Where Food Comes From, Inc. (WFCF) Q1 2019 Earnings Report, Transcript and Summary

Greetings and welcome to Where Food Comes From 2019 First Quarter Earnings Call. At this time, all participants are in a listen-only mode. A 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 turn the conference over to your host, Mr. Jay Pfeiffer, Investor Relations. Thank you. You may begin.

Good morning and welcome to the Where Food Comes From 2019 first quarter earnings call. Joining me today are John Saunders, CEO; Leann Saunders, President; and Dannette Henning, CFO. During the course of the 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 our 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. Today, we'll also be discussing EBITDA and adjusted EBITDA, which are non-GAAP financial measures provided as a complement to the results provided in accordance with Generally Accepted Accounting Principles. We use and believe investors benefit from the presentation of EBITDA and adjusted EBITDA in evaluating our operating performance because it provides an additional tool to compare our operating performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our operations. I will now turn the call over to John Saunders, Chairman and Chief Executive Officer.

Good morning and thanks for joining the call. In the first quarter of 2019 we generated 9% revenue growth that included year-over-year growth in all four revenue segments. In spite of yet another global pork epidemic, we showed modest growth in verification revenue highlighted by continued positive impact related to China and growth of new customers for our US Hemp Authority Certified standard. Our product sales, which consists of RFID tags sold to cattle ranches and dairy farms was the strongest segment in the quarter with 81% year-over-year growth. Tag sales have become an important component of our revenue mix. They generate solid margins over the course of a full year and they are a leading indicator of future sales because we generate recurring revenue as each tagged animal progresses through the system, from ranch to feed yard to packing plant in the ensuing months and years. And finally, our SureHarvest business delivered a 7% growth in the quarter for its combined software license, maintenance, support and consulting businesses. A few SureHarvest highlights in the first quarter include the provision of software and technical consulting to well known customers in the wine, almond and organic grower spaces and a contract renewal of protected harvest certified for winegrape, citrus and cut flowers standards. We incurred several anomalous but necessary expenses events during the first quarter that weighed on our profit metrics. One was the expanded presence we had at the Annual National Cattlemen’s Beef Association Conference in January. We invested heavily in this event this year, and we believe that investment is already paying off in the form of new customer wins in Q1, including some dairy farmers who placed large tag orders following discussions we initiated at the conference. I know I told you last quarter that NCBA attracts 9,000 ranches each year. So this is a terrific opportunity to promote our products and services to a ton of existing and potential customers. Another large expense item in Q1 involved a company-wide training seminar that we convened. Normally, these training events are spread out over the years, so we can focus on each business unit one at a time. This year, we brought all of our auditors in from across the country for a multi-day event. The idea is to cross pollinate our field teams and get them thinking not only about their particular areas of expertise, but about how we can promote our other services to customers that might only be using us for a single service. As a consequence, we made an unusually large investment in the first quarter event that we think they will pay dividends down the road. Our profitability was also negatively impact by higher public company costs during the quarter in the form of our year-end audit fees that were roughly 50% over budget for the quarter. The higher fees were largely related to compliance with revenue recognition rules that have become onus for many small public companies. We've always prided ourselves in keeping our public company costs low, so this overrun in the first quarter was a serious disappointment. We're not having -- intend on having this repeat again in the next year. Now I'm going to switch gears now and talk about an exciting initiative we have been working on for a couple years that is finally coming to fruition. The Where Food Comes From Market on the campus of Colorado State University in Fort Collins, Colorado. To be clear this is not an indication that we're diving headlong into the retail food business. This is a one-off marketing initiative that we think will provide a lot of bank for the buck. Our cash investment and ongoing costs associated with the market are non-material. The Where Food Comes From Market is located within the newly opened $20 million JBS Global Foundation Innovation Center in honor of Gary & Kay Smith. JBS is one of the world's largest meat processers and a longtime customer of ours. And Gary Smith is a former faculty member at CSU, which is one of the country's leading agricultural universities. In addition to being one of the most world renowned meat scientists, Gary is also a member of our Board of Directors. So between JBS, CSU and Gary Smith, we think we're in very good company for this exciting initiative. The JBS facility includes a complete livestock and meat processing center spanning the meat animal harvesting process, fully equipped with the livestock arena, tempogramed and designed holding and harvesting areas, a research and development center and sensory analysis room in an auditorium lecture hall and meat demonstration classroom. This facility will focus on best practices and food safety, meat scientists, meat sciences and animal handling and welfare. The adjacent Where Food Comes From Market open to the public and staffed and managed by CSU students will sell fresh Ram Country Meats produced on site under JBS facility. It will also sell a variety of other products, Dany Yogurt, for example, that have been verified in one way or another by Where Food Comes From division, such as Validus, CS or Sterling. So this is a great way to tell the Where Food Comes From story to hundreds of thousands of CSU students in coming years. In the process we will be gathering valuable data that we can share with our customers and consumers regarding trends and preferences around food verifications. And again, we view this as an extremely cost effective initiative for us because it includes only a modest financial commitment with no CapEx obligations going forward. We are aiming for parent’s weekend in August for a grand opening and we'll have more news about the market at that time. Of course with the mention of news we released yesterday around the launch of Black Angus certified beef, a new verification program designed to reassure cattle buyers and beef consumers that the claims producers and marketers make about Black Angus beef genetics are authentic. Black Angus Verified Beef is a sub-program of beef -- of breed verified IMI Global’s newly approved USDA process verified program. Black Angus beef producers throughout the US are heavily invested in ensuring active genetics in their cattle and our new programs gives them an opportunity to reap the rewards of their efforts. IMI Global will be bundling this program with Source and Age Verifications at no additional cost to producers. The company estimates that half of all US cattle ranchers produce some form of Black Angus beef. It's important to note that providing legitimate genetics of any breed is no small feat, which is why IMI Global is excited to continue working with the following breed associations on their genetic verification programs. ABS InFocus, American Aberdeen Premium Beef, Gelbvieh Balancer Edge, Certified Piedmontese, Charolais Advantage and the Red Angus Feeder Calf Certification Program. So with that I’ll open the call to questions operator.

[Operator Instructions]. Our first question comes from [Rafi Sumids] with [RYS Advisors]. Please proceed with your question.

Hey, good morning, guys. Just had a couple of questions, I was hoping to run by you today. The first one is about the software business. So I think you guys have been now in the software business for two years and the business is now about $2 million businesses including the consulting business. I guess I'd love to get your sense of how big that business can get? And also what's going well for you guys now in that market and what -- where's there an opportunity for improvement?

Great question. So I'll answer the first -- the last part of it with what the opportunity is. SureHarvest has a few key software offerings. The Sustainability MIS tool is the primary tool that they're selling to major industries. They currently work with about 12 of those industries. And we see the total market for that at about double that. One customer win that we've had over the last six months with that software installation is with the beef industry and the US Roundtable for Sustainable Beef that is utilizing the services of SureHarvest to coordinate the way that they're delivering that program to the stakeholders in the group. And that was really a cross-sell opportunity that we were able to successfully get done. Within the other software packages that they have, the primary one is within the organic space, Rafi and that's the so organic tool that they bought. We got that marketed to roughly 25,000 potential producers in North America at a $100 a producer, it’s about $2.5 million a year. So we see that as the market scope for that product. So I would say that in the next three to five years we’d hope to probably double that SureHarvest business.

And then kind of bigger picture here, how do we think about 2019, any other remains or catalysts or changes we should be aware that will impact the top-line and any of your division, positively or negatively?

Well both positively and negatively the number one influencer for us right now is the trade negotiations with China and what that will mean for US beef that’s currently being sent to China. Although we’ve been under this shadow for about a year, I'm really trying to understand what that’s going to look like long-term. We haven’t seen any drop in the demand for certifications for catalysts or for China. That’s probably the number one thing we have right now Rafi.

And I guess just to follow up on that. What caused the slowdown in the certification business this quarter and how should we think about that in subsequent quarters?

Yes, there was two big factors. One is that the first quarter is typically just a slow quarter for us because it’s the winter time and that’s we don’t conduct a lot of audits. And then unfortunately we’ve been hit with another global animal disease pandemic in the pork industry. And all of that has repercussions, so it’s -- those are two factors are really the big reason for the lack of significant growth in the Verification segment. But again just to highlight while verification revenue was stagnant, one of the real critical aspects of our business and leading indicator for the rest of the years and years to come are the hardware impact sales.

It appears there are no further questions. At this time, I’d like to turn the floor back over to John Saunders for closing comments.

Well, thanks again for joining the call and we look forward to a strong finish to the year and we’ll talk to you again in a couple of months. Thank you.

This concludes today’s conference. We thank you for your participation and you may disconnect your lines at this time.