Where Food Comes From, Inc. Q3 FY2023 Earnings Call

Greetings, and welcome to the Where Food Comes From Third Quarter 2023 Earnings Call. 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. Thank you. You may begin.

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 Leann Saunders, and Chief Financial Officer Dannette 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 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, 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 earnings release for important disclosures regarding non-GAAP measures. I'll now turn the call over to John Saunders.

Good morning, and thanks for joining the call today. As highlighted in our third quarter earnings release, our core verification and certification revenue increased for both the third quarter and nine-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 and year-to-date period. 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 million. In the context of the 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 business, which is by far our largest revenue segment, we achieved 4% growth in the quarter and 8% growth through the first nine 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 impacts and normal cattle cycles, our tag sales have declined as well. The initial audit and tagging process is the first step in the revenue continuum that follows each animal along its path to the consumer. Again, the current environment of smaller herd sizes means fewer animals in the pipeline, and that, along with lower tag sales, is a significant factor in why overall revenue was slightly lower year-to-date. The good news is we are steadily adding more cattle rancher customers and our audit activity is at an all-time high. We have a customer retention rate well over 90%, which we believe is unmatched in our industry. Additionally, because we now audit to dozens of standards, our revenue from non-cattle verification sources is also on the rise. This is something I'd like to highlight from time to time because the size and diversity of our services mix is what really 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 duplicate. For more detail on our Q3 results, total revenue in the third quarter declined 4% to $7 million from $7.3 million in the same quarter last year due to the reasons I've already detailed. Our flagship verification and certification revenue was up 4% in the quarter to $5.4 million from $5.2 million. That increase was offset by product revenue that declined by $367,000 to $1.2 million from $1.6 million. Consulting revenue was $76,000 lower at $431,000. Gross profit in the third quarter decreased to $2.9 million from $3.2 million. SG&A expense was 9% lower year-over-year at $1.9 million versus $2.1 million 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. Adjusted EBITDA in the third quarter was down slightly at $1.2 million from $1.3 million. Turning to the nine-month results, total revenue did decrease 2% to $18.4 million from $18.8 million in the same period last year. In addition to the impact of smaller herd sizes and lower tag sales, this decline included the effect of a $0.9 million one-time consulting contract we booked in the first quarter of 2022 that skewed our year-over-year comparisons. Revenue mix through nine months included verification and certification services, up 8% to $13.9 million from $12.9 million; product revenue down 10% to $3.1 million from $3.5 million; consulting revenue of $1.3 million compared to $2.4 million in the prior year period when we booked the aforementioned one-time contract. Gross profit through nine months was $7.5 million versus $7.7 million in the year-ago period. SG&A expense was flat at $5.7 million. Net income through nine months was $1.4 million or $0.24 per diluted share compared to net income of $1.5 million or $0.25 per diluted share in the same period last year. I'll reiterate, we are pleased with our overall profitability in light of some of the headwinds we've been dealing with. Adjusted EBITDA through nine months was $2.5 million versus $2.8 million a year ago. Our cash and cash equivalents balance at September 30, 2023, declined to $3.8 million from $4.4 million at year-end 2022, primarily due to our investment in share repurchases. Further to that subject, on a year-to-date basis, we bought back more than $2.9 million of stock and reduced our diluted share count by 432,000 to under 5.7 million shares. 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 Smart Catch program with the intention of accelerating the rollout and expanding the scope of the program. To recap, Smart Catch was originally a program of the James Beard Foundation, designed to promote transparency and sustainability in seafood at the restaurant level. It specifically links chefs to place-based seafood sustainability initiatives. Since inception, the program has been administered by our Postelsia division, and going forward, Postelsia 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 the other players in the food business, are paying a lot of attention to sustainability in response to broad interest from food consumers at both the restaurant and retail levels. One thing we heard repeatedly in our discussions with chefs and other culinary influencers was the concept of evolving from consumers to 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 Smart Catch 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. Although the current focus is on seafood, we, as well as the chef community, are interested in expanding the program to other products. Overall, the LA Chef Conference was a 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. Thank you again for joining the call today, and I will open the call to questions.

Thank you. We will now be conducting a question-and-answer session. Our first questions come from the line of Raphi Savitz with RYS Advisors. Please proceed with your question.

Hey John. I think a few calls back you referenced potential regulations that could drive increased demand for your tags. I just wanted to see where that stood and what your outlook is there.

Thanks, Raphi, 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 are being compiled. We hope to see something early next year regarding the results of that, but they haven't published anything yet.

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

Good question. It goes back and forth between things that require immediate attention. Over the last 12 months, we have seen an increased focus on sustainability. The most interest is around what's called Level 3 supply chain and valuations related to sustainability, specifically the carbon footprint. That's taking most of the headlines these days. We find ourselves right in the middle of that because we are responsible for keeping track of where the food comes from. It's a core component and foundational to most of the other attributes, but specifically, the carbon footprint of an animal must start when that animal is born. Full traceability is a requirement for managing whatever offsets or insets are associated with that supply chain. We find ourselves in the middle of several different pilot projects and programs that are part of the USDA's Climate-Smart program simply because we are maintaining the traceability of the product.

Got it. And is there any real change in competitive dynamics within auditing all of your tags?

Not really to speak of. I believe I addressed in our last call the struggles we're facing in finding talent and keeping our auditor staff. We find that this is the number one limiting factor for us right now—identifying qualified individuals capable of handling the audits we're requiring.

Got it. And just one last one if I can. I'm happy to see that you've been buying back stock this year. How do you approach your capital allocation at this point?

As I have mentioned many times, we are constantly looking for any type of M&A opportunity. That does bode well with what we're doing. The Smart Catch program was one of those opportunities, so we're investing quite a bit there. In lieu of those opportunities, we will continue to look at our stock very aggressively and continue to buy back shares in lieu of having other opportunities. However, we are still looking at those, so don't think that we've moved on from that. It's just a matter of allocating resources when we can and getting the best value for our investments.

Perfect. Thanks, John. Good luck.

Thank you.

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

Thanks. Raphi actually took a couple of my questions, but one follow-up was on the ADT program. I know it's 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 potential tailwind? Has anything changed materially in what they're considering that you know of?

Yes. We continue to work with industry groups including NCBA and CattleTrace, specifically the two groups involved with traceability related to ADT. In fact, next month, I will be traveling to an industry meeting in Kansas focused on that. Most of the conferences we do are early in the year, and the focus specifically of the National Cattlemen's Association is on traceability, and we will be sponsoring an event there. We're looking forward to having several hundred producers in attendance. Many of them are decision-makers for their operations as well as potentially in the states and regions where they live. We've always been really focused on ensuring there is a value opportunity and return on investment for producers to engage, and that continues to be the case. We're pleased to see momentum, but we also want to make sure that as producers engage, there is a sustainable path for their operations, which unfortunately can be quite unique over time.

Thanks for your time. Appreciate it.

Thank you.

We have reached 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.

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

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.