Where Food Comes From, Inc. (WFCF) Q4 2014 Earnings Report, Transcript and Summary

Greetings and welcome to Where Food Comes From Fourth Quarter and Year-End Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Jay Pfeiffer of Investor Relations. Thank you, Mr. Pfeiffer, you may begin.

Good morning and welcome to the Where Food Comes From 2014 fourth quarter and year-end conference call. During the course of this call, we'll be making forward-looking statements based on current expectations, estimates and projections that are subject to risk. Statements about future revenue, expenses, profitability, cash, growth strategy, new customer wins, business opportunities, market acceptance of products and services and potential acquisitions are forward-looking statements. Listeners should not place undue reliance on these statements as there are many factors that could cause actual results to differ materially from our forward-looking statements. We encourage you to review our publicly filed documents as well as our news releases and website for more information about the company. It is the company’s policy not to provide specific guidance with respect to future revenue and earnings expectations or new customer wins. I’ll now turn the call over to John Saunders, Chairman and Chief Executive Officer.

Good morning, everyone; thanks for joining us today. This morning, we announced another good quarter and solid top and bottom-line growth for the full year. I’d like to focus on a few financial and operational highlights before opening the call to questions. In the fourth quarter, total revenue increased 41% to $2.6 million from $1.9 million. Verification Services revenue increased 40% to $2.3 million from $1.6 million. This increase reflected both organic and M&A growth. Product revenue comprised of cattle identification ear tags increased 67% to nearly $300,000 from $179,000. The ADT mandate played a role in this growth as to the new source of tag revenue coming when we took over tag sales from our customer Superior Livestock. Growth in services and product revenue more than offset a reduction in labeling revenue. As reported in our press release this morning, Q4 labeling revenue declined following a change in beef suppliers by Heinen's Grocery Stores, which is our largest labeling customer. Specifically, Heinen's supplier was acquired by another company which in turn redirected that supply to other customers. Heinen's quickly replaced its beef supply but until Heinen's and Where Food Comes From can ensure accurate source verification with its new suppliers the decision was made to discontinue labeling beef products in Heinen's stores. We expect it to be a temporary situation and we’ll post in our joint efforts to resume labeling beefs at Heinen's. In the mean time, Heinen's continues to use our labeling on its poultry, lamb and pork products and continues to be very happy with the program. Gross margin in Q4 was 38%. It would have been higher had our Validus subsidiary not been negatively impacted throughout the year by the Porcine epidemic diarrheal virus which resulted in a sharp reduction in pork products, a big part of the Validus business. You recall that Validus employs primarily full time auditors and for much of the year they generated lower than expected revenue due to the PED virus. Selling, general and administrative expenses grew 31%year-over-year tracking higher revenue but we’re pleased to report that SG&A as a percent of revenue improved to 39% in Q4 versus 42% in the same quarter last year. Q4 operating income was up more than 400% year-over-year to $128,000 and net income attributable to Where Food Comes From, Inc. increased to $64,000 or less than $0.01 per share from a loss of $11,000 in the same quarter a year ago. For the entire year revenue increased 51|% to $8.8 million from $5.8 million. Verification revenue increased 53% to $7.6 million from $4.9 million. Hardware revenue increased 50% to $1.1 million from $700,000. As in Q4, the increased revenue for the full year reflected organic and M&A growth. Where Food Comes From labeling revenue decreased 10% to $115,000 from $127,000 reflecting the Heinen's beef supplier situation I referenced earlier. Gross margin in 2014 declined to 43% from 47% year-over-year, again primarily reflecting lower gross margins at our Validus business for reasons I’ve already explained. SG&A expense as a percent of revenue improved to 39% from 49% a year ago. The 39% is our lowest level as a public company. We strive to run a very lean, efficient organization and I'm proud of the dedicated hardworking people we have at all levels of our company. Operating income increased to $345,000 from $27,000 year-over-year. Net income attributable to Where Food Comes From increased to $229,000 or $0.01 per share versus a net loss of less than $0.01 per share a year ago. Adjusted EBITDA for the year increased 286% to $574,000 from $149,000 a year ago. The company generated $590,000 in cash from operations in 2014, up from $217,000 last year. On the balance sheet, our cash at 2014 year-end was just under $2.6 million versus $1.1 million a year ago. Working capital increased to $3.4 million from $1.5 million over the same period. That means we entered 2015 in the strongest position we've ever been in and with the wind at our back. We have closed and successfully integrated five acquisitions since 2012 and have other candidates on our radar. We have the industry's largest auditing force and most complete verification solutions portfolio. Demand for our legacy services continues to grow and new sources of revenue are presenting themselves on a regular basis. This morning, I'd like to highlight two of them. I earlier mentioned the USDA's Animal Disease Traceability program which has recently begun contributing to our services and product revenue in a meaningful way despite the fact that the program is still in its infancy. The domestic addressable market for cattle source verification is up to 800,000 ranches, roughly 80 times our current customer base. We view ADT as a steady source of new customers and revenue streams for years to come. Also, as I get many questions about ongoing opportunities in Japan, I'd like to briefly talk about an ongoing verification opportunity tied to beef and pork producers' ability to meet export market demand. The United States and several Pacific RIM countries are continuously engaged with U.S. suppliers of beef and pork about many export requirements including the use of data [indiscernible] and traceability. In closing and on behalf of the board of directors and employees of Where Food Comes From, I'd like to thank you for your continuing support of our efforts. With that, I'll open the call to questions, operator.

Thank you. We will now be conducting a question and answer session. [Operator Instructions]. Our first question comes from the line of Terry Thompson, a private investor. Please go ahead with your question.

John, first out, as I said in my email to you last week, big kudos on the Mc Donald's, that was a great news; I know you and Leann had been working on that for a long time. I went also on your numbers, that’s nice improvement. As you discussed in last stockholders meeting last night, I'm wondering if with this McDonald's news have you given any thought to [indiscernible]?

Thanks for the comments there, Terry, and we feel very excited about where we start the year. Honestly, I think what the issues with this thing is, yes, we've I think positioned ourselves well to do it and when the time is right and I wouldn’t say I knew when the time is right or a how I could define that, but just doesn’t feel like it's right, and it is a very expensive process. And as I mentioned, one of the things we're most proud of is being lean as possible and I think in the future we'll have an event or a situation that will make you very clear it's the time to do it, but in the short term I would say it's not high on our priority list.

Okay. Is there any way we might be able to increase the public profile, more press releases, more ways to get Where Food Comes From in front of more investors? I talk about it all the time to everybody I run into that are interested in the market. And I just met a guy the other day, said I've done a couple of searches and I don't see a lot of information out about it. And there has been so much good news, is there any way we might be able to increase the press releases or whatever to bring that more to the public's notice?

Again, that's a fair question. It's been interesting now that we've been doing this for eight years, Terry, it's inevitable that when we put out a press release we have people who say hey, that was a great idea, and we have people that are mad --

Mad?

For some reasons about what news was or what -- from a standpoint of, hey, that wasn't material, that wasn't something that most serious investors need to know. So you'd be surprised at the feedback that we get. So my real just basic answer is that when we feel there is news that's viable and worthy of everybody understanding and knowing that there is something that's happened we get it out. The other thing and again I'm -- every time we do a press release that's money and it doesn't seem like it's a lot, but we want to be very sensitive to making sure that the information is good. I will suggest on this call that one area that we've really focused on in the last six months and those of you that are Facebook followers of ours and Pinterest and all other social media that we have, we have a significant amount of consumer based traffic, people that are interested in what's going on. I think we're approaching about 3,000 followers on Facebook and there is a real interesting dialogue going on there, and you can learn a lot about the company just what we're doing and real transparent. We've got a lot of auditors that are sending in pictures of the farms and the ranches that they are auditing and the people and the process. We're continuously -- Leann and others in the company are continuously giving public appearances and interviews, and within the industry, we're -- we've actually I think tapped into that. On the consumer side, again it's kind of a double-edged sword with the press releases and what we really gain from it. But when there is viable news and something that's worthy of getting out there we will do it.

John, I appreciate it. I hope my questions weren't inappropriate. I just -- I'm kind of new at this, and I've just, these are the things that I've been kind of bouncing around on my head. I've started buying at 36 --

No, that's actually a great question. Those were really good questions.

Okay. All right. I couldn't be happier. I started buying at $36 and went it peaked the other day I was up, it was up over 1000% and that was exactly three years ago. So you're definitely doing it right, and I couldn't be more pleased, and just onward and upward. Thank you, John.

Thank you. [Operator Instructions]. Our next question comes from the line of Sean Marconi, a Private Investor. Please go ahead with your question.

I just have a couple of questions regarding the business. The first one being, how is the integration going with Mountain States Rosen?

That's a great question. Again, we are on Facebook; I think you'll be able to see a lot of new things that we've got going. I'll mention one specifically for those of you that are here in Colorado that I just actually found out the other day but one of the -- our restaurant customer of Mountain States Rosen Shepherd's Pride is a restaurant here in town called Root Down. And Root Down has kind of a cult-ish following around the freshness of their food and so that -- they feature Shepherd's Pride lamb on that. So we're in the process of kind of looking at a co-marketing or co-promotion idea with Root Down that we may be able to -- there is all kinds of magazines one on the Front Range here and where there's a lot of communities that are looking for locally produced products. So we're hoping to grow it here. Rally's in California is a big, big retailer that's using the product and then Roche Bros. on the East Coast are using it as well. So we're really excited about all the potential. I think if you follow us on Facebook and keep track there you probably learn as much about our interaction with those stores and promoting the product and promoting the farms, and all that I've seen so far is that they're very pleased.

Thanks, John. And you guys are specifically in the lamb -- in those stores, correct?

Correct, yes, its lamb product, now Pride Lamb.

And then the same business model for the labeling program with them is a per pound royalty similar to Heinen's?

Exactly, yes.

Okay. And then through the past couple of years that you've been working with Heinen's I know that you've been able to communicate with a lot of consumers and how they have interacted with the Where Food Comes From brand. How have the responses been?

That's a good question and I'll try to be brief in my response. But I had a comment from a potential investor in New York in a meeting that said, one thing you really need to be able to figure out is how to prove your concept and what you may have to do in Heinen's is actually take the label off of product and then see what people say. And this is the situation that Heinen's has had since they lost their verification of product, has been, I would say, safe to say, and Tom may -- I don't think he is on the call, but he could -- I'm sure he would agree with this, has been a negative experience for both the store, employees, and most importantly their consumers. So there is several issues which have compounded to create that. But I think what Heinen's has realized in the process is that having a verification partner and then being able to communicate that has a direct effect on quality. And it has a direct effect on consistency. So anecdotally, and we haven't done this, although, we probably should do a poll may be at the Heinen's stores now because we got his unique opportunity with the beef label being taken off of the product, and say something about their perceptions of quality and what the label means to them and what they look for in the program. So it's been a negative for us around the revenue side. But I think what it's done is answered your question that Heinen's is as engaged in the program as they have ever been, and that I can remember in the sense that they exceed value. They're trying to get their beef supplier that they will get them back to the same level but they are also doing it when meat prices are a record high. So there is a lot of different factors. But we feel pretty comfortable that the verification of those attributes back to the supply system helps ensure a better product for both Heinen's and their customers.

Thank you, John. And I know in the past you've mentioned that the non-GMO being a large growth driver for the company, are you still seeing --

Yes.

Are you still seeing that as a big growth driver?

Yes. It -- I see as -- had the best year they've ever had that's the organic, Gluten-Free and now non-GMO verification company within the Where Food Comes From umbrella. They had spectacular year and really just now getting started in several proportions of it. So again, it just reinforces I think what I've talked about over the past. We started this process over two years ago. And now we're starting to see and realize the benefit of that. So I tell you, Sean, I think it's going to be one of our bigger growers the next couple of years. It's just that it's taken almost all media. It's -- I've seen a lot of different videos. And I think there is two sides of the story, there is no question, like it's one of the number one consumer issues right now.

Great, John. And then I have one more question then I'll jump back in the queue. I've noticed that Leann has gotten a lot of press lately and I've been very encouraged by the press. How has the U.S. meat -- being on the chair for the U.S. Meat Export Federation, how has that helped the spotlight on Where Food Comes From?

That is an excellent question. And Leann is actually in here, I'll let her answer.

Thanks.

Hello. Good morning, everyone. I think the biggest thing is the opportunity for us to network and engage with a lot of current customers, potential customers. So it just gives us a platform for involvement. And when you look at a lot of what we see as future kind of international opportunities for the company, it gives us a picture and a view into kind of what's happening from a global consumer trends perspective and some insights that without the level of involvement that we have we otherwise would not get. So yes, I think it very much raises the visibility for Where Food Comes From.

Thanks, Leann.

Thank you. Our next question comes from the line of Tom Mcguire, a Private Investor. Please go ahead with your question.

Hey, John, I echo the congratulations, which you've accomplished over the two years that I've been an investor. My question is along the lines of Sean's first question. Besides integrating acquisitions, making them and integrating them, what are some of the other operational challenges you face going forward?

I think where we really had to figure out how to make it work is that we've got remote location. So we don't -- our administrative staffs for our independent divisions are relatively small in a centralized area. So right now, we have an office in Castle Rock, one in Medina, North Dakota, another in Urbandale, Iowa, and we've got through our Sterling acquisition an office in Southern California. At the same time, it's part of our opportunity too because people produce food everywhere. And what I think kind of our secret sauce has been is being able to identify very, very high quality people in sometimes remote areas of the country that are highly educated ,well-spoken and can meet the requirements of being a verification and our audit specialist. So identifying those people in key areas and having knowledge about what they're auditing, so we wouldn't send a person that grow up on a cattle ranch to conduct an egg laying hen audit. So having domain expertise and then being in the right area. So it's a constant jigsaw puzzle of being able to effectively get an audit done when a producer needs an audit done, and when you put on top of that our ability to localize. So we've got to have ICS conduct audit at the same time that an IMI global auditor would be on site. So we cross train our auditors. We've got over 100 auditors across the country now which has this domain expertise and are kind of in a woven pattern as far as being able ready and available for audits when we need to do them. So that's a big asset for the company, but it's been a struggle and it's hard for us to maintain all that communication. So we're always looking at ways to improve how we communicate across these diverse commodities and species that we work in and doing it through social media; we communicate it a lot through our own Facebook and Twitter accounts, and where we've got a internal newsletter that goes out once a week to all of our divisions, all of our people, just to keep that communication. So it's a challenge for us and will continue to be a challenge as we acquire other businesses. But one of our key factors that we look at in our acquisitions are the caliber of individuals that are the principles in those businesses and will they be able to transition into a role that its very independent within our company and in our structure so they're going to continue to be that leader in that person or that group of people that are going to take that division forward. Because again we've got to maintain this conflict of interest where we have to have independence and transparency around that all of our certification and our auditors, operate down to the auditor, all the way up to the CEO of the company, including myself. So it's a struggle, it's an opportunity but as we grow we're going to continue to find people and look for acquisitions that are very, very strong, culture based organizations that can grow independently.

Thank you. Our next question comes from the line of Adam Sander with Global Endowment Management. Please go ahead with your question.

Hey, John. Quick question regarding the recent executive hiring you made. Could you kind of expand on the reasons why you brought him on board and what sort of things he will be in-charge of doing?

Hey, Adam, good question. Jim Riva was the former Executive of the ARC Branch of the USDA, which is the organization that we have one of our certifications through that's the USDA Process Verified Program, which enables us to allow our beef and pork customers to meet the export verification requirements. So we've worked now with Jim close to 20 years, and have in several conversations over the years talked about if there was ever a time that we would love to have him coming onboard and a number of things that are going on range from GMO discussions that we talked about to export verification programs. For example, he was the lead negotiator, I just saw recently myself, but he was the lead negotiator, and technical individual with USDA when he immediately following the discovery of BSE in 2003. So he has very close contacts at very high levels in Japan that remember when he was the individual that came over and negotiated the terms of how we were going to be able to do it. I'm going to make a little joke about Jim, but we have a internal saying that's called the Jim Riva experience. And Jim has been a fireball for us and he has been a sparkplug and it's really exciting to work with him now because he knows so many people. He has so much expertise and so much experience that it was a great -- it's a great hire for us. And more importantly, I think everybody in the company has also seen him coming on board as being a real positive. So we haven't had any kind of issues of bringing him on staff. He's based out of DC still; he lives there and has his family there. So we made a decision that it was a good idea for us to keep him there. But again, referring back to the previous issue about having remote locations that's a struggle but having him in DC is critical for us. So pretty much everything.

Thanks. Another quick question I understand you won't be able to comment on it, but I think just a couple of weeks ago was at Chipotle and they -- they didn't have any pork and they said it had to do with supplier issues, did not say have anything to do with a audit finding from working with Chipotle or got any comment there?

Yes, very interesting situation and we had no communication with them directly. That being said, we conduct a numbers of audits not specifically in this case where it did have anything to do with them, but for other standards that they and other retailers and restaurants use. So what was most interesting to me about it, it's very hard for us to know all the details because there is negotiations going on. In my recollection, it was the first time that there as a use of an animal welfare issue around supply and meaning that the retailer restaurant was going to forego the use of a product based on an animal welfare issue. I'd say whatever that issue was there is always two sides of the story. So it's very unclear how it came on in the scene and then how it's gone off the scene. Honestly, I don't know more than that. Again, it's just the first time that it's been so public.

Thank you. Our next question is a follow-up from Terry Thompson, a Private Investor. Please go ahead with your follow-up.

Hello, John, again. I wondered if you could just speak a little bit about the McDonald's. I understand it's a pilot project in Canada from the news release, but I wondered if you might speak a little bit more detail and what you expect how that will develop.

Well, I'll tell you what, probably the best resource you're going to have is the article that was written in GreenBiz, okay? That was done by a writer that has been engaged with the program for a long time and it gives a great amount of detail and I think it's very accurate and very factual. So if you haven't read that article I would do that. As a result of that that was we felt we had to issue in 8-K or it makes some kind of an announcement, which is what we did and we felt comfortable with the announcement that we made. We honestly don't know exactly where this is going to go but I will tell you that we feel very fortunate to be working with McDonald's and where it not for that article being printed, we probably wouldn't make any of a statement about it. That's the way we typically operate and we will continue to do that. We're excited. We think it's a great step forward. We think they're a great company. The short-term, we're helping them with establishing the verification program that they've talked about, which is part of the Global Roundtable for Sustainable Beef. We're spending a lot of time on it and they have a great team and a great group of suppliers. So financially it's almost impossible for me to give any kind of guidance, we -- that process is still in development. Again what I want to reiterate is that McDonald's is the global leader in verification supplier based programs that address a multitude of issues. So they are a dream customer for us because they do exactly what they say, and they really are -- they really are putting a program in place in Canada that we feel confident of, and that's our number one concern is to make sure that we continue to be transparent and its exciting for us that McDonald's is making this move because they are the greatest food company in the world.

Well I couldn't be more excited; I was just thrilled when I saw the relation. I just read the GreenBiz article; I was just going to maybe squeeze a little more information out of you. Anyway, I appreciate it keep up the great work. Thank you again for making everything look so Green.

Thanks, Terry.

Thank you. Ladies and gentlemen, there are no further questions at this time. I would now like to turn the floor back over to John Saunders for closing remarks.

Once again, you guys, I appreciate your questions, they're well thought out. I appreciate you all of being on the call today, and looking forward to a great 2015. Talk to you in three months. Take care. Bye.

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.