Farmer Bros Co (FARM) 2016 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Farmer Brothers First Quarter FY16 Earnings Conference Call.

At this time, all participants are in a listen-only mode. Later, we will conduct a brief question-answer session and instructions will follow at that time.

(Operator Instructions)

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

Good afternoon, everyone. Thank you for joining Farmer Brothers' First Quarter FY16 Earnings Conference Call. I'm the Company's General Counsel. With me today are Mike Keown, President and Chief Executive Officer; and Isaac Johnston, 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 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 this 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 materially from those forward-looking statements.

Additional information on factors that could cause actual results and other events to differ materially from those forward-looking statements is available on the Company's press release and in our public filings, which are available on the Investor Relations section of our website.

On today's call, we use certain non-GAAP financial measures including non-GAAP net income, non-GAAP net income per common share diluted, 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 top line review of our first quarter of FY16 results, then update you on our corporate relocation and other strategic initiatives, and finally conclude with some commentary on the overall business. I will then turn the call over to Isaac Johnston, our Treasurer and CFO, who will discuss our financial results in greater detail.

Before I do, however, I want to take a moment and thank Mark Nelson for his service as Treasure and CFO, over the last two and a half years. As many of you know, Mark has been a critical leader in the turnaround of Farmer Brothers and is not able to make the move to Texas for family reasons.

Mark's fingerprints are on so many areas of improvement with many outside of the core CFO role. It is tough to summarize, so I'll just leave it that we will miss his business acumen, leadership, energy, and passion.

I have asked Mark to stay through a transition period and he will continue to help the company over that time. We all wish nothing but the best for Mark and his family in the years to come.

So on to the business. Overall, we continue to make progress improving our operating performance. To further understand the moving parts behind our performance, I would draw your attention to our presentation of key non-GAAP measures such as net income, net income per common share diluted, adjusted EBITDA, and adjusted EBITDA margin as they help to draw into sharper focus the moving pieces of our turnaround.

As a reminder, a reconciliation of each of these non-GAAP financial measures to the nearest GAAP financial measure is presented in our earnings release we filed today and also posted on our website.

Non-GAAP net income, which excludes restructuring and other transition expense and gains or losses from the sale of assets net of tax was $4.2 million for the quarter versus $2.6 million in the prior year period, or up 61%.

Of note, in the first quarter we achieved an adjusted EBITDA of $10.7 million or 8% of net sales. To put this quarter's performance in a perspective, when we look back at our prior first quarter results and calculate what non-GAAP net income would be in those quarters using the same method as we do now, we believe this represents one of the best Q1 non-GAAP net income quarters in over a decade, and we plan to continue improving behind the restructuring initiative.

However, as I mentioned on the last call, we thought there could be sluggishness in net sales and we did experience it at several of our larger customers as well as performance that was not up to our expectations in our DSD, or direct store delivery group.

There was roughly a $2.6 million decline in net sales as compared to the same period in the prior fiscal year. 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, national account customers that I noted on our prior conference call that we had won recently are scheduled to start production over the next three months, and I will provide more detail on that shortly.

On the other hand, our cost savings initiatives are progressing very well, ahead of expectations and you'll see that in roughly 250 basis points of improvement in gross margin, which Isaac will detail in a moment.

I will now turn to one of our key strategies to continue to drive profit and lower costs as well as become more attractive to new customers -- the relocation from Torrance, California to Northlake, Texas.

To remind everyone, the corporate relocation plan 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 comments that I would leave you with is that we are executing this initiative according to plan. That plan has three phases.

First, the closure of Torrance and a move into an interim facility. Regarding the closure of Torrance, overall, we are on plan. We opened a new interim facility north of Fort Worth, Texas, and hiring is proceeding on the pace that I mentioned on the last call. About half of the home office employees will be in this location by the end of the year.

Departures are in the final stages in Torrance. Once again, I want to thank those employees for their professionalism and grace. And we think the overall human capital phase is right on track.

Next, regarding the second phase or the building of a new facility. The second phase of our plan is also proceeding well and right on expectations. The pre-slab is down already despite some of the recent rains in the area, and design development work is proceeding well and nearing completion in many respects.

Next, regarding the third phase or the sale of Torrance. The sale of the Torrance property is also proceeding as planned. We selected Cushman Wakefield as the broker to represent us in the sale after an extensive vetting process, and we are completing the preparatory work as well.

Information that we have received suggest a very robust market for properties of the size of the Torrance facility, which are relatively rare in the Los Angeles metropolitan area. And we currently believe that the likely price may exceed our earlier expectations.

And finally regarding our fourth phase. As I mentioned on the last call, we are continuing to assess opportunities to lower our cost structure and in several cases improve our performance. I will continue to provide further updates on significant developments as they ripen. I will also give an update at the shareholder meeting.

So lastly, moving on to new customers recently won and the start-up. As I mentioned previously a challenge we faced in this transition is how to manage our current customer demands with the quality they expect while we close the plant. Moreover, we just had to be strategic and purposeful with how we bring on new business.

That being said, several recently contracted national account customers will come on board during the next three months right on plan. These include a portion of Sam's Club, CMG, and Grocery Outlet.

Isaac will go over the financial update a bit later, but let me reiterate what I've said before. We believe firmly the changes to be brought about in connection with the corporate relocation are essential to provide the platform for our company's success for the next 100 years. We expect to continue to focus on that transition, and we expect that it will take our company to a brighter future.

Let me now turn the call over to Isaac Johnston, our CFO, who will provide you with more details on our results as well as some financial updates on our corporate relocation.

Isaac Johnston: Thank you, Mike, and hello, everyone. I'll spend a few minutes discussing our financial performance for the first quarter of FY16.

As Mike mentioned, we continue to make significant progress towards our objectives of driving improved operational and financial performance.

Now, let me get into some of those details.

On the income statement, let's go through net sales. Net sales in our first quarter of FY16 was $133.4 million, representing a 1.9% decrease compared to net sales reported in the first quarter of FY15.

This was primarily due to decreases in sales of our coffee and other beverage products. RMG coffee pound volume was down 5.3% for the quarter primarily in several of our large direct ship customers.

The decrease in net sales of $2.6 million was partially offset by $1.1 million increase in revenue driven by customers in cost-plus pricing arrangements. Most of our direct ship customers utilize commodity-based pricing arrangements which -- where the changes in the green coffee commodity costs are passed on to the customer.

Additionally, most cost-plus customers are covered under coffee hedging contracts, which help to insulate them from immediate changes in green coffee commodity prices. The duration of these hedging contracts generally create a lag in how commodity price changes are ultimately reflected in our top line revenues.

And our gross margin for the quarter of FY16 was 37.9% or 250 basis points higher than the 35.4% recorded in the first quarter of FY15. The improvement in gross margin was primarily driven by improvements in conversion and leverage as we move production from our Torrance, California manufacturing site to our Huston, Texas and Portland, Oregon manufacturing facilities.

Operating expenses in the first quarter were $51.1 million representing an increase of $5.6 million as compared to the $45.5 million recorded in the prior year period. The increase was primarily due to $5.5 million incurred in restructuring and other transaction expenses this quarter with no similar expenses incurred for the prior year period.

As a result, loss from operations in the quarter was $563,000 compared to income from operations of $2.6 million in the prior year period.

Total other expense was $599,000 in the first quarter of FY16 as compared to total other income of $112,000 in the first quarter of FY15. Total other expenses in the quarter include net losses from coffee-related derivative instruments of $727,000 as compared to net gains from coffee-related derivative instruments of $49,000 in the first quarter of the prior fiscal year.

As of September 30, 2015, we held coffee-related derivative instruments covering 26 million [notational] pounds of green coffee as compared to 19.8 million [notational] pounds covered as of September 30, 2014. In addition to these coffee-related derivatives, as of September 30, 2015, we had $30.8 million in green coffee inventory, both processed and unprocessed, and commitments to purchase green coffee totaling $36.9 million under fixed price contracts.

For the first quarter of FY16, we recorded an income tax benefit of $88,000 compared to an income tax expense of $198,000 in the first quarter of FY15. In the first quarter of FY16, we increased our evaluation allowance by $400,000 to $85.3 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 the factors I mentioned, net loss was $1.1 million in the first quarter of FY16 compared to net income of $2.5 million in the first quarter of FY15. Net loss per common share diluted in the first quarter was $0.07 versus net income per common share diluted of $0.16 in the same prior year period.

As Mike mentioned in referencing our non-GAAP net income, which excludes restructuring and other transitional cost and gains and losses on sale of assets, you will see we achieved non-GAAP net income of $4.2 million for the first quarter of FY16 versus $2.6 million in the prior year period.

Our non-GAAP net income per common share diluted was $0.25 per share in the first quarter of FY16 versus $0.16 in the first quarter of our FY15.

OK, now let's turn to the balance sheet. As of September 30, 2015, we had $22.8 million in cash and cash equivalents plus restricted cash. Additionally, we had $22.8 million in short-term investments.

As of September 30, we had $154,000 borrowed and outstanding on our revolving credit facility. Our credit facility with JPMorgan Chase and SunTrust has a $75 million borrowing capacity and a $50 million accordion expansion feature.

As of September 30, 2015, we had utilized $11.5 million in letters of credit and had $49.2 million of excess availability on the credit facility based on our borrowing base capacity.

For the first quarter of FY16, our Capex expenditures were $4 million as compared to $4.9 million in the first quarter of FY15. 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 Q1 2016 was $5.3 million versus $6.3 million in first quarter of last year.

I would now like to discuss some of the financials relating to our corporate relocation plan.

In the first quarter ending September 30, 2015, restructuring and other transition expenses associated with our corporate relocation plan were $5.4 million. For the quarter, these expenses consisted of employee retention and separation benefits of $3.6 million. Facility relocation cost of $700,000 and other related costs including legal, consulting, and travel of $1.1 million.

We have estimated that we will incur approximately $25 million in cash cost in connection with these restructuring and other transition expenses associated with the corporate relocation plan.

To date, we have incurred $15.8 million in restructuring with the remainder of the estimated $25 million or $9.2 million expected to be recognized in the remainder of FY16 and the first quarter of FY17. In addition, we may incur certain non-cash asset impairment and pension related costs, the amounts of which we have 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, in addition to housing 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; if the option is not exercised an obligation to pay rent commences December 31, 2016. The expenditures associated with our new facility are expected to be partially offset by proceeds from the planned sale of our Torrance facility.

We believe our credit facility, the expected proceeds from the sale of the Torrance facility, and to the extent available, cash flows from operations and other liquid assets, collectively, will be sufficient to cover our financing requirement for the next 12 to 18 months -- including the anticipated expenditures for our corporate relocation plan.

As we have mentioned, when the corporate relocation plans have been fully implemented we expect to see annualized cost savings in the range of $12 million to $15 million, which savings will be increasingly realized throughout FY16 and early 2017.

And with that, I'd like to turn the call back over to Mike.

Thanks, Isaac. I would also like to thank those if you on the call for your continued interest in Farmer Brothers. I want to reiterate our commitment to continued and uninterrupted service for our thousands of customers nationwide as we accelerate our move to Northlake, Texas.

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

Thank you.

(Operator Instructions)

Our first question comes from the line of Tony Brenner with ROTH Capital Partners. Your line is now open. Please go ahead.

Tony Brenner: Thank you. I have three questions. First of all, I wonder if you could talk about, now that Torrance is closed -- and you're obviously getting a productivity benefit from that -- over the next four quarters, between now and when the new facility opens at the beginning of 2017, what are the opportunities for further sequential gross margin improvement?

Tony, I'll take a shot at that and then turn it over to Isaac. I think there's two things that we're seeing. One is the fundamental cost reductions that we thought we would see from project -- this project are occurring.

Secondly, we're also seeing a very strong performance from the supply chain, improvements from where we've been historically, and we're still getting our arms around what that is. To answer your question, moving forward, there are some other opportunities, which I'll highlight at the shareholders meeting in greater detail and --

More specifically, we believe we'll have them fully realized in FY17, and the items will ramp up on a timely basis between now and that timeframe. It's hard to give an exact number within the individual quarter slots as we look forward, but we believe we'll fully realize them in FY17.

OK. And second, I know we talk about a major strategy being to improve the volume trends in your direct store delivery business. I wonder if you could talk a little about what some of your initiatives will be.

OK, Tony, I'll take that. There's probably two or three key ones, and then we'll go into this in greater detail at the shareholder meeting. But one productivity initiative is around improving the routing and the technology we use to plan and execute. We call it mobile sales and we're highlighting some of that technology now.

The second area is around improving the selling quality of the organization, and we're going to continue to redouble our initiatives to sell the high-quality products that we have, be it coffee -- tea, iced coffee in particular. We've made some progress there, but I think we need to continue to become a better training organization over time to execute that on a day-to-day basis in the DSD group.

The only thing I would add is -- and this is more from a personal standpoint -- I've spent 27 years in the DSD world in helping on the optimization and improvement of running DSD businesses including growth.

So I'm looking forward to working with the organization over the coming months and years on helping implement some of the items that have been effective within other industries.

When you -- Mike, when you talk about improving selling, quality, and training, you've been there and done that with a little noticeable effect -- so what's going to be different?

Well, I think on the training standpoint, we're learning to become a better training organization. I wouldn't say that our efforts before, well, haven't -- we haven't got the results that we would like -- I wouldn't call them ineffective.

We've had some key areas of success. But I think it's more learning from those endeavors, figuring out what works and what we need to do better, and then taking that into the market.

As you know, I believe you know, Tony, we had a new leader in the DSD group, a demonstrated leader and builder of direct store delivery organizations. And I think as he gets his arms around the business you'll find that there were some things we did very well and some things we could have done better.

OK. My last question is how will the transition from Torrance and the eventual sale of that and closing of that entire facility affect your pension benefit obligations and the number of ESOP shares that remain outstanding as ESOP shares?

Hold on one second, Tony, we're getting that data.

On the ESOP side, we believe there is no change or impact on the ESOP program. It was -- I believe it was already timed out to occur over the next three-year timeframe.

What was the other part of the question, Tony?

Pension obligations in terms of how the closing of Torrance and the elimination of much of that workforce will affect that.

Tony, we're still evaluating exactly what the pension situation is at this point, so I don't think we can get into any greater detail at this point, though, we will certainly update the external world as we finish that process.

OK. Thank you.

Thanks, Tony.

Thank you.

(Operator Instructions)

Our next question comes from the line of Kara Anderson with B. Riley & Company. Your line is now open. Please go ahead.

Hi. Just wondering if you guys can discuss sort of general green coffee pricing in the market versus what your costs from your inventory, or fixed contracts, and derivatives -- sort of what you expect over the next 12 months?

Boy, if I had a crystal ball and could predict that perfectly I would be a very lucky man. I think if you look at the volatility over the last year and let me start there, we saw quite a bubble over the last 18 months.

And if you remember, our reaction was just to shorten our positions a little bit. We believe we could ride out the storm and that the cost of coffee would come down and that has, in fact, happened.

From a historical standpoint, the current costs of coffee are on the lower end of that and we're evaluating what our actions will be because of it, but at this point, I can't go into specifics about that.

We're constantly evaluating the market and you've seen the same costs we have, and we'll be determining over the next short period what we do in this environment. But I think it would be premature for me to put out a forward-looking view of what those specific prices and costs will be.

OK. We haven't talked about the e-commerce strategy in a while; I'm just wondering if you could provide an update there, what the goal is, what opportunities you're seeing, and just how it's tracking since you announced it a couple of quarters ago?

Sure. It's been a very interesting process. This was something that was new to us. I think that, overall, it's moving in a good direction. You'll probably see that if you were to go online, we'll focus on fewer SKUs over time. We're learning how we bring that out. We've got several ways.

We're currently engaging with our consumer base. And we're also learning that this could be a good tool to engage with our customer base as well.

As you know, we have a very broad customer network. In many cases, the best way to engage them is with the DSD high-touch model. In some cases, we're learning that perhaps to overlay an e-business strategy in addition to the service we've always provided can be an effective tool.

So probably premature for me to put out any revenue specifics or anything except to say that it's a growth avenue, one we were probably a little behind on, but we're catching up and we're pretty bullish on the future.

Great, thank you.

Thank you.

(Operator Instructions)

Our next question comes from the line of Chris Krueger with Lake Street Capital. Your line is now open. Please go ahead.

Hi. Good afternoon.

Good afternoon.

It sounds like you're pretty confident in your prospects for getting a good price on your Torrance facility. Do you have a timeframe in mind when you hope to have that completed by or a goal?

Yes, I can speak to that. So where we're at in the process -- we've largely finished the preparatory work. We have engaged an outside agent, who is working with us right now to figure out when we go on the market.

I think it's fair to say that will be within the next 90 days but what day specifically is probably premature but very imminent, and we're getting their best advice as to how to market that product -- property in the Los Angeles area.

OK. And then beyond Torrance, can you refresh my memory on -- are there other facilities you hope to consolidate into the new Dallas facility, where -- which should leave you able to monetize some other properties?

We don't have any announcement in terms of that at this point in time. We're always studying. If you go back through our history, at least over the last three or four years, we've taken the opportunity to occasionally consolidate a branch or an area, and we really view that as more of a cost reduction or efficiency initiative -- not necessarily with the goal of monetizing real estate.

I imagine we'll continue to take those types of actions on into the future.

OK. You mentioned the shareholder meeting. I don't have the date for that; when is that?

December 3rd. It will be in Northlake, and we can get you that information if you'd like.

Sure.

It's about 10 in the morning. And we view that as a good time while we're all in Texas to share an update and also provide some visual around what -- how things are taking shape.

OK, sounds good. That's all I got. Thanks.

Thank you. That's all the time we have for questions today. Mike?

OK. Well, once again, I want to thank everybody for their interest in Farmer Brothers. As I just mentioned, our shareholder meeting is in Northlake, Texas on December 3rd, and we welcome you.

And we look forward to continuing our discussion with the investment community and continuing the progress we've made in the last few years, and we'll update you along the way. And thanks again. Have a great afternoon.

Ladies and gentlemen, this does conclude today's program. You may all disconnect. Everybody, have a wonderful day.