Good afternoon, ladies and gentlemen, and welcome to the Farmer Brothers Second Quarter 2019 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. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Rachel Gomez. Please go ahead.

Thank you. Good afternoon everyone. Thank you for joining Farmer Brothers second quarter 2019 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 Farmer Brothers website at www.farmerbros.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 two hours after the conclusion of this call. The link to the audio replay will also be available on the Company's 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 represent 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 adjusted EBITDA and adjusted EBITDA margin in assessing the Company's operating performance. A 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, Rachel. Welcome everyone and thanks for joining us this afternoon. As we pass the halfway mark in fiscal 2019, we are continuing to make important progress in executing our strategy and implementing initiatives to strengthen our platform for long-term growth. We passed the one-year anniversary of the closing of the Boyd's acquisition in October and we have completed integrating this business into Farmer Brothers. Our results in the second quarter reflect the realization of these synergies just as we had anticipated and we expect those to continue to increase in the back half of the year as these synergies are fully realized. We are adding new customers to our pipeline in both direct ship and DSD, and we are continuing to make progress in further enhancing our DSD organization through our route and branch optimization. Year-over-year volume and sales in the second quarter were down as expected. However, we are pleased to have improved adjusted EBITDA by 18% to $12.4 million and remain on track to achieve our targeted range for the fiscal year of $49 million to $52 million. I'd like to turn now to review a few key initiatives we focused on in the second quarter. First, as I noted, we have completed our Boyd's integration work and remain on track to fully realize the targeted synergies and benefits from this transaction in the second half of the fiscal year. I remain incredibly proud of how our team has successfully executed our plan to bring Boyd's direct ship and DSD customers into our business, transfer coffee production to our plants and transition other production-related functions. As I mentioned on last quarter's call, 100% of Boyd's branches have been integrated into our DSD network and we now produce 100% of Boyd's SKUs in our Farmer Brothers facilities.…

Thanks, Mike. I'll now go into further detail regarding our results for the second quarter. Beginning with coffee volumes, green coffee processed and sold in the quarter decreased by 1.7 million pounds or 5.8% to 27.4 million pounds compared to the second quarter of fiscal 2018. The decline was driven largely by lower volume from two of our top customers, as well as the impact of two brands that we serviced in the prior year that were brought in-house by the owner of those brands. In addition to softness in our DSD channel, the mix of coffee volumes processed and sold during the quarter was approximately 9.9 million pounds or 36% of the total volume through our DSD network. Direct ship customers represented approximately 17 million pounds of green coffee processed and sold or 62.2% of the total volume and 0.5 million pounds or 1.8% of the total volume was through distributors. Turning next to the income statement, net sales for the quarter were $159.8 million, a decrease of $7.6 million or 4.5% from $167.4 million reported in the same period of the prior year. The decline was driven by lower volume in our direct ship business that I mentioned a moment ago, the impact of lower coffee prices for our cost plus customers, a reduction in industrial soup base revenues associated with the Boyd's acquisition, which we stopped selling in the first quarter of the current fiscal year, and a decline in revenue sold through our DSD network. Gross profit in the second quarter of fiscal 2019 decreased by $3 million or 5.4% to $53.2 million from $56.3 million and gross margin decreased 30 basis points to 33.3% from 33.6% in the prior year period. The decrease in gross margin rate was primarily due to higher freight expense of…

Thanks, David. The first half of our fiscal year has unfolded largely as we had anticipated. We anticipate delivering stronger results in the second half of the year as we more fully realize synergies from Boyd's and generate cost savings from our route and branch optimization in our DSD business. We believe that Farmer Brothers' sustainable sourcing, manufacturing and distribution practices help make us a more attractive partner and our competitive advantage for us. Looking to the remainder of fiscal 2019 and beyond, we continue to see both organic and inorganic growth opportunities and remain focused on adding new customers as well as increasing our business with already existing customers. Our long-term view of the industry and prospects for Farmer Brothers remains very optimistic as we are confident that we have found the right foundation to deliver growth and value for our shareholders. We remain excited about unlocking Farmer Brothers full potential and our future growth opportunities. As always, I thank those on the call for your continued interest in Farmer Brothers. And with that, I'd like to open the call up for questions. Operator?

Thank you. [Operator Instructions] Our first question comes from Gerry Sweeney of ROTH Capital. Your line is now open.

Good morning, Mike and David, thanks for taking my call. Good afternoon - sorry.

Good afternoon.

So my question for you on the - you ran down some list of customer wins and on boarding. Did you say there were two top three potential customers, one was - the one that was on-boarded in January and then I think you said a very significant customer that you're still working on on-boarding that thought to be a top three accounts. Is that...

That's right. The large convenience store retailer, we have up and running. The other customer that we've discussed is incredibly methodical in their process and we're moving through that process and we are in the final on-boarding and qualification stage.

And any sort of timeline on how much longer that on-boarding and qualification stage would take. And then correct me if I'm wrong there, the current supplier has they - will they run down their inventory of their current supplier before you start to deliver pounds to them. Is that correct as well?

That's right, that's right. So the way the process generally works is once we've gone through that, we would work in partnership with the other supplier to take on the volume as their volume runs down and we've had good experience with that in the past. In terms of timing, it's difficult to tell. The customer has expectations and those can move over time as you've heard us talk about wins in the past and our job is to just stay on it, keep moving through at the appropriate pace and then take on the new customer.

Got it. And as this sort of elongated process, has this impacted your original fall for the second half of '19 in terms...

Yeah. You heard in David's comment the softer volume in the third quarter and while we see trends improving in the fourth, a lot of that is regarding just the overall speed of how these customers come on board. And so, you know, there is always a bit of judgment and we thought it was appropriate at this point to say there is more risk than upside, but a lot of that again just depends on execution and the partnership we have with these customers.

Got it. Now that makes sense. And then the other part I wanted to talk about on the sales side is, when you got the food qualification, I think last February or March, yeah SQF certification, you had - there are a bunch of potential accounts always looking at the Northlake. What does that sales funnel look like, are there - is it still driving a lot of attention. Do you still have a lot of people coming through just maybe from a qualitative standpoint, you know, how much activity is being driven through Northlake on a potential...

As I've said before, we think the Northlake facility is a terrific facility and it makes us a good partner, that's been instrumental in some of the wins that we have had, be it the larger ones we tend to focus on, but also our channel wins. Also of note, I mentioned a larger international beverage customer that we're working on for a new line of products and certainly this facility and the capabilities of the people who work here were instrumental in getting us to this point and then we'll see how things go. So I'd say it's still a good pipeline, as I've mentioned in the last couple of calls and we are knocking down wins though never as fast as we'd like.

Got it. And then just one final question, then I'll jump back in queue. The softness from the - I think your two larger customers that we've experienced, that should - that anniversaries at the end of the second quarter. So that headwind should subside at least unless accelerated. Is that fair to assume?

Well, this is David. One of them will start to anniversary, the other will not anniversary until we get into the beginning of next year [indiscernible] see some of that benefit, but it won't fully anniversary until next year.

Until next year. Okay, got it. Okay, perfect. I appreciate. I'll jump back in line.

Thank you.

[Operator Instructions] Thank you. Our next question comes from Marc Wiesenberger of B. Riley FBR, your line is now open.

Thank you. Can you quantify what the typical quarterly revenues were for the industrial soup business?

I don't think we've given that out, but it was - if you look at the Boyd's volume decline, it was essentially year-over-year decline with last year.

Okay. And then with regards to some of the street team enhancements, could you provide a little more granularity and color around that and how you expect that to kind of impact to sales?

Sure. So, overall we're very pleased with the street team talent that we brought on the organization and we're beginning to see that pay off. They've largely been in the market now, call it, six months, maybe a little bit longer. It's difficult to give it a number though as it's moving. But I think we've seen at this point is they are certainly bringing on new business and as we have gone through the branch and route consolidation, they've been a very important stabilizing influence because we've got a fair amount of turmoil that we've successfully navigated to and now I think we'll begin to see the impact of their efforts.

Great, thank you. With regards to the headcount reductions in the DSD, was that more of a proactive or reactive kind of action based on some of the other things you've talked about in the previous quarters?

Sure. Definitely proactive. So this was a multi-staged effort to bring more efficiency into our DSD operation and allow for resources to be brought on for the street team. So as I think I've mentioned either on the call or at some investor conferences, we've better leveraged technology to improve the efficiency of our operation. We have definitely looked at how the Boyd's network allows for efficiency and effectiveness and other tools to try to drive this and headcount was a portion of it though as we've mentioned, some of that money has gone back to acquire resources and a whole host of areas to help us become more effective in the future.

Yeah, I don't think we're going to really ever be done with route optimization and how we deliver more efficiently through the network. We embarked on it this last quarter and it's going to continue throughout the year as more technology comes into play to make more - the network more efficient.

Understood. And final one from me, you mentioned some higher production costs, were these onetime issues or is that something that you kind of foresee over the next few quarters?

No, it's never something we foresee. Our volume was a little bit softer than we planned. As Mike indicated, it's taken a little bit longer to bring on a large customer as well as we were in the throes of the Boyd's integration which add some complexities. So I wouldn't call it one time. But we don't plan for that.

To give you a sense, we successfully brought in approximately 200 SKUs into our system over a relatively short period of time and that can lead to some inefficiencies. But what we are very proud of is how that team was able to work with many, many new customers and get the products successfully qualified and now we're ramped up.

We, by the way, completed decommissioning of the Boyd's plant in December. So, the good news is we're pretty much behind the integration efforts of further plant production as of 12/31 and now we are fully producing the product here.

Great, thank you very much.

Thank you.

[Operator Instructions] Thank you. Our next question comes from Chris Krueger of Lake Street Capital. Your line is now open.

Good afternoon.

Hi, Chris.

Hi, just a couple of questions. First, I want to make sure I have a handle on back half sales trends and you gave some detail there. If we looked at the third quarter, just looking at the dollar amount,, would you think the year-over-year decline would be very similar to the second quarter and how has it been so far in the first half to second - of the third quarter?

No, we can't give you a current view where we are at, we don't do that, but I think you're right, the trends we saw last quarter would be roughly what we're going to see in this current quarter. And then as Mike said, it's going to improve in the fourth quarter.

Got it. And then two callers ago asked about the two brands have brought their production in-house and I didn't quite catch the answer yet, you kind of faded as far as anniversary date of those customers leaving. Can you state that again, please?

Yeah, that was in the beginning of our fiscal year. So, we'll anniversary that when we start next year.

And the other one was the - a year ago right now?

Well, they were related to the same owner of those brands, so they both have...

Got it. All right. That's all I got. Thanks.

[Operator Instructions] Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Mike Keown for any closing remarks.

Well, once again, we appreciate everybody's interest in Farmer Brothers and look forward in updating you on our continued progress in the future. Thank you very much.

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