Good afternoon, ladies and gentlemen, and welcome to the Farmer Brothers Third Quarter 2019 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. I would now like to turn the call over to your host, TJ O'Sullivan. [Ph] Please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining Farmer Brothers' Third Quarter 2019 Earnings Conference Call. Participating on today's call are Chris Mottern, Interim CEO; and David Robson, Treasurer and CFO. 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 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 2 hours after the conclusion of this call. A 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 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 Chris. Chris, please go ahead.

Thank you, TJ Good afternoon, everyone, and thanks for joining us this afternoon. I'm pleased to be speaking with all of you in my new role. While the purpose of our call is to discuss the quarter's financial results and updated guidance for the full year, I also want to take this opportunity to introduce myself and share my perspective about where our company is today and what I believe we need to achieve in the future. I am honored to have been asked by the Board of Directors to serve in this interim role, while we conduct the search for our permanent CEO. On behalf of the entire Board, I also want to convey our thanks to Mike Keown for his commitment to the company's mission and his many contributions to Farmer Brothers during his time. As we position our company for its next phase of growth, the Board and Mike have agreed that now is the right time for a leadership transition at Farmer Brothers, and we all wish him well in his future endeavors. A bit about my background. I've been a Director of Farmer Brothers for 6 years, serving on the audit, compensation, governance and executive committees. I also bring more than 40 years experience in the food and beverage industry, including having previously served as CEO of Peet's Coffee & Tea President of Heublein Wines Group and CEO of Capri Sun. As part of the management team, I look forward to leveraging my extensive experience leading companies through periods of great change and transformation. Given my years on the Farmer Brothers' Board, I've stepped into this new role with a true appreciation for Farmer Brothers' strengths, operations and people as well as an understanding of the challenges in the business that must be overcome and…

Thanks, Chris. I'll now review our third quarter results in detail. Beginning with coffee volumes. Green coffee processed and sold in the quarter increased by 0.5% to 27.9 million pounds compared to the third quarter of fiscal 2018. The mix of coffee volumes processed and sold during the quarter was approximately 9.2 million pounds or 33.2% of the total volume through our DSD network, while direct ship customers represented approximately 17.9 million pounds of green coffee processed and sold or 64.1% of total volume. 0.8 million pounds or 2.7% of the total volume was through distributors. The slight increase in coffee volume was driven largely by improvement in volume from one of our top customers and the ramping of our new large global convenience store retailer we began shipping last quarter offset by the impact of 2 brands that we serviced in the prior year that were brought in-house by the owner of those brands. We experienced softer-than-expected volume through our DSD network, which I'll discuss in more detail in a moment. Net sales for the quarter were $146.7 million, a decrease of $11.2 million or 7.1% from $157.9 million reported in the same period of the prior year. The decrease was driven primarily by a decline in sales sold through our DSD network impacted by higher customer attrition related to the Boyd's integration and route optimization, less productive channel sales and short-term system issues and weather impact. Net sales were also primarily impacted by lower green coffee prices for our cost plus customers. I'll provide some additional context on a few of those items. First, regarding attrition associated with route optimization. Over the past several quarters, we have been reducing routes within our DSD network to deliver long-term efficiencies and cost savings. Part of these savings from optimizations have…

[Operator instructions] And our first question comes from Marc Wiesenberger with B. Riley.

Can you talk about the higher customer attrition related to the Boyd's business? And specifically kind of what changed from the customer perspective in the quarter relative to kind of your actions?

First what I would say -- this is David -- which is we've integrated the Boyd's customers with our customers through the DSD network. So as part of the route optimization, we've seen higher attrition, both in our legacy DSD network as well as Boyd's, and at this point, you can't really differentiate them. But I would say we're seeing cost savings come through and are committed from a long-term perspective that, that efficiency is the right thing to do.

Okay. And then I guess kind of following on that. The cadence of the efficiencies that you had expected kind of in the back half of fiscal '19 and then going into fiscal year '20, does that remain on track? Or do you have an updated kind of time line for those synergies to materialize?

No, no change in those. If you saw in the current quarter, we saw some of the leverage of our SG&A cost come in more favorable, and we're on that time line that we committed to when we rolled this out.

Okay, great. And then last quarter, you had an elevated level of installations. I think it was 1,500 plus. Why didn't that translate into some better results in the DSD business? And what can you do going forward to kind of make sure, or hopefully put you in a better position that those installations will translate to better performance in a shorter period of time?

Yes. I'd start off by saying some of these installations that we did last quarter and in the first quarter were some pretty large, significant wins for us. And so for a long-term perspective, we think those are valuable customers to have and they're going to ramp over time. But predicting the quarter that they start to ramp is hard to do, but we're pretty happy with the customers we've won. I would say that the attrition is higher than we'd like. So you did see that we're not getting a net growth in customers, and that's really where our focus is to drive new incremental wins.

Understood. And last one for me. Where do we stand with some of the large direct ship customers that were in the pipeline? And I know you talked about they're getting qualified. And any updated timetable on when they will be on-boarded and, in the system?

Well, you can see that we talked about in our remarks that the one large customer is up and running, and so we saw some growth modest but some growth in the current quarter, and we expect that to increase in the fourth quarter. The second large customer we've been talking about for a while, we're continuing to work through the on-boarding and qualification process. That said, in the guidance we gave, we're taking a conservative approach, so we're not contemplating the addition of that customer in our fiscal '19 numbers.

[Operator Instructions] And our next question comes from Gerry Sweeney with Roth Capital.

Not sure if this is too early to ask, but I mean you talked about becoming proactive on the DSD issues. Is there anything you can discuss that you started to implement, some major or lower hanging fruit that you think can be corrected sooner rather than later? Just a little bit of detail around, on that front if possible.

Well, Gerry, it's an ongoing process, but I would say is we're committed to the strategy that we have and we're adding on incremental resources both between the channel and the street sales organization and trying to get the optimal balance. And so I think as you look forward in the future quarters, we're going to get that right.

On that front, again, I always hate to ask this question but I think it needs to be done. But on the DSD side, obviously, you think you have the right plan in place. Is there any changes that you made in leadership within that segment down a couple layers that maybe someone wasn't executing? Or is something that needs to be changed, et cetera? Any commentary on that front?

I don't want to comment on lower level leadership changes in the organization, but I would say we are rebalancing where the team is focused both from individual performers, whether they're channel sales or street sales or large national accounts to drive more productivity because we were not happy with the attrition rate we've seen in our DSD network and taking actions to change that.

And then also just final question on the DSD side. It sounded like you're obviously happy with the big installs. You had some, I think, colleges, hotels, et cetera, large amount of installs, but it sounded like there was a disconnect between they won the business, they were installing it, but they weren't necessarily able to backfill with additional business. So a little bit of disconnect between sort of I guess doing both selling and installing at the same time. Is this -- is that sort of what I heard on the commentary?

Yes, I think there's a pretty significant onboarding process for some of these very major channel customers we won. But I would say is most of those larger installations are now complete, so now we're reinforcing our focus on further building out the pipeline. But it clearly was a lot of work both on our equipment installation team as well as our sales team to get it right.

Okay. And then last one, I promise on this one. Do they have a similar sort of -- on the direct ship, you win the business. You get qualified, and then the customer runs down their inventory. Then at some point, they start bringing your inventory on. Is that the same sort of process on the DSD side but maybe in a smaller sort of footprint or smaller type of volume?

Well, I would say that's true, and I would say the other level of complexity that takes time is we install equipment over multiple locations and multiple territories. And so that's sequence based on what the customer's time frame is. And so it takes -- like national accounts, there's a reason that takes a period of time for that to ramp up because you don't install that equipment overnight.

And I'm showing no further questions. I would like to turn the call back to Mr. Chris Mottern for any closing remarks.

Thank you. I just want to close the call by restating that my feeling is that Farmer Brothers has a strong platform for growth, and our long-term view of the industry and prospects for company -- for our company remains positive. However, we have invested a lot in resources and people, and we haven't achieved what we wanted to achieve to date. So as we move forward, our entire team will be operating with a sense of urgency to address the issues experienced in the quarter and drive improved results. So thank you for joining us today and for your continued interest and support of Farmer Brothers.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.