Vance Fisher
Thanks John and good afternoon everyone. As John stated, Farmer Brothers had a solid second quarter despite current market challenges with continued improvements in adjusted EBITDA in operating expenses and strong gross margin performance for the second consecutive quarter. Overall our adjusted EBITDA for the quarter was $5.9 million a year-over-year increase of $3.6 million compared to the second quarter of last year.
This was also a $4.5 million increase sequentially compared to the first quarter of fiscal '25.
Our adjusted EBITDA for the quarter was again supported by healthy gross margins. For the second quarter, our gross margin was 43.1% a year-over-year increase of 270 basis points compared to 40.4% in the second quarter of last year.
Our gross margin results primarily reflect our price optimization efforts over the past year as well as pricing actions taken early in the fiscal year to get ahead of the rising coffee markets. Sequentially, gross margins were down slightly compared to last quarter due to higher cost inventory starting to work through our cost of goods sold.
This will continue over the coming quarters and put some pressure on margins as we sell through higher cost inventory due to rising coffee prices. We do however believe our proactive pricing actions and inventory management have us positioned to continue to deliver margins above our 40% target over the coming quarters despite current market conditions.
For the second quarter, net sales were relatively flat year over year at $90 million, compared to $89.5 million for the same period last year.
Sequentially, net sales were up close to $5 million or 6% compared to the first quarter.
This sequential improvement represents normal seasonality along with further flow through of the pricing actions I previously mentioned, taken in the first quarter. operating expenses were $37.8 million or 42% of net sales in the second quarter, vompared to $31.7 million or 35.4% of net sales. In the second quarter of last year.
the year over year increase was driven by a $7.7 million decrease in net gains on asset sales as there were no branch sales during the second quarter of this fiscal year. When adjusted for net asset sales, operating expenses declined by $1.5 million year over year or 200 basis points as a percentage of net sales reflecting our progress in rightsizing our cost structure over the past year and positioning us well, going forward.
net income for the quarter was $0.2 million compared to $2.7 million in the second quarter of fiscal '24. You should know last year included $6.1 million of net gains related to asset disposals. While this quarter included a $1.5 million net loss related to asset disposals as there were no branch sales during the quarter.
Looking at the balance sheet as of December 31, 2024 we had $5.5 million of unrestricted cash and cash equivalents $0.2 million in restricted cash and $23.3 million in outstanding borrowings under our credit facility with $23.7 million of additional borrowing capacity. since the sale of our direct ship operations in 2023 we have been working hard to strengthen our financial position and create a stronger foundation for future growth and value creation for our shareholders.
Driving towards positive free cash flow has been a key element of this.
We've been making solid progress on this front as demonstrated by our six consecutive quarters of improved cash flow from operations including two consecutive quarters of positive operating cash flow. for the second quarter. Cash flow from operating activities was $2.6 million. An increase of $6.3million compared to the second quarter of last year.
We also reached an important milestone by achieving positive free cash flow for the quarter. Free cash flow was $0.5 million for the quarter. An improvement of $7.6 million compared to the prior year period.
As a reminder, farmer brothers defines free cash flow as cash flow from operating activities. Less capital expenditures.
Looking ahead, the unprecedented coffee markets will likely put pressure on our results over the coming quarters, we remain focused on execution. And as our second quarter results demonstrate, we are in a much stronger position to manage these challenges. Overall, we are pleased with our recent results and believe they demonstrate the significant progress we have made and provide a glimpse of our long term potential.
With that. I'll turn it back over to John John.
John Moore
Thanks Vance, our strong improvement year-to-date and in the second quarter is testament to the hard work of our team over the past year and a half, we're proud of the significant financial improvements we have seen so far in relation to gross margins, operating expenses adjusted EBITDA and operating cash flow.
These positive strides underline the success of our internal initiatives and efficiency efforts. There is still more work to be done though and we believe there is potential to realize additional incremental long term gains in terms of efficiencies.
The core focus of the organization at this time is driving growth in top line coffee pounds and customer accounts while continuing to optimize operations in the near term. The macroeconomic environment continues to be challenging for our industry that said farmer brothers is better positioned than it has been in prior years and we will continue to proactively adjust as needed to address these headwinds as our focus remains on protecting our customer base and driving top line growth with the addition of Brian as head of our sales team, we are further shoring up our business development strategy and capabilities.
This paired with the implementation of our simplified brand pyramid strategy and our focus on driving product penetration across our existing customer base should help to drive topline results as these initiatives gain traction in his new role, Tom will now also be able to fully focus his expertise on extending and enhancing our logistics and operational capabilities as we continue to work to optimize and add density across our existing DSD routes.
As is evident by our recent performance, we are continuing to make significant progress and improvements across the organization. Despite current market challenges with these improvements, we are confident when more stable market conditions return, we will be well positioned to realize significant positive gains and drive long term growth and profitability. I want to thank you all for joining us on the call today, operator. We will now open it up for questions.
Operator
Thank you. We will now begin the question and answer session to ask a question.
(Operator Instructions)
Gerry Sweeney, ROTH
Gerard Sweeney
Good afternoon guys. Thanks for taking my call.
Vance Fisher
Hey, Jared. Thanks for joining.
Great to hear from you. .
Gerard Sweeney
Congratulations. Obviously, you're executing very well with seeing the results. I did want, and I'm going to touch on that in a second, but I did want to start on obviously the top line. As you said, I think it's a growth in the top line is one of your strategic focuses going forward. No surprise there. You know, bringing Brian on board looks like you're making, taking some steps to either rework, revamped or tighten up the sales process. I'm just curious if maybe you could shed a little bit of light on what your thought process is on that front. Is this, you know, is this a big step forward? Is there, what's the opportunity here, etcetera along those fronts, if you could.
John Moore
Sure Jerry, we're extremely excited to have Brian Miller join the organization. You know, he comes with decades plus experience both in DD and specifically in the coffee space. You know, and he's charged with really breathing a new life and energy into our business development efforts. I think Tom Bauer has done a tremendous job restructuring. The KPI sets that drive the sales efforts, building that infrastructure building that team while simultaneously working through the various operational issues that we've talked about over the last year. And I think it's really about the scale and size of the both challenge and opportunity here at Farmer Brothers, having dedicated resources to both sides of the equation the optimization of the DSD organization and the business development efforts, I think are going to yield some exciting results for us going forward.
Gerard Sweeney
Got it. Switchgears obviously, like what I was probably alluding to and didn't articulate as well as, splitting the roles. You know, sales is important as this operational side and then on the operational side, maybe what inning do you think you are in terms of optimizing the platform? You've made some really good gains. We're seeing it in the numbers, but just curious as to how much more is out there and maybe some are, are there any chunkier items still remaining or are we going to see a little bit more blocking and tackling and some incremental gains?
John Moore
That's a great question, Jerry, I think I would say we're in the early to mid innings if I were to characterize it in that way, I think we're still getting a handle on all of the street level opportunities that remain. I do see that there's tremendous potential value in our existing customer base that that remains to an extent untapped. And one of the things we're really excited to dig into now that we have tom focused exclusively on the existing customer base and fulfillment of that White glove service value proposition. And we have Brian focused completely on the development of new opportunities. I think we can really fulfill our promise to the customer. We've, we've now buttoned up the brand pyramid skew rationalization piece. There's no question we've acknowledged and I think resolved some of the core challenges that we were facing in the past where there were the out of stock challenges or the equipment availability challenges. I think we've taken great strides in resolving some of those things and now we can really turn our lens to how do we increase that product penetration? How do we realize more value and strengthen that relationship per customer on a customer by customer basis? Because ultimately, that's going to drive that return on investment if we put equipment in and it will drive that top line contribution dollar per stop when we expand the footprint with the customer. So I think we have a lot of opportunity there yet to be realized and, and it's, it's great to think that we're in a space now where we can start to turn our lens more to strategic initiatives like that going forward.
Gerard Sweeney
Got it super helpful. I'll jump back into. I appreciate it. Thanks guys and congrats on the on the next quarter.
John Moore
Thanks Jerry. Thank you.
Operator
Eric Des Lauriers, Craig-Hallum
Eric Des Lauriers Lauriers
Great. Thank you for taking my questions and congrats on strong profitability this quarter, great execution.
My first questions are around the specialty tier brand. Just wondering if you could expand on any of the that positive early customer feedback that you touched on and then, overall, I know specialty is typically a smaller percentage of your sales. But do you see the rollout or I guess the full rollout of the specialty brand as a potential top line driver or is it more of a margin enhancer helping drive, the continued efficiency optimization that you guys have been executing on?
John Moore
That's a great question. I think it would, it would begin the former and end in the latter. So if you look at the data around coffee consumption patterns and particularly when you look at generational trends of most consumers, you can really see a gravitation to more exotic and specialty style beverages and flavor profiles as you get into Gen Z Gen Alpha and as that, that entire group matures into into a viable consumer set.
And that's one of the exciting things about the specialty opportunity, bigger picture, longer term is that it really aligns with a lot of those consumers. They're looking for the more conscientious consumer ideology around sustainability. They're looking for transparency. They're looking to have a more first person relationship with the products that they buy. And and I think our ability to do that to reverse engineer a value chain and coffee from seed to sip is something that really distinguishes farmer brothers. And what we can do the early results that, that you spoke to have been very positive.
You know, we're still in the early days there. So not putting too much color into that. But you can see some of that capability as evidenced with our relationship with your that we've discussed on the call. That's been out in the press, the ability of farmer brothers to do high quality production and sourcing work really differentiates us in our peer set. And I think in the initial phases, it'll it'll be somewhat of an optimization piece.
You know, we are optimizing through the collapsing of those multiple brands into one. You're seeing a consolidation of skews that's upward of 50%. When it comes to the finished goods, the total aggregate impact of the brand pyramid strategy has been a consolidation of over 66%.
And when you think about the associated raw materials and skew counts that go into producing these, it's over a 55% consolidation. So meaningful optimization the sourcing side and on the manufacturing side that then realized through the rest of the organization in the beginning, that'll generate value for us on the first piece optimizing our operations. But then longer term, I think we're excited to see this really a top line driver.
Eric Des Lauriers Lauriers
That's our help on great color. And you actually kind of touched on my next question. So with this us partnership I guess first question here is are the brands with us, is that sort of specific to that partnership or is this your your new specialty tier brand?
John Moore
It's a great question. Now, these are brands that are specific to that partnership. And I think as such, it really highlights one of our underappreciated perhaps core capabilities again, as a quality roasting and manufacturing sourcing operation, we do have the capability to, to breathe life into the value propositions and brands of others. And I think it's one of the things that distinguishes again, farmer brothers from many in the peer space.
And and that's a great example, again, their consumers are looking for eco friendly, environmentally sound, socioeconomically driven coffee types that also marry all of those sustainability and transparency efforts with very, very, very high quality. And we're able to having six curators on our team and a very accomplished coffee capability. We're able to fulfill all of their needs with that program under their flagship grant.
Eric Des Lauriers Lauriers
Yeah, that's great. How material could that us partnership be? I mean, obviously they're, they're, good sized customer. So I guess, yeah, fir first question just on how material that could be and then can you kind of talk about the landscape of these si of similar opportunities that are out there?
John Moore
Yeah, there are many in the space that that don't necessarily roas for manufacture but are looking for a partner that can provide that kind of service. And there are many that are also significant scale. So I would say it, it's a meaningful opportunity. Our core focus right now is not in that space to be fair, but it is a capability that we can bring to bear. When customers and prospects come to us, our core focus is and remains really on our, on the core business that we do. You know, our DSD customers are down the street business. Our, our accounts that we have today and then growing in that food and beverage space with our, with our own brands, but this is a capability that we can that we can offer.
Eric Des Lauriers Lauriers
No, that's helpful. And then last question for me here. So I also saw in the press that you have a direct to consumer e-commerce platform that you've recently launched. Can you just share any plans here or how you are thinking about this direct to consumer offer?
John Moore
Sure. So.
In actuality, many of the brands that we've had over the years we've spoken of in the past, they've had disparate brand expressions and there was no sense of familial affiliation between any brands. So one of the things we did and it's kind of in line with the brand pyramid strategy as well, was kind of align all of these existing sites, pare them down and make them consistent with the new corporate branding refresh, as well as the brand pyramid rollout, a critical element that was involved in that process was upgrading technology that was driving the e-commerce. And what's exciting for us really was the focus in that because as such, we enabled the B two B web based ordering platform that will go live in Q4 of this year. So although the early stages because it was a low hanging fruit, we did refresh the existing e-commerce sites and align them with the brand pyramid and with the new corporate refresh. Really, the exciting opportunity here is the launch of the B two B web based ordering platform that will go live in a few months' time and that will provide our customers for the first time in our history with the ability, ability to place orders at their own convenience while still enjoying the white glove service that our DS V fulfillment provides and that I think will enable them to, to really expand their line of sight into our other products that we sell. It will enable that product penetration that we've been talking about. And it also enables us to develop loyalty programming and promotional programming which again will drive that adoption and drive value creation through the portal. So we're really excited to see that come to light at the tail end of our fiscal year here in the second calendar quarter.
Eric Des Lauriers Lauriers
Great color. Thanks for taking my questions.
John Moore
Sure. Thank You.
Operator
(Operator Instructions)
Aaron Grey, A.G.P
Aaron Grey
Hi, good evening. And thanks for the question here. You've spoken a lot about, potential for increasing, the ticket from your existing customer base and just thinking about that through the lens of your product offerings, you just alluded to, making your customer base, more aware of the offerings that you have.
Do you think there's, any additional need to, to increase the offerings, either, via building out yourself, the products or, or acquiring? So, just any line of sight in terms of how you feel about the current product offerings, you have your customer base, do you need to make some additions to that or is it just making sure they're aware of the offerings that you have? Thank you.
John Moore
Thank you for joining Erin. Great to hear from you and happy to have you on the call and it's a great question. So, I think that right now our focus is on making the customers aware of the various offerings that we have. Again, one of the elements of the brand pyramid strategy was aligning all of our products in such a way that they, for the first time in our history would be available throughout the entire country. Keep in mind we grew through acquisition. It used to be that our products were very fractured and how we offered them where we offered them.
So again, for the first time in our history as of this next quarter, all three tiers on the coffee space will be offered throughout the nation and a unified methodology. When it comes to the allied portfolio we've said, and, and alluded to over the last year that we're always looking for innovative products and that was, the Shot Syrup Line that we've been launching and, and that we've been working with over the last year, that's been the Boyds Liquid Ambient Product that we've been talking about. We're expanding on that capability. We're excited about where that's going. And you know, we're, we're looking for new products, but our core focus is really on what we have and exposing our existing customer base arguably for the first time to that portfolio throughout the country in a consistent way.
Aaron Grey
Okay, great. Appreciate that color there. And then just secondly, you brought up price increases, not just for you guys, but in terms of the broader macro environment. So it sounds like more of those are coming for the year for the category. So do you feel like there, there is any potential limitation, are you looking to, to hedge the risk you have in terms of the commodity markets involved until you're sitting there? Just want to get a better line of sight in terms of any potential risk you might see in terms of, reaching some level of bottleneck for the price increases you have available. Thank you.
John Moore
Sure. I can speak to some of the market dynamics and, and bands can speak to our, our thoughts on price and where we stand today. I mean, there's no question. Robusta Coffee, hit an all time high just this past week, Arabica coffee hit an all time record high yesterday before then shattering its all time high record today. So getting all the way up to about 411 before closing at 4,395. So, but volatility in these markets is nothing new. It's what we do. We manage this on a daily basis and we always have and I would argue Matt Swenson and his Green Coffee team have implemented changes over the last year in our sourcing protocols that if anything make us more nimble than we've ever been in managing our supply chains, managing our cost structures that coupled with brand pyramid rollout and the associated screw rationalization both the green side and the finished good side that we did discuss.
That's really set us up pretty well to navigate these choppy waters. And I think our proactive approach to the pricing that we put in place at the beginning of the last fiscal year, this fiscal year rather. And the our capability to source forward plus all of these operational measures. It's really put us in a good spot, but I'll let that speak to the, to the s the pricing side.
Vance Fisher
Yeah. Erin, I would say, John covered obviously the pricing aspect of what we've already done. And as we stated in our, in our comments, we felt like we were, we've been working on pricing and margins, for the past year to kind of get back to that 40 plus target that that we're trying to achieve. And we've, you're pleased with the progress that we've made over the past couple of quarters. I think we're, we're, we're positioned well or better than we have in quite some time, to weather the current market conditions.
So being proactive earlier in the year, knowing the market was going to be rising, I think it's put us in a good position, as I think John mentioned earlier, we reserve the right to certainly take additional price if we need to. We're going to try and hold off on that as much as possible. It's a very volatile market conditions right now. But as we get further along in this fiscal year, we'll certainly be looking at that more closely and do what we need to do in order to, to make sure that we can continue to deliver, you know the margins that, that that we need.
Aaron Grey
Okay, great. Thanks very much for the color. I'll go ahead and jump back into the queue.
Operator
Hey, thank you. At this time, there are no more lines in the queue. This concludes the question and answer session as well as the conference. Thank you for attending today's presentation. You may now disconnect your lines.
