Farmer Brothers Company

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 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 in the company's press release and public filings. On today's call, management will also use certain non-GAAP financial measures, including 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 DePearl. Please go ahead.

Thank you, Jeff.

Good afternoon, everyone, and thanks for joining us. We hope you and your families are continuing to stay safe and healthy. Since the onset of the pandemic, Farmer Brothers has made great strides in stabilizing the business in the face of unprecedented challenges. On today's call, I'll discuss the important steps Farmer Brothers has continued to take early in our new fiscal year to lay a strong foundation that we can build upon as we move forward. Then Scott will discuss our first quarter results in more detail. we will then take your questions. Throughout the first quarter, we continued to deliver on our strategic initiatives, made solid progress in executing our turnaround strategy, and we fundamentally strengthened Farmer Brothers for the long term. In response to challenges associated with the COVID-19 environment, we have learned to operate more efficiently and effectively. I'm incredibly proud of how we've pivoted and adapted to the current environment. Early in the year, We primarily work to stabilize the business, and this quarter, we have laid solid groundwork to build upon the future. I firmly believe the progress we are making will enable us to emerge from this unprecedented time able to better serve our customers for years to come. Before I walk through our turnaround strategy and progress we have made across our five E's, I'd like to provide an overview of our DSD and direct shift businesses. First and foremost, we saw continued stability and recovery in the DSD business throughout the quarter, with steady improvement reported each month. By the end of the quarter, DSD revenues improved to a decline in the low 30% range from pre-COVID-19 levels that we averaged prior to the start of the pandemic, with some days reaching the 20% range. As we have mentioned, sales from our DSC customers have declined between 65% to 70% at the height of the pandemic in April 2020, compared to pre-COVID-19 weekly average sales. We are proud of how the business has steadily and significantly improved, as this is a testament to the team's hard work to stabilize the business and position Farmer Brothers for success. We have over-indexed on our cost saving initiatives, held overall SG&A at a lower run rate than pre-COVID levels, and accelerated our top strategic projects along with driving sales glitches in DSD and improving our production capability to serve e-commerce and grocery customers that are experiencing unprecedented growth due to the pandemic. While we've made significant progress since the onset of the pandemic, the largest DSD sales declines continue to be from restaurants, hotels, and casino channels. while demand from healthcare and convenience store channels have been less impacted. Our direct ship sales channel has been able to mitigate some of the impacts of COVID-19 due to the types of customers we serve through this channel. We have seen increases in our retail business, products sold to key grocery stores under their product labels, and third-party e-commerce platforms. We have aggressively supported continued organic growth with key strategic customers, improved customer mix in favor of category growth-focused customers, and are responding effectively as consumers' purchase habits shift to retail grocery and e-commerce. All this was achieved by pivoting and executing at record retail packaging production levels to take advantage of the upside growth opportunities with these strategic direct ship customers. Throughout the quarter, we made important operational and technological improvements that have strengthened our foundation and business. We continue to take strategic actions to pivot our business and accelerate certain operating initiatives, guided by our turnaround strategy. Now I'd like to review our progress on the five E's. First and foremost, executing our supply chain optimization initiatives. We continue to advance the de-risking of our Houston facility, build out our state-of-the-art DFW facility, and move forward with opening of our West Coast distribution facility. At our DFW facility, we completed the installation of our additional roaster to further enhance our roasting capability. We've also operationalized several new retail packaging lines. Additionally, We are pleased to announce that we have signed a definitive lease for our new West Coast distribution facility in Rialto, California. We expect this facility to begin operating in the fiscal third quarter. As we have communicated previously, 40% of our customers are located in the western U.S., and our new distribution facility will provide the ability to achieve substantial transportation and distribution savings while At the same time, enhancing the service we provide to our West Coast branches and customers. Taken together, we remain confident that the de-risk infusion, build out of the DFW facility, and the opening of our West Coast distribution facility will improve profitability and provide manufacturing flexibility. In turn, enhancing Farmer Brothers' competitive position for the long term. The second element of our turnaround strategy is enhancing our systems and processes. I'm excited to provide an update on our new technology that we have rolled out over the last few quarters. First, HiJump, our new handheld technology, will be fully deployed on 100% of our routes within the next week. This new technology represents one of the biggest opportunities to support our DSD team with tools to capture more cells, save time, and improve accuracy. I recently spent time in the field with our sales and distribution teams in California and have heard incredibly positive feedback about this new technology. Our frontline RSRs are excited about the amount of time it is saving them weekly so they can spend that time on focusing on the customer. As we discussed last quarter, we also adopted a software platform that supports our new online websites and better enables retail shopping and subscription services. The board's website has continued to gain traction with consumers throughout the quarter, and we are launching another series of new sites for other brands and companies, including Public Domain, China Mist, and Farmer Brothers in the coming months. We also continue to see opportunity to leverage this platform with B2B, such as our Roaster Direct program, which allows customers to get smaller shipments delivered from our distribution centers to their location through third-party carrier shipping. In addition to optimizing our supply chain and enhancing our systems, we continue to work to enrich our customer relationships. We are seeing positive response from an enhanced business development strategy, building new customers through the pre-sale and sell-sale approach in our DSC business. We have dedicated selling teams, hourly delivery drivers, and related warehouse support in place that we believe will help drive better customer service and higher sales while being less costly than our historical structure. We also wanted to provide additional color on our coffee brewing equipment pilot that we spoke about last quarter. We continue to execute the pilot, and in the back half of the year, we will be launching the core building blocks with a new back office infrastructure and processes to ensure an improved customer experience. We are currently working to finalize various contractual offerings and service level agreements, SLAs, options, while completing the initial scoping of equipment coverage and ensuring certifications and training across our service technician population in the pilot area. We are also in follow-up conversation with key customers and manufacturers that have expressed interest in such service agreements and continue to ask us to support this much-required service capability across the U.S. Additionally, as you may have seen, we are very pleased to announce a new production agreement with Newsy Inc. a leading U.S. producer of specialty single-serve pour-over pouches and tea bag coffee pouches. As part of this agreement, Newsy will place up to 32 co-packing machines in our North Lake facility, leveraging our manufacturing capacity and distribution network to roll out their popular Asian products in the U.S. At full capacity, these machines are estimated to produce a total capacity of 300 million single-serve tea bag coffee pouches, and pour-over drip cups. For Farmer Brothers, the agreement, while not immediately material financially, provides us with incremental fixed cost leverage along with the opportunity for upside at Newsy's customer-based gross. We have also continued to deliver on our commitment to elevate innovation. Our investment in a new e-commerce platform and linkage to a new distribution platform Order management capability with full inventory visibility will provide a state-of-the-art capability to improve and enhance how we are marketing and serving customers. In addition, as I mentioned last quarter, our new equipment that allows for hands-free dispensing of beverages is helping our customers drive increased consumption of self-service coffee and tea beverages. While we are prioritizing near-term initiatives that we believe will have the most benefit through the COVID-19 operating environment, looking past the pandemic, we also see great opportunities to innovate within our product portfolio to capitalize on evolving consumer demand trends. And finally, as it relates to our talent, the safety and health of our Farmer Brothers team members remains our top priority. Our team members working on-site in manufacturing, distribution, and other areas continue to do a terrific job adhering to our enhanced safety guidelines. We are also continuing to allow team members who are able to work from home to do so if they choose, and we also continue to welcome back previously furloughed team members as business conditions permit. As a result of our efforts to pivot the business, we have already seen meaningful improvement to our results since the beginning of the pandemic in March. As we look forward, the pandemic remains a risk as we have seen in recent weeks, but we believe the positive trends we have seen combined with our solid execution positions us for continued improvement in sales, particularly as we enter our busier fiscal second quarter. Before I turn the call over to Scott, I'd like to emphasize that our business has not only survived through this unprecedented state of crisis, but our fundamental strengths remain intact, and we are strengthening our platform. We remain focused on leveraging our strong foundation to emerge from this global crisis as a stronger organization. Looking ahead, we remain committed to executing on all fronts, and I look forward to being able to provide updates on our performance and continued progress on our initiatives on future earning calls. With that, I'll now turn the call over to Scott for a more detailed review of the financial results. Scott?

Thanks, DeVirl. Now let me walk through our first quarter results in more detail, beginning with coffee volumes. Volumes in the quarter decreased by 5 million to 20.9 million pounds, a 19.4% decrease from the prior year period, primarily due to the impact of the COVID-19 pandemic. volumes increased by 1.2 million pounds, a 6.1% increase as compared with the June quarter of 2020 figure of 19.7 million pounds. The mix of coffee volumes processed and sold during the quarter was 4.8 million pounds, or 22.8% of the total volume, through our DSD network, while direct ship customers represented 16.2 million pounds of green coffee processed and sold. or 77.2% of total volume. As this volume ratio is usually closer to one-thirds through our DSD network and two-thirds to direct ship customers, you can continue to see one of the primary impacts to our business from the COVID-19 environment. Turning to the income statement. Net sales for the quarter were $97.3 million, which is a decrease of $41.3 million or 29.8% from the prior year period. The decline in net sales was driven primarily by lower sales of coffee, beverage and allied products sold through our DSD network due to the COVID-19 pandemic. At the beginning of our fiscal first quarter, sales from our DSD customers were down by approximately 45% from pre-COVID-19 weekly average sales. However, as of September 30th, 2020, Due to lifting of some government restrictions and reopening of some of our customers' businesses, our DSD revenues had improved to an approximate decline of 33% from the pre-COVID-19 weekly average sales. As Devereux mentioned, the largest DSD revenue declines were from restaurants, hotels, and casino channels. While sales are clearly below prior year levels, it is a positive to see recovery of 20% in our overall reported sales as compared to our last quarter into June 30, 2020. Additionally, we have continued to see improvement in this sales metric throughout the month of October. To provide additional insight, we saw improvement in our income statement performance each month of the first quarter. In September, we reported the best month of adjusted EBITDA since March as our revenues continue to improve and we maintain our spending discipline from the cost savings initiatives implemented immediately following the pandemic. Our direct ship sales declined 7.5% compared to the prior year period due to lower coffee volume related to COVID-19, partially offset by the impact of coffee prices for our Cost Plus customers, improved volume from our retail business, products sold to key grocery stores under their private labels, and third-party e-commerce platforms. Gross profit in the first quarter of fiscal 2021 was $22.4 million. a decrease of $18.2 million, or 44.8% from the prior year period, and gross margin decreased to 23% from 29.3%. The decrease in gross profit was primarily driven by lower net sales of $41.3 million, partially offset by lower costs of goods sold. The decrease in gross margin was impacted by COVID-19 and the unfavorable impact it had on our customer mix away from DSD customers and higher production variances, partially offset by lower freight costs and lower coffee brewing equipment costs resulting from the various cost savings initiatives. Similar to sales, while our gross profit is a prior year comparable quarter, we were encouraged by the growth we have seen since last quarter, which was 44%. Turning to operating expenses. Operating expenses in the first quarter of fiscal 2021 were comparable with the prior year period at $33.9 million from $33.7 million, and as the percentage of net sales increased to 34.8% as compared to 24.3% of net sales in the prior year period. Operating expenses were impacted by a decrease in selling expenses of $10.1 million and a decrease in general and administrative expenses of $3 million, offset by the absence of $14 million of net gains realized from sales of assets in the prior year period. Net gains from sales of assets in the prior year quarter were primarily associated with the sales of the office coffee assets and one branch property. The decrease in selling expenses was primarily driven by reductions in headcount, lower DSD sales commissions, and lower travel expenses. The decrease in general and administrative expenses was associated primarily with reductions in third-party costs and reductions in headcount due to the COVID-19 pandemic. As discussed last quarter, we continue to focus on expense savings in light of the current business environment and sales uncertainty that we face. We continue to actively manage costs as areas of the business partially return to pre-COVID-19 sales levels, and these efforts are evident in both our operating expenses and cost of goods sold, where some costs are reflected as well. For the foreseeable future, our team will continue our weekly review and approval of all material requested cost increases across the business. Interest expense in the first quarter of fiscal 2021 increased $700,000 to $3.2 million as compared to $2.5 million in the prior year period, principally due to the write-off of deferred finance costs related to our debt amendment and the amortization of de-designated interest rate swap costs, partially offset by lower pension interest expense. Other net in the first quarter of fiscal 2021 increased by $8.4 million to $8.6 million in the quarter compared to $200,000 in the prior year period. The increase in other net was primarily a result of higher amortized gains on our post-retirement medical benefit plan due to the curtailment announced in March of 2020. and higher mark-to-market net gains on coffee-related derivative instruments not designated as accounting hedges. Turning to income taxes. Income tax expenses totaled $100,000 in the first quarter of fiscal 2021 as compared to income tax benefit of $100,000 in the prior year period. The tax expense and tax benefit in the three months ended September 30, 2020, and 2019, respectively, were primarily driven by change in previously recorded valuation allowance and a change in our estimated deferred tax liability. Net loss was $6.3 million in the first quarter of fiscal 2021 as compared to net income of $4.7 million in the prior year period. Net loss available to common stockholders was $6.4 million or 37 cents per common share in the first quarter of fiscal 2021 compared to net income available to common stockholders of $4.5 million or 26 cents per common share in the prior year period. Adjusted EBITDA was $5.7 million compared to $4 million in the prior year period. Our adjusted EBITDA margin increased to 5.9% for the quarter compared to 2.9% for the first quarter last year. Now, turning to the balance sheet. As of September 30, 2020, the outstanding debt on our revolver was $69.8 million, a decrease of $52.2 million since June 30, 2020. Our cash balance decreased by $49 million from $60 million as of June 30, 2020, to $11 million as of September 30, 2020. These changes resulted from the $55.2 million of repayments on our revolver completed under the terms of our amended credit facility. The net improvement in our liquidity provides additional financial and working capital flexibility as we prepare for our busiest season. As we previously announced, in July of 2020, we amended our existing senior secured revolving credit facility, providing us with increased financial flexibility and positioning us to weather these turbulent times. As of October 28, 2020, the company's total debt was $69 million, and the company had cash on hand of $8.7 million and $38.9 million of availability on its amended credit facility. Our ability to lower our debt balance and increase our cash balance as compared to the same prior period reporting on September 30th, 2019, speaks to the actions taken to both stabilize the business through the pandemic and allow us to focus on the strategies noted by Deverell that lay the foundation for future improvement. During the quarter, our accounts receivable balance increased $1.2 million to $42.1 million compared to $40.9 million at the end of the fourth quarter and was down $15.4 million from $57.5 million at the end of the prior year period. Our inventory levels increased during the quarter by $4.3 million to $71.7 million as compared to $67.4 million at the end of the fourth quarter and are down $20 million from $91.7 million for the prior year period. Accounts payable increased during the quarter to $50 million compared to $37 million at the end of the fourth quarter into June 30, 2020 and is down $21.8 million from the prior year period. Turning to capital expenditures. CapEx for the first quarter was $4.4 million, representing lower maintenance capital spend of $1.6 million, a 17.2 percent reduction compared to the prior year period. These spending reductions were driven by several key initiatives put in place, including a focus on refurbished CBE equipment to drive cost savings and reductions across some capital categories due to additional cost controls implemented during the COVID-19 pandemic. Depreciation and amortization expense was $7 million in the first quarter versus $7.6 million in the same period of the prior year. We continue to believe the steps we are taking will enable us to emerge from these challenging times as a stronger organization. And with that, I'd like to turn the call over to the operator for any questions.

Thank you. As a reminder, ladies and gentlemen, you may press star 1 to ask the question. That's star 1 to ask the question. To withdraw the question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Kara Anderson with B. Rowley Securities. Your line is open.

Hi, good afternoon.

Hello, Kara. Hi, Kara.

First, can you reconcile the moving parts behind the 30% revenue decline and the 19% volume decline in the quarter? Was it lower pricing, pass-through, mix? I guess maybe just help us there.

On the VFC side of the business that you're asking?

I think I gave you for the full DSD and direct shift combined metrics. But it's, you know, however you want to break it out would be helpful.

Yes, I was just saying, so versus prior year, the decline, because obviously it was up versus last quarter, right?

Yes, prior year.

Yeah. So there's the normal shift in the business that we've seen since COVID broke that obviously we're seeing a little more than two-thirds of the coffee pounds go through the direct ship channel as the grocers and those online retailers have kind of hung in there. And you kind of see the same thing going on with the revenues as well. We don't break out the revenues by each of those channels that we operate within. But if you follow the pounds and then you know that Obviously, the sales per pound on the DSD side of the business is going to be a little bit higher. You can kind of back into that change year over year. But obviously, the vast, vast majority of it is driven by DSD declines.

Got it. I understand that makes total sense. And then I think I missed it, but kind of with the daily COVID cases sort of rising essentially since the beginning of what is your second quarter, how is the business trending today? And do you see it kind of tied to, you know, changes in the COVID trajectory and are volumes still coming back or are you seeing some weakening in demand?

We've seen a steady improvement. As we reported in the formal remarks, we saw this last month continuing to improve. We see it tied very much to state openings. We've seen an ebb and flow from various states where they've become more restrictive and moved back down in the context of being tighter, especially in restaurants and other large gathering places, be it casinos, hotels, or convention centers and the like. We're seeing a track very close to that. However, we are winning in business. acquisition across the network, and that's covering up some of those declines, but not enough to continue to move us in a substantial direction until such time as you see the country fully reopening or substantially reopening beyond where it's been. And just to kind of put the final pin in that, what we have been seeing is a steady recovery since we'll call it the phase two COVID wave that we saw post the 4th of July, and then we've steady climbed back from that. So we continue to see improvements. Some weeks we see flat lines the prior week, but overall, throughout the quarter as a whole, and this last month, we've continued to see steady improvement.

Got it. And then what percentage of the team or employees that were furloughed at the beginning of the pandemic have you brought back?

I would say what we do week to week is we have a meeting whereby we discuss all functional areas that have opportunities for people to return. What we've absolutely stated is post-COVID, we would see us in a better SG&A position overall, the total number of terminated or furloughed employees that have come back, and I'm combining those two, Kara, is around 30% of the total we laid off. And we got up to a number right at a total headcount of term and furloughed somewhere in the 600 range. Right at 600. So 30% of those have come back. Is that helpful?

Yes, it is. Thank you. And then with respect to Houston, I heard the comments about continuing to be risked. I guess maybe just help us out with maybe talking a little bit about what's left there. I think there's some time left on the lease back. Just kind of update us on the plans if they've changed at all.

That's correct. As you know, from what's been over a year ago, prior to my arrival, we sold the facility, leased it back. We have a three-year lease. We have about a little over a year and a half left on that lease. And as we previously discussed, we're currently in the process of rebalancing that volume from Houston plant to our other roadside facilities to improve EBITDA. And we've accelerated the rebalancing and de-risking in Houston during the pandemic but in terms of at this point, this hour speculating, you know, vibes and timing, we have not been reporting that level of detail. But in the formal remarks, as you may remember, we talked about adding a roaster, a large roaster here at DFW. We've added packaging lines, and we will continue to do that through the balance of the current quarter we're in, second quarter. And we feel real good about the capability and the additional even the opportunities that we have as we continue to leverage the newer DFW facility, and as you know, the Houston facility has been a very old, dated facility, and we feel confident that by de-risking it, it's going to put us in a much, much better position. But we'll have more to say, and clearly by the next quarter, we'll have a lot more to say, and we'll continue to go down that path together.

Got it, thanks. And the West Coast distribution facility that you guys are going to be opening up, have you quantified the amount of savings that might come from doing that?

At this point, well, yes, we've gone down a path of, you know, what it's going to mean to the company in terms of providing guidance in terms of cost savings. We have yet to – As you know, we haven't been providing guidance. I think I won't rule out providing guidance in the future, but right now with the fact that we're in the midst of COVID and we're navigating, you know, those uncertain times and protecting our poison customers and Executing on the strategy, we've been very specific about laying out. You know, I look forward to at some point being able, and I would have said if COVID hadn't occurred, we would have been giving a much more direct perspective and definitely guidance on cost savings initiatives. And I think it gives a little bit more time to get through COVID and the impacts and the swings that that's creating for the business so we can get more specific on these initiatives. But without question, The initiatives that we've outlined, as you're very familiar with, we continue to do those initiatives to improve the overall top line and bottom line profitability of the company.

Just one last, and it's a housekeeping question that I ask every quarter, the percentage of revenue related to coffee and roast and ground in the quarter?

Yeah, so the percentage of total sales that was roast and ground was 68% for this quarter versus the 63% we saw in the same quarter last year.

Got it. Thank you so much.

Thank you.

Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to Mr. Davarol Messering for closing remarks.

Thank you. As we continue to navigate the COVID-19 environment, we continue to prioritize the health and safety of our team members and customers. as well as take actions to support the long-term sustainability of our business. And I want you to know we are confident in our strategy and believe the actions we have taken will put Farmer Brothers in a position of strength when the nation emerges from this state of crisis. And we appreciate you joining us today, and thank you for your continued interest in Farmer Brothers.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Thank you. you Thank you. Thank you. Bye. Thank you.