Farmer Brothers Company

Good afternoon, and welcome to the Farmer Brothers Fiscal Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this call is being recorded. Earlier today, the company issued its quarterly shareholder letter, available in the Investor Relations section of Farmer Brothers' website at farmerbros.com. The shareholder letter is also included as an exhibit on the company's Form 10-Q, and is available on its website and the Securities Exchange Commission's website at sec.gov. A replay of this audio-only webcast will be available on the company's website approximately two hours after the conclusion of this call. Before we begin the call, please note all of the financial information presented is unaudited and 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 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 which 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 Farmer Brothers President and Chief Executive Officer, John Moore. Mr. Moore, please go ahead.

Good afternoon, everyone, and thank you for joining us. Before we get started, I would like to thank the Board of Directors and the entire Farmer Brothers organization for the appointment to President and Chief Executive Officer. It is an honor and privilege to lead such a storied coffee company. Today, we are just over six months into the transition from the sale of our direct ship business to a sole focus on direct store delivery. We are beginning to see positive momentum on both an operational and financial front. During the first half of fiscal 2024, we made strides in rightsizing our business, becoming more operationally efficient, and adjusting our cost structure to support a return to sustainable profitability. Our second quarter results show some positive trend lines. While revenue gains were modest on a year-over-year basis, we saw meaningful improvements with gross margin and adjusted EBITDA. Boosted by improved pricing and a favorable position on our coffee costs, our gross margin expanded 550 basis points versus the prior year and rose above 40% for the first time in more than a year. Even with the progress we have made on gross margin, we know we still have opportunities to improve this metric going forward. We anticipate additional gross margin upside over time as we have now sold through the majority of our older, higher cost inventory. We believe the company is now positioned to generate sustainable gross margin in excess of 40%. Similarly, while we are encouraged by our adjusted EBITDA improvement in the second quarter, we know we have opportunities to improve there as well. Enhancing our ability to have the right product in the right place at the right time will drive top-line sales to better leverage our cost structure. Significant reduction in SKU counts and brand consolidation will reduce overhead and improve roasting efficiency for better margins. The impact of these initiatives will only be amplified as we consolidate our roasting operations and reduce complexity in our Portland facility. All of these efforts share a common purpose and goal, improvement in our customer retention and growth. Whether through better execution in every step of our supply chain or focus on brewing equipment and service, we know giving our customers what they need most is the fastest path to success for Farmer Brothers. Through what we have internally dubbed Project Symphony, we are also working to improve our customer experience with better processes and technology. We are enhancing our point-of-sale management tools and have recently launched a new customer relationship management system, reinforcing the theme of customer retention. These advances are critical as we know simply cutting costs and being more efficient won't be enough to achieve sustainable profitability and free cash flow. Part of our sales growth equation includes adding innovative on-trend products and continued product penetration within our existing customer base. In summary, we are pleased with the positive momentum we saw during the second quarter and believe our path to positive free cash flow by early fiscal 2025 is firmly in view. With that, I'll turn it over to Brad to discuss our financials in more detail. Brad?

Thanks, John, and hello, everyone. As a reminder, results for fiscal 24 and prior year second quarter are reported on a continuing operations basis, reflecting performance of our DSC business in the respective periods. Please refer to our Form 10-Q, which was filed with the SEC today, for further information regarding the respective performance of our discontinued and continuing operations. Overall, we are pleased to report a strong fiscal second quarter highlighted by a meaningful uptake in gross margin and adjusted EBITDA profitability. Net sales for the second quarter of fiscal 24 were $89.5 million, an increase of $600,000 compared to $88.9 million in the prior year period. Net sales were positively impacted by higher pricing, but were offset by lower coffee volumes. Higher pricing, along with favorable commodity costs, enabled expansion of our gross profit margin by 550 basis points on a year-over-year basis to 40.4% compared to 34.9% in the second quarter of fiscal 23. Operating expenses decreased $2.6 million from $34.3 million in the second quarter of fiscal 23 to $31.7 million in the second quarter of fiscal 24. This included a $1.1 million increase in G&A costs driven by lower incentive compensation expense in the prior year and a $2.5 million increase in selling expenses driven by increased healthcare expense and the same prior year incentive reduction. Our overall improvement in operating expense was driven by a $6.2 million increase in net gains from the sale of branch properties and other assets during the quarter. Net income from continuing operations moved from a loss of $8.7 million during the prior year period to a gain of $2.7 million in the second quarter of fiscal 24, an improvement of $11.4 million. Our capital expenditures for the quarter were $3.3 million compared to $4.7 million in the prior year period. In fiscal 24, we anticipate between $12 and $15 million in capital expense. We expect to finance these expenditures through cash flow from operations and borrowings under our credit facility. Adjusted EBITDA for the quarter was 2.3 million, an increase of 4.5 million compared to a net loss of 2.2 million in the same period a year ago. This is a significant swing, which highlights the work we have done to right-size the business to support healthy DSD growth. Turning to the balance sheet, as of December 31st, 2023, we had 6.9 million of unrestricted cash and cash equivalents. We had outstanding borrowings of 23.3 million utilized $4.6 million of the letters of credit sublimit, and had $24.5 million of availability under our credit facility. We believe we are adequately capitalized to finance operations in fiscal 24 and expect to achieve our goal to be free cash flow positive by early fiscal 25. In closing, I'll reiterate what John has said. While we recognize progress may not be linear on a quarter-over-quarter basis, we are feeling increasingly confident about the path we are on as we strive to generate sustainable top-line growth and profitability. With that, I'll turn it back to John.