Where Food Comes From, Inc. Q3 FY2025 Earnings Call

Greetings, and welcome to the Where Food Comes From Third Quarter Earnings Call. As a reminder, this conference is being recorded. It's now my pleasure to introduce Jay Pfeiffer of Investor Relations. Please go ahead.

Good morning, and welcome to the Where Food Comes From 2025 Third Quarter Earnings Call. Joining me on the call today are John Saunders, CEO; Leann Saunders, President; 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 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 forward-looking statements. We encourage you to review our publicly filed documents as well as our news releases and website for more information. I'll now turn the call over to John Saunders.

Hello, and thanks for joining the call today. In our earnings release this morning, we again reported strength in a wide range of service offerings that essentially offset the continued impact that the smaller herd sizes are having on our core beef-related verification activity. We also reported solid bottom line results in spite of the modest revenue decline, an accomplishment that underscores the resiliency of our business and our successful efforts to align expenses with revenue run rates as we navigate a challenging macro environment on top of some industry-specific headwinds. Total revenue in the third quarter was $7 million, a decline of just $92,000 over the same quarter last year. Revenue in our verification and certification segment grew by 1% to $5.6 million based on increased activity across our portfolio, which includes by far the industry's most comprehensive set of solutions. Verifications for pork, dairy and egg operations all increased year-over-year, and our CARE certified program continued to attract new customers in a variety of proteins. Similarly, certification activity for organic, non-GMO, gluten-free and Upcycled all showed gains. In addition, we continue to benefit from a unique ability to bundle services, an advantage that saves our customers' time and money, contributes to revenue growth and at the same time, helps on the gross margin side. Finally, customer retention rates well above the 90% level have also played a big role in revenue stability. Hardware sales declined to $1.2 million from $1.3 million year-over-year with lower tag volumes due to herd shrinkage and tag subsidies being partially offset by growing demand for value-added tags that we sell at higher price points. Gross margins remained fairly stable year-over-year, and SG&A expense actually declined slightly in the third quarter, reflecting careful management of fixed costs and lower marketing and trade show expenses that largely offset higher compensation costs. That led to operating income of $575,000 compared to $608,000 in the year-ago third quarter. Net income grew to $1.1 million or $0.22 per share in the third quarter compared to net income of $500,000 or $0.09 per share a year ago. The increase included a $946,000 gain on the sale of our Progressive Beef ownership and a $48,000 gain on digital assets. I think it's important to highlight some of these profitability metrics in light of headwinds we're encountering in the forms of tariffs and inflationary pressures, including significant wage inflation and smaller herd sizes, which impact both verification and hardware revenue and profitability levels. Our balance sheet remains strong and clean. We closed the quarter with cash and cash equivalents of $4.8 million, up from $2 million at 2024 year-end. We have no debt. The Progressive Beef stock sale, which closed in the third quarter, generated cash proceeds of $1.8 million and the return of 12,585 shares of our common stock, which was another 150,000 returned to shareholders or which have been canceled and removed from our total issued and outstanding stock. Turning to stock buybacks. We retired an additional 60,721 shares in Q3 through our buyback program that was initiated in 2018, raising our year-to-date buybacks to 116,547 shares and our total buyback since planned inception to more than 1.3 million shares, representing more than $14 million in value returned to stockholders over the past 7 years. Earlier this week, we announced our inclusion in Time Magazine's America's Growth Leaders ranking. Where Food Comes From was ranked 74th among more than 4,000 public companies in the United States. This ranking places Where Food Comes From among the most innovative and dynamic publicly held companies in America. The list was led by NVIDIA and included names like Tesla, Palantir, CrowdStrike, Broadcom, and Alphabet. You can find a link to the story in the November 11 press release posted on our website. As one of the smallest companies in the top 100 list, we view our inclusion as validation of the growing importance of verified sourcing in the world today. Consumer demand for transparency into food origins, ethics, and safety has never been more relevant. And we are playing a lead role in the megatrend that involves all participants in the supply chain, ranchers, growers, distributors, retailers, and consumers. Our ability to remain at the forefront of this megatrend is based on a customer-focused approach that gives ranchers and growers the tools they need to address the evolving demands of retailers and consumers in real time. We are constantly innovating with new services that are often years in development but are ultimately expected to become meaningful revenue streams. A case in point is our labeling program, which has been in place for more than 10 years and is now beginning to gain traction as forward-thinking retailers recognize its value in attracting and maintaining customers. We have other innovative new services in the pipeline that will further expand our market-leading portfolio and benefit both customers and consumers, and we hope to be announcing one of them in the very near future. And with that, I'll thank you again for joining the call today and open the call to questions.

And the first question comes from the line of James Ford with First Ballantyne.

I had a quick question with regard to the herd size and product revenue long term. When do you think you'll see a material pickup in product revenue relative to herd size growing? Is the beef and cattle futures prices high enough to get the demand up there in a year or 2?

Thanks for the question, James. I'll take the first stab, and then I'll let Leann answer from her perspective as well. I do think that the cattle prices have started to reach the level where there is some building back in the herd, but we're still faced with issues relative to primarily the border being closed with Mexico and that none of those cattle are able to come into Texas, Oklahoma. So that's typically a big part of our beef supply. And with this screwworm issue, I think we're just really struggling to see how it's going to be a short-term solution to this problem. So yes, I think in certain areas, we're starting to see a build back, but it's going to take a lot of time.

I agree with everything. I believe we're experiencing a very predictable cattle cycle. We're facing some unique challenges related to supply, primarily due to significant generational turnover in the cattle industry. Additionally, continued drought in certain areas is hindering recovery efforts. We expect that after possibly another year, supply may begin to increase again, which is quite typical. However, we are navigating somewhat unfamiliar territory, so we're cautious about making predictions as we normally would.

Yes. And maybe one final point with that. I think one of the things that we're encouraged about, although it was politically a very hot topic over the last couple of weeks, is that it appears that this administration is starting to look at utilizing public lands more than it has been over the last, obviously, 4 years. But I think that's something that's going to probably incentivize younger ranchers or ranchers and farmers that are looking to grow their herds that, that incentive hasn't really been there for a while. So we're encouraged by that, that there seems to be more financing available and just land that's available for use if you're wanting to raise livestock.

The other thing on the demand side is a little bit of things unknown relative to trade negotiations. I mean, China became our biggest export market for beef prior to now they're not purchasing U.S. beef products. So again, it's like we have all these factors relative to trade agreements happening at the same time. So it's challenging to predict. So we're kind of waiting to see on that as well and some increased restrictions from the EU, which are problematic.

The next question comes from Chris Brown, a private investor.

Following up on that question, under the assumption that kind of the beef verification is kind of stable and not growing particularly fast in the next year or so, what are the other businesses and programs that you're most excited about that you think will be kind of growers in the next year or 2? And then the second question is kind of a little bit capital structure. Are you thinking of yourselves as a growth company? Or can we think about more of kind of a stable cash-generating business going forward? I know you've done some dividends in the past, et cetera. How do you think about the balance sheet, the buildup of cash and what you do with it?

Thank you for the great questions, Chris. In our discussion, we highlight several factors currently influencing our dairy and poultry sectors, including both broilers and egg laying hens. Additionally, recent enhancements in organic certification regulations have broadened the number of customers eligible or required to participate. We also hold the exclusive supply rights for Upcycled certification, placing us in a distinctive position with CPG companies aiming to meet consumer demand. You might have noticed the rise of shelf-stable protein drinks like Fairlife Protein 42, which appeal to those engaged in fitness and seeking high protein intake. This renewed interest in dairy, especially this new type of hyper-energized milk, is noteworthy. We are aligning our business with these consumer trends while recognizing that the beef industry requires a long-term perspective. We maintain control over disease traceability and verification systems through our Beef Passport system, and we're committed to that aspect even as we acknowledge the long journey ahead. This situation also allows us to explore and expand into rapidly growing markets, which our Validus and Where Food Comes From organic division have been excelling in, enhancing efficiency in customer intake and processing. We're excited about these developments apart from beef, and we are dedicated to working hard on them. Regarding the second question, the sale of Progressive Beef has improved our capital position, and we're continuously looking for new growth opportunities. We aspire to move closer to consumers and embrace technological advancements. Currently, we have several new AI initiatives in progress aimed at improving efficiency, customer service, and outreach. We've invested significantly in SEO over the past year, ensuring that Where Food Comes From ranks prominently in search results for third-party verification, allowing us to better connect with consumers and understand their needs. If suitable investment opportunities arise and we can finance them, we'll pursue them. We are definitely a growth-oriented company, committed to patience but satisfied with our current balance sheet and debt-free status, willing to leverage capital for the right growth opportunities.

I've been a shareholder for probably 7, 8 years, and you guys have always been great stewards of capital.

There are no further questions at this time. I'd like to turn the call back to John Saunders for closing remarks.

Thanks again, everyone. Appreciate the questions, and we'll talk to you soon. Take care.

This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.