John Moore; President, Chief Executive Officer, Director; Farmer Bros Co
Vance Fisher; Chief Financial Officer; Farmer Bros Co
Eric Deslaurier; Analyst; Craig Hallam Capital Group
Jerry Sweeney; Analyst; Roth Capital
Operator
Good afternoon and welcome to the Farmer Brothers third quarter, Fiscal 2025 earnings conference call. [Operator Instructions] Today, the company filed its Form 10Q and issued its third quarter results press release, which are available on the investor relations section of the Farmer Brothers website at farmerbros.com
The release is also included as an exhibit on the company's Form 10Q 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 that all the financial information presented is audited, and various remarks made by management during this call about the company's future expectations, plans, and prospects may constitute forward-looking statements for the purposes of the safe harbor provisions under the federal securities 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 release and public filings.
On today's call, management will also reference certain non-gap financial measures, including adjusted EBITDA and adjusted EBITDA margin in assessing the company's operating performance. Reconciliation of these non-gap financial measures to their most directly comparable GAAP measures is also included in the company's release and SEC filings. I will now turn the conference over to former brothers, President and Chief Executive Officer; John Moore. Mr. Moore, please go ahead.
John Moore
Good afternoon everyone, and thank you for joining us. The third quarter was another solid quarter for Farmer Brothers. We realized our third straight quarter of positive adjusted EBITDA at USD1.7 million maintained gross margins above 42%, and continued improvement on our cost structure with decreases in both our selling and GNA expenses.
I am incredibly proud of our team and their ability to continue to maintain and build on the positive momentum we have achieved over the last several quarters, despite the extremely challenging consumer and industry headwinds. As all of you are well aware, both the Arabica and Robusta coffee markets remain historically high. Consumer confidence dropped again in April, according to the conference board to the lowest reading in many years, and nervous consumers spend less and less often.
These market dynamics, coupled with uncertainty regarding the potential impact of tariffs, continues to put pressure on the industry as a whole. Farmer Brothers has been proactively working to address these challenges by streamlining our operations, increasing internal efficiencies, and reducing our overhead to better manage our overall cost structure.
As is evident by our recent results, we believe these efforts have had a meaningful and positive impact on the organization and have us well positioned to meet the challenging market environment. We must continue to protect our gross margins and the progress we have made to date in spite of the macroeconomic headwinds. As such, we recently completed some additional right sizing of the organization, primarily among our support teams and corporate leadership.
Included in those changes was the departure of our Chief Operations Officer, Tom Bauer. We thank Tom for his service and all that he has done over the last two years to help us navigate a significant amount of change and build a strong foundation upon which we now stand. Our sales team led by Brian Miller, who joined us earlier this year, and our DSD teams will remain separate as we mentioned on our last call. This will allow each respective team to focus solely on driving top line revenue and increasing both customer growth and retention.
Our DSD team will now be led by Vice President of Field Operations Travis Young, who previously served as one of our DSD regional directors. Travis has been with Farmer Brothers for almost 25 years and has worked in a variety of roles across our operations, sales, and production teams. His experience in the trenches and vast knowledge of the industry, our company, and our customer base make him uniquely positioned to lead our DSD efforts.
He also provides valuable insight and leadership into our ongoing route and capital optimization efforts, as well as our operational system and process enhancements. The official launch of Someone Coffee Roasters this quarter also marked the completion of our brand pyramid and coffee skew rationalization initiatives.
Over the last year, these projects have allowed us to remove redundancies, optimize our roasting and operational facilities, reduce overhead costs, simplify our go to market strategy, and enhance the overall customer experience. With clearly defined traditional premium and specialty tiers available across our nationwide DSD network for the first time in our history, our customers can now engage at the levels and prices which make the most sense for them.
This, along with our customer service efforts is something that will continue to set Farmer Brothers apart in the marketplace, particularly in the current economic environment. With that said, we did continue to see declines in overall coffee volumes and customer count during the quarter.
Total coffee pounds were down 9.4% compared to the third quarter of 2024. We believe this is driven in part by downstream degradation across the customer base. Despite these declines, we continue to deliver improved gross margins and adjusted EBITDA results. This is primarily a result of our cost management efforts and proactive pricing approach.
Overall, we are proud of the progress we have made and the results we have been able to deliver despite these unprecedented market conditions. We know there is still much to do as we proactively navigate this ever-changing market environment, focus on execution and position Farmer Brothers for long-term growth. With that, I'll now turn it over to Vance to discuss our financials in more detail. Vance.
Vance Fisher
Thanks, John, and good afternoon, everyone. As John said, Farmer Brothers continues to deliver solid results despite the challenging operating environment, with positive adjusted EBITDA, stronger gross margin performance, and continued improvement in our cost structure.
Overall, our adjusted even for the quarter was USD1.7 million, an increase of approximately USD1.5 million compared to the third quarter of last year. Our adjusted EBITDA results were again supported by healthy gross margins. Gross margin in the third quarter was 42.1%, a year over year increase of 200 basis points compared to 40.1% in the third quarter of last year.
As expected, gross margins did contract slightly compared to the second quarter, which reflects rising coffee prices working through our cost of goods sold. We expect this to continue over the coming quarters, but feel we have appropriately planned for this and we will continue to actively manage inventory and pricing to deliver margins above our 40% target despite current market conditions.
Net sales during the third quarter of fiscal '25 were down on a year over year basis to USD82.1 million compared to USD85.4 million during the prior year period. Operating expenses were USD38.1 million in the third quarter compared to USD34.7 million in the prior year period. The USD3.4 million increase was primarily driven by a USD5.3 million decrease in net gains related to asset disposals, as there were no branch sales in the third quarter of this fiscal year.
When adjusted for net asset sales, operating expenses declined USD1.9 million on a year over year basis, or 50 basis points as a percentage of net sales, reflecting our ongoing progress in right sizing our cost structure. As John mentioned, we've made some additional adjustments recently which better positioned us going forward to manage the challenging operating environment.
For the third quarter, Farmer Brothers recorded a net loss of USD5 million compared to a [700,000] net loss in the third quarter of last year. This quarter's results, however, included a USD2.4 million net loss associated with the disposal of assets, while the prior year period included a USD2.9 million gain associated with the disposal of assets.
Looking at the balance sheet as of March 31, 2025, we had USD4.1 million of unrestricted cash and cash equivalents, USD200,000 in restricted cash, and USD23.3 million in outstanding borrowings under our credit facility with USD22.1 million of additional borrowing capacity. For the third quarter, cash flow from operating activities was USD1.3 million, an increase of USD3.6 million compared to the same period last year, and marking our third consecutive quarter of positive operating cash flow.
Free cash flow was negative at USD0.7 million for the quarter, a USD5 million improvement over the third quarter of last year, a testament to our progress in driving better operating performance and improved working capital and CapEx efficiency. Looking ahead, we expect market conditions to continue to be challenging. We remain focused on execution and proactively managing the dynamic market conditions we are in and believe we are well positioned to do so.
We are pleased with the results of our recent quarters and believe they demonstrate the significant progress we've made in our ability to generate long-term value under more normal market conditions. With that, I'll turn it back over to John. John.
John Moore
Thanks, Vance. To date, this year has been one of tremendous improvement for Farmer Brothers. We are extremely proud of the progress we have made both operationally and financially, particularly in terms of adjusted EBITDA gross margins and improvements in our overall cost structure. We do, however, know there is still much work to be done. We remain committed to driving growth on our top line coffee volumes and customer base, as we know these are fundamental to our long-term success.
With our fully implemented brand pyramid, we now have a tiered go to market strategy which allows our customers to move up and down the value chain to meet their current business needs. Rather than looking for a new supplier, Farmer Brothers now offers them a good, better, and best option to meet their quality and price requirements while also providing additional beverage and allied goods and equipment, as well as comprehensive white glove customer service.
These elements are a true market differentiator for Farmer Brothers and a tremendous benefit. In the current economic climate. Furthermore, with access to 90% of the global coffee market, our new simplified brand pyramid allows our planning and procurement team to fully take advantage of our global sourcing relationships to find the best origin options without sacrificing quality.
This creates flexibility for our suppliers and allows us to proactively navigate potential tariff impacts as we continue to work to manage our cost structure. We do not anticipate any immediate tariff impact to our COGS in the current fiscal year. We remain focused on these elements as well as our initiatives to drive product penetration across our existing customer base and add density across our existing DSD routes. Our goal, of course, remains to drive top line and customer growth in the coming quarters.
Overall, we remain confident that we are well positioned to realize significant positive gains and create meaningful long-term growth and profitability when more stable market conditions return. I want to thank you all for joining us on the call today, operator, we will now open it up for questions.
Operator
We will now begin the question and answer session. [Operator Instructions]
The first question comes from Eric Deslaurier with Craig Hallam Capital Group. Please go ahead.
Eric Deslaurier
Great, thanks for taking my questions. First one for me, I just wanted to clarify one of Vance's, comments, so obviously, there's some macro headwinds with pricing, you do expect some gross margin headwind as a result, but, should we still expect a sort of 40% plus in the quarters ahead? I wasn't sure if those headwinds might bring us below that or if you guys still feel confident that. You kind of have enough leverage topo to maintain that 40% gross margin.
Vance Fisher
Hey, Eric, good question. Thanks for the question. Yes, we feel like the actions that we've taken today and will continue to take will certainly, put us in a position to stay above that target range over 40%. So feel pretty good about that over the coming quarters.
Eric Deslaurier
All right, great, it's great to hear I guess this is sort of a related question how much room do you have to continue reducing operational costs or or or even cost of goods I I guess this maybe overall, how much room you have to continue increasing operational efficiency, I mean. You guys comment on there's a lot of work still to be done, but frankly you've made a lot of improvements already. I guess I'm just curious sort of where we are in the overall scheme of improving operational efficiency and reducing costs.
John Moore
Hi Eric, this is John. Thanks for the question. Thanks for joining the call. I think, we've done a lot of work over the last year and a half to optimize the operations, as you've said, you never stop looking for opportunities to optimize your business, particularly in this environment, but I do feel as though we've taken a number of measures to position us to maintain that [40+%] close margin as Vance said.
And we feel as though we're in a very good place right now with the team that we have to go forward and to start shifting gears a little bit from from the optimization efforts to to really focusing on on growing the customer base and certainly maintaining and even selling deeper into the customers that we have. So I think that's really where our opportunity is at the moment. That's management team's focus, that's the focus of the team. Yeah.
Eric Deslaurier
That certainly makes sense to me. Last question for me, bit of a perhaps unusual question or I know just not the typical focus, but, on the allied products, how much of an ability is there to sort of add additional products or drive this revenue line? I mean, could this be a meaningful growth driver or is it. Kind of too small of an impact, not worth it right now while you guys are looking to, add more customers, add root density, all that good stuff. I'm just kind of wondering about that. Revenue line. [inaudible]
John Moore
So no thanks for that question, Eric. We see it as a tremendous opportunity. I think, when you've got the customer accounts that we have, you always have your [cap exend] has already been committed, right? So the most, advantageous way to add immediate value is to sell deeper and sort of land and expand with your existing customer base. And I think that for us we see that as a tremendous opportunity. We've launched an initiative specifically around that idea and we're seeing, some positive returns already.
So we're excited about that initiative. We have a lot of faith in our sales representative team and the operations team to execute on that, and I feel as though we've done a pretty good job of supporting that initiative with various other parts of the organization. So it's. It's mobilized the marketing team, it's mobilized sales support functions. It's mobilized, field operations team and we're seeing some good positive results.
Eric Deslaurier
All right, it's great to hear. I appreciate the call thank you for taking my questions.
Operator
The next question is from Jerry Sweeney with Roth Capital. Please go ahead.
Jerry Sweeney
Good afternoon, John, Vance. Thanks for taking my call.
John Moore
Thank you, thanks for calling in.
Jerry Sweeney
I wanted to touch on. The splitting or dividing of operations back in the previous quarter, so Business development field operations, and I think this sort of goes along with some of the commentary around growth right so field operations, a lot of optimization.
Running routes and then business development and that feels as though it was a recent move, just wanted to see how that was going, and, how does that sort of play into some growth opportunities or at least strategy into developing some more growth op.
John Moore
Sure, I think, Brian Miller's still relatively fresh in the organization, but he's hit the ground running and is already making some pretty significant strides. We're very pleased with the results there. There's been a bit of a cultural shift and shift in structure in the business development team and that side of the business. I think he would characterize that as sort of creating centers of excellence that are not as much beholden to geography as they may have been in the past.
And really more role and function specific where you're able to put your aces in your places and have people that are that are pretty dedicated to their function really thrive and excel. So that those changes have already been made and implemented and now, our focus is really on having a a cleaner differentiation between those on that side that maintain the business and retain the customer base that we have, maintain those relationships and if anything strengthen those relationships.
And then there's the pure customer acquisition activity which is more sort of the classic hunter gatherer differentiation, right? And there too we're seeing some some early progress some early results, so we're pleased with how that's going, but there's a ton of work to be done. And then I would say with Travis Young taking on the reins of the field operations team, we both share a belief that our route sales representatives can really unlock a tremendous amount of value for the organization.
I mean, if you look at the the head count alone and that side of the operation, we have exponentially more people pounding the pavement every day, selling into the customer base that we have where we have an ability to expand within that customer base, what we're selling and how we're selling it. Which makes us stickier with that customer base with the addition of [each SKU].
But in addition to that, there is a little bit of latent capability there that we can tap to do some business development work and some customer acquisition work, and not every single day is packed from beginning to end with deliveries, and we feel as though that team could add a tremendous amount of value by getting out and doing a little bit more business acquisition activity. So we're really looking to drive that over the quarters ahead and think that it could add quite a bit of value for the organization.
Jerry Sweeney
Got it. What's the biggest challenge right now to expanding growth? I mean. I'm assuming that it's probably the macroeconomic backdrop, a little uncertainty, etc. But I'm just curious as to How you guys view it?
John Moore
I think it is a little bit of that. I think it's also a very competitive landscape, and I think, we are still refining our value proposition and go to market strategy. So I think as we continue to do that and we continue to enable our business acquisition team through better tools, better technology, I think we're going to start seeing that we're able to invest in that growth and then we'll start to see the results that we've been looking for.
Jerry Sweeney
Then Corporate actions that took place. Did we see those, did they benefit this quarter at all, or should they sort of, well, will they benefit the next quarter with the Be cognizant that there are also headwinds. Exactly when they took place and how they sort of filter into.
Vance Fisher
Yeah, Jerry, this is Vance. They, those actions were taken in early Q4, so there you'll see the flow through in Q4 and really position is better going into into fiscal '26 instead of baseline going into F-26.
Jerry Sweeney
Got it. Great. Okay, that's it for me. I'll jump back and cue thanks.
Operator
This concludes our question and answer session, and it also con concludes our conference. Thank you for attending today's presentation. You may now disconnect.
