Chief Executive Officer, and Scott Drake Chief Financial Officer.
Earlier today the company issued its inaugural quarterly shareholder letter, which is available on the Investor Relations section of farmer brothers' that site at Www Dot farmer Bros. Dotcom.
The shareholder letter is also included as an exhibit to the company's form 8-K and is available on the company's that site and on the Securities and exchange Commission's website at Www Dot S E C Dot com a.
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 company's website.
Before we begin the call. Please note that all of the financial information presented is unaudited 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 regulation. These forward looking statements represent the company's views only as of today and should not be relied upon as representing the company's views as of any subsequent date.
Results could differ materially from those forward looking statements.
Additional information on factors that could cause actual results and other events to differ materially from those forward looking looking statements is available in the company's shareholder letter and public filings.
On today's call management will also have friends certain non-GAAP financial measures, including adjusted EBITDA and adjusted EBITDA margin and that's the thing the company's operating performance reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measures is also included.
And the company's shareholder letter I will now turn the call or what did they vote. Their vote. Please go ahead. Good afternoon, and thank you for joining us.
You saw today, we have now moved our quarterly reporting to a shareholder letter format.
This approach better enables us to provide our investors with context around our performance strategy and progress.
If you haven't had a chance to view it it can be found on our IR website.
So with that on the call today.
I will provide some highlights from the quarter and Scott will go into a bit more detail on the financials and then we will field some questions.
Looking at our results for the fiscal second quarter.
We reported sales growth of 12%.
Paired with a slight sequential increase in our gross margin.
We are finally, beginning to see the benefit of contracted price increases and overall customer demand across our national account and DSD businesses.
We have more work to do here, but have already seen additional progress early in calendar 2023.
Additionally, we improved adjusted EBITDA as we held operating costs in check despite inflationary pressures.
We also believe that fiscal Q2 will prove to be the high watermark for our coffee input cost.
While we're encouraged with the early progress we recognize that our results need to improve from here to achieve the performance our turnaround work has laid the groundwork for.
We think the right factors are in place to see that improvement.
The short term pricing headwinds, we have faced more recently are expected to alleviate.
Our turnaround has improved our underlying operating cost structure and our strategic growth initiatives, while in the very early stage are progressing nicely.
This gives us confidence in a more pronounced recovery in sales and margins in the second half of our fiscal year.
Helped by a much more favorable cost environment.
We remain vigilant as we manage through the near term and our vision of a path for long term profitable growth remains steadfast.
I will now turn it to Scott Scott.
Thanks, Darryl, let's dive right in.
Net sales in the second quarter of fiscal 2023 were $132 $7 million up 12% year over year.
Growth in sales, primarily reflects traction with new customers and higher per pound pricing in both our DSD and direct ship sales.
This was partially offset by lower volume, which was primarily due to the loss of a large customer at one of our major national accounts and our direct ship sales channel.
Gross margin was 22, 9% in Q2, which was an incremental improvement on a quarter over quarter basis.
Margins in the quarter reflect what we believe were peak coffee costs combined with the previously noted lag that accompanies our contractual cost plus pricing agreements and the direct ship sales channel.
We expect margins to improve further over the next two to three quarters.
Adjusted EBITDA loss was $3 $1 million in the quarter, an improvement over the last quarter from a loss of $4 $9 million.
The adjusted EBITDA margin also improved quarter over quarter by 170 basis points.
Yeah.
Our unrestricted cash balance increased by $7 $8 million to $17 6 million as at the end of the calendar year.
The increase in unrestricted cash was due to a decrease in working capital net proceeds from the sale of a branch assets.
And net borrowings under our credit facilities.
Turning to direct ship and DSD.
We saw a low double digit percentage sales growth in our direct ship business on a year over year basis, as we began to see pricing realization. After a lag period that depressed the first quarter of fiscal 2023 performance.
On the volume front, one of our large national accounts experienced the loss of a major customer, which led to a decrease in our pound volume compared to the prior year period.
Looking ahead, we expect that the direct ship business continues to improve.
We saw positive momentum in our DSD business as revenue was up in the low double digit percentage range driven by our pricing increases.
Although volume decreased in the quarter compared to last year. There was strong unit and pricing momentum in December that carried over to January and we expect continued progress on pricing actions in the coming quarters.
Looking ahead.
Our focus in the coming quarters remains on completing the final elements of our turnaround driving process improvements that will result in sustainable higher level of performance and executing on our exciting growth initiatives, including shot and revise that bring more services and products to customers and leverage our national distribution footprint.
In recent weeks, we have started seeing the benefit of our ongoing pricing efforts as these take effect across our direct ship and DSD customers.
This development paired with our falling coffee prices leave us optimistic that gross margins will recover towards prior year levels exiting our 2023 fiscal year in June .
At the same time current economic headwinds are placing pressure on talent acquisition and wages as well as transportation and other operations.
We continue to move aggressively to contain and manage these pressures and we fundamentally believe our cost structure is better positioned than it has been in years to drive better performance as macro conditions abate.
Our near term objectives are to bring farmer brothers back to profitability improve our competitive position for sustainable long term growth.
And enhance our ability to manage macroeconomic challenges and challenges within our industry.
We will now open it up for questions operator.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on you touched on phone you're using a speakerphone. Please pick up your handset before pressing the keys.
Anytime Youre question has been addressed and you would like to withdraw your question. Please press Star then two at this time people pause momentarily to assemble our roster.
Our first question comes from Gerry Sweeney with Iraq T N P M.
Please go ahead.
Good afternoon, Scott Thanks for taking my call.
Hey, Jack.
I wanted to talk about prices pricing I know you talked a little bit about it there in the prepared remarks, but.
You know I think one of the things we discussed in the past was especially on the DSD side was not just instituting price increases, but making sure that they were appropriately or fully pushed through at the street level and maintained at the street level and I think.
It's really two questions one how is that going to I believe some of your initiatives.
Were being put in place to help also facilitate that I wanted to see if we could get an update on that front.
Yeah, Yeah, you bet Jerry.
When we think of pricing obviously, the direct ship is the more straightforward ones and you didn't ask but we will get that out of the way it should at pricing agreement, we have with all those customers. So it's kind of a cost plus pass through so there's that lag in.
In the direct ship side of the business that we've talked about specific to D. S. D and maybe maybe it's it's it's a little bit on us that we havent unpack this a little more fully but you're right. We were we continue to see inflationary costs are in the business that we have to pass through so we're doing so but even in our DSD business a lot of our larger <unk>.
National DSD customers are under a pricing agreement as well and so we have several of these that have windows that execution for for changes to the contract including pricing.
And for example, we've been doing those changes, but some of those contractual changes with those larger customers.
They've been happening in November December there is some still in January February as well. So that's one we'll continue to see momentum on that front in regards to the pricing, but the good news is that we think we've seen the peak pricing our peak cost for coffee as well as the other costs are starting to plateau as well. So we think we're gonna get both.
Many of them on the pricing side and start to see some relief on the cost of good side and the two of those will combine for the stronger margins that we expect to see in the coming quarters.
Regarding the long term salt, which is I think what you're getting at with the I T solution, you're exactly right and the <unk> solution may take a little longer as we work through it but we're currently underway with a basically a reengineering of our pricing function for DSD, taking up some of the complexity taking out quite honestly some of those variables are that.
We have less control over that we've talked about and we're gonna be testing and rolling out this new pricing engine for D. S. D. Here over the next two quarters. So by the end of the fiscal year. We think we'll have substantially improved pricing for DSD and you know better insights better controls all of those things. So we think that's another reason for our bullishness on margins and sales for that.
Kind of quarters.
Got you.
Would you be able to quantify or.
Qualify you know where you are on your pricing versus where you would like to be or should be or however, you would however, you would frame that.
In aggregate I guess.
Right right, Yeah, I think you're right I think in aggregate in aggregate I would call. It middle innings, you know moving towards the latter stages of the game, but it's still in the middle innings. Unfortunately, one of the things we really wanted to address with these new engines and our new logic is wherever we can you know move more swiftly we wanted to be.
To do so so that's one of the things, we're really targeting with some of these improvements.
Got it and then you did touch upon it for a second this was it.
Hum on my list of questions.
I guess well it impacted both direct ship and I think DST, but you know some of the hedging.
<unk> structure and delays.
I think last quarter you talked about.
Q2, which we just had some improvement but more substantial improvement in Q3 and Q4.
How does that work out or is that still sort of on the table per se.
Yeah, exactly I think that when you look at the that the program. We have really we've hedged. So that we can have more certainty around our costs and when theoretically when prices are rising like they were the last couple of years. That's when you saw us get much more coverage and we went much longer on our contractual coverage of of those costs.
And then when we had the thesis that prices were gonna be falling we've obviously shortened up our coverage quite a bit so that we could get to those lower prices as quick as possible, but we are still working through some of those inventories you know it has to be brought in manufactured distributed sold et cetera to get in some way all the way through the P&L. So we're starting to see that now but that is.
Another thing that you know that lag along with some of the pricing lags. We've talked about are both we're seeing progress, but we're just going to need some more time, a few more months here to continue to work through them, but the good news on both fronts is that they're they are accelerating.
Through Q3, Q4, and even Q1, we think will continue to have these tail winds and really see nice progress.
On that front, how long does it take for sort of inventory to roll through so obviously pricing is down you know it was well over two well above $2 a pound that was below what you know on average.
How long does it take to sort of see that benefit.
Yeah, you know it's interesting if you look at our like any other business. If you look at our top skus those turned quite a bit you know, it's pretty regular but I'll I'll use an example from from DSD and our spices and tease you know some of those products. They kind of have a growing season and ordering season, and you're really only place. Your order as you know once or twice a year for some of those items. So.
You've got you know longer inventory and it just takes a little longer for those to turn but I think on average when you look at it. It's you know people can do the kind of quick inventory turns but you know what we're usually at a a couple of months you know two to three months I would say on average, but then again you've got with DSD you have that sale and that turn and then you've got your collection you know youre.
A period, there that would tack onto the end of that and with DST, you've kind of got the customer notification. So even if you are going to change prices or move some of these things, there's usually a 30 day or so notification period and that tends to make it just feel longer and really because it is a longer than than the 60 to 90 days, we talk about so much.
Got it and then.
Unrestricted cash was up and you know just looking at the balance sheet inventories were down actually.
Scrub the balance sheet or go through it but.
I would imagine as car cost of coffee reduces working capital just stuck in inventory should decline as well.
Is that a fair assumption or is that what drove two Q or are we just seeing.
You know with some of the initiatives you put in place just better inventory management et cetera.
Yeah, you're exactly right that our inventory should get some natural benefit of lower cost as we move forward, but in Q2, what you really saw was the benefit of some of the actions we've talked about them through the summer months of 2022, and then into the fall where you know we were focused on restructuring our debt, which we did successfully and then we had.
Mentioned, how we were going to really turn our focus to getting more efficient with working capital in Q2 was really the result of that the inventory and some of the other efficiencies you see were really the result of us getting in and getting more efficient with our inventory with our processes. Our safety stocks all of those different components that go into that got a little better for us and quite.
Honestly, it's also been helpful and it was the right time to do so because more of the supply chain returning to normal you know at the time, where we can have more reliance on vendors and products and timing. So we're able to do a lot of this progress, but we're not done yet we will continue with the efficiency and have the benefit of lower cost.
With Coffey Sir.
I'm going to ask one more I'm not sure if there's anyone in queue, but labor you know historically, it's been challenging to get labor in the last couple of years and trouble led to some challenges around.
Rolling out additional routes or or reinstating routes et cetera.
Any issues, there or what's that looking like and obviously you know you also had the revive business but.
I'm curious as to what on that front, so Jerry labor as we've invested in HR.
Pulled some new resources in as you know we pulled into new Chr just over a year ago. She put her fingerprints on the organization.
Newark head of recruiting more.
Working on different programs with various technical schools and training program.
And what that has resulted and I'll speak to revive first.
We've been able to recruit against our turnover in revive on techs and have net adds per week, which is what's contributing to that.
Being able to get more tests on the street now were just working those folks to get them fully trained.
Trained and productive on their specific check routes and revive and then on the DSD side we've.
We've had.
I'd say, a little less success from where we were with revive but solid performance on maintaining our RSR head count and being able to get people back on routes and continue to add routes as the volume justifies those routes were still very much.
Focused on optimization of those are Sars as we add them back whether it be for turnover or.
Specifically our coverage on <unk>.
P T O or for adding additional <unk> to be able to you know.
Change route structures when they were out starts to get to a point, where it has too much volume on the route and we need to add a route. So we can pick up additional volume customers that may be underserved. So that's an ongoing optimization. We have group that continues to lead that with our DSD team and that's been very successful in the HR side, we've been able to turn that.
And I'd say from a macroeconomic perspective over the past quarter, we've seen as well the labor rates continue to unemployment.
Unemployment rate is still quite low we've been able to react to that and be able to get more applicants through and hired and on the streets. So.
I'm sensing right now given the new programs, we've been putting in place to our HR team and through our DSD frontline team that we've been able to hold our own and not deteriorate on the negative side and lose more than we can add.
That's been very positive.
And Jerry just quickly one external view, just because I happen to have seen it last week I. Unfortunately don't recall wherever there was an article I saw that the noted the restaurant industry in the United States is still they estimate about 1 million workers short from where they would like to be so we still see that with our customers and you know where we're hopeful for improvement there as well.
Got it I appreciate it thanks for taking my questions.
Alright. Thank you sure. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Debbie <unk> for any closing remarks.
Thank you.
Overall, while we've had the foundation in place market dynamics have been difficult.
We're very focused on sharpening execution as we manage through this period.
And we're encouraged by our progress this quarter and are optimistic that the expected favorable pricing environment that Scott spoke of in the prepared remarks and in the coming quarters will support meaningful improvement in our results. The strategy is in place and we are determined to show the benefits of the hard work. The team has completed as we move through <unk>.
Physical 2023 and into the next fiscal year.
For attending today.
The conference has now concluded. Thank you for attending today's presentation you may all now.
Great.
Okay.
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