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

Thank you. Good afternoon, everyone. Thank you for joining Farmer Brothers’ fourth quarter and fiscal year 2019 earnings conference call. Participating on today's call are Chris Mottern, Interim CEO; and David Robson, Treasurer and CFO. Earlier today, the Company issued its earnings 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 2 hours after the conclusion of this call. A 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. 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 Chris. Chris, please go ahead.

Thank you, Rachel. Good afternoon, everyone, and thanks for joining us. On today's call, my intention is to update you on the Company's progress and addressing the fundamental issues in the business and the steps we've taken in the last 120 days to drive improvement in execution and financial results. In addition to providing a progress report, I will also share a view of what's ahead for the Company. To do this, I'll speak about events in fourth quarter of 2019 as well as the first quarter of fiscal 2020. David will review our financial results for the fourth quarter and full year of fiscal 2019 in detail. Before I discuss the recent work that has been accomplished by the team, as you may have seen, we announced the appointment of the new CEO, Deverl Maserang. This afternoon, in addition to reporting our financial results, we are very pleased that Deverl has agreed to lead the Farmer Brothers team. I'll speak more about his background and why we think he is an ideal fit, later on the call. As I stepped into the interim CEO role in May, it was clear to me that fundamental changes were required to get the Company back on track. In the last 120 days, I completed a thorough review of our business and saw silo thinking and fragmenting decision making across the organization, which at times was leading to resources both human and financial not being allocated appropriately. The good news is that many great employees stepped forward and assisted in a significant fashion to develop five key priorities. These were created with strategic intent. Success and execution of these priorities is forming a strong foundation on which the Company will be able to stabilize, move forward with momentum and be positioned for long-term…

Thanks, Chris. I'll now review our fourth quarter and fiscal year results, beginning with coffee volumes. Green coffee processed and sold in the quarter was flat at 27.4 million pounds compared to the fourth quarter fiscal 2018. The mix of coffee volumes processed and sold during the quarter was approximately 8.9 million pounds or 32.4% of the total volume through DSD network, while direct ship customers represented approximately 18.2 million pounds of green coffee processed and sold, or 66.5% of total volume. 0.3 million pounds or 1.1% of total volume was through distributors. The flat coffee volumes reflect incremental new volume from the ramping of our new large global convenience store retailer who began shipping earlier in fiscal 2019, offset by the impact of two brands that we serviced in the prior year that were brought in-house by the owners of those brands, and reduced coffee volumes with one of our largest customers, as well as declining volume within our DSD network. Turning to the income statement, net sales for the quarter were $142.1 million, a decrease of $7.5 million or 5% from $149.5 million reported in the same period of the prior year. The decline in net sales was driven primarily by lower sales of coffee and allied products sold through our DSD network, offset by slightly positive growth within our direct sales channel, net of the impact of lower coffee prices for our cost plus customers. Net sales for our direct ship channel continued to improve as we ramped volume of the new large global convenience store retailer and trends improved from one of our largest customers. Sales through our DSD network was negatively impacted by higher customer attrition related to the Boyd Business integration, route optimization and lower inventory fill rates associated with downtime at our Houston…

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

Good afternoon, Chris and David. Thanks for taking my call. A lot presented in the -- in your opening remarks here. So, a couple of things that jumped out at me that I wanted to highlight and get a little bit more detail, and one of them was on the direct ship business. It sounds like you're going to shift a little bit of focus to mid-tier and hybrid potential customers because of maybe some pricing in the market. I mean, is this a little bit of concern that you're not well positioned to go after some of these larger direct ship customers, or is the market changing substantially? This is the first. We really heard about this, and just want to get a little bit more detail because it’s an important component.

I think, possibly the answer is both. But, what is happening is the large national accounts -- there is a lot of competition for the business, they usually have three or four suppliers. And we're in a time where our yields are spiraling down in an unfavorable direction. So, that's occurring. And you begin to lose your ability to supply and make a reasonable amount of money. That being said, the other piece that we're realizing is we have lots of opportunity to add value to sort of the mid-tier and hybrid accounts that actually use us for our expertise. And it gives us a chance to impact their business favorably and make a fair margin. So, that's sort of our take on the industry right now. We continue to look at national accounts and we evaluate it when they come up for bid. And we'll make our determinations when that happens.

And does Houston play a part into this? I'm assuming Houston is going away, if this three-year leaseback gives you time to fully transfer production, get SKUs qualified at the other facility. So, is it correct to think that this facility is no longer going to be part of the portfolio at some point in the future?

We haven't made that decision yet. But, I do think, it is our most expensive plant due to its age, and its production cost.

I would say, Gerry, what we are planning -- now the plant is not necessarily connected to our strategy. If you look at the profitability we're making on these mid-tier customers as they’re coming out to bid, it just is a lot more opportunistic for us to seek those out, and we're seeing the opposite happening on the larger accounts we're seeking out of this. So, we're shifting towards more of a hybrid and middle-sized account where the opportunity is very good and it's where we have a good competitive advantage on the things that we offer that they don’t have.

Now, and the second part of that would be, right, so, Houston, I mean, that actually -- it's a decent sized plant and you have Northlake, which is, we’ll say state-of-the-art or at least new and for much more efficient. What's the calculus of not shutting Houston down and just moving that all to Northlake and better positioning your current assets?

We're not commenting on -- much more on Houston than we've said. But, we'll be doing a lot of analysis over the next 30 or so months to determine exactly what to do with our capacities.

Understood. I know you're limited, but I appreciate that. And then, one more question, and I don't want to -- and I'll jump back in queue, and if there is none, get some more in. But attrition DSD client, this has been ongoing. Any of the new initiative showing any signs of rectifying some of this attrition?

This is a long haul. I've been doing this about 130 days, and I think we are much better organized and we have a much improved team, along with better systems and processes to begin to move the needle. And that's what we're seeing. We're seeing a slight turn, but not enough to sit down and say we've turned the corner. This is going to take some time.

A high level question, very qualitative, but I mean at some point, with some of these DSD clients, especially small ones, was the transfer, maybe some of them the drop ship, less visits by -- or drop offs of coffee? I mean, was there just a disconnect in potential customer service or getting to know that driver who was delivering some of it, did that play into it potentially?

I think, one of the things you're saying is the driver -- the person who delivers the product, really important to the customer relationship. And that is true. So, as turnover occurs, it takes a while to train drivers and for them to understand the customer dynamics and what their needs are. So that's part of it. Also, there's a part of it of smaller accounts, actually we're achieving some success with our roastery direct services, which put that into a different form of distribution which some customers, especially small operators like, because they receive the coffee in a different fashion than a delivery. So, some of that’s occurring and we're happy with that. In addition, we have customer profitability from the BI tool by customer. And it allows us to investigate what makes that customer unprofitable and fix it. And sometimes we find they’re buying coffee at -- outside our system and using our service and equipment. In some cases, we recover that account and make it more profitable; in others, we take our equipment back. So, there's lots of moving pieces, but we're achieving the discipline, I think that's necessary to make DSD very successful.

[Operator Instructions] Our next question comes from the line of Kara Anderson with B. Riley FBR. Your line is now open.

So, I just wanted to kind of follow up on the customer attrition issue. Can you speak at all to where you think those customers might be going? Are they going to your competitors, are they going to club stores? Just curious as to where that business is being lost.

Well, I think, the first thing is, and I think, the -- we have a lot of people who've come from other DSD networks and that service the similar customers. And they expect a churn of about 30% a year between going out of business, new business, bankruptcies, just sort of -- just a normal situation that you would find it in businesses. Beyond that, I think, what we have experienced is that we kind of lost our way in terms of customer service as we made some changes in DSD, and that prompted customers to move elsewhere. And that we're in the process of changing. But also, people are moving to we suspect internet businesses and getting their product in a different form. But we think we can interrupt that with our roastery direct, and we are. And we think the BI tool is giving us much more ability to go back and have conversations with customers about the benefit of having quality service and then coffee brewing equipment that is serviced on a regular basis that is provided to them as long as they purchase acceptable minimums of product. So, I think, we're working at having the churn be exceeded by achieving new customers and basically building our business within the customers we have, because a lot of our customers don't buy the full line of product. And customer profitability brings that right to the front and enables us to act on that. So, we have lots of things going on that I think are going to make the attrition the additions.

And Kara, to add that, I mean, we did note at the call that our fill rates were not where we wanted them to be. And so, although it’s an existing customer, and they buy from us, when we're unable to fully deliver their order, of course they're going to buy from someone else, and they should. That's on us and that's why we call that we're addressing that. It’s some of the things we're doing with respect to Houston, so, we can raise our fill rates up higher, as well as some SKU optimization we're going through to make it easier to make our fill rates. So, it's just not customer churn, it's also existing customers that bought less in the quarter.

And kind of on that point, I was going to ask about sort of the fill rates. So, what I'm hearing is it was primarily a DSD things, or were you unable to fill inventory for some of your larger customers?

No, I think, it's principally DSD. That was impacted by that.

Okay. And then, you've also called out an unfavorable mix of customers, I think last quarter, this quarter again. Can you kind of, I guess expand on that and give us a little bit more color?

The first call out is, yes, our DS, our direct ship business grew at a faster rate than our DSD business. So, that will drive an unfavorable mix by itself. And I think that's a principal driver impacting our margins.

And then, I wanted to clarify I guess on the directional outlook for fiscal 2020. I think, you said you're expecting adjusted EBITDA to be down somewhat from 2019. But, it sounds like you are also expecting a flat direct ship and maybe some improvement in DSD in Q3, if I heard correctly, and as well as I think $7 million in sort of cost savings from headcount reductions. I guess, can you reconcile all that for me? This doesn't quite I guess add up to sort of what you would expect or what you're expecting to be a down adjusted EBITDA outlook?

Sure. A couple of things. One, the run rate of our DSD business has been declining. So, in the near-term, we expect that trend to hold. As Chris mentioned, some of our direct ship business, not all of it is facing more competitive pricing. So, that will impact us. And then, last year, we did not fund our incentive plan. And so that will cost us somewhat more. And then, the offset going the other way is we did announce some cost savings, principally at headquarters that will drive savings that you alluded to. So, if you net all those out in total, you get to about very close to where we were last year, slightly down.

I'm showing no further questions. Thank you. At this time, I'd like to turn the call back to Mr. Mottern for closing remarks.

Thank you very much. And we really appreciate all of you on the call. We have a dedicated employee team working to turn this business around. And so, we appreciate you listening. And we believe we have an opportunity to be a market leader. Thank you for joining us today and for your continued support and interest in Farmer Bros.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone, have a great day.