Farmer Bros. Q3 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2025

There are 5 speakers on the call.

Operator

Good afternoon and welcome to the Farmer Brothers Third Quarter Fiscal twenty twenty five Earnings Conference Call. At this time, all participants are in a listen only mode. As a reminder, this call is being recorded. Today, the company filed its Form 10 Q and issued its third quarter results press release, which are available on the Investor Relations section of the 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.

Operator

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 that all 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 the 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 release 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 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 conference over to Former Brothers' President and Chief Executive Officer, John Moore. Mr. Moore, please go ahead.

Speaker 1

Good afternoon, everyone, and thank you for joining us. The third quarter was another solid quarter for Farmer Brothers. We realized our third straight quarter of positive adjusted EBITDA at $1,700,000 maintained gross margins above 42% and continued improvement on our cost structure with decreases in both our selling and G and A expenses. I am incredibly proud of our team and their ability to continue to maintain and build on the positive momentum we have achieved over the last several quarters despite the extremely challenging consumer and industry headwinds. As all of you are well aware both the Arabica and Robusta coffee markets remain historically high.

Speaker 1

Consumer confidence dropped again in April according to the conference board to the lowest reading in many years and nervous consumers spend less and less often. These market dynamics coupled with uncertainty regarding the potential impact of tariffs continues to put pressure on the industry as a whole. Farmer Brothers has been proactively working to address these challenges by streamlining our operations, increasing internal efficiencies and reducing our overhead to better manage our overall cost structure. As is evident by our recent results, we believe these efforts have had a meaningful and positive impact on the organization and have us well positioned to meet the challenging market environment. We must continue to protect our gross margins and the progress we have made to date in spite of the macroeconomic headwinds.

Speaker 1

As such, we recently completed some additional rightsizing of the organization, primarily among our support teams and corporate leadership. Included in those changes was the departure of our Chief Operations Officer, Tom Bauer. We thank Tom for his service and all that he has done over the last two years to help us navigate a significant amount of change and build a strong foundation upon which we now stand. Our sales team led by Brian Miller, who joined us earlier this year and our DSV teams will remain separate as we mentioned on our last call. This will allow each respective team to focus solely on driving top line revenue and increasing both customer growth and retention.

Speaker 1

Our DSD team will now be led by Vice President of Field Operations, Travis Young, who previously served as one of our DSD Regional Directors. Travis has been with Farmer Brothers for almost twenty five years and has worked in a variety of roles across our operations, sales and production teams. His experience in the trenches and vast knowledge of the industry, our company and our customer base make him uniquely positioned to lead our DSD efforts. He also provides valuable insight and leadership into our ongoing route and capital optimization efforts as well as our operational system and process enhancements. The official launch of Someone coffee roasters this quarter also marked the completion of our brand pyramid and coffee SKU rationalization initiatives.

Speaker 1

Over the last year, these projects have allowed us to remove redundancies, optimize our roasting and operational facilities, reduce overhead costs, simplify our go to market strategy and enhance the overall customer experience. With clearly defined traditional premium and specialty tiers available across our nationwide DSD network for the first time in our history, our customers can now engage at the levels and prices which make the most sense for them. This along with our customer service efforts is something that will continue to set Farmer Brothers apart in the marketplace, particularly in the current economic environment. With that said, we did continue to see declines in overall coffee volumes and customer count during the quarter. Total coffee pounds were down 9.4% compared to the third quarter of twenty twenty four.

Speaker 1

We believe this is driven in part by downstream degradation across the customer base. Despite these declines, we continue to deliver improved gross margins and adjusted EBITDA results. This is primarily a result of our cost management efforts and proactive pricing approach. Overall, we are proud of the progress we have made and the results we have been able to deliver despite these unprecedented market conditions. We know there is still much to do as we proactively navigate this ever changing market environment, focus on execution and position Farmer Brothers for long term growth.

Speaker 1

With that, I'll now turn it over to Vance to discuss our financials in more detail. Vance?

Speaker 2

Thanks, John, and good afternoon, everyone. As John said, Farmer Brothers continues to deliver solid results despite the challenging operating environment with positive adjusted EBITDA, stronger gross margin performance and continued improvement in our cost structure. Overall, our adjusted EBITDA for the quarter was $1,700,000,000 an increase of approximately $1,500,000 compared to the third quarter of last year. Our adjusted EBITDA results were again supported by healthy gross margins. Gross margin in the third quarter was 42.1%, a year over year increase of 200 basis points compared to 40.1% in the third quarter of last year.

Speaker 2

As expected, gross margins did contract slightly compared to the second quarter, which reflects rising coffee prices working through our cost of goods sold. We expect this to continue over the coming quarters, but feel we have appropriately planned for this we'll continue to actively manage inventory and pricing to deliver margins above our 40% target despite current market conditions. Net sales during the third quarter of fiscal twenty twenty five were down on a year over year basis to $82,100,000 compared to $85,400,000 during the prior year period. Operating expenses were $38,100,000 in the third quarter compared to $34,700,000 in the prior year period. The $3,400,000 increase was primarily driven by a $5,300,000 decrease in net gains related to asset disposals as there were no branch sales in the third quarter of this fiscal year.

Speaker 2

When adjusted for net asset sales, operating expenses declined $1,900,000 on a year over year basis or 50 basis points as a percentage of net sales, reflecting our ongoing progress in rightsizing our cost structure. As John mentioned, we've made some additional adjustments recently, which better position us going forward to manage the challenging operating environment. For the third quarter, Farmer Brothers recorded a net loss of $5,000,000 compared to a $700,000 net loss in the third quarter of last year. This quarter's results however included a $2,400,000 net loss associated with the disposal of assets, while the prior year period included a $2,900,000 gain associated with the disposal of assets. Looking at the balance sheet.

Speaker 2

As of 03/31/2025, we had $4,100,000 of unrestricted cash and cash equivalents, dollars 200,000 in restricted cash and $23,300,000 in outstanding borrowings under our credit facility with $22,100,000 of additional borrowing capacity. For the third quarter, cash flow from operating activities was $1,300,000 an increase of $3,600,000 compared to the same period last year and marking our third consecutive quarter of positive operating cash flow. Free cash flow was negative at $700,000 for the quarter, a $5,000,000 improvement over the third quarter of last year, a testament to our progress in driving better operating performance and improved working capital and CapEx efficiency. Looking ahead, we expect market conditions to continue to be challenging. We remain focused on execution and proactively managing the dynamic market conditions we are in and believe we are well positioned to do so.

Speaker 2

We are pleased with the results of our recent quarters and believe they demonstrate the significant progress we've made in our ability to generate long term value under more normal market conditions. With that, I'll turn it back over to John. John? Thanks, Vance. To date, this

Speaker 1

year has been one of tremendous improvement for Farmer Brothers. We are extremely proud of the progress we have made both operationally and financially, particularly in terms of adjusted EBITDA, gross margins and improvements in our overall cost structure. We do however know there is still much work to be done. We remain committed to driving growth on our top line coffee volumes and customer base as we know these are fundamental to our long term success. With our fully implemented brand pyramid, we now have a tiered go to market strategy, which allows our customers to move up and down the value chain to meet their current business needs.

Speaker 1

Rather than looking for a new supplier, Farmer Brothers now offers them a good, better and best option to meet their quality and price requirements, while also providing additional beverage and allied goods and equipment as well as comprehensive white glove customer service. These elements are a true market differentiator for Farmer Brothers and a tremendous benefit in the current economic climate. Furthermore, with access to 90% of the global coffee market, our new simplified brand pyramid allows our planning and procurement team to fully take advantage of our global sourcing relationships to find the best origin options without sacrificing quality. This creates flexibility for our suppliers and allows us to proactively navigate potential tariff impacts as we continue to work to manage our cost structure. We do not anticipate any immediate tariff impacts to our COGS in the current fiscal year.

Speaker 1

We remain focused on these elements as well as our initiatives to drive product penetration across our existing customer base and add density across our existing DSD routes. Our goal of course remains to drive top line and customer growth in the coming quarters. Overall, we remain confident that we are well positioned to realize significant positive gains and create meaningful long term growth and profitability when more stable market conditions return. I want to thank you all for joining us on the call today. Operator, we will now open it up for questions.

Operator

We will now begin the question and answer session. The first question comes from Eric De Laurier with Craig Hallum Capital Group. Please go ahead.

Speaker 3

Great. Thanks for taking my questions. First one for me, I just wanted to clarify one of Vance's comments. So obviously, there's some macro headwinds with pricing. You do expect some gross margin headwind as a result.

Speaker 3

But should we still expect a sort of 40% plus in the quarters ahead? I wasn't sure if those headwinds might bring us below that or if you guys still feel confident that you kind of have enough levers to pull to maintain that 40% gross margin?

Speaker 2

Hey, Eric. Good question. Thanks for the question. Yes, we feel like the actions that we've taken to date and will continue to take will certainly put us in a position to stay above that target range over 40%. So feel pretty good about that over the coming quarters.

Speaker 3

All right. Great. It's great to hear. And I guess as a sort of a related question, how much room do you have to continue reducing operational costs or even cost of goods? I guess just maybe overall, much room you have to continue increasing operational efficiency?

Speaker 3

I you guys comment on there's a lot of work still to be done. But frankly, you've made a lot of improvements already. I guess, I'm just curious sort of where we are in the overall scheme of improving operational efficiency and reducing costs?

Speaker 1

Hi, Rick. This is John. Thanks for the question. Thanks for joining the call. I think we've done a lot of work over the last year, year and a half to optimize the operations as we've said.

Speaker 1

You never stop looking for opportunities to optimize your business, particularly in this environment. But I do feel as though we've taken a number of measures to position us to maintain that 40 plus percent gross margin as Vance said. And we feel as though we're in a very good place right now with the team that we have to go forward and to start shifting gears a little bit from the optimization efforts to really focusing on growing the customer base and certainly maintaining and even selling deeper into the customers that we have. So I think that's really where opportunity is at the moment as management team's focus, That's the focus of the team.

Speaker 3

Yes. That certainly makes sense to me. Last question for me. Bit of a perhaps unusual question or I know just not the typical focus. But on the Allied Products, how much of an ability is there to sort of add additional products or drive this revenue line?

Speaker 3

I mean, this be a meaningful growth driver? Or is it kind of too small of an impact not worth it right now while you guys are looking to add more customers add route density all that good stuff? I'm just kind of wondering about that

Speaker 1

revenue line. No. Thanks for that question, Eric. We see this as a tremendous opportunity. I think when you've got the customer accounts that we have, you always have your CapEx spend has already been committed, right?

Speaker 1

So the most advantageous way to add immediate value is to sell deeper and sort of land and expand with your existing customer base. And I think that for us we see that as a tremendous opportunity. We've launched initiatives specifically around that idea and we're seeing some positive returns already. So we're excited about that initiative. We have a lot of faith in our route sales representative team and the operations team to execute on that.

Speaker 1

And I feel as though we've done a pretty good job of supporting that initiative with various other parts of the organization. So it's mobilized the marketing team. It's mobilized sales support functions. It's mobilized field operations team and we're seeing some good positive results.

Speaker 3

All right. Great to hear. I appreciate the color. Thank you for taking my questions.

Operator

The next question is from Gerry Sweeney with ROTH Capital. Please go ahead.

Speaker 4

Good afternoon, John and Vince. Thanks for taking my call.

Speaker 1

Hey, Jerry. Thanks for calling in.

Speaker 4

I wanted to touch on the splitting or dividing of operations back in the previous quarter. So business development, field operations and I think this sort of goes along with some of the commentary around growth, right? So field operations, a lot of optimization, running routes and then business development. And that feels as though it was a recent move. Just wanted to see how that was going.

Speaker 4

And how does that sort of play into some growth opportunities or at least strategy into developing some more growth opportunities?

Speaker 1

Sure. I think Brian Miller is still relatively fresh in the organization, but he's hitting around running and is already making some pretty significant strides. We're very pleased with the results there. There's been a bit of a cultural shift and shift in structure in the business development team and that side of the business. I think he would characterize that as sort of creating centers of excellence that are not as much beholden to geography as they may have been in the past and really more role and function specific where you're able to put your aces in your places and have people that are pretty dedicated to their function really thrive and excel.

Speaker 1

So that those changes have already been made and implemented. And now our focus is really on having a cleaner differentiation between those and that side that maintain the business and retain the customer base that we have, maintain those relationships and if anything strengthen those relationships. And then there's the pure customer acquisition activity, is more sort of the classic hunter gatherer differentiation, right? And there too we're seeing some early progress, some early results. So we're pleased with how that's going, but there's a ton of work to be done.

Speaker 1

And then I would say with Travis Young taking on the reins of the field operations team, we both share a belief that our brow sales representatives can really unlock a tremendous amount of value for the organization. I mean, you look at the headcount alone in that side of the operation, we have exponentially more people pounding the pavement every day, selling into the customer base that we have, where we have an ability to expand within that customer base what we're selling and how we're selling it, which makes us stickier with that customer base with the addition of each SKU. But in addition to that, there is a little bit of latent capability there that we can tap to do some business development work and some customer acquisition work. And not every single day is packed from beginning to end with deliveries. And we feel as though that team could add a tremendous amount of value by getting out and doing a little bit more business acquisition activity.

Speaker 1

So we're really looking to drive that over the quarters ahead and think that it could add quite a bit of value for the organization.

Speaker 4

Got it. What's the biggest challenge right now to expanding growth? I mean, I'm assuming that it's probably the macroeconomic backdrop a little uncertainty etcetera. But I'm just curious as to how you guys view it?

Speaker 2

I think it is a little

Speaker 1

bit of that. I think it's also a very competitive landscape. And I think we are still refining our value proposition and go to market strategy. So I think as we continue to do that and we continue to enable our business acquisition team through better tools, better technology, I think we're going to start seeing that we're able to invest in that growth and then we'll start to see the results of the good ones before.

Speaker 4

Then corporate actions that took place, did we see those did they benefit this quarter at all? Or should they sort of well, they benefit the next quarter with the being cognizant that there are also headwinds, exactly when they took place and how they sort of filter into?

Speaker 2

Yes. Jerry, this is Vance. They those actions were taken in early Q4. So there you'll see the flow through in Q4 and really position us better going into fiscal twenty twenty six instead of baseline going into F twenty twenty six.

Speaker 4

Got it. Great. Okay. That's it for me. I'll jump back in queue.

Speaker 4

Thanks.

Operator

This concludes our question and answer session and it also concludes our conference. Thank you for attending today's presentation. You may now disconnect.

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Key Takeaways

  • The company delivered its third straight quarter of positive adjusted EBITDA of $1.7 million, maintained gross margins above 42%, and reduced selling and G&A expenses through cost structure improvements.
  • Total coffee volumes and customer count declined, with coffee pounds down 9.4% year-over-year, reflecting persistent macroeconomic headwinds and lower consumer confidence.
  • The completion of the brand pyramid and coffee SKU rationalization streamlined product tiers (traditional, premium, specialty), reduced redundancies, and simplified the go-to-market strategy.
  • Organizational changes included the departure of the COO, separation of business development and DSD teams, and appointment of Travis Young to lead DSD, sharpening focus on top-line growth and route optimization.
  • Strong operating cash flow for a third consecutive quarter, $4.1 million of unrestricted cash, $22.1 million of borrowing capacity, and guidance to maintain gross margins above 40% despite high coffee costs.
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Earnings Conference Call
Farmer Bros. Q3 2025
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