Farmer Bros. Co. beats earnings expectations. Reported EPS is $-0.03232, expectations were $-0.16. FARM isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon and welcome to the Farmer Brothers Fiscal Third Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. As a reminder, this call is being recorded. Earlier today, the company issued its quarterly shareholder letter available on the Investor Relations section of Farmer Brothers' website at farmerbros.com. The shareholder letter is also included as an exhibit on the company's Form 10-Q and is available on its website and the Securities and Exchange Commission's website at sec.gov. A replay of this audio-only webcast will also be available on the company's website approximately two hours after the conclusion of this call. Before we begin the call, please note all of the financial information presented in 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 security laws and regulations.
These forward-looking statements represent the company's views 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, which could cause actual results and other events to differ materially from those forward-looking statements is available in the company's shareholder letter and public filings. On today's call, management will also reference 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 shareholder letter.
I will now turn the call over to Farmer Brothers' President and Chief Executive Officer, John Moore. Mr. Moore, please go ahead.
John Moore: Good afternoon, everyone, and thank you for joining us. Over the course of the third quarter, we continue to see positive momentum, as we made year-over-year gains versus many of our key metrics. We see ongoing progress in our transformation, to becoming a direct-store delivery-based organization, and in our efforts to optimize utilization of newly right-sized operations. We executed a new corporate headquarters lease in Fort Worth, Texas, which better aligns with our current business needs. We also continue to consolidate roasting, packaging, and production at our Portland, Oregon facility. In addition, we made significant strides in our brand pyramid and SKU rationalization initiatives. Designed to create clearly defined traditional, premium, and specialty coffee lines within our product catalog, this change to our brand pyramid will remove SKU redundancies, and simplify our offerings for customers.
It will also provide additional operational and cost efficiencies for the organization, as well as streamline our inventory and overall sales approach. We achieved a milestone in relation to this project during the third quarter, as we now have more SKUs related to our new tiered coffee offerings in inventory, than those of our previous catalog. We are encouraged to already be seeing scheduling and production improvements, leading to increases in our in-stock and delivery capabilities. We expect to complete this initiative, by the end of the first quarter of fiscal 2025. We are also continuing to improve our field operations, through investment in technology upgrades and enhancements. We recently completed an upgrade of handheld devices for our route sales representatives, which will simplify device management, enhance support, and improve our inventory management, invoicing, and overall customer service efforts.
The common theme in these initiatives, is that we remain focused on customer growth, retention, and improving key elements of our value proposition, to ensure profitable growth. This process will take time, but our efforts and initiatives are beginning to bear fruit. We reached an inflection point during the quarter, as retention trends stabilized and our rate of customer decline improved, compared to the prior year. Overall, we are proud of the strides we have made so far this year and the early wins we have achieved related to our DSD transformation, but there is still much work to be done. As we have said before, we do not expect our results to be linear quarter-to-quarter. Change of this magnitude takes time and patience as we continue to implement the deliberate foundational changes necessary for long-term success.
A freshly brewed cup of coffee on a barista's counter with the store's logo in the background.
Our focus continues to be on the following, driving customer attention and growth, improving our cost structure, delivering incremental margin improvement, increasing market penetration for new on-trend products, and completing the transitional services associated with our direct ship sale. With that, I will turn it over to Brad to discuss our financials in more detail. Brad?
Brad Bollner: Thanks, John, and hello, everyone. As a reminder, results for fiscal 2024, and the prior year third quarter, are reported on a continuing operations basis, reflecting the performance of our DSD business in the respective periods. Please refer to our Form 10-Q, which was filed with SEC today, for further information regarding the respective performance, of our discontinued and continuing operations. Overall, we're pleased to have maintained the positive year-over-year gains we have made in gross margin and adjusted EBITDA profitability. Net sales for the third quarter of fiscal 2024, were relatively flat on a year-over-year basis at $85.4 million, compared to $85.7 million in the prior year period. Overall, net sales were impacted by a reduction in total unit sales, which were offset by higher pricing.
During the quarter, gross margins increased 660 basis points, compared to the third quarter of fiscal 2023, moving from 33.5% to 40.1%, respectively. Gross profit during the quarter increased $5.5 million to $34.2 million, or 19% on a year-over-year basis. This increase in gross margin was primarily driven by improvements in pricing, and a decrease in underlying commodities costs. Operating expenses decreased slightly from $35.6 million in the prior year period, to $34.7 million during the third quarter of fiscal 2024. This improvement was a result of a $2.3 million increase in net gains, associated with property sales and other assets, and was offset by a $1.3 million increase in selling expenses and a $200,000 increase in general and administrative expenses.
The selling expense increase, was primarily a result of additional costs related to health care benefits, and vehicle rental expense, was partially offset by a decrease in advertising-related expenses. Net income from continuing operations moved to a loss of $682,000 during the quarter, compared to a loss of $6.9 million during the prior year period, an improvement of more than $6.2 million. Our capital expenditures for the quarter were flat on a year-over-year basis at $3.4 million. In fiscal 2024, we anticipate between $12 million and $15 million in total capital expense. We expect to finance these expenditures through cash flow from operations and borrowings under our credit facility. Adjusted EBITDA for the third quarter remained positive for the second consecutive quarter at $271,000.
This compares to a loss of $579,000 in the prior year period. Looking at the balance sheet, as of March 31, 2024, Farmer Brothers had $5.5 million of unrestricted cash and cash equivalents and $200,000 in restricted cash. We had outstanding borrowings of $23.3 million, utilized $4.6 million of the letters of credit sublimit, and had $30.5 million of availability under a revolver credit facility. We believe we are adequately capitalized to finance our operations, and expect to achieve our goal to be free cash flow positive in early fiscal 2025. Although we do not expect results to be linear quarter-to-quarter, we are pleased with the gains we have made so far in fiscal 2024, and are confident we are building a foundation to support long-term profitable growth and value creation.
With that, I'll turn it back to John. John?
John Moore: Thanks, Brad. As you have heard, we are making marked progress in our DSD transformation, but are nowhere near the finish line. It is our view that there is a significant amount of upside still to be realized, in operational and cost efficiencies as well as top-line growth. We firmly believe in the potential of Farmer Brothers, to generate significant and sustainable shareholder value. Thank you to all for joining us on the call today. Operator, we will now open it up for questions.
