Good afternoon, ladies and gentlemen, and welcome to the Farmer Brothers Fourth Quarter and Fiscal Year 2018 Earnings Conference Call. At this time, all participations are in a listen-only mode. Later, we will 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, Kaitlin Kikalo. Please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining Farmer Brothers fourth quarter and fiscal year 2018 earnings conference call. Participating on today's call are Mike Keown, President and CEO; and David Robson, Treasurer and CFO. Earlier today, the Company issued a press release, which is available on the Investor Relations section of our Farmer Brothers website at www.farmerbrothers.com. The press release is also included as an exhibit to the Company's Form 8-K available on the Company's website and on the Securities and Exchange Commission's website at www.sec.gov. A replay of this audio-only webcast will be available approximately 2 hours after the conclusion of this call. The link to the audio replay will also be available on our website. Before we begin the call, please note that all of the financial information presented is unaudited and that 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 represents 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 that could cause actual results and other events to differ materially from those forward-looking statements is available in the Company's press release and public filings. On today's call, management will also use certain non-GAAP financial measures, including EBITDA, EBITDA margin, 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 press release. I will now turn the call over to Mike. Mike, please go ahead.

Thank you, Kaitlin. Welcome, everyone, and thanks for joining us this afternoon. We had a solid finish to the fiscal year and are pleased to have achieved adjusted EBITDA in line with our guidance. As we look back at fiscal 2018, despite hitting a few speed bumps, I'm very proud of how the organization executed and delivered this year as we continue to take significant strides forward in our efforts to build sustainable, profitable growth and deliver long-term value for our shareholders. The team has done an incredible job integrating the Boyd's business and the start-up in SQF certification of our Northlake facility was a major milestone for us. We directed a substantial degree of effort towards both, the integration and certification throughout the year while also remaining focused on continuing to win and bring onboard new customers in both, our Direct Store Delivery, or DSD, and Direct Ship business. In addition, we continue to make tremendous progress on our sustainability, stewardship, and environmental efforts. Touching briefly on our financial performance, sales in the fourth quarter including sales from the acquired Boyd's business were up 12% year-over-year, and excluding the contribution from Boyd's declined 2% year-over-year. For the fiscal year, sales grew 12% to $606.5 million compared to $541.5 million in fiscal 2017. And excluding the contribution from Boyd's declined 4/10 of a percent year-over-year. We processed over 27 million pounds of green coffee volume in the fourth quarter, an increase of almost 18% compared to Q4 fiscal 2017, and over 107 million pounds for the fiscal year, up 12.5% from fiscal 2017. Adjusted EBITDA of $14 million in Q4 was more than double to $6.8 million reported in the prior year period and adjusted EBITDA margin expanded to 9.3% from 5.1%. Our results in the fourth quarter reflected better…

Thanks, Mike. I'll now go into further detail regarding our results for the fourth quarter and fiscal year. First, as we noted in our press release and as Mike mentioned, during the quarter we adopted a change in accounting principle by converting from the LIFO inventory method to FIFO. Along with this change, we also changed our accounting policies around certain freight and warehousing expenses that we feel are more appropriately classified as a cost to sale. These changes were adopted retrospectively, and all reported prior periods were recast. We believe these changes bring us more aligned with customary practice within our industry and provide better transparency. Now beginning with coffee volumes; green coffee processed and sold in the quarter increased by 4.1 million pounds or 17.6% compared to the fourth quarter of fiscal 2017, with the inclusion of Boyd's volume. Volumes from our base business were down 0.2% from the prior year fourth quarter, driven largely by lower DSD sales. The mix of coffee volumes processed and sold across our distribution network during the quarter was approximately 9 million pounds or 32.7% of the total volume through our DSD network, while direct ship customers represented approximately 18.1 million pounds of green coffee processed and sold, or 66% of the total volume. And sales through distributors, including through new distributor relationships acquired through Boyd's made up the remainder. Turning next to the income statement; net sales for the quarter were $149.5 million, an increase of $50.7 million or 12% compared to the same period of the prior year. This increase was driven primarily by $18.2 million net sales contribution from the acquisition of Boyd's. Excluding Boyd's, net sales declined $2.5 million, primarily due to a decrease in sales from our DSD organization. The impact of lower coffee prices for our…

Thanks, David. As we start our new fiscal year, we remain focused on executing across all areas of our business and unlocking Farmer Brothers full potential. Our long-term view of the industry and the prospects for Farmer Brothers remains positive. Coffee is a growing category and we are well positioned to capitalize on that growth through both organic and inorganic opportunities. Looking ahead, our priorities remain the same, completing the Boyd's integration and achieving the expected synergies, leveraging the investments we have made in our roasting facilities, expanding our distribution network, adding new customers, and increasing business with existing customers. As always, I thank those on the call for your continued interest in Farmer Brothers. And with that, I'd like to open up the call for questions. Operator?

[Operator Instructions] And our first question comes from the line of Gerry Sweeney with ROTH Capital Partners.

Just wanted to talk about some of the growth challenges I guess that we're seeing a lot of information in the call here but obviously, it feels like DSD remains sluggish but then offsetting that we have the direct ship which we have that large customer come in on board but you also had -- it sounds like a couple of brands were being brought in-house. I guess what are the challenges really on the DSD business and what is the opportunity here on the direct ship? It feels like that's getting a little bit more traction but DSD is lagging behind. Just trying to connect some dots if we could.

First, when you think about DSD, we are beginning to see the channel sales pipelines think of that as DSD beginning to come on board. So, if -- without jumping ahead to Q1 we do have a robust catalog of installs coming, machine installs; so we continue to feel like the channel strategy was the right one and while it hasn't come on as quickly as we wanted, it is coming onboard. Shifting to the direct ship business, we do have some large customers, one in particular that's coming onboard but we have seen some erosion in business that was done in some coffee houses, coffee shops and they are internalizing that business, but we didn't lose it to anybody but and without getting into specifics, some larger regional coffee shops and restaurants that have chosen to make their coffee internally.

And to give you [indiscernible] to that Gerry, it's probably 2.5 million to 3 million pound impact for us between now and over next year.

And then switching over to the OpEx line; I'm not sure -- I haven't had a chance to really look at the change that the FIFO change but obviously there was a tickdown in cost and I think some of it was pushed through the cost of goods buying; is there a way that you can sort of bracket out how much of it was -- how much change was pushed -- how much cost was pushed across the goods sold so I can get sort of a levelized run rate?

Sure. And when you get our K we've recasted all five years so you get a lot of color on it but for '18 in particular, we moved around $28 million between -- from selling costs of the cost of sales which works out to about 460 basis points, so it's essentially EBITDA neutral, we just moved it to the top, [indiscernible].

I was going to say, it goes without saying that if you look at the evolution of the transparency of our reporting, we feel like this was an important step; so for those on the call who might remember 6, 7, 8 years ago we had a lot of swings in mark-to-market and then we adopted hedged accounting which began to smooth out and give our investors a better lens on the business, and we think this moved to FIFO, it was another important step to line-up with the industry and give you all the best possible lens on the business.

And then, how much of an opportunity is there in cost savings as the Boyd's coffee transitions over to your Farmer Brothers equipment? I mean, I think there is some absorption of overhead, I think you talked a little bit about inventory; what's that opportunity as we [indiscernible] through the year?

Maybe say your question again, I just missed the first part of it.

As the Boyd's Coffee transitions, as the TSA agreement moves off the books and the Boyd's Coffee becomes a 100% into Farmer Brothers facilities; what -- how much of a savings or opportunity is there -- I think you talked about on the inventory side but I think there would be some absorption of overhead, especially in Northlake etcetera. Anyway, you can…

Yes. I mean, certainly as we talked about on the guidance that we just gave for '19, there is an incremental $2 million to $3 million of savings we're going to see in '19 and by the time we're all done, we'll have incremental savings in '20 that gets the additional EBITDA that the Boyd's revenue contributes of about $13 million to $16 million. So you're going to -- we saw some benefit this year, we'll see more in '19 and then it will be fully integrated and all the benefits will flow through in fiscal '20.

You did mention obviously that win on the direct ship that came through last quarter, you mentioned it could be a Top 3 customer. Could you put a Top 3 customer sort of into how many pounds on an annualized basis? Would that be possible, just…

No, that begins to really – compromise us from a confidentiality standpoint with that. I'm afraid we can't go there, it would probably also not be the wisest thing for us in a competitive industry to put that out for others who maybe listening on the call.

[Operator Instructions] And our next question comes from the line of Kara Anderson with B. Riley FBR.

Just kind of going back to the previous question, are you able to quantify the EBITDA benefit from Boyd's in FY18? And then with '19 looking at $2 million to $3 million, does that really leave the balance of that $13 million to $16 million for fiscal '20?

That's right. In the current year, it was around $3.8 million.

And then, thinking about the softness in the two direct ship customers that -- I mean, you didn't name but on the longevity of that can you remind us of when that softness began, is it worsening or is it kind of stable for those customers at this point. I guess when do we lap sort of that weakness?

We started to see as we talked at the beginning of last year, we started to see some softness with those large customers. So I guess you think it from a lap perspective as you get into end of -- beginning of Q2 we start to lap.

Yes, I would say beginning of Q2.

And our next question comes from the line of Chris Krueger with Lake Street Capital.

Can you please repeat the commentary on Boyd's? Did you state that you expect to be 100% integrated -- was it by the end of the second quarter? I didn't quite catch that.

We're ending our TSA with Boyd's in October. And we will start producing that product a 100% as we get into the beginning of Q3 which would be January. We did build up some inventory purposely with Boyd's while they were in production, so when we transitioned over to us and move some of their equipment in our facilities, we have the lead time to do that. And that's why in fiscal '19 there is really a partial year synergies and then you get the fiscal '20 is where we get the full synergies of 13 to 16 on an annual basis.

So Chris, you might think of it as phases; if you go back, we acquired the business in October of last year, we're able to retain all the large national customers which we felt very good about. And then the next phase was integrating the DSD organization which we actually did and we learned a lot about how to do that. As we move forward, we were over that time bringing in the back house and so forth; and then the last phase is really around bringing in the final elements of production which is around qualifying SKUs to match that, and then ultimately running it in the facility and then decommissioning there. So we're in the home stretch right now and we continue to feel good about it but there is still some significant work to do to just make sure it’s as flawless as possible and compounding that is -- we're in our busy season, so we thought it was prudent to build some inventory to ensure we have terrific customer service and that's why you don't see the synergies flow linearly throughout our FY19. It will happen as we burn through the inventory we build.

My other question is just -- in general, with everything going on with Boyd's and trying to work through your new facility. Are you guys looking at potential acquisitions right now or is it -- are you focused on kind of what's on your plate already?

I think in the immediate term we're focused on what we have; execution is critical, we've got a lot to do to finish up Boyd's, bring on some new business that's right in front of us, and then continue to build out the capabilities here. We've only been in Northlake a couple of years, so we're still building up the team and getting focused aligned, and so forth. That being said, in a very competitive industry we want to continue to understand what's happening and possibly participate, but for right now we're pretty focused on the nearer term than something else.

I would add that we're pretty pleased with how Boyd's has performed and we build up the skillset to do future integrations. But Mike is right, at the moment we're busy focused on other things but that doesn't mean overtime if opportunity doesn't come up, we're going to certainly look at them.

And we do have a follow-up question from the line of Kara Anderson with B. Riley FBR.

With the switch from LIFO to FIFO and the reclassification on certain costs to -- I guess, cost of sales. How should we think about the gross margin going forward?

As I said earlier, in the current year it was around 460 basis points. So it's going to be lower by 450 to 460 to 500 basis points but then our operating costs will be lower by the same amount.

Thank you. And I'm showing no further questions at this time. So this does conclude today's Q&A session. And I would like to turn the call back over to Mr. Mike Keown for any closing remarks.

As always, we really appreciate your interest in Farmer Brothers, and we look forward to the next report. Thank you very much.

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