Good afternoon, ladies and gentlemen and welcome to Farmer Brothers Third Quarter Fiscal 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a brief question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Tom Mattei. Go ahead, sir.

Good afternoon, everyone. Thank you for joining Farmer Brothers' third quarter fiscal year 2016 earnings conference call. I'm the company's General Counsel. With me today are Mike Keown, President and Chief Executive Officer; and Isaac Johnston, Treasurer and Chief Financial Officer. Earlier today we issued a press release, which is available on the Investor Relations section of our website at www.farmerbros.com. The press release is also included as an exhibit to our Form 8-K available on our website and on the Securities and Exchange Commission's website at www.sec.gov. Please note that all of the financial information presented on this conference call today is unaudited. 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 our website. Before we begin the call, please note various remarks that we make during this call about our 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 our views only as of today and should not be relied upon as representing our 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 in our public filings, which are available on the Investor Relations section of our website. On today's call, we use certain non-GAAP financial measures including non-GAAP net income, non-GAAP net income per common share diluted, adjusted EBITDA and adjusted EBITDA margin in assessing our operating performance. Reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measures is included in our earnings press release, which is available on the Investor Relations section of our website. I will now turn the call over to Mike Keown, our President and Chief Executive Officer. Mike?

Thank you, Tom. Hello everyone, and thank you for joining us this afternoon. Here is our plan for the call today. I will start by hitting some highlights of our financial results for the quarter, and then I would like to bring you up to date on our corporate relocation plan and as part of that the cost reduction initiatives we have been tackling over the past year or so. After that I will turn the call over to Isaac Johnston, our Treasurer and CFO, who will discuss our financial results in greater detail. Overall we were very pleased with the results this quarter. We feel that there was a lot to like as we turned the corner in many areas, including volume, restructuring, relocation and transition of the spice business. We have much to do, but we are meeting our commitments and will continue to be very focused on the work plan ahead of us. At a high level, volume was strong with improvements both in our direct ship and DSD channel, margins improved, net income results were solid. We continue to execute well on the operation side and we made continued progress on our corporate relocation plan. While we are only in the third or fourth innings of our turnaround, we believe we have more tailwinds than headwinds at the moment. Let us look at sales and volume. We have been telling you this over the past few calls that we haven’t been happy with our volume trends during calendar 2015, but we saw that start to reverse during the second quarter of our fiscal 2016. We returned to growth during that quarter with growth in our roast & ground coffee products, compared to the prior year. We felt this was more than a blip and it represented…

Thanks Mike and hello. I'll spend the next few minutes discussing our financial performance for the third quarter of fiscal 2016. We continue to make significant progress towards our objectives of driving improved volume growth, along with improvements in supply chain management and financial performance. Now, let me go into some of those details. On the income statement, net sales in the third quarter of fiscal 2016 was 134.5 million, representing a 1.5% increase compared to net sales in the third quarter of fiscal 2015. This increase was primarily driven by significant increases in coffee pounds sold, which were up 9.3% and an overall total unit sales which were up 6%, which were than offset by lower prices driven primarily by customers in cost plus pricing arrangements, where the changes in green coffee commodity cost are passed onto the customer. Most cost plus customers are covered under coffee hedging contracts, which help insulate them from immediate changes in green coffee commodity prices. The gross margin in the third quarter of fiscal 2016 was 39.1% or 400 basis points higher than the 35.1% in the third quarter of fiscal 2015. The improvements in gross margin was primarily driven by more green coffee costs, improvements in conversion and leverage as we moved production from our Torrance, California manufacturing site. Gross margin includes an expected benefit of LIFO layer reduction in the third quarter of fiscal 2016 of 800,000 compared to a very similar 700,000 reduction in Q3 of 2015. Overall we experienced a very strong quarter in gross margin improvement and I am very pleased with the results. Operating expenses in the third quarter were 52.3 million, representing an increase of 4.3 million as compared to the 48 million recorded in the prior year. One major factor impacted operating expenses and then…

Thanks, Isaac. As always, I would like to thank those on the call for your continued interest in Farmer Brothers. We are very excited about the continuing turnaround and confident that while we'll hit bumps in the road, given the size and complexity of our plan, we are making good progress and we'll continue to focus on creating value for our stockholders. And with that, I'd like to open up the call to a few questions.

Thank you. [Operator Instructions] Our first question comes from the line of Tony Brenner with ROTH Capital Partners. Your line is open.

Thank you. Good afternoon.

Hi Tony.

Hi. A couple of questions, Mike you indicated that the 1.9 million pound increase in green coffee sales portended an improved trend line going forward, and I know some of your larger chain customers are doing better than they were a year ago, but what else is behind that projection of ongoing improvement?

Well, I think the confidence comes from a quarter where we saw improvements across the board, whether it was our direct ship business or the DSD trend improved. Within the mix we are continuing to see customers both large and small embrace more premium coffee products, which I think is a good opportunity for us. I wouldn't take the confidence as guidance or any certainty, but I think we are confident that the customers we have are making some very good decisions on how they grow their coffee business. We are proud to be part of that and hopefully we can keep the trend going.

And I believe there was in the quarter 1.8 million derivative loss and the other income line has a gain of a little over $600,000, what is the difference between those two numbers?

I believe the 1.8 million derivative loss was in the prior year, and I have to…

You are right. I am sorry.

Yes, we had a slight gain of derivative income this year overlapping a derivative loss of 1.8 million in the prior year.

Got it. Okay, thank you very much.

Thanks Tony.

Thank you. Our next question comes from the line of Francesco Pellegrino with Sidoti & Company. Your line is open.

Good afternoon guys.

Hello Francesco.

Hello.

Wanted to touch on – so gross margin expanded 400 basis points, is therea way to almost normalize this number if the commodity cost environment was relatively flat and this quarter as compared to a year earlier how much of the gross margin would have expanded?

We are clearly realizing a portion of the conversion cost we were anticipating. I would look within the quarter in the 200 to 250 basis impact from all the corporate relocation plan initiatives. That is probably the best normalized, and then the remaining difference has been more from a commodity – primarily from commodity price moves, but I would look in the 200 to 250 basis points coming from the productivity initiate.

Yes, the productivity initiates though are occurring at the temporary transitional facility, if I am correct, right, so you are getting operating leverage as you are doing more pounds in that facility that you are eventually going to be transitioning out of this time next year. How much of this is sustainable because you are doing a lot of volume at these facilities that I am a little bit worried that when you transition to the newer facility you won't have the as great of a volume impact that you are – I guess, utilization will be lower at the newer facility than what we are currently seeing right now, and I'm just trying to understand maybe what this impact did have on gross margins going forward as we model the transition to the newer facility?

I think the information we disclosed in the March timeframe in the facilities we bring up and running, we have got a $90 million to $99 million range of the cost to facility. For that the largest incremental cost is in the depreciation load associated with the facility and the incremental fixed costs are not significant in the site, but the depreciation load is the one that comes on a little bit or has the largest impact. The conversion efficiencies, the supply-chain reengineering effort of moving out of California to Houston or to North Lake, Texas there are a series of combination of items that are driving that productivity. Some of them are green coffee, supply-chain reengineering coming through the port of Houston versus coming through the port of LA, the distance of not going through the canal is an element and then the wage and benefit cost between the two Texas facilities are better than what are coming out of the California facilities. So the way I would think about it is it is more depreciation load that is coming on-stream, it will be the incremental fixed cost that you will see on the income statement. If you look at your EBITDA and then kind of back it out, then I wouldn’t anticipate a significant increase in other fixed cost as we bring the side up and running. It basically allows us to have incremental capacity as we focus on continuing to drive the business growth.

I see you emphasizing this depreciation load and I know you rattled of a lot of numbers and figures to us in regards to expenses that you realized and have yet to realize to date, is there any way that you could provide us with a little bit of insight with where depreciation is going to look like for I guess the remaining quarter in the year and maybe for next year as well, because these are some aggressive assumptions that we have got to make on our part modeling the story at home, and you are putting a pretty big emphasis on it right now in regard how it is going to impact your gross margin?

Well, the facility will not be up and running by the end of this fiscal year. So it will have very little impact on this year. Then we said the facility will come up in stages, through the end of Q2 fiscal ’17. So the majority of the depreciation load would hit in the back half of fiscal 2017. There was a portion of a facility is associated – that we built is associated with land, we haven't broken that number out publicly, but a portion of the cost of the facility is land, which is not depreciable and then, we broke out the cost of the building, ME, in the machinery and equipment in the – I am looking to make sure I get the exact number – 30 million to 35 million and then the cost of the facility in the total range of 55 million to 60 million, and then the ME was 35 million to 39 million. The lives that we would assume for those two categories will be the depreciation load coming on stream, or the lives you would use within pretty much any normal machinery and equipment lives and also building lives. We haven’t gone through and provided that publicly, but if you look at what is normally used that is what we will pull through in them, the P&L.

We are not going to see any unique depreciation methods that is going to create a book to tax difference and put like a DCA or a DCL onto the balance sheet if you sort of front load your depreciation expense sooner rather than later, a little bit above my head, but I just want to make sure that if we can just allocate it based upon what you have disclosed in like the 10-K for the traditional assets of the company, if that sounds fair?

Well, there will be a difference between the book and tax depreciation. We will follow the guidelines to ensure that we are able to capture the largest potential tax benefit that we can. So accelerated depreciation lives versus the book and then on the book side could use more of the normal lives of the assets that are used within the industry.

Okay, and then just two more questions from me, Mike you referred to I guess the evolution of the business as being in the third or the fourth innings, that being said, you got a nice up tick in volume, how competitive you think you currently are given that you are working in a temporary operating environment, and how much more competitive do you think you guys could be out there sort of bidding for new customers?

Well, I think we are building capabilities across the board, whether it is in sales or how we procure roasted coffee, all of those things are very important to our most sophisticated customers, and I think we are doing a very good job right now, but there is certainly room for improvement. To your point, being in a new facility, where we can better show potential customers all the capabilities we have and as we continue to challenge ourselves to grow those, I think we will become more competitive in the future. That would certainly be the plan. We have a lot that we could improve on and we are going to try to be real honest with ourselves about those areas, and that ought to do better.

And one of the items we discussed in the last couple of quarters is the second quarter, particularly October, November, December timeframe, which is our tightest capacity time frame, the normal seasonality of coffee. We came off of that curve in the first quarter or first quarter of the calendar year, the third quarter of the fiscal year, which gave us capacity to handle more growth and we are seeing that flow through in this quarter. And then we have the new capacity coming on-stream as we get into the back half of this year, which will give us the – will have the capacity to handle the growth – incremental growth at that time.

Okay, and my last question is just about the compensation, the incentive compensation that you guys incurred during the quarter, are there certain thresholds that need to be met for this level of compensation, what should I be thinking about maybe for the fourth quarter and maybe next year?

That is a very good question. I am glad you asked that. If you look at our adjusted EBITDA margin, and the way I would think about it if you said, look, if you accrued a normal level of bonus, you are on plan, what is the impact to your EBITDA margin within the quarter and then also year-to-date, which will allow you to help normalize the cost. The impact in the quarter, if you assume it was a normal margin versus what we had accrued to was 150 basis points. So instead of 7.6%, our adjusted EBITDA margin would have been closer to 9.1% in the quarter, and then year-to-date instead of 8.2% adjusted EBITDA, it would have been another four-tenths, so 8.6%. So if you are looking at – if you are trying to look forward, I would use – though I would use that range within your models to kind of think about where we are at. What made the difference is last year when you reverse out our bonus and go to negative, when you are reversing it out, and then you are overlapping an incremental accrual, then it has a big swing and that big swing happened to occur to us within the third quarter.

Okay. So if I hear you correctly, the difference in the compensation level on adjusted EBITDA, if you back it out, your EBITDA margin would have been 9.1% this quarter?

If you used – if I were looking at it I would say what would be a normal level of bonus if you delivered on plan, on target, what would be the normal level of bonus, and then what is that difference. The difference if you did a normal level of bonus within the third quarter would be 150 additional basis points. So you would have been roughly 9.1 points within the quarter.

Okay, that was pretty helpful. That is it from me. Thanks again.

Thanks.

Thank you. Our next question comes from the line of Kara Anderson with B. Riley & Company. Your line is open.

Hi guys. You spoke about having derivates and fixed pricing contracts that gives you some certainty on green coffee pricing for the near term, just wondering if you could comment on your expectations for the lower commodity cost that we saw in the quarter, and how long that might persist given the fact that you are pretty fixed at this point?

Yes, you can see through both the level of derivate instruments and the fixed price contract that we have gone out much farther than what we traditionally have done. If you look at the price of green coffee, we are in the bottom third of the 5-year to 10-year and the 15-year historical averages of green coffee, which then gave us the indication to If you look go out longer than we traditionally do. So we have got – we are looking out and I believe in our Q we say we have got contracts and hedging out up to a 22-month time frame. And most companies including us, we want to make sure you are hedged out as completely within your pricing window, and then as you go out further, it has less coverage. But we have nearly got out farther up to a 22-month time frame, but as you go further and further out less than what we do in the near term. You always want to be covered during your pricing window. So you are not getting caught upside down.

Okay, and then just one other quick question, can you talk about the capacity of your, I guess, prior to the corporate relocation, the three plans, and what you expect to have with the new facility in Houston and Portland all combined?

What we have said is when we bring the new facility up and running, we will have between $24 million to $28 million additional pounds of capacity, and that comes onboard in the second quarter of the fiscal 2017 timeframe, above and beyond what we have [Indiscernible]. And though we haven't given any projections multiple years down the stream, but that is where we will be standing as of December of this year.

So no comment on sort of what the capacity at Houston or Portland is today?

Well, we did 71 million pounds last year. We are growing the business this year. So it will be north of that number for sure. So we are in the, let us say, 72 million pound range, and then we are going to bring on board another 24 million to 28 million pound above the 73 million plus 28 million takes you north of 100 million as of December.

We haven't talked about anything in the future.

Okay. That is it from me. Thank you.

Thank you.

Thank you. And our next question comes from the line of Mitchell Sacks with Grand Slam Asset Management. Your line is open.

Thank you, and nice quarter guys by the way.

Thanks Mitchell.

My question really just centers more around just kind of selling activity and bid activity, now that you are getting closer to opening Northlake, have you started to step up bidding activity, are you seeing more bid activity, just sort of give us more of a general thought around that?

Sure. I think the historical perspective I would share is if you go back three or four years ago when the company was in a pretty rough situation, it was more challenging even to get at the table because if you are losing money, you are not often invited to even come in. As we have seen the company turnaround, as we built capabilities and better leverage some great employees who are already on board, you have seen the business pick up pretty dramatically from say fiscal ’12 to this year. Now we are challenging ourselves to take it to a new level with a new plant coming on board with the work we are doing in coffee procurement and quality, sustainability and some of the new product work we have done, we are going to be as aggressive as we possibly can to go get not only more volume, but the right volume where we tend to do well is for a customer who wants good value, but also high quality, who might value our experience and service, and sustainability and grow our relationships and all those types of things. So for those customers and I think that is where the industry is going we should be – should serve very well for that business and we are going after it especially now that we are through some of the capacity constraints in the second quarter.

And you asked what the timing would be, the timing started basically 7, 8, 9 months ago. Based upon forecasting available capacity in the third quarters of 2016, which is basically in January, this capacity was going to come through just simply because of the seasonal curve. So the national accounts team has been out selling for at least the 6 to 9-month time frame.

Okay, thanks guys.

Thank you. And our next question comes from the line of Chris Krueger with Lake Street Capital. Your line is open.

Hi, you guys just answered my main question I had. I guess I just want to clarify in the Houston facility there is pretty bad flooding in that market, a couple of weeks ago, was there any damage or disruption that you noticed at that facility?

No, none whatsoever. As you might know that is a facility that has been in that area for quite a while, and I think the supply chain team, the plant team did a great job to stay up and running. We had a few employees who had some difficulty getting to work for a day or two, but from a production standpoint we had no issues.

All right, good. That is all I got. Thanks.

Thank you. This concludes today's Q&A session. I would now like to turn the call back over to Mr. Mike Keown for any closing remarks.

Okay, once again thank you very much for your interest in Farmer Brothers, and we look forward to speaking with you all again very soon. Thank you.