Where Food Comes From Inc (WFCF) 2020 Q2 法說會逐字稿

Greetings, and welcome to the Where Food Comes From Second Quarter Earnings Conference Call. (Operator Instructions) Please note, this conference call is being recorded.

I would now like to turn the call over to your host, Mr. Jay Pfeiffer, Investor Relations. Thank you. You may begin.

Good morning, good afternoon, and welcome to Where Food Comes From Second Quarter Earnings Call. Joining me on the call today are John Saunders, CEO; Leann Saunders, President; and Dannette Henning, CFO.

During this call, we'll make 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 discuss EBITDA and adjusted EBITDA, which are non-GAAP financial measures, provided as a complement to the results provided in accordance with GAAP. We use and believe investors benefit from the presentation of EBITDA and adjusted EBITDA in evaluating our operating performance as it provides an additional tool to compare that performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our operations.

I'll now turn the call over to John Saunders, Chairman and CEO. John?

Good morning, and thanks for joining the call today. Earlier this morning, we released our Q2 financial results and I'm pleased to say that we are more than holding our own given the pervasive and continuing negative effects that pandemic is having on the food supply chain in general and our customers in specific.

Revenue in the second quarter was $4.4 million, which was down only 10% year-over-year. Our 6-month revenue was $8.3 million, down only 6% from the same period last year.

As I said, these relatively positive results come at a time when many of our customers across the food supply chain are in great difficulty. The nation's largest protein processors are struggling to remain consistently operational, suffering from intermittent slowdowns and plant closures that are creating havoc up and down the supply chain.

Our ranch and farm customers, particularly in the area of pork, poultry, dairy and egg production, where facilities are more enclosed relative to cattle ranches, have severely curtailed on-site audits for the time being. So in this context, we think our top line is pretty good.

For those of you who have followed us for a while, you know that one of my recurring themes, when I talk to investors, is the depth and breadth of our solutions portfolio. For whatever reason, it seems our industry is subject to more ups and downs and anomalous events than other industries. And through the years, as we have grown and diversified our services, we've seen certain parts of our businesses pick up the slack for other parts.

Avian and swine flu are just 2 examples of that. Although both had devastating impacts on our poultry and swine business in given years, our overall business continued to grow and prosper because of the diversity of our revenue streams. So this year, when pork, poultry, dairy and egg verifications had declined, our beef business has actually continued to grow and has taken up at least some of the slack.

Despite widespread slowdowns and shutdowns of packing plants over the past 4 months, our beef business has actively thrived. By this, I mean, the bottlenecks that occurred when the packing plants slowed or ceased production created an oversupply of cattle. So when the packers did get back up and running, they prioritized the more premium beef products that grocers were demanding based in part on the closure of restaurants servicing high-quality beef. And by premium, I'm referring to cattle that had been verified to standards such as source and HTC, natural and our new CARE standard.

Of course, as our beef business continued to grow, our product sales grew as well, up 25% year-over-year in Q2. The increase in more profitable beef audits and the increase in product sales drove gross margins up nearly 500 bps in the second quarter to 47.6 from 42.7.

Rounding out our financial performance, we were solidly profitable in the second quarter with net income of $351,000 or $0.01 per share, down just 3% year-over-year. We continue to generate good cash flows from operations, up 27% through 6 months to $1.7 million, and we strengthened our balance sheet with a 65% increase in cash and short-term investments over December 31 year-end.

Switching gears now. I want to talk a little bit about our CARE initiative. You'll recall that in the first quarter, we rolled out the Where Food Comes From CARE program, a suite of sustainability solutions that address consumer demand for sustainably produced beef, dairy, poultry and pork products. We've been getting good interest at retail for this program. And as we announced in our earnings release this morning, we recently won 2 new important customers for CARE. Two leading food processing companies with protein-centric brands and deep commitments to sustainability and transparency. Their adoption of beef CARE represents a commitment to verify sustainable production practices on potentially millions of acres of domestic cattle grazing land. Several hundred ranches that supply beef to some of these companies are already enrolled in the program. We believe this is just the tip of the iceberg for the CARE program as more and more producers respond to the American consumers' preferences for sustainably produced products.

I encourage you all to visit http://wfcfcare.com.

And speaking of consumer preferences, the pandemic has shown a bright light on the food supply chain, giving consumers even more reason to scrutinize where their food comes from. Protein shortages in grocery stores, restaurant closures, endless stories about infected workers and plant closures in the food industry, I believe all of this is moving consumers further down the path of verifications of all kinds.

We are in new times, and I believe we are uniquely positioned to provide invaluable services to consumers, family farms and ranches and everybody in between.

In closing, I want to again thank the Where Food Comes From team for their outstanding effort this year and our shareholders and other stakeholders for their continued support.

And with that, I'll open the call to questions. Operator?

(Operator Instructions) Our first question comes from [Terry Thompson], a private investor.

It looks like things worked out pretty good considering everything that's going on, all the disruptions. My question is concerning the trade issues vis-à-vis China, primarily. Present view of that and any predictions on what may be coming in the future.

Terry, I'm going to let Leann answer that question.

So trying to predict anything relative to trade agreements right now is a little bit challenging, so I won't try to do that. But thus far, everything relative to kind of the protein movement, quotas that are existing, all seem to be holding. So we haven't seen any sort of disruption outside of when you had containers out on water because the COVID held up where you just couldn't get meat through the channels initially. Those channels have seemed to have opened up and product seems to be flowing relatively well, Terry, given all of the circumstances. And we haven't really seen any sort of disruption yet, even with all of the discussion and rhetoric in the media.

(Operator Instructions) Our next question comes from [Chris Brown], a private investor.

Last quarter, I asked a little bit about the credit exposure you have to your customers and how they're doing, given the COVID disruption. Could you just talk a little bit about that? And then my second question was just -- I noticed you guys added some debt to your balance sheet. Could you describe what that was and the purpose?

Sure. Yes, the first question is no. We haven't seen any change in our payment by producers. In fact, I think in certain areas, specifically, our organic business has improved, if you can believe it. There's just been such a demand for organic products. I think our producers are ready to make sure that they're all up to speed on stuff. So it's been really positive.

The debt question, I'll let Dannette answer specifically, but I believe it's related to our PPP loan.

Yes. Yes. It is related to the PPP loan. And it was just a great opportunity that the SBA was offering companies. It was during a time we didn't know what our performance was going to look like at that very moment when they made the offer, and so we decided that it would be beneficial to our business and it has helped.

We have not received any notification of whether or not it will be fully forgiven. However, we anticipate that a significant portion of it will be forgiven. SBA is still trying to finalize those rules on forgiveness.

And what was the total size of the loan?

It was just a little bit over $1 million.

Our next question comes from Alex Team with First Ballantyne.

Congrats on the great quarter. Can you talk a little bit more about your SG&A reduction? And if that will be a continuing trend or is this just for this quarter?

I'll let, again, Dannette answer the specifics. But I'd tell you, I think the -- there's been such a reduction in travel, marketing costs. We were attending 2 dozen different conferences over the course of the year. So we've had a lot of changes. There are -- because we're doing a certain degree of remote audits, there's a reduction there as well. So it's been a real change for us as a verification company. I think it offers us benefit moving forward.

To answer your question about will it always be this way? I think we'll probably -- again, this has been the worst quarter for everybody because just there's been such a decline in business and travel. I don't see it staying consistently that way, but I do see there being a change in our business model moving forward, where we incorporate technology and potentially remote auditing as a bigger part of our services.

So Dannette, I'll let you give the specifics.

Yes. What John said was exactly right. Our marketing and our travel has decreased. I don't know how long it will stay at that level. Obviously, as we start to return to business as it's going to look like in the future, it's hard to say whether or not that will continue at that level, but I think we will continue to invest in our marketing. And there will have to be a little bit more traveling pick up as well as we go in the future.

(Operator Instructions) There are no further questions. At this time, I'd like to turn the call back over to John Saunders for closing comments.

Well, we had a great group out today. We really appreciate everybody's participation. We'll talk to you in 90 days. Have a great day.

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