Farmer Brothers Company

Good afternoon and welcome to the Farmer Brothers fiscal second quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require operator assistance during this conference call, please press star then zero on your touchstone telephone. As a reminder, this call is being recorded. Joining me today are Deval Masarang, President and Chief Executive Officer, and Scott Drake, Chief Financial Officer. Earlier today, the company issued its inaugural quarterly shareholder letter, which is available on the investor relations section of Farmer Brothers website at www.farmerbros.com. The shareholder letter is also included as an exhibit to the company's form 8K and is available on the company's website and on the securities and exchange commissions 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 know 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 shareholder letter and public filings. On today's call, management will also reference certain non-GAAP financial measures, including adjusted EBITDA and adjusted EBITDA margin, and 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 shareholder letter. I will now turn the call over to Devo. Devo, please go ahead.

Good afternoon, and thank you for joining us. As you saw today, we have now moved our quarterly reporting to a shareholder letter format. This approach better enables us to provide our investors with context around our performance, strategy, and progress. If you haven't had a chance to view it, it can be found on our IR website. So with that, on the call today, I will provide some highlights from the quarter, and Scott will go into a bit more detail on the financials and then we will field some questions. Looking at our results for the fiscal second quarter, we reported sales growth of 12%, paired with a slight sequential increase in our gross margin. We are finally beginning to see the benefit of contracted price increases and overall customer demand across our national account and DSD businesses. We have more work to do here, but have already seen additional progress early in calendar 2023. Additionally, we improved adjusted EBITDA as we held operating costs in check despite inflationary pressures. We also believe that fiscal Q2 will prove to be the high watermark for our coffee input cost. While we're encouraged with the early progress, we recognize that our results need to improve from here to achieve the performance our turnaround work has laid the groundwork for. We think the right factors are in place to see that improvement. The short-term pricing headwinds we have faced more recently are expected to alleviate. Our turnaround has improved our underlying operating cost structure and our strategic growth initiatives, while in the very early stage, are progressing nicely. This gives us confidence in a more pronounced recovery in sales and margins in the second half of our fiscal year. helped by a much more favorable cost environment. We remain vigilant as we manage through the near term, and our vision of a path for long-term profitable growth remains steadfast. I will now turn it to Scott. Scott?

Thanks, DeVerell. Let's dive right in. Net sales in the second quarter of fiscal 2023 were $132.7 million, up 12% year over year. Growth in sales primarily reflects traction with new customers and higher per pound pricing in both our DSD and direct ship sales. This was partially offset by lower volume, which was primarily due to the loss of a large customer at one of our major national accounts in our direct ship sales channel. Gross margin was 22.9% in Q2, which was an incremental improvement on a quarter-over-quarter basis. Margins in the quarter reflect what we believe were peak coffee costs combined with the previously noted lag that accompanies our contractual cost plus pricing agreements in the direct shift sales channel. We expect margins to improve further over the next two to three quarters. Adjusted EBITDA loss was $3.1 million in the quarter, an improvement over the last quarter from a loss of $4.9 million. The adjusted EBITDA margin also improved quarter over quarter by 170 basis points. Our unrestricted cash balance increased by $7.8 million to $17.6 million as of the end of the calendar year. The increase in unrestricted cash was due to a decrease in working capital, net proceeds from the sale of branch assets, and net borrowings under our credit facilities. Turning to direct SHIP and DSD. We saw a low double-digit percentage sales growth in our direct ship business on a year-over-year basis as we began to see pricing realization after a lag period that depressed the first quarter of fiscal 2023 performance. On the volume front, one of our large national accounts experienced the loss of a major customer, which led to a decrease in our pound volume compared to the prior year period. Looking ahead, we expect that the direct ship business continues to improve. We saw positive momentum in our DSD business as revenue was up in the low double-digit percentage range driven by our pricing increases. Although volume decreased in the quarter compared to last year, there was strong unit and pricing momentum in December that carried over to January, and we expect continued progress on pricing actions in the coming quarters. Looking ahead, our focus in the coming quarters remains on completing the final elements of our turnaround. driving process improvements that will result in sustainable, higher levels of performance, and executing on our exciting growth initiatives, including Shot and Revive, that bring more services and products to customers and leverage our national distribution footprint. In recent weeks, we have started seeing the benefit of our ongoing pricing efforts as these take effect across our direct ship and DSD customers. This development paired with our falling coffee prices leave us optimistic that gross margins will recover towards prior year levels exiting our 2023 fiscal year in June. At the same time, current economic headwinds are placing pressure on talent acquisition and wages, as well as transportation and other operations. We continue to move aggressively to contain and manage these pressures, and we fundamentally believe our cost structure is better positioned than it has been in years to drive better performance as macro conditions abate. Our near-term objectives are to bring Farmer Brothers back to profitability, improve our competitive position for sustainable long-term growth, and enhance our ability to manage macroeconomic challenges and challenges within our industry.