Where Food Comes From Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 9, 2023

There are 5 speakers on the call.

Operator

Greetings and welcome to the Where Food Comes From Third Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. At this time, I would like to turn the call over to Jay Pfeiffer of Investor Relations.

Operator

Thank you. You may begin.

Speaker 1

Good morning, and welcome to the Where Food Comes From 2023 Third Quarter Earnings Call. Joining me on the call today are CEO, John Saunders President, Leanne Saunders and Chief Financial Officer, Danette Henning. During this call, we'll make forward looking statements based on current Statements about current and future financial performance, growth strategy, customers, 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 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.

Speaker 1

Today, we'll also discuss adjusted EBITDA, a non GAAP financial measure Provided as a complement to GAAP results. Please refer to today's earnings release for important disclosures regarding non GAAP measures. I'll now turn the call over to John Saunders.

Speaker 2

Good morning and thanks for joining the call today. As highlighted in our Q3 earnings release this morning, our core verification and certification revenue increased for both the 3rd quarter 9 month period Despite continuing headwinds primarily associated with smaller herd sizes related to the cyclical cattle trends. These increases were offset by lower hardware revenue, which resulted in a decline in total revenue for both periods. You might remember that on our last call in August, I mentioned that headwinds were likely to persist for a while, so slightly lower overall revenue in Q3 was not a surprise. Nevertheless, we continue to generate a lot of cash and deliver solid profitability in the quarter year to date period.

Speaker 2

We also returned $855,000 in value to stockholders in the form of stock buybacks in the quarter with year to date buybacks totaling nearly $3,000,000 So in the context of challenges we've been facing on multiple fronts in recent quarters, we're pretty pleased with our overall performance And as evidenced by our continued stock buybacks, confident in our future prospects. Getting back to our Verification and Certification Which is by far our largest revenue segment. We achieved 4% growth in the quarter and 8% growth through the 1st 9 months of 2023. Within this segment, beef verification is the largest single component of revenue. As herd sizes have shrunk Over the past year or so, due to a combination of drought impact and normal cattle cycles, our tag sales have declined as well.

Speaker 2

So as I said, the initial audit and tagging process is the first step in the revenue continuum that follows each animal along its path to the consumer. So again, the current environment of smaller herd sizes, there are fewer animals in the pipeline and that along with lower tax sales is a big factor While overall revenue was slightly lower year to date. The good news is we are steadily adding more cattle ranchers customers And our audit activity is at an all time high. We have customer retention rate well over 90% that we believe is unmatched in our industry. In addition, because we now audit to dozens of standards, our revenue from non cattle verification sources is also on the rise.

Speaker 2

This is something I'd like to highlight from time to time because the size and diversity of our services mix is really what sets us apart. We are unique in the depth and breadth of our service base, and that gives us an enormous competitive advantage that would be extremely hard, if not impossible, to Now for some more detail on our Q3 results. Total revenue in the 3rd quarter declined 4% to $7,000,000 from 7 point $3,000,000 in the same quarter last year for reasons I've already detailed. As previously noted, our flagship verification and certification revenue was up 4% in the quarter to $5,400,000 from $5,200,000 That increase was offset by product revenue that declined by 3 $7,000 to $1,200,000 from $1,600,000 Consulting revenue was $76,000 lower at $431,000 Gross profit in the 3rd quarter decreased to $2,900,000 from $3,200,000 SG and A expense was 9 percent lower year over year at $1,900,000 versus $2,100,000 in the same quarter last year. Net income was 723,000 or $0.13 per diluted share compared to net income of $785,000 or $0.13 per diluted share in Q3 a year ago.

Speaker 2

Adjusted EBITDA in the 3rd quarter was down slightly at $1,200,000 from $1,300,000 Turning to the 9 month results, Total revenue decreased 2% to $18,400,000 from $18,800,000 in the same period last year. In addition to the impact of smaller herd sizes and lower tax sales, this decline included the effect of a $900,000 one time consulting contract we booked in the Q1 of 2022 that skewed our year over year comparisons. Revenue mix through 9 months included Verification and Certification Services, up 8% to $13,900,000 from $12,900,000 Product revenue down 10 percent to $3,100,000 from $3,500,000 consulting revenue of $1,300,000 compared to 2,400,000 In the prior year period, when we booked the aforementioned one time contract, gross profit through 9 months was $7,500,000 versus $7,700,000 in the year ago period. SG and A expense was flat at 5,700,000 Net income through 9 months was $1,400,000 or $0.24 per diluted share compared to net income of 1,500,000 or $0.25 per diluted share in the same period last year. So I'll reiterate, we're pleased with our overall profitability in light of some of the headwinds we've been dealing with.

Speaker 2

Adjusted EBITDA through 9 months was $2,500,000 versus $2,800,000 a year ago. Our cash and cash Equivalents balance at September 30, 2023 declined to $3,800,000 from $4,400,000 at 2022 year end, due primarily to our investment in share repurchases. Further to that subject, on a year to date basis, We bought back more than $2,900,000 of stock and we reduced our diluted share count by 432,000 to under 5,700,000 shares. Now I'd like to switch gears and provide an update on our Smart Catch program, which has been an important strategic focus for us this year. Last week, we announced the acquisition of the SmartCatch program with the intention of accelerating the rollout and expanding the scope of the program.

Speaker 2

To recap, SmartCouch was originally a program of the James Beard Foundation designed to promote transparency and sustainability in seafood at the restaurant level. Specifically, it is designed to link chefs to place based seafood sustainability initiatives. Since inception, The program has been administered by our pastelsia division and going forward, pastelsia will take the lead in driving our growth plan. We announced the acquisition a couple of weeks ago in conjunction with our sponsorship of the LA Chef Conference, where we hosted a sustainability summit to discuss global sustainability trends. The news was well received by hundreds of chefs in attendance who, like other players in the food business, Are paying a lot of attention to sustainability in response to broad interest by food consumers at both the restaurant and retail levels.

Speaker 2

One thing we heard over and over in our discussions with chefs and other culinary influencers was the concept of evolving from consumers 2 contributors. In other words, there is a growing desire in the Chef community to move beyond simply consuming food to actively participating in practices that contribute to higher levels of sustainability. We see SmartCatch as being an important part of that process. It reinforces our mission of advocating for high food standards and facilitating the accessibility of responsible seafood choices for chefs and diners alike. We also see tremendous potential for expansion into other areas of the seafood supply chain, including food service institutions, Retailers, seafood distributors, suppliers and producers around the world.

Speaker 2

Although the current focus is on seafood, we as well as other Chef community are interested in expanding the program to other products. So overall, the LA CHEF Conference was Great kickoff for us in our new role and with dozens of similar conferences around the world every year, we see these types of events as excellent opportunities to market the program and grow our customer base. So with that, I'll thank you again for joining the call today and open the call to questions. Operator?

Operator

Thank you. We will now be conducting a question and answer A confirmation tone will indicate your line is in the question

Speaker 3

Hey, John. I think a few calls back, you had referenced Potential regulation that could drive increased demand for ear tags. Just wanted to see where that stood and what your sort of outlook is there?

Speaker 2

Thanks, Raffi, for the question. There hasn't been any significant movement other than The closure of a comment period that the USDA put out to the public for comment and those results, I think, are being Compiled. We hope to see something early next year in regards to the results of that, but they haven't published anything yet.

Speaker 3

Got it. And then Maybe big picture, you've been with this business, you've built this business for a number of years at this point. I guess what are you as you look to the future, what are you most excited about?

Speaker 2

Good question and it goes back and forth between things that are requiring attention immediately. I will tell you over the last 12 months, what we've seen is an increased focus on sustainability. And I think where we're seeing the most interest is what's called Level 3, supply chain evaluations related to the sustainability and specifically, most specifically, The carbon footprint, I think that's taking most of the headlines these days. So, we find ourselves right at the middle of that Because we are the ones that are in charge of keeping track where the food comes from. So it's a core component and it's foundational to Most of the other attributes, but specifically the carbon footprint of an animal, has to start when that animal is born.

Speaker 2

So full traceability is a requirement of being able to manage whatever offsets or insets are being associated with that supply chain and we find ourselves in the middle of a number of different pilot projects And programs that are under the USDA's Climate Smart program, surely because we are the ones that Are maintaining the traceability of the product.

Speaker 3

Got it. And any real change in competitive dynamics Within auditing or ear tags?

Speaker 2

Not really to speak of. I do think I spoke On our last call about the struggles we're dealing with in finding talent and finding Just keeping our auditors, staff, we find that's the number one limiting factor for us right now It's just being able to identify qualified individuals that are able to handle the audits that we're looking for.

Speaker 3

Got it. And just one last one, if I can. Happy to see that you've been buying back stock this year. How do you think about your kind of capital allocation at this point?

Speaker 2

Yes. As I mentioned many times, we are constantly looking for any type of M and A opportunity That sounds well with what we're doing. And the SmartCatch program was one of those opportunities, so investing quite a bit there. In lieu of those opportunities, we're going to continue to look at our stock very aggressively and to continue to buyback In lieu of having other opportunities, but we still are looking at those Rafi. So, don't think that we've moved on from that.

Speaker 2

It's Just allocating the resources when we can and getting the best bang for our buck.

Speaker 3

Perfect. Thanks, John. Great luck. Good luck.

Speaker 2

Thank you.

Operator

Thank you. Our next question has come from the line of Chris Brown with Oak Financial. Please proceed with your questions.

Speaker 4

Thanks. Raffi actually took a couple of my questions, but one follow-up was on the ADT program. I know it's Kind of taking a while and from the beginning, you said it was going to take a while for the changes to go through. Do you still see it as a Kind of potential tailwind, has anything changed materially in what they're considering that you know of?

Speaker 2

Yes. We continue to work with industry groups, including NCBA and Cattle Trace Specifically, the 2 groups that are involved with traceability and related to ADT. In fact, next month, I'll be traveling to an industry meeting in Kansas that's going to be focused on that. And then most of The conferences that we do are early in the year and the focus, specifically of the National Cattlemen's Association is traceability. And we're going to be sponsoring an event there.

Speaker 2

So we're looking forward to having probably several 100 producers there in attendance. A lot of them are decision makers, not only for their operations, but also potentially in the states and the regions that they live. So, again, we've always been really focused on making sure that there's a value opportunity and a return on investment for producers to engage. So that continues to be the case. So we're pleased to continue to see momentum, but we also want to make sure that as Producers are engaging that there's a way for the sustainability of their operation to continue as a result of that, which Unfortunately, over time, can be fairly you need patience, and that's what we're doing.

Speaker 2

Thanks for your time. I appreciate it.

Speaker 4

Thank you.

Operator

We have reached It's the end of our question and answer session. I would now like to turn the floor back over to John Saunders for any closing remarks.

Speaker 2

Once again, thank you for the time and great questions. We'll look forward to talking to you after the 1st of the year. Take care.

Operator

Thank you. This does conclude

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Earnings Conference Call
Where Food Comes From Q3 2023
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