Farmer Brothers Company · NASDAQ:FARM
Farmer Brothers — Proxy Contest (November 2016)
76 slides from Farmer Brothers's proxy contest presentation, Nov 10, 2016
Slide 1: In Pursuit of Maximizing Shareholder Value
In Pursuit of Maximizing Shareholder Value November 2016 www.SaveFarmerBros.com
Slide 2: Table of Contents
Table of Contents Executive Summary Poor Track Record of Value Creation and Operating Performance Poor Capital Allocation Decisions The Board’s Questionable Corporate Governance Our Highly Qualified Director Nominees 1
Slide 3: Executive Summary
Executive Summary 2
Slide 4: About Save Farmer Bros.
About Save Farmer Bros. Save Farmer Bros. is a shareholder group led by Carol Farmer Waite and certain other members of the founding family, which is the largest shareholder of Farmer Bros. Co. (“Farmer Bros.” or the “Company”) Farmer Bros. is a business that we care deeply about, but it is a bu
Slide 5: The Farmer Bros. Story
The Farmer Bros. Story Farmer Bros. was established by Roy E. Farmer in 1912 to brew and distribute coffee to homes and businesses in the Los Angeles area In 1920, Frank Farmer, Roy’s brother, became a partner in the Company During the 1920’s, Roy and Frank grew the Company to expand to San Di
Slide 6: Farmer Bros.' Sudden Decline
Farmer Bros.’ Sudden Decline In 2005, with the passing of Roy E., the Company was led for the first time by someone outside of the Farmer family During this period the Company struggled to be profitable These struggles were compounded by the 2008 financial crisis, which eventually led the Comp
Slide 7: Situation Overview
Situation Overview In August 2015, Ms. Waite wrote a letter to the Board describing her concerns regarding the direction of the Company, as well as its current reputation • Ms. Waite was not provided with any answers or resolutions to her concerns by the Board Therefore, in October 2015, Ms. Wai
Slide 8: In Our View, The Board Has Failed to Create Sustainable Shareholder Value
In Our View, The Board Has Failed to Create Sustainable Shareholder Value 15.7x EV/EBITDA 16.0x 15.0x 14.0x 13.0x 12.7x 12.0x 12.1x 12.0x 11.0x 10.0x 9.0x 8.7x 8.2x 8.0x 7.0x LTM EBITDA NTM EBITDA FY 2017E EBITDA Management's Selected Peer Group Median Farmer Bros Farmer Bros. is materially underval
Slide 9: The Board's Poor Operating Performance
The Board’s Poor Operating Performance 50% LTM Operating Margin 46.4% 45% 40% 35% 30% 25% 21.7% 20% 15.1% 15% 10% 5.7% 5.2% 5% 2.9% 1.9% 0.1% 0% Dunkin' B&G Foods National Treehouse Coffee Farmer Bros SpartanNash Inventure Brands Beverage Foods Holding Foods Farmer Bros. lags most of management’s se
Slide 10: Questionable Capital Allocation Decisions
Questionable Capital Allocation Decisions Recently, the Board has made several capital allocation decisions, which we believe were subsequently contradicted by the Company’s hastily executed relocation of its corporate headquarters to another state, including: : Long haul fleet investments : Long
Slide 11: The Company's Return on Invested Capital is Significantly Lower Than Its Cost of Capital
The Company’s Return on Invested Capital is Significantly Lower Than Its Cost of Capital 12% 10% 8% 6% 4% 2% 0% -2% Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 WACC ROIC We believe the fact that the Company’s return on capital is significantly lower than its cost of capital demonstrates the Board’s po
Slide 12: Questionable Corporate Governance
Questionable Corporate Governance We question what we deem to be the Board’s egregious corporate governance practices, including: : Mr. Keown’s claim that he hand-picked three out of seven directors, (1) which leads us to question the overall independence of the Board and its ability to hold senio
Slide 13: We have called upon the Board to immediately form a special committee
We have called upon the Board to immediately form a special committee comprised of outside, non-employee directors to review strategic alternatives and to retain the services of an independent financial advisor to assist the special committee in this review The Board has yet to announce the formatio
Slide 14: Our Highly Qualified Director Nominees
Our Highly Qualified Director Nominees We have nominated three highly qualified candidates to stand for election to the Board at the 2016 Annual Meeting who will be committed to instituting governance best practices, restoring board independence, making pragmatic capital allocation decisions, grow
Slide 15: We Encourage Shareholders Should Ask These Questions of the Board
We Encourage Shareholders Should Ask These Questions of the Board Is the Company’s lagging valuation the result of the Why would the Company make it possible for the Board’s poor capital allocation decisions and egregious trustee to vote corporate governance practices? against the will of a majority
Slide 16: Poor Track Record of Value Creation and Operating Performance
Poor Track Record of Value Creation and Operating Performance 15
Slide 17: We Do Not Believe Sustainable Shareholder Value Has Been Created
We Do Not Believe Sustainable Shareholder Value Has Been Created 15.7x EV/EBITDA 16.0x 15.0x 14.0x 13.0x 12.7x 12.0x 12.1x 12.0x 11.0x 10.0x 9.0x 8.7x 8.2x 8.0x 7.0x LTM EBITDA NTM EBITDA FY 2017E EBITDA Management's Selected Peer Group Median Farmer Bros Farmer Bros. is materially undervalued relat
Slide 18: The Company's SG&A Spend is Not In Line With Management's Selected Peer Group
The Company’s SG&A Spend is Not In Line With Management’s Selected Peer Group LTM SG&A Margin 40% 35.8% 35% 30% 29.4% 25% 20.8% 20% 15% 12.5% 12.6% 10.3% 11.0% 10% 9.0% 5% Coffee B&G Foods Treehouse Inventure SpartanNash National Dunkin' Farmer Bros Holding Foods Foods Beverage Brands Note these num
Slide 19: Corporate Overhead Has Ballooned Under Current Management
Corporate Overhead Has Ballooned Under Current Management $43,000 8.0% $41,000 $39,000 G&A Expense ($ in thousands) 7.0% $37,000 G&A Margin $35,000 6.0% $33,000 $31,000 5.0% $29,000 $27,000 $25,000 4.0% 2012 2013 2014 2015 2016 G&A Expense G&A Margin G&A expense and G&A margin have grown substantial
Slide 20: Farmer Bros.' Operating Margin Lags Most of Management's Selected Peers
Farmer Bros.' Operating Margin Lags Most of Management’s Selected Peers 50% LTM Operating Margin 46.4% 45% 40% 35% 30% 25% 21.7% 20% 15.1% 15% 10% 5.7% 5.2% 5% 2.9% 1.9% 0.1% 0% Dunkin' B&G Foods National Treehouse Coffee Farmer Bros SpartanNash Inventure Brands Beverage Foods Holding Foods Even tho
Slide 21: Operating Margin Has Been Largely Flat
Operating Margin Has Been Largely Flat By adjusting for only restructuring costs and asset sales, the Board and management present a narrative of growing operating income and operating margin The Company has been decreasing inventory and depreciation has been steadily falling, however, which mak
Slide 22: Mr. Keown enjoys boasting about the Company's total shareholder return
Mr. Keown enjoys boasting about the Company’s total shareholder return during his tenure as CEO(1) We do not believe he is to credit for the Company’s improved stock price performance during this time Rather, we believe that most of the improvement has been due to the fact that Mr. Keown’s tenure st
Slide 23: Total Shareholder Return Under Mr. Keown is Not What It Seems
Total Shareholder Return Under Mr. Keown is Not What It Seems 40% Total Shareholder Return(1) Current Management Former Farmer Bros. Chairman & CEO Roy F. Farmer Bros. announces 20% Farmer passes away During the first half of CY it will restate earnings 13.8% 2010 Franklin Mutual because of an error
Slide 24: Poor Capital Allocation Decisions
Poor Capital Allocation Decisions 23
Slide 25: Questionable Capital Allocation Decisions
Questionable Capital Allocation Decisions Recently, the Board has made several capital allocation decisions, which we believe were subsequently contradicted by the Company’s hastily executed relocation of its corporate headquarters to another state, including: : Long haul fleet investments : Long
Slide 26: Corporate Relocation
Corporate Relocation In February 2015, the Company announced that it was moving its corporate headquarters from its longtime home in California to Texas(1) We believe there are several issues with the relocation • The decision appears to us to have been hastily made, and we question whether the
Slide 27: Was the Corporate Relocation Thoroughly Assessed?
Was the Corporate Relocation Thoroughly Assessed? When compared with other companies that have moved offices to the Dallas-Fort Worth region, was Farmer Bros. relocation of its corporate headquarters too quick?(1) Company Announcement Expected Move In Months Farmer Bros. (Corporate HQ, February 2015
Slide 28: The Relocation Will Cost Investors Much More Than They Were Originally Led to Believe
The Relocation Will Cost Investors Much More Than They Were Originally Led to Believe Original Plan(1) Updated Plan Torrance Closure Costs $25 million $31 million(2) New Facility Costs $35-$40 million $55-$60 million(3) New Capital Expenditures $20-$25 million $35-$39 million(3) “The final budget re
Slide 29: Certain Long-Term Strategic Investments Appear Shortsighted in the Wake of the Relocation
In Our View Certain Long-Term Strategic Investments Appear Shortsighted in the Wake of the Relocation : Machinery Investment in Torrance Plant : Modernizing Long Haul Fleet : Rebranding Long Haul Fleet : Investments in Torrance Electrical System 28
Slide 30: Machinery Investment in Torrance Plant
Machinery Investment in Torrance Plant Why did funds get utilized to invest in “state of the art” equipment in Torrance only to have the Company move to Texas shortly thereafter? Is the equipment going to be utilized in Texas? 2012(1) 2013(2) The fact that these slides are a year apart and repre
Slide 31: Modernizing Long Haul Fleet
Modernizing Long Haul Fleet Why invest money in the Company’s truck fleet for the long-term, if only to sell a few years later for short-term gains as it switched to third party logistics (“3PL”)? “CapEx in fiscal 2014 included additional investments in our fleet….” Mark Nelson, CFO Q4 2014 Earnings
Slide 32: Management Re-Branded the Company's Long Haul Fleet and Then Sold It Two Years Later
Management Re-Branded the Company’s Long Haul Fleet and Then Sold It Two Years Later Not only did management invest in upgrading the mechanics of the fleet, but they also re- branded it and then sold the long haul fleet two years later “In December 2015, the Company announced its plans to replace
Slide 33: Was the Cost of the Installation of Light Bulbs and an Equalizer Recouped Prior to the Relocation?
Was the Cost of the Installation of Light Bulbs and an Equalizer Recouped Prior to the Relocation? Did the $70,000 in annual savings ever materialize or was the entire project a misuse of shareholder equity if a relocation was on the table? Source: Farmer Bros. Form 8-K filed December 11, 2013 32
Slide 34: We Do Not Believe That These Cost Saving Initiatives Required Relocating an Entire Company
We Do Not Believe That These Cost Saving Initiatives Required Relocating an Entire Company to Another State : Replacement of Fleet with Third Party Logistics : Vendor Managed Inventory Initiatives : Disposal of Former Spice Business These costs savings initiatives have been consistently coupled with
Slide 35: Capability or Not? Spice Sold in 2015
Capability or Not? Spice Sold in 2015 “About 70% of our portfolio is in coffee, but we've got nice capabilities in spice….” Mike Keown, Director & CEO 2012 Annual Meeting, December 6, 2012 (emphasis added)(1) “Our major emphasis is on coffee, but we also believe we have opportunity in spice, in tea,
Slide 36: E-Commerce – To Exist or Not to Exist?
E-Commerce – To Exist or Not to Exist? For several quarters management has been touting the Company’s dive into e-commerce as a strategic objective • We believe, investor questions are consistently darted on investor calls and no indication of any added value or profit has occurred in this sector
Slide 37: The Board's poor capital allocation decisions become readily apparent
The Board’s poor capital allocation decisions become readily apparent when comparing the Company’s return on invested capital to its cost of capital 36
Slide 38: The Company's Return on Invested Capital is Significantly Lower Than Its Cost of Capital
The Company’s Return on Invested Capital is Significantly Lower Than Its Cost of Capital 12% 10% 8% 6% 4% 2% 0% -2% Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 WACC ROIC Source: Bloomberg 37
Slide 39: A New Acquisition In the Middle of the Corporate Relocation
A New Acquisition In the Middle of the Corporate Relocation On September 12, 2016, the Company announced that it had entered into a purchase agreement to acquire substantially all of the assets of China Mist Brands, Inc. (“China Mist”) for $10.8 million, plus a performance-based payment of $0.5 mi
Slide 40: The Board's Questionable Corporate Governance
The Board’s Questionable Corporate Governance 39
Slide 41: Questionable Corporate Governance
Questionable Corporate Governance We question what we deem to be the Board’s egregious corporate governance practices, including: : Mr. Keown’s claim that he hand-picked three out of seven directors, (1) which leads us to question the overall independence of the Board and its ability to hold senio
Slide 42: Mr. Keown's Personal Recruitment of Three Directors Leads Us to Question the Independence of the Board
Mr. Keown’s Personal Recruitment of Three Directors Leads Us to Question the Independence of the Board Identifying director candidates is the job of the Nominating and Corporate Governance Committee, not the CEO! (1) We have to question the independence of three current directors who were personally
Slide 43: Which Directors Did Mr. Keown Personally Recruit?
Which Directors Did Mr. Keown Personally Recruit? Director since Director since Director since Hired March Director since Director since Director since 1980 2009 2011 2012 2012 2013 2013 8 8 8 Guenter Berger Jeanne Farmer Hamideh Assadi Mike Keown Randy Clark Charles Marcy Christopher Grossman Motte
Slide 44: Is the Board Lying or Is Mr. Keown Lying? Or Both?
Is the Board Lying or Is Mr. Keown Lying? Or Both? In a recent filing, the Board implies that Mr. Keown’s claim that he recruited three out of seven directors(1) is a lie “Contrary to false claims by [Save Farmer Bros.] that Mr. Keown hand-picked a number of directors, the three most recently added
Slide 45: Are shareholders really supposed to believe that Leadership Capital Partners independently identified Mr. Marcy
Are shareholders really supposed to believe that Leadership Capital Partners, LLC independently identified Mr. Marcy when he and Mr. Keown served together previously as directors of a regional nonprofit in Boulder, Colorado It appears to us that the Chairman of the Nominating and Corporate Governanc
Slide 46: Messrs. Clark's and Mottern's past claims of being CPAs are material misrepresentations
We believe Messrs. Clark’s and Mottern’s past claims of being a current Certified Public Accountants are material misrepresentations 45
Slide 47: Mr. Clark "Retired" as a CPA in 1986
Mr. Clark “Retired” as a CPA in 1986 Mr. Clark’s CPA license lapsed in 1986 Source: CPAVerify.org as of November 9, 2016 (emphasis added) 46
Slide 48: We Have Been Unable to Find Any Verification That Mr. Mottern Has Ever Been a CPA
We Have Been Unable to Find Any Verification That Mr. Mottern Has Ever Been a CPA We were unable to find any evidence that Mr. Mottern, the Chairman of the Audit Committee, is, or ever was, a CPA Source: CPAVerify.org as of November 9, 2016 (emphasis added); California Board of Accountancy; Connecti
Slide 49: In 2013, Messrs. Clark and Mottern Claimed to Be Current CPAs
In 2013, Messrs. Clark and Mottern Claimed to Be Current CPAs In 2013, the Board disclosed that Mr. Clark “is” a CPA Randy Clark In 2013, the Board disclosed that Mr. Mottern “is” a CPA Christopher Mottern Source: Farmer Bros. Form DEF 14A filed October 28, 2013 48
Slide 50: In 2014, Mr. Clark Claimed to Be a "Retired" CPA and Mr. Mottern Continued
In 2014, Mr. Clark Claimed to Be a “Retired” CPA and Mr. Mottern Continued to Claim to Be a Current CPA In 2014, the Board disclosed that Mr. Clark is a “retired” CPA Randy Clark In 2014, the Board continued to disclose that Mr. Mottern “is” a CPA Christopher Mottern Source: Farmer Bros. Form DEF 14
Slide 51: In 2015, Mr. Clark Continued to Claim to Be a "Retired" CPA
In 2015, Mr. Clark Continued to Claim to Be a “Retired” CPA and Mr. Mottern Continued to Claim to Be a Current CPA In 2015, the Board continued to disclose that Mr. Clark is a “retired” CPA Randy Clark In 2015, the Board continued to disclose that Mr. Mottern “is” a CPA Christopher Mottern Source: F
Slide 52: In September 2016, Save Farmer Bros. highlighted no evidence Mr. Mottern ever was a CPA
In September 2016, Save Farmer Bros. highlighted that we were unable to find any evidence that Mr. Mottern ever was a CPA 51
Slide 53: In 2016, Mr. Clark Continued to Claim to Be a "Retired" CPA and Mr. Mottern Claimed He "Was" CPA
In 2016, Mr. Clark Continued to Claim to Be a “Retired” CPA and Mr. Mottern Claimed He “Was” CPA In 2016, the Board continued to disclose that Mr. Clark is a “retired” CPA Randy Clark In 2016, the Board now disclosed that Mr. Mottern “was” a CPA Christopher Mottern The Board yet to disclose to share
Slide 54: We demand that Mr. Mottern and the Board immediately provide evidence
We demand that Mr. Mottern and the Board immediately provide shareholders with compelling evidence that Mr. Mottern was ever a Certified Public Accountant, and if so, when he was a Certified Public Accountant If Mr. Mottern and the Board are unable to immediately provide compelling evidence that Mr.
Slide 55: The Board Changed the ESOP to Allow the Trustee to Vote Hundreds of Thousands of Shares
The Board Changed the ESOP to Allow the Trustee to Vote Hundreds of Thousands of Shares at Its Discretion On October 7, 2016, Save Farmer Bros. was shocked to learn that the Board had approved an amendment to the ESOP Prior to this amendment, “shares that had not been allocated to participant ac
Slide 56: Instead of allowing the shareholders with the most at stake to have complete say
Instead of allowing the shareholders with the most at stake – current and former employees – to have complete say in the direction they want the Company to go, the Board decided to give an entity with no economic interest in the Company, other than remaining trustee of the ESOP, complete control ove
Slide 57: We Do Not Believe the Board is Properly Aligning the Executive Compensation Program
We Do Not Believe the Board is Properly Aligning the Executive Compensation Program to Shareholder Demands Shareholder response to “say-on-pay” advisory vote(1) 2011 2012 2013 2014 2015 2016 88% 63% 67% 68% 60% ? Starting in 2012, “say-on-pay” results dropped to a level that we believe should concer
Slide 58: A Constant Realignment of Executive Compensation In Prior Years
A Constant Realignment of Executive Compensation In Prior Years Board Responses to Poor “Say-on-Pay” Results in 2013, 2014 and 2015 “In light of this stockholder advisory vote, during fiscal 2013 the Compensation Committee evaluated the Company’s executive compensation programs… which resulted in th
Slide 59: The Board Blamed the Poor 2015 "Say-on-Pay" Vote on Save Farmer Bros.
The Board Blamed the Poor 2015 “Say-on-Pay” Vote on Save Farmer Bros. Board Response to Poor “Say-on-Pay” Results “Our stockholders approved the compensation of our named executive officers, with approximately 60% of the shares present or represented by proxy at the 2015 Annual Meeting and entitled
Slide 60: ISS Report Quote on Compensation Program Design
“[T]here are some concerns raised with respect to certain design aspects of the company's compensation program. First, discretionary bonuses were paid to NEOs under the company's corporate relocation plan…. In addition, questions remain over the rigor of the company's performance based equity, which
Slide 61: The Board Has Limited Its Transparency When It Comes to Bonus Triggers
The Board Has Limited Its Transparency When It Comes to Bonus Triggers for Two Years Threshold Threshold Operating Cash Threshold Modified Net Income and Modified Flow: $22.35 million Threshold Modified Net Income and Operating Cash Flow: Confidential Net Sales: $463.0 Operating Cash Modified Operat
Slide 62: Why Was the Largest Shareholder on the Board Replaced as Comp Chair After Only Two Years?
Why Was the Largest Shareholder on the Board Replaced as Comp Chair After Only Two Years? We believe the removal of Jeanne Farmer Grossman, the Board’s largest shareholder, as Chair of the Compensation Committee reflects an attempt to stifle any differing views on the Board, which is contrary to pro
Slide 63: Rewards Given to Management for Not Performing
Rewards Given to Management for Not Performing Management received a significant bonus which was specifically created for FY 2015 despite performance targets being unmet and performance being worse compared to FY 2014(1) The special bonus was created under the shroud of all the hard work that wa
Slide 64: Mr. Keown Given More Option Shares Than Policy Allows per Calendar Year
Mr. Keown Given More Option Shares Than Policy Allows per Calendar Year “On June 3, 2016, the Compensation Committee of the Board… determined that a portion of the non-qualified stock option granted to Michael H. Keown… on December 3, 2015… was invalid because such portion caused the total number of
Slide 65: Has Messrs. Keown, Clark, Marcy and Mottern Actually Demonstrated Corporate Governance "Excellence"?
Has Messrs. Keown, Clark, Marcy and Mottern Actually Demonstrated Corporate Governance “Excellence”? 8 8 8 8 Mike Keown Randy Clark Charles Marcy Christopher Mottern The Board enjoys boasting about Messrs. Keown, Clark, Marcy and Mottern being National Association of Corporate Directors (“NACD”) Gov
Slide 66: Messrs. Keown, Clark, Marcy and Mottern are the epicenter of the corporate governance problems
Messrs. Keown, Clark, Marcy and Mottern are the epicenter of the corporate governance problems on the Board We believe that over the course of Mr. Keown’s tenure, the Board has taken numerous actions which fly in the face of proper corporate governance practices 2016 provides an opportunity to repla
Slide 67: We Encourage Shareholders Should Ask These Questions of the Board
We Encourage Shareholders Should Ask These Questions of the Board Is the Company’s lagging valuation the result of the Why would the Company make it possible for the Board’s poor capital allocation decisions and egregious trustee to vote corporate governance practices? against the will of a majority
Slide 68: Our Highly Qualified Director Nominees
Our Highly Qualified Director Nominees 67
Slide 69: We have called upon the Board to immediately form a special committee
We have called upon the Board to immediately form a special committee comprised of outside, non-employee directors to review strategic alternatives and to retain the services of an independent financial advisor to assist the special committee in this review The Board has yet to announce the formatio
Slide 70: Our Highly Qualified Director Nominees
Our Highly Qualified Director Nominees We have nominated three highly qualified candidates to stand for election to the Board at the 2016 Annual Meeting who will be committed to instituting governance best practices, restoring board independence, making pragmatic capital allocation decisions, grow
Slide 71: Tom Mortensen – Improving Operating Leverage
Tom Mortensen – Improving Operating Leverage Experience Held numerous positions during his 35 year career at Farmer Bros. Executive officer at Farmer Bros. from 2012 through 2015 Mr. Mortensen will bring to the Board his extensive knowledge of coffee, tea and culinary product sales and distribut
Slide 72: Tom is an extraordinary leader and embodies Farmer Brothers' passion for service
“Tom is an extraordinary leader and embodies Farmer Brothers' passion for service and dedication to each of our customers. I am looking forward to his leadership of the route sales organization, which is the backbone of the Company.” Mike Keown, Director & CEO Farmer Bros. Form 8-K filed April 3, 20
Slide 73: John Samore, Jr. – Improving Capital Allocation
John Samore, Jr. – Improving Capital Allocation Experience Currently serves as an independent strategic business consultant and as an independent tax consultant Retired Tax Partner at Arthur Andersen LLP Former Director of Farmer Bros. Certified Public Accountant in California Mr. Samore wil
Slide 74: Jennifer Gonzalez Yousef – Improving Sales Growth
Jennifer Gonzalez Yousef – Improving Sales Growth Experience Current Senior Group Manager, Industry Relations at WNS (Holdings) Limited Former Human Capital Analyst at Deloitte Consulting LLP Ms. Yousef will bring to the Board her deep knowledge of strategy, process improvement, information tech
Slide 75: Contact Information
Contact Information Investors: Okapi Partners LLC 1212 Avenue of the Americas, 24th Floor New York, New York 10036 (877) 796-5274 info@okapipartners.com 74
Slide 76: This presentation with respect to Farmer Bros. Co. (“Farmer Bros.” or, the “Company”) is
This presentation with respect to Farmer Bros. Co. (“Farmer Bros.” or, the “Company”) is for general informational purposes only, is not complete and does not constitute legal, tax, investment, financial or other advice or a recommendation to enter into or conclude any transaction or buy or sell any