Farmer Brothers Company

Good day and welcome to the Farmer Brothers Fiscal Fourth Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Jeff Matejko with Ellipsis IR. Please go ahead.

Joining me today are DeBerle Mazerang, President and Chief Executive Officer, and Scott Drake, Chief Financial Officer. Earlier today, the company issued its earnings press release, which is available on the investor relations section of Farmer Brothers' website at www.farmerbros.com. The press release is also included as an exhibit to the company's Form 10-K and is 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 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 the 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 violence. 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 Burl. Burl, please go ahead.

Thank you, Jeff, and good afternoon, everyone. Thanks for joining us today. Our fourth quarter and fiscal 2022 year-end results were highlighted by continued recovery across our business. The fourth quarter is the first quarter without any significant impact from COVID-related mandates or shutdowns which have been impacting our business since February 2020. We are excited about the results we have achieved this quarter, and we believe we are positioning the company for future success. While we are keeping a close eye on the current economic and inflationary pressures, we believe that we are starting to see our business' true potential power and leverage in a more normal environment. As we continue to recover from the impact of COVID, and shift our focus from fixing and optimizing our operations, we anticipate pursuing a more aggressive growth-oriented approach. We recently brought on board a full-time seasoned IT executive, Dilip Lalani, to lead our IT function. He and his team have laid out our very robust IT roadmap, infrastructure architecture, and business operating model that is affordable and can be paced against our current projected capital plan. In addition, we will continuously optimize the business as we react to the ever-changing challenges in the new normal we now live in. As always, I'll let Scott provide more detail on our financials, including thoughts on our medium-term outlook for Farmer Brothers. While my comments will primarily focus on strategy and operations, still, I'd like to highlight a few figures. Our top-line sales for the fiscal year 2022 were up 18% to approximately 470 million, primarily driven by the sales growth we experienced in our DSD and direct ship channels throughout the fiscal year. Similarly, on a quarter-over-quarter basis, our net sales grew 20% from the prior year period to 123 million in the fiscal fourth quarter. Sales within our DSD channel were up year-over-year and were highlighted by several substantial customer wins, which led to strong customer net gain for the fiscal year, which increased drop sizes. Notably, we recently secured sizable national chain wins in the convenience and QSR channels that have the potential to add thousands of stops to our DSD business annually. To give you an idea of the impact of these wins, the QSR chain alone increased our revenue by over a million dollars in the fiscal fourth quarter and is estimated to add an additional $6 million of annualized revenue to our top line. We believe these wins are just an early indication of our potential sales growth runway, and we feel good about our opportunity pipeline as we head into the fiscal year 2023. Of course, a big part of our operational focus over the past two plus years has been to improve the company's margin structure to drive profitable growth as a favorable sales climate returned. We've seen early evidence of that. With a seven-quarter run of sequential gross margin improvement, while emerging economic pressures have temporarily halted that run in Q4, we still delivered a 3.8% expansion of our gross margin year over year, leading to a full-year fiscal 22 margin of 29.2%. On a quarterly basis, gross margin increased to 28.4% from 27.6% in the prior year's fiscal fourth quarter period. Ultimately, the economic and inflationary pressures that developed in Q4 are outside our control. They included reduced hours at certain customer locations, labor shortages that disproportionately hit services businesses, and continued supply chain impact that forced us to be creative in addressing solutions to avoid costs or deliver dollar-for-dollar cost savings. The team did excellent work reacting to these challenges. Further, while nautical freight costs have come down, the differential in inventory volumes to sales has gone up. In other words, costs are rising with volumes, but our customers' inventories are a bit stagnant. as the reduced hours led to lower sales in our higher margin DSD business. To combat inflationary and economic pressures, we must take pricing actions across our business and closely manage our cost structure. These actions allow us to remain boldly in line with the inflationary pressures thus far. Our hedging programs have been an effective defense against coffee price inflation, but there's still a lag before we fully catch up, and future prices are unknown. Much of the impact of this lag is due to two factors. First, our normal process for passing through cost updates to our direct shift customers includes a lag between when we incur the cost and when they are passed through to the customer. Secondly, the speed and magnitude of inflationary pressures that we are experiencing make it challenging to continue expanding margins as we have in the past. To put a final point on our Q4 performance, I'm excited to see Farmer Brothers winning in the market again, evidenced by the progress of our solid sales. Due to the current economic environment, the company is continuing to focus on its growth initiatives to improve operational and financial performance. As noted earlier, we now accelerated activities around the third pillar of our strategic plan, which we laid out nearly three years ago. If you recall, When we came into this business, the first thing on our agenda was to fix the most glaring inefficiencies, which included winning the hearts and minds of each team member, getting the right team in place, and system upgrades to help drive improved customer service execution. We then looked to optimize our operations and footprint by maximizing asset utilization, investing in operations reliability, and overhauling our quality management processes. With our focus turning now to our third pillar, we have two main legs of growth heading into the fiscal 2023. The first we call recovery-based growth, and the second is catalytic growth. Our recovery-based focus is on partnerships and other initiatives that create new opportunities while strengthening our ability to meet consumer demand, especially in a more pressured economic environment. While we are not immune to recessionary pressures, we are fortunate to provide a product that many folks are unwilling to sacrifice, coffee. And furthermore, within this business, we believe we have ample flexibility to provide our customers and consumers with value for their dollar. In addition to partnerships, one initiative we're focusing on is offering lower-cost coffee blends without sacrificing quality. It's worth noting that that many of these lower cost options are skews we already provide where other premium coffee businesses do not. In terms of catalytic growth, we are actively working on opportunities and higher growth extensions and adjacencies that leverage our platform and delivery network. In one example, we just signed an agreement with a global multinational-based flavoring and extract company that is the newest coffee supplier to a large club store chain. This is an exciting, unique opportunity to help them grow their U.S. business, and we're expecting it will lead to many more similar options. We also have our hybrid partnership, which continues to see targeted wins in various channels. Overall, we will continue to drive sales penetration in our DSD network as more and more customers look for premium RTD solutions to meet consumer demand. Another piece of our catalytic growth strategy is Revive, our coffee brewing equipment business. a business that is now fully turned on and ready to expand. Our Revive business has two aspects. One is tied closely into our espresso program through equipment upsells, coffee upgrades, beverage inclusions, and working with customers to build their espresso programs at restaurants and other consumer-facing locations. We see a significant opportunity to drive the penetration of Revive into more of the 45,000 outlets nationwide that we serve today. The other side of Revive is our standard white glove equipment maintenance and servicing business, where sales growth has started to pick up in a meaningful way. If you recall, our Revive team is one of the U.S.' 's largest fleets of certified coffee equipment experts. So while we're running our routes and delivering products, our team is also trained in equipment repair and maintenance, allowing us to remain sticky and close to our customers and removing the hassle of having to call elsewhere to keep their equipment functioning at optimal levels. We continue to add certifications to the service large coffee equipment manufacturers that see our support as critical and strategic to servicing their customers. We anticipate that a major portion of our future growth will come through providing service to this growing list of manufacturers. In fact, our revived business achieved a mid-seven-figure run rate in the fiscal fourth quarter and has since shown signs further acceleration. We believe that Revive has the opportunity to grow into a multi-million dollar revenue business for Farmer Brothers. Wrapping up on financial performance and strategy, there are three key headlines from today. First, we believe we're nearing a return to fully normalized business conditions and the early signs we see across the business are paving the way for significant growth runway. Second, We're managing carefully through economic pressures the somewhat restrained sales growth and margin expansion existing the fiscal year. While we expect those pressures to continue near term, it's worth noting that the fourth calendar quarter typically brings seasonal benefits. So as we see improvement ahead from this and the recent wins mentioned early will be accretive to sales in upcoming quarters. The third headline is our growth focus, with multiple exciting opportunities in front of us that I've just outlined for you. Before turning over the call to Scott to walk through our financials in more detail, I want to quickly mention our ESG program, which has always been a critical priority. Sustainability remains a priority for us, as it has been for over 10 years now, and we're incredibly proud of our work there. We believe sustainability has no finish line. Each success and shortfall we encounter today serves as an additional motivation to bring a more sustainable cup of coffee to our valued customers tomorrow. In 2017, Farmer Brothers was the first coffee-focused company to adopt science-based targets to reduce greenhouse gases. In 2018, we committed to an even more ambitious goal of limiting warming to 1.5 degrees C and we're working hard to meet those goals by 2025. I want to note a few milestones we hit this year. We made significant progress in one of our boldest initiatives, reducing our carbon footprint by operating our Rialto California Distribution Center. Since beginning operations last year, we helped reduce product delivery miles by 42% while serving our largest client base more efficiently. Further, we have reduced our electricity-related emissions by 41% since 2018, but we didn't stop there. We want to reduce emissions created up and down our supply line from harvest to delivery, even if we don't directly control them. This includes coffee from mills that operate with renewable energy. Cocofisa, one of the co-ops from where we source Project Direct Colombia, will install solar panels onto their coffee mill. So with the Piedra Grande Mill in El Salvador, where our direct trade coffee comes from. We also created a pilot program for producers in Columbia to calculate their emissions from their farms. These initiatives, among others, have reduced our supply line emission expenditures by 26% since 2018. The fiscal year 2022 marks our 110th year in business. We're confident that our foundation of sustainability programs, goals, and initiatives, combined with the rock-solid relationships we've built over the decades, has set us up to thrive for the next 110 years. With that, I'll turn the call over to Scott to walk through our financials.

Thanks, DeVirl. Overall, net sales in fiscal 2022 increased by $71.3 million, or 18%, to $469.2 million from $397.9 million in fiscal 2021. The increase in net sales was primarily due to the significant recovery from the impact of the COVID-19 pandemic on our DSD sales channel, along with price increases and delivery surcharges implemented during fiscal 2022. We previously noted the volume declines from exited customers that impacted our direct ship business early in the fiscal year. However, these businesses still experience sales growth for the year, primarily from higher C-market coffee prices. Net sales in the fourth quarter of fiscal 2022 were $123 million, an increase of $20.1 million, or almost 20% from the prior year period, driven primarily by continued recovery from the COVID-19 pandemic. In addition to detailing the financial performance, I'll focus my comments today around our margin progression and how we're managing the balance sheet. With respect to margins, as the numbers show, we've been able to outpace inflation both on the gross and operating margin levels year over year. In our DSD sales channel, the increase was driven by an improved volume of green coffee processed and sold along with an improved volume of other beverages, culinary, spice, and tea products sold as we continue to experience higher weekly sales volumes compared to prior periods and our strongest weekly sales performance since the start of the pandemic over two years ago. While we saw another quarter of increased drop sizes and new customer sales growth within DSD that outpaced our lost customers, we needed to make a few changes to combat the inflationary challenges. You'll recall that 50% of our DSD revenue is generated from non-coffee or allied products. During the quarter, we noticed that we fell slightly behind inflation within our DSD channel, which, once traced back to the source, ended up being primarily related to these allied products. Our sales folks running our DSD routes have always been given the flexibility to flex prices with our customers to a degree. And while we introduced price hikes universally across our coffee and allied products, there were varying degrees of adoption on a site by site and SKU by SKU basis. To address this issue, we've adjusted the price floor on our products, which has been implemented at the SKU level to ensure that our DSD margin continues to outpace any pricing challenges on a long-term basis. Still, our DSD channel continued to perform well, as previous price hikes and other initiatives, such as the delivery and fuel surcharges we've implemented, helped us mitigate the higher product costs. Turning to our direct ship channel, where we continue to operate with pricing disciplines. The year-over-year increase in net sales resulted from slightly lower volumes from direct-ship customers, which were offset by price changes to those customers utilizing commodity-based pricing arrangements where the changes in the green coffee commodity costs and other direct costs are passed on to the customer. As noted earlier, the slight volume decline was due to the recently optimized customer base and recovery from the impact of the COVID-19 pandemic by some of our larger direct-ship customers. On a quarterly basis, our direct ship channel sales improved 19.3% during the fourth quarter of fiscal 2022 compared to the prior year period. While our direct ship business operates under a cost plus model and the pricing pressures flow through to our customers per the terms of our various agreements, we are seeing increased pressures to our margins in the near term that we expect to continue for at least a few more months. This is because of the contractual lag and our hedging programs with various customers that successfully delayed inflationary pressures from the coffee market increases for some time. While ongoing changes in coffee and other direct costs will continue to fluctuate as we move forward, we should fully overcome the primary margin pressures in our direct ship business by the end of this calendar year, barring any significant sea market price movements. We remain committed to profitably growing our business. And some of the recent wins in both DSD and direct ship will certainly provide momentum and aid our continued recovery. Gross profit in fiscal 2022 increased by $36 million, or 36%, to $136.9 million from $100.9 million in fiscal 2021. Gross margin increased 3.8% to 29.2% in fiscal 2022 from 25.4% in fiscal 2021. The increase in gross profit in fiscal 2022 was primarily driven by higher net sales on both the DSD and direct ship sales channels, partially offset by higher freight costs due to global supply chain challenges and higher product costs, both direct and indirect. Gross margin improved due to the continued recovery in both our sales channels, especially DSD, as that channel has higher margins. The increase was also attributable to a decline in our unfavorable production variances and inventory scrap write-downs due to the closure of our aged Houston, Texas plant during fiscal 2021. The price increases and delivery surcharges we implemented across our DSD network during fiscal 2022 helped mitigate the impact of higher supply chain and product costs. Overall, the key initiatives we implemented throughout our optimization stage, such as distribution efficiencies now in play across our DSD network, the increased production and packing capacity at our state-of-the-art North Lake, Texas facility, and the efficiency boost in the West Coast region due to our newly opened Rialto, California Distribution Center, have all added material leverage to our business, which is now flowing through our income statement. For the fiscal 2022 fourth quarter, gross profit was $34.9 million, an increase of $6.5 million, or 23%, from the prior year period, and gross margin increased to 28.4% from 27.6%. Adjusted EBITDA for the fiscal 2022 year was $19.1 million, compared to $16.6 million in the prior fiscal period. Adjusted EBITDA was $6.1 million in the fourth quarter of fiscal 2022 compared to $3.4 million in the prior year period. Again, driven by our newly improved footprint and significant recovery in our sales channels. I would also like to remind listeners of the fiscal year 2021 gains of $14.4 million from the sunsetting of our retiring medical program that was part of that year's adjusted EBITDA total. I think this helps accentuate our real performance improvement year over year. Turning now to our operating expenses, which increased by $12.4 million in fiscal 2022 over the prior year period due to an $11.8 million increase in selling expenses and a $4.2 million increase in general and administrative expenses, partially offset by a $2.3 million gain on the sale of assets. The increase in expenses was primarily due to variable costs, including payroll associated with the higher sales volumes and operating costs related to our distribution center in Rialto, California, which was opened in the latter half of fiscal 2021. As we committed to everyone, we have continued to leverage the business by reducing our operating expenses as a percentage of net sales from 35% in the fiscal year 2021 to 32.3% this year. Operating expenses in the fourth quarter of fiscal 2022 increased $4.7 million, or 13.6%, to $39.2 million from $34.5 million in the prior year period, but decreased as a percentage of net sales to 31.9% compared to 33.6% of net sales in the prior year period. Our capital expenditures for fiscal 2022 were $15.2 million, compared to $15.1 million in the prior fiscal year, representing a minimal increase. This was driven by a lower expansionary capital spend in fiscal 2022 compared to fiscal 2021, and was partially offset by an increase in maintenance capital spending in fiscal 2022. Given the ramp-up of our Revive business, the implementation of our IT roadmap, and our focus on growth and recovery, we expect our capital spend to increase slightly to the $18 to $20 million range. Our capital expenditures for the fourth quarter of fiscal 2022 were $6.3 million compared to $2.3 million for the same period a year ago. The increase was due to higher maintenance capital spend on coffee brewing equipment purchased for our DSD customers as volumes have improved since last year. Several key initiatives put in place, including a focus on refurbished CBE to drive cost savings have helped reduce our coffee brewing equipment purchases as DSD sales have improved. Now turning to the balance sheet. Since the end of the recent fiscal fourth quarter, we have had some developments related to debt restructuring that was announced publicly, so I would like to mention them here as well. First, we amended our ABL credit facility. Among other things, the agreement increased our maximum revolver amount by $10 million to an aggregate maximum revolver commitment of $90 million. It also reduced the interest rate by replacing the LIBOR benchmark with SOFR, which lowered the applicable margin from 2.25% for LIBOR rate loans to a more appropriate margin of 1.75% for SOFR rate loans. Next, we refinanced our term loan through a low-cost transactional amendment to our existing ABL credit facility. In addition to lowering the interest rate and extending the maturity, the refinancing also eliminated our minimum adjusted EBITDA covenant and now allows for 15-year amortization on principal payments. Overall, the agreement provides more flexibility on our assets as there are fewer direct liens on our assets, such as real estate, and it provides more flexibility regarding financial activities. such as stock issuances, acquisitions, etc. This new amendment also reduced the interest rate on our previous term loan by replacing the LIBOR benchmark with SOFR, which lowered the applicable margin from 6.5% for LIBOR rate loans to a more appropriate margin of 2.25% for SOFR rate loans. Obviously, we expect to save significant expense dollars on a go-forward basis from these positive changes to our capital structure. Turning now to our cash position, which decreased by $400,000 to $10 million as of June 30, 2022, compared to $10.4 million as of June 30, 2021. It's worth noting that we intentionally carry a low cash balance for capital efficiency purposes and to lower our overall interest rates, but we believe we have adequate availability to operate our business. To provide some context on the relationship between our inventory and our total debt balances, consider that from the end of fiscal year 2021 to the end of fiscal year 2022, our inventory, mostly due to the impact of inflation, rose by $22.8 million, while our total debt increased by $18.1 million. The rising inflation cost of our inventory matched with the delays in recovery from the pandemic are the primary drivers of our higher debt balances. While domestic and international supply and transport issues are somewhat hampering our ability to increase the efficiency of our inventories in the near term, our long-range focus will be on optimizing the efficiency of our inventory to improve working capital metrics, which will also aid in lowering our debt leverage. As of June 30, 2022, Our net debt, which we define as total outstanding borrowings, less cash and cash equivalents, was $98.8 million. Since we did have some recent changes to the makeup of the company's shares that were detailed in a recent 8K, I wanted to call out that as of August 25th, all of the outstanding preferred shares in the company were converted to common shares per the terms of our existing Certificate of Designation for our preferred stock. With this conversion, Farmer Brothers will now only have one class of common shares with no cash dividend payouts on preferred shares in the past or future to be considered as related to our past preferred shares. With that, I'll now turn the call back over to Deverell.

Thanks, Scott, and thanks to everyone who tuned into our call today. We'll now turn it back to the operator for Q&A. Operator? Operator?

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2.

At this time, we will pause momentarily to assemble our roster.

And our first question will come from Jerry Sweeney with Ross Capital. Please go ahead.

Good afternoon, Deverell. Scott, thanks for taking my call.

Hello, Jerry.

I wanted to talk a little bit about revenue and growth. And Deverell, I think you called out three sort of highlights at the end of your comments. And one was nearing normalized business operations, paraphrasing it a little bit. How much growth opportunity is out there just as you look at the DSD business, the restaurants, conferences, convention centers, hotels, et cetera? A lot of that is coming back. I also know that you also had routes around 238, I think, was the number in the third quarter. There's an opportunity to bring back routes. What type of growth can we see from this sort of base DSD business perspective? And I guess not only, you know, these base customers that are out there that are coming back or maybe obtaining additional customers.

Well, Jerry, thanks for the question. I think I'll give a couple of comments and then turn it to Scott for any thoughts he may have. I would just tell you that we're in this unique situation where we're still COVID's behind us. I've made that point. We've seen that in our numbers for the last quarter. As you look at where we're headed and what's in front of us, we're still battling certain channels of distribution that they can't get the staffing, they can't stay open the entire week, and we wind up seeing that those channels wind up suffering. The good news is, as we mentioned in this call today, we've had several wins added to our DSC network. So we know that growth is there, And if we could get the underlying normalization of pre-COVID levels, which through this quarter, we've watched the core base business still be under pressure, and then we gain share from the overall industry, like we talked about in the prepared remarks, and that's covering up some of that growth that should be there that's yet to come back in a true post-COVID world. And You know, we didn't have relative impacts of COVID in this last quarter, but we did see impacts related to inflationary pressures and demand destruction and margin pressures that are forcing certain channels to reconsider how much they are buying or how much they bought in the past. So that base core demand that we watch very closely has still been under pressure and but we're seeing that many of our strategies that we've outlined go forward, whether we look at new beverage inclusion options to go onto our routes with syrups and functional inclusions to improving our espresso-based business and premiumizing our coffee offerings to seeing the growth through Revive that gives us more opportunity to see more customers come in based on the work we're doing through service and repair. Those are all growth opportunities, and there's still a large leverageable opportunity within the overall business as it relates to our DSD network, and we're going to do everything we can to fill that network up. And the last point that you made about number of routes, we know that we're working to add routes in various parts of the country where the demand is there, and we have routes running well north of a million dollars per route, and we've got to add that in. And I will tell you that the labor market for us is as difficult as it is for anyone. And we're recruiting, and I can tell you in our HR work that we're doing, recruiting is top of the list, and the more we recruit techs and RSRs for the front line, that will have an impact on leveraging our DSD network. So with that, I'll let Scott add anything that he might want to add that I might have missed to add to your questions.

Yeah, thanks, Deverell. Just a couple quick ones, Jerry. When we look deep in the data and we're looking by geography or by channel or by SKU or customer, we still see these ebbs and flows. And so we know that things are not fully where they could be. If all of those areas were – if all the sectors of geography and channels were at new highs and gaining, I'd feel differently about the business. But we still see ebbs and flows for different reasons. July, for example – We had some COVID impact from the latest variant, you know, as others did, but it was far less impactful to the business as I think everyone's learning to live with it. But where you really saw that impact was more on the labor. And it was the labor in restaurants and other facilities, you know, because they just couldn't, they didn't have the people or they were having to do many shutdowns, et cetera. So we still see that. We just know it's not optimized yet, even among the existing customer base. So when I look to the big three things that are going to be tailwinds or these macro tailwinds, one is, that I think the core business, the existing customers, will continue to recover, you know, in the restaurants, the convenience stores, and some of those primary channels that we follow. And then the secondary part is that I think new customers, we're adding new customers. We've talked about some of those wins. I think that'll be a nice piece. But then these other big-tail wins to some of the categories and some of the customer segments we have, like large events and conventions, we know there's going to be more of those over the next 12 months. We know that universities and health care are some of these areas that, you know, had just been slower to really return to normal will over the next 12 months, you know, barring any other setback. So I just think all of those combined are what kind of let us know we're still gaining, we still have tailwinds, and, you know, there's still growth to be had.

Got it. And then even on the, I guess, the espresso side, you know, how much of an opportunity or what's the – take on some of this premiumization of coffee or some of these services. I'm curious as to how that's flowing through.

Well, we believe it's significant, and it's one of our top three initiatives throughout 2023. And the reason we believe that is because, as you know, we've been a traditional brew coffee provider for the channels of distribution that we serve in, and we've got some great products on cold brew and RTDs and other extract type products and liquid coffee that we believe is core and is there. But what our customers are asking for is more premium, great tasting, you know, Arabica coffees. And so when we combine our ability with Revive to install great equipment and working with all these different manufacturers and our ability to service that equipment, we know that the more we can place those machines in those locations where we traditionally have put brewers in, predominantly batch brewers, that we can upscale to our Farmer Brothers Artisan Coffee lines, to our public domain products, to other great Arabica coffees that are espresso-based. And in combination with that, we're running a beverage inclusion option to provide new syrups, new functional syrups, beverages added to those products. We recently showed at National Restaurant Association up in Chicago with some partners that we're there with in terms of shot and lotus. And of course, you know, we've been running Califia Farms on our routes in test markets, and we know that great plant-based beverages going into coffees are another way. And we're completing that full Expresso experience, and we're going after those outlets that we know could sell those products in a big way. And we think that that catalyst of growth right there in that area is going to be really big for us. And I think it's really unlimited given our traditional focus. We don't believe Brood is going away anytime soon, but there is an absolute shift in consumer demand right that says that they want espresso-based beverages and to be able to do all forms from iced coffees to lattes to cappuccinos versus just a straight-up brew. But we also know with Bean to Cup being on the rise as it has been, and we put about every type of Bean to Cup machine that's on the market out in the trade, that we know that there's a lot of great machines that can do a lot of different things and provide a lot of opportunity for our customers to serve different types of beverages, we want to be that solution provider that values service and white glove and has the ability when that machine is down to work on it because you don't run a great expresso program without a great equipment service program, which we believe we have one of the best. And so that's why we're bullish on all things expresso and are putting a lot of effort around that with these beverage inclusion programs. solutions for both syrups that are premiumized and inclusions such as energy and additional caffeine shots that can go into both coffee and tea.

Got it. I mean, I guess on the espresso side, the other thing that goes hand in hand is, you know, Revive, right? So more complicated machinery, you know, potential maintenance contract. Does this sort of fall right into place with Revive? And it sounds as though that business is Got a nice little jump out of the gate. I think you said mid-seven figures. Maybe a little bit of detail, you know, the roadmap for the next 12, 18 months, if you could.

Yeah, I will tell you that it goes hand in glove. There's no question that our bullishness around Revive goes hand in hand and links to our Expresso-based program because you don't do one without the other well. And we believe we do that well and we can penetrate that market at a much deeper level. And so as you're seeing for the first time in our prepared remarks today, we've actually outlined some of the figures relative to Revive and how we're starting to see traction and growth. I will tell you, go forward, we'll start providing more information relative to the growth trajectory as it relates to the kind of numbers we shared today on Revive. But, you know, it's not about demand creation for Revive. It's about how fast we can bring in techs, put them on the road, shift third-party volume that we currently have today into servicing it by our own team members of Revive Techs, and then using that to continue to grow the business, and specifically in the Expresso area. So as we talked about the growth and the seven-figure numbers that we're reporting, It's good growth, but what will hamper our ability to go fast there is our ability to recruit and retain, you know, great techs and guarantee that that's one of the places we're focused on right now is recruiting, you know, good techs and creating really robust training programs to bring these techs up to speed quickly and be able to put them on the road in our branches. And with an infrastructure that's there already and is leverageable, which is what we've talked to you in the past about and we feel strongly in this case is a big part of our story relative to Revive. Scott, anything on Revive? You've been very close to Revive all along.

Yeah, no, I think you summed it well. It's going to go at the speed with which we can get techs in, get them, you know, trained internally, get them certified on the equipment. And, you know, again, we're being really creative about, you know, the sourcing of those folks. So we think we're coming up with some good ideas to be able to accelerate that.

And lastly, I'd just say, Jerry, this is why we hired a general manager for this business. Chaz Khan, who comes from a large global multinational company and has a deep pedigree and understanding how to run business. And we put him in and, you know, he is racing with the team that's there and very excited about what he's seeing. And we're getting a lot of structure in place that we've done over the past year. Now we're really starting to operationalize this business and really put it into growth mode.

I don't want to put the carpet before the horse, especially as you're still building out the tech in place, but is there an opportunity to sign some contracts with some larger restaurants or QSR chains even? I'm not sure how much coffee exactly they do, but I think you understand where I'm going. For the provide the maintenance and just be the go-to person on a national footprint or a regional footprint? Is that an opportunity for Revive?

It is. It's absolutely an opportunity, Jerry, and I would tell you the way we're doing it is very planful because clearly we know there's more demand than the ability to service. The customers that are coming to us that are seeing the work that we're doing want us to do more across all multinationals, across regional QSRs, convenience, and most importantly, all the manufacturers. And that includes pretty much everybody, all the big major manufacturers. And so in that context, what we're trying to be mindful of and prudent about is to not get the cart before the horse in terms of having available resources. We had some available capacity given how we serve our DSD. and we've got to make sure that we first and foremost serve our existing customers on our DSD routes and then work to third-party customers that are in the fringes of the geographic areas that we serve and converting and putting more equipment techs into that area and then come behind that with more service contracts that we're being offered to do, but we're doing them on a selection basis, region by region, city by city, where we have the capacity to maintain a high-level service of service first and foremost to maintain that customer base and grow it properly. We could go out tomorrow and sign a bunch of contracts and not be able to service. That's not what we're going to be. We're going to make sure we grow prudently and with focus and make sure we have the techs in place to leverage the current network and build the business profitably.

One more question. I'll jump in queue in case there's anyone in line. This may be a little bit more directed to Scott, but selling expenses, a percentage of revenue, that has dropped considerably, I think, on a year-over-year basis. What type of run rate should we expect for that? I'm just trying to sort of fine-tune the model here, just as we see some of the revenue growing and some volumes increase and where that number should be. And obviously, there's some moving parts because you know, volumes aren't up tremendously. You know, some of this revenue is just inflationary costs as well, but just want to understand what we should be thinking there.

Yeah, exactly. Jerry, I'd love to give you some, some great, uh, metrics and linear drivers, but it's really going to come down to the mix of, you know, DSD revive and our direct ship customers. You know, as we're winning this new business, obviously, um, there's different linear kind of equations with each of those types of business. So what I can commit to, though, is that it's clearly a focus for total selling, total operating expense to be more efficient as a percent of sales. So as sales recover, we absolutely expect that to become more and more efficient. But, you know, most of the selling costs are related to our DSD business. And so as DeVerell noted, you know, we're trying to bring on more routes, trying to find certified, you know, qualified folks to do that. But it's only going to be justified, you know, if the sales are there. whereas we can add a lot of Revive, we can add a lot of, you know, direct ship without a lot of addition to sales. So selling in particular will be linked to DSD growth, but it will be more efficient or continue to be more efficient, you know, in the future.

Got it. That's helpful. I appreciate it. I'll jump back in, too. Thanks for taking my multiple questions.

Thanks, sir. This concludes our question and answer session. I would like to turn the conference back to Devereux Messering for any closing remarks.

Thank you. I just want to again thank everyone for joining our call today. But most importantly, I just want to give a shout out to all our team members across the U.S. that have worked so hard and so diligently over the last two and a half plus years as we've navigated the turnaround, navigated COVID, and now facing these inflationary pressures. And they are doubling down and working harder than ever. And I just want to again just say thank you for all your work that each team member has represents farmer brothers has produced over the last quarter and as they look into 2023 so thank you everyone and again we look forward to our coming quarter thank you the conference is now concluded thank you for attending today's presentation you may now disconnect