Where Food Comes From Q3 2024 Earnings Report

Where Food Comes From EPS Results

• Actual EPS: $0.09
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Where Food Comes From Revenue Results

• Actual Revenue: $7.11 million
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Where Food Comes From Announcement Details

• Quarter: Q3 2024
• Date: 11/12/2024
• Time: Before Market Opens
• Conference Call Date: Tuesday, November 12, 2024
• Conference Call Time: 12:00PM ET

Where Food Comes From (NASDAQ:WFCF), together with its subsidiaries, operates as a third-party food verification company in North America. The company operates through Verification and Certification, and Professional Services segments. It conducts on-site and desk audits to verify that claims being made about livestock, food, other specialty crops, and agricultural and aquaculture products are accurate, as well as offers Where Food Comes From Source Verified retail and restaurant labeling program, which connects consumers directly to the source of the food they purchase through product labeling, and web-based information sharing and education. It also offers professional services and technology solutions; verification solutions; and consulting services, as well as sells hardware. The company serves beef and pork packers, organic producers and processors, and specialty retail chains. The company was formerly known as Integrated Management Information, Inc. and changed its name to Where Food Comes From, Inc. in December 2012. Where Food Comes From, Inc. was founded in 1996 and is based in Castle Rock, Colorado.

Where Food Comes From Q3 2024 Earnings Call Transcript

[Operator]

Greetings, and welcome to Where Food Comes From Third Quarter Earnings Conference 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. I would now like to turn the call over to your host, Jay Pfeiffer, Investor Relations.

[Speaker 1]

Thank you. Good morning, and welcome to the Where Food Comes From 20 24 Q3 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 expectations, estimates and projections that are subject to risk. Statements about current future financial performance, growth strategy, customers, business opportunities, market acceptance of our products and services and potential acquisitions are forward looking statements.

[Speaker 1]

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. Today, we'll also discuss adjusted EBITDA, a non GAAP financial measure provided as a complement to GAAP results. Please refer to today's news 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. Total revenue in the Q3 increased slightly to $7,100,000 from $7,000,000 dollars That included a 2% increase in verification and certification services to $5,500,000 from $5,400,000 year over year. It also included an increase in product revenue, which rose 9% or about $100,000 to $1,300,000 from $1,200,000 Professional services revenue declined to $300,000 from $400,000 year over year. Gross profit in the 3rd quarter declined slightly to $2,800,000 from 2,900,000 SG and A increased 13% year over year to 2,200,000 from 1,900,000 reflecting higher marketing, personnel and travel costs. As a result of the higher fixed costs and lower operating margins, we reported a 32% decline in net income to $500,000 or $0.09 per diluted share versus $700,000 or $0.13 per diluted share last year.

[Speaker 2]

Adjusted EBITDA in the 3rd quarter was 29% lower at $800,000 versus $1,200,000 We continued our share buyback program in the 3rd quarter, repurchasing 66,000 620 shares of stock at a cost of $734,000 Turning to the 9 month results. Total revenue through 9 months increased 4% to $9,100,000 from 18 point $4,000,000 in the same period last year. Revenue mix included verification and certification services, up 9% to $15,200,000 from $13,900,000 product revenue down 8 percent to $2,900,000 from $3,100,000 and professional services revenue of $1,000,000 compared to $1,300,000 Gross profit through 9 months was $7,800,000 up 3 percent from $7,500,000 a year ago. SG and A expense increased 10% to $6,300,000 from $5,700,000 due to the aforementioned increases in marketing, personnel and travel costs. Operating income year to date declined 18% to $1,500,000 from 1,800,000 dollars Net income through 9 months decreased 16 percent to $1,200,000 or $0.21 per diluted share compared to net income of $1,400,000 or $0.24 per diluted share in the prior year period.

[Speaker 2]

Adjusted EBITDA was $2,100,000 versus $2,500,000 year over year. We generated $2,800,000 in cash from operations through 9 months, which was a 6% increase compared to $2,600,000 in the same period last year. Our cash and cash equivalents pounds through 9 months increased 4% to 2,800,000 from 2,600,000 at 2023 year end. We have a solid balance sheet with no long term debt. Through the 1st 9 months of 2024, we bought back 216,039 shares of stock.

[Speaker 2]

That total included 135,838 shares as part of our ongoing buyback program and another 80,201 shares in a single private purchase. Given the persistent headwinds in our beef verification business, we're pleased with our overall business performance. We expect those headwinds to continue until the cyclical herds downsizing begins to cycle back around and the impact of drought conditions subsides. As you probably know, our beef business, which includes multiple verification services as well as hardware sales is our largest revenue generator. So, I'll reiterate that we're very fortunate to have a diverse non beef services mix that right now is more than compensating for the temporary slowdown in our beef related revenue.

[Speaker 2]

On another topic, a question we frequently hear from investors is, how might government regulation play into our growth potential, both with our beef business and other traceability and verification activities? That's a particularly timely question today due to a couple of recent developments relating to USDA activities. We touched on this in our earnings release this morning, but I'd like to provide some more color because we think it's important that investors understand the potential positive impact of these developments. The first involves the USDA's Animal Disease Traceability or ADT program. We've been talking about this for several years and are now able to report some meaningful forward progress with this initiative.

[Speaker 2]

In April of this year, the USDA issued its final rule to strengthen procedures and compliance for our animal disease traceability in order to enhance the regulator's ability to manage an animal disease outbreak. A key component of the new rule is a requirement that for certain classes of cattle, ranchers transition to electronic RFID tags from the traditional metal clip tag that must be read manually. Beginning last week on November 5, in order to qualify for the interstate transport, heifers over 18 months, dairy cattle, bulls and certain other animals destined for interstate transfer are required to have electronic RFID tags. As you know, we have required RFID EID tags for years because they allow the beef supply chain to read tags and verify claims at the speed of commerce. These tags are critical to our ability to accurately trace cattle and to ensure that the claims producers are making about their beef products have been verified by an independent third party.

[Speaker 2]

So what does all this mean to where food comes from? Well, in the short term, we're already seeing a positive impact in terms of new tag customers coming on board. Although this growth has been slower than we'd hoped through the USDA's decision to provide tags and subsidies to help soften the financial impact of the new requirement. Whether those subsidies are sustainable is yet to be determined because there are a few complicating factors. Chief among them, the continuing availability of federal funding and potential tax implications for ranchers.

[Speaker 2]

Another important consideration is that these subsidies limit ranchers to vanilla 1 dimensional tags as opposed to the more versatile customizable tags that we provide our customers. We also think that there's a high likelihood that some ranchers now transitioning to electronic tags for traceability purposes, we'll determine that they may as well take full advantage of those tax by engaging in 1 or more of our value added programs to help them catch our higher sales for their beef. Our long term view on this change is the more cattle with RFID tags translate into a much larger addressable market for us over time. We estimate that up to an additional 10,000,000 head of cattle will be RFID tagged over the next year or so with the potential for another 90,000,000 cattle becoming eligible for our value added programs over the next 10 years. That gives us a lot of runway considering our current annual tag run rate is roughly $2,500,000 For those of you doing the math, your next question is what percentage of those additional tag cattle will we be able to convert customers for our value added services?

[Speaker 2]

That's a great question, but one we're not ready to speculate on at this early stage. What I will say is we believe this transition will inevitably lead to new growth phase in our beef business. Our second recent example of how government regulation is impacting our business is the new strengthening organic enforcement or SOE rule implemented by the USDA's National Organic Program. This rule is designed to increase transparency and reduce fraud in organic certification claims. It is the most significant update to the organic regulations since the Organic Cement Production Act of 1990.

[Speaker 2]

Specifically, SOE requires domestic brands and producers as well as importers of organic products to comply with new requirements around record keeping and reporting, supply chain traceability audits, label review, inspections and other processes. In addition, it mandates that other participants in the supply chain entities once exempt from oversight must now comply with the same requirements as the producers and brands themselves. These include brokers, traders, co manufacturers and other entities. Our organic business has been a strength for us in recent years as we've dedicated significant resources to new customer acquisition, as well as refinement of our SO Organic technology platform that directly addresses key requirements of the SOE program at a time when compliance is becoming more challenging and costly. SO Organic automates the process of achieving and annually renewing organic certification, replacing cumbersome paper based processes with easy to use software that our customers depend on to lower costs and streamline compliance.

[Speaker 2]

The software is flexible, nimble, accepting changes in real time that are immediately available on our end. So as usual, we've got a lot going on across multiple fronts. I'm proud of the work we're doing and how individuals throughout our organization continue to lead the industry in innovating new solutions that benefit producers and consumers of agricultural products in the United States. We believe we are positioned to remain at the forefront of our industries for years to come. With that, I'll turn the call over to questions.

[Operator]

Thank you. At this time, we'll be conducting a question and answer session.