Thank you for standing by, and welcome to the Farmer Bros. Company Q1 Fiscal 2022 Earning Conference Call. At this time, all participants are in a listen-only mode. After speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today’s conference call is being recorded. I would now like to turn the conference over to your host, Ms. Jennifer Milan. Ma’am may begin.

Thank you, and good afternoon, everyone. Thank you for joining Farmer Bros. fiscal first quarter 2022 earnings conference call. Joining me today 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 Bros. website at www.farmerbros.com. The press release is also included as an exhibit to the company’s Form 8-K and is 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 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 the most directly comparable GAAP measures is also included in the company’s press release. I will now turn the call over to Deverl. Deverl, please go ahead.

Thank you, Jen, and good afternoon, everyone. Thanks for joining us today. The first quarter of fiscal 2022 represented the fifth consecutive quarter of sequential improvement and three critical measures for Farmer, DSD sales volume, gross margin expansion and production at our DFW facility. Starting with the top line. Sales continue to trend favorably, with total net sales up 11.4% year-over-year as volumes in both of our core channels continue to recover. The structural and operational changes we’ve implemented into the business led to 600 basis points of gross margin expansion year-over-year and 200 basis points sequentially to 29%. We experienced our best DSD volumes during the quarter since the onset of COVID, and those trends have continued to improve in recent weeks. DSD sales were down around 25% compared to pre-COVID levels in our fiscal first quarter. This compares to down 41% in the corresponding period of last year and down 27% in the previous quarter. We’re very pleased with the sequential improvements materializing our top line numbers and gross margin, especially considering the headwinds presented by the Delta variant and the lingering effects of the pandemic, such as inflationary freight cost, labor shortage, and other challenges, elevated coffee prices and the yet to come full normalization of consumer behaviors. Despite these challenges and the fact that we’re still operating under significantly reduced DSD volumes compared to pre-COVID levels, it’s clear that the improvements we have executed are demonstrating the leverage opportunity in our business model as market conditions gradually improve. Our gross margin is now just below 30%, despite the continued reduced volumes we’re operating under. So we’re eager to see how the business responds, once our volumes fully recover and even start to grow beyond that. Our pre-COVID historical range hovered in the low to mid-30s. We’re…

Thanks, Deverl. In the fiscal first quarter, we saw continued meaningful progress and material improvements throughout our business. Sales in both our DSD and direct ship channels continue to recover, and our margins improved in both channels as well. Of note, we achieved sequential improvements in DSD sales in each of the past five consecutive quarters. As expected, and as we’ve communicated to you over the past few quarters, the largest DSD sales declines were from restaurants, health care, hotels and casino channels, while demand from C-stores had been impacted to a lesser degree. As Deverl mentioned, we experienced our best DSD volumes since the onset of pandemic in our fiscal first quarter and DSD sales volumes have continued to trend favorably in recent weeks as the Delta variant has subsided, and we enter our busiest time of the year. We continue to monitor our DSD business and our pricing closely while continuing to look for opportunities to proactively rightsize our investments in technology, equipment and personnel against our volume. We are hopeful for continued recovery, but are closely watching COVID and labor trends as they seem to be the most significant hurdles to growth that we currently face. Turning now to our direct ship business. As we’ve mentioned in the past, our direct ship business was less impacted by the pandemic, given the types of customers in that channel, including our retail businesses, private label brands and third-party e-commerce platforms. We ended our fiscal first quarter with direct ship sales down 5.7% on a year-over-year basis. Unfortunately, the fallout from the pandemic and the associated supply chain complexities put downward pressure on some of our customers’ businesses. As such, we optimized our direct ship customer base and exited several of our less profitable accounts throughout our fiscal 2020 and…

Thank you. [Operator Instructions] We have a question from Gerard Sweeney of Roth Capital. Your line is open.

Good afternoon, Deverl and Scott. Thanks for taking my call.

You bet.

Thanks, Gerard.

I was curious, Deverl, if you could maybe describe how much of an impact Delta sort of had through the quarter. So I think, we started off 1Q pretty good and then Delta raised its head and then, I think, created some headwinds, and now it feels like it’s dissipating. And I don’t know if you can do it qualitatively or quantitatively. I’m just trying to figure out, could that 25% down been much better without Delta, if that makes sense?

Well, as you go back to our prepared remarks upfront, we gave you the 25% and the answer is yes, it had an impact in the quarter. It got progressively better as the quarter continued to come into to the – towards the end. And then as you saw us report, we’re continuing to see improvements week-to-week through the current quarter. And so while we don’t provide specific guidance on the COVID recovery number, because things continue to ebb and flow. What we can tell you is two things. One, it improved, as we said; and two, the same behaviors that we saw in the prior three from the initial COVID drop, where we were 70% down to the July 4 to the Thanksgiving, Christmas and then most recently, Delta, the behaviors of our customers changed. And we’re seeing our ability to manage through with all the initiatives that we put into play and to all the mitigations on cost avoidance that we’re having as we manage our supply chain, ocean freight and transportation freight. I’ll turn it to Scott for any other maybe specifics that he can give you.

Yes, Gerard, it definitely impacted us. And as we talked about, we just did our yearend release in September and so at that point, the Delta variant was still pretty strong. So I think, the only thing I would really add to what Deverl said was that as we’ve more recently seen the Delta variant, the case counts really fall away, we’ve also seen a similar acceleration in our DSD recovery. So it’s definitely been tied to the Delta case loads. Now, I will tell you, we will continue to see – we’re continuing to see our best weeks and in fact, we’ve seen some of our best reported days that would be the best days of sales that we’ve had since the outbreak of COVID and that continues each week as we progress through. So we’re very hopeful with all the work that everyone is doing and specifically across our country on a federal, state and local level. We’re seeing pockets that we’re seeing a lot more recovery and then we’re still seeing some still lag and haven’t totally returned. And then as you saw in our prepared remarks, we still see a component on channels of distribution, where they’re showing up more progressive. We still haven’t seen breakfast come back in full view in all hotels, even though hotel occupancy continues to be an all-time high. We’re just now starting to see conventions and concerts come back at more of a normal level. Thus, the products that we sell into those channels are having a slower recovery. C-stores are rebounding better now that they’ve taken the coffee and tea from behind the register and put it back out into the bars, where you can have self-service again. So each channel that we serve is a little bit different, and every channel is reacting a little bit different than the other, and we watch that by region and by channel across the nation, each and every day.

Got it. Next question was utilization of employees, assets, branches, trucks. If you look at the revenue, the revenue was – on a sequential basis, was up 5%, 6%, but gross profit was up 10%, 11%. So you’re getting some pretty high contribution margins. Is this – and I know at some point, you say, we’re going to have to bring people back and – as volumes return, but that’s a pretty hefty contribution margin. And I’m not looking for guidance, but as we start to accelerate the volumes, is that portend to what we could look at on the margin front? Or were you running really hard with what you had in the quarter?

No, I’ll say a couple of things on that. First, every day, every week, we are maniacal as it pertains to bringing people back. We know we have to balance the health and well-being of our team members, first and foremost, which we’re doing. We have pockets where it’s outpacing the ability of some of our branches. So we’re reacting. We meet weekly and literally at – our Chief of Sales, who drives this process at our frontline DSD with Scott and I and our new CHRO, Amber, we constantly are evaluating this. I will tell you, we have a lot more routes that have picked up pace, because we look at routes on a basis of how much total dollars each one of those routes annualize that on a run rate basis. And that’s our trigger on putting headcount back in, plus ensuring market-by-market, where we’re working to ensure that our team members can take their allowed PTO and balance bringing new people on. So if you said the role, where you’re recruiting the most, we’re making sure that we’re bringing back and recruiting for both DSD, what we call RSRs, route service representatives and on our tech service technicians. Those are the top two job positions that we’re recruiting for right now, and we’re watching closely, because we know that our ability, first and foremost, to continue to drive more sales is get more installs and refurbs and repairs done to ensure the equipment is servicing the customer. And two, we know that we have to not put so much burden on the RSR and that is an absolute balancing act each and every other day. And what we’re really trying to do is just make sure that we focus heavily on the health and well-being of our team members and making sure that we’re doing as much as we can given the peaks that are occurring in any one of these good markets. But we will watch that, that’s – we know that, that’s a key statistic and the question you’re asking, we expect it to continue to be an area. We will not go back to the same structures that we have pre-COVID, that we’ve said to the Street. We will continue to say that, and we feel very good about that. And so we’ll be a different organization as we continue, but we’ll lay our cost back in as we absolutely new to so that we can continue to grow DSD sales with the frontline.

Got it. And then one other question. I know you touched upon on the inflationary items. There’s a lot of pack in the prepared remarks, but could you go over some of the levers, obviously, you have pricing power, I’m not sure how often you could – how hard it is to increase price or how often. I think you also even had fuel surcharges available in the past, plus some other items, maybe describe a little bit more in detail these levers that you can use to manage this?

Now, first and foremost, I’ll turn this to Scott, but I want to give a couple pieces of context. It’s a very pointed question. We’re in unprecedented time that I haven’t seen in my 35 years and that being said, we have a team that’s positioned to drive cost savings and cost avoidance. I’d love to see our numbers if we wouldn’t had this pressure, but what that has done to us is it has shifted the conversation with our customers, to a supply conversation. So they’re valuing supply over any other single item and so we’re working hard to keep our customers in supply. And with that, Scott gives more specifics on inflationary pressures and how we’re dealing with them.

Yes. Thanks, Deverl. And a couple of quick points, Gerry. One, on I’ll kind of weave it together with your last question you had about the sequential numbers quarter-to-quarter that we had from Q4 to Q1, because I think, that part of the story has been there. As you said, sales were up 5%, gross profit dollar is up 11%, so a really nice leverage. And then we tend to have noise in our OSG&A, because of asset sales or other entries. So if you look at just selling in G&A those two areas of the business were up 8%. So up a little more than sales, but not quite as much as margin, and my point was going to be a couple of things. One is there’s inflationary pressures. We are seeing the direct cost, the fuel costs, pass-throughs on freight. Obviously, we’re all kind of growing into the new labor rates that either we’re having internally, and we’re also seeing externally, so those are all pressures. But we also wanted to call out that we turned on a few more benefits on July 1, when we started the new fiscal year. So like our 401(k) cash match, those types of things as well. So that was a little bit of incremental cost quarter-over-quarter that’s in the P&L. But still, we’re making sure we control those costs and keep them in line with the rest of the P&L, so that we’re still getting contribution gains to the bottom. So that was one key point. I think the other key point I would make, and I think, you called it out in one of your research notes, and it was a great way to lay it out. I think, it’s very true, it’s all kind of affirm it for you, is you talk about how you think we have pricing power, we can put in these fuel and freight surcharges into our business, but that it may lag a bit with the actual cost coming in the business. And I think that we’re currently in a mode, where we’re seeing those costs obviously come in and come in rapidly in some cases. But we are instituting new surcharges and some new pricing as well, but we’re in the process of rolling that out. So that will kind of continue and really be impacted – or kind of fully impactful by the end of the quarter, but we’re kind of in the process now, whereas the costs are really here first. So there is a little bit of a lag between that catch up, but we’re trying to manage that as closely as we can.

Got it. Okay. Well, great quarter. I think a lot of people are excited to see what you guys can do as volumes come back, so a great quarter. Thanks for taking my questions. I’ll jump back in line.

Thanks, Gerry. Appreciate it.

Thank you. I’m showing no further questions at this time. I’d like to turn the call back over to Deverl Maserang for any closing remarks.

Thank you, operator, and thanks to all of you who have tuned into our call today. We’re pleased with our continued quarter-to-quarter improvements as we navigate COVID. The recovery, as you can see, is progressing and our strategy is having the impact we expected. Many of our customers have thanked us for keeping them in supply, and I think that is a big note to make here today, while others have struggled. And Farmer Bros. team members are working hard to execute each and every day. And lastly, I just want to add another note that we talked about in the prepared remarks, but we are pleased to announce our newest website that provides more detail to the newly branded revived service and restoration. The website is live at www.reviveservice.com, check it out, and we look forward to providing more progress in the coming quarters as it relates to Revive. This is going to be a big piece for us. So thank you for your time today. We’ll talk to you in the next quarter.

Thank you. Ladies and gentlemen, this does conclude today’s conference. Thank you all for participating. You may now disconnect. Have a great day.