Farmer Bros Co (FARM) 2015 Q2 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to the Farmer Brothers Corporate Relocation and Second Quarter Fiscal 2015 Earnings Conference Call.

At this time all participants are in a listen-only mode.

Later we will conduct a brief question-and-answer session and instructions will follow at that time.

(Operator Instructions).

As a reminder this conference call is being recorded.

I would now like to turn the call over your host, Tom Mattei.

You may begin.

Good afternoon everyone.

Thank you for joining Farmer Brothers corporate relocation and second quarter fiscal year 2015 earnings conference call.

I'm the Company's General Counsel.

With me today are Mike Keown, President and Chief Executive Officer, and Mark Nelson, Treasurer and Chief Financial Officer.

Earlier today we issued a press release which is available on the Investor Relations section of our website at www.farmerbros.com.

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

Please note that all of the financial information presented on this conference call today is unaudited.

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

The link to the audio replay will also be available on our website at www.farmerbros.com.

Before we begin the call please note that 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 and other future events could differ materially from what is described in those 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 earnings press release and in our public filings which are available on the investor relations section of our website.

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, adjusted EBITDA margin, net income excluding restructuring and other transition expenses and net income, excluding restructuring and other transition expenses for common share diluted in assessing its operating performance.

Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is included in our earnings press release, which is available on the Investor Relations section of our website.

I will now turn the call over to Mike Keown our President and Chief Executive Officer.

Mike?

Thank you, Tom.

Hello everyone and thank you for joining us this afternoon.

This is the third earnings conference call for Farmer Brothers and I'm pleased you have joined us today.

I will start with some very important news that we announced today and then move into a top-line review of our second quarter of fiscal 2015 results, update you on a few key corporate strategic initiatives and conclude with some commentary on the overall business.

I will then turn it over to Mark Nelson, our Treasurer and CFO, who will discuss our financial results for the quarter in greater detail.

Over the past 18 months, the Company has conducted a thorough review of our operations to determine how we can become more competitive, grow the business, invest in our current and future customers.

Through a thorough analysis of our needs it became clear that the best option for the future was a more extensive overhaul to our infrastructure.

As a result, today we announced the corporate relocation plan as approved by our Board of Directors which we will begin to implement immediately.

The changes associated with this corporate relocation plan are as follows.

First, our Torrance facility will close and we will relocate to a new state-of-the-art manufacturing, distribution and corporate headquarters facility expected to be located in either the Dallas/Fort Worth area or Oklahoma City.

The final decision on the location is pending the outcome of state and local incentive negotiations and final site selection, which is expected within the next 90 days.

We expect to begin closing the Company's Torrance facility in phases starting in the summer of 2015 and concluding by the summer of 2016.

Second, construction of the new facility and relocation are expected to be completed by the end of the summer of 2016.

Lastly the Torrance facility will be sold.

While we've operated in this location for almost 65 years, the Torrance facility has over time become outdated and inefficient, suffering from an aging infrastructure and inefficient factory layout.

We believe relocation to a new state-of-the-art facility will enable us to streamline functions and processes which will help us control our supply chain costs and also position us better for a national customer footprint.

These were incredibly difficult decisions and the actions will impact many valued and long-term employees.

We will support our employees through this transition.

Our employees, who will lose their jobs and who are not part of a collective bargaining agreement will be provided severance benefits in accordance, excuse me, with company policy and assistance in transitioning to other employment.

For those under collective bargaining agreements, the Company and the affected unions will begin to negotiate transition benefits immediately.

Mark will go over more of the financial implications associated with these actions a bit later.

But let me say again that although this was a very difficult decision we believe firmly that this change is essential in ensuring the Company's success for the foreseeable future and we hope we can continue the focus that has made us what we are today.

Okay, moving on, I will move in to the second quarter summary with some perspective.

Overall, we continue to make progress improving our operating performance in the current environment of volatile coffee prices.

Net sales in our second quarter were $144.8 million, up 1.2% versus the same period a year ago.

So net sales increased coffee volume was down by 1% to 23.1 million pounds versus 23.8 million pounds in the second quarter of last year.

To be frank volume growth did not meet our expectations in the quarter.

Net income was $2.9 million versus $4.7 million in the same period a year ago.

On an EPS basis we delivered $0.18 per diluted common share versus $0.29 per diluted common share in the second quarter of the prior fiscal year.

There were some factors that we believe contributed to the reduction in volume that drove the slowdown in growth of our top line.

Most important of these was that several of our larger national customers experienced a slowdown for various reasons.

In addition, we are still lapping the loss of a high volume, but relatively low margin customer which cost us approximately a 120 basis points of growth comparatively.

Moreover, though, we have new business prospects in development these don't always move on the schedule which we'd expect or prefer.

That being said, our business development pipeline has produced two recent wins.

We're very pleased to have recently brought back a customer that we had worked with previously in Cosi restaurants and are very excited to begin a relationship with Big Lots.

Beyond that we're recently made some pricing adjustments that we believe we'll produce results in the second half of the year from a profit standpoint.

On a final note, we incurred significant expenses doing the foundational work leading to the Boards approval of the corporate relocation plan.

Mark will go into this shortly.

Before I turn it over to Mark for a deeper dive into our Q2 performance and the financial elements associated with our relocation I wanted to give you a brief overview on several of our core strategic initiatives, e-commerce and our recent acquisition of Gourmet Cup.

First e-commerce, I mentioned during the conference call for the previous quarter that we were taking the next step to provide an e-commerce platform to allow consumers to order our great products online which we launched successfully at the end of calendar year 2014.

This site will also afford customers as well as consumers the ability to buy our products directly and potentially limit the need to have a direct store presence at the same level in less dense geographies providing some efficiency benefits.

We are excited to bring this new e-commerce platform to our customers and consumers.

Next, on the acquisition, I'm pleased to say we successfully completed the acquisition and integration of the Rae' Launo Corporation's direct store delivery business also known as Gourmet Cup as well as the in-room hospitality business.

We have transitioned the acquired DSD routes and in-room coffee into the Farmer Brothers system as well integrated the team and back office processes.

We are very pleased with this new addition to the Farmer Brother's network.

Let me now turn the call over to Mark Nelson, our CFO who will provide you with more details on our second quarter results as well as the financial aspects of our corporate relocation.

Mark?

Thanks Mike and hello everyone.

I'll spend a few minutes discussing our financial performance for the second quarter of our fiscal year 2015.

As Mike mentioned we had some challenging headwinds in the quarter but continued to make progress towards our objectives of driving improved operational and financial performance.

I'll get right into those details now.

Net sales in the second quarter of fiscal 2015 were $144.8 million, representing a 1.2% increase from net sales recorded in the second quarter of fiscal 2014.

This increase was primarily due to increases in sales of our coffee, tea and other beverage products.

The increase of $1.7 million over the prior year period included approximately $750,000 in price increases to customers, utilizing our commodity-based pricing arrangements where the changes in the green coffee commodity costs are passed on to the customer.

Many of our cost plus customers were covered under coffee hedging contracts which insulated them from much of the increase in green coffee commodity prices that were experienced over the past three quarters.

The duration of their hedging contracts creates a lag in how quickly commodity price changes are ultimately reflected in our top line revenues.

In cost of goods sold for the second quarter of fiscal 2015 they increased by $2.9 million versus the second quarter of 2014.

As a percentage of net sales cost of goods sold increased a 130 basis points to 63.3% in the second quarter of fiscal 2015 versus 62% in the prior year period, primarily due to the increase in average cost of green coffee purchased.

As a result, gross margin for the second quarter of fiscal 2015 was 36.7% or 130 basis points below that of the second quarter of fiscal 2014.

Operating expenses in the second quarter of fiscal 2015 increased by $913,000 as compared to the prior year period and this was primarily due to $784,000 in expenses relating to the analysis of alternatives and preparation for the corporate relocation plan we announced today.

As a percentage of net sales operating expenses in the quarter increased 30 basis points to 34.3% versus 34% in the second quarter of fiscal 2014.

As a result income from operations in the second quarter of fiscal 2015 was $3.5 million compared to income from operations of $5.7 million in the prior year period.

Total other expense was $357,000 in the second fiscal quarter as compared to $539,000 in the prior year period.

In the second quarter of fiscal 2015 we incurred net losses of $699,000 on coffee related derivative instruments partially offset by lower interest expense of $208,000, as compared to net losses of $400,000 on coffee related derivative instruments and a higher interest expense of $393,000 in the prior year period.

Since our adoption of hedge accounting in the fourth quarter fiscal 2013 the majority of our directive gains and losses are now being recorded as a component of cost of goods sold upon receipt of the commodity as opposed to being marked-to-market through other income and expense.

As of December 31, 2014 we held coffee-related derivative instruments covering 26.6 million pounds of green coffee compared to 53.2 million pounds of green coffee covered as of December 31, 2013.

In addition to these coffee futures and to address our fiscal 2015 demand for those DSD customers not on a commodity based pricing arrangements we also have green coffee in inventory as well as commitments to purchase green coffee totaling $16.4 million under fixed price contracts and other inventory items totaling $6.6 million under non-cancellable purchase orders.

In the three and six months ended December 31, 2014, we recorded income tax expense of $0.3 million and $0.5 million respectively compared to $0.4 million and $0.7 million respectively in the three and six months ended December 31, 2013.

As of June 30, 2014, our valuation allowance was $72.6 million.

In the six month period ended December 31, 2014 we decreased our valuation allowance by $2.2 million to $70.4 million.

We will continue to monitor our cumulative three year loss position together with all other available evidence, both positive and negative in determining whether it is more likely than not that we will realize our net deferred tax assets.

As a result of all of these factors I mentioned, net income was $2.9 million in the second quarter of fiscal 2015 compared to net income of $4.7 million in the second quarter of fiscal 2014.

Weighted average common shares outstanding diluted in the second quarter of fiscal 2015 were 16.2 million shares versus weighted average common shares outstanding diluted in the second quarter of fiscal 2014 of 16 million shares.

Diluted earnings per share for the second quarter of fiscal 2015 were $0.18 versus diluted earnings per share of $0.29 in the prior year period.

Okay, now let's turn to the balance sheet.

As of December 31, 2014 we had $4.7 million in cash and cash equivalents.

Additionally, we had $23.7 million in short term investments and $720,000 of restricted cash.

We had $1.3 million borrowed and outstanding on our revolving credit facility as of December 31, 2014.

For the fiscal first half of 2015, our capital expenditures were $9.4 million as compared to $12.1 million in the first half of the prior fiscal year.

Our CapEx during the first half included funds spent on coffee brewing equipment, expenditures for vehicles, machinery and equipment building and facility improvements and IT related expenses.

Depreciation and amortization expense in the second quarter of fiscal 2015 was $6.1 million and $12.4 million through the first half of fiscal 2015.

This was versus $7.1 million of depreciation and amortization expense in the second quarter of fiscal 2014 and $14.5 million through the first half of fiscal 2014.

I'd now like to discuss certain non-GAAP financial measures that we use in assessing our operating performance.

A reconciliation of these non-GAAP financial measures to the nearest GAAP financial measure are presented in our earnings release and posted on our website.

In the first half of fiscal 2015, we incurred certain expenses related to the preparatory and foundational work associated with the closure and relocation of the Torrance facility, including the consolidation of our coffee production operations into our Houston Texas and Portland Oregon facilities and the consolidation of distribution volume from Houston into our Oklahoma City facility.

We have introduced two new non-GAAP measures to that end, which are net income excluding restructuring and other transition expenses and net income excluding restructuring and other transition expenses per common share diluted.

We define net income excluding restructuring and other transitional expenses as net income excluding restructuring and other transition expenses associated with the recently announced corporate relocation plan net of tax.

We define net income excluding restructuring and other transition expenses per common share diluted as net income excluding restructuring and other transition expenses divided by the weighted average number of common shares outstanding inclusive of the dilutive effect of common equivalent shares outstanding during the period.

In addition, we define adjusted EBITDA as net income or loss excluding the impact of income taxes, interest expense, depreciation and amortization expenses, ESOP and share-based compensation expenses non-cash impairment losses, non-cash pension withdrawal expense and other similar non-cash expenses, and beginning in the quarter ended December 31, 2014 restructuring and other transition expenses associated with the corporate relocation plan.

We define adjusted EBITDA margin as adjusted EBITDA expense expressed as a percentage of net sales.

In the second quarter and the six months period the amount of restructuring and other transition expenses associated with the preparations for our corporate relocation were $784,000 and $974,000 respectively consisting primarily of consulting and legal expenses.

Net income, excluding restructuring and other transition expenses was $3.7 million in the second quarter and net income, excluding restructuring and other transition expenses per common share diluted was $0.23 in the second quarter.

Adjusted EBITDA and adjusted EBITDA margin for the second quarter of fiscal 2015 were $11.9 million and 8.2% respectively as compared to $13.8 million and 9.6% respectively in the second quarter of fiscal 2014.

Now I will comment on certain aspects of our announced corporate relocation plan.

Although we are currently still engaged in negotiations with developers on various sites in Texas and Oklahoma and in ongoing incentive discussions with state and local governments we plan to invest between approximately $35 million and $40 million in new facility cost with an additional $20 million to $25 million for machinery and equipment.

Furniture and fixtures and related expenditures associated with the new facility.

The capital expenditures associated with the new facility are expected to be partially offset by the net proceeds from the planned sale of our Torrance facility.

We believe the current land value of the Torrance facility based strictly on comparable sales data and the size of the parcel and without any changes or improvements to that parcel is estimated to be between $28 million and $35 million.

As a result of the exit and restructuring actions, we currently estimate that we will incur approximately $25 million in restructuring related cash costs for employee retention and separation benefits, equipment relocation costs and other associated costs.

In addition, we expect to incur certain non-cash asset impairment costs and potentially curtailment charges, the amount of which we have not yet estimated.

Upon full implementation of the corporate relocation plan we expect to see annualized cost savings in the range of $12 million to $15 million beginning in the latter half of fiscal 2016.

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

Thanks, Mark.

I would also like to thank those on the call for their continued interest in Farmer Brothers.

We realize that the release in the earnings call schedule is not standard and not as we have done in the past but it was very important to us that our employees hear this message directly from us first.

We had a series of meetings that started with the first early morning shift and continue with different groups throughout the day.

As we begin to implement the relocation of our Torrance facility during this transition period we remain steadfast in our commitment to ensuring continued and uninterrupted service to our thousands of customers nationwide.

We are excited at the tremendous opportunities ahead as we prepare Farmer Brothers for the next 100 years.

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

Thank you.

(Operator Instructions).

Our first question comes from the line of Tony Brenner of ROTH Capital Partners.

Your line is now open.

Thank you.

I've got a couple of questions.

First of all can we get a little more granular on your volume change?

I understand how the loss of one of your largest accounts impacted and poor traffic trends at two of your large accounts.

However you've also signed on some new chain accounts over the past 12 months, which should be at least partly offsetting and in addition to that some of those new accounts are in your street business.

So first of all I wonder if you could break out the volume change from your - what you classify as your chain business versus the street business?

So Tony we've -- this is Mark and hi how are you.

We do not discretely describe our pounds, coffee pounds by segment.

What we can say generally our DSP delivered volume was essentially flat, and we did see erosion year-over-year decline in our national account volume to the tune of a percent or two.

So the net of that drove a volume of pounds decline of 1% as Mike described.

Okay, can we talk a little about gross profits?

Your chain account gross profit per pound is constant, for each account anyway, because it's cost plus.

On your street or DSP business my understanding is that you increased prices during the fourth and first quarters to reflect higher prices.

So that given the case I'm wondering why there was so much margin pressure on the gross profit line or cost of goods line.

Hi, Tony.

It's Mike I think I can answer that.

We did take pricing pretty aggressively to offset the commodity increase.

However we did have some customers that have timing lags or grace periods that didn't allow us to take the full potential price in the quarter.

That being said those pricing opportunities are becoming available now and we are seeing that begin to occur but there were some timing issue based on contracts and those types of arrangements.

Tony I'll add in the mention of the cost plus customers, as we've moved through those customers hedging contracts we saw only $750,000 of commodity based -- of revenue increase and that essentially as you described is a dollar for dollar increase in cost and revenue.

So the truly the margin pressure is typically seen on those non-cost plus customers and to the extent that we are efficient in increasing prices across that customer base we protect our margin and in some instances some of that price protection prevented us from doing that.

Okay, and one of those 10 accounts that's been weak, I believe you're lapping the main problem that's been causing that.

So going forward, I wonder Mark if you could talk a little about the trend you're seeing in the third quarter in terms of sequential improvement.

Okay, so the customer's ultimate revenue in the quarter was about -- in the second fiscal quarter of 2014 was about $1.7 million.

That is the 130 basis points that Mike referred to.

We have lapped that now in this quarter, that was the last of it.

As we move forward into the third quarter we don't expect to see that headwind against us.

We do have a natural seasonal trend in our business and the second quarter or the second quarter which we just came off typically represents a stronger quarter for us and that is obviously not fully related to the national account volume that we add through time.

So I'm gone stop short of giving you a concrete number for what I expect as far as volume guidance into our third quarter, although I can tell you the seasonality does show typically trends to show decline from our fiscal second quarter into our fiscal third quarter.

Right, no I understand the seasonal aspect.

My last question would you explain that $2.2 million cost of goods benefit from LIFO inventory liquidation in the quarter?

Certainly.

We are in a LIFO inventory accounting system and as we reduce our inventory and this is a byproduct of the operational drive to consolidate the manufacturing capacity from Torrance into Houston and Portland and also as a result of the compression of our distribution out of Houston and into our Oklahoma City facilities we are anticipating pretty good drop in our inventory levels.

As a result we begin to estimate what that impact is going to be as we eat into the lower priced levels of our inventory.

And so that lower cost coffee is essentially trapped in inventory and as we reduce our inventory we released some of that LIFO benefit.

So that might...

So there's more to go in terms of liquidating some of these inventories?

That would be correct.

Through the six month period we estimated about half of that benefit through our six month financial period.

Okay.

Thank you very much.

Sure.

Thank you.

Our next question comes from line of Kara Anderson of B. Riley and Company.

Your line is now open.

Hi guys.

I'm just wondering if you could update us on coffee pricing, what you're seeing in the market for pricing and if your views have -- towards hedging has changed given the current market?

I think -- I'll start with the first part -- we are seeing some support in that 1.60, 1.65 that's $1.60 to $1.65 in the Arabica C market.

As you know in the third quarter of -- our fiscal third quarter of last year coffee prices jumped pretty aggressively.

They got as high as $2.25, since have come down and kind of bouncing around a pretty reasonable level compared to that $2.25.

It's hard to say what the future of the coffee prices may hold.

What we are seeing now is a period of rain and the country that we hear about the most is Brazil which is experiencing good rain conditions which has I think lessened the pressure on that tendency to make coffee prices go up.

With that being said I think our perspective on coffee prices has gotten more favorable.

When coffee was up around $2 to $2.25 we were not buyers of coffee futures.

So we effectively waited out what I think was a peak in the market.

And we are continuing to evaluate when and how much we start to layer back in our hedging contracts and you can see that just naturally as those hedging positions have come down year-over-year.

So I hope that answers your question for you.

Yeah, it does, thank you.

And then with regards to the relocation in selecting a final location what kind of incentives might you receive from the local and state governments?

I think it's a little early to speculate on that.

This is Mike.

We are in the middle of negotiations now across multiple fronts.

So you are going to have to give us a little time to let that process take place before we share anything it's premature at this point.

Okay.

And then also wondering if you might be able to comment now on some further detail on ways that you will achieve to $12 million to $15 million in annual savings once this is fully implemented?

Just at a high level you know those savings are in aggregation of some of the things we are doing to compress manufacturing some of the elements of the benefit of moving into a low cost state whether it be Oklahoma or Texas.

I think the distribution savings that we annualized are pretty significant as we evaluate that across our nationwide network.

And ultimately the construction of our new state-of-the-art facility we believe will have certain benefits as we manufacture and move towards some manufacture on that side.

So it comes from a number of different areas which we believe are all well evaluated and concrete at this point.

And in addition to the savings I think it's important to note that we believe that this facility and if you think of it as manufacturing, distribution headquarters of course but also from research and development to training standpoint we believe this facility can offer us a better chance to compete for new business, better interaction with our customer base and so forth and we haven't built that in to the economics but I think it's really important to note that this facility we think can be a better engine for new business growth, so that remains to be seen.

Thank you.

Thank you.

Our next question comes from the line of Chris Krueger of Lake Street Capital.

Your line is open.

Hi, good afternoon.

Hi, Chris.

Hi, Chris.

Another question on the new facility, more of a kind of long-term vision type of question.

With I assume a large capacity, do you foresee yourselves like potentially making acquisitions of smaller competitors but then consolidation that into that facility or making moves with other existing facilities that you hone into that one down the road.

Let me break that up into pieces.

In terms of a more aggressive acquisition profile, I think we have commented in the past that as the Company turnaround continues, as our financial strength grows there is a clearly an opportunity to do with what we did with Gourmet Cup and we are pleased that was a good test for us to successfully integrate them albeit a relatively small organization but it went very well.

So yes, I would see us attempting to do that more in the future, should the right conditions exist for an acquisition and so forth.

On the second piece, I think at this point we are not in any position to say anything or make any comment on that.

Frankly we have our hands full right now closing this facility, pushing volume into Houston and Portland maintaining our high quality position in customer service and so forth and it's frankly been a huge focus of management, my team here to get us to this place.

So anything beyond that is not a place we're ready to at all right now.

We're focused on executing what's in front of us.

Okay.

Then over to the e-commerce, I know it's very early, but can you tell us how are you making people aware that service is there that they can buy coffee?

We're just in our infancy of marketing it.

So we went online as we committed at the end of last year.

And I think you'll see a presence on Facebook and Twitter.

I think you'll see us try to connect, given our experiences and expertise in local growing areas and so forth.

We've got a very good presence and a great team in green coffee, that I think can bring a lot of the magic of the coffee industry and our grower industry experience directly to the customer.

So again we're only a month into it, so there is no real results but I'm excited for this for the future.

I think it could have all sorts of benefits for us.

Okay, last question.

I think I know the answer but on your national accounts, in the past you've stated that you have the three of the top 100 restaurants, two of the top 20 convenience store chains and five of the top grocery store chains.

Are those numbers the same still?

Yes.

Okay, that's all I got.

Thanks.

Thank you.

(Operator Instructions).

Our next question comes from the line of Keith Rosenbloom of Cruiser Capital Group.

Your line is now open.

Thanks.

Thank you guys.

It sounds like you've been making a lot of tough decisions.

Want to ask about the two clients that you called out on the call, Big Lots and Cosi.

When did those companies become customers and were they reflected in your last quarter's results?

No, neither were reflected.

I believe one comes on board at the very end of the quarter with the second one quickly thereafter, at the beginning of our fourth quarter.

Okay, and the relative size of these clients are they -- you've called them out.

Are they material?

We're still getting the volume estimates and the plans pulled together.

So it's probably premature to give you a number but I do think that they will be meaningful for us, both of them, both from a size standpoint but also a strategic standpoint.

We're very pleased to have this emerging partnership with both.

But I'm afraid at this point we're still pulling it together.

So I don't have a good number.

But I'm personally excited for both of them coming on board.

Perfect.

And then just the last question, so I think everyone is aware that Torrance has been operating at sub-optimal level, like 25% of capacity or something.

What is actually going on now at Torrance with these layoffs today.

Are they actually producing much product there now or you have pretty much moved everything to Texas and Oregon?

We have not yet moved everything.

So the departure from Torrance will begin with production.

We're targeting for that in May and then we have a phased sequence through each function that will largely carry us through the end of the year.

So it will take a little time.

Frankly we wanted to give employees the best chance to transition.

So we felt it was important to announce a little earlier than perhaps we had every detail sorted out.

We're very proud of this employee base and confident that they'll do everything into the way the Company always has to move us through the next transition period.

Okay, thanks a lot, Mike.

Thank you.

(Operator Instructions).

Our next question comes from the line of Matt Martinek of Reinhart Partners.

Your line is now open.

Hi guys.

Hi.

So it's sounds like the -- some of your other facilities are going to be able to handle the volume that was coming out of the Torrance plan.

And so maybe you can just help me better understand the benefits that are going to be generated from spending $85 million to build a new headquarters and facility, because that's an awful lot of money for a company of your size.

Let me take that.

One of the things that we -- as we evaluated this, struggled with it, is where to invest across our existing infrastructure base and it became pretty clear that it was a tough decision to put capital and facility infrastructure into the Torrance facility.

As a result the decision was made to essentially utilize the value that was in the asset here primarily, the land, to incorporate that into the construction of a new facility.

And if you look at it on the high end of land or in the low end of the new facility those two kind of are pretty close equivalents which led to some discussion around the benefits of being in a new facility, new state-of-the-art facility with new production capacity headquarters and design.

As Mike mentioned the facility here is 65 years old this year, and it's definitely ramping in its capital expenditure that we need to put into it, to maintain it and certainly to meet FISMA and SQF certification requirement, it was going to be an incredible challenge to get this facility up to that level of standard.

That being said the investments in this decision associated with the exit cost and associated with the additional CapEx related for the machinery and equipment facility and fixtures, these are the things I think were warranted when you look at the potential benefit that we see going into the future.

The $12 million to $15 million savings range, as we start to compress some of the production, as we start to realize what some of the benefits more fully we fully expected that and will be readily achievable and so I think that's kind of the story behind the math, that we went through as a leadership team and through the board of directors.

Let me come at it just a little bit differently.

I think you mentioned that other plants can handle the volume.

If you were to look at our second quarter, which is our highest volume season, they probably couldn't have.

So we needed to do something to get capacity for the future to last us all year.

As we began to push volume albeit very slowly to Houston and to Portland both of those facilities were certainly working at a very large pace.

So ultimately if we continue to put volume on the way we have over the last couple of years which has been pretty sizeable we do need to plan for additional capacity.

Okay.

I mean I guess I understand the exit from the Torrance facility given what you've said and certainly considering where those capacity levels were but I guess I'm just curious if the Board considered any other alternatives rather than spending that amount of capital on the new facility and a new corporate headquarters?

Yes, I think it's important to note this has been a large initiative that we've been working on for 12 to 18 months in various stages.

As we've gone down that path the board has been extensively involved and we did flush out other options and different scenarios.

This one, I believe and they ultimately believed was clearly the best one for the long-term.

Okay.

I just only asked because it seems like potentially exploring a sale of the Company to a strategic buyer might be a possible alternative considering theoretically could have the capacity to handle the volume already in place and we've seen a lot of consolidation in the coffee space at pretty high multiples over the last few years.

So I just, I'm curious the Board has thought of that and considered it?

I can't comment on any of the options we looked at.

Okay, thank you.

Thank you (Operator Instructions) Our next question comes from the line of Carter Dunlap of DEM.

Your line is now open.

Hi, guys.

A couple questions I realized you're not in a position to discuss whatever incentives may or may not be offer to you but in terms of thinking of what kind they could be it sounds like from your budget forecast of this spend, you're talking about owning land, owning your building and owning all your capital equipment, so as opposed to other alternatives that might be available to you.

So is it safe to say that the incentives we're talking about are just sort of taxes?

Well, so there are couple of different forms of incentives.

Some come in the form of tax abatements.

Others come in the form of job creation credits.

There are other payroll type benefit tax advantages that -- or incentives that some of the states do, but generally speaking it's in those new jobs or tax abatement type buckets.

Okay.

And maybe to go sort of one more long-term and then a short-term.

To go back to the gentlemen's questions about -- sorry, if you could handle the volume temporarily and I realize you can't at peak with the other two roasting facilities.

But the forward question is, once you get whatever the new place and production up to, what will be the purpose of the Houston and Portland roasting facilities?

I realize they were put there due to historical acquisition, but if this is a white board start over what's their role going to be?

Well in the near-term, which is really all I can comment on right now, we've got, we will have our hands more than full to keep Portland and Houston running at a very high capacity level invest need, the customer needs.

If you step back and look at where we were three years ago, you can see that we put a very significant volume on in a relative short period of time.

And that's created the need for this facility.

In the long-term, who knows, I think at this point, we can't comment on what that might be.

It would be a hypothetical question at best.

So like I said, we're really focused right now on ensuring that Houston and Portland can handle the significant volume that is coming their way and has begun to go their way.

One of the things that we struggled with as we are in this quarter is the prospect of additional volume coming on.

And without saying it was tough decisions.

We had to measure our growth through this period to make sure we can execute in this transition.

Which we believe in the pursuit of high customer service levels and making sure we maintain high quality levels is the right thing to do.

We certainly hope to have that excess capacity and build this excess or build in the additional capacity to grow and to find additional growth opportunities.

And so I think that factored a little bit into our decision making as well.

One more last, excuse me, short-term question.

You've made great strides in reducing your working capital and you've spoken even on this call about bringing inventory down.

But as you envision this migration do you see needing to bring those numbers back up just to ensure there is no delivery kinks in the process i.e.

reducing inventories and flex back up here?

We think, we will be able to plan adequately through a transition.

And if our targeting is correct to have that completed by the -- I think the May timeframe, which would allow us to have our inventories back to a kind of a more operating level by the end of our fiscal year, which is really the measuring point, when we take a snapshot of that LIFO inventory calculation.

I think part of the planning we're doing is really to optimize where the inventory is coming into which port Houston or LA and that has also factored into our decision making as we encounter some difficulty and bring things in through the Los Angeles port.

But we've really modeled this so that we will make inventory available and our output of production of our facilities continuous as we move through this transition.

It's Mike, let me just add another layer to that.

So if you recall, we went live with JD Edwards across the system, which was important for us to see the system.

Now we're beginning to build capabilities of understanding that tool.

You might also recall, we mentioned that we were putting things like barcode scanners on the product.

So we can see and manage inventory, that process is continuing on now.

We're in the process of rolling out scanner-based technology to all of our branches.

We're also looking at improving our SNLP process.

And the point is when you ladder -- link all those up together we should be able to do a significantly better job managing our inventory at lower levels then we've done in the past.

Now, we still have to prove that, but I do think you begin to see a web of initiatives we've talked about over the last two years or so begin to come together.

Thank you.

I appreciate the help.

Thank you.

That's all the time we have for questions today.

Mike?

Thank you for being part of Farmer Brothers second quarter fiscal 2015 earnings call.

We appreciate your interest in our story and are excited about the future.

And we look forward to continuing the progress we've made in the past few years and updating you as we embark on the next chapter in our evolution of Farmer Brothers.

Thanks and have a great day.

Ladies and gentlemen, thank you for participating in today's conference.

That does conclude today's program.

You may all disconnect.

Have a great day, everyone.