Farmer Bros Co (FARM) 2020 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Farmer Brothers First Quarter Fiscal 2020 Earnings Conference Call.

(Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the call over to your host, Rachel Goldman.

Please go ahead.

Thank you.

Good afternoon, everyone, thank you for joining Farmer Brothers First Quarter Fiscal 2020 Earnings Conference Call.

Participating on today's call are Deverl Maserang, President and CEO; and Scott Lyon, interim Principal Financial and Accounting Officer.

Earlier today, the Company issued its earnings press release, which is available on the Investor Relations section of Farmer Brothers' website at www.farmerbros.com.

The press release is also included as an exhibit to the Company's Form 8-K available on the Company's website and on the Securities and Exchange Commission's website at www.sec.gov.

A replay of this audio-only webcast will be available approximately 2 hours after the conclusion of this call.

A link to the audio replay will also be available on the Company's website.

Before we begin the call, please note that all of the financial information presented is unaudited and that various remarks made by management during this call about the Company's future expectations, plans and prospects may constitute forward-looking statements for purposes of the safe harbor provisions under the Federal Securities Laws and 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 forward-looking statements.

Additional information on factors that could cause actual results and other events to differ materially from those forward-looking statements is available in the Company's press release and public filings.

On today's call, management will also use certain non-GAAP financial measures, including adjusted EBITDA and adjusted EBITDA margin, in assessing 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 press release.

I'll now turn the call over to Deverl.

Deverl, please go ahead.

Thank you, Rachel.

Good afternoon everyone and thanks for joining us.

It's a privilege to be with you today on my first earnings call as President and CEO of Farmer Brothers.

Before we get started, I'd like to thank, Chris Mottern for his leadership during his time as Interim CEO and would like to acknowledge all of the great recent work accomplished by the team.

During this transition period, the team laid the foundation for the company's turnaround and established a strong framework to return Farmer Brothers to growth and profitability.

In my first weeks as CEO, I've worked to pick up where Chris and the team left off and initiate a deep dive into the entire business.

I'm honored to join the company at this important juncture.

Before I get into some of my initial observations from my first weeks as CEO.

I'll speak to my background and why I chose to lead the team here at Farmer Brothers.

I'll then cover my main areas of focus, and provide a sense of where we're headed.

After that, I'll hand it over to Scott to get in more detail around the quarter and our financials.

So with that, let me start off by saying that neither the challenges we face at Farmer Brothers, nor the opportunities I see ahead of the company are unknown or unfamiliar to me.

In my 32 plus years of experience, I've led multiple company turnarounds.

Majority of my career has been focused on global supply chain transformation, creating shared service structures and integrating transportation and distribution groups along with leading various business units.

Importantly, I have a deep experience in the food and beverage industry.

My experience in direct store delivery while at PepsiCo and my coffee knowledge acquired by leading Starbucks global supply chain were serviced well here at Farmer Brothers.

Most recently I was humbled to lead a successful turnaround at Earthbound Farm organic that led to being able to divest the business and sell to the largest strategic player in the space.

The team and I were able to return the company to profitability and achieve record operational execution metrics.

The unique challenges faced at Earthbound Farm organic were very similar to the ones I've witnessed thus far at Farmer Brothers.

I enthusiastically came to Farmer Brothers because I believe the company has a great deal of potential and want to see it succeed.

The company has a deep and rich history within the coffee industry.

Once a person has the opportunity to work in coffee, it gets in your blood and you desire to return if an opportunity presents itself.

The other reality is the coffee industry trends or a tailwind and not a headwind.

I believe we have valuable asset and a strong platform.

And importantly we have dedicated and talented group of team members, that's motivated to see the company thrive.

Throughout the company turnaround I've experienced I believe that the foundation for success always starts with people and culture.

As a team I understand that we have work to do.

But I'm confident in our ability to grow long-term.

I've spent my initial days at Farmer Brothers, talking to our key customers, learning the business, listening to our leaders and meeting with team members across the organization.

I've also assist our current strategy and reflected on past business decisions.

I recognize we are at a critical inflection point and I'm aware of the complexities of the industry in which we operate.

Like I said, Chris and the team have already taken important steps to reposition the company and ready to get to work to continue our forward progress.

On last quarter's call, Chris outlined 5 near-term operating priorities on the organization, how to execute it against in the recent months.

I've worked with Chris, the rest of the Board and management team in refining these priorities and setting strategic initiatives that we will focus on moving ahead.

These strategic initiatives are executing our supply chain optimization, elevating our execution, enhancing our service capability and building upon our competitive advantage with our coffee brewing equipment program, evolving our product portfolio through innovation and engaging our talent and refocusing on culture.

All these strategic initiatives will help us, but not only customer retention, but also adding new customer.

And of course at the same time, we focus on these improvements in our operations, prudent cash management and debt reduction will continue to be important financial objectives.

I'd like to take a moment to dive into each of these initiatives in more detail.

First executing our supply chain optimization is essential to the turnaround.

We are taking a close look at our manufacturing, roasting and distribution network to optimize operations across both direct ship and DSD customers.

More specifically, we are continuing to build upon the steps we've taken already with the sale leaseback of the Houston plant.

And as discussed last quarter, we are currently in the process of rebalancing volume from the Houston plant to our other roasting facilities to improve EBITDA.

We also will continue to re-route and optimize our route sales representatives and service techs to improve our on time in full and equipment service metrics.

Making these changes, gives us the right to have sales discussions around new innovation and product marketing to improve margin and meet customer needs.

To-date, we have been forced to have discussions around execution due to the fact we have been below acceptable levels.

As part of the supply chain optimization effort, we will continue our focus on inventory management and reducing scrap to consistently reach as near 100% on time and in full rate go as possible, which Chris touched upon last quarter.

Second, we are making great progress in improving our systems and processes, which will ultimately result in elevating our overall execution we are already seeing positive results from our business intelligence tool, which is providing the basis for setting our ourselves objective.

In addition, one of our primary near term objectives is piloting and upgrading the handheld technology for our route sales representatives.

We are excited about this new technology pilot and is underway and expect our upgraded systems have significant positive impact on the DSD network.

Further, Chris mentioned last quarter that we had piloted in a 24/7 customer call center, which provides customers with immediate assistance.

I'm pleased to share that we're now in the beginning stages of the national rollout of this tool and are already hearing positive feedback.

Additionally, our field employ call center that provides assistance to employees with product supply issues has already proven to be a success.

Prior to this process being established, a customer can have waited for several reasons and not had the problem solve and chosen to seek out a competitive thus creating customer churn.

Now they call a 911, 24/7 number and have the problem solved.

Within many cases within a day.

Turning to our third priority, we are digitally working on enhancing our service capability and build upon our competitive advantage with our coffee brewing equipment program.

The coffee brewing equipment refurbishment project allows us to be cost competitive.

This initiative is focused on further driving utilization of our own restored equipment, ultimately this contributes to an overall goal of optimizing cost and driving overall program profitability.

The program reduces our capital need and also provides a compelling sustainability story for our customers and team members to be proud of.

Fourth, I'm determined to reinvigorate the organization by evolving our product portfolio by encouraging a return to innovation.

In order to differentiate our product portfolio and establish a competitive advantage that will allow us to increase product margins, improve customer retention and gain new customers.

We need to focus on building our product innovation capabilities as well as effective product management capabilities versus traditional brand management.

In this area we are continuing the work already underway on SKU rationalization and optimizing our assortment.

And finally, and most importantly, I recognize that engaging our talent and refocusing on culture are the foundation of every company and that is, especially the case of the company in the midst of a turnaround.

One of our main near-term objective is to re-install a winning culture and win the hearts and minds of dedicated and talented team we have here at Farmer Brothers.

This company has an incredible 100 plus year legacy and I'm proud to be a new member of this team.

For our field employees, the average tenure is approximately 25 years, which is a testament to the strong culture of dedication and teamwork that has already been established here.

As part of this goal of engaging our talent, I'm excited to announce that Ruben Inofuentes is joining the Farmer Brothers family in the role of Chief Supply Chain Officer effective November 15.

A critical component of this turnaround is riding our supply chain operations and I'm confident he is the right person to lead this effort.

More specifically, he will be responsible for leading our manufacturing, logistics, procurement, quality, engineering and innovation teams.

Ruben brings deep operations and leadership experience to our team.

Most recently he was Chief Operations Officer For JR286, a global leader in sporting goods industry.

Part of JR286, Ruben held various technical and leadership roles with AdvoCare International, Oracle and UPS among others.

I'm looking forward to closely working with Ruben as we work to enhance our operations and optimize our supply chain.

As we focus on these 5 strategic initiatives moving forward, I'd also like to share more detail on some of my initial views of our direct ship business and our DSD network.

During the first quarter the DSD sales channel was impacted by decline in volume because of lower inventory fill rate and continued customer attrition.

These challenges were similar to what the company experienced in fiscal 2019.

And while it will take time and effort to turn these metrics around, we are seeing gradual improvement.

As for our direct ship business coffee volume grew in the quarter, although sales decline on and favorable customer mix shift and the impact of lower year-over-year coffee commodity prices.

I'm taking a closer look at our direct ship business.

As Chris noted last quarter, we see growth opportunities with our mid-size and smaller customers which don't require significant incremental investment of capital and people.

These customers come to us for product development, equipment expertise and additional services allowing us to achieve better margins.

But we will also continue to pursue our national customers will be focused on balancing revenue and margin in line with our efforts to drive improved EBITDA for the company overall.

Finally, I'd like to acknowledge that while our financial results are still not where we need to be they showed continued progress from the fourth quarter.

The entire team is focused on our key strategic initiatives in order to improve our results.

The team has already made progress since last quarter and I believe we are taking the right additional steps to improve our operational and financial performance.

I look forward to being able to provide updates on our continued progress on future earnings calls.

Before I turn the call over to Scott.

I'd like to mention our CFO transition with David Robson departing the company.

On behalf of the entire company, I want to thank David for his years of service at Farmer Brothers and wish him the best in the future.

As we conduct a search for a permanent CFO, we are fortunate to have Scott step in on our interim Principal Financial Accounting Officer.

Scott joined Farmer Brothers in July 2018, as an Assistant Controller and a served in the role of Corporate Controller since October 2018.

Scott brings over 10 years of finance experience including more than 5 years of management experience in both public accounting and global public companies.

Since joining our team, Scott has proven himself to be a value leader within our finance organization and I'm confident he will continue to make strong contribution to the company during this transitional period.

With that, I'll now turn the call over to Scott for a more detailed review of financial results.

Thanks, Deverl.

I'm excited to take on the role of interim Principal Financial and Accounting Officer and work closely with the rest of the management team and our Board to build on the company's progress.

Now let me walk through our first quarter results.

Beginning with coffee volumes.

Green coffee processed and sold in the quarter increased by 500,000 pounds to 26 million pounds, a 2% increase over the prior year period.

The mix of coffee volumes processed and sold during the quarter was approximately 8.3 million pounds or 32% of the total volume through our DSD network, while direct ship customers represented approximately 17.4 million pounds of green coffee processed and sold, or 67% of total volume.

300,000 pounds or 1% of the total volume was through distributors.

The increased coffee volumes reflect new volume from the ramping of our new large global convenient store retailer, we began shipping earlier in fiscal 2019 and incremental volume on other direct ship customers.

Offset by declining volume within our DSD network and the sale of our office coffee business in July of this year.

Turning to the income statement.

Net sales for the quarter were $138.6 million, which is a decrease of $8.8 million or 6% from $147.4 million reported in the same period a year ago.

The decline in net sales was driven primarily by lower sales of coffee and allied products sold through our DSD network, unfavorable customer mix within our direct sales channel, nonrecurring sales of industrial suit based products associated with the acquisition which we stopped selling last year and impacts the lower coffee prices for our cost-plus customers.

Sales through our DSD network were impacted by the sales of our office coffee business, higher customer attrition and lower inventory fill rates associated with the downtime at our Houston plant, which is similar to what we experienced last year.

While our direct ship sales channel grew in terms of coffee pounds in the quarter, sales declined on unfavorable customer mix shift and the impact of lower year-over-year coffee commodity prices.

Gross profit in the first quarter of fiscal 2020 was $40.6 million, an increase of $7.6 million from the prior year period.

Gross margin decreased to 29.3% from 32.7%.

The decrease in gross profit was primarily driven by lower year-over-year net sales, customer mix, higher production costs associated with certain aging production infrastructure and higher scrap expense.

This was partially offset by lower coffee brewing equipment and labor and lower green coffee prices.

I'd like to discuss a few of these items now in more detail.

Excess slow moving inventory remained a challenge in the first quarter, resulting in higher inventory markdowns and scrap expense as we continue to work through excess product.

We also continue to see elevated costs from inefficiencies at our Houston plant.

However inventories have declined and are in line with historical levels.

The higher manufacturing costs we reported in the fourth quarter continued into the first quarter, negatively impacting gross profit.

As we announced last quarter, we expect the sale and leaseback of our Houston facility will enable us to rebalance volume across our roasting facilities, which in turn should reduce future manufacturing downtime.

We also expect the future proceeds from the sale will give us increased liquidity and flexibility.

We realized favorable reductions in coffee brewing expenses during the quarter as initiatives we began late last year are taking hold.

This reduction in cost is a result of increased controls we put in place late in the fourth quarter of fiscal 2019.

We expect to see further improvements throughout the remainder of fiscal 2020 as the controls and process changes fully take hold.

Turning to operating expenses.

Our operating expenses for the quarter decreased $16.6 million to $33.7 million from $50.3 million.

As a percentage of net sales, operating expenses declined 24.3% compared to 34.1% of net sales in the first quarter a year ago.

The decrease in operating expenses was primarily due to net gains from sale of assets.

The absence of restructuring and other transition expenses.

The conclusion of Boyd's coffee integration at the beginning of October 2018, head count reductions and other efficiencies realized from DSD route optimization.

This was partially offset by increased severance costs associated with the reduction in force which occurred during the current quarter.

Net gains from sale of assets are primarily associated with the sales of our office coffee assets in the Seattle office branch property of $7.2 million and $6.8 million respectively.

Interest expense in the quarter decreased $300,000 from the prior year period to $2.6 million, principally due to lower pension interest expense.

Other net in the first quarter decreased by 500,000 to 200,000 in the quarter compared to 700,000 in the prior year period.

This was primarily due to reduced employee post retirement benefit gains, partially offset by lower mark-to-market losses on coffee-related derivative instruments, nondesignated as accounting hedges.

Turning to income taxes, we reported an income tax benefit of 100,000 in the first quarter of fiscal 2020, as compared to income tax benefit of $1.3 million in the prior year period.

The lower tax benefit is primarily due to the previously recorded valuation allowance and reduction of our estimated deferred tax liability during the first quarter of fiscal 2020, as compared to the prior year period.

As a result of these factors net income was $4.7 million in the first quarter, as compared to a net loss of $3.0 million in the prior year period.

Net income available to common stockholders was $4.5 million or $0.26 per diluted common share in the first quarter of fiscal 2020 compared to net loss available to common stockholders of $3.1 million or $0.18 per diluted common share in the prior year period.

Adjusted EBITDA was $4.0 million in the first quarter of fiscal 2020, as compared to $11 million in the prior year period.

Our adjusted EBITDA margin declined to 2.9% for the quarter compared to 7.4% for the same period last year.

Now turning to the balance sheet.

Overall, we've continued to strengthen 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 $7.4 million in cash and we had $85 million borrowed on our revolving credit facility, or $77.6 million in debt net of cash, this compares favorably to debt net of cash of $85 million at June 30 2019.

As of September 30, 2019 availability under our credit facility was $63 million compared to $56 million in availability as of June 30 2019.

During the quarter, our accounts receivable balance increased $2.3 million to $57.5 million compared to $5.2 million at the end of the fourth quarter and was down $5.0 million from $62.5 million at the end of the prior year period.

Our inventory levels also increased during the quarter by $3.8 million to $91.7 million compared to $87.9 million at the end of the fourth quarter as we prepare for our busiest season.

Inventories were down to $23.9 million from $115.6 million for the prior year period.

Accounts payable decreased during the quarter to $71.8 million compared to $72.1 million at the end of the fourth quarter and are down $2.1 million from the prior year of $73.9 million.

Turning to capital expenditures, CapEx for the first quarter was $5.3 million with $4.4 million related to maintenance.

Depreciation and amortization expense was $7.6 million in the first quarter versus $7.7 million in the same period of the prior year.

We expect maintenance capital to range between $17 million to $20 million, a decrease from fiscal 2019 maintenance capital of $21 million.

The reduction in fiscal 2020 maintenance capital from the prior year is due to lower planned spending on new coffee-growing equipment and an increase in our lease of refurbished coffee brewing equipment, which has a lower cost per unit.

We anticipate our depreciation and amortization expense will be approximately $7.5 million to $7.8 million per quarter in the remainder of fiscal 2020 based on our existing fixed asset commitments and the utilize of our intangible assets.

We expect minimal cash and accrued tax expense in fiscal 2020.

We expect our debt, net of cash to continue to decline throughout fiscal 2020 from $85 million at the end of fiscal 2019 to approximately $75 million to $80 million by December 31, 2019.

We are focused on the strategic initiatives that Deverl outlined 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?

(Operator Instructions) And our first question comes from the line of Kara Anderson with B Riley.

I'm sorry if I missed it, but given the changes in leadership.

Just wondering if you could provide actually an update on the directional outlook for fiscal year 2020?

Kara, thanks for the question.

What I'd say in regards to guidance at this point, it's still the early days.

We're in the midst of this turnaround and currently focused on the 5 strategic initiatives that I had outlined in the prepared remarks.

At this point, we're not going to be guidance at this time and we look forward to sharing ongoing progress with you as the quarters unfold.

Okay.

And then I had to try.

On the DSD business.

Just wondering if you're seeing any change in the pace of customer attrition?

From a perspective of DSD, here is what I would say, as we look at DSD and as I said earlier, it's the early days of beginning out and about and looking at the operation, we're clearly focused on execution.

And forecasting on time in full and customer attrition is incredibly important and optimizing our network and get under distribution network balance in what we need to be is important and then focusing on innovation, which is obviously going to help us from a DSD perspective.

So winning new business and seeing improvement in churn in select markets we're experiencing and I would tell you in our national sales meeting, we work with, (inaudible) DSD markets across the country I was really encouraged by the fact that our best and most improve it really was built around the fact that they own those branches and when they feel like they own those branches, there are delivering results and we're not seeing the churn in the attrition in those branches and that's what we're going to continue to focus and Mike Walsh and his leadership in the field will be out and working on that and continue to make those visits across the country.

I've been to several, I can tell you we're going to continue to work on that incredibly hard and continue to win back business.

Kind of on the same point, I guess in your prepared remarks you talked about re-routing sales reps as part of the supply chain optimization priority.

Can you elaborate on that a little bit more for me?

To make sure I understood.

Could you just state that first part of the question in regards to my earlier remarks, prepared?

In your prepared remarks you talked about re-routing sales reps.

I think is kind of what you said in terms of I guess a priority within the supply chain optimization efforts.

Just wondering if you can elaborate on that.

I guess as you're talking about only in the branches and just curious like what you mean by that comment?

Yes.

I think you're referring to route optimization, in the prepared remarks were really talking about optimization across the distribution network in terms of branches and DCs and optimizing those relative to our overall network footprint, we have gone through a re-routing exercise, We've done that.

It's a part of the day-to-day business that we do on an ongoing basis in that particular area of the business.

So as opportunities persist, we'll continue to route optimize within the branch structure, but we don't have an active initiative.

At this point, we've actually can -- we've done that work.

And then as an ongoing basis we continue to do that as we see change in routes.

But we need to add a route or reduce a route.

That does clarify it for me.

And then just wondering if you can elaborate some on what's happening with the unfavorable mix and direct ship.

And second to that, whether that is expected to be a drag for a couple more quarters?

Yes.

And in regards to direct shift in specifically currently doing a deep dive into that business segment.

We see growth opportunities with mid and small size customers as we talked in the prior quarter and we'll continue to pursue those large national accounts.

And as I've said, we're focused on balancing revenue and margin with an eye toward improving EBITDA.

Okay.

And then I guess last question for me.

Last quarter, it was talked about some head count reductions and $7 million in savings.

I think directly related to that, just how much of that contributed to the quarter and if you recognizing that at this point, if you could comment on that?

Yes.

Kara, this is Scott.

Yes.

We did realized some savings this quarter.

If you look at our OpEx expenses and I think you should really focus on our current expenses this quarter and the last couple of quarters that we've seen to develop our current run rates that we're experiencing right now.

(Operator Instructions) And I'm showing no further questions at this time.

I will now turn the call back over to CEO, Deverl Maserang for closing remarks.

Thanks, Andrew.

While it's still early in the days and time as CEO.

I've already seen great potential in Farmer Brothers and probably going to accomplish together.

I'm focused on leading this company become more profitable, be more forward thinking, be an industry leader and have a clear vision of what needs to be done to get there.

And I look forward to continuing my conference review of the Company and sharing our ongoing progress in the future quarters.

I'd also look forward to meeting each of you and members of the investment community in person as well, which we have many of those planned.

And thank you for joining us today and for your continued interest and support in Farmer Brothers.

Thank you.

Ladies and gentlemen, this concludes today's conference call.

Thank you for participating and you may now disconnect.