Farmer Brothers Co. demonstrated a promising start to fiscal 2024, as revealed in its first-quarter earnings conference call. The company has shifted its focus back to its core competency of direct store delivery (DSD), leading to an increase in revenue, expanded margins, and its adjusted EBITDA nearing breakeven. Despite some costs associated with the transition from the direct ship business and sluggish coffee volumes, the company's management expressed confidence in the positive trend.
Key takeaways from the call include:
- Farmer Brothers is focusing on what it does best, direct store delivery, after selling off its direct ship business. This shift is part of a larger strategy to streamline the business and reduce costs.
- The company's first-quarter results showed a year-over-year increase in revenue, expanded margins, and adjusted EBITDA nearing breakeven.
- Despite some costs associated with the transition from the direct ship business and sluggish coffee volumes, the company's management expressed confidence in the overall positive trend.
- The company is also benefiting from lower coffee costs, which are expected to continue throughout the fiscal year. The cost per pound of coffee during the quarter was down 12% year-over-year and 1.6% from the prior quarter.
- Farmer Brothers is centralizing its roasting and production activities in Portland, Oregon, to reduce conversion costs. It is also working to reduce brand and SKU redundancies to simplify its customer-facing lineup and streamline production and sales operations.
- The company's AI-driven pricing engine is helping to optimize its pricing strategy, with changes implemented in May and October already helping to drive gross margin improvement.
- New product additions, including SHOTT natural-flavored syrups and Boyd's ambient liquid coffee, are performing well in their early stages.
Financially, the company reported net sales for the first quarter of $81.9 million, a slight increase from $79.8 million in the first quarter of fiscal 2023. The gross profit margin increased to 37.6% from 33.8% in the same period of the previous year. Operating expenses were $32.9 million, up from $27.8 million in the prior-year period, mainly due to a $3.6 million increase in G&A expenses related to severance costs for executive management transitions.
The company ended the first quarter with $4 million of unrestricted cash and cash equivalents, and had outstanding borrowings under its credit facility of $23.3 million. Looking ahead, the management stated that the company is adequately capitalized to execute on its DSD plans. Farmer Brothers anticipates generating positive free cash flow in early fiscal 2025 and delivering long-term value to shareholders.
InvestingPro Insights
InvestingPro's real-time data and tips provide a deeper understanding of Farmer Brothers' financial situation. The company operates with a substantial debt burden, as indicated by InvestingPro Tip 0, which may pose challenges in making interest payments (InvestingPro Tip 1). The company's revenue growth has also been slowing down recently (InvestingPro Tip 3), which could impact its financial stability. However, in terms of liquidity, the company's liquid assets exceed its short-term obligations (InvestingPro Tip 11), suggesting some financial resilience.
InvestingPro's data also reveals some interesting trends. Despite a tough year, the company's stock price showed a strong return over the last month (14.64% according to InvestingPro Data), indicating some investor confidence. The company's market cap stands at 55.78M USD, and its revenue for the last twelve months as of Q4 2023 was 339.96M USD, showing a growth of 8.0%.
These insights, among many other valuable tips and data points, are part of InvestingPro's comprehensive analysis. For those interested in a deeper dive, InvestingPro offers additional tips and data on various aspects of the company's performance.
Full transcript - FARM Q1 2024:
Operator: Good afternoon, and welcome to the Farmer Brothers fisca first-quarter 2024 earnings conference call. [Operator Instructions]. 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 farmerbros.com. The shareholder letter 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. This 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 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 included, including adjusted EBITDA and adjusted EBITDA margin in assessing the company's operating performance. Reconciliation of those non-GAAP financial measures to their most directly comparable GAAP measures is also included in the company's shareholder letter. And I will now turn the call over to Farmer Brothers' Interim Chief Executive Officer, John Moore. Mr. Moore, please go ahead.
John Moore: Good afternoon, everyone, and thank you for joining us today. Immediately after I joined Farmer Brothers in June, we executed on the sale of our direct ship business and refocused our model on what we have always done best, direct store delivery. Since then, we've been strengthening our foundation by appropriately sizing the business, instilling a more efficient operational organization, reducing our cost structure and formalizing an attractive but achievable strategic, long-term, sustainable growth plan. Simply put, Farmer Brothers is getting back to basics and executing on the fundamentals which have made us industry leader for so many years. Our first-quarter results are a promising preliminary look at these efforts. Overall, our revenue increased year over year, our margins expanded, and our adjusted EBITDA is approaching breakeven. Costs associated with the direct ship business transition, along with sluggish coffee volumes offset some of the gross margin improvement we realized during the quarter. But big picture, we are beginning to trend in the right direction. Progress likely won't be linear across all the metrics we track and we anticipate transitional impacts will abate as we move throughout the year. We are confident that we will continue to see improvement in our revenue, gross margins, and operating costs, especially as we focus on driving customer growth, customer retention, and increasing product penetration in the market. This is all happening at an opportune time as coffee costs trended lower in the quarter and are expected to continue to do so throughout the fiscal year. We're still selling through our higher priced coffee inventory and bringing in new supply at a meaningfully lower cost. In fact, our cost per pound of coffee during the quarter was down 12% on a year-over-year basis and 1.6% from the prior quarter. Meanwhile, we are making progress on centralizing our roasting and production activities to our Portland, Oregon facility. Once completed, we believe this facility will operate with a significantly reduced conversion cost. In addition, we're working to evaluate and reduce brand and SKU redundancies across our coffee lines to simplify our customer-facing lineup and further streamline production and sales operations. We believe these efforts will continue to drive down our cost of goods sold over the coming quarters. In addition, our AI-driven pricing engine is helping us optimize our pricing strategy. This system is informing necessary and timely changes in prices such as those we implemented in May and October, which are already helping to drive gross margin improvement. We are also making headway with several of our growth initiatives. Our new on-trend product additions, including our SHOTT natural-flavored syrups and Boyd's ambient liquid coffee are performing well in their early stages. Our Revive equipment and service business also continues to be a differentiator for our DSD business. With that, I'll turn it over to Brad to discuss our financials in more detail. Brad?
Brad Bollner: Thanks, John, and hello, everyone. Before jumping into the numbers, just a quick reminder, results for fiscal '24 first quarter are reported on a continuing operations basis, reflecting the performance of our DSD business only in the respective periods. From a headline perspective, we're encouraged by the results driven from a transition to DSD-focused business with three of our primary financial metrics, net sales, gross margin, and adjusted EBITDA. Our net sales for the first quarter were $81.9 million, which increased slightly on a year-over-year basis compared to $79.8 million in the first quarter of fiscal '23, driven by higher pricing and offset by lower volumes. Our gross profit margin increased to 37.6% for the first quarter of fiscal '24 from 33.8% for the first quarter of fiscal '23. The increase in gross profit represents a 380 basis point increase compared to the prior-year period. Improvement in margin resulted from pricing actions as well as a decrease in our underlying product costs. Operating expenses were $32.9 million for the first quarter of fiscal '24, up from $27.8 million in the prior-year period. This increase was due primarily to a $3.6 million increase in G&A expenses, which were related to severance costs for executive management transitions, a decrease in net gains from the sale of branch properties and other assets and an increase in selling expenses, which was driven by additional spend on vehicles, fleet, and freight. Adjusted EBITDA approached breakeven for the first quarter at a loss of $452,000 compared to a loss of $3.9 million in the same period a year ago. Turning to the balance sheet. The end of the first quarter, we had $4 million of unrestricted cash and cash equivalents. We had outstanding borrowings under our credit facility of $23.3 million, utilized $4.6 million of the letters of credit sublimit and had $25.4 million of availability. Looking ahead, we're adequately capitalized to execute on our DSD plans. You can expect us to be laser focused on improving efficiency of operations, continuing to reduce our costs, and streamlining how we go to market in terms of brands and product SKUs, all of which, along with anticipated favorable coffee pricing trends, position us well to deliver high gross margins and improved results. With that, I'll turn it back to John. John?
John Moore: Thanks, Brad. In closing, we're off to a good start in setting the foundation and positioning the company for long-term growth. With a local branch network covering 49 states and equipment servicing capabilities across the country, we remain an industry leader in size, service, and product offerings. We are already seeing early-stage improvement in our gross and operating margin profile. And we'll continue to focus on the following: leveraging our nationwide DSD customer network, appropriately sizing our cost structure, continuing to optimize pricing, driving customer growth and retention, increasing market penetration for on-trend products and completing the transitional services associated with our direct ship sale. We believe we're in a position to be able to generate positive free cash flow in early fiscal 2025 and ultimately deliver long-term value to shareholders. Thank you again to everyone for joining this call and for your continued support of Farmer Brothers. We look forward to speaking with you more soon.
Operator: And this concludes this conference. Thank you very much for attending today's presentation. You may now disconnect.
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