Farmer Brothers Company

Good day and welcome to the Farmer Brothers Physical Third 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 the conference, please press star then zero on your touch-tone phone. As a reminder, this call is being recorded. Joining me today are Devorah Massering, President and Chief Executive Officer, and Scott Drake, Chief Financial Officer. Earlier today, the company issued its 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 of the company's Forum 8K, 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 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 represented 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-GATS 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 shareholder letter. Now, I'll turn the call over to Deverell. Deverell, please go ahead.

Good afternoon, and thank you for joining us. I'd like to take this opportunity to discuss some highlights from our third quarter before Scott discusses financials. and we will take questions. While we did make some slight progress this quarter, our results are not what we or our investors should expect. Progress in restoring sales growth and rebuilding gross margins back toward our targeted 30% level has been challenging. This has been due in part to issues outside of our control in terms of coffee pricing volatility and inflationary impacts on cost in a tough macro environment. But frankly, we know we need to execute better. To that end, we pivoted in the third quarter, implementing critical long-term pricing optimization and production process enhancements, which we believe will put us on a stronger foundation. These efforts are beginning to drive efficiencies and position us to better capture pricing opportunities as we head into the 2024 fiscal year. However, There are near-term costs to implementing these changes, including some short-term disruptions in inventory planning, which impacted our third quarter. As part of these efforts, we launched our new AI-based pricing engine, which is already providing improved, actionable data, enabling us to optimize pricing structures with customers and facilitate our goals toward margin expansion. In fact, We have already implemented a copy price increasing using the data from this tool early in our fiscal fourth quarter. Production-wise, we also implemented strategic changes to our customer ordering process, including adopting a longer lead time ordering approach. This effort involves holding more finished goods to better plan for and meet fluctuating customer demand for key items while creating manufacturer efficiencies that will benefit our cost structure. The targeted improvements include realizing lower cost per pound, delivering better margins, and generating additional cash flow, all while better serving our customers through improved product availability and quality. The benefits of this new ordering processes are already beginning to appear, with record setting production at our facilities in recent weeks and lower price per pound. While focusing in on efficiencies in the third quarter, We are also executing on future growth initiatives. During the quarter, we saw tremendous growth from our Revive Services business unit, securing several new national accounts and successfully launched SHOT, an innovative line of premium shelf-stable real fruit syrup concentrates, which we're very excited about. We are already experiencing solid demand from our limited releases on the West Coast and are working to expand its availability. To close, we remain firmly committed to improving execution and achieving our financial, operational, and strategic goals. At the same time, our board committee on strategic alternatives and capital allocation is working expeditiously on potential enhancement to our capital and operating structure. Together, both the board and management are very focused on delivering results for our shareholders, and we will have more to share in the near future. I will now turn it to Scott. Scott?

Thanks, DeVirl. Net sales in the fiscal third quarter of 2023 were $124.2 million, an increase of $4.8 million, or 4%, compared to the prior year period. The revenue growth reflected pricing increases to date. Gross profit was $28.7 million for the quarter. This results in a slight improvement in gross margin on a quarter over quarter basis for the second consecutive quarter. The fiscal third quarter marked the first recent three-month period where the average coffee product cost per pound did not increase compared to the prior period, a trend we expect to continue to benefit from. Farmer Brothers reported an adjusted EBITDA loss of $800,000 in the third quarter of fiscal 2023. a significant improvement over the previous quarter's $3.1 million loss. Our unrestricted cash balance decreased by $2.5 million from $9.8 million as of June 30, 2022, to $7.3 million as of March 31, 2023. We had an increase in DSD revenues, reflecting increased realization of recent pricing increases. Additionally, we had lower coffee costs better pound volumes for DSD customers, several new customer wins, and a lower customer churn rate. In our direct ship customers, we delivered a mid-single-digit year-over-year sales decrease, primarily due to the previously mentioned near-term disruptions as we shifted our production planning process from a make-to-order to a make-to-stock focus. We are now operating at full capacity and anticipate recovering most of the resulting paused sales before the end of this fiscal year. Overall, we have exited the third quarter a healthier business than we entered it, though as DeVerl noted, we have a lot of work to do to deliver the results we are committed to delivering. We remain focused on our near-term objectives, which are to continue expanding our margins, improve our capital structure, and position the company for sustainable long-term growth.