Farmer Bros Co (FARM) 2016 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Farmer Brothers' third-quarter fiscal 2016 earnings conference call. (Operator Instructions) As a reminder, this conference call 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' third-quarter fiscal-year 2016 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 at www.sec.gov. Please note that all the financial information presented on this conference call today is unaudited.

A replay of this audio-only webcast will be available approximately 2 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 in 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 our plan for the call today. I will start by hitting some highlights of our financial results for the quarter, then I'd like to bring you up to date on our corporate relocation plan and, as part of that, the cost-reduction initiatives we've been tackling over the past year or so. After that, I will turn the call over to Isaac Johnston, our Treasurer and CFO, who will discuss our financial results in greater detail.

Overall, we were very pleased with the results this quarter. We feel that there was a lot to like as we turn the corner in many areas including volume, restructuring, relocation, and transition of the spice business. We have much to do, but we are meeting our commitments and will continue to be very focused on the work plan ahead of us.

At a high level, volume was strong with improvements both in our direct-ship and DSD channels; margins improved; net income results were solid. We continued to execute well on the operations side, and we made continued progress on our corporate relocation plan. While we are only in the third or fourth inning of our turnaround, we believe we have more tailwinds than headwinds at the moment.

Let's look at sales and volume. We've been telling you this over the past few calls: that we haven't been happy with our volume trends during calendar 2015, but we saw that start to reverse during the second quarter of our fiscal 2016. We returned to growth during that quarter, with growth in our roast and ground coffee products compared to the prior year.

We felt this was more than a blip and it represented a change in the trend line, and that recent additions of customers would position us for future growth. It looks like that is proving to be the case. We are happy that net sales are up for the quarter by $2 million for this quarter compared to last year.

As we've said, however, looking at net sales doesn't always tell the tale because of the effect of commodity-based pricing arrangements, and during this period commodity costs were comparatively lower than the prior-year period. So the bigger story is volume. Total unit sales for this quarter were up 6% compared to the same quarter last year, and this was driven by increases with both our roast and ground coffee and spice products.

During this quarter, we processed and sold around 22.8 million pounds of green coffee compared to 20.9 million pounds during the same quarter last year. This is approximately a growth rate of 9%. That uplift came from a combination of new business as well as increases from existing customers.

Next, on to gross margin, another positive for this period. We saw a reduction in cost of goods sold during the third quarter. COGS decreased $4 million or 4.7% to $81.9 million compared to the third quarter of fiscal 2015.

Leading the way in the reduction was lower commodity costs compared to last year's third quarter, the continued benefit from supply chain efficiencies, as well as some help from a LIFO inventory layer reduction. The increase in net sales combined with the reduction in COGS produced a gross profit of $52.6 million, an increase of $6 million or 12.9% compared to last year. That brings gross margin to 39.1% for the third quarter compared to 35.1% in the third quarter of the previous year.

One thing you'll note in the results for this period is the accrual for companywide incentive compensation. Based on improving results, we increased our accrual, and that is driving the increase in SG&A and operating expenses generally, compared to the third quarter of last year. It seems more pronounced in the third quarter of fiscal 2016 because we reversed our accruals for incentive compensation at this time last year, as our performance last year did not justify accruals at typical levels.

Selling expenses in the quarter also included expenses associated with our DSD reorganization. This is approximately $500,000 and is not included in the restructuring and transition expenses associated with the corporate relocation plan. Isaac will go into more detail on this later in the call.

Despite the higher incentive compensation expense, stronger gross profit for the period helped drive an improvement in net income. In the third quarter of fiscal 2016, net income of $1.2 million compares favorably to the net loss of $2.6 million for the third quarter of the prior year. We incurred about $3.2 million in restructuring and transition expenses related to the corporate relocation plan during the third quarter of fiscal 2016, which was slightly less than the $3.6 million for the third quarter of last year.

So, looking then at our non-GAAP net income measure, the third quarter of fiscal 2016 produced a marked increase to a total of $4 million in non-GAAP net income compared to $1.1 million in the third quarter of last year, an increase of nearly $3 million compared to the prior-year period. This translates to non-GAAP net income per common diluted share of $0.24 per share versus $0.07 per share in the third quarter of fiscal 2015, an improvement of $0.17 per share. Isaac will go into more specifics with the financials, but suffice it to say we are happy to see things pointing in the right direction at the same time during the quarter.

Next, I'd like to touch upon key strategic initiatives, with particular attention to our corporate relocation plan and other cost-savings initiatives that we've shared with you previously. While we have continued to focus and work very hard on the corporate relocation, similar to last quarter there is not a great deal to report right now.

Overall, we are right on plan. We completed final design on the new Northlake, Texas, facility, and in early March finalized revised estimated cost ranges for the building and other aspects of the corporate relocation plan as well as updated our estimated annualized cost saving.

Construction on the new facility is proceeding well despite some occasionally challenging weather. Walls and steel have been going up, and the roof is following. So generally, things remain on track, and that's a very good thing for an initiative of this size.

The third-party logistics initiative that we have discussed has nearly completed its initial rollout as of the end of March. And our vendor-managed inventory programs are also in progress as we planned.

In addition, you may have seen that we entered into an agreement to sell our Torrance, California, property. The prime location, combined with a very competitive market, produced very strong and competitive interest in the property.

We were fortunate to have received interest from what we feel was a strong and professional group of potential purchasers, and the party with whom we've entered into an agreement for sale was emblematic of the quality of the purchaser pool. We have been pleased with the results and look forward to completing the transaction.

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

Thanks, Mike, and hello. I'll spend the next few minutes discussing our financial performance for the third quarter of fiscal 2016. We continue to make significant progress towards our objectives of driving improved volume growth along with improvements in supply chain management and financial performance. Now, let me go into some of those details.

On the income statement, net sales in the third quarter of fiscal 2016 was $134.5 million, representing a 1.5% increase compared to net sales in the third quarter of fiscal 2015. This increase was primarily driven by significant increases in coffee pounds sold, which were up 9.3%, and in overall total unit sales, which were up 6%, which were then offset by lower prices, driven primarily by customers in cost-plus pricing arrangements where the changes in green coffee commodity costs are passed on to the consumer -- on to the customer. Most cost-plus customers are covered under coffee hedging contracts which help insulate them from immediate changes in green coffee commodity prices.

The gross margin in the third quarter of fiscal 2016 was 39.1%, or 400 basis points higher than the 35.1% in the third quarter of fiscal 2015. The improvement in gross margin was primarily driven by lower green coffee costs, improvements in conversion, and leverage as we move production from our Torrance, California, manufacturing site.

Gross margin includes an expected benefit of LIFO layer reduction in the third quarter of fiscal 2016 of $800,000, compared to a very similar $700,000 reduction in Q3 of 2015. Overall, we experienced a very strong quarter in gross margin improvement and we're very pleased with the results.

Operating expenses in the third quarter were $52.3 million, representing an increase of $4.3 million as compared to the $48 million recorded in the prior-year period. One major factor impacted operating expenses and then a few smaller items.

First, performance-based incentive compensation accruals were above plan in the quarter, as compared to a reversal of accrual for incentive compensation in the prior year, when the operating performance was behind target. This total difference in the quarter was $4.6 million.

In addition, some smaller items, with lower vehicle freight and fuel costs of $500,000, were offset by a $500,000 one-time increase in expenses related to a small reorganization in the DSD business not included in the corporate relocation plan. You might recall we discussed this DSD reorganization during the prior quarter's call. Expenses related to the corporate relocation plan was $400,000 lower than Q3 of 2015.

As a result, income from operations in the quarter was $300,000 compared to a loss from operations of $1.4 million in the prior-year period, an improvement of $1.7 million versus the prior-year quarter. Total other income was $900,000 in the third quarter of fiscal 2016, as compared to total other expense of $1.4 million in the third quarter of fiscal 2015. In Q3 fiscal 2016, we recorded $200,000 of coffee-related derivative instruments gains, with coffee-related derivative instrument losses of $1.8 million in the prior-year period.

For the third quarter of fiscal 2016, we recorded an income tax expense of $43,000 compared to income tax benefit of $218,000 in the third quarter of 2015, an effective tax rate of 4.4% in Q3 of 2016. In the third quarter of 2016, we decreased our tax valuation allowance by $600,000 and still have $82.5 million in our deferred tax valuation allowance. We will continue to monitor all 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 the factors I mentioned, net income was $1.2 million in the third quarter compared to a net loss of $2.6 million in the third quarter of 2015. Net income per common diluted share in the third quarter was $0.07 per share, versus net loss per common share of $0.16 per share in the prior-year period.

As Mike mentioned in referencing our non-GAAP net income, which excludes restructuring and other transition costs, and gains and loss on assets, you will see our non-GAAP net income was $4 million in the third quarter of fiscal 2016 versus $1.1 million in the prior-year period. Our non-GAAP net income per common share diluted was $0.24 per share in the third quarter of fiscal 2016 versus $0.07 per share in the third quarter of our fiscal 2015. Our adjusted EBITDA margin improved to 7.6% in Q3 2016 versus 6.7% in Q3 of 2015.

That brings our net income results for the first nine months in fiscal 2016 to $5.7 million, compared to $2.8 million in the first nine months of fiscal 2015, or $0.34 per diluted share in the first nine months of fiscal year 2016 versus $0.17 per diluted share in the same period in fiscal 2015. Our non-GAAP net income is now $13.9 million for the first nine months of fiscal 2016 compared to $7.8 million for the first nine months of fiscal 2015.

Our non-GAAP net income per common share diluted is $0.84 per share for the first nine months of fiscal 2016 versus $0.47 per share in the same period in fiscal 2015. This quarter continues the same trend we saw in the first two quarters, along with coffee pound growth accelerating.

Now let's turn to the balance sheet. As of March 31, 2016, we have $13.3 million in cash and cash equivalents. Additionally, we had $24.8 million in short-term investments.

As of March 31, 2016, we had $300,000 borrowed and outstanding on our revolver credit facility, so virtually nothing drawn on the revolver. Our credit facility with JPMorgan Chase and SunTrust has a $75 million borrowing capacity and a $50 million accordion expansion feature. As of March 31, 2016, we've utilized $11.5 million in letters of credit and had $45.9 million of excess availability on the credit facility, based on our borrowing base capacity.

For the first nine months of fiscal 2016, our capital expenditures were $16.2 million, as compared to $13.6 million in the first nine months of fiscal 2015. Our CapEx includes funds spent on brewing, coffee brewing equipment, expenditures for vehicles, machinery, and equipment, building and factory improvements, and IT-related expenditures.

In addition, for the first nine months, we increased construction-in-process assets under the Texas facility lease of $13.5 million, offset by an increase in Texas facility lease obligations of an equal $13.5 million. On the balance sheet you will notice $9.3 million in assets held for sale, which is mainly our Torrance, California, property and certain properties in Northern California.

Depreciation and amortization expense in the first nine months of 2016 was $15.7 million versus $18.6 million in the first nine months of fiscal 2015.

As of March 31, 2016, we held coffee-related derivative instruments covering 36.9 million pounds of green coffee as compared to 34.2 million pounds covered as of June 30, 2015. In addition, we had green coffee fixed-price contract commitments of $59.8 million, which is $18 million higher than June 30 of 2015.

As of March 31, 2016, we had $27.7 million in coffee inventory, both processed and unprocessed, combined. The combination of increased coffee-related derivative instruments and the increase in fixed-price green coffee contract commitments has increase the price certainty on green coffee cost for us.

I would like to now discuss some financials relating to our corporate relocation plan. In the first nine months ending March 31, 2015, restructuring and other transition expenses associated with our corporate relocation plan totaled $13.9 million. For the first nine-month period these expenses consisted of employee retention and separation benefits of $8.5 million, facility-related costs of $2.7 million, and other related costs including legal, consulting, and travel of $2.7 million.

We have estimated that we will incur approximately $30 million in cash costs in connection with these restructuring and other transition expenses associated with the corporate relocation plan. To date, we have paid or accrued $23.2 million in cash costs in connection with the corporate relocation plan, with the remainder of the estimated $30 million, or $6.8 million, expected to be realized in the remainder of fiscal 2016 and the first two quarters of fiscal 2017.

Of the $23.2 million of cash costs associated with the corporate relocation expenses, $23.2 million has been expensed and $19.6 million of cash has already been paid out against the $23.2 million that has been accrued. In addition, we may incur certain noncash asset impairment, postretirement-related, and pension-related costs, the amounts of which we have not yet determined.

In July of 2015, we entered into a lease agreement with an affiliate of Wells Fargo to lease an approximate 538,000 square foot facility to be constructed on just over 28 acres of land located in the city of Northlake, Texas, which will include corporate offices, areas for manufacturing and distribution, in addition to housing a lab. The updated size and scope of the facility includes a larger manufacturing footprint and a larger warehouse with increased palette spaces.

In March 2016, we updated the estimated cost of the facility to $55 million to $60 million, and the machinery and equipment capital expenditures to $35 million to $39 million. And those ranges remain the same.

The Northlake, Texas, lease agreement contains a purchase option equal to 103.5% of the total projected cost as of the date of the option closing. If the option is not exercised, an obligation to pay rent would commence December 31, 2016.

The expenditures associated with our Northlake, Texas, facility, are expected to be partially offset by proceeds from the planned sale of our Torrance, California, facility and the previously completed sale of our spice assets. The sale of the spice assets was completed in December 2015 for $6 million.

The current offer to purchase the Torrance property is for $43 million, which we expect to close in very late fiscal-year Q4 2016 or early fiscal-year Q1 2017. We anticipate the total gain from the sale of the Torrance facility will be in the 70% to 75% of the sales price.

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

In February 2015, when the corporate relocation plan was announced, we expected that, when fully implemented, to see annualized savings in the range of $12 million to $15 million. Our latest estimate in March of 2016 is $18 million to $20 million of estimated savings, including our move to third-party logistics provider versus our internal long-haul fleet; vendor-managed inventories, or VMI; and some other items. And we're confirming those ranges of $18 million to $20 million are still the same. We expect to realize these savings along with other savings at an increased rate throughout fiscal 2016 and in 2017.

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

Thanks, Isaac. As always, I would like to thank those on the call for your continued interest in Farmer Brothers. We are very excited about the continuing turnaround and confident that, while we'll hit bumps in the road, given the size and complexity of our plan, we are making good progress and will continue to focus on creating value for our stockholders. And with that, I'd like to open up the call to a few questions.

(Operator Instructions) Tony Brenner, ROTH Capital Partners.

Thank you; good afternoon. A couple of questions. Mike, you indicated that the 1.9 million pound increase in green coffee sales portended an improved trend line going forward.

I know some of your larger chain customers are doing better than they were a year ago. But what else is behind that projection of ongoing improvement?

Well, I think the confidence comes from a quarter where we saw improvements across the board, whether it was our direct-ship business or the DSD trend improved. Within the mix we're continuing to see customers, both large and small, embrace more premium coffee products, which I think is a good opportunity for us.

I wouldn't take the confidences as guidance or any certainty, but I think we're confident that the customers we have are making some very good decisions on how they grow their coffee business. We're proud to be part of that, and hopefully we can keep the trend going.

Okay. And, Isaac, I believe there was in the quarter a $1.8 million derivative loss; and the other income line has a gain of a little over $600,000. What's the difference between those two numbers?

Okay. I believe the $1.8 million derivative loss was in the prior year, and I'll have to --

Hold on --

I'll have to --

Oh, you're right. I'm sorry.

Yes, we had a slight gain of derivative income this year overlapping a derivative loss of $1.8 million in the prior year.

Got it; okay. Thank you very much.

Francesco Pellegrino, Sidoti & Company.

Good afternoon, guys. Wanted to touch on -- so gross margin expanded 400 basis points. Is there a way to almost normalize this number, if the commodity cost environment was relatively flat this quarter as compared to a year earlier, how much the gross margin would have expanded?

We're clearly realizing a portion of the conversion cost we were anticipating. I would look within the quarter in the 200 to 250 basis impact from all the corporate relocation plan initiatives. That's probably the best normalized.

And then the remaining difference has been more from a commodity -- primarily from commodity price moves. But I'd look in the 200 to 250 basis points that are coming from the productivity initiatives.

Yes, the productivity initiatives, though, are occurring at the temporary transitional facilities, if I'm correct. Right? So you're getting greater operating leverage as you are doing more pounds in that facility that you're eventually going to be transitioning out of this time next year.

How much of this is sustainable? Because you are doing a lot of volume at these facilities that -- I'm a little bit worried that when you transition to the newer facility you won't have as great of a volume impact that you're -- I guess utilization will be lower at the newer facility than what we are currently seeing right now.

I'm just trying to understand maybe what this impact could have on gross margins going forward as we model the transition to the newer facility.

I think what we -- I think the information we disclosed in the March time frame, in the facilities we bring up and running we've got in the $90 million to $99 million range of the cost facility. For that, the largest incremental cost is in the depreciation load associated with the facility. And the incremental fixed costs are not significant in the site, but the depreciation load is the one that comes on a little bit, or has the largest impact.

The conversion efficiencies -- the supply chain reengineering effort of moving out of California to Houston or to Northlake, Texas, there's a series of combination of items that are driving that productivity. Some of them are green coffee supply chain reengineering coming through the Port of Houston versus come through the Port of LA. The distance of not going through the Canal is an element. And then the wage and benefit cost between Texas and -- the two Texas facilities are better than what are coming out of the California facilities.

So the way I would think about it is it's more depreciation load that's coming onstream. It will be the incremental fixed costs that you will see on the income statement.

If you look at your EBITDA and then back it out, then I wouldn't anticipate a significant increase in other fixed cost as we bring the site up and running. It basically allows us to have incremental capacity as we focus on continuing to drive the business growth.

I hear you emphasizing this depreciation load, and I know you rattled off a lot of numbers and figures to us in regards to expenses that you've realized and have yet to realize to date. Is there any way that you could provide us with a little bit of insight with where depreciation is going to look like for, I guess, the remaining quarter and the year, and maybe for next year as well?

Because these are some aggressive assumptions that we have got to make on our part, modeling the story at home. And you are putting a pretty big emphasis on it right now in regards to how it's going to impact your gross margin.

Well, the facility will not be up and running by the end of this fiscal year.

Right.

So it would have very little impact on this year. Then we said the facility will come up in stages through the end of Q2 fiscal 2017. So the majority of the depreciation load would hit in the back half of fiscal 2017.

There is a portion of our facility that we built is associated with land. We haven't broken that number out publicly; but it's a portion of the cost of the facility's land, which is non-depreciable.

And then we broke out the cost of the building. ME in the -- machinery and equipment in the 30 -- I'm looking at my notes to make sure I get the exact number -- $30 million to $35 million; and then the cost of the facility in the total range of $55 million to $60 million. And then the ME was $35 million to $39 million.

Those, the lives that we would assume for those two categories, which would be the depreciation load coming on stream, are the lives you would use within pretty much any normal machinery and equipment lives and also building lives. We haven't gone through and provided that publicly, but if you look at what's normally used, that's what we'll pull through in the P&L (technical difficulty).

So we're not going to see any unique (technical difficulty) depreciation methods that's going to create a book-to-tax difference and put like a DTA or a DTL onto the balance sheet, if you frontload your depreciation expense sooner rather than later. A little bit above my head, but I just wanted to make sure that we can just allocate it based upon what you have disclosed in, like, the 10-K for just the traditional assets of the Company, if that sounds fair.

Well, there will be a difference between the book and tax depreciation. We will follow the guidelines to ensure that we are able to capture the largest potential tax benefit that we can, so accelerated depreciation lives versus the book. And then on the book side, we'll use more of the normal lives of the assets that are used within the industry.

Okay. Just two more questions for me. Mike, you referred to, I guess, the evolution of the business as being in the third or the fourth inning. That being said, you got a nice uptick in volume.

How competitive do you think you currently are, given that you are working in a temporary operating environment? And how much more competitive do you think you guys could be out there, bidding for new customers?

Well, I think we're building capabilities across the board, whether it's sales or how we procure roast coffee. All of those things are very important to our most sophisticated customers. And I think we're doing a very good job right now, but there's certainly room for improvement.

To your point, being in a new facility where we can better show potential customers all the capabilities we have, and as we continue to challenge ourselves to grow those, I think we'll become more competitive in the future. That would certainly be the plan.

We have a lot that we can improve on, and we're going to try to be real honest with ourselves about those areas and set out to do better.

One of the items we discussed the last couple of quarters is the second quarter -- particularly October, November, December time frame -- was our tightest capacity time frame because (multiple speakers) normal seasonality of coffee.

We came off of that curve in the first quarter of the calendar year, the third quarter of the fiscal year, which gave us capacity to handle more growth. And we're seeing that flow through in this quarter.

And then we have the new capacity coming onstream as we get into the back half of this year, which will give us the -- we'll have the capacity to handle growth, incremental growth, at that time.

Okay, and my last question is just about the compensation, the incentive compensation that you guys incurred during the quarter. Are there certain thresholds that need to be met for this level of compensation? What should I be thinking about maybe for the fourth quarter and maybe next year?

Let me -- yes, that's a very good question; I'm glad you asked that. If you look at our adjusted EBITDA margin and you -- the way I would think about it, if you said -- look. If you accrued at a normal level of bonus, you're on plan, what is the impact to your EBITDA margin within the quarter and then also year to date, which will allow you to help normalize the cost.

The impact in the quarter, if you assume it was a normal margin versus what we had accrued to, was 150 basis points. So instead of 7.6%, our adjusted EBITDA margin would have been closer to 9.1% in the quarter. And then year to date, instead of 8.2% adjusted EBITDA, it would have been another 0.4%, so 8.6%.

So if you're looking at -- if you're trying to look forward, I would use though -- I would use that range within your models to think about where we're at. What made the difference is last year, when you reverse out a bonus and go to negative when you're reversing it out, and then you're overlapping an incremental accrual, then it has a big swing. And that big swing happened to occur to us within the third quarter.

Okay. So if I hear you correctly, the difference in the compensation level on adjusted EBITDA, you back it out, your EBITDA margin would have been 9.1% this quarter?

If you used -- if I were looking at it, I would say: What would be a normal level of bonus if you delivered on plan, on target? What would be the normal level of bonus? And then what's that difference?

Okay.

That difference, if you did a normal level of bonus within the third quarter, would have been 150 additional basis points. So you would have been roughly 9.1 points within the quarter.

Oh, okay. That was very helpful. That's it for me. Thanks again.

Kara Anderson, B. Riley & Company.

Hi, guys. You spoke about having derivatives and fixed pricing contracts. That gives you some certainty on green coffee pricing for the near term.

Just wondering if you could comment on your expectations for the lower commodity costs that we saw in the quarter and how long that might persist, given the fact that you are pretty fixed at this point.

Yes, you can see through both the level of derivative instruments and the fixed-price contracts that we have gone out much farther than what we traditionally have done. If you look at the price of green coffee, we're in the bottom third of the 5- to 10- and the 15-year historical averages of green coffee, which then gave us the indication to go out longer than we traditionally do.

So we've got -- we are looking out, and I believe in our Q we say we've got contracts and hedging out up to a 22-month time frame. And most companies, including us, you want to make sure you're hedged out as completely within your pricing window; and then as you go out farther, it has less coverage.

But we've clearly gone out farther, up to a 22-month time frame. But as you go farther and farther out, less than what you would do in the near term. You always want to be covered during your pricing window so you're not getting caught upside down.

Okay, and then just one other quick question. Can you talk about the capacity of your -- I guess, prior to the corporate relocation -- the three plants, and what you expect to have with the new facility in Houston and Portland, all combined?

What we've said is when we bring the new facility up and running, we will have between 24 million to 28 million additional pounds of capacity, and that comes onboard in the second quarter of the fiscal 2017 time frame. Above and beyond what we have[just for] today.

And then we haven't given any projections multiple years down the stream. But that's where we'll be standing as of December of this year.

So no comment on what the capacity at Houston or Portland is today?

Well, we did 71 million pounds last year.

Yes.

We are growing the business this year, so it would be north of that number, for sure. So we're in the, let's say, 72 million pound range. And then we're going to bring on board another 24 million to 28 million --

28 million.

-- pounds above the 73 million. So 73 plus 28, that takes you north of 100 million as of December. And then we haven't talked about anything --

We haven't talked about anything in the future.

Okay. That's it for me. Thank you.

Mitchell Sacks, Grand Slam Asset Management.

Thank you. Nice quarter, guys, by the way.

My question really just centers more around just selling activity and bid activity. Now that you're getting close to opening Northlake, have you started to step up bidding activity? Are you seeing more bid activity? Just give us more of a general thought around that.

Sure. I think the historical perspective I'd share is, if you go back three or four years ago when the Company was in a pretty rough situation, it was more challenging even to get at the table. Because if you're losing money, you're not often invited to even come in.

As we've seen the Company turn around, as we've built capabilities and better leveraged some great employees who were already onboard, you've seen the business pick up pretty dramatically from, say, fiscal 2012 till -- to this year. And now we're challenging ourselves to take it to a new level with a new plant coming onboard, with the work we're doing in coffee procurement, in quality, sustainability, and some of the new product work we've done.

We're going to be as aggressive as we possibly can to go get not only more volume but the right volume. Where we tend to do well is for a customer who wants a good value but also high quality, who might value our experience in service and sustainability and grower relationships and all those types of things.

So for those customers -- and I think that's where the industry is going -- we should show very well for that business. And we're going after it especially now that we're through some of the capacity constraints in the second quarter.

You asked what the timing would be. The timing started basically seven, eight, nine months ago, based upon forecasting available capacity in the third quarter of 2016, which is basically in January. This capacity was going to come through just simply because of seasonal curves. So the national accounts team has been out selling for least the six- to nine-month time frame.

Okay. Thanks, guys.

Chris Krueger, Lake Street Capital.

Hi, you guys just answered my main question I had. I guess I just want to clarify. In the Houston facility, there was pretty bad flooding in that market a couple of weeks ago. Was there any damage or disruption that you noticed at that facility?

Nope. None whatsoever. As you might know, that is a facility that's been in that area for quite a while, and I think the supply chain team, the plant team, did a great job to stay up and running.

We had a few employees who had some difficulty getting to work for a day or two. But from a production standpoint we had no issues.

All right, good. That's all I got. Thanks.

Thank you. This concludes today's Q&A session. I would now like to turn the call back over to Mr. Mike Keown for any closing remarks.

Okay. Well, once again, thank you very much for your interest in Farmer Brothers, and we look forward to speaking with you all again very soon. Thank you.

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