FARM - Earnings call transcript Q3 2018

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Operator

Good afternoon, ladies and gentlemen, and welcome to Farmer Brothers Third Quarter Fiscal Year 2018 Earnings Conference Call. At this time, all participations are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to your host [Sophie Crosby]. ahead. go Please

Unidentified Company Representative

Officer. to of and Executive Investor afternoon, issued third audio-only Good Participating the will X-K to X of you a Securities link joining and of is this available today, for also today's Thank Treasurer fiscal everyone. replay Form note also at exhibit of section available our year the which our Brothers Robson, on Chief President and Keown, audio on quarter today press this all Earlier are A on and available replay unaudited. included www.sec.gov. release available an release, webcast is is our call. we the the call. website. and this XXXX on Financial will that Chief Farmer website our on presented Relations The the be David conclusion call be website call you. Mike financial press Thank information Officer website. earnings The approximately Exchange on Commission's as hours after conference Please conference

Results any date. not and and upon regulations. subsequent future we constitute laws statements. plans under Before These call, differ as as forward-looking various our note views that those and only make securities Safe federal the be the during forward-looking relied should of purposes about call our prospects statements please we may of of for today forward-looking this provisions statements remarks materially the our begin as expectations, represent representing Harbor from views could

available share non-GAAP events in forward-looking to common On including today's cause income, press could that those results net diluted, income website. use EBITDA GAAP the filings, non-GAAP in Relations margin, we to our differ is net operating EBITDA, which are of our Executive which performance. on public Web and the turn section Mike adjusted certain will over from materially and per comparable Mike, available the Officer. company's of financial EBITDA our and section EBITDA factors other call, and these is measures, release statements financial the available on is information Investor non-GAAP in Additional earnings Relations Keown, release, our Investor measures in Reconciliation go adjusted now I margin, site. directly measures call of our non-GAAP to ahead. included most President please on assessing their press Chief actual

Mike Keown

the elements I'll I'd to call you. Thank of of what's detailed open it on us. call forward, and for our like year-to-date and we over the review including short our our of fell quarter, David expectations. today's in turning where questions. with for Welcome, everyone, start financial discussion thanks joining for your areas performance for up operational We'll next to strategy before touch and of the quarter looking us, financial results. a more then and then

where nearly level the increased our in £XX in to the and continue performance. with coffee included year-over-year margin of year. while Boyds, line in results list to including missed million areas we've and and was the below adjusted year volume are XX.X% declined and hoped. third sold there guidance at business the year-over-year our on missed be excluding new We business our period, such year Northlake green on both green full volume areas $XX.X in our fiscal wins seeing At from on, and are our that Boyd's we'd the have While the facility, EBITDA needed business X.X% to of third Sales volumes the briefly comparison, new touch for contribution from year-over-year, up adjusted DSD were customer $XX year-to-date financials direct processed confident top the million ongoing a of processed there business, we ago, of of into getting XX.X% primary third before drivers financial like EBITDA X.X%.While EBITDA performance coffee prior down With were And SQF the forecast million sales to of the performing from third I'd in and quarter certification proud customer in the up ability and in and were of quarter. declined acquired in quarter in ship. we progress of had aren't for the new the as are Boyd's where our quarter, our the of pipeline Adjusted come the meet we integration frankly, expectations is quarter. top of, QX a the previous coffee other Boyd's. tracked our quarter.

outlook As a the in $XX revising be $XX to range to result, adjusted we EBITDA fiscal million. are our for XXXX million of

of going how third positioned performance our are Now and the let drivers primary forward. about quarter we talk me X

direct was a We've rollout also discussed completed DSD. our opportunities. months the new since modernize training, pipeline about of of made new the new which Smart steps last organization, spoken planned. to in with and First, restructure implementing or third month store technology, our the taking building progress and hires, growth quarter continued key delivery, we've processes In Touch, DSD planning as selling customer and

the new the our field. from the the place in business, out efforts with are DSD to foundation some we we success pleased for see have in with put and beginning are of We

a the the the cycle However, signed channel-based lead more under about or as takes selling called out typical generation X months we've selling previously, contract. to approach, from of

the are for at miss quarter. accounted portion largest we in the third pace which result, the historically, new have of business as adding we our a same still As not

we the on company believe, for industry move to headed. has that is organization We however, channel-based over in our chains, retail our right more therefore, convert selling the national the We growth and can future, this and restaurant generate to as we create more continue customers work to us pipeline. with believe based and approach consistent where business confident the the feel term robust position long will win a been larger the

business. ship direct our Second,

customers. two see from what gains that from while our these signing steady the of two largest two with customers Each them. seen, million new to worth did little our of this experiencing winning customers, it's In customers pounds very softness largest decline, new of XX and softness During are supplier we customers remain to business with our during and not contracts, a large to noting accounts us, we valued the years, Unfortunately, our these a committed particular, grew and each direct from X own. volume to accounts these these ship working volume being over With two we cultivate pounds ramp-up are important experienced five quarter, their to span than are from we of the well to are quarter business have new offset million of more with of in challenges the similarly the customers. incoming period. said, the even we continue we we

accounts. with volume we new the with are We existing over of in be In leverage and for growing offers quarter, that to final about this significant to of to are have moment final type ship new an I grow begin very Northlake, top to business in the direct time, we mentioned bringing SQF customer. continues be two limited our Northlake customer is and in investment new for implementation customer, ship stage Texas production have and facility. and us quarter strong. was time a pleased customers pipeline some This during We received a It to excited so a us to roasting accounts time with to a healthy direct step ability third and the certification the ago. our increase made leads these our we facility as our won very our over commenced believe volume become potential of our and new

our and drove addition quarter. expectations, of mentioned for business acquisition. volume Third, from as volume with overall top I line earlier, and business this increased in our this the was our the Boyd's line and Revenue

cost the complete opportunities the as more the closing, process. accelerate and work we with agreement through integration, upon Since have higher-than-expected specifically, services to and the quarter. or As worked saw we integration in searched we TSA, Boyd's, seized we to transition third

coffee the organization. anticipate talented customers, the path down this, leadership taken all the production of is Farmer have Touch examples have very well people produce integration able all and of full and under some integrating to have synergies ship completed, begun we from the product the this are DSD, we have direct of have and ended, and As control the combined realize Brothers on transaction. facilities, to hired Farmer Smart routes being in our Boyd into transition fully is arrangements Once Brothers

confident our and integration XX-month remain the the about fourth in. which timeline, as will And proceeding timeframe, largely X to of we're terms In XX was integration activities freight we expense. in the our transportation which the in increased months integration projected complete of planned and is driver, finally, our expected we

rise savings more and cost, achieve significantly third the offset food industries. in savings of areas packaged retailing is these in by our a broader While than transportation target cost freight to in that a affecting and we quarter distribution continue were the business, rise goods,

to are As our costs reduce we'll look we within control working we control and forward, that expenses. opportunities are additional to the look for operating

in the be to earlier, market, excited about opportunities. our about indicated positioned how Farmer I and As is continue Brothers we growth

know, long-term As in significantly months you of be estimated rise. $XX in and a for acquisition business billion our we on growth We acquisitions, Boyd's. a points the is particularly the industry believe the of our past our U.S, platform have XX most coffee strengthened through are growing to price

serving make available, our cultivation, attractive which the customers for help products distribution us a more significant progress sustainable commitment and to and potential practices customers. make while continue to manufacturing maintaining partner of finest in all We

beginning channel-based new, is wins. DSD We a strategy that better customer have quality generate to

to adding have customer SQF organically. exploring to customers. the addition we grow And ability facility We and our is large growing direct recent national base new The are we to ship believe longer on certification categories. distribution us our our expanding established term, acquisitions, to of M&A roasting through allowing in Northlake our product bring with network,

deliver programs the to to stronger for And QX improved industry-leading We while continue and to achieve to foundation financial motivated believe highly results. results is and superior have fiscal that in performance we focused in team XXXX. have right sustainability do, our we place in work

improve better execute However, on financial over now review David? several areas results. focus that turn we a David are to aware business sales. a with also for the call our ability in of forecast of to need we keenly the to and our more detailed I'll

David Robson

detail now results I'll Mike. our go regarding further Thanks, into quarter. this

sold ship customers Boyd's, represented the in touch or network review through you volumes to press distribution relationships inclusion DSD total areas, coffee sold I'll national X.X was As sales.The volume, the release, key quarter through by including chance processed distributor made ago, Volumes and £XX.X lower sold volumes.Green XX.X% the during were mix acquired direct and XX.X% from the the beginning approximately Boyd's volumes volume and few pounds XX.X% our X.X DSD processed of the a had pounds all coffee of a by distributors, only increased processed across volume.Coffee million or while and with with sales coffee through year-over-year of new quarter last driven and of over million down softness network, total accounts through base X of X.X% largely large coffee increased business of the our year million up our year. remainder. green on from approximately to

driven the prior to the to million, statement. of for a an were year million from quarter. of by Boyd's. the quarter $XX.X Net the was million XX.X% primarily or $XXX.X This sales now net $XX.X contribution sales income increase compared Turning increase acquisition

lower net sales large X.X% result is customers price to X decreases decreased impact to sales coffee. of a or of lower Excluding X.X%. accounts, and softness million the due green cost-plus DSD decrease Boyd's, hedge primarily cost our from This $X.X national of

depreciation our lower to the largest business. prior us in of has The downward net the sales help in on margins, volume decrease net a and to with XX.X% remaining Boyd's occurred business base gross the XXX XX.X% lower quarter sales year the and addition exclusive customers point decline million decreases to LIFO amortization our compared $XX.X higher was through year slightly amortization related new of business. that we with base in million depreciation during rate was leverage we put achieved quarter, $X.X selling cost, quarter The acquisition increase in in compared of state-of-the-art year-over-year gross the additional points quarter. driven addition increase cost an recorded the integration of our increase a administrative certification new of decrease also expect to large year. given in and general a million. spice pressure $X.X Farmer quarter, due compared recently realize to The compared revenue quarter million prior margin base million, XXX basis expenses year, largely pounds Brothers the part cost sales facility, nonrecurring sales were performance of basis net DSD in Northlake top our The ago, disappointed and year primarily we're $XX.X of model of sales significant Boyd's as net our this of of of facility, relates Operating $X.X benefits margin the last from of manufacturing on Although million XX.X% of and in $X.X with confident by channel or and last structure line Northlake the a not less which which Gross XX.X% driver future benefit the of on to to of to SQF third and expenses, our the from was the or and and a business new, in our our inventory, volume reflects national it increase business will year. were quarters.

expected These we once other Corporate mentioned, items the of we the from associated offset $X.X the the an realize through production associated Further, acquisition. transition Additionally, by decrease and in year with as complete, restructuring associated benefit quarter. the to able is the million the anticipate integration higher-than-expected Expenses expenses in and agreement $X.X of have with arrangements associated as Plan partially acquisition, third impairment transition Mike cost is reduced the $X.X coffee Mist. this work were transition being with with payroll China employee service quarter Boyd's a saw last charge we from and Relocation synergies cost combined ended, Boyd's reflect million in million. also our and

China we our and estimated intangible quarter, the our and value testing exceeded we trademark the Mist all determined impairment performed annual assets their that of of the During customer carrying fair value. of relationships

value our China assessment quarter, we of Mist which a customer, assets. significant the the During estimated lost fair intangible China Mist impacted of

experienced compared $X.X other QX we when for to of able Finally, higher freight also during which of last the we're cost offset quarter, freight initiatives. year, cost million to with cost savings

nine cost compared the months freight March ended year. XX, last experienced For have million $X.X to higher of we

integration. Going our related time improve expenses, forward, the we excluding as Boyd's we integration cost expect over operating savings to leverage, onetime to realize expense

third Turning higher the Interest the to to to $XXX,XXX expense. $XXX,XXX due year quarter, interest last period. up prior in expense compared borrowings year from was

associated October. higher the We in last acquisition, borrowings levels expect given the to interest expense early at Boyd's closed which remain compared year with to

$X.X We tax expense an in recorded $XXX,XXX Turning recorded loss in in common expense or tax due $X.X tax of third the compared period. for -- this prior margin the to the go-forward on of during diluted primarily stockholders approximately while year compared Adjusted million EBITDA law X we million the tax common On prior income million last loss EBITDA in adjusted compared quarter income the year. a basis, new million expense $XX.X associated tax period. with net resulting our the was changes prior taxes. share income period, year to tax We quarter of $XX.X The in income quarter, effective rate per loss expect diluted X.X% income the compared be enacted to to rules in in the a period. December the or common available year to million a in net per to the was XX%. $X.XX quarter share $X.XX X.X% $X.X prior was of to year to

of the million had sheet. balance cash revolving the At $XX.X million we turn our $X to credit borrowed we on had and the let's end Now in quarter, facility.

of cash, million net and $XX.X XXXX, was XX, $XX.X XXXX. at million the million debt, compared to as December March Our of of XX, as $XX quarter-end

compared of used we essentially operations integration Boyd's. debt activities our flat cash base fund from business quarter, flows our primarily Our last generated to net was with cash as to our

this the base. primarily facility our Our the was up availability of the business our the second inclusion related into is of from at borrowing quarter $XX.X increase availability the to million under credit million Boyd's quarter, in end $XX.X of 'XX. during $XX.X assets at fiscal million to related of the end The quarter

capital to turning expenditures. Now

million and $XX.X business. includes million line For several acquisition our at the resulted which $X.X the which investments prior currently to addition expense we expense new the depreciation our the and the quarters. $X.X related production approximately of our assets, maintenance Northlake asset Coffee commitments capital Based $X used of the increase million with expense existing were CapEx, and facility, this CapEx $XX.X we added the to Northlake The depreciation the $X.X related of of primarily million, $X.X of next integrate quarter amortization by of the $X.X integration in million useful expense to facility, deployment in the from expansion and quarter was million company's to to amortization and current in cash million quarter. and lives CapEx lines at the intangible expectations of to volume with of is for spent production fixed Year-to-date, our and expect run amortization depreciation million quarter, of amortization in new this $XX million including on our the the annually. DSD per Boyd's Smart made quarter. Boyd's, The organization the in expenditures acquisition devices Touch $X.X from work the million have Boyd's Boyd's Depreciation $XX versus in maintenance currently year from million in in our maintenance Coffee. the

the to Lastly, to acquisition. I'd Boyd's like turn

We to acquisition an approximately to million integration annual have basis an incremental currently business onetime to continue the million to of that to million date, in cost and XX expect additional post-integration. date, the contribute $X.X $XX integration. estimate million million complete million and to we cost we we acquisition will the on over approximately $XX spend CapEx $X.X in adjusted $X.X EBITDA in To incurred X and To we Boyd's expect million million next to the in Boyd's to additional associated an $X.X cost $X.X CapEx integration. $X.X months complete with spent the spend to have

of EBITDA expectations. Mike remainder facility. we expectations, growth $XX as Boyd's earlier, to million adjusted realizing to driving expect between 'XX. new, results additional becomes We ship orders to to several sales at and the business look profitability, We customers our incremental full volume complete from productive SQF prior improved fiscal top Northlake contribute from channel results anticipate including As our mentioned our consolidated fiscal we synergies and 'XX.While direct large, as and million fiscal margin $XX our ahead operating quarter integration, on year we short the and matures our attracting tracking drivers to expansion be line for based for our fully the DSD as certified year for opportunity has below third see fell changed quarter the of continue outlook year-to-date now will third in team greater

to the call for turn Mike back remarks. closing I'll Now

Mike Keown

it operating we David. as entire can. Again, to business to that get way our work recognize earlier, have I Thanks, believe do more we noted the we

continue on and our investments expanding positive, have network, customers. Brothers of view customers business a we see opportunities our our well increasing we our for positioned made to to be the and focused growth. that distribution roasting adding in and with organic existing we category, continue are both on the Coffee and growth capitalize is facilities, new inorganic leveraging prospects the Farmer to However, and industry remains as growing

full remain remainder potential. XXXX, and forward Farmer the we we our executing Brothers fiscal on look focused to areas unlocking of As all to XXXX and of across fiscal business

in Farmer open like I'd call thank to Brothers. I up And call Operator? for for that, always, the those on with continued As your questions. interest the

Operator

Thank you [Operator Instructions].

question from comes of first Our Capital. Gerry Sweeney Roth

open. Your line is

Gerry Sweeney

-- a but you A you mentioned a a said customer little -- wanted Is a the win. know customer plus, out? I remarks, for here, lot offers you very frame detail in I X flesh limited trial more Could prepared very win mean, potential you significant question out there's think, Just on time if of significant that this I if obviously, won, a don't you sitting you're that something possible. basis discussing? bit or that's down to

Mike Keown

Mike. take Sure, Jerry. I'll that. It's

an So which when production on time the you we limited the which another nice. a is we I new won very customer. But stage in for important excited customer, significant think about quarter, of final we're existing we're commenced And couple a with very about. implementation offers more a think basis, customer, with

Our execute if million and typically the pipeline to in perspective which being lot foundation help good producing to national £X a Two at they're healthcare it, sales us continues direct we more to chain Tex-Mex systems, frame you that fresh be the on-boarded. robust have do give so in That and we've you've customers combination significant you of X kind to is sense of samples large and phase, for gotten grow customer implementation and then there. little the in sales, year got potential forth. channel To a to the DSD, you once audits a place. a look said, have a

do. the feel to the get to great the like work a we over goal So bit But we've line. got potential little more ball

Gerry Sweeney

So this is…

David Robson

could you add to the our thing see Jerry, out in to one that CapEx customer give always give don't spend wins. color, big in So, probably it because you to But to that the our for we're we to $X million balance related spent But is million, really Boyd's. of of is million. $X.X close CapEx, maintenance making Outside quarter. $X.X customers. new we investments

Gerry Sweeney

final timeline and we mean… the when I between process? talked is this, samples about And Yes, decision what's you, got the that. implementation, I when auditing mean,

Mike Keown

say if driven the I'd a give you bell the had customer. I to the middle of quarter. curve, But it's by about Well,

Gerry Sweeney

a About quarter?

Mike Keown

customers to again, through and And process. execute our driven well, be that's through But confident we that by that we're the very we'll process good ability deliver before this and in been if shape. we've

Gerry Sweeney

was £X assume that I customers in And those million, aggregate?

Mike Keown

you. We path by But trying it's we on, share intend start is to find keeps service. to coming Yes. the six a level magnitude have in a over customers magic as up. a glide customers all We, the board. sense customer interesting a of putting brought last But for to with pounds, kind can't get And this way for as way them them you on world continue together. number to a execute, bucket we the trying the to to of of exceeded a find great where it provide of years, that we're to you real

Gerry Sweeney

Is something percentage you're Well, like that I or is you detail, am XX% I just total that the front, looking magnitude? possible for but this, mean what to would of if £X provide this order and not at businesses? of million, on that if want an sure company's

David Robson

This if think last did we year, of with course, Boyd's, we're million. addition year, to you Well, the £XX just going grow. of

going million, £XXX million. £XXX between probably we're well of and £XXX to be north So million

yes, perspective. for that's customer us a big So a pounds from

Gerry Sweeney

a and think Gross switching little gears jump in then And margin line. back expected. most lower then people I is real than quick I'll

overhead? quarter said said you switch move the in a last actually possible? can and you've if is you period you basis Northlake but exact maybe think of if portion Are when TSA TSA? And the about you -- numbers Boyd's the And of word, pardon XXX from into aren't bound contractually Northlake absorb I the and Northlake. don't was what production start that are XXX good of overhead maybe out a absorbing point called certain Facility. me, was of right know to time? think an in stuck to I some that XX Boyd's that stuck points biggest for the about was I -- these But driver you drag. or believe that At basis some I can the but can you point Northlake

David Robson

end Yes, designed started. to it months after the TSA is XX

in. it in October actually So to wouldn't integrate. it so we can wanted call going getting I facility through we're ready started stuck We our year. that integrate And of timeframe now last that.

you're that start flow volume So going to through in see to fiscal 'XX.

Gerry Sweeney

drag suspect way? Boyd's on coffee Northlake? would to the it I margins enough bring shift that that would there other maybe of from sort eliminate the Is --

David Robson

Well, have we said capacity today. pounds. lot pounds pounds additional XXX of this go could at a to to XX million it's up plant. it We investment, million XX million With

Boyd want certainly that than help pounds. We to it is with -- to more about XX growth. of So ability just million add leverage to it leverage lot

Operator

[Operator Gerry Instructions] And Capital. we have of a follow-up Roth from question Sweeney

Gerry Sweeney

to mitigate et costs freight been assume, Well is a given cetera, since there this it's me. cost, gasoline, I'll take the go basis? those -- Freight way the to opportunity vis-à-vis, forward I on that is higher a and prices, oil

Mike Keown

back. a Well, Jerry, take just I'll step

pressures. that a and is from definitely You've more recently certainly perspective seen fuel perspective, both there inflationary a driver

to as we can So we'll savings work offset cost to find that.

I and is, to future how far a of -- big think I trying through how the us view think that go. And has magical in the the will of what that don't future. magic looks a number are question just like sort anybody for

I is that near in headwinds to freight. ways but we encountering there's be our are around we people do the many definitely found term, we'll business think found in over that time, what as

Operator

B. [Operator Instructions] have line from the Riley. from a Anderson question we Kara of And

Kara Anderson

Farmer, ask did and mean Starbucks implications want earlier this that late. might Nestlé for to and any about to it the what your But I week, if announced was alliance joined I speak So Thanks business? for you could

Mike Keown

it about question. press. the read probably good only in a you've I've It's what read

we have while At I be a our grasp, a full recent a food given So and businesses more on more it of focused that retail, high the service. level, have can't business, appears to in retail we say announcement.

our don't in we right the see job against what's notable said think is I to on Though Boyd's to So it But path customer to now. customer is see saves against prospective clearest impact or going execute way it's pool, from pool, coffee value what continue one another. our we an our I think to value creation. and around certainly globe immediate execute

David Robson

say, a mind players that A small Kara, coffee keep lot a that I would And compete our we high-service through in DSD. in. fragmented is were such of model market

the lot from accounts. near-term great that a don't at implications of have we any We see I national see moment.

Operator

[Operator closing for the I'd call further Keown like I'm remarks. And queue. any to to questions not Instructions] showing back in turn Mike

Mike Keown

Well. Thank once again. you,

that our it operating recognize business we we get can. more entire the earlier, to noted way I As have do we to work believe

view However, for of both as continue over term. the Brothers the and the longer to industry the our business many positive and remain term prospects our short grow opportunities and see to the medium we Farmer

those I call much. you, always, on As your for the Brothers. Farmer Thank interest in very continued thank

Operator

This conclude Everyone, Ladies all disconnect. day. may and a for you participating gentlemen, conference. in you have great thank program, today's does the and

Farmer Bros. (FARM) 12 May 182018 Q3 Earnings call transcript