Farmer Brothers Company

Good afternoon and welcome to the Farmer Brothers fiscal second quarter 2025 earnings conference call. At this time, all participants are in listen-only mode. As a reminder, this call is being recorded. Today, the company filed its Form 10-Q and issued its second quarter results press release, which are available in the investor relations section of Farmer Brothers' website at farmerbros.com. The release is also included as an exhibit on the company's Form 10-Q and is available on its website and the Securities and Exchange Commission's website at sec.gov. A replay of this audio-only webcast will also 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 to differ materially from those forward-looking statements is available in the company's release and public filings. On today's call, management will also reference 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 release and SEC filings. 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. The second quarter was a strong one for Farmer Brothers despite the challenging market environment. Sales were up slightly on a year-over-year basis and up 6% compared to the first quarter of this year to $90 million. We maintained gross margins above 43% for the second straight quarter. Our selling and G&A expenses also continued to decline. In addition, we realized our second straight quarter of positive adjusted EBITDA performance at $5.9 million and generated positive free cash flow for the first time in many years. We believe these results underscore the positive impact of the changes we have made to focus on DSD operations and optimize the business over the last 18 months. Overall, our cost structure is significantly improved, but we remain focused on driving customer and volume growth against a tough consumer backdrop. On that front, just last week, Eurest announced a partnership with us to develop a new premium coffee program featuring ethically sourced eco-friendly blends specifically designed for the workplace. This partnership highlights our core value proposition with our white glove DSD service model serving as a key factor in their decision to work with us. We also announced the addition of Brian Miller to our senior leadership team in January. Brian joins the company as our vice president of sales. He is a results-oriented leader who has a proven track record of driving business development efforts within both DSD organizations and the coffee sector. Tom Bauer, who previously led our sales organization and DSD operations, has transitioned to the role of Vice President and Chief Field Operations Officer. Tom will continue to head up our DSD teams, where he will be focused on leading our route and working capital optimization efforts, as well as helping to further refine our operational systems and processes. We believe these leadership enhancements will provide significant benefits as each of these experienced leaders will now have a singular area of focus within the business, both of which play a vital role in driving our top line and strengthening customer growth and retention efforts. In addition, I am pleased to announce our comprehensive SKU rationalization and brand pyramid projects will both be completed by the end of the fiscal third quarter. The final phase, the addition of our new specialty tier coffee brand, has already rolled out to select customers and will be launching fully in a few weeks. Early feedback has been positive, and with this initiative completed, we can focus on executing. These projects have created significant operational efficiencies for Farmer Brothers, which we expect to continue to realize benefits from through the back half of 2025, and have helped simplify our overall go-to-market approach. Our updated brand pyramid also allows us to meet our customers where they are and provide them with options to engage at the levels and prices which make the most sense for them. We believe this simplified and straightforward approach will further enhance our customer growth and retention efforts. We do, however, continue to experience pressure related to customer counts and overall coffee volumes. We saw some customer attrition during the second quarter, and our overall coffee volumes were down 8% on a year-over-year basis. This is primarily a result of customer count degradation, lower consumer spending, and decreased foot traffic across our customer base. All of these will be a key area of focus for Brian and his team for the remainder of this year and beyond. With that said, our allied products, which include teas, other beverages, spices, mixes, and various culinary items, make up approximately half of our total sales. These products, which are a natural extension of our coffee offerings, continue to help us protect our gross margins during volatile market environments by making each route and individual stock more profitable and creating additional value within our existing accounts. Our coffee expertise coupled with our allied goods is a market differentiator for Farmer Brothers. Together, they provide additional opportunities and benefits for our customer base, ultimately creating greater customer loyalty and helping us sell both more coffee and more allied products. Looking at the macroeconomic environment, we continue to see high prices and volatility in the commodity markets. As a result, a number of our peers have taken price in the last few months or have announced plans to do so in the coming year. Farmer Brothers was proactive in doing this, making a price adjustment in early fiscal 2025 in response to what we were seeing in the marketplace. As such, we feel we remain well positioned from an inventory and pricing perspective to continue to protect our top line and customer base but will, of course, proactively monitor and adjust as necessary. I'd also note we are paying close attention to the heightened risk of trade actions initiated with key export markets for coffee and some of our allied products. While this risk hasn't directly impacted us at this juncture, it does introduce another layer of volatility into the commodity markets. Wrapping up, we feel good about the performance this quarter and the progress we are making. We have a lot more to do, and we're doing it in a challenging market environment. We remain heads down on executing and setting up Farmer Brothers for longer-term success. I'll now turn it over to Vance to discuss our financials in more detail. Vance?

Thanks, John, and good afternoon, everyone. As John stated, Farmer Brothers had a solid second quarter despite current market challenges, with continued improvements in adjusted EBITDA and operating expenses and strong gross margin performance for the second consecutive quarter. Overall, our adjusted EBITDA for the quarter was 5.9 million, a year-over-year increase of 3.6 million compared to the second quarter of last year. This was also a 4.5 million increase sequentially compared to the first quarter of fiscal 25. Our adjusted EBITDA for the quarter was again supported by healthy gross margins. For the second quarter, our gross margin was 43.1%, a year-over-year increase of 270 basis points. compared to 40.4% in the second quarter of last year. Our gross margin results primarily reflect our price optimization efforts over the past year, as well as pricing actions taken early in the fiscal year to get ahead of the rising coffee markets. Sequentially, gross margins were down slightly compared to last quarter due to higher cost inventory starting to work through our cost of goods sold. This will continue over the coming quarters and put some pressure on margins as we sell through higher cost inventory due to rising coffee prices. We do, however, believe our proactive pricing actions and inventory management have us positioned to continue to deliver margins above our 40% target over the coming quarters, despite current market conditions. For the second quarter, net sales were relatively flat year over year at $90 million, compared to $89.5 million for the same period last year. Sequentially, net sales were up close to $5 million, or 6% compared to the first quarter. This sequential improvement represents normal seasonality, along with further flow-through of the pricing actions I previously mentioned taken in the first quarter. Operating expenses were $37.8 million, or 42% of net sales in the second quarter, compared to $31.7 million, or 35.4% of net sales in the second quarter of last year. The year-over-year increase was driven by a $7.7 million decrease in net gains on asset sales, as there were no branch sales during the second quarter of this fiscal year. When adjusted for net asset sales, operating expenses declined by $1.5 million year-over-year, or 200 basis points as a percentage of net sales, reflecting our progress in right-sizing our cost structure over the past year and positioning us well going forward. Net income for the quarter was 0.2 million compared to 2.7 million in the second quarter of fiscal 24. You should know last year included 6.1 million of net gains related to asset disposals, while this quarter included a 1.5 million net loss related to asset disposals as there were no branch sales during the quarter. Looking at the balance sheet, as of December 31st, 2024, we had 5.5 million of unrestricted cash and cash equivalents. $0.2 million in restricted cash and $23.3 million in outstanding borrowings under our credit facility, with $23.7 million of additional borrowing capacity. Since the sale of our direct ship operations in 2023, we have been working hard to strengthen our financial position and create a stronger foundation for future growth and value creation for our shareholders. Driving towards positive free cash flow has been a key element of this. We've been making solid progress on this front as demonstrated by our six consecutive quarters of improved cash flow from operations, including two consecutive quarters of positive operating cash flow. For the second quarter, cash flow from operating activities was 2.6 million, an increase of 6.3 million compared to the second quarter of last year. We also reached an important milestone by achieving positive free cash flow for the quarter. Free cash flow was 0.5 million for the quarter, an improvement of $7.6 million compared to the prior year period. As a reminder, Farmer Brothers defines free cash flow as cash flow from operating activities, less capital expenditures. Looking ahead, the unprecedented coffee markets will likely put pressure on our results over the coming quarters. We remain focused on execution, and as our second quarter results demonstrate, we are in a much stronger position to manage these challenges. Overall, we are pleased with our recent results and believe they demonstrate the significant progress we have made and provide a glimpse of our long-term potential. With that, I'll turn it back over to John. John?