Farmer Bros. Co. Q3 2023 Earnings Call

Good day and welcome to the Farmer brothers fiscal third quarter, just all from 'twenty three earnings conference call.

At this time all participants are in a listen only mode. Later, we'll conduct a question and answer session and instructions will follow at that time.

If anyone should require operator assistance during the conference. Please press Star then zero on your Touchtone phone.

As a reminder, this call is being recorded.

Joining me today are Jay Burrell, mastering, President and Chief Executive Officer, and Scott Drake Chief Financial Officer.

Earlier today, the company issued its quarterly shareholder letter, which is available on the Investor Relations section of farmer Brothers' website at Www Dot farmer barrels dotcom.

The shareholder letter 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 desktop.

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 various remarks made by management. During this call about the company's future expectations plans prospects.

Institute 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 not be relied upon as representing the company's views as of any subsequent date.

Results could differ materially from those collaborations looking statements.

Additional information on factors that could cause actual results and all the revenge to differ materially from those forward looking statements is available in the company's shareholder letter and public filings.

On today's call management will also reference certain non-GAAP financial measures, including adjusted EBITDA and adjusted EBITDA margin.

The company's operating performance.

Reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measures is also included in the company's shareholder letter.

Now I'll turn the call over the call over to Darryl.

Please go ahead, good afternoon, and thank you for joining us.

Like to take this opportunity to discuss some highlights from our third quarter, where Scott discuss the financials.

And we will take questions.

Well, we did make some slight progress this quarter our.

Our results are not what we or our investors should expect.

Progress in restoring sales growth in rebuilding gross margins back toward our targeted 30% level has been challenging.

This has been due impart to issues outside of our control in terms of coffee pricing volatility in it.

Inflationary impacts on cost.

In a tough macro environment.

Frankly.

We know we need to execute better.

To that end, we pivoted in the third quarter implementing.

Implementing critical long term pricing optimization and production process enhancements, which we believe will put us on a stronger foundation.

These efforts are beginning to drive efficiencies and position us to better capture pricing opportunities as we head into the 'twenty 'twenty four fiscal year.

However, there are near term cost to implementing these changes, including some short term disruptions and inventory planning, which impacted our third quarter.

As part of these efforts, we launched our new AI based pricing engine.

Which is already providing improve.

Actionable data, enabling us to optimize pricing structures with customers and facilitate our goals towards margin expansion.

In fact, we have already implemented a coffee price increasing using the data from this too early in our fiscal fourth quarter.

Production wise.

We also implemented strategic changes to our customer ordering process, including adopting a longer lead time ordering approach.

This effort involves holding more finished goods to better plan for and meet fluctuating customer demand for key items, while creating manufactured efficiencies that will benefit our cost structure.

The targeted improvements include realizing lower cost per pound delivering better margins and generating additional cash flow.

All while better serving our customers through improved product availability and quality.

The benefits of this new ordering processes are already beginning to appear with record setting production at our facilities in recent weeks and lower price per pound.

While focusing in on efficiencies in the third quarter. We are also executing on future growth initiatives.

During the quarter, we saw tremendous growth from our revive services business unit.

Securing several new national accounts and successfully launched shot and innovative line of premium shelf stable real fruit concentrates, which we're very excited about.

We are already experiencing solid demand from our limited releases on the West coast and are working to expand its availability.

To close we were.

I am firmly committed to improving execution and achieving our financial operational and strategic goals at.

At the same time, our board committee on strategic alternatives and capital allocation is working expeditiously on potential enhancements to our capital and operating structure.

Together, both the board and management are very focused on delivering results for our shareholders and we will have more to share in the near future.

I'll now turn it to Scott Scott.

Thanks Darryl.

Net sales in the fiscal third quarter of 2023 were $124 $2 million, an increase of $4 $8 million or 4% compared to the prior year period.

The revenue growth reflected pricing increases to date.

Gross profit was $28 $7 million for the quarter. This result in a slight improvement in gross margin on a quarter over quarter basis for the second consecutive quarter.

The fiscal third quarter marked the first recent three month period, where the average coffee product cost per pound did not increase compared to the prior period.

We expect to continue to benefit from.

Farmer brothers reported an adjusted EBITDA loss of $800000 in the third quarter of fiscal 2023.

A significant improvement over the previous quarter's $3 1 million dollar loss.

Our unrestricted cash balance decreased by two and a half million dollars from $9 8 million as of June 30th 2022 to $7 3 million as of March 31 2023.

We had an increase in DSD revenues, reflecting increased realization of recent pricing increases.

Additionally, we had lower coffee costs better payment volumes for DSD customers, several new customer wins, and a lower customer churn rate.

In our direct ship customers, we delivered a mid single digit year over year sales decrease primarily due to the previously mentioned near term disruptions as we shifted our production planning process from a make to order to a make to stock focus.

We are now operating at full capacity and anticipate recovering most of the resulting pass sale before the end of this fiscal year.

Overall, we have exited the third quarter, a healthier business than we entered it there was the barrel noted we have a lot of work to do to deliver the results we are committed to delivering.

We remain focused on our near term objectives, which are to continue expanding our margins improve our capital structure and position the company for sustainable long term growth.

We will now open up for questions operator.

Thank you.

Now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.

We are using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Thank you. Our first question comes from Brendan Rodgers with Ross and T. M. Please go ahead.

Hey, good morning, deferral and Scott.

Gerry Sweeney friend Brendan.

Registered me so it came up under his name so my apologies, but.

Good morning, Jack.

I have a few I wanted to start with margins right. So obviously, that's a lot of focus it's still down in the low twenties targeting high Twenty's and eventually into the low 30 range and you know what.

As we were progressing through this year, we knew we had some contractual headwinds that.

Where are supposed to roll off you know Q3 Q4.

I believe you made some investments that maybe impacted margins in the short term, but then you also have pricing structure changes and then make for stocks. So there's a there's a lot of moving parts under here that we're looking at margins.

I was hoping maybe you could peel back the onion, a little bit and just work through those you know how the contractual aspect of pricing.

That's going to work through the system and then.

Look at.

Investments in pricing structure changes and make versus the stock how that's gonna impacted over the next couple of quarters I know that that's a lot to unpack there and it's a little bit of a messy question, but if you could maybe take a shot at it I appreciate it.

You bet you bet. The good morning, Gerry I think that if you look at it you're right. It's it's not where we wanted to be it's not where it needs to be.

Do you have to start obviously and there's a lot in there, but I think the highest level way to look at it just to try to make it digestible components is that you're right. There we talked about price increases contractual changes and I would say that obviously for the for the most part those are having minimal impact at this point. So then you have to flip over to the cost side.

And that's where we have seen our coffee costs peak out you know for both DSD and direct ship business, a little bit different timing on those because of the way some of our customers handle there there pricing on coffee, but we've seen both of those peak and they're starting to decline now.

So it's really just us selling through this higher priced coffee. It is on the balance sheet. So that we can get to lower price coffee and better margins.

Another response to that two other primary drivers that are really you'll see as we go forward. You know we wanted to be sure that we still absolutely see the margin recovery coming it's just a timing issue at this point. So we expect you know for the rest of the calendar year here to continue to gain on the margin equation.

The efficiencies and the changes and the investments we've made to both our production and you know how we're going about the production of coffee and handling of coffee. It was almost kind of a investment for the longer term to really really get efficient and really have.

Patient sees that we could rely on for a longer period of time versus a short term fix so that did pause a little bit the cost equation, but we absolutely are setting up for a better long term.

Rising in cost per pound in the operations.

And then finally you know we did note that we were taking more pricing action as well that's the other thing that with coffee, having not you know really fallen much you know we're still in the dollar $80 90.

Just appropriate to go in and adjust pricing and the good news is we have much better insights and much better analytics due to the tools that the outside parties, we're looking at and working with now so it's another one where we think we can have near term benefits from pricing as the actions that we're taking now as well as get really really better refinement going forward as well.

That'll really help us with long term margins again.

Got it and.

Just to follow up on that on the DSD pricing.

You mentioned it also sounded as though volumes were up in your once a customer so.

Those price increases have not only been passed through to customers are successfully being pass through the customers you're still.

You're you're winning customers as well so.

Am I reading that correctly.

Yeah, we've definitely seen the the margins sorry, the pounds year over year in D. S. Improve now I would say if you look at the quarter and kind of unpack it a little bit. We did have January was a little softer again, because those manufacturing changes you know, we we called out it primarily impacted direct ship. It there was some impact of DSD in January .

But in March February and going into April we're seeing much better pound volume increases and again, yeah customer win so definitely momentum within DST.

Got it and then switching gears to direct ship.

The stock versus make.

Aspect is that.

I don't know if I don't want a standard procedure in the industry or are your customers comfortable with that or is there any risk that your customers will balk at that and reduce volumes I understand that certainly the benefits you're no longer runs you know just more efficiencies et cetera, just curious as to how that customer reaction to that.

That processes.

Yeah, Jack Great question I'll tell you this we.

We've gone since my time here for the last four years and making daughter.

Indirect ship.

The direct ship peak to trough can can vary anywhere from zero growth.

400%.

The Asian.

That reality creates a lot of.

Mediate issues when you're trying to cover those kind of volume fluctuations and forecasting demand for those direct ship customers.

In Covid.

And currently post Covid the supply chain has dramatically shifted.

That shift has resulted in basically the elimination.

Spot market volume within North America.

So we said with those longer lead time challenges of getting specialty copies for certain Roche profiles for direct ship customers fluctuation in demand and forecast them for those customers that we couldn't continue to just service those customers and a make to order fashion.

So we have changed the way, we're producing those to build more stock for them.

And by doing that it provided us better production efficiency, we are running better production efficiencies in the last couple of months than we've ever seen we actually setting records on cost to serve in the last few months.

And secondly, it's actually improving the overall service to those direct ship customers. Because we then have inventory and if were missing some amount of inventory and we have the green beans available then we're able to make up that and not have to make it up in such a dramatic way within a week or a month of the motoring.

So we back them to link then the challenge for those customers in the knee.

Their order lead time, that's one ramification.

And then making sure that we have the green beans pulled.

Pull through and available and close by because of the lack of the spot market on green beans in the U S.

And then we're building inventory based on those overruns and that's provided us.

Some success there.

We knew it would be good but we didn't know it would be as good as what we witnessed in the recent weeks and months and so that that is kind of the outcome of that and that's investment that we made in this last quarter.

We saw some cost absorbed through that and increases and now we're coming out of it and it's paying some dividends as we move at the end of that quarter and move into the park water.

Got it.

Just a couple more quick questions.

In the shareholder letter you you talk a little bit about the debt covenants or a waiver for the June .

June forward.

Covenants are.

And there was a sense of.

That security, but are you at a level of confidence that you can obtain that waiver I mean any can you comment on what provides a sense of security or higher level of confidence that youre going to obtain that waiver.

Yeah sure no no details obviously at this time, but the fact that you know the margin is a top priority and that the capital structure is a top priority. So we have we've continued conversations with our banking partners. You know we have a good relationship we feel very supported both directions. We have solutions that we're working through.

They just take a little bit of time, but are you have you know what.

Case scenario, obviously, we have other backup solution. So we just we're highly confident that we'll be able to resolve that you know before we have any any any type of formal covenant testing later this fall.

Got it and then.

Does some of that go hand in hand, with the strategic alternatives and that the board is exploring and then the part b to that question would be sort of you know do sort of a timeline. When you are going to announce some of those strategic alternatives for moves are or however, you want to phrase it.

Well as you know Jerry we we announced.

At the end of last year the formation of the strategic Committee they've continued to me. They are aggressively reviewing as we've stated to date all alternatives have been.

Evaluated and we as a management committee.

And team have continued to provide them lots of alternatives that they are considering.

We're moving on a very tight timeline given the nature of the business in nature of.

The global economic pressures that we're all under and.

Tied to the question you just asked so we would be hopeful that we'll we'll have news in the short order I'd come back and start to lay out some of the actions of that committee.

Got it okay. That's it for me I appreciate taking my questions. This morning.

You bet. Thank you Derrick.

Thank you. This concludes our question and answer session.

To turn the conference back over to deferral, Mr. Mastering for any closing remarks. Please go ahead Sir.

Thank you operator, and thanks again to everyone for joining our call today.

We know we have a lot of work to do to achieve our goals.

But we're confident we're moving in the right direction and the actions we've taken.

Combined with an improving pricing and operating environment.

To a future upside.

We want to emphasize here that both the board and management are moving with a strong <unk>.

Sense of urgency and we look forward to keeping you posted on our progress in the coming weeks and months.

Thank you.

Yeah.

The conference has now concluded. Thank you for attending today's presentation. You may disconnect your lines at this time.

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