Good afternoon, ladies and gentlemen, and welcome to the Farmer Brothers financial third quarter 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. If anyone should require operator assistance during the conference call, please press star then zero on your touchtone telephone. 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 the Farmer Brothers 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 the 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. The 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 these 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 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 seventh 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 past seven consecutive quarters. We reported a 29.8% margin in the third quarter, representing a 4.2% or 420 basis points increase from the prior year period and an expansion of 30 basis points from the previous quarter. As noted earlier, our adjusted EBITDA improved meaningfully to $5 million, compared to a loss of $0.8 million in the prior year period, representing the most robust operational performance we've seen since the onset of the pandemic.
While we recorded higher adjusted EBITDA in our fiscal first and second quarters of 2021, those quarters benefited from one-time gains from our retired medical plan that were not a direct result of our field operational performance. Turning now to an update on our operations. With respect to specific markets, we saw a substantial recovery in our Eastern and Northeastern markets, both of which were more significantly impacted by COVID. Additionally, during the quarter, a major competitor closed over 60+ branches, and we are seeing others scale back, which is presenting us with opportunities to expand our current offerings in these markets.
While our highest customer-concentrated Western region, in addition to our Northwest and Southern regions, saw better sales compared to pre-COVID levels, they were not as heavily impacted in the prior year and did not have quite the same year-over-year growth opportunity. Nonetheless, all regions trended positively throughout the quarter and continued to show improvements year-to-date. In the Pacific Northwest, we continue to make progress in Portland, which will ultimately allow us to offset some of the higher costs we've been seeing, and is also part of our proactive strategy for the region. On that front, our consolidation efforts remain ongoing, and due to our recent announcement that we'll be consolidating our West Coast coffee operations into our existing facilities in the area, we expect more branch consolidation in the coming quarters. Further, we continue to make progress with our IT infrastructure in Portland and across the organization in key areas.
Our consolidation efforts remain a key strategic initiative for us across the board as we continue to increase the efficiency of our footprint throughout the nation. More specifically, we're considering the exit or sale of excess properties that will provide both lower operating expenses and potentially additional capital that would be used to reduce our debt levels. We are currently reviewing these branches along our vast asset base for opportunities to optimize our capital structure and expect to share more details on our plans for improvements that would include lower debt levels in the coming months. Despite the ongoing challenges with international shipping, we're pleased to see domestic shipping starting to normalize again, and we continue to find new ways to offset many of the higher costs we're facing due to the macroeconomic challenges.
One such way we're doing so is by proactively managing more components of our DSD business. For example, we're able to offset some of the product and labor inefficiencies during the quarter by targeting our tier five customers or less profitable customers and picking up older equipment for refurbishment and reinstallation at a higher volume and in new customer locations. Additionally, within our DSD business, we'll continue to implement surcharges, which we're now breaking down into individual delivery and fuel costs. I'll let Scott discuss all the nuances in more detail, but I'll quickly note that we continue to manage our pricing against inflation in an efficient manner. The price hike we implemented in November has now mostly flowed through our P&L and contributed meaningfully to our DSD margin in the quarter.
During March and April, we implemented additional price changes that essentially protect our margins for the current cost environment that we are seeing. In closing, we continue to manage through the inflationary environment during the third quarter and are encouraged by trends we see in the business as the initiatives we've been working on continue to take hold and translate into continued improvements in our financial performance. We're pleased with how quickly the business has responded to post-COVID world, which in large part is being driven by operational changes we executed throughout the pandemic. As we enter the fiscal Q4, we continue to focus on forecasting and managing inflation directly and indirectly. Despite the normal seasonality we tend to experience in our fiscal fourth quarter, we are confident in our ability to close out our fiscal year on a strong note.
Before turning the call over to Scott, I want to quickly mention two things as the 2020 calendar year marks two significant anniversaries for Farmer Brothers. First, the company turned 110 years old this year. While we're proud of all the progress we've made and are happy to say that we've been providing the U.S. with delicious coffee for over a century, we by no means plan on slowing down. In fact, we plan on being even more ambitious in the next 110 years. Second, we recently released our 10th annual sustainability report, which can be found on our website. We are among only a handful of companies that have set and met specific scientific-based criteria in this realm.
As a result, we're proud to say that for the second consecutive year, we were listed on the Carbon Disclosure Project, CDP Supplier Engagement Leaderboard, and recognized as one of the best companies for supplier engagement rating, SER, indicating our commitment to collaborate with our suppliers on climate action. Sustainability remains a priority for us as it has for 10 years now, and we're incredibly proud of the work we've done there. With that, I'll turn the call over to Scott to walk you through our financials.
Thanks, Deverl. 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. 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 helped 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 inflation we experienced throughout the current quarter. We feel that our more recent price increases have positioned us well for the current environment we are operating in. We've also started analyzing our price increases by individual components, such as delivery and fuel surcharges, instead of just product hikes, which provides us with more data and helps us forecast and manage the pressures more effectively. Additionally, it will also help us provide relief to our customers should the needed surcharge costs dissipate.
If you recall, we made mention of another price increase last quarter, which went into effect in April, so you can expect that to start to materialize in our financials throughout the fiscal fourth quarter. Even with the impacts of Omicron and the inflationary and other challenges we faced and continue to face, we posted our best gross margin in recent history for Q3, which speaks to our ability to manage expenses and implement price hikes strategically and effectively. As noted, we expect Q4 to be the first full quarter of normalized DSD operations with Omicron finally in the rear view mirror, and thus expect the efficiencies we've implemented to be better reflected in our gross margin. Turning now to our direct ship business.
As previously discussed, our direct ship business operates under a cost-plus model, which means the pricing pressures flow to our customers instead of us manually increasing prices. As such, the inflationary challenges we faced from September through March in our direct ship business won't be fully realized until the next quarter as our pricing engine captures these increases and passes them along to our customers. While a portion of those price increases are recognized in our P&L, the remainder sits within our inventory line items. This is because two-thirds of our coffee pounds roasted and shipped are for our direct ship customers, which again abide by the cost-plus model.
Because we have the data and control of our supply chain from bean to cup, we've also started to help our customers manage their inventory, as the supply chain challenges around getting coffee beans into the U.S. and the continued increases in coffee spot prices have become increasingly burdensome for them. To ensure that our customers stay in stock when possible, we've begun ordering our specialty coffee beans further in advance, especially our limited types of Arabica beans, which have been significantly impacted by the higher commodity prices. As a result, our net debt is higher in the quarter due to the upfront investments we've made. In fact, the primary investments we've made throughout the quarter were in inventory, which increased by $13 million from the prior year period, $10 million of which were direct investments in coffee.
Coffee spot prices from our 2021 fiscal year- end or the period into June 30 of last year have increased by 42% on a cost per pound basis. At the same time, our coffee inventory balance on a cash basis over that same period has only increased by 27%. While our hedging strategy is working and helping mitigate those increases, we are still expecting some inflationary investment in coffee inventory on our balance sheet in the upcoming quarters. In the long run, our focus will be on optimizing the efficiency of our inventory to improve working capital metrics, which will also aid in lowering our debt leverage. Turning now to our operating expenses.
In the third quarter of fiscal 2022, our operating expenses increased by $5.2 million or 15.2% to $39.5 million from $34.3 million in the prior year period. As a percentage of net sales, our operating expense decreased by over 260 basis points to 33.1% of sales, compared to 36.8% of sales in the prior year period. The increase in operating expenses on a dollar basis were driven by a $4.7 million dollar increase in selling expenses and a $600,000 dollar increase in general and administrative expenses. The increase in selling expenses was primarily due to variable costs, including payroll associated with the return of DSD routes over the past year and the operating costs associated with our new distribution center in Rialto, California.
The increase in payroll in both selling and general and administrative expenses was predominantly due to the expiration of the temporary 15% reduction in base salaries and the expiration of the 401(k) cash match suspension under the Farmer Brothers 401(k) plan, which were both cost- saving actions implemented in fiscal 2020 due to the COVID-19 pandemic. Our capital expenditures for the three months ended March 31, 2022, were $3 million, a decrease of $100,000 compared to the prior year period. This was due to lower investment spending of $1.1 million for several strategic initiatives completed during fiscal 2021, partially offset by higher maintenance capital spending of $900,000 compared to the prior year period.
The higher maintenance capital was mainly due to coffee brewing equipment refurbished and purchased for our DSD customers as volumes have improved and new customers are being added. Several key initiatives, including a focus on refurbished coffee brewing equipment to drive cost savings on a per- unit basis, have helped reduce our purchases as DSD sales volumes return. Turning now to the balance sheet. At the end of fiscal Q3, our total outstanding borrowings were $101.1 million, an increase of $10.1 million from June 30, 2021. While our cash balance increased by $100,000 from $10.3 million as of June 30, 2021 , to $10.4 million as of March 31, 2022.
The increases in our total outstanding borrowings were primarily due to higher inventory costs and the investments we've made there, in addition to the payment of our fiscal 2021 employee incentive program. These uses of cash were partially offset by cash proceeds from the sale of three branch properties during the nine months ended March 31, 2022, and realized hedging gains. Our net debt, which we define as total outstanding borrowings less cash and cash equivalents, was $90.7 million at the end of our third fiscal quarter, compared to $80.7 million at fiscal year-end of 2021, primarily due to the noted investments in inventory and incentive plan payments. Going forward, our focus remains on generating improved cash flow and paying down our debt. With that, I'll now turn the call back over to Deverl. Deverl?
Thanks, Scott, and thanks to all of you who 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. To ask a question, you may press star then one on your touch tone phone. If you are using a speakerphone, please pick up your headset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Gerry Sweeney from ROTH Capital. Please go ahead.
Good afternoon, Deverl and Scott. Thanks for taking my call.
Hello, Gerry. How are you doing?
Good. 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 like it may be 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're looking at?
Yeah, Gerry, this is Scott. I think we were just trying to call out the nature of how we're not just doing blind or blanket across the board price increases, that we're breaking it out into the surcharges on both fuel and delivery costs. I think at this point, both the fuel and delivery costs have risen up to where they're somewhat stabilizing in recent months. I would say the April was really more about the coffee market and coffee pricing and getting us where we're fully caught up, I think, with where the markets are. Hopefully it's the end of, you know, kind of near- term price increases, but we'll obviously watch the market closely.
Gotcha. Maybe to summarize, these price increases get you back to where you thought, back to even, or where you believe is the appropriate pricing and margins for the products across the board.
Right. Right. You know, we have our hedging in place still, and, you know, those hedging programs, they run for a few more quarters. We're not really, you know, I guess, a little bit ahead of the curve just because we know it takes a while for that adoption. You know, we've got a 30-day notice period on price increases, you know, and the like. We like to get the price increases out there, knowing that, you know, it takes a little bit of time to get them out there.
Got it. Yeah.
The sizing, you know, I guess I didn't hit on that. The sizing of this most recent price increase is, it's not the same size as November. It's a smaller price increase than our last one.
Got it. We should see that in a second.
Gerry, just to give a-
Yeah, sorry.
Just a little more context. When you think about our process as it's been for many, many years, we do one annual price increase, which we did last year in mid-year. Then we came back in November, and we adjusted for inflationary coffee increases on various aspects. Then that one was where we really thought we were gonna be netted out. Then, of course, as you saw the April 1 that we just announced, and it's basically coming through right now, is really kinda addressing those supply chain inefficiencies that are occurring due to geopolitical and other issues around the world, fuel and shipping charges and transportation charges in the U.S. 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.
Shipping internationally has been the challenge, and we're managing that very closely and watching it to make sure we align with actual increases there as 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. I think we're in really good shape, you know, specific call-outs on each.
You know, as Scott mentioned, you know, we're 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've tried 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 drive out. 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. Now we're 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, you know, a little more guidance than what we've done just on capital and a few other things. You know, real guidance as we've been talking about doing. As I look at that right now, the guidance that we'd like to give, I think we still need another quarter or so, given just the global stability that we're playing in right now and how it's impacted consumer demand in the U.S.
While we're encouraged and we see great results on this quarter, we've 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, you know, 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'd mentioned a customer selling 60 branches, moving. You know, we've spoken a little bit about this. They were moving away from, you know, 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 Brothers in the next, you know, 12, 18, 24 months?
Well, I think the first thing we've done is we recognize, you know, that we are following a different playbook. We firmly believe in DSD, and we believe DSD is the engine that's gonna continue to go. We're doing a lot in DSD to drive innovation for our existing customers in terms of new products. We're looking at different ways to service these DSD customers. We've got a very robust installation, repair, and refurbishment, you know, segment, or business component, within the business that serves our DSD customers. We believe in the strength of that model. The way we're 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 day-to-day interaction with the customer.
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, you know, our white glove service. We're looking at those top- tier one, two, and three customers and being smart about the lower- producing, you know, monthly to quarterly top customers. We've been in the Southeast and the Northeast pressing the gas hard on calling on a lot of these new customers. I think you're seeing us get our fair share of those and manage those directly. By default, we're seeing the same thing in our strength areas.
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-COVID levels. All the other channels that we serve on DSD have had a gap from where they were at pre-COVID. This new business we're gaining is kind of holding all that flat. You look at our price increases that we've had, which would be above where we were at a pre-COVID level. As we start to ascertain and look at the various dynamics within the DSD, which is where the bulk of our profit comes, as you know, we only put out pounds forecast and between the two, in terms of where we are on a pounds basis, and report pounds only.
You know, I'd like to get to a point where we could start to report, you know, more information on guidance on EBITDA and others. I think as this settles out, we'll see the DSD business start to operate at a more new normal level as we've been calling out and get another good quarter under our belt. I think from our standpoint, you know, our criteria of executing well beyond just fixing the base and starting to get into growth mode, as well as start to really lay the foundation, that's more consistent, where the last two and a half to three years have been very challenging with the turnaround and all things, COVID-related.
We're very optimistic at this point and feel like that, you know, we've got a lot of good efficiencies ahead of us to still draw out, and we're just trying to weather all these COVID-related expenses, and we're being prudent on where we're going on some of these DSD accounts due to the fact that transportation has been up, both in rail and truck. Importation of those beans are not equal. We're not seeing beans come into the West Coast. Many of those have been shipped to the Gulf, and the Gulf's under pressure, and we're starting to see them come into the East Coast. That means you got to move beans around to where your roasting facilities are, and our roasting facilities are predominantly in DFW and in Portland, so with some co-packers in various spots across the country.
Where we serve and where we're stronger, obviously, we've got better efficiencies and penetration. I think that's about as deep of an answer I can give you to kind of give everyone a perspective of how we're looking at it at the present. We are running a different playbook against many of our competitors.
Got you. Just speaking of route-based, obviously, you know, there's growth opportunities there, but is there anything specifically you can do to help, you know, drive, I get new customers, but, you know, larger drop size per customer. What can you do to expand what you're doing with your existing customers to drive some more efficiencies there?
Yeah. 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. The way we've been doing that, first and foremost, 'cause this is just operating better, and that is selling the products that we have to those that don't buy all our portfolio. If you're buying our coffees, 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 Boyd's coffees that we've served for the 110, the 122 in Boyd's that we have over these centuries. 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 excel in that area.
Third thing we're doing is we have got a lot of new innovation projects on the drawing board that are directly tied to consumer research, customer research. Focusing on not just the customers we serve, but also the consumers that they serve, and bringing products to the market that meet the need of those consumers and customers. You'll hear us talk more about, in the coming quarters, those new products that we'll be launching into the field. I'm really excited about that because that's been that kind of third leg of the strategy where we said we would, you know, fix, then optimize and grow. Grow is really about bringing new innovative products. We've been working a lot more with High Brew, with Califia Farms, and distributing plant-based products along with, you know, High Brew and their RTD.
We'll see more of that type of product working with those two companies and see that pushed out onto routes. Anything else that matches up with the current products that we serve, because again, I'll say it, and I say this often, we are not a food service distributor or a broadliner. We work with those companies and have many accounts in those types of customers. We are a specialty beverage distributor that anything that complements the coffee, tea, or cocoa products, we're gonna sell and serve off of our RSR DSD routes. That's hopefully gives you a sense of where our heads are right now and just continuing to improve our execution across the board.
Got it. Maybe one or two more. Revive, that was the CBE business that you white- labeled and rolling out.
Right.
You know, how is that progressing to date, and any update on that front?
It's progressing well. I'm gonna 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 could bill and collect and provide a good base of service. We're really doing some great things. It's starting to become the point where we think we can report some numbers against it in the next six months or maybe even less. Scott?
Yeah. Thanks, Deverl. Gerry, as we've talked about, you know, we'll start to give more insight on those numbers and whatnot. You know, it's still you know, when we're not a huge company, but still it takes a while for a new business to become meaningful enough to talk about. I think the best indicator, and you may have seen this out, you know, in the posting boards, whatnot, but the best indicator is that we're currently recruiting for a leader for this business. You know, we have deemed that based on both customer response that we're seeing, manufacturer partnerships that we're seeing, and you know, quite honestly, we talked about the five geographies that we were operating in and doing this test in as we, you know, we're rolling it out.
Many of those partners are just asking us to go beyond those boundaries. We've started that, but obviously it's gonna grow at a rate that we can grow it based on making sure that these technicians and all the people involved in the business, you know, are trained properly, they've got the background for it, and, you know, 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. We want it to be a differentiator for us when we think of service, and we want it to be really quality service, you know, first and foremost. I think what you'll see is we'll get a new leader in place.
It's the indications that we're certainly serious about growing it and having it become a meaningful part of the business, you know, in the upcoming quarters. I would say all is going, you know, as well as could possibly be expected.
Got it. Final question. You did mention as well, you have real estate obviously on the balance sheet, and we've done some work on that front. You know, what's the equation you're gonna sort of, or equations, or how are you gonna look at, you know, progressing with that? You know, Dallas-Fort Worth is a huge facility. I believe you own that outright and, you know, it's $ tens of millions, multiples of that in value. But what's gonna be the driving factors in making you maybe decide to sell and do a lease back, et cetera? Obviously, you're a coffee company, not a real estate company, but any more light you can shed on that?
Yeah. I think that, you know, it's kind of the gift of riches in a way. You know, having such a real estate portfolio, that you're right, we do own outright. And obviously, we have, you know, leaned against it with our debt, but we own our real estate outright. We own $tens of millions of equipment outright, in our fleet as well. Just it's a lot of assets. The review we're really doing, you know, 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. You know, Deverl talked in his comments a little bit about how we're 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're 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. 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 properties that we just deem are excess. I think the other approach we have is, to your point, it's robust our asset bases and values, and, you know, we're exploring a lot of things there. You know, even during COVID, we explored the sale and leaseback option. We're familiar with it. We've got a good handle on what that means.
You know, we're currently exploring other options where we can fully retain, you know, possession of the properties, yet still unlock some of that value and, you know, the cash flows within those properties. We're just seeing if that's viable and meaningful for us. What we're doing is across the board. We're looking at, you know, the machinery and equipment, the fleet, just a full kind of capital allocation model to make sure we're primed for what we need to be set up for the next couple of years. You know, obviously, the deal we did a year ago, if you look at our interest costs year-over-year, even though debt's much higher, our actual interest cost is much lower.
Yeah
Because of the deal we put in place. It worked really well. You know, there's an old interest rate swap in there that's finally helping us as well. It's all worked really well, but we're just ensuring that we're set up for the next, you know, two, three years, versus kind of being in just a true COVID mode. You know, we're ready to grow and optimize the business going forward.
Got it.
You know, Gerry, on that point, I'm just gonna 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've analyzed that, and we've told many people about the public information you've provided in reports. A little dated, but, you know, obviously real estate has continued to increase in value, if not double in most cases. 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.
Yeah
we put it in that boundaries. You know, with, you know, a couple months, that puts us up to our fiscal year-end as we close the year at the end of June. Stay tuned and we'll be producing some public comments between now and then.
I was trying to give you some leading questions to pull some more of that, but of what you just said, but I gotcha. I appreciate it.
Yeah, I would love to say more at this point, but you know, as you know.
We'll just have to wait.
We will get it out there and, you know, we're not the only public, you know, coffee company anymore, so maybe we'll produce a little bit more given others have entered the fray in the last quarter.
That's right. I appreciate it. I'll leave it at that. Thanks, guys.
You got it.
Thanks, Gerry.
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. In closing, we're really pleased with our financial results, and we're proud of the initiatives we've executed against, given the very challenging turnaround times, and most importantly, the last couple of years of COVID, which continued to take hold and translated into continued improvements, you know, 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, you know, 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.
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 forecasts that were estimated. We feel good about where we're at. I mean, we thank you for your attention and your interest in Farmer Brothers, 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.