Q4 2019 Earnings Call
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This is Rachel RBC CEO .
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In Q.
Integrating our channel and street businesses under the structure.
As we evaluated our DST accounts it became clear that many of our channel accounts our regional in nature.
Additionally, we connected the coffee brewing equipment control installation and service with regional sales management.
The team's ability to be effective and control expenses has been aided enormously by our business intelligence tool.
This tool allows sales team members the flexibility to use this key asset along with service to build our business at the local level.
As we have begun the new fiscal year. This team is executing with a budget reduced by $14 million compared to fiscal 19.
For June July and August were running favorable to the plan.
In addition, this group is charged with developing revenue streams associated with equipment sales and service. We are already seeing results from this initiative long term, we see this as a strategic opportunity.
We have also reduced the span of each of our regions to focus on major metropolitan markets and their surroundings.
In addition.
We've added a developing market region for less dense markets that will require different forms of sales attention Roastery direct services being one. These sales efforts are being supported by trade marketing reporting to the senior VP and GM of direct store delivery.
Further.
We have updated our DSD sales incentive program for regional sales representatives, providing significant upside for improved performance.
With added incentive when the branch team exceeds their goal is a unit.
We believe we have established the right structure, the right team and have given our people the necessary tools to see greater success in retaining customers and winning new business.
Our direct ship business performed in line with expectations in Q4.
In terms of pounds sold to large national accounts with that said this business continues to be impacted by a highly competitive pricing environment.
As we look to the future, we see growth opportunities with mid tier and smaller customers that are more of a hybrid between direct ship and DSD.
These are customers, who don't require significant investment of capital and people.
They are coming to us for product development equipment expertise and additional services, allowing us to achieve fair margins.
While we are working to improve and grow our DSD business, we are making changes within direct ship through increased our focus on these mid tier and smaller hybrid accounts. We're also looking beyond this two additional growth opportunities as I mentioned earlier, we are seeing good traction with our roaster direct services and see opportunity to continue building, our ecommerce business, where the services we provide.
Our differentiator with customers.
Our systems and processes objective is to develop critical reports needed to better manage and control our business.
First for DSD, the new business intelligence tool that I briefly mentioned earlier is proving to be transformational. It provides key details about our customers, including profitability service events sales drop size.
And equipment installed.
The tool will allow the user to drill down from total to branch to route for customer by product sold or information on any element of our business proposition.
We've already put this tool to use and its providing.
The basis for setting our sales objectives, and how we are working toward achievement of those objectives.
Second we are continuing to move ahead with the upgrade of our legacy GE Enterprise system. This is a fundamental tool, which hasn't been updated for a number of years a significant improvement of this system will allow us to manage our business more effectively and efficiently.
Third we have piloted a 24 seven customer call center, which provides customers with immediate assistance.
The initial results of the pilot have been excellent and a plan for the national rollout is currently underway.
And finally.
We have made progress as it relates to the technology our employees are using in the field.
While we have made necessary improvements to our handheld technology. We are also adding an all hours field employee call center for our employees with product supply issues to directly reach an employee with utility to fix the issue immediately.
For SK, you rationalization, and our 100% product availability commitment.
We are seeing progress in reducing our SKU count.
But we still need to work through existing raw materials inventory.
For eliminated SK use.
This process for coffee entails rationalization from coffee blending to grind consolidations.
Through standardization of films to case packs, along with the reduction of SK use for Allied products. We anticipate the result will be longer runs and fewer changes, while providing for more focused selling and ultimately reducing scrap.
Product availability.
At 100%.
Involves better forecasting at the S.K. level.
And visibility of inventories of coffee and allied products, all the way through our branches.
The IP team is nearing completion of a branch tool that will improve ordering capabilities and provide better visibility into inventory.
Within this priority as a reduction of scrap.
In 2019, our scrap was unacceptable.
It was caused by over production.
Houston's inability to produce without creating production scrap and other field issues associated with obsolete product.
More efficient manufacturing operations and improved product availability, coupled with a vibrant supply chain is important.
For our success now as well as in the long term.
As our team has focused on these five priorities since may.
And as we have entered fiscal 2020.
We've also made a number of other leadership changes and adjustments to the organizational structure that we believe will foster improved execution and enable more nimble decision making.
In concert with the leadership changes.
We right sized the organization and eliminated approximately 60 physicians, mostly at our corporate headquarters in July to help us operate more efficiently.
This will generate estimated savings of $7.6 million in fiscal 2020.
We recorded a severance charge of $1.9 million in the first quarter of fiscal 2020.
Having provided this update on progress made to improve execution and put the company on the right path to improved financial performance I'd like to turn next to our outlook for fiscal 2020.
With a new permanent CEO coming onboard and the business in the midst of a turnaround.
We are not providing an expected range for adjusted EBITDA for fiscal 2020 with that said.
I'd like to give some qualitative guidance for the fiscal year.
We currently anticipate that adjusted EBITDA will be down somewhat compared to fiscal 19.
Factoring in the following assumptions.
First.
We expect direct ship to remain steady.
Second our outlook also factors a turnaround we expect to see in DST in the third quarter with its new regional structure in place and more refined balanced between our channel and street account based business.
Additionally, this assumes we pay our incentive plan this year, whereas we did not in fiscal 2019.
David will provide some additional metrics in a moment that may also be helpful for your financial models.
Before I turn the call over to him I'd like to speak a few moments about the company's incoming CEO .
We are thrilled to have darrelle mattering, joining farmer brothers and are confident.
He is the ideal executive to lead farmer brothers into its next stage of growth Darrelle brings over three decades of innovative leadership in turnarounds supply chain management expertise as well as it has deep experience in the food and beverage industry.
He most recently served as president and CEO of Earthbound farm organic where he led the company to deliver record operational execution metrics.
Prior to that.
Ill health multiple senior positions that food and beverage companies, including Starbucks.
Key to brands and Pepsi bottling group.
He will officially begin in the role on September 30.
And we look forward to benefiting from his experience insights and strong leadership capabilities.
My time as interim CEO has been short but productive.
I am confident the rel will hit the ground running and continue the great execution already demonstrated by this talented team.
Well and I have already and in depth discussions about farmer brothers business.
The actions, we have taken in the past quarter.
And our five priorities are designed to better position the company for the future with this foundation and darrelle stepping in as CEO . We believe the company is well positioned to execute our strategy on a standalone basis and also pursue M&A opportunities in parallel to drive maximum value for our shareholders.
As it relates to our broader strategy going forward.
We recognized that we operate in a consolidating industry and we want to be part of that consolidation. We believe that there will be potential opportunities on a regular basis, and we plan to evaluate them as they come.
It's been an honor serving as farmer brothers.
Interim CEO and I look forward to working with development as the company continues to improve and evolve with that ill now turn the call over to David for a more detailed review of our financial results.
Thanks, Chris ill now review, our fourth quarter and fiscal year results, beginning with coffee volumes Green coffee processed and sold in the quarter was flat at 27.4 million pounds compared to the fourth quarter of fiscal 2018, the mix of coffee volumes processed and sold during the quarter was approximately 8.9 million pounds or 32.4% of the total volume through our DSD network, while direct ship customers represented approximately 18.2 million pounds of green coffee processed and sold or 66.5% of total volume.
Point 3 million pounds or 1.1% of total volume was through distributors.
The flat coffee volumes reflects incremental new volume from the ramping of our new large global convenience store retailer, we began shipping earlier in fiscal 2019.
Offset by the impact of two brands that we serviced in the prior year that were brought in house by the owners of those brands and reduce coffee volumes from one of our largest customers as well as declining volume within our DSD network.
Turning to the income statement net sales for the quarter were 142.1 million a decrease of $7.5 million or 5% from 149.5 million reported in the same period of the prior year.
The decline in net sales was driven primarily by lower sales of coffee and Allied products sold through our DSD network offset by slightly positive growth within our direct sales channel net of the impact of lower coffee prices for our cost plus customers net sales for our direct ship channel continued to improve as we ramp volume of the new large global convenience store retailer and trends improved from one of our largest customers.
Sales through our DSD network was negatively impacted by higher customer attrition related to the boys business integration route optimization and lower inventory fill rates associated with downtime at our Houston plant.
Gross profit in the fourth quarter of fiscal 2019 was 37.7 million a decrease of 15 million.
From the prior year period, and gross margin decreased to 26.6% from 35.3%. The decrease in gross profit was primarily driven by lower year over year net sales of $7.5 million and higher cost of goods sold.
The higher cost of goods sold is attributed to higher inventory markdowns on slow moving inventory.
Higher manufacturing costs, driven by downtime associated with aging production infrastructure at our Houston facility.
Higher coffee brewing equipment, and labor costs and unfavorable shift in customer mix.
However, the margin impact was partially offset by lower green coffee prices I'd like to discuss a few of these items now in more detail.
First excess slow moving inventories remained a challenge in the fourth quarter, resulting in higher inventory markdowns and scrap expense as we work through the excess product associated with the boys acquisition.
We also saw elevated scrap generated from production challenges at our Houston plant as of year end, our inventory levels have declined and are now back in line with historical levels.
The higher manufacturing costs, we reported in the third quarter at our Houston plant continued into the fourth quarter negatively impacting gross profit. This month, we entered into a sale and leaseback of our Houston facility, which Chris discussed earlier that will unlock additional capital, enabling us to transfer volume away from our Houston production facilities to our other roasting facilities, which in turn should reduce future manufacturing downtime and scrap expense.
We have worked through the higher coffee brewing equipment costs throughout the quarter declining over the third quarter, but remained higher than the fourth quarter of last year.
The reductions in costs as a result of increased cost controls we have put in place late in the fourth quarter, we expect to see further improvements in fiscal two point as the cost reductions and process changes fully take hold.
Turning to operating expenses, our operating expenses for the quarter decreased $6 million to $44.7 million from $50.7 million and as a percentage of net sales declined to 31.5% compared to 33.9% of net sales in the fourth quarter of the prior year.
The decrease in operating expenses was primarily due to synergies achieved through the boys business acquisition.
Headcount reductions and other efficiencies from DSD route optimization, lower acquisition and integration costs and a reduction in bonus expense.
Interest expense in the quarter increased 8.3 million over the prior year period to $2.8 million, principally due to higher outstanding borrowings on our revolving credit facility primarily related to the boys acquisition.
Other expense increased 5.2 million to $2.1 million in the quarter compared to the prior year period, primarily due to increased mark to market losses on coffee related derivative instruments not designated as accounting hedges.
Turning to income taxes, we reported an income tax expense of $1 million in the fourth quarter of fiscal 2019 as compared to $1.3 million in the prior year period.
The lower tax expense in the current year is primarily due to losses from operations in the fourth quarter of fiscal 2019 as compared to income from operations in the same period in 2018.
As a result of these factors net loss was $8.8 million in the fourth quarter of fiscal 2019 as compared to net income a point $1 million in the prior year period.
Net loss available to common stockholders was $8.9 million or 52 cents per diluted share available to common stock holders in the fourth quarter of fiscal 2019.
Compared to breakeven net income available to common stockholders in the prior year period.
Adjusted EBITDA was $3.9 million in the fourth quarter of fiscal 2019 as compared to $14 million in the prior year period, and adjusted EBITDA margin declined to 2.8% for the quarter compared to 9.3% for the same period last year.
Our full year, adjusted EBITDA was $31.9 million, which fell $2 million below the low end of the revised guidance range, we provided last quarter.
Now turning to the balance sheet.
Overall, we've been strengthening our financial flexibility by reducing debt levels and managing our working capital more efficiently. These efforts have led to improved free cash flow at the end of the quarter. We had 7 million in cash and we had 92 million borrowed on our revolving credit facility or 85 million in debt net of cash.
This compares to debt net of cash at March 30, Onest 2019 of 110.8 million a decline of $25.8 million.
As of June Thirtyth availability under our credit facility was $56 million compared to $25 million in bank availability as of March 30, Onest 2019.
During the quarter, our collections of accounts receivables improved and our accounts receivable balance declined by $10.7 million to $55.1 million compared to 65.8 million at the end of the third quarter and down $3.4 million from the prior year to 58.5 million.
Our inventory levels also declined during the quarter by 12.5 million to 87.9 million compared to 100.4 million at the end of the third quarter and down $16.5 million for the prior year of 104.4 million.
Accounts payable increased during the quarter by $10 million to $72.8 million compared to $62.8 million at the end of the third quarter and up 16.2 million from the prior year to 56.6 million.
During fiscal 19, we were able to negotiate extended vendor terms, which supported the higher payable balance at the end of the quarter.
Turning to capital expenditures capital expenditures and cash for the fourth quarter were 4.4 million.
With $4.1 million related to maintenance capital.
Total capital expenditures for the year with $34.8 million in line with our expectations.
Depreciation and amortization expense was $7.8 million in the fourth quarter versus $7.7 million in the same period of the prior year.
Looking out to fiscal 20, we expect maintenance capital to range between 17 million to $20 million a decrease over fiscal 19 maintenance capital of 21 million.
The reduction in fiscal two falani maintenance capital over fiscal 19 is due to lower planned spending on new coffee brewing equipment and an increase in our use of refurbished coffee brewing equipment, which has a lower cost per unit.
We expect depreciation expense in fiscal 23 range between $7.7 million to $7.9 million for the next several quarters.
We expect minimal cash and accrued tax expense in fiscal two money.
We expect our debt net of cash to decline during the first quarter from $85 million at the end of the year to 78 million to 82 million by September Thirtyth 2019.
We remain focused on the five operating priorities, Chris outlined earlier on the call and the entire organization is committed to returning farmer brothers to growth and profitability and with that I'd like to open the call up for questions operator.
Ladies and gentlemen, if youd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telethon.
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Again that Star then one if you'd like to ask a question.
Our first question comes from the line of Gerry Sweeney with Roth Capital. Your line is now open.
Hi, Good afternoon, Chris and David Thanks for taking my call.
Hi, Jerry.
Well lot.
Presented in the.
In your opening remarks here. So couple of things that jumped out at me that I wanted to highlight and get a little bit more detail and one of them was on a direct ship business.
Sounds like you are going to shift a little bit of focus that mid tier and hybrid.
Potential customers.
Because maybe pricing in the market.
Is this a little bit of concern that.
You are now well positioned to go after some of these larger direct ship customers.
Or is the market changing substantially.
This is the first really heard about this.
I, just want to get a little bit more detail, but.
There is an important component.
Hey, I think possibly the answer is both.
But what what is happening is is large national accounts.
So there is a lot of competition for the business, they usually have three or four suppliers.
And we're in a in a time where.
Our our yields are spiraling down.
In an unfavorable direction, so that's occurring and you begin to lose.
Your ability to supply it and make a reasonable amount of money.
That being said.
The other piece that that we're realizing is we have lots of opportunity to add value to sort of the mid tier and hybrid accounts that actually uses for our expertise.
And it gives us a chance to impact their business favorably and and make a fair margin.
So that's that's sort of our take on the industry right now.
And when continued we continue to look at national accounts, and we evaluated when they come up for bid and will make our determinations when that happens.
And does Houston play a part into this I am assuming Houston.
Going away at this three year lease back is your time to fully transfer production get SK years qualified at the other facilities. So is it correct to think that this facility is no longer going to be part of the portfolio at some point in the future.
We haven't made that decision yet.
But I do think it.
It is our most expensive plants dude due to its age and its production cost.
I would say hearing what we are what we are finding that the client is not necessarily connected to our strategy. If you look at the profitability, we're making on these mid tier customers as they are coming out to bid. It just has a lot more opportunistic for us to seek those out and we're seeing the opposite happened in on.
The larger Cas were taken out of it so we're shifting towards more of a hybrid or in the middle size account or the opportunity is very good and it's where we have a good competitive advantage on the things that we offer that they want.
No I mean.
The second part of that would be right. So Houston I mean actually.
Sometimes plan and you have northlake, which is.
Well say steady yard or at least new and four.
Much more efficient.
What's the calculus of not shutting Houston down and just moving that all the northlake and better positioning.
Your current assets.
We're not commenting on on much more on Houston, and we've said, but we'll be doing.
A lot of analysis over the next.
30, or so months to determine exactly what to do with our capacities.
I understood I know you're limited, but I appreciate that and then one more question I don't want to.
Back in June .
At this time.
Good morning.
Attrition decline this has been ongoing.
And even new initiatives showing any signs of rectifying some of the attrition.
We are.
This is a long haul.
I've been doing this about a 130 days and and.
I think.
We are we are much better organized and we have.
A much.
Improved team, along with better systems and processes to begin to move the needle and and that's what we're seeing we're seeing a slight turn but not enough to sit down and say we've we've turned the corner. This is this is going to take some time.
High level question, very qualitative, but I mean at some point.
With some of the decline, especially the smaller.
With the transfer or maybe some of them the drop ship less visits by or drop off of coffee. I mean was there just a disconnect on potential customer service or getting to know that driver who is delivering some of it.
Did that play into it.
Potentially.
I think one of the things you're saying is is the driver the person who delivers the product really important through the customer relationship and that is true so as as as turnover occurs.
It takes a while to train.
Drivers and for them to understand.
The customer dynamics and what their needs are so thats part of it.
Also there's there's a part of it.
Of.
Smaller accounts actually we're achieving some success with our Roastery direct services.
Which put that into a different form of distribution, which some customers, especially small operators like.
Because they receive the coffee.
In a different fashion than a delivery so some of that occurring and we're happy with that.
In addition, we we have customer profitability.
From B to bite by customer and it allows us to to investigate what makes that customer on profitable and and fiction and sometimes we find they are buying coffee.
At outside our system.
And using our service and equipment.
In some cases, we recover that account and make it more profitable and others, we take our equipment back. So there's lots of moving pieces, but we're we're achieving that discipline I think thats necessary to make this make DSD very successful.
Got it I appreciate it David I'll jump back fine. Thank you.
Thanks.
As a reminder, ladies and gentlemen that is star then one to ask a question.
Our next question comes from the line of Kara Anderson with B. Riley FBR. Your line is now open.
Hi, good afternoon.
Hi, good afternoon.
So I just wanted to kind of follow up on the customer attrition issue can you speak at all to where you think those concerns might be going are they going to your competitors that are going to club stores, just curious as to where that business is being lost.
Well I think the first thing is.
And I think the the we have a lot of people who've come from from other DSD networks and.
That service the similar customers and they expect to churn of about 30% a year between.
Between going out of business new business.
Bankruptcies, just sort of what just a normal situation that you would find in businesses.
Beyond that.
I think what we what we have experienced.
Is that that.
We kind of lost our way in terms of customer service.
As as we made some changes in DSD and that prompted customers to move elsewhere.
And and that we're in the process of changing.
But also.
People are moving too, we suspect internet businesses and and getting their product in a different form.
Well, we think we can interrupt that with our Roastery direct and we are.
And we think the VI tool is giving us much more ability to go back and have conversations with customers about the benefit of having quality service, having coffee brewing equipment that that that is serviced on a regular basis that is provided to them as long as they purchase acceptable minimums of minimums of product. So I think we're working at add having.
Our because the churn be exceeded by achieving new customers and basically building our business within the customers. We have because a lot of a lot of our customers don't buy the full line of product.
And customer profitability brings that right to the front than enables us to act on that so we have lots of lots of things going on that I think are going to.
Two.
Make the attrition and be additions.
And Karen to add to that I mean, we didnt know that call that our our fill rates were not where we wanted them to be and so although it's an existing customer and they buy from us. When we are unable to philly deliver their order of course, they're going to buy from someone else and they should.
So thats on us and that's why we called out we're addressing that some of the things we're doing with respect to Houston. So we can raise our fill rates up higher.
As well as some SKU optimization, we're going through to make it easier to make our fill rates. So it's just not customer churn. It's also existing customers that bought last quarter.
And on that point I was going to ask about sort of the fill rate so on.
On hearing is that primarily at the seizing on or were you unable to fill inventory for some of your larger customers.
No I think it's principally DSD.
That was impacted by that.
Okay, and then you also called out an unfavorable mix of customers I think last quarter. This quarter again can you kind of I guess expand on that and give us a little bit more color.
Well the first call out is our Dsos are direct ship business grew at a faster rate than our DSD business. So that will drive an unfavorable mix by itself and I think thats the principle driver impacting our margins.
Got it.
And then I wanted to clarify I guess on the directional.
Outlook for fiscal 2020, I think you said, you're expecting adjusted EBITDA to be down somewhat from 2019, but it sounds like you are also expecting a flat direct ship and maybe some improvement in DSD in Q3, if I heard correctly and as well as adding 7 million dollar then sort of cost savings from headcount reductions I guess can you reconcile that for me. This doesn't quite I guess add up to sort of what you would expect.
Our what you're expecting to be a down.
Adjusted EBITDA outlook.
Sure sure a couple of things one the run what rate of our DSD business has been declining so in the near term, we expect that trend to hold.
As Chris mentioned some of our direct ship business not all of it is facing more competitive pricing so that won't impact us and then last year, we did not fund our incentive plan and so that will cost us somewhat more and then the offset going the other way as we did.
An out some cost savings principally a headquarters that will drive savings that you alluded to so if you net all those out in total you get to about very close to where we were last year slightly down.
Thank you that's very helpful.
Im showing no further questions in queue at this time I would like to turn the call back to Mr. modern for closing remarks.
Thank you very much and we really appreciate all of you on the call we have a dedicated employee 18.
Working to turn this business around and so we appreciate appreciate you listening.
And we believe we have an opportunity to be.
A market leader.
Thank you for joining us today and for your continued support and interest in farmer brothers.
Ladies and gentlemen, thank you for your participation in today's conference.
This concludes the program and you may now disconnect everyone have a great day.