Farmer Bros. Co.
Q2 2021 Earnings Call Transcript

Published: 4 Feb 2021

[Operator:]

Good afternoon ladies and gentlemen and welcome to the Farmer Bros.' Second Quarter Fiscal 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this call is being recorded. I would now like to turn the call over to your host today, Jeff Majtyka. Please go ahead.

[Jeff Majtyka:]

Thank you operator and good afternoon everyone. Thank you for joining Farmer Bros.' second quarter fiscal 2021 earnings conference call. Joining me today is Deverl Maserang, President and Chief Executive Officer; and Scott Drake, Chief Financial Officer.

[Deverl Maserang:]

Thank you, Jeff. Good afternoon everyone and thanks for joining us today. We hope your families and loved ones are continuing to stay safe and healthy. I want to first express my gratitude to the entire Farmer Bros. organization. Because of them, I can proudly say that the supply chain and network optimization strategy, we've communicated over the past several quarters, has now largely materialized. While I'll let Scott discuss the financials in more detail, I want to provide a few updates first. The headwinds associated with COVID-19 continued to impact our business throughout the quarter, especially, within our DSD segment, which sells to restaurants, hotels, and casinos among other channels. Over the past several months, we have seen our business respond rather quickly in both directions as the pandemic has progressed, including renewed downturns tied to holiday time case surges and encouraging data following localized re-openings.

[Scott Drake:]

Thanks, Deverl. During the three months ended December 31, 2020, we experienced sales declines in our DSD and direct ship sales channels compared to the prior year period, as both channels continue to face ongoing headwinds related to COVID-19. Despite these declines, we experienced sequential sales growth of 7.5% from the first quarter, as our DSD channel saw improving conditions until the COVID-19 resurgence and our direct ship business experienced some seasonality benefits. Until the resurgence of cases and reinstated lockdown that California experienced this quarter, we saw consistent month-over-month improvements in volumes. This momentum continued through September, where our weekly sales improved to a decline of 32% from our pre-COVID levels, representing continued progress compared to the 44% decline we saw in June and the 65% to 70% decline we saw in April. If not for this new wave of cases, we believe the trajectory of rate improvements would have continued throughout the current quarter. But, ultimately, we ended the December quarter with DSD volumes down 40% compared to the prior year period.

[Operator:]

Our first question comes from Kara Anderson with B. Riley Securities. Your line is open.

[Kara Anderson:]

Hi, good afternoon.

[Deverl Maserang:]

Hello Kara.

[Kara Anderson:]

I'll start with an easy kind of housekeeping -- quarterly housekeeping question around roast and ground coffee sales as a percentage of total sales, if you can provide that?

[Deverl Maserang:]

Absolutely. So the number for the quarter is 66.4% of roasted coffee as a percent of total sales and the year-to-date number is 67.2%.

[Kara Anderson:]

Great. Thank you. And then on the inventory investments that you made in the quarter, are you caught up at this point or should we expect further investments needed to sort of position yourself for the recovery?

[Deverl Maserang:]

Yeah. We feel good about where we are with inventories at this point. And obviously, the balancing between the coffee and the allied products is a lot of what we're doing and we feel good about where we are. We'll obviously -- or we do monitor it week-to-week based on what we're seeing in the marketplace and we just want to make sure because of lead times on some products that we're staying in a good place with that. So as we see this recovery as we see markets open again, we'll be keeping a really close eye on it, but we think we're in a good place.

[Scott Drake:]

It's a hot topic around the office.

[Kara Anderson:]

It's certainly a good sign that you think that there's a recovery on the horizon. And then kind of on that theme with the rising cases, particularly here in California and ultimately the shutdown here, did you make any adjustment kind of with the reversal of some of the progress in the weekly sales that you saw within the quarter?

[Deverl Maserang:]

Say that question one more time. I missed the back half of it. In terms of the recovery in the quarter...

[Kara Anderson:]

I'll just rephrase it for you. Whether you made any adjustments to the organization or your cost as a result of things going from down 32% to down 40% within the quarter?

[Deverl Maserang:]

Okay. I got it. Yeah. And we did see a decline as the quarter progressed. And since then as the vaccinations over the last several weeks, we've seen an uptick. And we're seeing that same pattern, we saw if you remember back during the July 4 period. The same time of effect November, December had we're seeing it reverse at same course and follow the same trend that we saw previously. I think what we're trying to anticipate here is how fast with the new administration and the vaccination program that's going across the country and Governor seems to be relaxing and maybe not everyone following 100% of the guidelines and more people packed into outdoor dining or indoor dining, just timing those orders and making sure we're ready for that volume. And from that perspective to your direct question, Scott in terms of the percentages that we've been reporting and then kind of how it ended up in the quarter?

[Scott Drake:]

Yeah. Yeah. Absolutely Deverl. As the recurrence of COVID cases happened, you're right. In Q1 you could kind of think of Q1 as being a little bit better month to month to month. And I would say that end of September, when we were reporting the DSD business down 32% to prior year to pre-COVID that was kind of the peak. And then it started to regress a little bit in October. And then it was interesting because as we saw COVID reach new heights in all regions of the country, obviously the case count, the hospitalizations, the closures and actions that we're taking were far more severe than we've seen before. In mid-November, we obviously had a deterioration in our DSD sales, but we hit this level of about 40% down to prior year or to pre-COVID levels and we really stayed there. It didn't get any worse as we moved through November and through December and early January we really found kind of I guess a near-term floor that the down 40% level. And as Deverl said, we're nice to see it starting to move up from there on a positive direction.

[Kara Anderson:]

Got it. And then I'm sorry if I missed it, but I think previously you've talked about a non-branded or non-farmer owned coffee brewing equipment service. Can you remind us of that? And I think it was a pilot just provide an update there, correct me if I'm wrong?

[Deverl Maserang:]

Yes, it was a non-branded service tech in Texas and the fortunate thing is Scott Drake's been the key executive leading that effort. So, I'll turn to him to let you give a quick update to some of the results that we've been seeing.

[Scott Drake:]

Yes. Absolutely. Absolutely. A lot of what we've been doing is that that foundational groundwork if you can imagine the back-office work of making sure that we could actually -- it's a service we provided to our current existing customers for years had no charge. So, you've got to come up with the revenues and the billings and invoicing and all those different things that we would need as well as the service level agreements that we'll be offering people at different levels. So, a lot of that foundational work is now nearing completion. And what we're finding is that as you go look to maybe manufacturers to partner with and others, the lack -- it's the timing, I guess, of the restaurant business and the restaurant recovery will be key to that business as well. So, we're kind of moving around a little bit and talking with a lot of different parties, but we have started having some actual service calls and some work around that and really, really good discussions with a lot of different parties. So, we think we'll be able to provide a meaningful update on that hopefully next quarter, but it is moving in the right direction. And we're kind of done with the groundwork phase and we're really moving now into starting to execute.

[Kara Anderson:]

Great. Thank you. That’s it for me.

[Deverl Maserang:]

Thanks Kara.

[Operator:]

Thank you. We have a question from Gerry Sweeney with ROTH Capital. Your line is open.

[Gerry Sweeney:]

Good afternoon, Deverl, Scott. Thanks for taking my call.

[Deverl Maserang:]

Hello Gerry.

[Gerry Sweeney:]

I wanted to touch upon the comment around the premier specialty distribution. Obviously, great DSD network rate sort of distribution. Wondering if you could maybe expand on maybe what the opportunity is there? I think you mentioned High Brew, which I think would be an opportunity to leverage that DSD network? Are there other things that you have in mind or maybe a little bit -- any more detail you could provide on what you see for that strategy?

[Deverl Maserang:]

Yes. Thanks for the question Gerry. I think you hit on it. In terms of leveraging the platform, it's with no question that Farmer Bros. has built this platform over 109 years in the GSE side. And there's a lot of products that are on trend that in fact we don't sell to coffee forward customers. So, if I think about a coffee forward, tea, and spice type account, there's more premier specialty type products that we could sell in that network. Now, today, you look at some of the products that we don't have and you ask yourself why? We're not putting some of the high-end non-dairy replacement products such -- you've got oat milk, almond milk, soy milks, and the like, that's a huge opportunity. In fact, if you go to most locations across the country that are coffee forward, you'd find us not playing that. And we're in conversations with individuals around those types of products just as we learn heavily from our initial hybrid discussions that we've always known that we needed to be in the RTD space, but didn't want to spend the capital in terms of innovating those products because there was really good companies out there that did that. So, leveraging our network especially in institutional foodservice as the initial step forward with companies like High Brew and then looking for other opportunities. So there are other types of products that we do sell today that are gaining popularity and we could get into the whole category around sweeteners of all types, especially agave, other types of sweeteners that we can have right on our network. And today we have the typical traditional color packets in raw sugar. And frankly, if you go to a typical coffee shop you're going to find a lot more progressive types of things that consumers are asking for and we know, we have the network by which to deliver those. So we're constantly out there searching for partnerships that make sense to leverage on top of the robust platform that Farmer Bros. built over the course of time.

[Gerry Sweeney:]

Got it. That's helpful. And then I'm not sure how much you can answer this, but obviously, you've made a lot of changes since COVID and already accelerated some of the changes Houston West Coast distribution. Could you sort of quantify how much expenses you've taken out of the model over the past year?

[Deverl Maserang:]

Well, as you know, we don't provide guidance at this point but I will commit to both Kara and you and others that as COVID stabilizes, we absolutely plan to get on a path of giving you some cost savings inputs around guidance and also margin. And I expect to do that – I would hope that we might be able to do that by fourth quarter call. I think third quarter call is going to be a little challenging because we'll still be navigating through COVID. But with that let me give it to Scott, because he can give you some updates on things we have discussed as it related to COVID and cost savings. And then I think the bigger question that you're asking for is one we've got to move toward and that is a much harder thing to do right now since much of our success has been covering the downturn due to COVID and we got a lot of moving parts. But I think Scott's got a means by which to give you a little sense of that and just showing you kind of where it is without formally going down this path of giving guidance at this hour. So Scott?

[Scott Drake:]

Yes. Thanks, Deverl. So Gerry, what I would say is a couple of parts here I'll give you. One is on cost savings. And if you look at the quarter just ended I know that we talked early on when COVID first broke about having an internal goal of saving $6.5 million per month and then we talked about how we had exceeded that goal. And it's tough to see sometimes because about a third of those savings are in our margin number in cost of goods and about the other two-thirds are down in our operating expenses. But if you just look at the gross margin, the first quarter gross margin we reported was 23%. The second quarter of the quarter just reported was 25.1%, yet the sales level to prior year were both very similar down, 30% and down 31%. So you see some of that progress in cost of goods there. And I can also kind of just tell you directionally that for the quarter we just ended we've obviously brought back a lot of the business from Q4 when COVID was really at its peak. So some of those expenses are back, but we're still running at a rate just below about $6 million a month of cost savings. So hopefully that kind of gives you a framework on cost savings. Now thinking of cost savings going forward and the West Coast DC and the Houston facility and all the other things we've talked about, as Deverl said, we hope to get things to a more stable level. And as we talk about a little bit in the release, a lot of those savings especially at a DC and at a manufacturing facility are volumetric. So the more volumes we put through those facilities the bigger the savings are. But I would just caution you not to look for a big difference in Q3, as we move forward just a lot of obvious reasons there. It's -- Q3 is this first quarter for both facilities. It's also the quarter we've got the final transition of both facilities. And as anyone knows it's kind of obvious moving -- winding down a production facility, you're not at high efficiency, starting up new production in a new place similar. So Q3 it's sound like we're going to take a big step back, but you're just not going to see I don't think a big difference there. We think however in Q4, we've also gotten through a lot of -- we captured a lot of production variances and we recognize those in the next quarter. So from Q2, we'll recognize some in Q3. So you'll really get a clear picture of some of these facilities and their impact at current levels at least when we get to Q4 and Q1 and that's where I think yes Deverl and I will work hard to give you some more clarity on that.

[Gerry Sweeney:]

That's really helpful. I mean just reviewing some of the cost savings that you sort of targeted before and just understanding it and I get Houston going down and North Lake running up. It's not always linear. There's a little bit of a learning curve. So that's very helpful. So I appreciate it. I’ll jump back in line. Thanks a lot.

[Scott Drake:]

Thanks, Gerry.

[Operator:]

Thank you. There are no other questions in the queue. I'd like to turn the call back to Deverl Maserang for any closing remarks.

[Deverl Maserang:]

Thank you. And as we continue to navigate the COVID-19 environment, we will continue to prioritize the health and safety of our team members and our customers as well as take actions as we've been taking over the last many months to support the long-term sustainability of our business. We're very confident right now as we look forward to the recovery and the vaccinations and seeing people come back to work. We have everyone working remote at this point that can work remote and we are confident in our strategy and believe the actions we have taken that will put Farmer Bros. in a position of strength when the nation or the country emerges from this state of crisis. And we appreciate each of you joining today and thank you for your continued interest in Farmer Bros.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.