Farmer Bros Co (FARM) 2014 Q4 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to the Farmer Brothers Fiscal Year End 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions).

As a reminder this conference call is being recorded. I'd now like to turn the conference over to Ms. [Jennifer Matuschek]. Please go ahead.

Good afternoon everyone and thank you for joining Farmer Brothers fourth quarter and fiscal year end 2014 earnings conference call. With me today are Mike Keown, President and Chief Executive Officer, and Mark Nelson, Treasurer and Chief Financial Officer. Earlier today we issued our earnings press release which is available on the Investor Relations section of our Web site at www.farmerbros.com.

In addition an investor presentation that accompanies today's prepared remarks is also available on the Investor Relations section of our Web site as well as the webcast link. The press release and investor presentation are also provided as attachments to our Form 8-K filing available on our Web site and on the Securities and Exchange Commission's Web site at www.sec.gov. Please note that all of the financial information presented on this call is unaudited.

This call is being simultaneously webcast and a link to this is available on the investor relations section of our Web site. Additionally, a replay of the audio webcast will be available approximately two to three hours after the conclusion of this call. The link to the webcast replay will also be available on our Web site.

Before we begin the call, please note, various remarks that we make 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.

The Company's actual results could differ materially from what is described in those statements. Additional information on factors that could cause actual results to differ materially from those forward-looking statements is available in the Company's press release and in our public filing, each of which are available on the investor relations portion of our Web site at www.farmerbros.com.

In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our views change.

Therefore you should not rely on these forward-looking statements as representing our views as of any date subsequent to today. Additionally, please note that the Company uses certain non-GAAP financial measures including adjusted EBITDA and adjusted EBITDA margin in assessing its operating performance. A reconciliation from these non-GAAP financial measures to the most directly comparable GAAP measures is available in our press release, which is available on the Investor Relations portion of our website at www.farmerbros.com.

I will now turn the call over to Mike Keown. Mike?

Thank you Jennifer. Hello everyone and thank you for joining us this afternoon. This is the first earnings call for Farmer Brothers. So we are making history here today. For those of you not familiar with our story, I will start with an overview of Farmer Brothers, our history and what we've achieved over the past few years with a top line review of our fiscal 2014 results. I will then turn it over to Mark Nelson our CFO, who will discuss our financial results in greater detail.

Finally, I will conclude with some commentary on the overall business. So first, a bit of history. Farmer Brothers began in 1912 when a young man named Roy E. Farmer decided to open up his own coffee business to make it easy for restaurants to pour a great cup of coffee. He was an entrepreneur and won several patents for an array of coffee making equipment and other products as well.

Over the next century, the Company evolved and flourished through a series of product line expansions and acquisitions and a relentless commitment to continually invest in customers. Today, Farmer Brothers is a leading national roaster, manufacturer, wholesaler and distributor of high quality branded and private label coffees, teas, ice-coffee, cappuccino, spices and other culinary products which we sell to food service operators, convenience stores and grocery retailers.

Our growth is predicated on a differentiated business model. We currently provide one of the most complete local, regional and national direct store delivery or DSD systems in the industry and have concurrently built production capability at all three coffee quality tiers, that being value, premium and specialty. Along the way, Farmer Brothers developed substantial knowledge of coffee sourcing, procurement, roasting and blending, all of which makeup the backbone of our business model.

Today, we serve approximately 60,000 food and beverage establishments across the U.S. With three manufacturing plants, six distribution centers and a 111 branches nationwide, we utilize this network to reach our customers wherever they are located in the Continental U.S.

I think it's important to understand what the team at Farmer Brothers has accomplished in the last few years as the Company has been emerging from an extremely challenging period in our history. So let me highlight some of these achievements. We put considerable effort over the last several years into rightsizing our infrastructure, enhancing our capabilities and leveraging our core strengths and we've made meaningful progress in each of these efforts.

First we've completed the integration of key acquisitions. In the mid to late 2000s, we made several acquisitions to harness the growth of premium coffee across the country and better position our DSD restaurant business as the market transitions to larger regional and national customers. Specifically, in 2007, we acquired Coffee Bean International or CBI in Portland Oregon, which provided us with the capabilities to manufacture wonderful specialty coffees and in 2009, we acquired the DSD business of Sara Lee, which significantly expanded our geographical footprint eastward in essence connecting the coasts.

We struggled a bit to integrate these acquisitions and frankly only recently completed them. We have now fully integrated these strategic acquisitions into the Farmer Brothers' platform to create one streamlined organization.

Next, we have attracted national customers. The integration has extended our specialty coffee business, lowered costs and given us the tools to attract significant national customers. Prior to 2012, we were rarely part of the discussion when these types of accounts were assessing potential partners. Today, we have a seat at the table and are working hard to win new national account customers.

Next, we aligned the entire company on one ERP platform. Under Mark Nelson's finance and IT teams, in 2014 we upgraded our financial reporting capabilities while aligning the company on a single ERP platform. We were pleased as the process went smoothly and that our go-live took place without any meaningful interruption to our business. As many of you know, this is not always the case with these types of initiatives.

As a result of having this unified ERP platform in place, we are beginning to gain additional insights into our business and see things we were not able to prior to implementation. This includes items like operational efficiencies, route and SKU optimization, supply chain utilization and other metrics that we can utilize to improve our profitability.

While we are still early in the game here, having just harvested what we believe to be the lower hanging fruit and we are working towards achieving further gains and efficiencies in the future. On another note, we've built an experienced management team. While we have considerable talent within the organization, we've also recruited strong talent to our senior team in the last several years. They brought with them significant experience across consumer branded, packaged goods, food service and beverage companies.

There are a number of other areas in which we've made great progress. These include, enhancing our specialty coffee capabilities by uniting our teams in Portland and Torrance. We focus more on supply chain rationalization as the data we have now allows us to better see the supply chain. We've broadened our hedging program, which allows us to better manage swings in commodity prices and we've invested significantly in areas like national account sales, improving our R&D and product innovation efforts, which we've leveraged to re-launch our iced tea and iced coffee businesses. And as I'll touch on later, sustainability has been a key focus for us as well.

And we've expanded our industry leadership. For a company of our size in the coffee category, we are well represented in leadership positions in many of the key industry organizations including the Specialty Coffee Association of America, the Coffee Quality Institute and World Coffee Research to name a few. This is important for our customers and ensures we are on the cutting edge of coffee knowledge.

With all this, we are beginning to see the fruits of our labors. As I mentioned, the Company went through a very challenging period as a result of the acquisitions and the massive run up in the coffee market from 2007 to 2011. For perspective, the company had a net loss of $52 million just three years ago in fiscal 2011. However, over the last three years, we have followed a disciplined strategy which has led to significant volume growth, a focus on better priced methods, cost reductions and with improved commodity pricing, we have worked to strengthen our bottom line.

In fiscal 2014, we generated net income of $12.1 million, representing our most profitable years in over a decade. We have also improved our balance sheet during this period considerably, yet we did face challenges that has impacted our bottom line.

While Mark will get into the details later in the call, let me point out that we believe supply chain inefficiencies whether from extreme weather and customer issues in our fiscal third quarter and less than perfect forecasting as the volume of green coffee has surged over 45% in the last two years, all taken together impacted our operating profit by about $4 million to $5 million in the most recent fiscal year.

We are keenly aware that our operation needs to improve very rapidly in virtually every area as we continue to grow and I believe we have the team to do it. We will face obstacles along the way but I am confident in the long run, we will continue to make progress. We have made great strides over the last few years but we are still early in the turnaround and we are excited about the future.

Let me now turn the call over to Mark Nelson, our Chief Financial Officer will provide you with more details on our results. Mark?

Thanks, Mike and hello everybody. I'll spend the next few minutes discussing our financial performance for the fourth quarter and fiscal year 2014. As Mike mentioned, we have continued to make positive financial progress over the last few years. However this growth did not come without some challenges that impacted our operating efficiency. With the addition of substantial volume growth as demonstrated by the 45% increase in coffee we processed throughout the last two years. A new layer of cost and complexity was added to our operations and that was not well forecasted.

Additionally, we fell short of an efficient transition to our Oklahoma City brewer refurbishment facility which took longer than expected. These two, combined with the negative impact of the Q3 winter-storms and customer disruptions dampened our financial results in the second half of the fiscal year. Despite these operating inefficiencies brought about from these growing pains, we were still able to deliver stronger financial results in 2014 and now I will get into some of those details.

On the income statement, net sales in the fourth quarter of fiscal 2014 were $130.2 million, representing a 0.3% increase from net sales in the fourth quarter of 2013. For the full year fiscal 2014, net sales increased $14.5 million or 2.8% to $528.4 million from $513.9 million in fiscal 2013. This increase was primarily due to increases in sales of our roast and ground coffee products. It is important to note that the decline in coffee cost, masks a very large growth in the underlying volume because a large portion of our business, primarily our national account business is largely on a commodity pass-through cost plus model.

In fact, year-over-year we saw a 14.5% increase in the volume of green coffee we processed and sold over the prior fiscal year. We estimate the impact from these cost plus pricing arrangements drove approximately $1.8 million reduction in sales in the fourth quarter of 2014 alone as compared to the fourth quarter of fiscal 2013.

And cost of goods sold in the fourth quarter of 2014, it increased by $1 million from the prior year period. For fiscal year 2014, cost of goods sold increased $3.8 million from the prior fiscal year. But importantly as a percentage of net sales, cost of goods sold in fiscal 2014 decreased by 110 basis points to 62.9% versus 64% in 2013.

As a result, gross margin for the fourth quarter was 34.9% or 60 basis points below that of the fourth quarter of fiscal 2013. Although somewhat muted, this lower gross margin was expected due to the sizable mark-to-market coffee hedging gains that we recorded in our fiscal third quarter of 2014. We estimate that roughly 150 to 200 basis point erosion in Q4 gross margins can be traced to Q4 commodity deliveries where the corresponding hedging gains were already recorded in other income in our fiscal third quarter. For the full year of fiscal 2014, gross margin improved 110 basis points to 37.1% from 36% in fiscal 2013, primarily due to a 14.1% decrease in the average cost of our green coffee purchased throughout fiscal 2014.

Let me point out here that as of fiscal Q4, 2014, we corrected our presentation of sales, cost of goods sold and gross margin to properly capture certain revenue surcharges and other labor and overhead expenses, which has impacted gross margin for fiscal years 2010 through 2014. We also made certain other immaterial corrections that reclassify other aspects of our consolidated statement of operations and our consolidated statement of cash flows. I would refer you to our Form 10-K filing for fiscal 2014 for further review of these details and that is scheduled to be released on September 15th for a full explanation of those details.

Our operating expenses in the fourth quarter decreased by $5.5 million as compared to the prior year period and this was primarily due to a $3.8 million gain on the sale of our LA refurbishment facility involved in the tradition to Oklahoma City and this was also driven by $1.8 million decrease in selling expenses.

For full year fiscal 2014, operating expenses increased $2.2 million to $187 million as compared to $184.8 million in fiscal 2013 and this was largely due to an increase in payroll and other employee related benefit expenses. As a percentage of net sales, operating expenses in fiscal 2014 decreased 60 basis points to 35.4% versus 36% in fiscal 2013. Given this, income from operations in the fourth quarter of fiscal 2014 was $2.3 million compared to a loss from operation of $2.7 million in the prior year period. For the year, income from operations was $8.9 million versus $372,000 in fiscal 2013.

Total other income was $585,000 in the fourth quarter of fiscal '14 as compared to total other expense of $1.5 million in the prior year period. For the fiscal year 2014, total other income was $3.9 million, as compared to total other expense of $9.7 million in fiscal 2013. In both periods the difference was primarily due to net gains and losses from coffee related derivatives. In fiscal 2014, we had net gains of $2.7 million on these derivatives, as compared to net losses of $11.3 million in fiscal 2013.

It's also important to note that in the fourth quarter of fiscal 2013, we implemented hedge accounting. As a result the majority of our derivative gains and losses are now being recorded as a component of cost to goods sold upon receipt of the commodity as opposed to being mark-to-market through other income and expense.

Now let me provide you with a quick update on coffee prices. The green coffee commodity market experienced a sharp increase during our third and fourth fiscal quarters of 2014, spiking to over $2 per pound. While we benefited from our hedging program in the latter half of fiscal 2014, looking forward we are currently seeing potential headwinds in cost coffee prices. Uncertainty about the future harvests in Brazil, which was reported to have experienced drought conditions continues to cause concern and we believe also causing speculation in the green coffee futures markets.

As a result of these higher prices, we significantly decreased the number of our future contracts, now covering 19.8 million pounds of green coffee at the end of fiscal 2014 versus a year ago covering 49.6 pounds at the end of fiscal 2013.

Our hedging program is designed to create stability in our pricing model. We believe that chasing coffee prices especially in the current speculative environment does not promote that stability. That said, we will continue to monitor coffee prices and will rely upon the hedging program we have put in place to better position us to react to variability in the market and plan effectively for pricing actions in the future.

As a result of the above factors I mentioned, net income was $3.1 million in the fourth quarter of fiscal '14 compared to a net loss of $3 million in the fourth quarter of fiscal '13. Weighted average common shares outstanding diluted in the fourth quarter of fiscal '14 were 16,252,262 versus weighted average common shares outstanding in the fourth quarter of fiscal '13 of 15,640,187.

Diluted earnings per share for the fourth quarter of 2014 were $0.19 versus a loss per share of $0.19 in the prior year period. For full year fiscal 2014, net income was $12.1 million as compared to a net loss of $8.5 million in fiscal 2013.

Weighted average common shares outstanding diluted for the full year fiscal 2014 were 16,014,587 versus weighted average common shares outstanding in fiscal '13 of 15,604,452. As a result, diluted earnings per share for fiscal 2014 were $0.76 versus a loss per share of $0.54 reported in fiscal 2013.

Now let's turn to the balance sheet. These improving results have enabled us to significantly strengthen our balance sheet. As of June 30, 2014, we had $12 million in cash and cash equivalents. Additionally, we had $22.6 million in short term investments and no restricted cash.

During the fiscal fourth quarter of 2014, we effectively paid down our revolving credit facility at the end of our fiscal year. And at the end of our fiscal year we had just $78,000 in borrowings as compared to $19.7 million borrowed and outstanding at the end of fiscal 2013.

For fiscal 2014 our capital expenditures were $25.3 million as compared to $15.9 million in the prior year. Our CapEx includes funds spent on coffee brewing equipment, building and facility improvements, and expenditures for vehicles, machinery and equipment.

CapEx in fiscal 2014 included additional investments in our fleet, a temporary ramp up of brewing equipment purchases due to our refurbishment facility transfer from LA to Oklahoma City, the implementation of the final piece of our ERP platform and additional packaging capacity in several of our manufacturing facilities for new customers.

Depreciation and amortization expense in the fourth quarter of fiscal 2014 was $6 million versus $7.8 million in the fourth quarter of fiscal 2013. For the full year of fiscal 2014 depreciation and amortization expense was $27.3 million as compared to $32.5 million in fiscal 2013.

Finally, in the third quarter of fiscal 2014 we refined our non-GAAP definition of adjusted EBITDA to be net income less income tax, interest expense, depreciation and amortization and ESOP and share based compensation. We believe this revision more accurately reflects the cash earnings of the company. As a result adjusted EBITDA for the fourth quarter of fiscal 2014 was $10.4 million compared to $7.4 million in the fourth quarter of fiscal 2014.

For the fiscal year adjusted EBITDA was $46.1 million or 8.7% of sales as composed to $28.7 million or 5.6% of sales in fiscal 2013. We are pleased with the $17.4 million increase or 61% increase in our adjusted EBITDA measure. We believe this exemplifies our cash generation capability and furthers us towards our stated adjusted EBITDA margin goal of 10% of net sales.

And with that I'll turn the call back over to Mike.

Thanks Mark. As you can see in fiscal 2014, we continued to improve our operational and financial performance. The turnaround continues and sometimes that path is not as linear as we would like while we faced some headwinds in the second half of the year, the year-over-year trends point to our continued progress. As a point of perspective, looking back at fiscal 2011, we had an operating loss of $70.7 million and that can be juxtaposed versus an operating profit of $8.9 million in fiscal 2014 as Mark just mentioned.

Let me now provide you with some other highlights from the year. Over last two years our national account business has seen strong growth with the addition of notable customers such as Bay Valley Foods, which is a division of TreeHouse Foods and Kehe distributors among others and we believe there is real opportunity for expansion.

For a perspective, we current count just three of the top 100 restaurant chains as customers, two of the top 20 convenience store chains and five of the top 20 supermarket chains. So we are encouraged by the prospects for new customers and the opportunity to win more business.

These customers value the breadth of services we provide from world class coffee to our price risk management strategies, industry leadership, product innovation and connections at coffee origins. These are things we weren't able to bring to the table as confidently just a few years ago.

Today because of what I'd like to call the authentic coffee geek factor inherent in our DNA and culture, we are more competitive when these customers are making decisions. So while the sales cycle is longer with national accounts, we believe the value add we provide gives us a better chance or a seat at the table and ultimately win that business.

Turning to the street business, our progress has been very noteworthy. Over the last two fiscal years we have added significant regional customers in colleges and universities, healthcare and a very strong pickup in our casino business.

We're also seeing growth accelerate in several regions as we begin to achieve inroads based on our investment in our sales infrastructure primarily in training. Part of the goal here is to introduce these customers to specialty coffee. A good example of this happened when were working with a head of food service at a state run university. A major frustration for her was seeing folks come into her facility with coffee cups from branded retail stores in their hands. We were able to bring her a specialty coffee solution to help her compete, grow and even thrive. This was a big part of our ability to win the business initially and then grow it in the long term and we are taking the same approach with more and more of our potential street customers, introducing them to higher end coffees and increasing our penetration at the account through other products like our new iced coffee and iced teas. How does this happen? By training our sales representatives on our product innovations, trends in the marketplace and giving them the tools to be more efficient in their efforts. While we are just in the early stages of this effort, the investment Farmer Brothers has made in training our array of personnel is gaining traction.

Turning to product innovation, as many of you may know, we are focused on utilizing our coffee expertise to best meet the needs of customers. In 2014, we introduced our new line of ready to drink customer tested iced coffee products. They are offered in three flavors and made from premium Arabica beans. These products offer customers the ability to capture fast growing category and to appeal to a very exciting demographic in Millennials. We are excited about the opportunity and see much opportunity to harness innovation in the future.

Now let me update you on another area of differentiation for us and a key passion of mine as well as the rest of the leadership team, and that is sustainability. At Farmer Brothers we're always seeking out better ways to care for our farming partners, source coffee responsibly and reduce our environmental impact.

In the spring we released our 2013 sustainability report, which asks the question, can a coffee company actually make the world a better place? This report summarizes the impact of activities and initiatives undertaken by the Company at home and around the globe in 2013 as we focused on growing our business while improving our impact on the world around us.

I'd like to mention a few key highlights from the 2013 report. First, we reduced our water consumption by 46% per pound. We reduced our carbon dioxide emissions by 30% per pound. We reduced our electricity consumption by 12% per pound and we purchased renewable wind powered energy credits for 100% of the electricity our headquarters and roasteries use. We are really proud of these companywide efforts which reflect the mission of Farmer Brothers. Our focus on sustainability is having a positive impact on our business in exciting ways and we have received recognition from our customers for these efforts.

So overall we see a lot of opportunity, both for our top line and in leveraging our strengths to continue to improve the Company's financial results. To close, let me share with you some of our key strategies that have served us and I believe will serve us well in the future. First, we'll continue to growth our street business; two, we'll continue to create strategic partnerships in production with our customers and with our coffee suppliers. Next, we'll continue to implement a very disciplined asset strategy and attack non-value added costs. Four, we'll continue to improve and align employee and corporate capabilities. Five, we'll continue to invest in high growth categories, like iced tea and iced coffee. Next, we'll continue to increase our product penetration as we seek to sell more items on the trucks to each of our customers. And lastly, we'll continue to focus on growing the profitability of national accounts.

The bottom line is the turnaround Farmer Brothers continues. I'd like to say that we are in the second or third inning and we are excited about the opportunity for growth. Over the last several years, Farmer Brothers has gone through a tremendous change while delivering improving year-over-year financial results. This is something I believe our whole organization should be very proud of. So what can you expect in the upcoming year? We will continue to leverage our product innovation, industry leadership, sustainability, price risk management strategies and leverage the strength of our distribution platform to expand our customer base and penetrate into existing accounts and we expect to also continue to optimize our manufacturing infrastructure and product offerings to deliver improved financial results to our investors.

And with that I'd like to open the call up for a few questions.

Thank you, Mr. Keown. (Operator Instructions). Our first question is from Tony Brenner with ROTH Capital Partners. Your line is open.

I have a couple of questions. First of all, Mark you just stated that for the full year there was a disparity between the double digit volume growth and the double coffee price decline. For the fourth quarter you reported a revenue increase of less than 1%. I wonder if you could provide the same sort of breakdown as to what that number hides in the way of real growth in the quarter.

Tony, good to hear from you. This is Mark. So I mentioned about $1.8 million that was linked to those costs plus pass through commodity pricing contracts. Many of our larger customers have that type of a pricing arrangement. We estimated that about $1.8 million was driven by the year-over-year change, Q4 to Q4, about 140 basis point erosion in revenues. There were also two very notable other items, one was a customer that we had resigned from was an unprofitable customer in our second quarter of fiscal 2014. That drove roughly 210 basis point of revenue erosion in our fiscal fourth quarter versus the fiscal fourth quarter of 2013.

And is that a national account or is state account?

That is a national account. So it's a large national account. As we have been upgrading our national account profitability, we have had to make some tough choices on some of those accounts. And finally, we had some lingering issues on another large national account that experienced some customer disruptions in the third quarter. Some of that carried over into our fiscal fourth quarter as well. That drove roughly 150 basis point erosion versus where they were in the prior year.

And so if you add up those, it's about 140 basis points on cost plus, 210 basis points on the customer that we elected to resign from and 150 basis points on the final customer that experienced some disruption. That's about a 5% aggregate impact in our fourth quarter revenue versus the prior year. So we understand the cost plus impact and as we rationalize some of our less profitable customers, we're going to see some of these impacts.

Sure, but in addition to that, Mark, your green coffee costs were down, your pricing was down for national accounts, Okay, so that's the 1.8 correct?

That's 1.8, yes, that's correct.

Okay, why then was that percentage difference less than for the full year? It looks like it's a slower percentage volume increase in the fourth quarter than it was for the nine months?

Yes, so the 14.5% I think was the total year decline in coffee prices. It wasn't as pronounced -- I'm sorry, 14.2% decline in our purchased commodity cost. It was much more pronounced through the entire year. The quarter-over-quarter change was not that pronounced.

Okay. Second question, is the inefficiency stemming from the volume growth continuing into the new fiscal year? Are there still the sort of operating inefficiencies that affected your recent quarters?

Tony, its Mike. I will take that. So, if you traced back through, there were couple of the key drivers of the inefficiency. The way I would call it is they are still the right thing to do but we do not execute them up to our standards.

The first was some issues we had as we've taken on such a significant amount of volume. Next we didn't execute our move to the Oklahoma City Refurbishment Center as well as we'd like and frankly we've had some hiring issues in our Houston facility. I believe we have addressed those now. We are not seeing the lingering impact of that but it just reminds us that there are some growing pains when you take on this kind of volume growth and we need to do a better job of reacting to it in the future.

So that's no, right?

Yes.

It's not an ongoing problem?

Thank you, Tony, yes.

My last question, your new ERP system, there is obviously a lot to do. You mentioned route optimization, SKU optimization and a number of other things I'm sure. Could you give me a sense of a short-term timeline in terms of what's on the front burner in terms of efficiencies that that new system might provide over the very short term?

Tony, I'll take the first shot at this and then turn it over to Mark. I don't think we're in any position to make any kind of clear financial assessment of what it would be. However, we are seeing gains as we undertake efforts like cutting the number of SKUs we have. If you look over the last three years, I believe we have removed a third of the shelf keeping units out of our system, which simplifies our supply chain. We are looking at implementing a mobile sales solution to help our route sales organization manage customers more efficiently and frankly move more quickly throughout the day. And we think that could save significantly but it's very hard to put a dollar figure on that.

And then I still think we're in the infancy of seeing our supply chain as one. As you may recall, we were running our three manufacturing facilities somewhat independently just a few years ago. We're now seeing that as we manage it as one organism if you will. There are considerable benefits but I can't quantify it for you right now.

I'll add on to that. Tony, I think the real -- the base bone of the ERP system being ported on one platform is very important. It serves as really the springboard for things like mobile sales, supply chain kind of common operating platform. I really think that the mobile sales tool will provide us with another level of efficiency and productivity. We're excited about that, to bring that on.

When is that going to be driven out?

We're -- without really committing where we're hopeful that it's in our fiscal '15 year, that we have the ability to at least start rolling it out and it really will revolutionize or at least improve the tool that our over 500 route sales folks used to go do business every day. So there is a lot hope and optimism on that, complete with a scanning solution. We don't have barcode scanning, which is kind of basic thing, but we don't have that all the way through into our branches and our route trucks. So just a lot of new efficiency tools that we'll bring it forward and we are looking forward to the supply chain efficiency that we get from those tools.

Our next question comes from Mitchell Sacks with Grand Slam. Your line is open.

In talking a little bit about some of the asset sales that you've done over the years and most recently I guess the idled LA refurbishment facility, is there much less for you guys to realize over the next 12 to 24 months?

Let me start with that, Mitch. I think we're really just in the infancy of understanding where we can improve the efficiency of our supply chain. That's the basis we use to look at these types of moves in real estate or said another way, we're not looking just to sell it for selling sake, but if we can make a change in the supply chain which lowers our cost, then it will be a smart thing to do. I'd like to give you more concrete answer, but we're still on our infancy of assessing our supply chain as one group. So I think that there is more to do, which I just couldn't quantify it for you or give you a forward looking view of that.

And then during the call you talked a little bit about your hedging strategy and shifting down the number of contracts that you're currently utilizing to hedge inventory, how do we think about that as investors in terms of trying to make our own projections going forward?

Hi, Mitch. This is Mark. So the decision to kind of slowly drain some of our futures portfolio, that was not just on the futures that we hold for our street business, but also many of our large national customers also had the exact same rationale. We were locking in pricing when coffee was under $1.50 and as coffee kind of went up, the natural inclination was to get a little bit shorter and kind of lead down. I think what we see, specifically when we're out purchasing the commodity is somewhat different than the market is telling us when we're looking at those futures market.

So there was a lot of speculation in the third and fourth quarter. At least we believe, there was speculation in that coffee futures market which helped to drive prices back over $2 and you can see that they've kind of bounced around a little bit, but softened some since then.

So it's really -- we act independently and then we also act at the request of our customers as to how many futures and how far out we go and collectively we evolved in choosing to kind of come a little bit shorter as prices went up. And we'll continue to assess that. I mean futures market for us really provides a reaction period where we can react within to choose to take pricing actions to the customers.

Ultimately, if coffee is at $2 and stays at $2 or goes higher, we ultimately have to take pricing to the customer to reflect that change in the commodity price. The hedging portfolio just provides a certain amount of time within which to react.

And then the final question has to do more with asset strategy. So you have a clean balance sheet at this point with no debt. Is there any thought to selective tuck-in acquisitions or are you still at a point in terms of rolling out your ERP and your sales force optimization that it doesn't quite make sense yet?

Mitch, I'll go ahead and I take that one. We're looking at all sorts of opportunities as we have a healthier balance sheet to strengthen our company. When it comes to acquisitions, I would say we're probably looking at smaller acquisitions that can be quickly and efficiency tucked-in to our overall business. And I think that what we'd like to do is find those, get some experience in successfully integrating them and then move on; or said another way, I wouldn't want to see us taking on a significant risk as we do have momentum in the marketplace. On the other hand, we do see opportunities. So I hope that gives you some sense of how we're thinking about it.

Our next question comes from Carter Dunlap with Dunlap Equity Management. Your line is open.

Most of my questions have been asked but just to answer -- just to sort of go back to Mitch's comment about the hedging, I obviously misunderstood. I thought it was going to be much more of a steady state function for the national account business, but having said that, so using your example, if coffee were to stabilize at $2 per pound green -- I guess what I'm trying to figure out is what would bring the volume of hedging back on that you had said a year ago? Would it be -- if you saw a stability going forward, would we stay at this low level?

If the market was at $2 and stayed at $2, then definitely you wouldn't need to hedge at all, but I think we only control or I should say it a different way. We have -- a large portion of our hedging portfolio is directed by our customers and so they have chosen to get shorter, the national account customers. We've also kind of followed suite, maybe not quite as much as them but to the extent that call it our portfolio was very full in through the second fiscal quarter of 2014. A lot of our customers have directed us to hold off and not acquire futures contracts, not go out as far. It's really a question of how far out you hedge as opposed to the number of contracts, you're hedging out 369 and in some cases over 12 months and so some customers choose to go longer and some choose to go shorter. We tend to think of it as a buffer. Like I said for the change in prices, if coffee prices changed dramatically like they did in Q3 and Q4, it gives us a reaction time to ultimately contemplate when and how much pricing we have to take to our non-cost plus pricing customers. So that's primarily our DST and our street customers.

And just -- I said one question but actually I was knocked off at the beginning of the call. You made some reference it sounds like to your SKU optimization. Did you make any statements about where you are in terms of progress so far?

The only comment we made, and I think we might have even touched on it at our annual shareholder meeting, we felt we could cut about a third of the SKUs out from where they were in our fiscal 2011. We ended up doing slightly better than that as we finish the year and right now we're looking at really the next level of how we can simplify the supply chain, yet still meet the needs of our customers.

One of the byproducts of these integrations is that we have several -- more than several -- quite a few coffee formulas if you will that are relatively similar. So the process we try to go through is to align on those but there is some work to work with the customer even when there is a small change in the formula. I personally believe we've got a significant way to go but we're really reassessing now after the last wave was successfully completed.

That's all the time we have for questions today. I will now turn it back over to Mr. Keown for concluding remarks.

Well, thank you everyone for being part of Farmer Brother's inaugural earnings conference call. We appreciate your interest in our story and are excited about the future. We look forward to continuing the progress we've made in fiscal 2014 and telling you more about our accomplishments on our fiscal 2015 first earnings call in early November and at our annual shareholders meeting in early December. Thank you very much and have a great day.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.