Farmer Bros Co (FARM) 2015 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. And welcome to the Farmer Brothers fourth-quarter and FY15 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Tom Mattei. Please go ahead, sir.

Good afternoon everyone. Thank you for joining Farmer Brothers fourth-quarter and FY15 earnings conference call. I am 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 investors 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 two hours after the conclusion of this call. The link to the audio replay will also be available on our website.

Before we begin the call, please note various remarks that we make during the call about our 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 our views only as of today and should not be relied upon as representing our views as of any subsequent date. Results could differ material from those forward-looking statements. More information is available in the Company's press release and our public filings while are available on the investor relations section of our website.

On today's call we use certain non-GAAP measures including non-GAAP net income, non-GAAP net income per diluted share, adjusted EBITDA and adjusted EBITDA margin, in assessing our operating performance. Reconciliation of these non-GAAP financial measures to their 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. Here is the agenda for this call. First, I will do a topline review of our total year and fourth quarter FY15 results, then update you on our corporate relocation and several other strategic initiatives, and conclude with some commentary on the overall business. I will then turn the call over to Mark Nelson, our Treasurer and CFO who will discuss our financial results in greater detail.

First, a quick summary of the business. Overall, we continue to make progress improving our operating performance. To best understand the performance of our Company, I suggest you look at our non-GAAP presentation, as it isolates the moving pieces of our turnaround. A reconciliation of each of these non-GAAP financial measures to the nearest GAAP financial measure is presented in our earnings release which we filed today and also posted on our website. If you look at non-GAAP net income which is GAAP net income before restructuring and other transition expense from the corporate relocation, and also gains or losses on the sale of assets, you'll see $3.7 million for the quarter versus a net loss of $690,000 in the prior-year period. And for the total year, non-GAAP net income of $11.5 million, up $3.2 million from FY14, and an improvement of $24.4 million from FY13. Further, if you look at adjusted EBITDA in the chart below the non-GAAP net income chart, you'll see that in FY15 we were up about $200,000 to $42.5 million. Of note, in the fourth quarter we achieved adjusted EBITDA of $11.1 million, or 8.3% of net sales.

While this is our best annual and fourth-quarter performance in over a decade, we aren't yet firing on all cylinders. At a high level, sales were below our expectations due to sluggishness at several of our larger customers and some of their one-time inventory adjustments, as well as some slight softness in our DSD group. We believe this is a short term phenomenon, but expect some of this weakness to persist over the next quarter or two. From a longer term standpoint, we have won several significant national customers recently and will bring them on over the upcoming year and I will give you more specifics on that shortly. On the other hand, while sales were below our expectations, our cost savings initiatives are progressing very well. Perhaps even slightly ahead of expectations. To give you greater color on this, I will turn to our key strategic initiative to drive profit and lower cost, which is the relocation of our Torrance facility to Northlake Texas.

To remind everyone, the corporate relocation we announced earlier this year was the result of a thorough review of our operations and supply chain to determine how we can become more competitive, grow the business and best serve current and future customers. It effectively begins to reposition us for the next chapter of our history. The summary comment that I would leave with you is that we are on track in terms of executing the plan and garnering the associated economic benefits. The plan has three main elements or phases. The first is the closure of the Torrance facility and move into an interim facility, and relocation of our corporate headquarters to a more central location. The second is the construction of the new state-of-the-art facility to house our headquarters and manufacturing operations, and thirdly is the sale of the Torrance facility. We are also developing a fourth phase of continued cost reductions work, which I plan to share at the upcoming shareholder meeting in December in Texas. Let me review each phase for you.

First, regarding the closure of Torrance to move an interim facility. Overall we are on plan. Coffee production has been successfully transferred to Portland and Houston and the Houston distribution center closed, the first phases of the layoffs have been executed well and right on plan. We have opened a new interim facility north of Fort Worth and will have hired about half of the employees that will be there by the end of the year. Of note, since we last spoke, we have made several key leadership hires, including a new chief information officer Gary Nordland, a new head of our DSD business or direct store delivery, Scott Bixby, and a new head of human resources, Susan Gargis. Five other key leaders have already moved to Texas from the existing management team here in Los Angeles. Net, the human capital phase is on track.

Regarding the second phase and the building of the new facility, overall the second phase is also proceeding well and on plan. We recently celebrated the groundbreaking ceremony in Northlake and are going into full construction mode. Development work is proceeding regarding the design of the new facility as we planned, and once again I want to thank the local leaders in Texas for their support.

Next, the third phase, the sale of Torrance. The sale of Torrance is proceeding as planned as well. We are in the final selection phase of the sales agents to market the property and are progressing with our preparation work as well. So the bottom line there are -- there are no issues to report.

We will begin to talk about a fourth phase, and to get ahead of a question I'm likely to be asked later we are continuing to assess opportunities across the Company to lower our cost structure and in several cases also improve our performance. I will give a thorough update at the shareholder meeting on December 3 regarding this phase.

Next, I'd like to shift gears and move on to new customers won. As I have mentioned previously, a challenge we have faced in this transition is how to manage our current customer demands with the quality they expect, while we close a plant, a headquarter and also a distribution center. We have had to balance how we bring on new business in this environment. As an example of the short-term challenges we face, our capacity in the key second quarter is largely at maximum, and then we have capacity and the following quarters which will alleviate with the start of our third quarter, and subsequent start of the new plant. That being said, we have recently won several key customers which will come on board during the second quarter and ramp up in the third. This includes a portion of Sam's Club, also CMG, a large distributor of cash and carry stores, and three, our relationship with Big Lots continues to evolve very well.

Mark will go over the financial update a bit later, but let me reiterate what I've said before, we firmly believe that this change is essential for assuring that our Company's success for the next 100 years remains vibrant. We expect to continue the focus that has made us what we are today, as our Company undergoes this transition. Let me now turn the call over to Mark Nelson, our CFO, who will provide you with more details on our fourth-quarter and full-year results, as well as the financial details of our corporate relocation plan. Mark?

Thanks, Mike. And hello everyone. I will spend the next few minutes discussing our financial performance for the fourth quarter and our full FY15.

As Mike mentioned, we continued to make significant progress towards our objectives of driving improved operational and financial performance. So now let me get right into some of those details. On the income statement, net sales in our fourth quarter of FY15 were $132.6 million, representing a 1.8% increase from net sales recorded in the fourth quarter of FY14. This increase was primarily due to increases in the sales of our coffee and other beverage products. Primarily driven by pricing actions through which we increased both prices to direct ship and direct store delivery customers. The increase in net sales of $2.4 million over the prior-year period included approximately $3.8 million in price increases to customers utilizing commodity-based pricing arrangements where the changes in the green coffee commodity costs are passed on to the customer. Most of our cost plus customers are covered under coffee hedging contracts, which helped to insulate them from immediate changes in green coffee commodity prices. The duration of these hedging contracts creates a lag in how commodity price changes are ultimately reflected in our topline revenues.

For our DSD customers, we also implemented pricing increases, as we saw green coffee commodity costs increase throughout the fiscal year. Gross margin for the fourth quarter was 37.1%, or 220 basis points higher than the 34.9% recorded in the fourth quarter of FY14. Approximately 130 basis point or $1.7 million of this improvement was driven by the beneficial effect of liquidation of LIFO inventory quantities, primarily as a result of the reduction in inventories at the end of FY15.

In the fourth quarter of FY15 we reduced a significant amount of coffee inventory, due primarily to the consolidation of our coffee production from our Torrance, California facility into our Houston, Texas facility. The resulting drop represented a 28% or almost eight million pound reduction in coffee inventories across the entire supply chain. Operating expenses in the fourth quarter were $50.6 million, representing an increase of $7.5 million as compared to the $43.2 million recorded in the prior year period. This increase was primarily due to $5.9 million incurred in restructuring and other transition expenses this quarter as well as a significant $3.8 million gain on sale of a property that was recorded in our fourth quarter last year. As a result, loss from operations in the quarter was $1.4 million compared to income from operations of $2.3 million in the prior-year period.

Total other expense was $600,000 in the fourth quarter as compared to total other income of $585,000 in the fourth quarter of FY14. Total other expense in the quarter included net losses from coffee related derivative instruments of $301,000, as compared to net gains from coffee related derivative instruments of $102,000 in the fourth quarter of the prior fiscal year. Total other expense in the quarter also included losses from investments of $551,000, as compared to net gains from investments of $449,000 in the fourth quarter of FY14.

As of June 30, 2015, we held coffee related derivative instruments covering 34.2 million notional pounds of green coffee, as compared to 19.8 million notional pounds covered as of June 30, 2014. In addition to these coffee related derivatives, as of June 30, 2015, we had $25.8 million in green coffee inventory and commitments to purchase green coffee totaling an additional $41 million under a fixed price contracts.

In the three months ended June 30, 2015, we recorded net income tax expense of $170,000, compared to income tax benefit of $199,000 in the fourth quarter of FY14. In the 12 months ended June 30 we increased our valuation allowance by $12.3 million to $84.9 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 loss was $2.2 million in the fourth quarter of FY15, compared to net income of $3.1 million in the fourth quarter of FY14. Net loss per share in the fourth quarter was $0.13, versus diluted earnings per share of $0.19 in the prior-year period.

As Mike mentioned in referencing our non-GAAP net income, which excludes restructuring and gains and losses on sales of assets, you will see we achieved $3.7 million for the quarter in net income, versus a net loss of $690,000 in the prior-year period. Our non-GAAP net income per common share diluted was $0.23 per share in the quarter, versus non-GAAP net loss per share of $0.04 in the fourth quarter of FY14.

Okay, now let's turn to the balance sheet. As of June 30, 2015 we had $16.2 million in cash and cash equivalents, plus restricted cash. In addition, we had $23.7 million in short term investments. As of June 30, we had $78,000 borrowed and outstanding on our revolving credit facility, which is unchanged versus a year ago.

In March 2015, our credit facility with Wells Fargo expired. We replaced that facility with a new credit facility from JPMorgan Chase and SunTrust, with a $75 million borrowing capacity and a $50 million accordion expansion feature. As of June 30, 2015, we had utilized $11.5 million in letters of credit and had $43.5 million of excess availability on the credit facility, based on our borrowing base capacity.

For the full year of FY15, our capital expenditures for purchases of property, plant and equipment were $19.2 million, as compared to $25.3 million in FY14. Our CapEx included funds spent on coffee brewing equipment, expenditures for vehicles, machinery and equipment; building and facility improvements; and IT related expenditures. Depreciation and amortization expense in the FY15 was $24.2 million, or $5.6 million in the fourth quarter versus the $27.3 million in the full year of FY14, or $6 million in the fourth quarter only of last year.

I would now like to discuss some of the financials related to our corporate relocation plan. In the fourth quarter and full year ended June 30, 2015, restructuring and other transition expenses associated with our corporate relocation plan were $5.9 million and $10.4 million respectively. For the full year, these expenses consisted of employee retention and separation benefits of $6.5 million, facility relocation costs of approximately $600,000, and related -- other related costs including legal, consulting and travel of $3.3 million.

We expect that we will incur approximately $25 million in cash costs, in connection with these restructuring and other transition expenses. With the remainder of the $25 million or $14.6 million expected to be recognized in FY16 and the first quarter of FY17. In addition, we may incur certain non-cash asset impairment and pension related costs, the amount of which we had not yet determined.

On July 17, 2015, we entered into a lease agreement with Wells Fargo to lease a 538,000 square foot facility to be constructed on just over 28 acres of land located in the city of Northlake, Texas. The new facility is expected to include approximately 85,000 square feet for corporate offices, more than 100,000 square feet for manufacturing, and more than 300,000 square feet for distribution. The facility will also house a coffee lab. The lease agreement contains a purchase option equal to 103% of the total project cost, as of the date of the option closing. The purchase option -- the option purchase price is subject to increase, if not exercised by July 17 2016. With an obligation to pay rent commencing on December 31, 2016 if the option remains unexercised.

The expenditures associated with our new facility are expected to be partially offset by proceeds from the planned sale of our Torrance facility. We anticipate that net proceeds from the Torrance facility will be approximately $28 million to $35 million. We believe our credit facility, the extent proceeds from the sale of our Torrance facility, and to the extent available, cash flows from operating and other liquid assets, collectively will be sufficient to cover our financing requirements for the next 12 to 18 months, including the anticipated expenditures for our upcoming corporate relocation plan. 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 FY16. And with that, I will 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. I want to reiterate our commitment to ensuring continued and uninterrupted service to our thousands of customers nationwide, as we accelerate our move to Northlake, Texas. And with that I would like to open up the call to a few questions.

Thank you

(Operator Instructions)

Kara Anderson, B. Riley & Company, your line is open.

Hi, good afternoon guys. Just wondering if you can comment on the number of pounds sold for the quarter and the year?

Yes sure. So this is coffee pounds roast and ground sold in the quarter, 16.7 million pounds, and for the year 70.1 million pounds.

And then can you comment on the general pricing environment for green coffee and how that deviates, at all that is if it does even, from sort of the average cost per pound you were seeing in the quarter?

Yes, sure. So when we look across the year, the average price of coffee that we see in the C market is down roughly 16%, 17%. That's not exactly our hedged cost, but the C market impact across the average of 12 months did come down in the year.

We've seen different price points based on our cost plus customers who will take varying durations of how far out they go on their hedging contracts versus our market based DSD customers. But in general we did see a declining commodity environment, and as you know now with -- it still continues to stay quite low.

Okay Thank you. Sure.

Thank you.

(Operator Instructions)

I am showing no further questions at this time. I'd like to turn the call back to Management for closing remarks.

Thank you. Once again, we appreciate your interest in our story and we are really excited about the future. We look forward to continuing the progress we've made over the past few years, and updating you as we embark on the next chapter in the evolution of Farmer Brothers.

If you are planning to come to our annual shareholder meeting, we will be in Texas in the Northlake area on December 3, with additional details to follow. With that, we will sign off and say thank you once again for your interest in Farmer Brothers.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.