Farmer Bros Co (FARM) 2018 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Farmer Bros.

Fourth Quarter and Fiscal Year 2018 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, Kaitlin Kikalo.

Please go ahead.

Thank you.

Good afternoon, everyone.

Thank you for joining Farmer Bros.

Fourth Quarter and Fiscal Year 2018 Earnings Conference Call.

Participating on today's call are Mike Keown, President and CEO; and David Robson, Treasurer and CFO.

Earlier today, the company issued a press release, which is available on the Investor Relations section of Farmer Bros.' website at www.farmerbros.com.

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

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 the company's website.

Before we begin the call, please note that all of the financial information presented is unaudited and that various remarks made by management 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.

These forward-looking statements represent the company's views only as of today and should not be relied upon as representing the company's 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 public filings.

On today's call, management will also use certain non-GAAP financial measures, including EBITDA, EBITDA margin, adjusted EBITDA and adjusted EBITDA margin, in assessing the company's operating performance.

Reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measures is also included in the company's press release.

I will now turn the call over to Mike.

Mike, please go ahead.

Thank you, Kaitlin.

Welcome, everyone, and thanks for joining us this afternoon.

We had a solid finish to the fiscal year and are pleased to have achieved adjusted EBITDA in line with our guidance.

As we look back at fiscal 2018, despite hitting a few speed bumps, I'm very proud of how the organization executed and delivered this year as we continue to take significant strides forward in our efforts to build sustainable, profitable growth and deliver long-term value for our shareholders.

The team has done an incredible job integrating the Boyd's business, and the start-up in SQF certification of our Northlake facility was a major milestone for us.

We directed a substantial degree of effort toward both the integration and certification throughout the year, while also remaining focused on continuing to win and bring on board new customers in both our direct store delivery, or DSD, and direct ship businesses.

In addition, we continue to make tremendous progress on our sustainability, stewardship and environmental efforts.

Touching briefly on our financial performance.

Sales in the fourth quarter, including sales from the acquired Boyd's business, were up 12% year-over-year and excluding the contribution from Boyd's declined 2% year-over-year.

For the fiscal year, sales grew 12% to $606.5 million compared to $541.5 million in fiscal 2017, and excluding the contribution from Boyd's, declined 0.4% year-over-year.

We processed over 27 million pounds of green coffee volume in the fourth quarter, an increase of almost 18% compared to Q4 fiscal 2017 and over 107 million pounds for the fiscal year, up 12.5% from fiscal 2017.

Adjusted EBITDA of $14 million in Q4 was more than doubled to $6.8 million reported in the prior year period and adjusted EBITDA margin expanded to 9.3% from 5.1%.

Our results in the fourth quarter reflect a better-than-expected performance from Boyd's as well as our cost-saving efforts.

For the fiscal year, adjusted EBITDA was $47.6 million, an increase of 11% from $43 million in fiscal 2017.

Adjusted EBITDA margin was 7.8% in fiscal 2018, compared to 7.9% in fiscal 2017.

In order to be more in line with customary reporting in our industry and to offer better transparency into our business, we made an accounting change from LIFO to FIFO and reclass certain expenses between cost of goods sold and SG&A.

All of the year-over-year comparisons I noted are based on this new accounting method and David will provide additional information when he reviews our results in more detail shortly.

Now, let me talk about how we are continuing to execute our strategy and provide an update on our activities in the fourth quarter.

Having completed the acquisition of Boyd's in October of 2017, a key focus for us throughout fiscal 2018 has been to integrate this business into our operations.

As you know, Boyd's is expected to add about 15 million pounds of green coffee into our business on a run-rate basis or about 14% of our total volume.

In fact, Boyd's added over 13 million pounds of green coffee into our business in fiscal 2018 or about 12% of our total volume throughout the year.

As we have worked throughout the year to bring the 2 businesses together, our goal is to retain customers and protect our revenue channels without losing sight of our base business.

We developed a detailed integration plan to bring Boyd's direct ship and DSD customers into our business to transfer coffee production to our plant and to transition other production-related functions.

This was a significant undertaking, and our team has executed very well throughout the year.

After completing the production qualification process with Boyd's large national accounts and taking leadership of all Boyd's direct ship customers in the fourth quarter, we began production in Farmer Bros.

facilities.

As of today, we have already begun producing a large portion of the Boyd's total SKUs in our Farmer Bros.

facilities and we intend to produce 100% in our facilities by the third quarter of fiscal 2019.

During the fourth quarter, we also completed the integration of Boyd's DSD customers into our network and have ensured all Boyd's routes are on our Smart Touch technology.

We are very pleased to note that we have retained 100% of Boyd's large national accounts and have retained DSD customers in line with our typical customer turnover.

Importantly, we are thrilled to have transitioned a national account lineup that brings, in our estimation, some of the highest-quality restaurant, convenience store and grocery customers into the Farmer Bros.

fold.

While we still have some integration work to complete, we remain on track for Boyd's to complete the integration in the second quarter of fiscal 2019 and continue to expect to see increased benefits from this transaction in the second half of the year.

Turning to an update on our DSD business.

In the fourth quarter, while new customer wins did not offset turnover in street account sales, we did begin to onboard some of the customers in the new business pipeline created by our channel sales teams and are beginning to see benefits from our channel-based selling approach that we started in fiscal 2017.

In addition, as we integrated Boyd's DSD business into ours, we have seen opportunities to further optimize our DSD network.

We have begun a review of our network, routes and branches and we have implemented a new routing software solution that will identify ways we can deliver to our customers more efficiently, enable more customer-facing time for our salespeople and make us more competitive in the marketplace.

As we discussed last quarter, we continue to believe that the work to create a channel-based selling organization has been the right move to position our company for the future, based on where we believe the industry is headed.

We feel confident this approach can and will win us more business with larger national restaurant and retail chains, and therefore, generate more consistent growth over the long term as we onboard the customers from our healthy pipeline.

We look forward to our route optimization initiative providing further support for our selling organization.

Turning to our direct ship business.

During the fourth quarter, we continue to see softness from 2 of our largest customers as we had earlier in the year.

Each of these customers, from what we have seen, are experiencing business challenges.

In the quarter, we completed the implementation stage with a very significant customer and expect to ramp-up production with this customer throughout fiscal 2019.

We believe this very significant customer has the potential to grow and become one of our top 3 accounts over time.

The ability to bring this customer is a perfect example of why we decided to leave Torrance and build our new Northlake facility.

We are also excited about our new partnership with a leading-foodservice provider to colleges and universities, which has resulted in initial -- new business gains in the Southeast with plans to expand nationwide.

While we do not name specific customers, we have also begun to install one of the largest health care providers in Texas and have gained new accounts in the gaming industry, specifically in Central and Northeast U.S. With the facility's recent SQF certification and a healthy pipeline, we remain excited about our ability to increase volume over time.

Before I turn the call over to David, I'd like to give a brief update on our sustainability initiatives.

We believe that our leadership in and commitment to sustainable business practices, enhances our ability to deepen existing customer relationships, and in fact, is a competitive advantage for us as we work to win new customers.

During fiscal 2018, we are very pleased to have made the Carbon Disclosure Project's Climate A list for our leadership in reducing direct and indirect emissions.

We may progress in reducing greenhouse gas emissions across our roasting and administrative operations to achieve our approved science-based targets.

In addition, we achieved our goal of 90% waste diversion for our primary production and distribution facilities.

To accomplish this goal, we implemented ambitious recycling and composting guidelines across these facilities.

The enhanced efforts resulted in an approximately 80% reduction from previous years, meeting the zero waste, international alliance requirements for diverting wastes and to landfills in these locations.

We also, very recently, were awarded LEED Silver certification for our Northlake facility.

As for our coffee sourcing, we remain committed to increasing sustainably sourced coffees in our supply chain and we continue to track traceability levels from all green coffee suppliers on a per contract basis.

During the past fiscal year, we expanded our project direct program completing a baseline analysis of a third origin, Brazil.

Also, you may recall that in fiscal 2017, we surveyed our green coffee suppliers to assess their social environmental and economic sustainability practices as well as their alignment with United Nations Global Compact.

At the time, we documented 99% compliance with United Nations Global Compact practices from all respondents.

In fiscal 2018, we expanded our survey to include not only our green coffee suppliers but also our top suppliers of processed coffee and noncoffee products.

We expect to have the results of this survey soon, and we expect to include them in our 2018 sustainability report.

We continue to be excited about how Farmer Bros.

is positioned in the market and about our future growth opportunities.

As most of you know, coffee is a growing business estimated to be a $76 billion industry and price points for many coffee products are on the rise.

We believe that we have strengthened our platform for long-term growth in the past year.

We continue to make significant progress in sustainable cultivation, manufacturing and distribution practices while maintaining our commitment to serving some of the finest products available, all of which help make us a more attractive partner for customers and potential customers.

We have a DSD channel-based strategy that is beginning to generate new, higher-quality customer wins.

We are expanding our distribution network, adding to our customer base and exploring new product categories.

The SQF certification of our Northlake roasting facility is allowing us to bring on large national direct ship customer accounts to further enhance the efficiency of our production infrastructure.

In longer term, we believe we have established the ability to grow through M&A in addition to growing organically.

We continue to believe that we have the right foundation in place to continue growing our industry-leading sustainability programs and to achieve superior results.

And our team remains highly focused on continuing to execute our strategy and deliver strong financial performance in fiscal 2019.

I'll now turn the call over to David for a more detailed review of our financial results.

David?

Thanks, Mike.

I'll now go into further detail regarding our results for the fourth quarter and fiscal year.

First, as we noted in our press release, and as Mike mentioned, during the quarter, we adopted a change in accounting principle by converting from the LIFO inventory method to FIFO.

Along with this change, we also changed our accounting policies around certain freight and warehousing expenses that we feel are more appropriately classified as a cost of sale.

These changes were adopted retrospectively and all reported prior periods were recast.

We believe these changes bring us more aligned with customary practice within our industry and provide better transparency.

Now beginning with coffee volumes, green coffee processed and sold in the quarter increased by 4.1 million pounds or 17.6% compared to the fourth quarter of fiscal 2017, with the inclusion of Boyd's volume.

Volumes for our base business were down 0.2% from the prior year fourth quarter, driven largely by lower DSD sales.

The mix of coffee volumes processed and sold across our distribution network during the quarter was approximately 9 million pounds or 32.7% of the total volume through our DSD network, while direct ship customers represented approximately 18.1 million pounds of green coffee processed and sold or 66% of the total volume.

And sales through distributors, including the new distributor relationships acquired through Boyd's, made up the remainder.

Turning next to the income statement.

Net sales for the quarter were $149.5 million, an increase of $15.7 million or 12% compared to the same period of the prior year.

This increase was driven primarily by an $18.2 million net sales contribution from the acquisition of Boyd's.

Excluding Boyd's, net sales declined $2.5 million, primarily due to a decrease in sales from our DSD organization, the impact of lower coffee pricing for our cost plus customers and softness in a few large direct ship accounts.

We remain confident that the recent SQF certification achieved at our Northlake facility will help us to increase business with large national customers, and we expect to realize volume and top line benefits from our new DSD sales channel model in future quarters.

Gross profit in the fourth quarter of fiscal 2018 increased $9.8 million or 23% to $52.6 million from $42.8 million.

And gross margin increased 320 basis points to 35.2% from 32.0% in the prior year period.

The increase in gross profit dollars was primarily due to the addition of the Boyd's business and improved leveraging of our production and warehouse facilities on higher sales volumes.

Operating expenses for the quarter were $50.6 million or 33.8% of net sales as compared to $45.9 million or 34.3% of net sales recorded in the fourth quarter of the prior year.

The increase of $4.7 million reflects $6.3 million in additional operating expenses associated with the Boyd's business, offset by a $1.6 million reduction in expenses in the base business associated with realization of benefits of cost-reduction initiatives realized in the fourth quarter.

We incurred $2.5 million in integration expenses for Boyd's in the fourth quarter compared to $1.7 million in the prior year quarter, and $0.4 million in DSD restructuring plan expenses in the fourth quarter compared to $1.5 million in the prior year fourth quarter.

In the fourth quarter, our total freight cost increased by $0.4 million, a portion of which is expense to operating expense and cost to sales and a portion is capitalized inventory associated with unsold product.

Higher freight and fuel costs continue to impact our business.

For the full year fiscal '18, we experienced higher freight and fuel cost of $1.2 million and we anticipate these headwinds to continue into fiscal 2019.

As we move into fiscal 2019, our transition arrangements associated with Boyd's and their coffee production will be fully integrated into our production facilities.

As Mike noted, we expect our operating expense leverage will then begin to improve as we realize cost savings related to the integration of Boyd's, and we burn through our inventory that we -- that had been produced by Boyd's at a higher cost during the transition service agreement period.

Turning to interest expense.

Interest expense, net of interest income and dividends increased by $0.5 million to $0.9 million of net interest expense in the quarter compared to net interest expense, net of interest income and dividends of $0.4 million in the fourth quarter of last year, principally due to higher borrowings associated with the Boyd's acquisition.

Turning to income taxes, we incurred $1.3 million of income tax expense this quarter compared to $1.8 million income tax benefit in the fourth quarter of last year.

The change in income tax was primarily a result of the change in earnings before income taxes this quarter compared to a loss before income taxes last year.

The resulting net income for the quarter was $0.1 million, roughly breakeven per diluted common share compared to a net loss of $1.8 million or a loss of $0.11 per diluted common share in the prior year period.

Adjusted EBITDA was $14 million for the quarter compared to $6.8 million in the prior year, while adjusted EBITDA margin was 9.3% for the quarter compared to 5.1% for the same period last year.

We were pleased with our fourth quarter EBITDA margins driven by strong performance from Boyd's, realization of benefits of cost-reduction initiatives and increased leveraging of our warehousing and production cost.

Our full year adjusted EBITDA was $47.6 million or 7.8% of net sales compared to $43 million or 7.9% of net sales last year.

Included in our full year adjusted EBITDA of $47.6 million was a $1.7 million benefit of changing from the LIFO method of accounting to the FIFO method.

Now, let's turn to the balance sheet.

At the end of the year, we had $2.4 million in cash and we had $89.8 million borrowed on our revolving credit facility.

Our debt net of cash at fiscal year-end was $87.3 million compared to $21.4 million as of June 30, 2017.

Our debt net of cash has increased primarily due to the funding of the Boyd's acquisition with our bank loan.

Availability under our credit facility was $25.3 million at the end of the fiscal year, down from $27.9 million at the end of prior fiscal year.

Now, turning to capital expenditures.

For the fourth quarter, our capital expenditures in cash were $9.6 million, which $4.4 million related to the maintenance CapEx and $5.2 million related to the expansion of our production lines in the Northlake facility, which includes work to integrate the production volume from the integration of the Boyd's business.

For the year, our total maintenance capital expenditures were $21.8 million, which is in line with our annual expectations of $20 million to $22 million spending for maintenance.

Depreciation and amortization was $7.7 million in the fourth quarter versus $6.4 million in the same period of the prior year and $30.5 million for fiscal '18 versus $23 million in fiscal 2017.

The increase in this expense resulted primarily from investments made at our Northlake facility, the deployment of the new Smart Touch devices used by our DSD organization and depreciation and amortization related to assets acquired as part of the acquisition of Boyd's Coffee.

The acquisition of Boyd's Coffee added $0.6 million in depreciation and amortization expense in the quarter and $2 million for the full year.

Based on our existing fixed asset commitments and the useful lives of our intangible assets, including the addition of Boyd's, we currently expect depreciation and amortization expense to run approximately $8 million to $8.5 million per quarter for the next several quarters.

That brings me to an update on Boyd's.

We continue to estimate that the Boyd's business will contribute approximately $13 million to $16 million in incremental adjusted EBITDA on an annual basis when fully integrated and all synergies are flowing through.

To date, we have incurred approximately $9.3 million in acquisition and integration costs, and we currently expect to spend an additional $1.5 million to $2 million of onetime cost to complete the integration.

To date, we have incurred $6 million in CapEx associated with the Boyd's acquisition, and we expect an additional $3.5 million to $4.5 million in CapEx as we complete the integration.

Lastly, I'd like to discuss our outlook for fiscal 2019.

For fiscal 2019, we expect green coffee pound volume and the base business to grow modestly.

This assumes that we will continue to ramp-up production for the very significant customer Mike mentioned earlier and that we will continue to convert new direct ship and DSD customers in our pipeline.

But this will be partially offset by production for 2 of the brands we currently service, being brought in-house by the owner of those brands.

Our long-term goal is to increase our volume at market rates or higher.

In the last 5 years, we have achieved organic coffee pound growth of 5% and we anticipate we can reach this level again in the future.

We continue to anticipate that Boyd's will add an incremental 14 million to 15 million pounds of volume on a run-rate basis beginning in fiscal 2019.

Turning to fiscal '19 capital expenditures.

We anticipate our total maintenance capital expenditures for fiscal '19 will be in line with fiscal '18 in the range of $20 million to $22 million.

As I noted a moment ago, we expect to spend an additional $3.5 million to $4.5 million in CapEx related to the Boyd's integration in fiscal 2019.

In addition, we expect approximately $8.5 million to $11.5 million in investment in CapEx to further add capabilities to our Northlake facility.

As we are engaging with potential new customers, we are seeing new opportunities to win new business with additional capabilities in the areas of specialty coffee, cappuccino and flavoring capacity.

We anticipate to generate adjusted EBITDA in fiscal 2019 in the range of $49 million to $52 million.

The net improvement in adjusted EBITDA of $1.4 million to $4.4 million over fiscal 2018 reflects incremental EBITDA contribution from Boyd's in fiscal '19 of approximately $2 million to $3 million, and our base business EBITDA remaining relatively flat on assumed modest volume growth.

We anticipate labor and freight cost will continue to be headwinds in fiscal 2019.

To provide some additional color regarding the cadence of results over the course of the year, we expect the first quarter will be our lowest quarter in terms of adjusted EBITDA, a decline compared to the prior year, and we anticipate the second half of the year will be stronger than the first half as we more fully realize the synergies from Boyd's later in the year.

Now, I'll turn the call back to Mike for closing remarks.

Thanks, David.

As we start our new fiscal year, we remained focused on executing across all areas of our business and unlocking Farmer Bros.' full potential.

Our long-term view of the industry and the prospects for Farmer Bros.

remains positive.

Coffee is a growing category, and we are well positioned to capitalize on that growth through both organic and inorganic opportunities.

Looking ahead, our priorities remain the same: completing the Boyd's integration and achieving the expected synergies; leveraging the investments we have made in our roasting facilities; expanding our distribution network; adding new customers and increasing business with existing customers.

As always, I thank those on the call for your continued interest in Farmer Bros.

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

Operator?

(Operator Instructions) And our first question comes from the line of Gerry Sweeney with Roth Capital Partners.

Just wanted to talk about some of the growth challenges, I guess, that we're seeing, a lot of information on the call here, but obviously, feels like DSD remains sluggish, but then offsetting that, we have the direct ship, which we have that large customer coming on board.

But you also -- it sounds like a couple of brands were being brought in-house.

What are -- I guess, what are the challenges, really, on the DSD business?

And what is the opportunity here on the direct ship?

It feels like that's getting a little bit more traction, but DSD is lagging behind.

Just trying to connect some dots, if we could.

Sure, Gerry, it's Mike.

So first, when you think about DSD, we are beginning to see the channel sales, pipeline, think of that as DSD begin to come on board.

So if -- without jumping ahead to Q1, we do have a robust catalog of installs coming, machine installs.

So we continue to feel like the channel strategy was the right one.

And while it hasn't come on as quickly as we wanted, it is coming on board.

Shifting to the direct ship business, we do have some large customer, one, in particular, that's coming on board.

But we have seen some erosion in business that was done in some coffee houses, coffee shops and they are internationalizing that business.

But we didn't lose it to anybody, but -- and without getting into specifics, some larger regional coffee shops and restaurants that have chosen to make their coffee internally.

And to give you the size of that, Gerry, it's probably 2.5 million to 3.5 million pound impact for us between now and over next year.

Okay.

And then just switching over to the OpEx line.

I'm not sure -- I haven't had a chance to really look at the change that the FIFO change did.

But obviously, there was a tick down in cost and I think some of it was pushed to the cost of goods line.

Is there a way that you can sort of bracket out how much of it was -- how much change was pushed -- how much cost was pushed to cost of goods sold so I can get sort of a levelized run rate?

Sure.

And when you get our K, we've recast it all 5 years, so you can get a lot of color on it.

But for '18 in particular, we moved around $28 million between -- from selling cost up to cost of sales which works out to about 460 basis points.

So it's essentially EBITDA neutral, we just moved it up to the top.

We thought that it's a better...

Yes, no.

And I get that...

I was going to say, it goes without saying that if you look at the evolution of the transparency of our reporting, we feel like this was an important step.

So for those on the call, who might remember 6, 7, 8 years ago, we had a lot of swings in mark-to-market and then we adopted hedge accounting, which began to smooth out and give our investors a better lens on the business.

And we think this move to FIFO was another important step to line up with the industry and give you all the best possible lens on the business.

Okay.

And then how much of an opportunity is there in cost savings, as the Boyd's Coffee transitions over to your Farmer Bros.' equipment.

I mean, I think there's some absorption overhead.

I think you talked a little bit about the inventory.

What's that opportunity as we roll through the year?

Maybe say your question again, I just missed the first part of it.

As the Boyd's coffee transitions -- as the TSA agreement moves off the books and the Boyd's coffee comes 100% into Farmer Bros.

facilities, what -- how much of the savings or opportunity is there?

I think you talked about on the inventory side, but I think there would be some absorption of overhead, especially in Northlake, et cetera.

Any way you can give a little bit of color on that.

Yes.

I mean, certainly, as we've talked about on the guidance that we just gave for '19.

There is an incremental $2 million to $3 million of savings we're going to see in '19.

And by the time we're all done, we'll have incremental savings in '20 that gets the additional EBITDA that the Boyd's revenue contributes of about $13 million to $16 million.

So you're going to see some benefit this year, will see more in '19 and then it will be fully integrated and all the benefits flow through in fiscal '20.

Okay.

And then one more question and then I'll jump back in line.

You did mentioned, obviously, that win on the direct ship that came through last quarter, you've mentioned it could be a top 3 customers.

Could you put a top 3 customers sort of into how many pounds on an annualized basis?

Would that be possible just to...

No, that begins to really compromise us from an -- confidentiality standpoint with that.

I'm afraid we can't go there.

It would probably also not be the wisest thing for us in a competitive industry to put that out for others who may be listening on the call.

(Operator Instructions) And our next question comes from the line of Kara Anderson with B. Riley FBR.

Just kind of going back to, I guess, the previous question.

Are you able to quantify the EBITDA benefit from Boyd's in FY '18?

And then with '19 looking at $2 million to $3 million, does that really lead the balance of that $13 million to $16 million for fiscal '20?

That's right.

In the current year, it was around $3.8 million.

Okay.

And then, on -- and thinking about the softness in the 2 direct ship customers that, I mean, you didn't name, but on the longevity of that, can you remind us of when that softness began?

Is it worsening?

Or is it kind of stable for those customers at this point?

I guess, when do we lap sort of that weakness?

Well, we -- Kara, this is David.

We started to see -- as we talked the beginning of last year, we started to see some softness with those large customers.

So I guess if you think it from a lap perspective as you get into end of -- beginning of Q2, we start to lap.

Yes, I would say beginning of Q2.

And our next question comes from the line of Chris Krueger with Lake Street Capital.

I just have a couple.

Can you please repeat the commentary on Boyd's?

Did you state that you expected to be 100% integrated?

Was it by the end of the second quarter?

I didn't quite catch that.

No.

We're ending our TSA with Boyd's in October.

And we will start producing that product 100% as we get into the beginning of Q3, which would be January.

We did build up some inventory purposely with Boyd's while they were in production, so when we transition over to us and move some of their equipment in our facilities, we have the lead time to do that.

And that's why in fiscal '19, there is really a partial year synergies and then you get to fiscal '20 is where we get the full synergies of $13 million to $16 million on an annual basis.

So, Chris, you might think of it as phases.

If you go back, we acquired the business in October of last year, we were able to retain all the large national customers, which we felt very good about.

And then the next phase was integrating the DSD organization, which we actually did.

And we learned a lot about how to do that as we move forward.

We were, over that time, bringing in the back house and so forth.

And then the last phase is really around bringing in the final elements of production, which is around qualifying SKUs to match that and then ultimately, running it in the facility and then decommissioning there.

So we're in the home stretch right now and we continue to feel good about it.

But there's still some significant work to do to just make sure it's as flawless as possible.

And compounding that is we're in our busy season, so we thought it was prudent to build some inventory to ensure we have terrific customer service and that's why you don't see the synergies flow linearly throughout our FY '19.

It will happen as we burn through the inventory we build.

All right.

My other question is just, in general, with everything going on with Boyd's and trying to work through your new facility, are you guys looking at potential acquisitions right now?

Or is it you're focused on kind of what's on your plate already?

I think in the immediate term, we're focused on what we have, the execution's critical.

We've got a lot to do to finish up Boyd's, bring on some new business that's right in front of us and then continue to build out the capabilities here.

We've only been in Northlake a couple of years.

So we're still building up the team and getting folks aligned and so forth.

That being said, in a very competitive industry, we want to continue to understand what's happening and possibly participate.

But for right now, we're pretty focused on the nearer term than something else.

I would add that we're pretty pleased with how Boyd's has performed.

And we've build up the skill set to do future integrations.

But Mike's right, at the moment, we're busy focused on other things.

But that doesn't mean over time -- if opportunities come up, we're going to certainly look at them.

And we do have a follow-up question from the line of Kara Anderson with B. Riley FBR.

Just one more, with the switch from LIFO to FIFO and the reclassification on certain cost to, I guess, cost of sales, how should we think about the gross margin going forward?

As I said earlier, the current year was around 460 basis points.

So it's going to be lower by 450, 460, to 500 basis points, but then our operating cost will be lower by the same amount.

And I'm showing no further questions at this time.

So this does conclude today's Q&A session.

And I would like to turn the call back over to Mr. Mike Keown for any closing remarks.

As always, we really appreciate your interest in Farmer Bros., and we look forward to the next report.

Thank you very much.

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.