Farmer Bros. Co. (NASDAQ:FARM) Q4 2023 Earnings Call Transcript

Farmer Bros. Co. (NASDAQ:FARM) Q4 2023 Earnings Call Transcript September 12, 2023

Farmer Bros. Co. beats earnings expectations. Reported EPS is $2.33, expectations were $-0.61.

Operator: Hello, good afternoon and welcome to the Farmer Brothers Fiscal Fourth Quarter and Full-Year 2023 Earnings Conference Call. [Operator Instructions] 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 Brothers website at farmerbrothers.com. The shareholder letter is also included as an exhibit on the company’s Form 8-K and is available on the company’s website and the Securities and Exchange Commission’s website at sec.gov. A replay is available on the company’s website and the Securities and Exchange Commission website at sec.gov. A Replay of this audio-only webcast will be available approximately two hours after the conclusion of this call.

The link to the audio replay will also be available on the company’s website. 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 only 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, 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 shareholder letter. I will now turn the call over to Farmer Brothers Chief Executive Officer, Deverl Maserang. Mr. Maserang, please go ahead.

Deverl Maserang: Thank you, Operator, and thank you, everyone, for joining us this afternoon. Hopefully you’ve had a chance to look at the shareholder letter we filed earlier today. We’ve had several significant news announcements these last few weeks. And we want to take some time here to walk you through those and make introductions to our new Interim CEO John Moore and Interim CFO Brad Bollner. Most importantly, we want our investors to come out of today’s call with a good sense of the company’s positioning over the next several quarters and for the long-term. Scott, the board and I fully believe Farmer Brothers has a bright future in front of it. The sell of our direct ship business was a transformative moment in Farmer Brothers history and creates a significant inflection point for our shareholders.

A close-up of a freshly roasted coffee bean, accompanied by a vintage aluminum scoop. Editorial photo for a financial news article. 8k. –ar 16:9

It trains our full focus on what we do best as a company. It strengthens our balance sheet and best positions us to unlock the company’s full margin expansion and growth potential. We already hit the ground running, showing rapidly improving margins in our DSD business. In May, we began rolling out our AI-based pricing model, which uses more than 200 data points from more than 40,000 customers to facilitate dynamic pricing adjustments. In the last weeks of the quarter alone, we saw several 100 basis point improvements in gross margins. We really are excited about this capability. As we noted in our letter, DSD’s standalone gross margins historically have run above 40% even without sophisticated pricing capabilities. Since the closing of our direct ship transaction, several important steps have been taken to position the company for what we believe will be an accelerated return to positive free cash flow.

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Q&A Session

First, we used $100 million in transaction proceeds to pay down outstanding debt and increase our balance sheet flexibility. This allows the team to focus on execution, improving margins, and driving strategic growth in our continuing DSD operations. Second, we underwent a significant reorganization within DSD, which allows us to apply 100% focus to this important business. We introduce a new field organization structure, which will drive a more sales and profit-centric approach to account management and we’ve improved accountability and reporting throughout this organization to better align with our goals and priorities. We have also taken steps to lower product costs, locking in COGS gains, which will benefit performance throughout the year.

And we are optimizing operations across the board, including inventory management, procurement, and manufacturing. We continue to elevate opportunities and implement changes to adjust our cost structure to align with our now smaller and leaner organization. Finally, we are ramping up new growth initiatives. Our Revive business is performing well, growing revenue by 50% on a year-over-year basis in fiscal ‘23. Our launch of SHOTT branded syrup concentrates has also gone well, especially on the West Coast, and we’re excited about our ambient liquid coffee program offered under our Boyd’s brand. This is in test markets ahead of the broader launch expected in the fall. We are confident its innovative, proprietary design will allow us to capture significant market share in a critical segment for our customers.

Now, to discuss what the company will be focused on in the fiscal 2024, let me introduce you to our Interim CEO, John Moore. John joined us earlier this year as Vice President and Head of Coffee. He’s a proven industry leader with more than 30-years of experience and one of the most knowledgeable people I know in the coffee industry. He will do an outstanding job leading Farmer Brothers through this management transition.

John Moore: Thanks, Deverl and hello everyone. One of the reasons I joined Farmer Brothers back in May was the groundwork which has been laid for future growth and profitability. Speaking from an industry perspective, the last several years have been among the most challenging I’ve ever seen across the coffee business. Farmer Brothers has participated and been impacted by those challenges, but the opportunity is apparent. Beneath the hood, significant operational and financial work has been done, which we’re now ready to capitalize on as industry conditions become more favorable. I want to make some points to amplify and build on Deverl’s previous comments. First, our margins are already improving and are set to continue to do so throughout this year.

That’s not just because we’re getting better at pricing, it’s also because we’re entering a softer coffee market. Toward the end of the past fiscal year, we’ve seen a notable shift from bullish to bearish in Arabica’s. Macroeconomic conditions, optimal weather in growing regions, and a strong forecasted ’23, ‘24 Arabica harvest in Brazil are providing downward momentum in Arabica prices. As this trend is forecast to continue, we look to opportunistically participate and further optimize margins going forward. In short, the market we’re moving into is one in which Farmer Brothers historically has thrived. And with our full focus on DSD now, we have visibly improved our performance. Second, the changes executed in the DSD business are meaningful.

Farmer Brothers has been around a long time, so operational changes sometimes take more work than you would think. They require cultural change too. It’s a way of doing business where we need to maintain the strong relationship-driven approach our brand is known for while increasing discipline and accountability throughout the organization. I feel good about the changes and believe we have an energized and talented team to execute. Finally, our goal is sustainable, profitable growth. We’re already better at pricing and getting much more efficient. In addition, as we leverage our revitalized and optimized nationwide network with new products such as Revive, SHOTT, and Boyd’s ambient liquid coffee, we see exciting sales leverage opportunities, which can enhance cash flows over time.