Farmer Bros - Earnings Call - Q2 2025
February 6, 2025
Executive Summary
- Gross margin remained strong at 43.1% (up 270 bps YoY) on net sales of $90.0M, while adjusted EBITDA improved to $5.9M; diluted EPS was $0.01.
- Operating cash flow positive for the second consecutive quarter and first quarter of positive free cash flow in “many years” (CFO $2.6M; FCF $0.5M), reflecting cost discipline and route optimization; management reiterated confidence in sustaining margins ≥40% despite higher-cost inventory headwinds.
- Coffee volumes declined 8% YoY on customer attrition and softer consumer traffic; allied products (~50% of sales) helped protect margins in a volatile commodity environment.
- Leadership additions (VP of Sales) and completion of SKU rationalization/brand pyramid by Q3 are intended to drive top-line, coffee pounds, and customer counts; specialty-tier brand rollout is underway.
- Potential stock catalysts: sustained ≥40% gross margins, continued positive FCF, specialty brand commercialization, and execution on DSD route density; watch for near‑term margin pressure as higher-cost inventory works through COGS and elevated commodity volatility.
What Went Well and What Went Wrong
What Went Well
- Gross margins >43% for the second straight quarter; management: “one of our strongest performing quarters in quite some time”.
- Adjusted EBITDA improved to $5.9M (+$3.6M YoY; +$4.5M QoQ), supported by price optimization and efficiency initiatives; CFO: positioned to “continue to deliver margins above our 40% target”.
- Free cash flow turned positive; CFO: “achieving positive free cash flow for the quarter…$0.5M…an improvement of $7.6M YoY”.
What Went Wrong
- Coffee volumes down 8% YoY due to customer attrition, lower consumer spending, and decreased foot traffic; customer count degradation remains a focus area.
- Sequential gross margin slightly down as higher-cost inventory begins to flow through COGS; margin pressure expected over coming quarters given rising coffee prices.
- Net income softened YoY to $0.21M vs $2.70M in Q2 FY24 primarily due to a $1.5M net loss on asset disposals this quarter vs $6.1M gains last year.
Transcript
Operator (participant)
Good afternoon and welcome to the Farmer Brothers Fiscal First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this call is being recorded. Earlier today, the company filed its Form 10-Q and issued its first quarter results press release, which is available on the investor relations section of Farmer Brothers' website at farmerbros.com. The release is also included as an exhibit on the company's Form 10-Q and is available on its website and the Securities and Exchange Commission's website at sec.gov. A replay of this audio-only webcast will also be available on the company's website approximately two hours after the conclusion of this call.
Before we begin the call, please note all of the financial information presented is unaudited, and various remarks made by management during this call about the company's future expectations, plans, and prospects may constitute forward-looking statements for the purposes of the safe harbor provisions under the federal securities laws and regulations. These forward-looking statements represent the company's views 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 which could cause actual results and other events to differ materially from those forward-looking statements is available in the company's release and public filings. On today's call, management will also reference 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 release and SEC filings. I will now turn the call over to Farmer Brothers President and Chief Executive Officer, John Moore. Mr. Moore, please go ahead.
John Moore (CEO)
Good afternoon, everyone, and thank you for joining us. The first quarter showed steady improvement for Farmer Bros. We saw solid sales growth and meaningful gains in both gross margin and adjusted EBITDA on a year-over-year and quarter-over-quarter basis. These results underscore the positive progress we have made recently. They are also the result of efforts related to our brand pyramid and SKU rationalization initiatives, enhancements with our inventory management processes, proactive and favorable pricing updates, and realignments within our sales team. During the quarter, we achieved another milestone related to our brand pyramid initiative with the refresh of our premium Boyd's coffee brand. Boyd's includes a diverse range of classic, light, medium, and dark roasts, in addition to single-origin and flavored offerings.
Boyd's is specifically geared toward our c-store, casual dining restaurants, hospitality, healthcare, entertainment, and gaming customers. Historically, Boyd's has been predominantly a West Coast brand. However, as part of our brand pyramid initiative, it will now be our premier premium nationwide coffee offering. We will be announcing our new specialty tier brand in the next few months, and we'll have more details on our next call. We are incredibly excited about the addition of this brand as it marks the final phase of our brand pyramid initiative and a reintroduction of Farmer Brothers into the specialty coffee space. By simplifying our brands and product offerings, we have been able to remove redundancies, optimize our roasting, streamline operational facilities, and enhance the overall customer experience. We have achieved all of this while aggressively managing our working capital and costs.
Once complete, our customers will have options across multiple flavor profiles and up and down the value chain, allowing them to participate at the level and price structure which works best for them. This is something we believe will help us drive customer growth and retention. Additionally, we have been working to optimize and add density to our existing DSD routes as part of our commitment to having the right products in the right place at the right time and at the right value proposition for our customers. This mantra is one of the most important aspects of our business and plays a crucial role in customer service growth and retention. We believe customer retention has continued to stabilize thanks to these efforts and improved execution by our restructured sales force.
We are also proactively working to navigate the volatility the industry is seeing in coffee markets and changes in consumer behaviors. To mitigate these impacts, we are being nimble in commodity purchasing and inventory management. We are also utilizing our customer data as a way to gain a deeper understanding and further insight into the impact macroeconomic trends have on our customer base and their ordering habits. To that end, we piloted a short-term customer-focused sales incentive with positive results during the recent quarter. We will continue these efforts and explore additional opportunities to offset potential headwinds while also continuing to focus on selling in addition products to existing customers.
Overall, we are confident the initiatives we put in place and the operational improvements we made throughout fiscal 2024 are helping us navigate the challenges posed by macroeconomic headwinds and a volatile commodity pricing environment. From strategic pricing initiatives to enhanced operational efficiency to a focus on the value proposition we can provide our customers as a true specialty goods provider, we feel Farmer Brothers is fundamentally better positioned to meet ongoing market demands than it has been in many years. With that, I'll turn it over to Vance to discuss our financials in more detail. Vance?
Vance Fisher (CFO)
Thanks, John, and good afternoon, everyone. Our first quarter results represent a solid start to our fiscal year and reflect meaningful progress in positioning Farmer Brothers on a more solid foundation for future growth. Our adjusted EBITDA for the quarter was positive at $1.4 million, an improvement of $1.9 million on a year-over-year basis when compared to a $500,000 loss in the first quarter of last year. This was also a quarter-over-quarter improvement of almost $3 million when compared to a $1.6 million loss in the fourth quarter of fiscal 2024. Our improved adjusted EBITDA was largely driven by gross margin expansion. For the first quarter, our gross margin increased 630 basis points year-over-year to 43.9%, compared to 37.6% in the first quarter of last year, and increased 510 basis points sequentially compared to 38.8% last quarter.
Our gross margin results primarily reflect our continued price optimization efforts as well as actions taken to address elevating coffee commodity markets. For the first quarter, net sales increased $85.1 million, a $3.2 million or nearly 4% increase compared to the first quarter of last year. This sales growth, along with margin expansion, resulted in a gross profit increase of $6.5 million to $37.3 million for the quarter, compared to $30.8 million in the same period last year. Operating expenses were $40.1 million or 47.2% of net sales in the first quarter, compared to $32.9 million or 40.1% of net sales in the first quarter of last year. This year-over-year increase was driven by an $8.5 million difference in net gains on asset sales, as there were no branch sales during the first quarter of this fiscal year.
When adjusted for asset sales, operating expenses declined by $1.2 million or 3.2% of net sales year-over-year, reflecting the operational efficiencies which have been accomplished and our continued progress in optimizing our cost structure. Our net loss for the quarter was $5 million compared to a net loss of $1.6 million in the first quarter of last year. You should note the last year included $6.8 million of net gains related to asset disposals, while this quarter included a $1.7 million net loss related to asset disposals. Looking at the balance sheet, as of September 30, 2024, we had $3.3 million of unrestricted cash and cash equivalents, $1.9 million in restricted cash, and $23.3 million in outstanding borrowings under our credit facility, with $27.1 million of additional borrowing capacity.
We're making solid progress towards our goal of positive free cash flow, as demonstrated in our improved cash flow from operating activities, which improved to positive $2.5 million in the first quarter of this year. This represents a $9.6 million improvement compared to negative $7.1 million in the first quarter of last year, and a $3.5 million improvement compared to negative $1 million last quarter. This marks five consecutive quarters of improved cash from operating activities. We are encouraged by the solid quarter and the significant improvements we have achieved in gross margin, adjusted EBITDA, and cash flow. We are, however, mindful of the current volatility in coffee commodity markets and the macroeconomic environment. While we are proactively working to address these conditions, we do not expect our financial results to be linear quarter to quarter.
We remain confident we are on the right path and building the right foundation to generate sustainable value creation. With that, I'll turn it back to John. John?
John Moore (CEO)
Thanks, Vance. Overall, we believe this quarter provides a glimpse of the long-term potential of Farmer Brothers and what we can achieve. With gross margins reaching a level not seen since March of 2022 and positive adjusted EBITDA performance, we believe we're on the right track. It appears our internal initiatives are starting to gain traction, which should allow us to realize additional efficiency, working capital, and operational gains throughout this fiscal year and beyond. We do, however, recognize we are not seeing the top-line results we know we need to drive significant scale and long-term growth. This will be a continued point of emphasis for us in fiscal 2025.
As we focus on customer growth, adding density across our existing DSD routes, and selling additional products into our existing customer base as a means to generate additional revenue and protect our margins. We are confident we will continue to build on this positive momentum as we remain focused on providing outstanding customer service, strong operational execution, fundamental performance, and proactively mitigating market factors to drive sustainable growth and long-term value for our shareholders. Before we open it up for questions, I would like to take a moment to thank our team for their tremendous work. Their entrepreneurial spirit and commitment to continuous improvement is evident in our recent results.
Our success, both in the near and long term, would not be possible without them. With that, I want to thank you all for joining us on the call today. Operator, we will now open it up for questions.
Operator (participant)
At this time, we will conduct the question-and-answer session. If you would like to ask a question, please press star one on your phone now, and you'll be placed into the queue in the order received. Once again, to ask a question, press star one on your phone now. Our first question comes from Gerry Sweeney of Roth Capital.
Gerry Sweeney (Managing Director and Senior Research Analyst)
Good afternoon, John and Vance. Thanks for taking my call.
John Moore (CEO)
Hi, Gerry. How are you?
Vance Fisher (CFO)
Hi, Gerry.
Gerry Sweeney (Managing Director and Senior Research Analyst)
Doing well. Wondering if we could start with the growth and density in the routes. It was something that I paid particular attention to, but wanted to understand churn, how that's coming along, and some of the growth initiatives and how they've taken place. Maybe we can talk about the route density.
John Moore (CEO)
Sure. Even since our last call, we're seeing a continued positive trend when it comes to churn. There's no question within the industry, there are some headwinds that are there. You're seeing some single-digit to low double-digit declines, comparable year-on-year unit sales in degradation and frequency of visits, average consumer spend. Consumer spend in general is relatively soft. Having said that, we're seeing that our levels of retention are even better than we had anticipated, given some of the necessary price actions that we've taken over the last quarters, given the coffee markets. At this point, we're reaching pretty much an inflection point there. You can imagine we look at this weekly, and some weeks are positive somewhat, some weeks are negative a little bit somewhat.
We're talking about values that in some cases are under, that are single digits, in an estate of approximately 30,000 customers. We are feeling like we are in a very good space there and getting better. When it comes to flipping into a growth trajectory, I think that's where we are really doubling down on our need to commit to outstanding customer service, keeping in mind that commitment to right place, right time, right product, right value. We feel as though we have taken significant strides over the last year in resolving what were some of those out-of-stock issues, not having the stock where we needed it, when we needed it. We have pretty much resolved all of those issues. The other major theme was equipment, again, where we needed it and when.
Again, there we had a rapid deployment system. We have now got equipment where we need it. We've leveraged our refurb capability. We've managed to do all of this in having a finished goods portfolio in the right place, right time, with no increase, in fact, a decrease in days on hand inventory with our finished goods and a decrease in our CapEx related to brewing equipment. Very, very pleased with where all of that is going and looking to improve that going forward.
Gerry Sweeney (Managing Director and Senior Research Analyst)
Gotcha. The out-of-stock issues, is that addressed by SKU rationalization and brand pyramid collapses everything so you can have the part of the right product at the right place, right time, etc.? Is that correct?
John Moore (CEO)
I think it's a congruence of a number of things. It is most definitely those things in addition to taking a real careful look at how are we converting customer by customer from one SKU set into another and really being deliberate about that process and making sure that the communication to all of the team members in the field was done in a very deliberate and thoughtful fashion. The customers were treated, again, with that white glove service and coached through the transition to mitigate any potential attrition related to that.
Gerry Sweeney (Managing Director and Senior Research Analyst)
Got it. Obviously, growth, part of it is limiting churn and if not growing customers. How much of growth comes from maybe adding new routes or adjusting routes and obviously, like I said, more stops, more product sales per stop?
John Moore (CEO)
Sure. I think that's a great question. I think we are, if anything, looking to optimize our routes and get even more value out of the routes that we have. I don't know that we need to add significantly to our route network. We have a number of routes where we can improve utilization simply by focusing our business development efforts specific to those areas. That is one of the things that we're looking about getting a bit better with over the quarters ahead, making sure that our business development efforts are focused in a very deliberate way so that that density is achieved to really optimize that route structure and get as much value out of it as possible.
The other piece of that is really unlocking the potential value that's there already within, again, that estate of approximately 30,000 customers through better product penetration. I mean, the best dollars to be had are in the existing accounts where there's no additional deployment of CapEx or brewers. You're just basically selling in products that you already have on your truck and realizing the value of them. I think we have a tremendous opportunity there.
Gerry Sweeney (Managing Director and Senior Research Analyst)
How do we unlock that? This is the follow-up.
John Moore (CEO)
Sure. I think with deliberate and thoughtful planning and execution, I think we're getting better and better about approaching our customers with the totality of product mix, enabling our route sales representatives to be better equipped to get into those conversations with our customers, and then also enabling our account executives with the tools that they need to go out and make more profitable, more comprehensive customers. What I mean by that, they can go in now with the tools that they have. If they're, again, selling pancake mix, they should be selling the syrup that goes right along with that pancake mix. Clearly, they should be selling orange juice. They should be selling coffee. They should be selling tea.
Gerry Sweeney (Managing Director and Senior Research Analyst)
Got it. Okay. That is it for me. I will jump back in line. I appreciate it.
John Moore (CEO)
Thank you, Gerry.
Operator (participant)
Our next question comes from Eric Des Lauriers of Craig-Hallum Capital Group.
Eric Des Lauriers (Senior Research Analyst)
Great. Thank you for taking my questions. Congrats on the strong quarter here.
John Moore (CEO)
Thank you. Thank you.
Vance Fisher (CFO)
Thanks, Eric.
Eric Des Lauriers (Senior Research Analyst)
Yeah, for sure. My first question is in regards to getting back into specialty coffee with this new brand that's to be announced in the coming months here. How should we think about that impacting financials? I guess we can start with just kind of the revenue side of things. Should we think of this essentially as reentering a new category and thus mostly incremental sales opportunities, or is there any sort of, I guess, cannibalization of existing revenues, maybe your customers buying premium where more premium while they can't buy specialty? I'm just kind of wondering how we should think about the impact on revenues.
John Moore (CEO)
That's a great question, Eric. I think in the short term, it would be optimization on the sourcing and manufacturing and distribution side in that we already have built into our network a significant number of pounds in the specialty space. We haven't had a unified brand message around any of that forever, really, in our history. That's always been somewhat regional. In launching this new brand expression, the first step will be transitioning the existing volume that's in the specialty space to this new brand experience. From there, we can start to think about how do we roll that out nationally as a new portfolio of goods to customers that have never been exposed to Farmer Bros. as a specialty coffee roaster before. I think that's where you'll start to see incremental revenue through the specialty brand.
Specialty, as most people in the coffee business have seen, is the fastest growing side of the coffee space. We are really excited to think about what that might mean for us.
Eric Des Lauriers (Senior Research Analyst)
That makes sense. I guess that sort of brings up another question for me on Boyd's. You mentioned that it's been a West Coast brand. You're now bringing it nationally. Are there any sort of areas where you were perhaps under-indexed or didn't have much exposure to premium coffee and thus this Boyd's brand could also represent some incremental opportunity? Or is it sort of similar to just disparate brands and not a unified brand approach?
John Moore (CEO)
No, I would say there are incremental opportunities with Boyd's. In relaunching it as a comprehensive program, that comes with POS materials, that comes with marketing, that comes with some initiatives that will really build equity into that as a brand experience. That will be relatively new for Boyd's. It's been mostly a West Coast phenomenon to date, but it's performing particularly well in the C-store channel. It's also very strong, as we had mentioned, in healthcare, entertainment, casino, gaming. It really checks a lot of boxes for people that are looking for that somewhat better experience in coffee, better value proposition. We have not explored that comprehensively in other parts of the country with any kind of uniform brand messaging. We definitely see an opportunity there.
Eric Des Lauriers (Senior Research Analyst)
That's helpful. I guess just margin-wise, so understood that specialty is not just a new incremental opportunity, but that there is opportunity for incremental sales. As we just kind of think about that on the gross margin side, can you help us understand if there's much of a difference at all between, I guess, all three of these categories? Just kind of help us understand how you see margins between them.
John Moore (CEO)
I mean, I don't know that we see them as particularly different on a percentage point basis. Of course, given that the top-line contribution on a dollars basis will be different, just based on the value proposition, from a top-line dollars perspective, you'll see more contribution from the specialty than you might from the commercial or premium. Having said that, typically, in our system to date, there is more volume to be had in the commercial space and then a modicum of volume in the premium space. And then specialty really is truly the tip of the iceberg for us. We're excited to see where that goes in the future.
Eric Des Lauriers (Senior Research Analyst)
Yeah. That's awesome. Could you elaborate a bit more on the gross margin drivers, I guess, the drivers in the improvement that we've seen besides your price optimization efforts? Vance, you mentioned something else around commodity pricing, but I was a little, I guess, just confused there.
Vance Fisher (CFO)
Yeah. Sure, Eric. Yeah. As you know, throughout the course of the last several quarters, we've been working on that pricing optimization effort really in response to what we were seeing in terms of elevating commodity markets in the coffee markets. We wanted to make sure that we weren't behind that curve. We were taking pricing actions in response to the rising market. That was just obviously to make sure that we're not falling behind. We're seeing a little bit of that in first quarter where we're still not quite seeing the full effect of that higher cost inventory, but realizing the pricing action that's going to be necessary to offset that as it comes through over the next couple of quarters.
Eric Des Lauriers (Senior Research Analyst)
Got it. Got it. Just last question for me. Can you comment on the prospect for potential further asset disposals? Just kind of wondering if this is something that we should think of as largely behind us now or if there's still some opportunities going forward.
John Moore (CEO)
I mean, I think as we've said in the past, we're not relying on those as a business strategy in any way, shape, or form. For us, it's looked at opportunistically. In some cases, we have a network of branches dating back decades. As we all know, urban centers have changed over that span, and we may not have branches in an area that matches the need any longer. In some cases, we'll entertain offers for branches that are no longer perfectly suited for our needs, but it's not part of our ongoing business strategy.
Eric Des Lauriers (Senior Research Analyst)
That's helpful. All right. Thank you for taking my questions. Congrats again on a strong start to the year.
John Moore (CEO)
Thank you very much.
Vance Fisher (CFO)
Thanks Eric.