FARMER BROTHERS CO Q3 FY2024 earnings call

• Continued positive momentum with year-over-year gains in key metrics. • Progress in DSD transformation, including new corporate HQ lease in Fort Worth and consolidation at Portland, Oregon facility. • Brand pyramid and SKU rationalization initiative with progress made, expecting completion by end of Q1 2025. • Technology upgrades for field operations, including handheld device upgrades. • Focus on customer growth, retention, cost structure improvement, incremental margin, market penetration for new products, and completing direct ship sale transitional services.

Net sales for the third quarter of fiscal 2024 were relatively flat at $85.4 million, compared to $85.7 million in the prior year period. Gross margins increased 660 basis points, moving from 33.5% to 40.1%, with gross profit increasing $5.5 million to $34.2 million year-over-year. Operating expenses decreased slightly to $34.7 million from $35.6 million in the prior year period. Adjusted EBITDA for the third quarter was $271,000, positive for the second consecutive quarter.

• Anticipates $12 million to $15 million in total capital expense in fiscal 2024. • Expect to be free cash flow positive in early fiscal 2025.

Q: Good afternoon, guys. Thanks for taking my call. I wanted to start on customer retention. It sounded like two different things that was pulling out from the quarter. One, revenues were down and it sounded as though revenue was down, because some customers had left. But secondarily, in your script, you talked about customer retention stabilizing. Are we sort of - was that an inflection point during the quarter that, retention has sort of flipped from a negative to a positive?

A: Yes. In terms of customer retention, the decrease in customers we were facing last year is much better, cadence has improved, stabilized and come to neutral. As we refine marketing and focus on field execution, it's bearing fruit. Customer accounts are approaching neutral or turning positive.

Q: And then secondarily, on the operational side, we hear reduced SKUs, scheduled planning, roasting, consolidating everything in Portland. What inning would you say you're in on that process, and how much opportunity remains?

A: We're in the early to mid-innings. Initiating changes in planning and production takes weeks to reflect at field level. There's exponential improvement in fulfillment rates, made substantive changes in infrastructure, and we're beginning to see impact.

Q: My first question is kind of, diving a bit more deeply into that SKU rationalization and the progress there. So, I understand that you're expecting to have, all the legacy SKUs sort of fully out by the end of Q1 of fiscal '25. Have you finalized which SKUs and brands will be included in the new tiered offerings? Have you sort of fully built out what those tiers will look like?

A: We have the first two tiers defined. Traditional tier is Farmer Brothers brand, premium tier is Boyd's brand. Still working on specialty brand expression, but three defined tiers with value propositions mostly defined.

Q: And understand that we're at sort of more than half of your inventory now is these new SKUs. You mentioned the obvious sort of delay of getting these SKUs in the inventory and then out into the market. I'm just wondering if any of these newer tiers have gone out into the market, and if there's been any sort of early feedback from customers, or any sort of early insights to ascertain from that?

A: Early indications show new products positioned well in market. Resistance not significant. Manufacturing and planning efficiencies realized. Procurement, manufacturing, production efficiencies gained.

Q: Do you anticipate any meaningful gross margin difference among the tiers?

A: No, we have existing business associated with these tiers, collapsing multiple brands into singular brands, so we can maintain consistency in gross margin across tiers. Also, simplification allows more strategic pricing.

Q: On the technology upgrades, nice to see these handheld device upgrades and the expected improvement there, in inventory management and customer service. Can you give us a high level update on what other technology upgrades you're focusing on?

A: We're implementing Project Symphony, touching every piece from risk mitigation, sourcing, CRM (Phase 2 rollout), street level operations, and significant ERP upgrades over the last six months.