Farmer Brothers Q1 2024 Earnings Call Transcript

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November 9, 2023

Key Takeaways

  • Net sales rose to $81.9 million in Q1 due to pricing gains, partially offset by lower volumes.
  • Gross profit margin expanded to 37.6% from 33.8% year-over-year on pricing actions and declining coffee costs.
  • The adjusted EBITDA loss narrowed to $0.45 million from a $3.9 million loss a year earlier, approaching breakeven.
  • Operating expenses increased to $32.9 million from $27.8 million, reflecting severance costs and higher selling and freight expenses.
  • Coffee cost per pound declined by 12% year-over-year, bolstering margins and expected to stay lower throughout the fiscal year.
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Earnings Conference Call
Farmer Brothers Q1 2024
00:00 / 00:00

There are 3 speakers on the call.

Operator

Good afternoon, and welcome to the Farmer Brothers Fiscal First 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 on the Investor Relations section of Farmer at 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 and Exchange Commission's website atsec.gov.

Operator

A replay of this audio only Webcast will also be available on the company's website approximately 2 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.

Operator

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 those non GAAP financial measures to their most directly comparable GAAP measures is also included in the company's shareholder And I will now turn the call over to Farmer Brothers' Interim Chief Executive Officer, John Moore. Mr. Moore, please go ahead.

Speaker 1

Good afternoon, everyone, and thank you for joining us today. Immediately after I joined Farmer Brothers in June, we executed on the sale of our direct ship business and refocused our model on what we have always done best, direct store delivery. Since then, we've been strengthening our foundation by appropriately sizing the business, instilling a more efficient operational organization, Reducing our cost structure and formalizing an attractive but achievable strategic long term sustainable growth plan. Simply put, Farmer Brothers is getting back to basics and executing on the fundamentals, which have made us industry leader for so many years. Our first quarter results are a promising preliminary look at these efforts.

Speaker 1

Overall, our revenue increased year over year, our margins expanded and our adjusted EBITDA is approaching breakeven. Costs associated with the direct ship business transition along with sluggish coffee volumes offset Progress likely won't be linear across all the metrics we track, and we anticipate transitional impacts will abate as we move throughout the year. We are confident that we will continue to see improvement in our revenue, gross margins and operating costs, especially as we focus on driving customer growth, customer retention and This is all happening at an opportune time as coffee costs trended lower in the quarter and are expected to continue to do so throughout the fiscal year. We're still selling through our higher priced coffee inventory and bringing in new supply at a meaningfully lower cost. In fact, our cost per pound of coffee during the quarter was down 12% on a year over year basis and 1.6% from the prior quarter.

Speaker 1

Meanwhile, we are making progress on centralizing our roasting and production activities to our Portland, Oregon facility. To evaluate and reduce brand and SKU redundancies across our coffee lines to simplify our customer facing lineup and further streamline production and sales operations. We believe these efforts will continue to drive down our cost of goods sold over the coming quarters. In addition, our AI driven pricing engine is helping us optimize our pricing strategy. This system is informing necessary and timely changes in prices such as those we implemented in May October, which are already helping to drive gross margin improvement.

Speaker 1

We are also making headway with several of our growth initiatives. Our new on trend product additions, including our Schott natural flavored syrups and Boyd's Ambient Liquid Coffee are performing well in their early stages. Our REVIVE Equipment and Service This also continues to be a differentiator for our DSD business. With that, I'll turn it over to Brad to discuss our financials in more detail. Brad?

Speaker 2

Thanks, John, and hello, everyone. Before jumping into the numbers, just a quick reminder, results for fiscal 'twenty four Q1 are reported on a continuing operations basis, reflecting the performance of our DSD business only in the respective periods. From a headline perspective, we're encouraged by the results driven from a transition to DSD focused business with 3 of our primary financial metrics, net sales, gross margin and adjusted EBITDA. Our net sales for the Q1 were $81,900,000 which increased slightly on a year over year basis compared to $79,800,000 in the Q1 of fiscal 'twenty three, driven by higher pricing and offset by lower volumes. Our gross profit margin increased to 37.6 percent for the Q1 of fiscal 2024 from 33.8% for the Q1 of fiscal 2023.

Speaker 2

The increase in gross profit represents a 380 basis point increase compared to the prior year period. Improvement in margin resulted from pricing actions as well as a decrease in our underlying product costs. Operating expenses were 32,900,000 Q1 of fiscal 2024, up from $27,800,000 in the prior year period. This increase was due primarily to a 3,600,000 dollar increase in G and A expenses, which were related to severance costs for executive management transitions. A decrease in net gains from the sale of branch properties and other assets and an increase in selling expenses, which was driven by additional spend on vehicles, fleet and freight.

Speaker 2

Adjusted EBITDA approached breakeven for the Q1 at a loss of $452,000 compared to a loss of $3,900,000 in the same period a year ago. Turning to the balance sheet. At the end of the Q1, we had $4,000,000 of unrestricted cash and cash equivalents. We had outstanding borrowings under our credit facility of $23,300,000 utilized $4,600,000 of the letters of credit sublimit and had $25,400,000 of availability. Looking ahead, we're adequately capitalized to execute on our DSD plans.

Speaker 2

You can expect us to be laser focused on improving efficiency of operations, continuing to reduce our costs and streamlining how we go to market in terms of brands and product SKUs, all of which along with anticipated favorable coffee pricing trends position us well to deliver high gross margins and improved results. With that, I'll turn it back to John. John?

Speaker 1

Thanks, Brad. In closing, we're off to a good start in setting the foundation and positioning the company for With a local branch network covering 49 states and equipment servicing capabilities across the country, We remain an industry leader in size, service and product offerings. We are already seeing early stage improvement in our operating margin profile and we'll continue to focus on the following: leveraging our nationwide DSD customer network Appropriately sizing our cost structure, continuing to optimize pricing, driving customer growth and retention, Increasing market penetration for on trend products and completing the transitional services associated with our direct ship sale. We believe we're in a position to be able to generate positive free cash flow in early fiscal 2025 and ultimately deliver long term value to shareholders. Thank you again to everyone for joining this call and for your continued support of Farmer Brothers.

Speaker 1

We look forward to speaking with you more soon.

Operator

And this concludes this conference. Thank you very much for attending today's presentation. You may now disconnect.

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