Farmer Bros. Co. (FARM) Q4 2019 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the Farmer Brothers Fourth Quarter and Fiscal Year 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, Rachel Goldman. [Ph] Please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining Farmer Brothers’ fourth quarter and fiscal year 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, Rachel. Good afternoon, everyone, and thanks for joining us. On today's call, my intention is to update you on the Company's progress and addressing the fundamental issues in the business and the steps we've taken in the last 120 days to drive improvement in execution and financial results. In addition to providing a progress report, I will also share a view of what's ahead for the Company. To do this, I'll speak about events in fourth quarter of 2019 as well as the first quarter of fiscal 2020. David will review our financial results for the fourth quarter and full year of fiscal 2019 in detail. Before I discuss the recent work that has been accomplished by the team, as you may have seen, we announced the appointment of the new CEO, Deverl Maserang. This afternoon, in addition to reporting our financial results, we are very pleased that Deverl has agreed to lead the Farmer Brothers team. I'll speak more about his background and why we think he is an ideal fit, later on the call. As I stepped into the interim CEO role in May, it was clear to me that fundamental changes were required to get the Company back on track. In the last 120 days, I completed a thorough review of our business and saw silo thinking and fragmenting decision making across the organization, which at times was leading to resources both human and financial not being allocated appropriately. The good news is that many great employees stepped forward and assisted in a significant fashion to develop five key priorities. These were created with strategic intent. Success and execution of these priorities is forming a strong foundation on which the Company will be able to stabilize, move forward with momentum and be positioned for long-term success. These five priorities include effective cash management and debt reduction; customer retention and acquisition; efficiently managing coffee brewing equipment, installation and service; enhancing processes and systems; and reducing our SKU count, and achieving 100% product availability. Most of these priorities are connected and require teams to break out of their silos and work together and make decisions quickly to achieving the common goal of success. I am pleased and proud of those employees who have embraced change and are instrumental to the successes achieved to-date. I will comment on major improvements. But many, many great things are happening at Farmer Brothers. First, in terms of cash management and debt reduction. Our debt had reached a peak of $140 million on January 10, 2019. By August 31, 2019, we have reduced debt to $100 million, an improvement of $40 million. We also improved accounts receivable from a month-end peak of $79.5 million on December 31, 2018 to $56.7 million on July 31, 2019, a reduction of $22.8 million. We reduced inventory from a month-end peak of $123 million on November 30, 2018 to $90.4 million on July 31, 2019, a reduction of $32.6 million. Over the past 120 days, we completed the sale of certain assets that brought proceeds of $17.8 million, which were used to improve liquidity and pay down debt. These included the sale of parcel of Company-owned land in June for $1.3 million, the sale of our office coffee business in July to a large office coffee supplier, generating proceeds of $9.2 million. We expect to record an estimated gain of $7.3 million in the first quarter of fiscal 2020 with an additional potential earn-out of up to $2.2 million. Our office coffee business is not a core part of our overall business. And as part of this sale, we also entered into a significant three-year coffee supply contract with the purchaser. We sold our Seattle branch for $7.3 million. We expect to record an estimated gain of $6.9 million in the first quarter of fiscal 2020. We have recently signed an agreement to sell our Houston plant for $10 million with the leaseback term of up to 36 months. We expect this transaction to close in the second quarter of fiscal 2020 and are currently transferring volume to our other roasting facilities. Regarding customer retention and acquisition, the Company has been working for some time to improve DSD sales productivity, and taken steps earlier in fiscal 2019 to further refine the balance between our channel and street account based business. We have now taken an additional step by organizing the DSD business’s nine regions and integrating our channel and street businesses under the structure. As we evaluated our DSD accounts, it became clear that many of our channel accounts are regional in nature. Additionally, we connected the coffee brewing equipment control, installation and service with regional sales manager. The team's ability to be effective and control expenses has been aided enormously by our business intelligence tool. This tool allows sales team members the flexibility to use this key asset along with service to build our business at the local level. As we have begun the new fiscal year, this team is executing with a budget reduced by $14 million, compared to fiscal ‘19. For June, July and August, we are running favorable to the plan. In addition, this group is charged with developing revenue streams associated with equipment sales and service. We are already seeing results from this initiative. Long-term, we see this as a strategic opportunity. We have also reduced the span of each of our regions to focus on major metropolitan markets and their surroundings. In addition, we've added a developing market region for less dense markets that will require different forms of sales attention, roastery direct services being one. These sales efforts are being supported by trade marketing reporting to the Senior VP and GM of direct store delivery. Further, we have updated our DSD sales incentive program for regional sales representatives, providing significant upside for improved performance with added incentive when the branch team exceeds their goal as a unit. We believe we have established the right structure, the right team and have given our people the necessary tools to see greater success in retaining customers and winning new business. Our direct ship business performed in line with expectations in Q4 in terms of pounds sold to large national accounts. With that said, this business continues to be impacted by a highly competitive pricing environment. As we look to the future, we see growth opportunities mid-tier and smaller customers that are more of a hybrid between direct ship and DSD. These are customers who don't require significant investment of capital and people. They're coming to us for product development, equipment expertise and additional services, allowing us to achieve fair margins. While we are working to improve and grow our DSD business, we are making changes with indirect ship to increase our focus on these mid-tier and smaller hybrid accounts. We're also looking beyond this to additional growth opportunities. As I mentioned earlier, we're seeing good traction with our roastery direct services and see opportunity to continue building our ecommerce business where the services we provide are a differentiator with customers. Our systems and processes objective is to develop critical reports needed to better manage and control our business. First, for DSD, the new business intelligence tool that I briefly mentioned earlier is proving to be transformational. It provides key details about our customers including profitability, service events, sales, drop size, and equipment installed. The tool allows the user to drill down from total, to branch, to route, to customer by product sold or information on any element of our business proposition. We've already put this tool to use and it's providing the basis for setting our sales objectives and how we are working toward achievement of those objectives. Second, we're continuing to move ahead with the upgrade of our legacy JDE Enterprise system. This is a fundamental tool which hasn't been updated for a number of years. The significant improvement of this system will allow us to manage our business more effectively and efficiently. Third, we have piloted a 24/7 customer call center, which provides customers with immediate assistance. The initial results of the pilot have been excellent and a plan for the national rollout is currently underway. And finally, we have made progress as it relates to the technology our employees are using in the field. While we have made necessary improvements to our handheld technology, we are also adding an all-hours field employee call center for employees with product supply issues to directly reach an employee with the authority to fix the issue immediately. For SKU rationalization and our 100% product availability commitment, we are seeing progress in reducing our SKU count, but we still need to work through existing raw materials inventory for eliminated SKUs. This process for coffee entails rationalization from coffee blending to grind consolidations to standardization of films, to case packs, along with reduction of SKUs for allied products. We anticipate the result will be longer runs and fewer changes, while providing for more focused selling, and ultimately reducing scrap. Product availability at 100% involves better forecasting at the SKU level, and visibility of inventories of coffee and allied products all the way through our branches. The IT team is nearing completion of a branch tool that will improve ordering capabilities and provide better visibility into the inventory. Within this priority is a reduction of scrap. In 2019, our scrap was unacceptable. It was caused by overproduction, Houston's inability to produce without creating production scrap, and other field issues associated with obsolete product. More efficient manufacturing operations and improved product availability, coupled with the vibrant supply chain is important to our success now, as well as in the long term. As our team has focused on these five priorities since May and as we have entered fiscal 2020, we've also made a number of other leadership changes and adjustments to the organizational structure that we believe will foster improved execution and enable more nimble decision-making. In concert with the leadership changes, we right sized the organization and eliminated approximately 60 positions, mostly at our corporate headquarters in July to help us operate more efficiently. This will generate estimated savings of $7.6 million in fiscal 2020. We recorded a severance charge of $1.9 million in the first quarter of fiscal 2020. Having provided this update on progress made to improve execution and put the Company on the right path to improve financial performance, I'd like to turn next to our outlook for fiscal 2020. With the new permanent CEO coming on board and the business in the midst of a turnaround, we are not providing an expected range for adjusted EBITDA for fiscal 2020. With that said, I'd like to give some qualitative guidance for the fiscal year. We currently anticipate and adjusted EBITDA will be down somewhat compared to fiscal ‘19, factoring in the following assumptions. First, we expect direct ship to remain steady; second, our outlook also factors a turnaround we expect to see in DSD in the third quarter, with its new regional structure in place and more refined balance between our channel and street account-based business. Additionally, this assumes we pay our incentive plan this year, whereas we did not in fiscal 2019. David will provide some additional metrics in a moment that may also be helpful for your financial models. Before I turn the call over to him, I'd like to speak a few moments about the Company's incoming CEO. We are thrilled to have Deverl Maserang joining Farmer Brothers and are confident he is the ideal executive to lead Farmer Brothers into its next stage of growth. Deverl brings over three decades of innovative leadership in turnarounds, supply chain, management expertise, as well as deep experience in the food and beverage industry. He most recently served as President and CEO of Earthbound Farm Organic, where he led the company to deliver record operational execution metrics. Prior to that Deverl held multiple senior positions at food and beverage companies, including Starbucks, Chiquita Brands, and Pepsi Bottling Group. He will officially begin in the role on September 13th, and we look forward to benefiting from his experience insights and strong leadership capabilities. My time as Interim CEO has been short but productive. I am confident Deverl will hit the ground running and continue the great execution already demonstrated by this talented team. Deverl and I have already had in-depth discussions about Farmer Brothers business. The actions we have taken in the past quarter and our five priorities are designed to better position the Company for the future. With this foundation, and Deverl’s stepping in as CEO, we believe the Company is well-positioned to execute on our strategy on a standalone basis and also pursue M&A opportunities in parallel to drive maximum value for our shareholders. As it relates to our broader strategy going forward, we recognize that we operate in a consolidating industry and we want to be part of that consolidation. We believe that there will be potential opportunities on a regular basis and we plan to evaluate them as they come. It's been an honor serving as Farmer Brothers’ interim CEO. And I look forward to working with Deverl as the Company continues to improve and evolve. With that, I'll now turn the call over to David for a more detailed review of our financial results.

Thanks, Chris. I'll now review our fourth quarter and fiscal year results, beginning with coffee volumes. Green coffee processed and sold in the quarter was flat at 27.4 million pounds compared to the fourth quarter fiscal 2018. The mix of coffee volumes processed and sold during the quarter was approximately 8.9 million pounds or 32.4% of the total volume through DSD network, while direct ship customers represented approximately 18.2 million pounds of green coffee processed and sold, or 66.5% of total volume. 0.3 million pounds or 1.1% of total volume was through distributors. The flat coffee volumes reflect incremental new volume from the ramping of our new large global convenience store retailer who began shipping earlier in fiscal 2019, offset by the impact of two brands that we serviced in the prior year that were brought in-house by the owners of those brands, and reduced coffee volumes with one of our largest customers, as well as declining volume within our DSD network. Turning to the income statement, net sales for the quarter were $142.1 million, a decrease of $7.5 million or 5% from $149.5 million reported in the same period of the prior year. The decline in net sales was driven primarily by lower sales of coffee and allied products sold through our DSD network, offset by slightly positive growth within our direct sales channel, net of the impact of lower coffee prices for our cost plus customers. Net sales for our direct ship channel continued to improve as we ramped volume of the new large global convenience store retailer and trends improved from one of our largest customers. Sales through our DSD network was negatively impacted by higher customer attrition related to the Boyd Business integration, route optimization and lower inventory fill rates associated with downtime at our Houston plant. Gross profit in the fourth quarter of fiscal 2019 was $37.7 million, a decrease of $15 million from the prior year period and gross margin decreased to 26.6% from 35.3%. The decrease in gross profit was primarily driven by lower year-over-year net sales of $7.5 million between and higher cost of goods sold. The higher cost of goods sold is attributed to higher inventory mark downs on slow moving inventory, higher manufacturing costs driven by downtime associated with aging production infrastructure at our Houston facility, higher coffee brewing equipment and labor costs, and unfavorable shift in customer mix. However, the margin impact was partially offset by lower green coffee prices. I'd like to discuss a few of these items now in more detail. First, excess slow moving inventories remained a challenge in the fourth quarter, resulting in higher inventory markdowns and scrap expense as we worked through the excess product associated with the Boyd's acquisition. We also saw elevated scrap generated from production challenges at our Houston plant. As of year-end, our inventory levels have declined and are now back in line with historical levels. The higher manufacturing costs we reported in the third quarter at our Houston plant continued into the fourth quarter, negatively impacting gross profit. This month, we entered into a sale and leaseback of our Houston facility, which Chris discussed earlier, that will lock additional capital, enabling us transfer volume away from our Houston production facilities to our other roasting facilities, which in turn should reduce future manufacturing downtime and scrap expense. We have worked through the higher coffee brewing equipment costs throughout the quarter, declining over the third quarter but remained higher than the fourth quarter of last year. The reductions in costs as a result of increased cost controls we have put in place late in the fourth quarter. We expect to see further improvements in fiscal ’20 as the cost reductions and process changes fully take hold. Turning to operating expenses. Our operating expenses for the quarter decreased $6 million to $44.7 million from $50.7 million, and as a percentage of net sales declined to 31.5%, compared to 33.9% of net sales in the fourth quarter of the prior year. The decrease in operating expenses was primarily due to synergies achieved through the Boyd Business acquisition, headcount reductions and other efficiencies from DSD route optimization, lower acquisition and integration costs, and a reduction in bonus expense. Interest expense in the quarter increased $0.3 million over the prior year period to $2.8 million, principally due to higher outstanding borrowings on our revolving credit facility, primarily related to the Boyd’s acquisition. Other expense increased by $0.2 million to $2.1 million in the quarter, compared to the prior year period, primarily due to increased mark-to-market losses on coffee-related derivative instruments, not designated as accounting hedges. Turning to income taxes. We reported an income tax expense of $1 million in the fourth quarter of fiscal 2019, as compared to $1.3 million in the prior year period. A lower tax expense in the current year is primarily due to losses from operations in the fourth quarter of fiscal 2019 as compared to income from operations in the same period in 2018. As a result of these factors, net loss was $8.8 million in the fourth quarter of fiscal 2019 as compared to net income of $0.1 million in the prior year period. Net loss available to common stockholders was $8.9 million or $0.52 per diluted share available to common stockholders in the fourth quarter of fiscal 2019 compared to breakeven net income available to common stockholders in the prior year period. Adjusted EBITDA was $3.9 million in the fourth quarter of fiscal 2019, as compared to $14 million in the prior year period, and adjusted EBITDA margin declined to 2.8% for the fourth quarter compared to 9.3% for the same period last year. Our full-year adjusted EBITDA was $31.9 million, which fell $2 million below the low end of the revised guidance range we provided last quarter. Now turning to the balance sheet. Overall, we've been strengthening our financial flexibility by reducing debt levels and managing our working capital more efficiently. These efforts have led to improved free cash flow. At the end of the quarter, we had $7 million in cash and we had $92 million borrowed on a revolving credit facility or $85 million in debt net of cash. This compares to debt net of cash at March 31, 2019 of $110.8 million, a decline of $25.8 million. As of June 30th, availability under our credit facility was $56 million compared to $25 million in bank availability as of March 31, 2019. During the quarter, our collections of accounts receivables improved and our accounts receivable balance declined by $10.7 million to $55.1 compared to $65.8 million at the end of the third quarter and down $3.4 million from the prior year to $58.5 million. Our inventory levels also declined during the quarter by $12.5 million to $87.9 million compared to $100.4 million at the end of the third quarter and down $16.5 million from the prior year of $104.4 million. Accounts payable increased during the quarter by $10 million to $72.8 million compared to $62.8 million at the end of the third quarter and up $16.2 million from the prior year to $56.6 million. During fiscal ‘19, we were able to negotiate extended vendor terms, which supported the higher payable balance at the end of the quarter. Turning to capital expenditures. Capital expenditures and cash for the fourth quarter were $4.4 million with $4.1 million related to maintenance capital. Total capital expenditures for the year were $34.8 million, in line with our expectations. Depreciation and amortization expenses was $7.8 million in the fourth quarter versus $7.7 million in the same period of the prior year. Looking out to fiscal ‘20, we expect maintenance capital to range between $17 million to $20 million, a decrease over fiscal ‘19 maintenance capital of $21 million. The reduction in fiscal ‘20 maintenance capital over fiscal ‘19 is due to lower planned spending on new coffee brewing equipment and an increase in our use of refurbished coffee brewing equipment, which has a lower cost per unit. We expect depreciation expense in fiscal ‘20 to range between $7.7 million to $7.9 million for the next several quarters. We expect minimal cash improved taxes expense in fiscal ‘20. We expect our debt net of cash to decline during the first quarter from $85 million at the end of the year to $78 million to $82 million by September 30, 2019. We remain focused on the five operating priorities Chris outlined earlier on the call, and the entire organization is committed to returning Farmer Brothers to growth and profitability. And with that, I'd like to open the call up for questions. Operator?

[Operator Instructions] Our first question comes from the line of Gerry Sweeney with ROTH Capital. Your line is now open.

Good afternoon, Chris and David. Thanks for taking my call. A lot presented in the -- in your opening remarks here. So, a couple of things that jumped out at me that I wanted to highlight and get a little bit more detail, and one of them was on the direct ship business. It sounds like you're going to shift a little bit of focus to mid-tier and hybrid potential customers because of maybe some pricing in the market. I mean, is this a little bit of concern that you're not well positioned to go after some of these larger direct ship customers, or is the market changing substantially? This is the first. We really heard about this, and just want to get a little bit more detail because it’s an important component.

I think, possibly the answer is both. But, what is happening is the large national accounts -- there is a lot of competition for the business, they usually have three or four suppliers. And we're in a time where our yields are spiraling down in an unfavorable direction. So, that's occurring. And you begin to lose your ability to supply and make a reasonable amount of money. That being said, the other piece that we're realizing is we have lots of opportunity to add value to sort of the mid-tier and hybrid accounts that actually use us for our expertise. And it gives us a chance to impact their business favorably and make a fair margin. So, that's sort of our take on the industry right now. We continue to look at national accounts and we evaluate it when they come up for bid. And we'll make our determinations when that happens.

And does Houston play a part into this? I'm assuming Houston is going away, if this three-year leaseback gives you time to fully transfer production, get SKUs qualified at the other facility. So, is it correct to think that this facility is no longer going to be part of the portfolio at some point in the future?

We haven't made that decision yet. But, I do think, it is our most expensive plant due to its age, and its production cost.

I would say, Gerry, what we are planning -- now the plant is not necessarily connected to our strategy. If you look at the profitability we're making on these mid-tier customers as they’re coming out to bid, it just is a lot more opportunistic for us to seek those out, and we're seeing the opposite happening on the larger accounts we're seeking out of this. So, we're shifting towards more of a hybrid and middle-sized account where the opportunity is very good and it's where we have a good competitive advantage on the things that we offer that they don’t have.

Now, and the second part of that would be, right, so, Houston, I mean, that actually -- it's a decent sized plant and you have Northlake, which is, we’ll say state-of-the-art or at least new and for much more efficient. What's the calculus of not shutting Houston down and just moving that all to Northlake and better positioning your current assets?

We're not commenting on -- much more on Houston than we've said. But, we'll be doing a lot of analysis over the next 30 or so months to determine exactly what to do with our capacities.

Understood. I know you're limited, but I appreciate that. And then, one more question, and I don't want to -- and I'll jump back in queue, and if there is none, get some more in. But attrition DSD client, this has been ongoing. Any of the new initiative showing any signs of rectifying some of this attrition?

This is a long haul. I've been doing this about 130 days, and I think we are much better organized and we have a much improved team, along with better systems and processes to begin to move the needle. And that's what we're seeing. We're seeing a slight turn, but not enough to sit down and say we've turned the corner. This is going to take some time.

A high level question, very qualitative, but I mean at some point, with some of these DSD clients, especially small ones, was the transfer, maybe some of them the drop ship, less visits by -- or drop offs of coffee? I mean, was there just a disconnect in potential customer service or getting to know that driver who was delivering some of it, did that play into it potentially?

I think, one of the things you're saying is the driver -- the person who delivers the product, really important to the customer relationship. And that is true. So, as turnover occurs, it takes a while to train drivers and for them to understand the customer dynamics and what their needs are. So that's part of it. Also, there's a part of it of smaller accounts, actually we're achieving some success with our roastery direct services, which put that into a different form of distribution which some customers, especially small operators like, because they receive the coffee in a different fashion than a delivery. So, some of that’s occurring and we're happy with that. In addition, we have customer profitability from the BI tool by customer. And it allows us to investigate what makes that customer unprofitable and fix it. And sometimes we find they’re buying coffee at -- outside our system and using our service and equipment. In some cases, we recover that account and make it more profitable; in others, we take our equipment back. So, there's lots of moving pieces, but we're achieving the discipline, I think that's necessary to make DSD very successful.

[Operator Instructions] Our next question comes from the line of Kara Anderson with B. Riley FBR. Your line is now open.

So, I just wanted to kind of follow up on the customer attrition issue. Can you speak at all to where you think those customers might be going? Are they going to your competitors, are they going to club stores? Just curious as to where that business is being lost.

Well, I think, the first thing is, and I think, the -- we have a lot of people who've come from other DSD networks and that service the similar customers. And they expect a churn of about 30% a year between going out of business, new business, bankruptcies, just sort of -- just a normal situation that you would find it in businesses. Beyond that, I think, what we have experienced is that we kind of lost our way in terms of customer service as we made some changes in DSD, and that prompted customers to move elsewhere. And that we're in the process of changing. But also, people are moving to we suspect internet businesses and getting their product in a different form. But we think we can interrupt that with our roastery direct, and we are. And we think the BI tool is giving us much more ability to go back and have conversations with customers about the benefit of having quality service and then coffee brewing equipment that is serviced on a regular basis that is provided to them as long as they purchase acceptable minimums of product. So, I think, we're working at having the churn be exceeded by achieving new customers and basically building our business within the customers we have, because a lot of our customers don't buy the full line of product. And customer profitability brings that right to the front and enables us to act on that. So, we have lots of things going on that I think are going to make the attrition the additions.

And Kara, to add that, I mean, we did note at the call that our fill rates were not where we wanted them to be. And so, although it’s an existing customer, and they buy from us, when we're unable to fully deliver their order, of course they're going to buy from someone else, and they should. That's on us and that's why we call that we're addressing that. It’s some of the things we're doing with respect to Houston, so, we can raise our fill rates up higher, as well as some SKU optimization we're going through to make it easier to make our fill rates. So, it's just not customer churn, it's also existing customers that bought less in the quarter.

And kind of on that point, I was going to ask about sort of the fill rates. So, what I'm hearing is it was primarily a DSD things, or were you unable to fill inventory for some of your larger customers?

No, I think, it's principally DSD. That was impacted by that.

Okay. And then, you've also called out an unfavorable mix of customers, I think last quarter, this quarter again. Can you kind of, I guess expand on that and give us a little bit more color?

The first call out is, yes, our DS, our direct ship business grew at a faster rate than our DSD business. So, that will drive an unfavorable mix by itself. And I think that's a principal driver impacting our margins.

And then, I wanted to clarify I guess on the directional outlook for fiscal 2020. I think, you said you're expecting adjusted EBITDA to be down somewhat from 2019. But, it sounds like you are also expecting a flat direct ship and maybe some improvement in DSD in Q3, if I heard correctly, and as well as I think $7 million in sort of cost savings from headcount reductions. I guess, can you reconcile all that for me? This doesn't quite I guess add up to sort of what you would expect or what you're expecting to be a down adjusted EBITDA outlook?

Sure. A couple of things. One, the run rate of our DSD business has been declining. So, in the near-term, we expect that trend to hold. As Chris mentioned, some of our direct ship business, not all of it is facing more competitive pricing. So, that will impact us. And then, last year, we did not fund our incentive plan. And so that will cost us somewhat more. And then, the offset going the other way is we did announce some cost savings, principally at headquarters that will drive savings that you alluded to. So, if you net all those out in total, you get to about very close to where we were last year, slightly down.

I'm showing no further questions. Thank you. At this time, I'd like to turn the call back to Mr. Mottern for closing remarks.

Thank you very much. And we really appreciate all of you on the call. We have a dedicated employee team working to turn this business around. And so, we appreciate you listening. And we believe we have an opportunity to be a market leader. Thank you for joining us today and for your continued support and interest in Farmer Bros.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone, have a great day.