Welcome to the Farmer Brothers Company Q3 Fiscal 2020 Earnings Conference Call. My name is Annette, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] I will now turn the call over to [Jennifer Malan] [ph] in the line.

Thank you and good afternoon, everyone. Thank you for joining Farmer Brothers' third quarter fiscal 2021 earnings conference call. Joining me today is Deverl Maserang, President and Chief Executive Officer; and Scott Drake, Chief Financial Officer. 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 and is available on the company's website and on the Security 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 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 on 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 Deverl. Deverl, please go ahead.

Thank you, Jennifer, and good afternoon, everyone. Thanks for joining us today. Our third quarter was highlighted by continued execution of our business optimization, including the doubling of capacity at our Dallas-Fort Worth, Texas facility, the formal shutdown of our Houston, Texas facility and the opening and full ramp-up of our new West Coast distribution facility in Rialto, California. Quite the seasonality impact we've historically had in our fiscal third quarter. We've experienced encouraging trends in our DSD business in recent weeks, with sales beginning to stabilize down into the mid to high 20s on average compared to pre-COVID levels, in fact, the week of March 29 was the best week we've had since the onset of COVID, with sales down only 25% compared to pre-COVID levels. Further, the month of March was the best month we've had in terms of sales performance since the pandemic took effect, which drove the strongest gross and operating profit we've had this fiscal year. Despite the anticipated choppy rebound from the pandemic across both markets and customer sets, we're pleased to see the business responding well now that we're consistently under the down 30% mark. It's a good sign as our country continues to recover. Geographically speaking, we're still feeling the impacts in some of our Eastern markets, but we see encouraging data in our Southern and Mid-Western regions. And despite lagging re-openings in California and recent outbreaks in Oregon, our most concentrated Western markets have positively contributed to our recovery. And according to the Governor of California and the Mayor of New York City, we can expect to see re-openings in those key areas as early as June 1. Overall, the fact that our DSD sales are down only around 25% compared to pre-COVID levels is reassuring. With respect to our end…

Thanks, Deverl. During the 3 months ended March 31, 2021, we continue to make progress against pandemic headwinds. While we reported declines in our DSD and direct ship sales channels compared to the prior year period, the results show encouraging sequential sales improvements in our DSD business compared to pre-COVID levels. Most recently in April, average weekly DSD sales were down 27% compared to pre-COVID levels, which are the most robust sustained DSD sales levels we've seen since the start of the pandemic. For the third quarter, average weekly DSD sales were down 36% compared to pre-COVID levels. As expected, the most significant DSD revenue declines in terms of dollar impact were from restaurants, hotels and casino channels, which have been slower to recover. Overall, the trends have been heading in the right direction over the past 12 months, even with the seasonality we historically felt during this period. We are now seeing significant improvements over the trough in April 2020, when DSD sales were down by approximately 65% to 70%. Our direct ship sales declined 23% in the quarter compared to the prior year period due to lower coffee volume related to COVID-19 and the impact of coffee prices for our cost plus customers. This was partially offset by improved volume from our retail business, key grocery stores under their private labels and third-party e-commerce platforms. We also experienced a bit of a sales shift into the month of April with limited customers. Our net sales in the third quarter of fiscal 2021 were $93.2 million, representing a decline of $36 million or 28% from the prior year period. As a result of the continuation of reduced volumes from our DSD business, our gross margin decreased to 25.6% from 29.4% year-over-year. However, the fiscal third quarter gross margin continue…

Thanks, Scott. And thanks to all of you who tuned in for our call today. We're pleased with the recent trends in our business and excited to see greater benefits from all we've accomplished as the country continues to rebound in the coming months. With government representatives announcing plans to fully reopen soon in certain markets, we look forward to updating you shortly on the substantial and fundamental efficiencies that will become increasingly evident as our volumes continue to recover and our efficiency scale. We also look forward to reflecting on all the hard work our team has put into affecting our turnaround plan and demonstrating the underlying strength of our business. Thank you again, and I now will turn the call back over to the operator to field any questions. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Okay. And our first question is from Kara Anderson with B. Riley Securities. Go ahead.

Hi, guys.

Hello, Kara.

Hello, Kara.

Thanks for taking my question. I guess, just to start off, is it possible to quantify the revenue impact from severe weather or differences in selling days or seasonality versus the fourth quarter that it had on the - sorry, not fourth quarter, your second quarter and had on your third quarter?

Yeah, sure, actually. It's quantified as the - the numbers that we put as the unusual item in there. But really, it was more of the Dallas area, since our plants are based here. It was about a week-long disruption of one kind or another. And then we had obviously a little period of recovery after that. But I think it was more a timing issue than it was really direct impact to revenues. It just caused us to have to move things around, doing a little bit of catch-up, but it did impact us a little more on the cost side.

Got it. I guess, I missed that in the release. On the DSD business down 26% I think from pre-pandemic levels in the quarter as a whole, can you, or did you discuss how March is kind of comparing to April, given that you've seen in markets kind of like you're best in the quarter.

Yeah, actually we put the numbers in there. The best way to think of it really, we don't talk a lot about the months. But if you were to break the Q3 month apart, really January and February, they look exactly like November, December timeframe did. The impact of COVID was really the same as once we had the resurgence in kind of early to mid-November, all the way through February. It was March where we really had the recovery, and had much better performance within the business and it has continued in April. So we talk about how in April, we're running it down 27% to pre-COVID and it wasn't quite that good in March obviously. It was still in the 30%s or so, but much better than the trend before, because it's clearly - the low 40%s the other months before that.

Understood. And then on the direct ship business, there was a pretty big sequential change in the green pounds sold more than what I would expect for seasonality, can you talk about that?

Yeah, yeah, absolutely. That was another one that we probably should have maybe called out a little more plainly, because in our discussions internally, we realized that was something maybe we didn't address fully. But you're right, there is some seasonality impact in there. But on top of that, we're also starting to cycle the exit of some of those customers we've talked about. As Deverl came on, looked at the business and then he and Chris spent time together looking at the business. This is that timeframe, where some of those customers were in last year's results a direct ship or national account customers, and they weren't in this year's results. But in the script, we also talked a little bit about how we had a little bit of a shift of some of those sales, just strict timing between March and April. So again, that it kind of got overstated in this third quarter here a little bit, because of that timing, a little bit of which was due to the weather that we just spoke off. And then I think cost plus customers was another one where year-over-year, there was a little bit of a price deflation on some of those as well.

Just got to understand the customers that are stifling out, like were those customers also in the second quarter then and may just like rolling off with the large programs or…?

Yes, yes, some of them were. And there were a couple that were decent size, there were in the second quarter, yes. Yes, so we're looking to kind of hitting that anniversary of when the [acquisitive] [ph] business, just out of your guard, just under here.

Got it. And then, I know you're not giving guidance. But is there - is threshold for when we think you get back to the 30% sort of gross margin range that we can think about from a revenue perspective?

Yeah, it really depends on the pace of the recovery. We're obviously hopeful that we'll get there sooner than later, and we're very confident we'll get there. It's really a matter of a couple of key events that are coming up soon will give us some good information. And one of those is obviously the opening that's kind of planned for California, the start of June. And then out east, I think they're starting to look at dates around the start of July. And kind of Deverl noted in his script, the other parts of the country are really outperforming. It's the East and the West that still they're better than they were, certainly performing better. But they're still lagging behind the other parts of the country. So we're looking to those 2 key dates. Obviously, unfortunately, we won't get a lot of great information by the end of Q4, but we'll start to see some of that in June and then obviously, once we get - that's kind of what we speak to the next few quarters we think there'll be this kind of downhill run with both sales and margin.

Got it. And then, just last, a housekeeping question, the breakout for coffee revenue in the quarter.

Yeah, so roasted coffee as a percent of total sales was 65.2% for the quarter.

Great. That's it for me. Thank you.

You bet, thanks, Kara.

Thank you, Kara.

Okay. And we have a question from Sam Namiri of Ridgewood Investments.

Hello, I just wanted to follow-up on the last part of the question that Kara asked was, can you break out the places that has been fully open? What sales in the DSD business have been comparatively to pre-COVID?

Sam, I appreciate the question, but we haven't historically broken it out by region or branch publicly and don't plan to provide that level of information other than what we do at the level that we've been providing.

Okay. Okay.

We just haven't historically done it.

And then, yeah, just competitive reasons, since we're the only public company talking.

Got it, okay. But you mentioned like it outperformed. Maybe can you give a little more color on what you mean by outperformed?

Yeah, just the recovery rates are stronger in - I'd say the South, the Midwest, those kind of core areas of the country. If you look at - the total decline they had during COVID, not only are they performing better as a percentage of that, but the percentage of recovery. They're just further back to where they were originally then the East and the West areas. And, obviously, it's primarily due to just the reopening trajectory of the states and areas and geographies that have opened either, more fully or fully as compared to the far East and West cost or specifically New York and California.

Right, okay. Okay. Thanks. That's good for me. I appreciate it.

Thanks, Sam.

Okay. And with that, we are concluding today's conference. We thank you, ladies and gentlemen, for participating. You may now disconnect.