Good day, and welcome to the Farmer Brothers Fiscal Fourth Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation there'll be an opportunity to ask questions, [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Jeff Majtyka with Ellipsis IR. Please go ahead.

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' website at www.farmerbros.com. The press release is also included as an exhibit to the Company's Form 10-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 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 the 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 Deverl. Deverl, please go ahead.

Thank you, Jeff, and good afternoon, everyone. Thanks for joining us today. Our fourth quarter and fiscal 2022 year-end results were highlighted by continued recovery across our business. The fourth quarter is the first quarter without any significant impact from COVID-related mandates or shutdowns, which have been impacting our business since February 2020. We are excited about the results we have achieved this quarter, and we believe we are positioning the company for future success. While we are keeping a close eye on the current economic and inflationary pressures, we believe that we are starting to see our business true potential power and leverage in a more normal environment. As we continue to recover from the impact of COVID and shift our focus from fixing and optimizing our operations, we anticipate pursuing a more aggressive growth-oriented approach. We recently brought on board a full-time seasoned IT executive, Dilip Lalani, to lead our IT function. He and his team have laid out our very robust IT road map, infrastructure architecture and business operating model that is affordable and can be paced against our current projected capital plan. In addition, we will continuously optimize the business as we react to the ever-changing challenges in the new normal we now live in. As always, I'll let Scott provide more detail on our financials, including thoughts on our medium-term outlook for Farmer Bros., while my comments will primarily focus on strategy and operations. Still, I'd like to highlight a few figures. Our top line sales for the fiscal year 2022 were up 18% to approximately $470 million, primarily driven by the sales growth we experienced in our DSD and Direct Ship channels throughout the fiscal year. Similarly, on a quarter-over-quarter basis, our net sales grew 20% from the prior year period to $123 million…

Thanks, Deverl. Overall, net sales in fiscal 2022 increased by $71.3 million or 18% to $469.2 million from $397.9 million in fiscal 2021. The increase in net sales was primarily due to the significant recovery from the impact of the COVID-19 pandemic on our DSD sales channel, along with price increases and delivery surcharges implemented during fiscal 2022. We previously noted the volume declines from exited customers that impacted our Direct Ship business early in the fiscal year. However, these businesses still experienced sales growth for the year, primarily from higher C market coffee prices. Net sales in the fourth quarter of fiscal 2022 were $123 million, an increase of $20.1 million or almost 20% from the prior year period, driven primarily by continued recovery from the COVID-19 pandemic. In addition to detailing the financial performance, I'll focus my comments today around our margin progression and how we're managing the balance sheet. With respect to margins, as the numbers show, we've been able to outpace inflation, both on the gross and operating margin levels year-over-year. In our DSD sales channel, the increase was driven by an improved volume of green coffee processed and sold, along with an improved volume of other beverages, culinary, spice and tea products sold as we continue to experience higher weekly sales volumes compared to prior periods and our strongest weekly sales performance since the start of the pandemic over two years ago. While we saw another quarter of increased drop sizes and new customer sales growth within DSD that outpaced our lost customers, we needed to make a few changes to combat the inflationary challenges. You'll recall that 50% of our DSD revenue is generated from non-coffee or allied products. During the quarter, we noticed that we fell slightly behind inflation within our DSD channel,…

Thanks, Scott, and thanks to everyone who tuned into our call today. We'll now turn it back to the operator for Q&A. Operator?

[Operator Instructions] And our first question will come from Gerry Sweeney with ROTH Capital. Please go ahead.

Good afternoon, Deverl, Scott. Thanks for taking my call. I wanted to talk a little bit about revenue and growth. And Deverl, I think you called out three sort of highlights at the end of your comments. And one was nearing normalized business operations, paraphrasing it a little bit. But how much growth opportunity is out there just in -- as you look at the DSD business, the restaurants, conferences, convention centers, hotels, et cetera? A lot of that is coming back. I also know that you also had routes around 238, I think was the number in the third quarter. There's an opportunity to bring back routes. What type of growth can we see from the sort of base DSD business and, I guess, not only these base customers that are out there that are coming back or maybe obtaining additional customers?

Well Gerry, thanks for the question. I think I'll give a couple of comments, and then turn it to Scott for any thoughts he may have. I would just tell you that we're in this unique situation where still COVID is behind us. I've made that point. We've seen that in our numbers for the last quarter. As you look at where we're headed and what's in front of us, we're still battling certain channels of distribution that they can't get the staffing, they can't stay open the entire week and we wind up seeing that those channels wind up suffering. The good news is, as we mentioned in this call today, we've had several wins added to our DSD network. So we know that growth is there. And if we could get the underlying normalization of pre-COVID levels, which through this quarter, we've watched the core base business still be under pressure and then we gained share from the overall industry like we talked about in the prepared remarks. And that's covering up some of that growth that should be there that's yet to come back in a true post-COVID world. And we didn't have relative impacts of COVID in this last quarter, but we did see impacts related to inflationary pressures and demand destruction and margin pressures that are forcing certain channels to reconsider how much they are buying or how much they bought in the past. So that base core demand that we watch very closely has still been under pressure. But we're seeing many of our strategies that we've outlined go forward, whether we look at new beverage inclusion, options to go on to our routes with SERPs and functional inclusions to improving our espresso-based business and premiumizing our coffee offerings to seeing the growth through Revive that gives us more opportunity to see more customers come in based on the work we're doing through service and repair. Those are all growth opportunities, and there's still a large leverageable opportunity within the overall business as it relates to our DSD network. And we're going to do everything we can to fill that network up. And the last point that you made about number of routes, we know that we're working to add routes in various parts of the country where the demand is there, and we have routes running well north of $1 million per route. And we've got to add that in. And I will tell you that the labor market for us is difficult as it is for anyone. And we are recruiting, and I can tell you, in our HR work that we're doing, recruiting is top of the list. And the more we recruit techs and RSRs for the front line, that will have an impact on leveraging our DSD network. So with that, I'll let Scott add anything that he might want to add that I might have missed to add to your question.

Yes. Thanks, Deverl. Just a couple of quick ones, Gerry, is when we look deep in the data, and we're looking by geography or by channel or by SKU or by customer, we still see these ebbs and flows. And so we know that things are not fully where they could be. Like if all of those areas were -- if all the sectors of geography and channels were at new highs and gaining, I feel differently about the business, but we still see ebbs and flows for different reasons. July, for example, we had some COVID impact from the latest variant, as others did, but it was far less impactful to the business as I think everyone is learning to live with it. But where you really saw that impact was more on the labor, and it was the labor in restaurants and other facilities because they just couldn't -- they didn't have the people or they were having to do mini shutdowns, et cetera. So we still see that. We just know it's not optimized yet even among the existing customer base. So when I look to the big three things that are going to be tailwinds or the macro tailwinds, one is that I think the core business, the existing customers, will continue to recover in the restaurants and convenience stores and some of those primary channels that we follow. And then the secondary part is that I think new customers. We're adding new customers. We've talked about some of those wins, I think that will be a nice piece. But then these other big tailwinds to some of the categories and some of the customer segments we have, like large events and conventions, we know there's going to be more of those over the next 12 months. We know that universities and health care, some of these areas that had just been slower to really return to normal, will over the next 12 months, barring any other setbacks. So I just think all of those combined are what kind of let us know we're still gaining, we still have tailwinds and there's still growth to be had.

Got it. And then even on the, I guess, the espresso side, how much of an opportunity or what's uptake on some of this premiumization of coffee or some of these services? Just curious as to how that's flowing through?

Well, we believe it's significant and it's one of our top three initiatives throughout 2023. And the reason we believe that is because, as you know, we've been a traditional brewed coffee provider the channels of distribution that we serve in. And we've got some great products on cold brew and RTDs and other extract top products and liquid coffee that we believe is core and is there. But what our customers are asking for is more premium, great tasting, Arabica coffees. And so when we combine our ability with Revive to install great equipment and working with all these different manufacturers and our ability to service that equipment, we know that the more we can place those machines in those locations where we traditionally have put brewers in predominantly, batch brewers, that we can upscale to our Farmer Brothers artisan coffee lines to our public domain products to other great Arabica coffees that are espresso-based. And in combination with that, we're running a beverage inclusion option to provide new syrups, new functional beverages added to those products. We recently showed at National Restaurant Association up in Chicago with some partners that were there with in terms of shot and LOTUS. And of course, we've been running Kalifa farms on our routes in test markets, and we know that great plant-based beverages going into copies are another way. And we're completing that full espresso experience, and we're going after those outlets that we know could sell those products in a big way. And we think that, that catalyst of growth right there in that area is going to be really big for us. And I think it's really unlimited given our traditional focus. We don't believe brewed is going away anytime soon, but there is an absolute shift in consumer demand that says that they want espresso-based beverages, and to be able to do all forms from iced coffees to lattes to cappuccinos versus just a straight up brewed. But we also know with bean-to-cup being on the rise as it has been, and we've put about every type of bean-to-cup machines that's on the market out in the trade. That we know that there's a lot of great machines that can do a lot of different things and provide a lot of opportunity for our customers to serve different types of beverages. We want to be that solution provider, that value service and white glove and has the ability when that machine is down to work on it because you don't run a great espresso program without a great equipment service program, which we believe we have one of the best. And so that's why we're bullish on all things espresso, and are putting a lot of effort around that with these beverage inclusion solutions for both SERPs that are premiumized and inclusions, such as energy and additional capping shots that can go into both coffee and tea.

Got it. And I mean, I guess, on the espresso side, the other thing that go hand-in-hand is Revive. So more complicated machinery maintenance -- potential maintenance contract. Does this sort of fall right in the place with Revive? And it sounds as though that business has got a nice little jump out of the gate. I think you said mid-7 figures. Maybe a little bit of detail of the roadmap for the next 12, 18 months, if you could?

Yes. I will tell you that it goes hand in glove. There's no question that our bullishness around Revive goes hand-in-hand and links to our espresso-based program because you don't do one without the other well. And we believe we do that well and we can penetrate that market at a much deeper level. And so as you're seeing for the first time in our prepared remarks today, we've actually outlined some of the figures relative to Revive and how we're starting to see traction and growth. I will tell you, going forward, we'll start providing more information relative to the growth trajectory as it relates to the kind of numbers we shared today on Revive. But it's not about demand creation for Revive. It's about how fast we can bring in techs, put them on the road, shift third-party volume that we currently have today into servicing it by our own team members of Revive techs. And then using that to continue to grow the business and specifically in the espresso area. So as we talked about the growth in the 7-figure numbers that we're reporting, it's good growth. But what will hamper our ability to go fast there is our ability to recruit, retain great techs and guarantee that that's one of the places we're focused on right now is recruiting good techs and creating really robust training programs to bring these techs up to speed quickly and be able to put them on the road in our branches. And with an infrastructure that's there already and is leverageable, which is what we've talked to you in the past about. And we feel strongly in this cases a big part of our story relative to Revive. Scott, you got anything on Revive, you've been very close to Revive all along.

Yes. No, I think you said it well. It's going to go at with which we can get tech in, get them trained internally, get them certified on the equipment. And again, we're being really creative about the sourcing of those folks. So we think we'll come up with some good ideas to be able to accelerate that.

And lastly, I'd just say, Gerry, this is why we hired a General Manager for this business. Charles Cahn [ph], who comes from a large global multinational company and has a deep pedigree and understanding how to run business, and we put him in, and he is racing with the team that's there and very excited about what he's seeing and were getting a lot of structure in place that we've done over the past year. Now we're really starting to operationalize this business and really put it in the growth mode.

Would it be -- I don't want to put the cart before the horse, especially as you're still building out like the tech back you have in place. But is there an opportunity to sign some contracts with some larger restaurants or QSR chains even -- I'm not sure how much coffee exactly they do. But I think you understand going for the -- provide the maintenance and just be the go-to person on a national footprint or a regional footprint. Is that an opportunity for Revive?

It is. It's absolutely an opportunity, Gerry, and I would tell you the way we're doing it, is very planful, because clearly, we know there's more demand than the ability to service. The customers that are coming to us that are seeing the work that we're doing, want us to do more across multinationals, across regional QSRs, convenience and, most importantly, all the manufacturers. And that includes pretty much everybody, all the big major manufacturers. And so in that context, what we're trying to be mindful of and prudent about, this does not get the cart before the horse in terms of having available resources, we had some available capacity given how we serve our DSD, and we've got to make sure that we, first and foremost, serve our existing customers on our DSD routes, and then work to third-party customers that are in the fringes of the geographic areas that we serve and converting and putting more equipment techs into that area, and then come behind that with more service contracts that were being offered to do, but we're doing them on a selection basis, region-by-region, city-by-city, where we have the capacity to maintain a high level of service, first and foremost, to maintain that customer base and grow it properly. We could go out tomorrow and sign a bunch of contracts and not be able to service, that's not where we're going to be. We're going to make sure we grow prudently and we're focused and make sure we have the techs in place to leverage the current network and build the business profitably.

One more question, I'll jump in queue in case there's anyone in line. This may be a little bit more directed to Scott. But selling expense as a percentage of revenue, that has dropped considerably, I think, on a year-over-year basis. What's type of run rate should we expect for that? I'm just trying to sort of fine-tune the model here just as we see some of the revenue growing and some volumes increase and where that number should be. And obviously, there's some moving parts because volumes aren't up tremendously. Some of this revenue is just inflationary costs as well, but I just want to understand what we should be thinking there.

Yes, exactly, Gerry. I'd love to give you some great metrics and linear drivers, but it's really going to come down to the mix of DSD, Revive and our Direct Ship customers. As we're winning this new business, obviously, there's different linear kind of equations with each of those types of business. So what I can commit to, though, is that it's clearly a focus for total selling, total operating expense to be more efficient as a percent of sales. So as sales recover, we absolutely expect that to become more and more efficient. But most of the selling costs are related to our DSD business. And so as Deverl noted, we're trying to bring on more routes, trying to find certified, qualified folks to do that. But it's only going to be justified if the sales are there. Whereas we can add a lot of Revive, we can add a lot of Direct Ship without a lot of addition to sales. So selling, in particular, will be linked to DSD growth, but it will be more efficient or continue to be more efficient in the future.

Got it, that's helpful. I appreciate, I'll jump back in queue. Thanks for taking that multiple questions.

This concludes our question-and-answer session. I would like to turn the conference back to Deverl Maserang for any closing remarks.

Thank you. I just want to again thank everyone for joining our call today. But most importantly, I just want to give a shout out to all our team members across the U.S. that have worked so hard and so diligently over the last 2.5-plus years as we've navigated the turnaround, navigated COVID and now facing these inflationary pressures. And they are doubling down and working harder than ever. And I just want, again, just say thank you for all your work that each team member that represents Farmer Brothers has produced over the last quarter and as they look into 2023. So thank you, everyone. And again, we look forward to our coming quarter. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.