Good afternoon, ladies and gentlemen, and welcome to the Farmer Brothers Fiscal First Quarter 2023 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. 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 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 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 can 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.

Thanks, operator and hello everyone. Our fiscal first quarter results showed continued good progress on rebuilding sales momentum post pandemic, with revenue up 12% against an uncertain macroeconomic environment. And I'm encouraged by the traction we're getting with new customers and some of our catalytic growth initiatives. I'll update you there in a moment. On the downside, our performance reflects significant declines in gross margin and profitability in the quarter. There is a complex set of factors at play here that I'll walk you through. But while we're disappointed with the performance, the impacts are largely very short term in nature and already beginning to reverse. Along with that, we are excited about the opportunities we have in front of us, and are optimistic about our potential in fiscal 2023. Let's start with the summary of sales performance and the external factors impacting the quarter. And Scott can fill in some of the details. Our total sales came in at $121 million, up 12% year-over-year, though down slightly from $123 million in our seasonally stronger fiscal Q4, both DSD and Direct Ship sales were up approximately 12% year-over-year. DSD is executing well on all rollouts of recent -- wins in the convenience and QSR spaces. We've also had a good quarter in customer renewals and maintain a robust pipeline of new opportunities that our sales teams are pursuing. While we're certainly pleased with the sales growth and customer momentum, margins did not keep pace due to a combination of pricing, seasonal and inflationary pressures. Our gross margin percentage was -- significantly in fiscal Q1 relative to Q4. Both national accounts and DSD were impacted roughly an equal measure. There were several key factors at play. First, looking at Direct Ship. While we have been seeing the benefits of our price…

Thanks, Deverl. My comments today will focus on the first quarter fiscal 2023 financial performance, our margin and how we're managing the balance sheet, along with some more color on the key initiatives you mentioned. Overall, net sales in the first quarter of fiscal 2023 were $121.4 million, an increase of $13 million, or 12% from the prior year period. The growth in net sales primarily reflects increased customer pricing on both our DSD and Direct Ship networks, both of which generated similar sales increases. These results were partially offset by lower volume in both DSD and national accounts compared to the prior year, and the lag in recognition of price increases in the Direct Ship business. That said, DSD and national account revenues in the current quarter do reflect some of our historic pricing actions and that is helping offset decreased volume. Volumes as Deverl highlighted were down 13% year-over-year. More than two-third of this decline was on the Direct Ship side. And of that amount, two-third was attributable to continuing customers and the rest to exited customers. With continuing customers a healthy portion of the decline is attributable to inventory drawdowns within just a few of our key accounts. Additional factors impacting volumes include the seasonally weaker summer months, as well as recessionary pressures on consumption. In the first half of the quarter, a COVID resurgence impacted staffing levels and opening status at a number of customers within the DSD businesses that we support. As Deverl noted, the DSD business has recovered aggressively over the last two months. And in fact, during October, we experienced our highest sales weeks since the start of the pandemic in about three years. Week-to-week DSD sales are noticeably improved from our first quarter reported results. Breaking down sales a little further, DSD…

We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Gerry Sweeney with ROTH Capital. You may now go ahead.

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

Hey, Gerard.

Hi Gerard.

On margins, obviously, a little bit of a disappointment there. And I know you spent a little bit of time on the call on it. And I think you said half DSD half Direct Ship. And just wanted to understand a little bit more clearly. It sounds as though and correct me if I'm wrong, that there were hedges. I'm not sure if the hedges begin to roll off, but even at that point, the hedges reduced your cost of goods sold. So when they did roll off, cost of your -- go up. And this was not -- I guess -- and that increase in cost was not accounted for in higher pricing with your customers at that given point. Did I summarize that correctly?

Yes. Yes, Gerry, you did. You got that right. And just, the easier side, like, the national account side where it's just a contractual delay. You're exactly right. It was -- the hedges were basically maturing. People were using over the last year. And so, if you imagine that -- because coffee prices have been in that 220 to 240 range for quite a while many months. And if you had hedged like most people do in a six-month, nine-month, 12-month window, then what was happening is really, until very, very recently, Q4 and Q1 you were -- you effectively, because of your hedge is having much lower price cost of coffee the hedging program worked. And really what we're trying to portray there is that, the acceleration of that cost has been much more dramatic. So that's the impact before we can pass that through to those accounts.

So, the key question here is, and I think people will probably want to understand is, why did it stop working, because the hedges rolled off? And was that you? Was that the customer, or was there some kind of mechanics in the contract that the contract rolled over, because it was a new year and there was a gap. This is -- I'm trying to figure this all out.

Yes. Let me answer it this way, Gerry. Let's just get right cut to the chase. What was the surprise for us? And it really was the surprise on margins, to the question you're asking, it really comes back to; one, was on the volume side. Large national account businesses were working off inventory in the Q. And if you remember, during that Q, we had a lot of national customers and companies had taken on additional inventory, bought product and then they got long and was not yet there in early July and August. It didn't start to come back until the back half of the Q. So the recession was impacting them. The reduction in orders was a surprise for us and the volume we projected didn't come through and we need to replatform that current reality if that continues and we're watching that incredibly closely. Point two, pricing. And the pricing, as Scott just alluded to, was reflective of the hedging rolling off and then we're now -- in one case, our largest impacted customer that we serve, impacted us and didn't get the price change per the contractual arrangement until October 15. And so, now we're seeing that and we'll make that up in the coming Q as reflective of what occurred in the last Q. So those were the two things that we didn't think would happen to the level they did. They have or has and we're now reacting and doing many things that Scott pointed out in his comments in the prepared remarks.

Yes. And then, just plain and simple on the DSD side, Gerry, it's -- hedging is a part of it, but we simply didn't keep pricing ahead of all the inflationary pressures, in coffee and all the other things we're facing, like everyone else is as well. It was just a simple factor. We have new pricing going in, in November and effective kind of December full.

So, let me just say another thing, Gerry, becuase you're going to probably ask this question. I think it's prudent that we just making sure they’re right. And that's -- how are these margins going to trend throughout the rest of the fiscal 2023, which obviously is a tag on to the question you're asking. And it's -- we believe recovery is underway based on the data and the information we're looking at in the current Q and volumes, as we said in the prepared remarks we had our best week in DSD literally pre-pandemic. We expect to be back on our targeted trajectory exiting this fiscal -- into Q3 and Q4. And we'll caveat that by the macro uncertainty, but we're going to have to take pricing and we've got a pricing move that's coming up in this current month. And we have other levers in place that we are working through. If the economic picture darkens further, but the overall impact to the economy are still somewhat unclear and we realize that we're going to have to play knowing the case until it reverses and we see more pickup on the inflationary side, meaning that inflationary reduces.

Got it. Are you seeing any let up on the inflationary side? Obviously, green coffee beans. Any letup on inflationary side?

Yes. We had seen some trucking rates, fuel to a degree. But I know you watch the news closely as we do and we're watching this diesel, given that we're at the lowest levels of diesel in the US and who knows how long. That impact is obviously concerning. So we're looking at options to -- from rail. But then post the midterms, let's see what we see in the rail situation in the country. We're hopeful that, that doesn't go in a negative way or trucking surcharges increase, because diesel are deciding to take a further run up, which would impact. So the other thing that we're really positive on that will help mitigate some of those, let's say, U.S. inflationary impacts is the fact that for the first time just as we've seen coffee break and come down we saw 169 literally in the last two weeks. It came back up over the last couple of days. We're expecting that to continue to trend in that until the harvest comes in. But here's the other big impact is we know that differentials had been historically at the all-time high. And we saw massive breaks and differentials in the recent weeks toward the downside which is also going to be helped to a large portion of our cost basis. So those are a couple.

Got it. How long does it take for lower coffee prices, I think it is green coffee prices to work into the system?

Yeah. Yeah. So that's an interesting one. Again, I'll break it into two parts, because on the national account and the Direct Ship side we work with those customers. And it's really their book. Each of them we help them with the trading and with the industry insights and the market insights but they all kind of build the book to their own specifications. So it's a variable answer on that side of the business. But again, even as prices fall, we'll follow the contractual norm. So we will always be on kind of the historical cost structure of the prior 90 days as we go forward and keep rolling that forward. So there will be -- just like there was a lag in the pricing going up, there'll be a lag in the pricing coming down. Some of those customers will start to see the benefit of lower pricing within I'd say just one or two quarters. Some of them it's much further. Some of them have hedged out nine months even 12 months. So it will be a longer tail on those customers. For us personally on our DSD account, we have been kind of trending the market closely and you can [Technical Difficulty]

Please wait one moment, as I reconnect the speaker line. Okay. I've joined the speaker line back in. Gerry, your line is still open.

Hey, Scott I lost you at DSD, you went through Direct Ship coffee prices.

Yeah. Apologies, apologies the system, I don't know what happened maybe a power issue in the building or something, but we got dropped. [Technical Difficulty] Yeah. So, DSD, you can tell -- if you look closely at the materials in our Qs, the amount of hedges we have out there. But effectively what I can say is that based on market conditions and what we've been seeing recently is that we've been shortening up our hedge book quite a bit. So we will have benefit from these lower costs -- if the lower costs continue in the back half of the fiscal year. We won't have to wait for six, nine, 12 months.

Yeah. In the back half of this fiscal year, you said sorry?

Yeah. Yes. So yes the March quarter and the June quarter will start to have some good benefits from the lower cost if they continue.

Got it. Okay. Switching gears to maybe the gross side Revive. You made a comment about doubling workforce I think over the course of the year. Now, Revive is a new business per se, right? You white labeled it maybe not necessarily new business. But how many techs do you have in that business? Because you did have techs, before you white labeled it. So I'm just curious, as to what really that baseline is on the doubling on the tech part.

Yeah. You're right. And it's not a new business, but it's new in the context that we're expanding …

Yeah.

…the third-party areas that previously were offered out to third parties. It's new in the context that we're adding new manufacturers across the board that we did not provide service and support for. And it's also new in the context that we're adding accounts that our coffee type customers that have equipment that can be serviced and that we're servicing that. Our current baseline is 120, at the present, roughly, and growing weekly. And we have excess demand that we are covering, as we add new techs in key markets where the demand is incredibly strongly unmet. And that's what gives us excitement that these avenues of increasing the current amount that we have been handling. We know is real. And it's profitable. And it's accretive to the business. And it will make our overall network both on the DSD side and the customer we served there today that were served heavily through third-party we'll be able to add those with a Revive tech and then add non-DSD Farmer Brothers accounts, be it manufacturers or other clients that want to service. So it's very exciting. And we'll start continuing to report more-and-more as this is becoming a substantial impact to our overall network.

I think you said in the prepared remarks, mid-six-digit type revenue on a monthly basis for Revive, correct?

Yes.

What was -- something but you has 120 techs. Of that 120 only -- some of the -- a lot of those techs are -- a portion of them are servicing your DSD or existing clients and that revenue is baked into coffee prices that those clients pay for. So that does not -- that mid -- that six-digit revenue doesn't necessarily reflect that. So if you double your base of techs that's projecting -- I'm assuming, that's for this -- that's going to project -- that's going to be substantial type of revenue opportunity. Do you understand what I'm saying?

Absolutely. We agree with you on that point. And I would also tell you that with the new general manager we brought in to lead this business to really take it to the next level he would tell you that even on existing DSD customers that we're starting to change the way we evaluate the service of those with kind of a platinum, gold, silver approach in some cases selling them equipment, in some cases then selling them a service contract to that equipment, in some cases having a service contract only, or in large accounts that purchase volume in the traditional way, we're providing that service, but we're also changing the frequency by which we service on a periodic basis for maintenance. And then if it's something that comes in and it's a one-off that they're asking for a frequent service in their machine is in good order, but somehow it continues to break. We're looking at ways to charge for those services where it becomes well above the cost basis of what we had projected. So, lots of different work we're doing to model this out. But to your point it's going to be higher per tech that we add in total revenue per technician as we go forward and get to this potential of doubling here in the next 12 months. So, it should become as we're seeing it now and as we've not reported in the past how big we think Revive can be. We're much more pro in terms of the size and the overall margin impact it could have to the business. So, we're not yet prepared to give you a range of just how big it can be, but we're trying to start to tee that up as we've done in the last two quarters and give you a better sense and we'll get deeper and deeper into that to give you more information as we continue to grow it. And right now we just land one of our first largest manufacturing contracts that we're executing and that's really exciting and we expect that more of those are here to come. And that if we have the techs to service it the demand is already there.

Got it. How about -- I know you don't want to project on how big it can get but profitability?

Yes. The beauty of that model as we've talked about a little bit is the core cost of that business is already in our financial numbers. It's been a part of the business because of DSD for many years. So, all of the incremental dollars that we add primarily in techs we're adding because they're accretive to the business. So, I like to think of it as a highly leverageable model. And yes we will have some cost increases, but they're more than justified by the revenue increases. And again as Deverl said, we're in this kind of unique spot that we're very fortunate of is we are fulfilling demand. We're not having to identify and change demand. We're literally at this point fulfilling demand as quickly as we can with tech. So, we'll kind of keep you abreast on when that changes, but we think that's quite a runway for the next several quarters at least of just being in that mode.

And the obvious question that most people ask is well with labor the way it is today, how do you think you're even going to get one additional tech much less doubling of your current over the next 12 months. And the reality is we're going to -- we've changed our recruiting model which is effectively working right now is point one. Point two, we are working with a large tech service school here where we'll be actually training and minting new techs through a technical school with our curriculum and their force combined and then giving these folks a job as soon as they come out of the tech school and then into the workforce with a training program that our new Head of Learning and Development training is helping develop. And that's why we have some assurance that we're very bullish on Revive in the present structure because we've cracked the code. And I think even in this environment we know we can win and we're going to do everything in our power because nothing better than having a piece of your business that you're not chasing demand. The demand is there. If you can learn to fill it and execute against it with good margins and higher margins because of the cost base that Scott just alluded to. We'll be leveraging that fixed asset that's there today.

Got it. I'll jump back in line. I appreciate it guys.

All right Gerry. Thank you.

Gerry Thanks.

It appears there are no further questions. Gerry if you have any follow-ups you may present them now.

I'm in good shape. Thank you.

Okay. This concludes our conference. I'd like to turn it back over to Deverl for any closing remarks.

Well, thanks for the questions. And I'll close by saying that while we're disappointed with the outcome of the quarter that disappointment should prove short-lived. Near-term we are recapturing momentum as we get through the lag impact of our price increases and we believe that we are positioned well heading to lower coffee price environment with a shorter hedge position in our book. Most important for the long-term, we have not been distracted from foundational initiatives underway to achieve Farmers' potential. Those initiatives include the optimization we've made to our business operations winning new customers broadening and modernizing the product portfolio we push through our national distribution footprint and investing in the systems that will make us more nimble. All these initiatives along with better data and insight should drive higher levels of performance. We appreciate our investors' interest and support and look forward to keeping you posted on our progress. Have a great evening. Thank you.

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