Q3 2024 Farmer Bros Co Earnings Call
Operator: Good afternoon, and welcome to the Farmer Bros Fiscal Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode.
Good afternoon, and welcome to the Farmer brothers fiscal third quarter 'twenty 'twenty four earnings conference call.
Operator: As a reminder, this call is being recorded. Earlier today, the company issued its quarterly shareholder letter, available on the investor relations section of Farmer Bros.' website at farmerbros.com. The shareholder letter is also included as an exhibit on the company's form 10-Q and is available on its website and the Securities and Exchange Commission's website at sec.gov. A replay of this audio-only webcast will also be available on the company's website approximately two hours after the conclusion of this call.
Operator: At this time all participants are in a listen only mode. As a reminder, this call is being recorded.
Operator: Earlier today, the company issued its quarterly shareholder letter available on the Investor Relations section of Farmer Brothers' website at farmer Bros. Dotcom.
Operator: The shareholder letter is also included as an exhibit on the Companys Form 10-Q and is available on its website.
Operator: And the Securities and exchange Commission's website at SEC Gov.
Operator: Play of this audio only webcast will also be available on the company's website approximately two hours after the conclusion of this call.
Operator: Before we begin the call, please note all of the financial information presented in unaudited form and 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 security laws and regulations. These forward-looking statements represent the company's views as of today and should not be relied upon as representing the company's views as of any subsequent date.
Operator: Before we begin the call. Please note all of the financial information presented in an on an.
Operator: Audited and various remarks made by management during this call about the company's future expectations plans and prospects.
Operator: Jude forward looking statements for purposes of the Safe Harbor provisions under the federal security laws and regulations. These forward looking statements represent the company's views as of today and should not be relied upon as representing the companys views as of any subsequent date.
Operator: Results could differ materially from those foregoing statements. Additional information on factors which could cause actual results and other events to differ materially from those foregoing 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, and assess 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. I will now turn the call over to Farmer Bros. President and Chief Executive Officer, John Moore. Mr. Moore, please go ahead.
Operator: Could differ materially from those forward looking statements additional information on factors, which could cause actual results and other events to differ materially from those forward looking statements is available on the companys shareholders letter and public filings.
John E. Moore: On today's call management will also reference certain non-GAAP financial measures, including adjusted EBITDA and adjusted EBITDA margin in assessing the company's operating performance.
Operator: Reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measures is also included in the company's shareholder letter.
Operator: I will now turn the call over to Farmer brothers, President and Chief Executive Officer, John Moore.
John E. Moore: Mr. Moore. Please go ahead.
John E. Moore: Good afternoon, everyone. And thank you for joining us. Over the course of the third quarter, we continued to see positive momentum as we made year over year gains on many of our key metrics. We see ongoing progress in our transformation to becoming a direct store delivery-based organization and in our efforts to optimize utilization of newly right-sized operations. We executed a new corporate headquarters lease in Fort Worth, Texas, which better aligns with our current business needs.
John E. Moore: Good afternoon, everyone and thank you for joining us over the course of the third quarter. We continued to see positive momentum as we made year over year gains versus many of our key metrics we.
John E. Moore: We see ongoing progress in our transformation to becoming a direct store delivery based organization and in our efforts to optimize utilization of newly right sized operations.
John E. Moore: We executed a new corporate headquarters leased in Fort worth, Texas, which better aligns with our client business needs. We also continue to consolidate roasting packaging and production at our Portland, Oregon facility.
John E. Moore: We also continue to consolidate roasting, packaging, and production at our Portland, Oregon facility. In addition, we made significant strides in our brand pyramid and skew rationalization initiative, designed to create clearly defined traditional premium and specialty coffee lines within our product catalog. This change to our brand pyramid will remove skew redundancies and simplify our offerings for customers.
John E. Moore: In addition, we made significant strides in our grant Jeremy and SKU rationalization initiatives.
John E. Moore: Designs to create clearly defines traditional premium specialty coffee lines within our product catalog. This change to our brand pyramid will remove SKU redundancies and simplify our offerings for customers.
John E. Moore: It will also provide additional operational and cost efficiencies for the organization, as well as streamline our inventory and overall sales approach. We achieved a milestone in relation to this project during the third quarter, as we now have more SKUs related to our new tiered coffee offerings and inventory than those of our previous catalog. We are encouraged to already be seeing scheduling and production improvements, leading to increases in our in-stock and delivery capabilities.
John E. Moore: It will also provide additional operational and cost efficiencies for the organization as well as streamline our inventory and overall sales approach.
John E. Moore: We achieved a milestone in relation to this project during the third quarter as we now have more skus related to our new tiered coffee offerings in inventory than those of our previous catalog.
John E. Moore: We are encouraged to already be seeing scheduling and production improvements leading to increases in our in stock and delivery capabilities.
John E. Moore: We expect to complete this initiative by the end of the first quarter of fiscal 2025. We're also continuing to improve our field operations through investment in technology upgrades and enhancements. We recently completed an upgrade of handheld devices for our route sales representatives, which will simplify device management, enhance support, and improve our inventory management, invoicing, and overall customer service efforts.
John E. Moore: We expect to complete this initiative by the end of the first quarter of fiscal 2025.
John E. Moore: We are also continuing to improve our field operations through investment in technology upgrades and enhancements. We recently completed an upgrade of handheld devices for our route sales representatives, which will simplify device management enhanced support and improve our inventory management invoicing and overall customer service efforts.
John E. Moore: The common theme in these initiatives is that we remain focused on customer growth, retention, and improving key elements of our value proposition to ensure profitable growth. This process will take time, but our efforts and initiatives are beginning to bear fruit. We reached an inflection point during the quarter as retention trends stabilized and our rate of customer decline improved compared to the prior year. Overall, we are proud of the strides we have made so far this year and the early wins we have achieved related to our DSD transformation, but there's still much work to be done.
John E. Moore: Common theme in these initiatives, we remain focused on customer growth retention and improving key elements of our value proposition to ensure profitable growth.
John E. Moore: This process will take time, but our efforts and initiatives are beginning to bear fruit.
John E. Moore: We reached an inflection point during the quarter as retention trends stabilize and our rate of customer decline improved compared to the prior year.
John E. Moore: Overall, we are proud of the strides we have made so far this year and the early wins, we have achieved related to our DSD transformation, but there is still much work to be done.
John E. Moore: As we have said before, we do not expect our results to be linear from order to order. Change of this magnitude takes time and patience as we continue to implement the deliberate foundational changes necessary for long-term success. Our focus continues to be on the following: driving customer attention and growth, improving our cost structure, delivering incremental margin, increasing market penetration for new on-trend products, and completing the transitional services associated with our direct ship sale. With that, I'll turn it over to Brad to discuss our financials in more detail. Brad?
John E. Moore: As we have said before we do not expect our results to be linear quarter to quarter change.
Brad: Change of this magnitude takes time and patience as we continue to implement the deliberate foundational changes necessary for long term success.
Brad: Our focus continues to be on the following.
Brad: Driving customer retention and growth improving our cost structure delivering incremental margin improvement.
Brad: Creasing market penetration for new on trend products and completing the transitional services associated with our direct ship sales.
John E. Moore: With that I'll turn it over to Brad to discuss our financials in more detail Brad.
Brad Bollner: Thanks, John. And hello, everyone.
Brad: Thanks, John and Hello, everyone.
Brad Bollner: <unk> results for fiscal 2024 in the prior year third quarter are reported on a continuing operations basis, reflecting the performance of our DSD business in the respective periods. Please refer to our Form 10-Q, which was filed with SEC today further information regarding the respective performance of our discontinued and continuing operations.
Brad Bollner: As a reminder, results for fiscal 2024 and the prior year third quarter are reported on a continuing operations basis, reflecting the performance of our DSD business in the respective period. Please refer to our form 10-Q, which was filed with the SEC today, for further information regarding the respective performance of our discontinued and continuing operations. Overall, we're pleased to have maintained the positive year over year gains we have made in gross margin and adjusted EBITDA profitability.
Brad Bollner: Overall, we're pleased to have maintained a positive year over year gains we have made in gross margin and adjusted EBITDA profitability net sales for the third quarter of fiscal 2024 were relatively flat on a year over year basis at $85 4 million compared to $85 7 million in the prior year period.
Brad Bollner: Net sales for the third quarter of fiscal 2024 were relatively flat on a year over year basis at $85.4 million compared to $85.7 million in the prior year period. Overall, net sales were impacted by a reduction in total unit sales, which were offset by higher prices. During the quarter, gross margins increased 660 basis points compared to the third quarter of fiscal 2023, moving from 33.5% to 40.1%, respectively. Gross profit during the quarter increased $5.5 million to $34.2 million, or 19% on a year over year basis. This increase in gross margin was primarily driven by improvements in pricing and a decrease in underlying commodity costs.
Brad Bollner: Overall net sales were impacted by a reduction in total unit sales, which were offset by higher pricing.
Brad Bollner: During the quarter gross margins increased 660 basis points compared to the third quarter of fiscal 2023, moving from 33, 5% to 41% respectively.
Brad Bollner: Gross profit during the quarter increased $5 5 million to $34 2 million or 19% on a year over year basis. This increase in gross margin was primarily driven by improvements in pricing and a decrease in underlying commodity costs.
Brad Bollner: Operating expenses decreased slightly from $35.6 million in the prior year period to $34.7 million during the third quarter of fiscal 2024. This improvement was a result of a $2.3 million increase in net gains associated with property sales and other assets and was offset by a $1.3 million increase in selling expenses and a $200,000 increase in general and administrative expenses. The selling expense increase was primarily a result of additional costs related to health care benefits, and vehicle rental expense was partially offset by a decrease in advertising-related expenses.
Brad Bollner: Operating expenses decreased slightly from $35 $6 million in the prior year period to $34 7 million during the third quarter of fiscal 2024.
Brad Bollner: This improvement was a result of a $2 3 million increase in net gains associated with property sales and other assets was offset by a $1 3 million dollar increase in selling expenses and a $200000 increase in general and administrative expenses.
Brad Bollner: The selling expense increase was primarily a result of additional costs related to health care benefits and vehicle rental expense was partially offset by a decrease in advertising related expenses.
Brad Bollner: Net income from continuing operations moved to a loss of $682,000 during the quarter compared to a loss of $6.9 million during the prior year period, an improvement of more than $6.2 million. Our capital expenditures for the quarter were flat on a year-over-year basis at $3.4 million. In fiscal 2024, we anticipate between $12 and $15 million in total capital expenditure. We expect to finance these expenditures through cash flow from operations and borrowings under our credit facility. Adjusted EBITDA for the third quarter remained positive for the second consecutive quarter at $271,000.
Brad Bollner: Net income from continuing operations moved to a loss of $682000 during the quarter compared to a loss of $6 $9 million during the prior year period, an improvement of more than $6 2 million.
Brad Bollner: Our capital expenditures for the quarter were flat on a year over year basis at $3 4 million in fiscal 2024, we anticipate between 12 and $15 million in total capital expense, we expect to finance these expenditures through cash flow from operations and borrowings under our credit facility.
Brad Bollner: This compares to a loss of $579,000 in the prior year period. Looking at the balance sheet, as of March 31, 2024, Farmer Bros. had $5.5 million of unrestricted cash and cash flip lengths and $200,000 in restricted cash. We had outstanding borrowings of $23.3 million, utilized $4.6 million of the letters of credit sublimit, and had $30.5 million of availability under a revolver credit facility. We believe we are adequately capitalized to finance our operations and expect to achieve our goal to be free cash flow positive in early fiscal 25.
Brad Bollner: Adjusted EBITDA for the third quarter remain positive for the second consecutive quarter at $271000. This compares to a loss of $579000 in the prior year period.
Brad Bollner: Looking at the balance sheet as of March 31, 2020 for Farmer brothers had $5 5 million of unrestricted cash and cash equivalents and $200000 in restricted cash we had outstanding borrowings of $23 3 million utilized $4 6 million of the letters of credit sub limit and had $30 5 million of availability.
Brad Bollner: Under our revolver credit facility.
Brad Bollner: We believe we are adequately capitalized to finance, our operations and expect to achieve our goal to be free cash flow positive in early fiscal 'twenty five.
Brad Bollner: Although we do not expect results to be linear quarter to quarter, we are pleased with the gains we have made so far in fiscal 2024 and are confident we are building a foundation to support long-term profitable growth and value creation. With that, I'll turn it back to john. Thanks.
Brad Bollner: Although we do not expect results to be linear quarter to quarter. We are pleased with the gains we have made so far in fiscal 2024 and are confident we are building a foundation to support long term profitable growth and value creation with that I'll turn it back to John John.
John E. Moore: Thanks Brad. As you have heard, we are making marked progress in our DST transformation, but we are nowhere near the finish line. In our view, there is a significant amount of upside still to be realized in operational and cost efficiencies, as well as top line growth. We firmly believe in the potential of Farmer Bros. to generate significant and sustainable shareholder value. Thank you to all for joining us on the call today. Operator, we will now open it up for questions. We will now begin the test.
John: Thanks, Brad as you have heard we are making market progress in our DSD transformation, but are nowhere near the finish line.
John E. Moore: It is our view that there is a significant amount of upside still to be realized in the operational and cost efficiencies as well as top line growth.
John E. Moore: We firmly believe in the potential at farmer brothers to generate significant and sustainable shareholder value.
John E. Moore: Thank you to all for joining us on the call today, operator, we will now open it up for questions.
Operator: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then 2. At this time, we'll pause momentarily to sum up our roster. Our first question will come from Jerry Sweeney with Roth Capital.
Speaker Change: We will now begin the question and answer session.
Gerard J. Sweeney: To ask a question you May press Star then one on your telephone keypad.
Operator: If you're using a speakerphone please pick up your handset before pressing the keys.
Operator: To withdraw from the question queue. Please press Star then two.
Operator: At this time, we will pause momentarily to assemble our roster.
Gerard J. Sweeney: Our first question will come from Gerry Sweeney with Roth Capital You May now go ahead.
Gerard J. Sweeney: Good afternoon, guys. Thanks for taking my call.
Gerard J. Sweeney: Good afternoon, guys. Thanks for taking my call.
Gerard J. Sweeney: Hi, Joe Hey, Jerry how are you.
Gerard J. Sweeney: Doing well, thanks, I wanted to start on customer retention it sounded like.
Gerard J. Sweeney: Two different things.
Speaker Change: Pulling out from the quarter.
Gerard J. Sweeney: One revenues were down and it sounded as though revenue was down because you had some customer.
Gerard J. Sweeney: Customers had left but secondarily in your script, you talked about customer retention stabilizing.
Gerard J. Sweeney: Are we sort of was that an inflection point during the quarter.
Gerard J. Sweeney: Retention is sort of flipped from a negative to a positive just want to dig in on that a little bit further.
Unknown Executive: Hi Jerry. Hey Jerry, how are you doing? Well, thanks.
Gerard J. Sweeney: Yes, Hi, Jerry this is John.
Gerard J. Sweeney: I'm doing well, thanks. I wanted to start on customer retention.
Unknown Executive: In terms of the customer retention and what we're seeing is the.
Unknown Speaker: It sounded like two different things. Unknown Speaker, The Economist, The Economist, The Economist, The Economist, Are we sort of at an inflection point during the quarter where the tension has sort of flipped from a negative to a positive, speaking on that.
Speaker Change: The numbers are the.
Unknown Speaker: The decrease in customers that we were facing last year, the cadence at which that was happening.
John E. Moore: Yeah. Hi Jerry. This is John.
Speaker Change: It's it's much much better than it was and if anything it's stabilized and come to neutral so that in and of itself is a huge positive relative to the performance last year and I think you know.
John: As we continue to refine how we are going to market and focusing on execution at the field level, we're seeing that it's starting to bear fruit. So in the past we've talked about operational excellence when it comes to showing up at the right place at the right time with the right product at the right price and basically fulfilling on the service proposition.
John: We're starting to see that as we as we invest in our.
John: Our manufacturing capability, our plan planning and procurement capability, we're building in better systems and infrastructure, allowing us to fulfill on the on the value proposition to the customers. That's beginning to bear fruit and again, we're starting to see that the customer accounts are approaching neutral or at neutral even.
John E. Moore: In terms of customer attention, what we're seeing is the numbers are the decrease in customers that we were facing last year, the cadence at which that was happening. It's, it's much, much better than it was. And if anything, it's stabilized and come to neutral.
John E. Moore: Turning a little bit positive from week to week.
John: And that's an extremely positive situation for us.
Jerry: Got it so where.
John E. Moore: Yeah.
Speaker Change: We're getting there is sort of a follow up.
John E. Moore: Summation.
John E. Moore: Getting there it's improving.
John E. Moore: What came out a week to week and we're getting to a neutral if not positive.
John E. Moore: So that, in and of itself, is a huge positive relative to the performance last year. And I think, you know, as we continue to refine how we're going to market and focus on execution at the field level, we're seeing that it's starting to bear fruit. So in the past, we've talked about operational excellence when it comes to showing up at the right place, at the right time, with the right product at the right price, and basically fulfilling the service proposition.
Speaker Change: Got it.
John E. Moore: And then secondarily on the operational side.
John E. Moore: See here reduce skus scanned scheduled planning roasting consolidating everything in Portland.
John E. Moore: We're what inning would you say you're in on that process and how much opportunity for me. It sounds like we're still in the early early section of that to be honest with you.
John E. Moore: Yes, I would say we're in the early to mid innings, we haven't brought in our first re lever yet.
John E. Moore: Second type of Atlanta.
John E. Moore: Uh huh.
John E. Moore: The other piece to that puzzle is that when we initiate a change in planning and production. It takes weeks for that to be realized at the field level I can tell you that there's been exponential improvement we're tracking this on a weekly cadence and of course, we're planning production daily.
John E. Moore: There has been a market improvement if I look from February to today are there is there is significant improvement in our fulfillment rates.
John E. Moore: Not only in the fulfillment rates, but then also in our line of sight and ability to track from the from the manufacturing level all the way through to the branch level and I know you've been following us for a while and you may have heard in the past we talked about difficulty in establishing line of sight to the branch even beyond to the.
John E. Moore: The route level, where it really matters to the customer and I think we've made substantive changes in our in our infrastructure redeploying assets built.
John E. Moore: Building new systems of communication from the branch level operatives back through to the planning and procurement even into the manufacturing piece integrating all of those in a meaningful way so that we get mad.
John E. Moore: We're starting to see that as we invest in our manufacturing capability, our plan, planning, and procurement capability, we're building in better systems and infrastructure, allowing us to fulfill on the value proposition of the customers, that's beginning to bear fruit. And again, we're starting to see that the customer accounts are approaching neutral or at neutral, even turning a little bit positive from week to week. And that's an extremely positive situation for us.
John E. Moore: Manufacturing cadence that matches to the need of the customer and I would say that that is somewhat new capability that we've developed in the last couple of months.
John E. Moore: Got it. So we're We're getting there, sort of. I'll put it as a summary, we're getting there, it's improving, we're looking at it week to week, and we're getting to neutral. And then, secondarily, on the operational side, reduce SKUs, schedule planning, roasting, and consolidating everything in Portland. Where what inning would you say you're in on that process, and how much opportunity? It sounds like we're still in the early, early section of that, to be honest.
John E. Moore: We are beginning to see meaningful fulfillment at the branch level, but were in that regard we're in the early innings.
John E. Moore: That means having the right products.
John E. Moore: On the trucks.
John E. Moore: Satisfy costs, that's correct. So in the past we felt as though we had the right products in the system in general they just happened to be in the wrong place today I would say that we're getting much better about manufacturing the right products and getting them to the right place at the right time and in that regard we're in the early innings slash middle innings.
John E. Moore: Yeah, I would say we're in the early to mid innings. We haven't brought in our first reliever yet.
Unknown Speaker: Unknown Speaker This is the second time. Transcribed by https://otter.ai
John E. Moore: The other piece to that puzzle is that when we initiate a change in planning and production, it takes weeks for that to be realized at the field level. But I can tell you that there's been exponential improvement. We're tracking this on a weekly cadence, and of course, we're planning production daily. There has been a marked improvement. If I look from February to today, there's a significant improvement in our fulfillment rates. Not only in the fulfillment rates but also in our line of sight and ability to track from the manufacturing level all the way through to the branch level.
Unknown Speaker: But we are beginning to see the impact and that's one of the things we see with this Q3 inflection and the customer rates, we feel as though that is having an immediate impact and that's by the way that that same level of of a line of sight on the finished goods inventory side. We're also making substantive changes on the other piece of this which are <unk>.
John E. Moore: I know you've been following us for a while, and you may have heard in the past that we talked about difficulty in establishing a line of sight to the branch, even beyond the route level, where it really matters to the customer. I think we've made substantive changes in our infrastructure, redeploying assets, building new systems of communication from the branch level operatives back through to the planning and procurement, and even into the manufacturing piece, integrating all of those in a meaningful way so that we get manufacturing cadence that matches the need of the customer.
John E. Moore: <unk> representatives and the customers told us again reinforced by the artificial intelligence engine. The other piece of that equation was the equipment placement and getting speed to market with the equipment, so that customers could actually brew the coffee and service their customers further downstream and there again, we've made substantive changes making sure that at.
John E. Moore: I would say that that is a somewhat new capability that we've developed in the last couple of months. We are beginning to see meaningful use at the branch level, but in that regard, we're in the early stages.
John E. Moore: Does that mean you're having the right product? That's correct. So in the past, we felt as though we had the right products in the system in general; they just happened to be in the wrong place. Today, I would say that we're getting much better at manufacturing the right products and getting them to the right place at the right time. And in that regard, we're in the early innings slash middle innings.
John E. Moore: The branch level, there is an adequate inventory of the equipment that is most often used in the field. So that they can get speed to market with their equipment placement and allocation. So on both sides of that the pieces that the customers were telling us through their purchasing cadence there were issues around retention and purchasing now.
John E. Moore: But we are beginning to see the impact. And that's one of the things we see with this Q3 inflection in customer rates; we feel as though that's having an immediate impact. And that's, by the way, that same level of line of sight on the finished goods inventory side. We're also making substantive changes on the other piece of this, which our field representatives and the customers told us, again, reinforced by the artificial intelligence engine.
John E. Moore: The other piece of that equation was equipment placement and getting speed to market with the equipment so that customers could actually brew the coffee and service their customers further downstream. And there again, we've made substantive changes, making sure that at the branch level, there's an adequate inventory of the equipment that is most often used in the field so that they can get speed to market with their equipment placement and allocation.
John E. Moore: We feel as though we've made substantive changes and we're beginning to get traction with those.
John E. Moore: So on both sides of that, the pieces that the customers were telling us through their purchasing cadence, there were issues around retention and purchasing. Now we feel as though we've made substantive changes, and we're beginning to get traction with
John E. Moore: Gerry one thing I'd add is as Youre looking at this you are reading the P&L and trying to see what inning we're in.
John E. Moore: Jerry, one thing I'd add is, as you're looking at this, you know, you're reading the P&L and trying to see what inning we're in. We call that, I think, in the shareholder letter that we are now. Our inventory level on the new SKUs, for example, is higher than the inventory level on the, quote, old SKUs. As that flows to the P&L, though, that's still to come, because that product has to get sold through.
John E. Moore: We called out I think in the shareholder letter that we are now our inventory level on the new Skus for example.
John E. Moore: Higher than the inventory level on the quote old skus as that flows through the P&L, though that's still to come because that product has to get sold through we get through the old inventory, we start selling the new inventory at that point, you're seeing on the top line. Then you start to see the efficiencies on the bottom line, where a lesson doing lots of more inventory all the way around.
John E. Moore: Once we get through the old inventory, we start selling the new inventory. At that point, you see it on the top line. Then you start to see the efficiencies on the bottom line; we're doing less with more inventory all the way around. We're doing more with less inventory. So all of these things are, we have a line of sight to this progress being made, and then it trickles through the supply chain and then trickles through the business. So you'll see those things as we go along. As we talk about these inflection points, just keep that in mind.
John E. Moore: Doing more with less inventory. So all of these things are we have a line of sight to this progress being made and then it trickles through the supply chain and that trickles through the business. So youll see those things as we as we go along as we talk about these these inflection point just keep that in mind.
John E. Moore: Sure.
Gerard J. Sweeney: And I should have asked this question earlier. But when you talked about the AI price, you know, there were several models. One was the pricing, and the other two, I think, were market basket and customer retention.
John E. Moore:
Speaker Change: And I should have asked this question earlier, but when you talked about the AI pricing engine.
Gerard J. Sweeney: There are several models one was the pricing and the other two I think were market basket and customer retention.
John E. Moore: And they were going to, I think, be, for lack of a better term, turned on, I think, this year. I'm just curious if they're in play. They're part of the solution, not only driving sales, but you know
Gerard J. Sweeney: And they were going to.
Gerard J. Sweeney: I think the.
John E. Moore: Sort of lack of better term turned on I think this year just curious if there are in play.
John E. Moore: They're part of the.
John E. Moore: Solution, not only driving sales, but customer retention.
John E. Moore: So that was part of our initial understanding of what we could do with that tool. I would not say that we're driving a market basket with the AI tool at this point, but it's certainly in the capability.
John E. Moore: So.
John E. Moore: That was that was part of our initial understanding of what we could do with that tool.
John E. Moore: I would not say that we're driving market basket with the AI tool at this point, it's certainly in the capability.
John E. Moore: What I would call out is that we've used it, you know, a key part of the pricing engine is to anticipate when we think we might lose a customer because that is the most critical thing to pricing. So applying the fact that we have the pricing engine built means we've done more than just optimize pricing. It's also given us really good feedback on how to retain customers in general, not just related to the price we're giving them.
John E. Moore: What I would call out is that we've used it a key part of the pricing engine is to anticipate when we think we might lose a customer because that is the most critical thing to pricing. So applying the fact that we have the pricing engine built means we've done more than just optimize pricing. It's also given us really good feedback on how to retain customers in general not just related to the price of oil.
John E. Moore: But I would say that intelligence has driven us towards our focus on in-stock position and our focus on equipment service levels. So we found those to be good predictors of customer turnover. So we're leveraging that tool for more than just, hey, what's the price of this pound of coffee? But that said, we haven't gotten to the basket driver yet. I would say we've found lower hanging fruits, but that's pretty valuable on the way there.
John E. Moore: Giving them, but I would say that intelligence has driven us towards our focus on in stock position and our focus on equipment service levels. Because we found those to be good predictors of customer turnover. So we're leveraging that tool for more than just hey, what's the price of this kind of coffee.
John E. Moore: But that said we haven't gotten too.
John E. Moore: The basket driver yet I would say we've found lower hanging fruit, that's pretty valuable on the way there so got it.
Gerard J. Sweeney: Got it. Got it. And then just New Growth, New Products, Growth Opportunities, obviously, you know, I think you guys are getting to the point where operational efficiencies are coming into play. We're seeing in the margin, Unknown Executive, John Moore, Brad Bollner, Farmer Bros Co
Speaker Change: Got it.
Gerard J. Sweeney: And then just.
Gerard J. Sweeney: New growth new products growth opportunities obviously.
Gerard J. Sweeney: I think you guys are getting too.
Gerard J. Sweeney: Where operational efficiencies are coming into play we're seeing in the margins, we're seeing in EBITDA results et cetera, and your target for free cash flow. The natural step is end up and I know you're not done with the outside but next step is maybe new products and adding that to the system and getting some growth maybe some thoughts on that.
John E. Moore: Yeah, you bring up a great point, Jerry. I mean, as you know, we've been emphasizing both the shot, the innovative syrup line extension that we have in our portfolio, and also Boyd's liquid ambient coffee, both of which are beginning to get traction. There's no question that when we talk about driving top-line growth, one of the bigger opportunities for us is really the idea of product penetration and the customers that we have.
Speaker Change: Yes, you bring up a great point, Jerry I mean, as you know we've been emphasizing both the shot the innovative syrup line extension that we have in our portfolio and also the boyd's liquid ambien coffee both of which are beginning to get traction. There is no question. When we talk about driving top line growth one of the bigger off.
John E. Moore: Opportunities for US is really the idea of product penetration and the customers that we have and that's we're offering products like shop like the boyd's liquid ambient coffee throughout the rest of this fiscal year as they begin to gain traction probably into the next fiscal year as they continue to grow and come to maturity those will continue.
John E. Moore: And that's where offering products like shots, like Boyd's liquid ambient coffee, throughout the rest of this fiscal year, as they begin to gain traction, probably into the next fiscal year, as they continue to grow and come to maturity, those will continue to be points of focus for us. We do see some positive signs of growth in both right now. And then, obviously, we also have an eye to the future. So in a future state beyond that, what will the next innovation look like? We're constantly looking toward a future state where we'll be shifting the emphasis in the months ahead toward new products and new introductions. Got it.
John E. Moore: To be points of focus for us we do see some positive signs of growth in both right now.
John E. Moore: And then obviously, we also have an eye to the future. So our future state beyond that what will the next innovation look like are we're.
John E. Moore: We're constantly looking toward the future state, where we will be shifting emphasis in months ahead toward towards new products and new introductions.
Gerard J. Sweeney: Got it. And staying with this theme on growth, what about adding, you know, more routes, or are your routes optimized, or is there an opportunity there?
Speaker Change: Got it and staying with this.
Speaker Change: Theme on.
Gerard J. Sweeney:
Gerard J. Sweeney: Growth.
Speaker Change: What about adding.
Speaker Change: You know more routes or are your routes optimized or is there or is there an opportunity there.
John E. Moore: There may very well be opportunity there longer term, but I think right now what we're looking at, as opposed to adding routes, is adding density to the routes that we have. And I think one of the things we're looking at, you know, how do we get more value out of the existing infrastructure that we have? There's still a lot to be gained through that exercise. And I think we are really looking to leverage the assets we have where we have them and look channel by channel for opportunity.
Speaker Change: There may be it may very well be opportunity there longer term I think right now what we're looking to as opposed to adding routes adding density to the routes that we have and I think one of the things. We're looking at how do we get more value out of the existing infrastructure that we have there is still a lot to be gained through that exercise.
John E. Moore: And I think we are really looking to to leverage the assets, we have where we have them.
John E. Moore: Look channel by channel four opportunity, so rather than adding routes I think you would see us optimizing routes and adding value to the routes that exist at the moment.
John E. Moore: So rather than adding routes, I think you would see us optimizing routes and adding value to the routes that exist at the moment. But we also keep in mind, we've completely transformed the sales team and fulfillment capability we've added with Tom Bauer's leadership as the chief commercial officer. We've completely restructured that side of the business and established new KPI sets, what we refer to internally as power rankings. And we've created somewhat of a performance-driven culture on that side of the equation. And that's another piece that we look to in order to grow through new customer acquisition, but at the same time, with an eye to establishing density in areas where we already exist.
John E. Moore: But we are also keep in mind we've completely.
John E. Moore: <unk> transformed the sales team and fulfillment capability, we've added with with Tom Bowers leadership as the Chief commercial officer, we've completely restructured that side of the business and establish new Kpis sets, what we referred to internally as power rankings.
John E. Moore: And we've created somewhat of a performance driven culture on that side of the equation and.
John E. Moore: And Thats another piece that we look to in order to grow through new customer acquisition, but at the same time with an eye to establishing density in areas, where we already exist got.
Gerard J. Sweeney: Got it. Density is key to the route.
Speaker Change: Got it.
John E. Moore: Density is key to route based business, so I get that.
Gerard J. Sweeney: I get that. That is it for me. I appreciate it. Thanks.
Speaker Change: That does it for me I appreciate it thanks.
Speaker Change: Thanks, Jerry Thanks sure.
Speaker Change: Okay and if you have a question. Please press Star then one.
Gerard J. Sweeney: Our next question will come from Eric the Laurie as with Craig Hallum Hallum Capital Group you May now go ahead.
Unknown Executive: Great, thank you for taking my questions and congrats on the skew rationalization progress here. Thanks, Eric.
Speaker Change: Great. Thank you for taking my questions and congrats on the SKU rationalization progress here.
Speaker Change: Thanks, Eric.
Speaker Change: My first question is kind of <unk>.
Speaker Change: Having a bit more deeply into that SKU rationalization and the progress there.
Speaker Change: So understand that you.
Speaker Change: You're expecting to have all the legacy Skus start fully out by the end of Q1 of fiscal 'twenty five.
Speaker Change: Have you finalized, which skus and brands will be included in the new tiered offerings have you have you sort of fully built out what those tiers will look like.
John E. Moore: We have in terms of the first two tiers, where most of the volume is. So, essentially, in the traditional tier, we've established the Farmer Bros brand as our traditional tier offering. And then, what we're referring to as the premium tier, we have Boyd's brand position to take that space. We're still working on the brand expression in the specialty space. But those will be essentially the three defined tiers. The value propositions presented by those are pretty well defined. And essentially, now we're in the brand building effort on the specialty side, but the Farmer Bros. and Boyd's brands are established and will be the brands of choice for those other two tiers.
Unknown Executive: We have in terms of the first two tiers, where most of the volume is so essentially in the traditional tier we've.
John E. Moore: We've established the farmer brothers brand as our traditional tier offering.
John E. Moore: And then what we're referring to as the premium tier we have the boyd's brand position to take that space.
John E. Moore: Still working on the brand expression in the specialty space, but but those will be essentially the three define tiers.
John E. Moore: The value proposition is presented by those are pretty much well defined and essentially now where we're in the brand building effort in the specialty side, but the farmer brothers and the Boyd's brands are established and will be will be the brand of choice for those other two tiers.
John E. Moore: Got it. And, you know, understand that we're at sort of more than half of your inventory now are these new SKUs. You know, you mentioned the obvious sort of delay of getting these SKUs in the inventory and then out into the market. I'm just wondering if any of these newer tiers have gone out into the market and if there's been any sort of early feedback from customers or any, any sort of early insights to ascertain from that.
Speaker Change: Got it.
John E. Moore: And.
John E. Moore: Understand that we're at sort of more than half of your inventory now is.
John E. Moore: As these new Skus.
John E. Moore: You mentioned, the obvious sort of delay of.
John E. Moore: Getting these skus in the inventory and then out into the market just wondering.
John E. Moore: If any of these newer tiers have gone out into the market and if there's been any sort of early feedback from customers are.
John E. Moore: Any sort of early insights to two.
John E. Moore: To ascertain from that.
John E. Moore: No, that's a great question. I mean, I would say that the early indications are that we've managed thus far to thread the needle when it comes to positioning the new products in the market space. Keep in mind that both Farmer Bros. and Boyd's had been in the market in the past and were essentially distilling down other brands that had been out. But even in those markets, they may have had some exposure to Farmer Bros. and Boyd's. So the resistance has not been significant.
Speaker Change: That's a great question I mean, I would say that the early indications are that we.
John E. Moore: We've we've managed thus far to thread the needle when it comes to positioning the new products into the market space keep in mind that both farmer brothers and Boyd had been out in the market in the past and we're essentially distilling down other brands that had been out but even in those markets. They may have had some exposure to pharma.
John E. Moore: Brothers and boards. So the resistance has not been significant.
John E. Moore: Having said that, on the manufacturing side and the planning side, the efficiencies are definitely there and are being realized. So, you can imagine when it comes to procurement. The effort and attention that you need to spend on sourcing when you've got half of the coffee SKUs that you had in the past is radically reduced, and you can really focus on adding value there. When it comes to the manufacturing and production side, even more so, the planning of manufacturing on the lines is much more straightforward.
John E. Moore: Having said that on the on the manufacturing side and the planning side. The efficiencies are definitely there and being realized so you can imagine when it comes to procurement.
John E. Moore: The effort and attention that you need to source when you've got half of the coffee Skus that you had in the past is radically reduced and you can really focus on adding value there when it comes to the manufacturing and production side, even more so the planning of manufacturing on the lines as much.
John E. Moore: More straightforward you can realize the efficiencies by not turning over your line changes as often and so there we've seen a great deal of efficiency gains when it comes to the manufacturing in Portland.
John E. Moore: You can realize efficiencies by not turning over your line changes as often. And so there we've seen a great deal of efficiency gained when it comes to manufacturing in Portland. Also, the fact that we've been able to consolidate the vast majority of the manufacturing in the Portland facility has made that facility much more efficient in and of itself. So we're seeing lots of advantages there. Where I think we'll continue to see efficiencies gained in the future, as that stretches through the chain and it goes into the distribution center and into the branch level and onto the trucks, ultimately, we'll see a much more streamlined capability.
John E. Moore: Also the fact that we've been able to consolidate the vast majority of the manufacturing in the Portland facility has made that facility much more efficient in and of itself. So we're seeing lots of advantages there.
John E. Moore: Where I think we will be continue to see.
John E. Moore: Efficiencies gained in the future.
John E. Moore: Is that as that stretches through the chain and it goes into the distribution center and into the branch level and onto the trucks ultimately we will see.
John E. Moore: A much more streamlined capability, so as much as producing things in getting to the right branch into the right truck, we have improve that part of the ability to improve that has been yes communication additional infrastructure and resources.
John E. Moore: So as much as producing things and getting them to the right branch and to the right truck, we have improved that. Part of the ability to improve that has been, yes, communication, additional infrastructure, and resources, but it's also the fact that the offering set has been radically reduced. So we're going to see efficiency when it comes to the amount of space we need, and the amount of gas we burn. Every single piece of the puzzle will be more efficient as we continue to roll this out.
John E. Moore: But it's also the fact that the offering set has been radically reduced so we're going to see efficiencies when it comes to the amount of space, we need the amount of gas we burn.
John E. Moore: Every single piece of the puzzle will be will be more efficient as we continue to roll this out.
John E. Moore: Great color and very great to hear. Last question on the new tiered offerings here. Do you anticipate any meaningful gross margin difference among the tiers? And you know, understand that specialty is still sort of a work in progress here. But just as you see it now, do you anticipate any meaningful gross margin difference among the tiers?
Speaker Change: That's great color and very great to hear.
John E. Moore: Last question on the on.
John E. Moore: On the new tiered offerings here do you anticipate any meaningful gross margin difference among the tiers.
John E. Moore: Understood that specialty is still sort of a work in progress here, but just as you as you see it now do you anticipate any meaningful gross margin difference among the peers.
John E. Moore: No, you know, honestly, keep in mind that we have an existing business associated with these tiers, and we are as much collapsing multiple brands into singular brands as anything. So we already have gross margin data around where these brands have been positioned. And as such, I think we're able to maintain consistency in gross margin across the three brand tiers. Brad, if you want to speak to him about that?
John E. Moore: No.
John E. Moore: Honestly keep in mind, we have existing business associated with these with these tiers and we are we are as much collapsing multiple brands into singular brands as anything so we already have.
John E. Moore: Gross margin data around where these brands had been positioned and as such I think we're able to maintain consistency in the gross margin across the three brand tiers, Brad if you want to speak to that yes.
Brad Bollner: Yeah, well, I would call out, Eric, like, your question, the answer is definitely, you know, I think we're thinking of the same margin profile within each tier. But that said, the simplification of our product offering, and it on the back end, is going to allow us to be very intentional with our pricing in a way that will get all the votes. So there's an opportunity to find, you know, inefficiencies in where individual customers are priced and move them into the new system.
Brad Bollner: I would call out Erik but youre.
Brad Bollner: A question and the answer is definitely.
Brad Bollner: We're thinking of it the same margin profile within each year.
Brad Bollner: But that said the simplification of our product offering and on the back end is going to allow us to be.
Brad Bollner: Very intentional with our pricing in a way that.
Brad Bollner: We will raise all boats. So so there is opportunity to find to find inefficiencies and where individual customers or price to move them into the new system.
Brad Bollner: So there's potential to derive more value, not to the extent we've done over the last year with, you know, 600 basis points. This isn't going from, you know, zero to full, but it is an opportunity for us to be much more strategic with the pricing on our ongoing maintenance.
Speaker Change: So there is potential to derive more value not to the extent that we've done over the last year with 600 basis points.
Brad Bollner: This isn't going from.
Brad Bollner: Zero to full but it is it is an opportunity for us to be much more strategic with the pricing on our ongoing maintenance basis.
Unknown Executive: All right, that's helpful. Um, and then on the technology upgrades, nice to see these handheld device upgrades and the expected improvement there in inventory management and customer service. Can you give us a high-level update on what other technology upgrades you're focusing on? I know last quarter you mentioned the or you touched on the CRM upgrade. Maybe just an update there and on any other technology upgrades you're working on. Thanks.
Speaker Change: Alright Thats helpful.
Unknown Executive: And then on the technology upgrades are nice to see.
Unknown Executive: The handheld device upgrades and we expect an improvement there.
Unknown Executive: Inventory management and customer service can you just give us a high level update on what other technology upgrades you're focusing on.
Unknown Executive: Last quarter, you mentioned the <unk>.
Unknown Executive: You touched on the CRM upgrade.
Unknown Executive: Just an update there and any other technology upgrades you are working on.
John E. Moore: Sure, we refer to that sort of suite of improvements internally as Project Symphony because, essentially, what we're doing is seeing RIT capability as really a partner in the business, not sort of as an isolated or siloed activity. And as such, I think it's touching every piece.
Speaker Change: Sure, we refer to that sort of suite of improvements internally as project Symphony.
John E. Moore: Because essentially what we're doing we're seeing alright capability as really a partner in the business not sort of as an isolated or siloed activity.
John E. Moore: And as such I think it's touching every piece. So we're implementing new software programming around everything from risk mitigation in sourcing when it comes to commodities driven purchasing.
John E. Moore: So we're implementing new software programming around everything from risk mitigation and sourcing when it comes to commodities-driven purchasing. We're utilizing it when it comes to CRM activities, and we have rolled that out. What we're referring to as phase one is now complete, and we're into phase two of the rollout with the CRM. We're utilizing that when it comes to street-level operations and handheld technologies, both in terms of hardware and software.
John E. Moore: We're utilizing it when it comes to the CRM activities and we have rolled that out.
John E. Moore: What we're referring to as phase one is now complete we're into phase two of the rollout with the CRM.
John E. Moore: We're utilizing that when it comes to street level operations and handheld technologies. Both in terms of hardware, but also software so improvements there to be expected and let's not forget we had significant upgrades to the ERP over the last six months. So a great deal of work happening on that side.
John E. Moore: So improvements are to be expected. And let's not forget, we have had significant upgrades to the ERP over the last six months. So a great deal of work is happening on that side. So, you know, again, we're seeing that the IT integration is a key part of what we're doing driving the business forward.
John E. Moore:
John E. Moore: So.
John E. Moore: Again, we're seeing that the integration is a key part of what we're doing driving the business forward.
Unknown Executive: Very helpful. I appreciate the call. Thanks for taking my questions. Sure.
Speaker Change: Very helpful. I appreciate the color thanks for taking my questions.
Operator: Thanks, Ed. This concludes our question and answer session. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Speaker Change: Sure. Thanks, Eric.
Speaker Change: This concludes our question and answer session.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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