Ladies and gentlemen, thank you for standing by and welcome to the Farmer Bros Company Q3 Fiscal Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ms. Rachel Goldman. Thank you. Please go ahead.

Thank you. Good afternoon everyone, thank you for joining Farmer Brothers third quarter fiscal 2020 earnings conference call. Participating on today's call are Deverl Maserang, President and Chief Executive Officer and Scott Drake, Chief Financial Officer. Earlier today, the company issued its earnings press release which is available on the Investor Relations section of Farmer Brothers website at www.farmerbrothers.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 two hours after the conclusion of this call. The link to the audio replay will also be available on the company's website. Before we begin the call, please note that all 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 purposes of the Safe Harbor provisions under the federal securities laws and regulation. 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 on the company's press release and public filings. On today's call, management will also give you certain non-GAAP financial measures, including adjusted EBITDA and adjusted EBITDA margin and assessing the company's operating performance. Reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measures is also included in the company's press release. I will now turn the call over to Deverl. Please go ahead.

Thank you, Rachel. Good afternoon everyone and thanks for joining us. We hope you and your families are safe and healthy. Scott and I are together in our Farmer Brothers support center and are practicing social distancing with safety in mind. On our call today, I'll discuss our response to the COVID-19 pandemic and how we are managing our business through the crisis. And then, Scott will discuss our third quarter results in detail and provide an update on how we're managing our liquidity and capital during this time. Then we will take your questions. First, on behalf of our team here at Farmer Brothers, I'd like to express our deepest sympathies for those affected by COVID-19. We appreciate the work being done by first responders, healthcare workers and others on the frontlines fighting this global pandemic. I also want to take this opportunity to recognize the efforts of our team members who are ensuring we continue to supply coffee and other products to our customers and consumers. This is a challenging time and we appreciate their dedication. As the COVID-19 outbreak was declared a global pandemic in March and state and local government here in the US began to issue stay-at-home orders and mandate closure of non-essential businesses, we move rapidly to address challenges and adapt out operations to new ways of working. Our response to this crisis has been focused on three priorities; first, protecting the health and safety of our employees and our customers; second, taking actions to preserve liquidity and support the long-term sustainability of our businesses and third, managing our business through this time which is meant supporting some of our customers who have faced unprecedented demand, as well as accelerating strategies that will enable us to quickly take advantage of new sales opportunities. When…

Thanks Deverl. I'm pleased to be joining the Farmer Brothers family. As Deverl acknowledged, this is a very difficult time for the company and for the country as a whole. That being said, I'm extremely encouraged by the prospects for Farmer Brothers and the talented team here. The dedication and strength that I've seen in the face of this unprecedented crisis is inspiring and I'm confident we will navigate this trying time and emerge a stronger organization that will excel at meeting the needs of our existing and new customers in many improved ways. Now, let me walk through our third quarter results beginning with coffee volumes. Volumes in this quarter decreased by 2.2 million to 25.7 million pounds a 7.9% decrease over the prior year period. I will talk more in a moment on the drivers for this decline. The mix of coffee volumes processed and sold during the quarter was approximately 8.4 million pounds or 32.5% of the total volume through our DSD network, while direct ship customers represented approximately 17.1 million pounds of green coffee processed and sold or 66.4% of total volume. Approximately 300,000 pounds or 1% of the total volume was through distributors. Turning to the income statement, net sales for the quarter were $129.1 million which is a decrease of $17.5 million or 12% from 146.7 million reported in the same period one year ago. The decline in net sales was driven primarily by lower sales of coffee, beverage and allied products sold through our DSD network due to the COVID-19 pandemic, as well as the sale of our office coffee business in July 2019 and net customer attrition. As Deverl mentioned the impact of the pandemic on DSD revenues by the end of March 2020 was a decline of approximately 65% compared to…

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

Hey, good afternoon, Deverl and Scott. Hope you guys are doing well.

Hello Gerry

I appreciate you taking my call. You obviously gave a lot of detail there in the opening remarks. I wanted to discuss direct ship a little bit. Obviously, if the direction on DST, but on direct ship – I don't know how much detail you would like to get into but just trying to figure out how much ecommerce and retail are maybe prior to the pandemic and just trying to get a better gauge on how some of these national accounts are doing. I'm in Philadelphia. Dunkin' Donuts are closed, McDonald are closed, other fast-food restaurants are closed. The other convenience stores not serving coffee or had coffee removed [ph] behind the counter and you had to ask for it, so just trying to figure out how these larger accounts doing in the quarter so far.

Sure. Thanks, Gerry. Between Scott and I will try to give you as much color on this as possible. Here's what I would say. When you look at ecommerce and you look at retail grocery and you heard in our comments that we had a pretty substantial increase in ecommerce seven to eight times what the normal run rate was free. You heard us talk about retail grocery fortify. What that actually did is it made up the difference for all the other elements of direct ship. So when you talk about QSRs and you talk about convenience. Convenience was plugging along pretty well at the beginning of the pandemic and then we saw it decline when they realized that they needed to serve behind the counter. Some moved to that, some just cut off their coffee and tea out in the convenience area. It obviously had a follow-up component on the actual volume for convenience stores. However, any place that we service and we have some direct ship customers, as you know that service the industry on an RTD extract beverage component and we their roast coffee and ship. That volume was also up. So net of all of it we saw at times 10% to 20% overall gain and then we had the offset from the others. As we're seeing a comeback, we're still seeing – we've got a lot of orders backed up, part of the retail line that we put in and the reason we rushed to get that line fully operational in literally inside a few weeks. We've been producing on that line 24/7. And so what's good is we have that capability with that line that was basically completed. We just needed to operationalize it and that stuff. So we had a nice balance out. To get to your direct question on overall direct shift, pre-COVID levels, as you know, we were reporting direct ship volumes from 1% to 2% over prior year. So we are going to continue to watch this area well and I'll turn it to Scott for any other comments that he may want to make, as it relates to that specific question.

Yeah, thanks Deverl. I think Deverl did a nice job covering the gives and takes that are within the space. I think the only real thing that I would add is that our direct ship customers – the majority of those customers are on a cost plus type arrangement on their pricing. So when you look at the pricing and the revenues for that segment, I kind of go back and look at the coffee market movement over the period as well. If you look at the end of the calendar year, the coffee market pricing was quite a bit higher than at the end of the quarter, and the decline of just coffee markets were about 8% to 11%. So I think that's another factor on just when you look at the pricing that was a factor across that segment as a whole of those cost plus customers.

Got it and then shifting to margins, I think you mentioned about $6.5 million of cost take out on a monthly basis, which is quite substantial. Trying to figure out how much of that – you're hitting a lot of different component – I suspect some of that is in the cost of goods sold versus SG&A and I'm just trying to figure out what happens to margin with the lower absorption of overheads and then the positive is the cost outside. Maybe could you walk through that a little bit if we can get a little bit more detail?

Yeah. Gerry, as you see obviously the product margins expanded a little bit due to the lower reserves on slower moving inventories, the freight, the CVE, and some of the product variances that we had. But I think if you follow that through the P&L and get to the full margins, you're right. The saving – some of those savings are impacting margin because it does come through in cost of goods, some of the efficiencies from the plants and distribution. But it really is marked down the entire P&L where these savings are, so a couple of things I would point out is that the majority it is payroll related in some way, not the vast majority, but it's certainly a majority and that comes through with the headcount that's either been terminated a furloughed, also just you have the natural decline in some commissions and bonus programs that come with that. And then the specific actions we took to reduce salaries. There has been 401(k) matches, et cetera. There's been a lot of other actions reducing temporary labor and that goes for the home office here, the store support center as well as out in our different branches and production facilities. But as you go through, there's a lot of other direct costs that I look at that are related to volume declines, kind of volume metric. So if you go through that you get into all the different the production cost, the freight, the fleet, obviously with the coffee brewing equipment, the CVE segment. We're slowing down on service cost of parts and accessories there as well as the marketing the T&E, those controllable. So part of the difficulty in getting to what that margin is really going to fall out is that as you take these actions, employees are a good example. A lot of employees are still using and we're supporting their medical costs and they're also now going through their vacation pay. So that vacation pay is going to continue to show in our P&L, until they exhaust their vacation balances and then that will change these metrics a little bit as well. But I think overall it's just tough to overcome that top line hit and the sheer dollars you're going to add that we should certainly see improvements within the margins, both product margin and our cost margins.

Got it, that's helpful. And then I missed, I think you went through some metrics, you're obviously working on the working capital side, and I didn't hear what you said on the inventory side, just taking a bunch of notes. But I'm assuming inventory was down and what is sort of a good inventory number for you guys to have as you work through the pandemic? Obviously, it's going to change as we come out of this, but what is sort of an appropriate number, if you can discuss that?

I think that Deverl may have some thoughts on the number of longer term as well, but actually when you look at inventory, versus last quarter, I think as a micro-storing inventory a macro-storing inventory. So last quarter was actually up slightly, was up just a few hundred thousand dollars. It's kind of the micro-storing as we the pandemic started to impact. The inventories that they flow through our system, but on a macro level, it was over $100 million last year at this time. So it's come down about 15% year-over-year and my thoughts on the long term are you're also – as you derisk Houston and you get your production facilities where you want them, and you get them optimized. I think that'll help inventories in the long term, but I also think it's just hard in these times of – as we walk through the different customer types that we have and channels we have, with the different behaviors, some are up substantially summer pretty flat, others are down substantially. That's a tough environment to really have your inventories right. You just want to make sure you can be there for people with the products they need, so I think that's the focus near term, but I think it should continue to improve.

Only other comment I'd add to that Gerry is we, there is a pandemic, we got a pretty quick view after the first two days and then the first week. We immediately cut off supply of all inbound goods. We started assessing how much inventory we had, and more importantly, we've taken this opportunity where we've – we went to full make to – make the order only versus make the stock, so we could work that down. You heard us talk about the 330,000 as of last week, in regards to selling our inventory both that was distress. So we first started those programs for pop ups and branches from a distressed perspective and then we started moving into new inventory versus distressed inventory and also servicing all customers with product coming out of warehouses that were enabling us to bring down the inventories and not ordering anything else.

Got it.

I think long term and inventory, we still see it as an opportunity. If you go back to Chris' time here, he started inventory program. I continue that work with the team. We believe there's a lot of opportunity. We're going to get better visibility on our WMS that we're implementing and continue to drive down route branch in DC inventories.

Got it, I appreciate it. I'll jump back in line. Thanks.

Thank you.

[Operator Instructions] And speakers, I'm showing no further questions in the queue at this time. I'd like to turn the call back to the speakers for any closing remarks.

Thank you. As we navigate through the uncertain period. We will continue to prioritize the health and safety of our team members and customers as well as take actions to support the long-term sustainability of our business. We are thankful to our dedicated team members who have demonstrated remarkable commitment and courage during this global pandemic. We strongly believe the strategic actions we are taking as a company will position us for success when the nation begins to emerge from the state of crisis. We appreciate you calling in today and thank you for your continued interest in Farmer Brothers.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program and you may now disconnect.