Thank you for standing by and welcome to the Farmer Brothers Fiscal Second Quarter 2022, Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your host, Jennifer Milan.

Thank you. And good afternoon, everyone. Thank you for joining Farmer Brothers Fiscal Second Quarter 2022 earnings conference call. Joining me today are 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 Best site at www.farmerbrothers.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 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 the 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 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 that 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, and assess taking 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, Jen. Good afternoon, everyone. Thanks for joining us today. Our second fiscal quarter was highlighted by another period of meaningful sequential improvement amid the continued recovery of the business, with both gross margin and DSD sales volumes improving sequentially for the sixth consecutive quarter. Of course, I should also note that the accelerated impact of the Omicron variant experienced in the last two weeks of the calendar year and entering the new year have presented some fresh challenges, which I'll address shortly. Overall, however, we're excited that our strategies and execution have significantly and positively impacted the business over the past several quarters. We know that when the impact of COVID abates, we will be able to forecast the business better and provide long-term guidance going forward. In terms of the topline for the second fiscal quarter, net sales were up about $10 million sequentially and grew nearly $14 million from the prior year period, representing a 13% increase year-over-year. Improvements in our DSD volumes were the primary driver as we processed and sold more green coffee during the period in that channel. We continue to produce improved gross margin, which is our key metric and evidence that our strategies are working. Our current quarterly gross margin is the strongest we've posted since fiscal Q2 of 2019, nearly three years ago before the onset of COVID, and what was the beginning of the turnaround. As Scott will discuss in more detail, gross margin expanded by 50 basis points sequentially to 29.5% during the second fiscal quarter, and by 440 basis points compared to the prior year period. Demonstrating the structural operating leverage and the incremental improvements we've implemented in the business. The improvement in gross margin also led to stronger adjusted EBITDA performance, excluding the one-time amortization benefit…

Thanks, Deverl. Our Fiscal second quarter marked another period of meaningful progress and improvements, highlighted by significantly higher gross margins driven by product margins expansion in both our DSD and direct ship channels. While past recovery trends have been on track to continue earlier in the year and during the first fiscal quarter, the uptick of the recent omicron variant presented challenges across many channels due to labor, traffic, and local policy changes that constricted some of our customers’ ability to operate as they had been. However, due to the significant recovery in our DSD channel throughout fiscal 2021 and in the past two quarters, our average weekly DSD sales compared to pre-COVID levels, improved from down 40% a year ago to down 17% during our Fiscal Second Quarter. This also represents a sequential improvement from down 25% in the first fiscal quarter. All-in, we are pleased with the ongoing recovery of the DSD channel, especially given the strong weeks we experienced in this business from November to early December that Deverl noted earlier. During the second fiscal quarter, we implemented another price increase, including delivery surcharges across our DSD network to mitigate the impact of higher supply chain and product costs. However, these changes will be more fully realized in January and thereafter. We will remain proactive regarding any future needs to protect margin or reduce any delivery or fuel surcharges for our customers if conditions improve in those areas. Turning to the direct ship channel, we ended the quarter with direct ship sales down 6.8% and pounds down 15.6% compared to the prior year period. However, these declines were predominantly due to the exit of less profitable direct ship accounts in fiscal 2021 that we've discussed on prior calls, partially offset by the continued recovery of several larger…

Thank you. [Operator Instructions] Please stand by while we compile the Q&A roster. Our first question comes from the line of Gerry Sweeney of Roth Capital. Your line is open.

Good afternoon. Deverl and Scott, thanks for taking my call.

You bet Gerry.

Wanted to start on the sales side. Obviously, there's a lot going on there. You have COVID rebounding to a degree. But you've also reduced some activity with certain customers, both on type of things on the direct ship side and maybe even on the DSP side by tiering of customers. But what about new customer additions? Are you seeing either some growth with new -- straight out new customers, as well as maybe expanding your average order size within the DSD, and how is that coming along and being positioned as you go through all this?

Thanks Gerard for the question. First of all, we haven't reduced any customers in the quarter relative to prior year that hadn't already been taken out. So the good thing is all those are now fully out on direct ship. We're actually seeing some rebound of new customers and increase in customers, but you can get a clean picture of direct ship as it stands today. Okay. Cleaned up now to turning to DSD, lot of customer opportunity, I think the story is mixed they're predominantly for a couple of points. One, we are adding lots of new customers and winning new business. But at the same time, as we talked in the prepared remarks, we're seeing this impact of closures multiple days a week with many of these accounts. And then other impacts of labor shortages impacting multiple channels that we operate in. So that net is still that COVID effect. But when you look at overall, I think the positive thing for volume in general, if we can truly get behind COVID and not have another Omicron or Delta,

Yeah.

Or any of those. You're going to see the true increase that we're seeing in new accounts that we're bringing on. As you know, we don't specifically call out any accounts, be at direct ship or DSD. I can tell you we are adding at a good clip, and it's covering up the other components that are still result of COVID, and the impacts of labor, and so forth. I think I'm very, very energized with what the sales team is doing and we're extremely excited that we can post the results that we posted this last quarter, and we just need to get beyond these impacts of COVID. I think it shows again, we've had now six quarters of progressive movement, we had a very substantial top-line compared to prior year, 70% down. All that's as a result of 17% in DSD. But we had peaks when COVID was really starting to bate in the early part of the quarter where it was less than 17. So the average for the quarter was 17 down over 40 last year. So as this improves consistently, I think what we'll see coming up in coming quarters as we get behind, and you tell me when that happens, we're all going to see it in our numbers. And I'm really excited about the work the sells team is doing. We could talk more specific about that, but that's the general feel. We are winning new customers and much of that's coming up. The loss volume, it's occurring as a result of these pandemic hangover issues. Scott, you want to comment any further?

[Indiscernible] I'm sorry. Go ahead.

Okay.

What is driving some of that sales growth as you said, even some sales initiatives or opportunities?

While lots of different things. We are up on a per drop basis. I think we've reported specific dropped size improvements but we're seeing substantial uptick in drop size improvement which is obviously driving that continued margin improvement. Two, we've added in each of our markets, especially in our strongest markets, what we call sales ambassadors and business development managers. We've continued to add those as we see the opportunities occur where they're out hunting and driving new business and penetration especially in those accounts that are predominantly delivered by DSD, delivery drivers in some case, or RSAs and route sales representatives in other cases. That's where we get these kind of regional customers, and we're winning those regional customers whether they'd be at QSR -- small QSR regional player, restaurant regional player, or other types of convenience stores. We're seeing that be the driver, and that's been really positive.

Got it. Switching gears a little bit to gross margins to couple of things on that front. Just curious of how the market reacted to price increases. Obviously, a lot of Dunkin Donuts. That's different. You can, given Starbucks announced to trend in varying price increases. Just curious as to how well it was accepted.

I'll just wait for Scott there. Okay. Yeah. We've had really positive reaction from customers on price increases. And specifically, as I've been out on several of those customer visits, where we've had to sit down with customers, it's well understood. And I think the way we went about structuring our cost increase, in our price increase rather, was that we broke it apart into a base price component, and then we put our surcharges. So if over time the delivery surcharge or the fuel surcharge was to improve, we can take that out and not be a permanent, lasting effect. I said with several customers and I will just tell you it was very positive. They said we get it, we understand. It hasn't been pushed back. I'd tell you what's really exciting is the fact that most customers are looking at this and saying, "Ensuring the supply is really where we want you to focus ". So, on a take price situation in the market today has been, as a result of COVID and other factors inflationary that we talked, we haven't had a problem with instituting. We just have contracts at some cases, lag as we mentioned in the prepared remarks.

Got it And then just on gross margins, obviously made a lot of improvements, over the last several years and there's still some things still along to talk about IT. I think you talked about improving DFW further, as well as Portland. What are the top 1, 2, or 3 opportunities there that can drive to move the needle the most? I know probably the bigger items have been done, but what's remaining, what gets you?

We still have -- we still -- we're working on several, so let me just take the Portland Consolidation clearly is an opportunity. And as you know, we put on an additional capacity to free up our ability to move more manufacturing into Portland, and thus relieve them from the distribution side. Being able to consolidate a green copy, being able to consolidate the operations within the overall Pacific Northwest to better serve those customers. That's been -- I'll put that as active with lots of resources being put against that from the management side. So that's been very positive, and we haven't seen those fully come through as of yet, but they're there, and coming. Two, as you know, we continue to optimize our new CBE now revive network and we have yet to put the refurbishment into the West Coast. That remains in Rialto. We like that opportunity, but we've been focusing heavily on getting as many refurbs through Oklahoma City, and leveraging that to the maximum while we see the churn in Tier 5 and Tier 4 can bring more equipment to support a larger refurbishment, specifically into the West. Optimization of the logistics network, both from suppliers to DCs, DCs to branch, and also branch down to routes, we continue to have opportunities there as we're trying to offset all these increases in costs due to fuel, due to freight, due to ocean, due to rail. What we're seeing mainly, if you heard in our prepared remarks around cost avoidance. So cost avoidance is really important, but I'd like to have said that that was going to be all our cost savings dollar per dollar. But given these pressures and then the lag and prices. We're not fully seeing it. But I think as we -- again, COVID abates and we can forecast this business better will be in a much stronger position to see that flow through and get back to those historical gross margin highs. I think given the quarter, I don't know what word you want me to use, but I can tell you my feeling is we're incredibly pleased to see at 29.5 in a period of the second quarter, the way we did. I would like to see more and I think we would have seen it over 30 if all these other factors that we're working against, but seeing 6 sequential quarters of margin improvement and still have opportunities in the last one is going to be procurement. We're working feverously on continue to build our procurement organization to really go out for a lot more which other customers and suppliers are doing the same type of thing. We're doing it as well. I think we'll see more from that as well.

Got it. I will jump back to queue. Deverl, thank you I really appreciate it and congrats it's a great quarter, especially considering the headwinds.

Thank you, Gerard.

Thank you. This time I'd like to turn the call back over to Deverl Maserang for any closing remarks. Sir?

Thank you. In summary, we're excited about our performance throughout one of the most challenging times in our history. That said, we believe our results would have been significantly better if not for the pandemic's recent resurgence and the reluctance in terms of the stalled recovery. The reality is that until the macro challenges subside, namely those associated with labor and supply chain, we'll continue to navigate these headwinds. Nonetheless, given our experience managing through previous waves of pandemic, we remain optimistic that the current wave will be on the downturn within the next many weeks or so. Given that we're already demonstrating the potential to operate at a pre -COVID level when conditions permit, and we really highly confident in the ultimate recovery of our business and the return to growth. So thank you for your time today and your interest in Farmer Brothers.

This concludes today's conference call. Thank you for participating. You may now disconnect.