Good afternoon, ladies and gentlemen, and welcome to the Farmer Bros. Financial (sic) [Fiscal] Third Quarter’s 2022 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. Joining us 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 2 hours after the conclusion of the 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 law 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 on any other subsequent date. Results could vary 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, 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. Deverl, please go ahead.

Thank you, and good afternoon, everyone. Thanks for joining us today. Our 2022 fiscal third quarter represents another period of meaningful performance improvement across the business, highlighted by our 7th consecutive quarter of gross margin expansion and higher net sales, as volumes in both our DSD and Direct ship businesses continue to recover. Further, we posted meaningful progress in our adjusted EBITDA performance by attaining a $20 million annual run rate this quarter. Operationally, we saw incremental improvements and continued recovery across our business throughout the fiscal third quarter. These improvements were aided by the efficiencies we’ve implemented across the businesses over the past couple of years, which have reinforced the strength of our distribution network and positioned us for further improvement, as the industry continues to recover. While our fiscal fourth quarter is subject to typical seasonality, we expect to finish out the fiscal year on a strong note, and we’re excited to see the full potential of our improved business as the recovery continues and consumer behavior normalizes. We posted net sales of $119 million in the third fiscal quarter, representing a 28% increase from the prior year, which was again driven by continued recovery in our DSD and Direct ship channels. Within DSD, we experienced our highest average weekly sales since early 2020, and have more routes running over $1 million of annualized sales than we’ve had in many years. We are seeing net new customer sales growth and increased drop sizes at our long-term customer locations. Additionally, our Direct ship channel saw year-over-year growth of 23.7%, primarily due to higher volumes among critical customers and the increasing impact of our cost plus price increases, which are now flowing through our P&L. Turning to our gross margin, which as we mentioned, has continued to expand over the…

Thanks, Deverl Maserang. Since Deverl hit on the high level numbers, I’ll focus my commentary on the performance drivers and the strategic initiatives that enable us to achieve them. As Deverl mentioned, our total sales were up 28.2% from the prior year period, which was driven by continued recovery across our channels. Further, our continued gross margin expansion was driven by higher contribution from DSD, given the channel’s higher product margins. Our DSD sales continued to recover in Q3, and we saw volume improvements on a year-over-year and quarterly sequential basis. During the quarter, we experienced our highest average weekly DSD sales since the onset of the pandemic and now have more routes running over $1 million on an annual sales run rate basis than we’ve had in many years. Within the channel, we also saw increased drop sizes at our long-term customer sites and we continue to see new customer sales growth year-to-date. Please note, our DSD year-over-year comparisons reflect better production variances and inventory scrap write-downs from the closure of our aged Houston, Texas, plant that happened last year. And while this quarter and our fiscal fourth quarter will have some negative production variances due to the Omicron slowdown, we do not expect these impacts to carry into our 2023 fiscal year, in any meaningful way. Additionally, the price increases and delivery surcharges implemented across our DSD network in the previous quarter, and flowing through our results in Q3 help to mitigate that impact and will continue to offset some of the higher supply chain and product costs. We continue to keep our heads down on inflationary forecasting, and do what we can to stay ahead of the pressures. As such, the price hike we implemented in November was by design and was needed to offset the higher…

Thanks, Scott. And thanks to all of you who’ve tuned in for our call today. We will now turn it over to the operator to take your questions. Operator?

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Gerry Sweeney from ROTH Capital. Please go ahead.

Good afternoon, Deverl and Scott. Thanks for taking my call. I wanted to -- could we just talk about the price increases? You put one through in November. Then, it sounded as though you put another one through in April. But the one in April sounds maybe a little bit more targeted or have more surcharge in nature in terms of specific costs. Is that correct, or could we review that? And if you’re up for it, maybe discuss how much the price increases were you looking at?

Yes. Gerry, this is Scott. The -- I think, we were just trying to call out the nature of how we’re not just doing blind or blank across the board price increases that we’re breaking it out into the surcharges on both fuel and delivery costs. And I think at this point, both the fuel and delivery costs have risen up to where they’re somewhat stabilizing in recent months. So, I would say that April was really more about the coffee market and coffee pricing and getting us where we’re now fully caught up, I think with where the markets are. So, hopefully, it’s the end of kind of near-term price increases, but we’ll obviously watch the market closely.

Got you. So, maybe to summarize, these price increases get back -- can get back to where you thought, back to EBITDA where you believed is the appropriate pricing and margins for the products across the board?

Right. And we have our hedging in place still. And those hedging programs, they run for a few more quarters. So, we’re not really -- we’re, I guess, a little bit ahead of the curve, just because we know it takes awhile for that adoption. We’ve got a 30-day notice period on price increases and the like. So, we’d like to get the price increases out there knowing that it takes a little bit of time to get them out there. But the sizing -- I guess, I didn’t hit on that. The sizing of this most recent price increases, it’s not the same size as November. It’s a smaller price increase than our last one.

Got it. And we should see that -- yes, sorry. Yes.

Gerry, just to give a -- just a little more context. We think about our process, as it’s been for many, many years, maybe one annual price increase, which we did last year in mid year. And then we came back in November and we adjusted for inflationary coffee increases on various aspects. And then, that one was where we really thought we were going to be netted out. And then, of course, as you saw the April one that we just announced and it’s basically coming through right now is really kind of addressing those supply chain inefficiencies are occurring due to geopolitical and other issues around the world, fuel and shipping charges and transportation charges in the U.S. So, as we said in the prepared remarks, we’ve seen shipping in the U.S. specifically transportation, rail and truck starting to stabilize to a degree and then shipping internationally has been the challenge, and we’re managing that very closely and watching it to make sure we align actual increases there, because we don’t want to do anything more than pass along those types of costs, given just the sheer nature of the increases that we’ve seen over the last year. So, I think we are in really good shape. Specific call outs on each, as Scott mentioned, we are managing it incredibly close and watching it and trying to minimize, because this is unusual for us to have what we have had in terms of the number over the last year, and that is only a function that we try to be prudent and take measured approach to how many we’ve put in. But, as you know, this market has moved in an unprecedented way and we’ve been managing that along with managing the efficiencies that we can draw down. Otherwise, our results in this quarter would have been substantially better if we wouldn’t have had the leakage we’ve had for some of the things that have gone on. And now, we are getting back into a routine of managing it, so we can -- what I think the Street is asking us is to start to lay out some groundwork as to a little more guidance than what we’ve done just on capital and a few other things. But, real guidance, as we have been talking about doing and as I look at that right now, the guidance that we’d like to give, I think we still need another -- a quarter or so given just the global stability that we are playing in right now and how it’s impacted consumer demand in the U.S. and while we are encouraged, when we see great results on this quarter, we have got a lot more to do, continue to drive efficiencies and move forward in a productive way to get the confidence of the consumer back and also manage customers that have been struggling to get back, because not all channels have reacted equally across the U.S.

Got you. Shifting gears a little bit, Deverl. You had mentioned a customer selling 60 branches moving -- and we’ve spoken a little bit about this, they were moving away from the higher touch DSD business and sort of outsourcing that opportunity. How do you look at that from a strategic or tactical advantage for Farmer Bros. in next, 12, 18, 24 months?

Well, I think the first thing we’ve done is we recognized that we are following a different playbook. We firmly believe in DSD, and we believe DSD is the engine that’s going to continue to go. We are doing a lot in DSD to drive innovation for existing customers in terms of new products. We are looking at different ways to service these DSD customers. We’ve got a very robust insulation, repair and refurbishment segment or business component within the business that serves our DSD customers. So, we believe in the strength of that model, and the way we are attacking it is we’ve added many, what we call sales ambassadors, which are frontline salespeople outside of the direct store delivery, route service representative that manages the orders and delivers the product and manages the interaction with the customer. And then, we’ve added some business development managers, because we believe there’s a lot of opportunity in these regions where we can look at the best opportunities that were being serviced by DSD and use our branches and our assets to attack these customers and really provide them our white glove service. So, we are looking at those top Tier 1, 2 and 3 customers and being smart about the lower producing, monthly to quarterly top customers. And we have been in the Southeast and the Northeast pressing the gas hard on calling on a lot of these new customers. And I think you are seeing us get our fair share of those and manage those directly, and by default, we are seeing the same thing in our strength areas. And I think time will tell as these various distribution channels that have gone slower than the -- restaurant up and down, the street business has neared pre-OVID levels. All the…

Got you. Just speaking of route base, obviously, there’s growth opportunities there, but is there anything specifically you can do to help drive -- I get new customers, but larger drop size per customer. What can you do to expand what you’re doing with your existing customers to address more efficiencies there?

Yes. I think the number one thing is we are up in drop size even at the present, which is one of our stated strategic objectives. And we’ve been doing that. And the way we’ve been doing that first and foremost, because this is just operating better and that is selling the products that we have to those that don’t buy all our portfolio. And so, if you’re buying our copies, but you may not have been buying the pancakes or the syrups, then we’re in there giving the RSR the freedom to make those price changes and ensure that we compete with those that are competing against us in some of those allied based categories. The same would be true for sauces and dressings and anything else that complements that breakfast, lunch and brunch hour with coffee and tea, and cocoas, we’re doing. That’s number one. Because that’s something we can immediately impact. And we’re seeing that work really demonstrate some success. Second thing, we are increasing the premiumization of all the coffees that we serve our customers and offer our customers, and we’re constantly moving them up into espresso based beverage programs, where it’s a higher coffee than maybe some of the standards Farmer Brothers and Boyds coffees that we’ve served for 110 to 122 in Boyds that we have over these centuries. And from that perspective, we’re looking at continuing to draw on our experience as a team to push higher espresso based programs with our equipment manufacturers and our equipment team, because we sell in that area. The third thing we’re doing is, we’ve got a lot of new innovation projects on the drawing board that are directly tied to consumer research, customer research. So, focusing on not just the customers are served, but also the…

Got it. Maybe one or two more, Revive, that was the CBE business that you white labeled and rolling out? How is that progressing today, any update on that front?

It’s progressing well, and I’m going to let Scott take this one, because he’s been the executive in charge of really putting processes and systems in place for the last year, so we can ensure we can build and collect and provide a good basis service and we’re really doing some great things. It’s starting to become the point where we think we can import some numbers against in the next six months, or maybe even less. So, Scott?

Yes. Thanks, Deverl. And Gerry, as we’ve talked about, we’ll start to give more insight on those numbers and whatnot. It’s still -- we’re not a huge company, but still, it takes a while for a new business to become meaningful enough to talk about. But I think the best indicator, and you may have seen this out, when the posting boards, whatnot, but the best indicator is that we’re currently recruiting for a leader for this business. We have deemed that based on both customer response that we’re seeing, manufacturer partnerships that we’re seeing. And, quite honestly, we talked about the five geographies that we were operating in and doing this test and as we’re rolling it out. And so many of those partners are just asking us to go beyond those boundaries. So, we’ve started that. But obviously, it’s going to grow at a rate that we can grow it based on making sure that these technicians and all the people involved in the business are trained properly, they’ve got the background for it, and that we can keep up with it and do the work really well because that’s what matters. That’s a lot of what’s lacking out there in the marketplace. So, we want it to be a differentiator for us when we think of service and we want it to be really quality service first and foremost. So, I think what you’ll see is we’ll get a new leader in place. It’s the indication that we’re certainly serious about growing it and having it become a meaningful part of the business in the upcoming quarters. So, I would say, all is going as well as could possibly be expected.

Got it. And then final question, you did mentioned as well, you have real estate, obviously on the balance sheet and we have done some work on that front. What’s the equation you are going to sort of -- or equations or how are you going to look at progressing with that? Dallas-Fort Worth is a huge facility. I believe you own that outright. And it’s tens of millions of dollars, multiples of that in value, but what’s going to be the driving factors in making you maybe decide to sell and do a leaseback, et cetera. Obviously, you are a coffee company, not a real estate company, but any more light you can shed on that?

Yes. I think that, it’s kind of the gift of riches in a way, having such a real estate portfolio, but you are right, we do own outright. And obviously we have leaned against it with our debt, but we own our real estate outright. We own tens of millions of dollars of equipment outright in our fleet as well. Just -- it’s a lot of assets. And so, the review we are really doing, specifically to point it to real estate is a couple things. One is what we always do? It’s just that optimization of our footprint. And Deverl talked in his comments a little bit about how we are continuing the consolidation within Portland. I think that will result in some excess properties, most of those properties up there are leased. But still, we are just going to optimize the footprint, whether it’s owned or leased and make sure we’ve got the best footprint that we need to service the business. So, I think when we get through that process of just normal optimization of the branches as we come out of COVID, there’ll probably be a couple of properties that we just deem or excess. I think, the other approach we have is, to your point, it’s robust asset bases and values. And we are exploring a lot of things there. Even during COVID, we explored the sale-leaseback option. We are familiar with it. We have got a good handle on what that means. But, we are currently exploring other options where we can fully retain possession of the properties yet still unlock some of that value and the cash flows, within those properties. So, we are just seeing if that’s viable and meaningful for us, but we are doing it across the board. We’re looking at the machinery equipment, the fleet, just a full kind of capital allocation model to make sure we are primed for what we need to be set up for the next couple of years. Obviously, the deal we did a year ago, if you look at our interest costs year-over-year, even though debt is much higher, our actual interest costs is much lower, because of the deal we put in play. So, it worked really well. There is an old interest rate swap in there, that’s finally helping us as well. So, it’s all worked really well. But, we are just ensuring that we are set up for the next two, three years versus kind of being in just a true COVID mode. We are ready to grow and optimize the business going forward.

Gerry, on that point, I’m just going to say one other thing and take it back to our prepared remarks. And I think this is good for everybody to hear. As you look -- and you know probably better than anyone as you have analyzed that, and we have told many people about the public information you’ve provided in report’s a little dated, but obviously real estate has continued to increase in value, if not double, in most cases. But if you go back to my comments on opportunities to optimize our capital structure and expect to share more details on our plans for improvements that include lower debt levels in the coming months. I think, without speaking any more than what Scott has just stated and what I’ve stated, that is really our intent. And we put it in that boundaries, with a couple months that puts us up to our physical year in, as we close the year at the end of June. So, stay tuned and we will be producing some public comments between now and then.

I was trying to give you some leading questions to pull some more on that -- what you just said, but I got you. So, I appreciate it.

Yes. I would love to say more at this point, but as you know, -- we will get it out there, and we’re not the only public coffee company anymore. So, maybe we’ll produce a little bit more, given others have entered the frame the last quarter.

I appreciate it. I’ll leave it at that. Thanks guys.

Thank you, Gerry.

This concludes our question-and-answer session. I would now like to turn the conference back over to Deverl Maserang for any closing remarks. Please go ahead.

Thank you. Thanks again for joining us today. And in closing, we are really pleased with our financial results and we’re proud of the initiative we’ve executed against, given the very challenging turnaround times in most importantly the last couple of years of COVID, which continue to take hold and translate in continued improvements as we look at our financial performance against those things that have been occurring. The business is responding well to a post-COVID world. And we look forward to seeing how it responds, once consumer behaviors have fully normalized along with many of these geopolitical and second and third order types costs that are coming through. We’ve got enough synergies and cost efficiencies that we are working on right now, as we speak, to help continue to post the types of results. And as you know, we posted our seventh quarter of progressive gross margin expansion again this quarter, our best quarter without question across both, revenue, EPS, and EBITDA in all cases, beating the forecast that were estimated. So, we feel good about where we’re at. And we thank you for your attention and interest in Farmer Bros. And we look forward to talking to you in the months and the quarters ahead. Thank you.

This conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.