Farmer Bros. Co. (NASDAQ:FARM) Q2 2025 Earnings Call Transcript

Farmer Bros. Co. (NASDAQ:FARM) Q2 2025 Earnings Call Transcript February 6, 2025

Farmer Bros. Co. beats earnings expectations. Reported EPS is $0.01, expectations were $-0.12.

Operator: 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, 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. Mister Moore? Please go ahead.

John Moore: 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%, and 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 eighteen 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, Urest 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.

Q&A Session

John Moore: Tom Bauer, who previously led our sales organization and DSD operation, 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 operation 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 benefit 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 stop 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 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, actively 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 Fisher: Thanks, John, and good afternoon, everyone. As John stated, Farmer Brothers had a solid second quarter despite current market challenges, 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 2025. 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 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 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 were down 200 basis points as a percentage of net sales, reflecting our progress in rightsizing 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 2024. You should note 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 31, 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 have 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. 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 demonstrated, 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 will turn it back over to John.

John Moore: Thanks, Vance. Our strong improvement year to date in the second quarter is testament to the hard work of our team over the past year and a half. We are proud of the significant financial improvements we have seen so far in relation to gross margins, operating expenses, adjusted EBITDA, and operating cash flow. These positive strides underline the success of our internal initiatives and efficiency efforts. There is still more work to be done, though, and we believe there is potential to realize additional incremental long-term gains in terms of efficiencies. The core focus of the organization at this time is driving growth in top line cost pounds and customer counts while continuing to optimize operations. In the near term, the macroeconomic environment continues to be challenging for our industry.

That said, Farmer Brothers is better positioned than it has been in prior years, and we will continue to proactively adjust as needed to address these headwinds as our focus remains on protecting our customer base and driving top line growth. With the addition of Brian as head of our sales team, we are further shoring up our business development strategy and capabilities. This, paired with the implementation of our simplified brand pyramid strategy and our focus on driving product penetration across our existing customer base, should help to drive top line results as these initiatives gain traction. In his new role, Tom will now also be able to fully focus his expertise on expanding and enhancing our logistics and operational capabilities. As we continue to work to optimize and add density across our existing DSD routes.

As is evident by our recent performance, we are continuing to make significant progress and improvements across the organization despite current market challenges. With these improvements, we are confident when more stable market conditions return, we will be well-positioned to realize significant positive gains and drive long-term growth and profitability. I want to thank you all for joining us on the call today. Operator, we will now open it up for questions.

Operator: Thank you. We will now begin the question and answer session. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, comes from Gerard Sweeney with Roth. Please go ahead.

Gerard Sweeney: Good afternoon, guys. Thanks for taking my call.

Vance Fisher: Hey, Gerard. Thanks for joining, Gerard. Great to hear from you.

John Moore: Congratulations. Obviously, you know, you are executing very well. We are seeing results. I did want to and I gotta touch on that in a second, but I did want to start on, obviously, the top line. As you said, I think it is a growth in the top line as one of your strategic focuses going forward. No surprise there. You know, bringing Brian on board looks like you are making taking some steps to either rework, we have had or tighten up the sales process. I am just curious if maybe you could shed a little bit of light on what your thought process is on that front. Is this, you know, is this a big step forward? Is there what is the opportunity here? Is you know, etcetera, along those fronts, if you could.

John Moore: Sure, Gerard. We are extremely excited to have Brian Miller join the other organization. You know, he comes with decades plus experience, both in DSD and specifically in the coffee space, you know, and he is charged with really breathing a new life and energy into our business development efforts. I think Tom Bauer has done a tremendous job restructuring the KPI sets that drive the sales efforts, building that building that while simultaneously working through the various operational issues that we have talked about over the last year. And I think it is really about the scale and size of the both challenge and opportunity. Keurig Farmer Brothers. Yep. Having dedicated resources to both sides of the equation on the optimization of the DSP organization and the business development efforts, I think are going to yield some exciting results for us going forward.

Gerard Sweeney: Got it. Tuition Gear is obviously, you know, like, what I was probably alluding to and did not articulate as well as, you know, splitting roles you know, sales is important as is operational side. And then on the operational side, maybe what inning do you think you are in in terms of optimizing the platform? You have made some really good gains. We are seeing it in the numbers, but just curious as to how much more is out there and maybe some are are there any chunkier items still remaining? Or are we going to see a little bit more blocking, tackling, and some incremental gains?

John Moore: That is a great question, Gerard. I think I would say we are in early to mid innings, if I were to characterize it in that way. I think we are still getting a handle on all of the street level opportunities that remain. I do see that there is tremendous potential value in our existing customer base that that remains, to my extent untapped. And one of the things we are really excited to dig into now that we have Tom focused exclusively on the existing customer base fulfillment of that white glove service value proposition and we have Brian focused completely on the development of new opportunities. I think we can really fulfill our promise to the customer. We have now buttoned up the brand pyramid’s de rationalization piece.

There is no question we have acknowledged and I think resolved some of the core challenges that we were facing in the past, whether it were the out of stock challenges or the equipment availability challenges, I think taken great strides in resolving some of those things. And now we can really turn our lens to how do we increase that product penetration. How do we realize more value and strengthen that relationship? Per customer on a customer by customer basis. Because ultimately, that is going to drive that return on investment if we put equipment in and it will drive that top line contribution dollar per stop when we expand the footprint with the customer. I think we have a lot of opportunity there yet to be realized, and it is great to think that we are in a space now where we can start to turn our lens more to strategic initiatives like that going forward.

Gerard Sweeney: Got it. Super helpful. I will jump back into I appreciate it. Thanks, guys, and congrats on a on a nice.

Operator: The next question comes from Eric Des Lauriers with Craig Hallum. Please go ahead.

Eric Des Lauriers: Great. Thank you for taking my questions. Congrats on strong profitability this quarter. Great execution.

John Moore: Thanks, Eric.

Eric Des Lauriers: My first question is around the specialty tier brands. Just wondering if you could expand on any of the that positive early customer feedback that you touched on. And then you know, overall, I know specialty is typically a smaller percentage of your sales, but do you see the rollout or I guess, the full rollout of the specialty brand as a potential top line driver, or is it more of a margin enhancer helping drive, you know, the continued efficiency optimization that you guys Excuse me.

John Moore: That is a great question. I think it would it would begin in the former and end in the latter. So if you look at the data around coffee consumption patterns, and particularly when you look at generational trends amongst consumers, you can really see a gravitation to more exotic and specialty style beverages and flavor profiles. As you get into Gen Z, Gen Alpha, and as the that entire group matures into into a viable consumer set. And that is one of the exciting things about the specialty opportunity bigger picture longer term is that it really aligns with a lot of those consumers. They are looking for the more conscientious consumer ideology around sustainability. They are looking for transparency. Looking to have a more first person relationship with the products that they buy.

And I think our ability to do that, to reverse engineer a value chain in coffee from seed to sip something that really distinguishes Farmer Brothers and what we can do. The early results that that you spoke to have been very positive. We are still in the early days there, so not putting too much color into that. But you can see some of that capability as evidence with our relationship with Urest that we have discussed. On the call, that has been out in the press, you know, the ability of Farmer Brothers to do high quality production and sourcing work really differentiates us in our peer set. And I think in the initial phases, it will be somewhat of an optimization piece. You know, we are optimizing through the collapsing of those multiple brands into one.

You are seeing a consolidation of SKUs that is upward of 50%. When it comes to the finished goods, the total aggregate impact of the brand pyramid strategy has been at consolidation of over 66% when you think about the associated raw materials and SKU counts that go into producing these, over a 55% consolidation. So meaningful optimization on the sourcing side and on the manufacturing side that then realized through the rest of the organization. In the beginning, that will generate value for us on the first piece. Optimizing our operations. But then longer term, I think we are excited to see this really a my driver.

Eric Des Lauriers: That is your help on great color. And you actually kinda touched on my next question. So with this Urest partnership, I guess first question here is, are the brands with Urest, is that sort of specific to that partnership, or is this your your new specialty tier brand?

John Moore: It is a great question. Now, these are brands that are specific to that partnership. And I think as such, it really highlights one of our underappreciated perhaps core capabilities. Again, as a quality roasting and manufacturing sourcing operation, we do have the capability to to breathe life into the value proposition propositions and brands above others. And I think it is one of the things that distinguishes again, Farmer Brothers from many in the peer space. And that is a great example, you know, again, their consumers are looking for eco-friendly environmentally sound, socioeconomically driven coffee types that also marry all of those sustainability and transparency efforts with very, very, very high quality. And we are able to having six Q raters on our team, and a very accomplished coffee capability, we are able to fulfill all of their needs with that program. Under their flagship brand.

Eric Des Lauriers: Yeah. Oh, that is great. How material could that Urest partnership be? I mean, obviously, they are they are know, a good-sized customer. So I guess yeah. First question just on how material that could be, and then can you kind of talk about the landscape of these sim of similar opportunities that are out there?

John Moore: Yeah. There are many, in the space that that do not necessarily roast for manufacture, but are looking for partner that can provide that kind of service. And there are many that are also significant scale. So I would say it is a meaningful opportunity. Our core focus right now is not in that space, to be fair. But it is a capability that we can bring to bear when customers and prospects come to us. Our core focus is and remains really on our on the the core business that we do. You know, our DSD customers are down the street business. Our our accounts that we have at today, and then growing in that food and beverage space with our with our own brands. But this is a capability that we can we can offer.

Eric Des Lauriers: That is helpful. And then last question is from me here. So I also saw in the press that you have a direct-to-consumer e-commerce platform that you recently launched. Can you just share any plans here or how you are thinking about this? Direct-to-consumer offer?

John Moore: Sure. So in actuality, many of the brands that we have over the years, we have spoken of in the past, they have had disparate brand expressions and they have there was no sense of familial affiliation between any of the brands. So one of the things we did, and it is kind of in line with the brand pyramid strategy as well was kind of align all of these existing sites pair them down, and make them consistent with the new corporate branding refresh as well as the brand pyramid rollout. A critical element that was involved in that process was upgrading technology that was driving the e-commerce. And what is exciting for us really was the focus in that because as such we enable the B2B web-based ordering platform that will go live in Q4 of this year.

So although the early stages because it was a low-hanging fruit, we did refresh the existing e-commerce sites and align them with the brand pyramid with a new corporate refresh. Really, the exciting opportunity here is the launch of the B2B web-based ordering platform that will go live in a few months’ time. And that will provide our customers for the first time in in our history the ability to place orders at their own convenience while still enjoying the white glove service that our DSV fulfillment provides. And that, I think, will enable them to to really expand their line of sight into our other products that we sell. It will enable that product penetration that we have been talking about it also enables us to develop loyalty programming and promotional programming which again will drive that adoption and drive value creation through the portal.

So we are really excited to see that come to life at the tail end of our fiscal year here in the second calendar quarter.

Eric Des Lauriers: Great color. Thanks for taking my questions.

John Moore: Sure. Thank you.

Operator: Thank you. As a reminder, to ask a question, you may press star and then one. The next question comes from Aaron Grey with AGP. Please go ahead.

Aaron Grey: Hi, good evening and thanks for the question here. So you have spoken a lot about you know, potential for increasing you know, the ticket from your existing customer base. And just thinking about that through the lens of your product offerings. You just alluded to, you know, making your customer base, you know, more aware of the offers that you have. Do you think there is, you know, any additional need to to increase offerings either you know, via building out yourself, you know, the products or or acquiring, so just any line of sight in terms of how you feel about the current product offerings. You have your customer base. Do you need to make some additions to that, or is it just making sure they are aware of the offerings that you have?

John Moore: Thank you for joining, Aaron. Great to hear from you. Happy to have you on the call and great question. So I think that right now our focus is on making the customers aware of the various offerings. Again, one of the elements of the brand pyramid strategy was aligning all of our products in such a way that they, for the first time in our history, would be available throughout the entire country. Keep in mind, we grew through acquisition. It used to be that our products were very fractured. How we offered them, where we offered them. Again, for the first time in our history as of this next quarter, all three tiers on the coffee space will be offered throughout the nation a unified methodology. It comes to the Ally portfolio, we have said and alluded to over the last year that we are always looking for innovative products.

And that was, you know, the shot, syrup, line that we have been launching and that we have been working with over the last year. That has been the Boyd’s liquid Ambient product that we have been talking about. We are expanding on that capability. We are excited about where that is going. And, you know, we are looking for new products both our core focus is really on what we have and exposing our existing customer base arguably for the first time to that portfolio throughout the country in a consistent way.

Aaron Grey: Okay. Great. Appreciate that color there. And then just secondly, you brought up price increases. I am not sure for you guys, but in terms of the broader macro environment. So it sounds like more of those are coming for the year, for the category. So do you feel like there there is any potential limitation or you look into it? To hedge the risk you have in terms of the commodity markets and volatility you are seeing there? Just want to keep an eye on the side in terms of any potential risk you might see in terms of, you know, reaching some level of bottleneck for that price increase you have available. Thank you.

John Moore: Sure. I can speak to some of the market dynamics and and Vance can speak to our our thoughts on price and where we stand today. I mean, there is no question Robusta Coffee, you know, hit an all-time high just this past week. Arabica coffee hit an all-time record high. Yes, yesterday before then shattering its all-time high record today. So so getting all the way up to about four eleven before closing at four three ninety-five. So but volatility in these markets is nothing new. It is what we do. We manage to this on a daily basis. And we always have. And I would argue Matt Swenson and his green coffee team implemented changes over the last year in our sourcing protocols that, if anything, make us more nimble than we have ever been in managing our supply chains.

Managing our cost structures. That coupled with a brand pyramid rollout and the associated SKU RAS on both the green side and the finished SKU side that we just discussed, that is really set us up pretty well to navigate these choppy waters. And I think our proactive approach to the pricing that we put in place beginning of the last fiscal year this fiscal year rather, and the our capability of source forward plus all of these operational measures, it is really put us in a good spot. But I will let Vance speak to the to the saw the pricing side.

Vance Fisher: Yeah. Aaron, I would say, you know, John covered obviously the pricing aspect of what we have already done and as we stated in our comments, we felt like we were, you know, we have been working on pricing and margins, you know, for the past year to kinda get back to that forty plus target that that we are trying to achieve. And we be pleased with the progress that we have made over the past couple of quarters? I think we are we are we are positioned well or or better than we have in quite some time. You know, to weather the current market conditions. So being proactive earlier in the year knowing the market was going to be rising I think it is put us in a good position. You know, as I think John mentioned earlier, you know, we reserve the right to certainly take a additional price if we need to.

We are going to try and and hold off on that as much as possible. It is a very volatile market conditions right now. But as we get further along in this fiscal year, we will certainly be looking at that more closely and do what we need to do in order to to make sure that we can continue to deliver you know, the margins that that that we need.

Aaron Grey: Okay. Great. Thanks, Trevor, for the color. I will go and back into the queue.

Operator: Thank you. At this time, there are no more lines in the queue. This concludes the question and answer session as well as the conference. Thank you for attending today’s presentation. You may now disconnect your lines.