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Inventure Foods Inc (NASDAQ:SNAK)

Q4 2013 Earnings Conference Call

February 27, 2013 11:00 AM ET

Executives

Katie Turner – Managing Director, ICR LLC

Terry E. McDaniel – Chief Executive Officer

Steve Weinberger – Chief Financial Officer

Analysts

Scott Van Winkle – Canaccord Genuity, Inc.

Ian Corydon – B. Riley & Co. LLC

Mitch Pinheiro – Imperial Capital

Jonathan Feeney – Janney Montgomery Scott

Kurt Frederick – Wedbush Securities

James Fonda – Sidoti & Company

Operator

Good day, ladies and gentlemen. And welcome to the Inventure Foods Inc Fourth Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions) As a reminder, today’s conference call is being recorded.

I would now like to turn the conference call over to Katie Turner. Ma’am, you may begin?

Katie Turner

Thanks. Good morning, and welcome to Inventure Foods fourth quarter and fiscal 2013 earnings conference call. I’m Katie Turner, ICR, Inventure Foods Investor Relations Firm. And on the call with me today are Terry McDaniel, Chief Executive Officer; and Steve Weinberger, Chief Financial Officer.

By now, everyone should have access to the earnings release for the period ending December 28, 2013 that went out this morning at approximately 8 AM Eastern Time. If you do not receive the release, it’s available on Inventure’s website at www.inventurefoods.com. This call is being webcast, and a replay will be available on the Company’s website.

During the course of this call, Inventure will make projections or other forward-looking statements regarding future events or the company’s beliefs about its sales and earnings. We wish to caution you that such statements are just predictions and involve risks and uncertainties, and the actual results may differ materially.

Factors which may affect actual results are detailed in the company’s filings with the SEC. Also please note that the Company undertakes no obligation to update or revise these forward-looking statements.

And with that, I like to turn the call over to Inventure Foods’ CEO, Terry McDaniel. Terry?

Terry E. McDaniel

Thank you, Katie. Good morning. And welcome ladies and gentlemen to our fourth quarter and fiscal 2013 earnings conference call. I will begin today’s discussion with an overview of our 2013 business highlights, afterwards our CFO, Steve Weinberger will provide greater detail on our fourth quarter and fiscal year financial results. Then we will open the call up for questions.

We are pleased with our solid results for the fourth quarter and fiscal 2013. We finished the year with record net sales of $215.6 million, an increase of 16.4%. We believe these results speak to the success of our strategic initiatives as we strive to become the leading provider of both indulgent and healthy/natural food products.

This year, our products in healthy/natural category represents 67% of net sales, a six point increase from the year prior. Looking ahead, we expect this number to further increase and help fuel our gross margin expansion over the longer-term.

I’d now like to discuss our business highlight from the fourth quarter, and full year. Specifically, with two strategic acquisitions in 2013, we have created a very strong platform to greatly expand our high margin Frozen business.

We announced the completion of the acquisition of Fresh Frozen Foods, a brand of Frozen Vegetable Processor. Fresh Frozen was a family-owned, full-service processor and supplier of more than 60 varieties of frozen vegetables and fruits to retail outlets.

This acquisition allows us to have year around freezing operations, including ability to freeze blueberries and other fruits in a new region of the country. This is an addition to our acquisition of Willamette Valley Fruit Company, which we announced earlier in the year.

The assets purchased in the Willamette acquisition include berry processing equipment assets such as the new Individually Quick Frozen IQF tunnel, long term building and ground leases including additional improvements currently being installed and other intellectual property and inventory rights.

Overall, we are very excited about the growth opportunities of our frozen business, and believe that fresh frozen fruit and vegetables are the future in healthy eating, and we are now better positioned to capture a larger percentage of this growing market in 2014 and beyond.

According the Nielsen Homescan survey last June, 90% of people say they have brought frozen vegetables at least once in the past year. Trends in home juicing and smoothie making had also led to a rise in frozen fruit sales. Frozen fruit and vegetable items are highly attractive by offering nutritious produce year around.

The highly nutritional content retained and the convenience of the product makes it a win-win for our consumers. We believe these acquisitions will better position Inventure for new role of growth and innovation, and we will continue to invest in freezing capacity and capability to ensure we are well positioned for long-term growth.

As you know, it’s not nearly enough for a food product to be nutritious, it must also meet the high taste expectations of our customers. Our latest investment, include the purchase of two state-of-the-art IQF freezing tunnels mentioned previously. Not only will this purchase include the long-term margins of our frozen food segment, but will also allow us to further meet the growing demand to our customers.

Our team is always looking to create new innovative products that delight our customers and in some instances, teaming with leading brands to make them more accessible to the end consumer.

Earlier this year, we introduced Seattle's Best coffee. While we believe this would be an outstanding product, it has not met or performed at our expectation. Moving forward, we will focus on the core markets, and will not increase distribution further at this time, but safely can improve the velocity to capitalize on the investments already made on this product. This is confirmed by a research that shows there was a very high repeat purchase, although the product has not had much exposure.

In 2014, we’ll be introducing other new products under Jamba Fusion line, which we believe will have greater impact on our sales growth and margin expansion. Although the Smoothie category is down, we continue to gain market share, and we believe the frozen smoothie category is a long-term viable category.

Currently, we’re also working on our next Frozen Beverage concept with a proposed introduction of 2015. In 2014, we expanded our product offering in certain categories with many new and enhanced products. Without going into too much detail, we’d like to provide you a preview of what’s the term. The first product is truly original in innovation and healthy eating. We have developed a technology that adds vital nutrients and vitamins back into frozen foods that are packed.

The new product will provide over 100% of the daily recommended value of 6 vitamins including A, B1, B6, C, D and E. This technology does not affect the taste, and/or the texture of frozen food products.

Customers have wholly noticed that their favorite frozen foods are now healthier than ever before. We plan to begin testing this in limited markets shortly. We are currently in test markets with another new product under our Boulder Canyon lineup. We have developed a high protein, non-fried baked crisp that tastes delicious too.

Protein is a building block to muscle reparation, and helps you stay cool longer. With 10 grams of proteins per serving, our Boulder Canyon protein crisps will be a fantastic substitute to the common snack product. We see this product as a great opportunity to further expand our healthy natural portfolio. We even further expand our Boulder Canyon product line in 2014, where we’ll be testing our first product outside the snack category, with the new cereal called Oraya [ph].

With the initial rollout of two flavors, Greek yogurt and dark chocolate, these new products are created using our field technologies, which we’ve talked to you about in the past, and provides a unique concept to the growth profile.

We plan to showcase these new products and more in the upcoming Natural Products Expo West Show, which will take place in early March in Anaheim, California. We look forward to this event each year. It’s a great opportunity to meet the retailers, and see their response to our new product. Like in the past, we expect this year to be a huge success, and we welcome you to come visit our booth if you attend this event.

Now, I’ll focus on the indulgent category results for a moment. In the fourth quarter, I’m pleased to report, we generated a slight year-over-year improvement in revenues. We continue to experience positive momentum in our licensed products brand, our Vidalia Brands and Nathan’s Famous. And plan to launch new products under these brands in 2014. We’ve also generated an increase in revenues from our premium private label, and co-packing arrangements in the quarter. However, as a reminder, co-packing is a larger lower margin revenue gain.

Our strength in indulgent category was partially offset by a decline in T.G.I. Friday’s. T.G.I. Friday continues to be an important brand for us. As I mentioned last quarter, we recently launched two new products including Extreme Hot Fries and Jalapeno Poppers, and we’ll continue to rollout new and improved products under the T.G.I. Friday’s brand, including a bacon ranch flavored potato skin. Creating new and innovative products are only one reason why Inventure is the leading food products company.

Our corporate culture is extremely important part of our company. We are highly driven organization, and this has allowed us to have significant growth in recent years. This past year, Inventure was once again named to the Forbes Magazine’s America's Best Small Companies list for 2013. We were ranked number 41, which is a significant jump from our 85th position, which we held last year.

We were one or just two food companies listed in the top 50 spots on the list. We know that this prestigious recognition could not – have been achieved without the hard work and dedication of our talented associates, and we appreciate all their efforts.

We also received recent accolades for our products and packaging from consumer report, good housekeeping, good business news among others. As our team looks ahead into the future, we are very excited about our expansion opportunities in all of our categories as we continue to transform our business. I’d now like turn the call over to Steve to provide some additional details on the quarter. Steve?

Steve Weinberger

Thank you, Terry. And good mooning, everyone. Consolidated net revenues for the fourth quarter increased $15.3 million or 35.2% to $58.9 million as compared to the fourth quarter of 2012.

Net revenues for our Frozen Products segment increased 59.4% to $35.1 million compared to $22 million in the same period last year. If we adjust for the acquisition of Fresh Frozen, the Frozen segment net revenues increased $4.2 million or 18.9%.

Net sales of our frozen berries continue to increase by a double-digit rate, and increased to 23.2% to $24.0 million compared to $19.5 million prior year. Net sales of frozen beverages decreased 14% to $2.2 million. Net revenues for our Snack products segment increased 10.4% to $23.8 million compared to $21.5 million in the same period last year.

Adjusted for the DSD disposition last year, SNAK segment net revenues increased $2.6 million or 12.2%; this increase was attributable to a 47.1% increase in sales of Boulder Canyon, a 285% increase in co-packed products and 29.2% increase in sales of our premium private label products.

However, T.G.I Friday’s net revenues continue to be soft and decreased almost 26% in the quarter. In the fourth quarter of 2012, and in the first quarter of 2013, as you may recall, we participated in a one-time national display event with one of the largest retailers, and we chose not to participate in that event this year. This contributed to the year-over-year declines for this brand, which will also impact year-over-year comparison in the first quarter of 2014. Adjusting for this promotional event, T.G.I Friday’s net revenue decreased 9.9% in the fourth quarter.

Gross margin for the quarter decreased 190 basis points to 18.5% versus 20.4% in the same quarter last year. This is due to a gross margin decrease in the Snack segment, which decreased 640 basis points to 15.7%, largely due to an increase in manufacturing of co-packed products, as well as reduction in sales of T.G.I. Friday.

We plan to improve snack margins by driving continued savings at our plants, and plan to invest in the new extruder of our Bluffton, Indiana plant that produces higher margins from that product. This decrease in the snack segment was partially offset by a gross margin increase in the frozen segment, which increased to 160 basis points to 18.7%.

We continue to look for opportunities to meet growing demand for our frozen food products, while also improving margins in our frozen fruit segment by increasing our internal freezing capability.

As we announced during the fourth quarter, we are currently installing the new IQF tunnels that are very impressive in facilities in both Lynden, Washington and in Salem, Oregon.

Selling, general and administrative expenses increased $1.7 million to $7.8 million, compared to $6.1 million in the fourth quarter of 2012. As a percentage of net sales, SG&A decreased 90 basis points to 13.2% compared to 14.1% in prior year; the increase in SG&A is due to approximately $1.1 million in transaction related expenses, and increased commissions on higher revenue.

We ended the quarter with net income of $2.0 million compared to net income of $2.4 million during the fourth quarter of 2012. This resulted in fully diluted earnings per share of $0.10 compared to $0.12 in the same period last year.

Fourth quarter 2013 net income includes $0.8 million net of tax in transaction related expenses due to the acquisition of Fresh Frozen Foods. The comparable prior year includes a gain of $0.7 million net of tax related to the sale of the DSP business.

Excluding these items, adjusted diluted earnings per share for the fourth quarter this year is $0.14 versus $0.08 in the fourth quarter of 2012. Adjusted EBITDA for the fourth quarter increased 46.4% to $5.8 million or a 9.8% of net revenues compared to $3.9 million or 9.1% of net revenue last year.

Now I would like to briefly review our financial results for the full year. Consolidated net revenues increased $30.4 million or 16.4% to $215.6 million compared to $185.2 million the prior year. This increase was driven by 27 points of increase in the healthy/natural portfolio, which represented 67.1% of net revenues, compared to 61.4% prior year.

Net income for the year decreased 11.2% to $6.6 million, compared to $7.4 million the prior year. And diluted EPS for 2013 were $0.33, compared to $0.38 during the same period last year. This decrease was largely driven by transaction costs related to our two acquisitions in 2013. Net income includes $0.9 million net of tax and transaction-related expenses due to the acquisitions of Willamette Valley and Fresh Frozen Foods.

In our 2012 annual results, we recorded a benefit of $0.7 million net of tax, associated with the sale of our DSP business. Excluding these items, adjusted diluted earnings per share would have been $0.38 for 2013 versus $0.34 in 2012, and consolidated adjusted EBITDA increased 12.2% to $18 million compared to $16 million the prior year.

The company’s balance sheet remains strong with stockholders equity of $59.2 million and working capital of $34 million as of the end of 2013. To facilitate the acquisition of Fresh Frozen Foods, we entered into a $16 million senior secured term loan and a new $13 million senior secured revolving line of credit during the fourth quarter. This was also used to repay two existing equipment term loans totaling $8.4 million and the existing $17.6 million line of credit. The new syndicated loans provide us with greater cash availability to support continued growth while also providing less restricted covenant than our pervious loan.

Overall, we are very encouraged by the continued growth and accomplishments of our company. We believe 2014 will be another strong year of revenue and earnings growth. However, due to the seasonality of some of our newly acquired customers, as well as the timing of additional promotional activity and brand investments, we expect our growth to be more heavily weighted toward the second and third quarters on a year-over-year basis.

While we expect first quarter revenues will be solid, our recently acquired businesses have historically experienced their slowest period during the first quarter each year. Although both of our acquired businesses will be accretive to earnings in 2014, we do not expect Willamette Valley to be accretive in the first quarter.

In addition, our comparative results will be affected by the additional administrative expenses in amortization of intangibles as a result of the acquired business. Beginning in the second quarter, we expect the seasonal nature of our new businesses in the expansion of our product lines to benefit our revenues and improve our operating margins until we realize further accretion from both Fresh Frozen Foods and the Willamette Valley acquisition.

This concludes our financial overview. I will like to now turn the call back to our CEO, Terry McDaniel.

Terry E. McDaniel

Thanks, Steve. In summary, we are pleased with our fiscal year 2013 results, and are confident in our ability to grow long-term. We remain focused on expanding and efficiently streamlining our business to allow us to deliver consistent returns to our shareholders.

Specifically, over the next few years, we will plan to continue to make strategic operating decisions that we expect will increase our operating cash flow, and better position us for long-term future growth.

These include, creating innovative product across our brand portfolio to capture consumer demand in key product category. Expanding our margin by increasing focus on higher margin frozen sales growth, improved operating efficiency and increased long-term revenue growth, increase the overall percentage of our healthy/natural portfolio of products, adding production capacity and reinvesting in our product facilities to support accelerated growth in our frozen and snack segment, and use our strong balance sheet to prudently evaluate new, complementary acquisition opportunity.

These strategies serves as the building blocks of our road to success. We believe they will help drive our top line growth, expand our margin profile, and increase our bottom long-term.

In conclusion I’m very pleased with our results for the quarter and for the year. We have solidly grown our business, and we’re excited for our potential for expansion in the future. Our team remains focused on our strategic objectives and ability to provide delicious and innovative products to our customers to maximize shareholder value long-term.

Looking ahead, we believe we have the right team in place for significant growth. This concludes our prepared remarks. Steve and I are now available to take your questions. Operator?

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question comes from Scott Van Winkle of Canaccord Genuity. Your line is now opened.

Scott Van Winkle – Canaccord Genuity, Inc.

Hi, thanks good morning guys. Congratulations.

Terry E. McDaniel

Good morning. Thank you.

Scott Van Winkle – Canaccord Genuity, Inc.

So, a quick question to Steve on the gross margin, maybe I wrote them down while I’m going to give you the snacks versus frozen, I couldn’t have understood. Did you say it was a 15.7% gross margin on snacks?

Steve Weinberger

On snacks, we said it was 15.7%.

Terry E. McDaniel

Yes.

Scott Van Winkle – Canaccord Genuity, Inc.

And then in 18.7% in frozen?

Steve Weinberger

Yes.

Scott Van Winkle – Canaccord Genuity, Inc.

Okay, gets me little off, but no worries. And then next the frozen fortified nutritional product or technology, can you explain that a little better, what form are deliverable does that take?

Steve Weinberger

Basically, we’re going to be able to add vitamins back to the product, through this new process which new technology which we help develop, and what we’ll end up doing is you will get frozen food, I mean two at a price of one strawberry and blueberries and one is a mix of various strawberries, blueberries and blackberries. You will get the same exact product that you get now, same taste, same work. The difference is they will have over six vitamins in which you get a 100% of the daily requirement.

Scott Van Winkle – Canaccord Genuity, Inc.

So it’s like a coating on the product?

Terry E. McDaniel

You will not see it. It’s actually, and again we’re trying not to say a lot about how we’re doing it, because we know some of our competitors are listening to our call. And we’re trying to keep how we do it confidentially, but you will not – it will not impact the taste, the look of the product, but the vitamins will be on the product, and we’ll be able to hit those numbers generally higher than the those numbers. Because we don’t make sure every dag we make comes out with that full amount.

Scott Van Winkle – Canaccord Genuity, Inc.

Got you, got you. And then, on the other new product, the cereals this is a baked item that’s filled with Greek yoghurt, or what have you?

Terry E. McDaniel

Yeah, we’ve been talking for a couple of years about this filled technology that we have and this is one of the first products that the – other products during the year that we’ll introduce with it, but it will be a very health multi-grain product for example the Greek yogurt is a multi-grain cereal, and inside that is Greek yogurt.

Scott Van Winkle – Canaccord Genuity, Inc.

Got you, got you. And then a couple of more if I could real quick, when you think about the cadence of revenue for Fresh Frozen, are we talking 60% of sales are in Q2 and Q3 collectively or is it 75%, what type of magnitude of seasonality should we anticipate?

Terry E. McDaniel

Well, I think that, the seasonality as we alluded to in our 8-K filing in January, both of our businesses are accretive, so the lack of accretion in Q1 is related only to Willamette, so on the revenue side, it’s marginally Fresh Frozen’s revenue first quarter is marginally different, not significantly different, but Willamette Valley in the first quarter is pretty much a great even business, remember with an operating plan, there is not much going on with Willamette Valley in the first quarter, we start to ramp up in the second quarter and the balance of the year as we bring in berries and other products into the plan.

We’re pretty much all the products that we make as we had explained before, some of them come to us internally, but the rest of that business goes to other industrial type customers and pretty much for the first quarter, where most of those customer have taken that, so you will not see much from an earnings standpoint first quarter.

Going forward though, the business is a very profitable business, and we’re going to expanding this year with the new tunnel.

Scott Van Winkle – Canaccord Genuity, Inc.

Got you. And then lastly, can you remind us that T.G.I. Fridays. When did that business really start to fall off. I’m wondering when we anniversary that or if we anniversary that, as I understand, the weakness in that business was really kind of channel related – dollars to our channel. Do I have all that correct or can you fill me in?

Steve Weinberger

Well, it’s a combination, it’s a little more than dollar channel. There was some convenience. Second quarter last year is when the business really was off, as Steve mentioned, first quarter we still have the other half of that major promotion. I mean I’m just going to – I’ll just tell you, that promotion was $4 million promotion about half of it fourth quarter, and half of it first.

But second quarter is when we start seeing, laughing those declines. And as Steve also mentioned, the declines that we had for the year, if you factor out that one promotion we’ll actually – the net of decline reduced significantly fourth quarter, and we’re certainly hoping that to be fourth quarter. We also have some other new products other than the ones I’ve mentioned that were submitted to T.G.I. Friday’s and we got a pretty robust new product activity coming in second and third quarter.

Scott Van Winkle – Canaccord Genuity, Inc.

Okay, thank you.

Steve Weinberger

Scott, I’m looking at my notes, and you are right, the frozen gross margin was 18.7% last year, it was 20.3% this year.

Scott Van Winkle – Canaccord Genuity, Inc.

Thank you very much. That will make us look a little bit better.

Steve Weinberger

There you go, sorry about that.

Scott Van Winkle – Canaccord Genuity, Inc.

Thanks.

Steve Weinberger

Okay, thank you.

Operator

Thank you. Our next question comes from Ian Corydon of B. Riley & Company. Your line is now opened.

Ian Corydon – B. Riley & Co. LLC

Thank you. I think I might be able to pull this out from some of the numbers you’ve provided, but do you have the organic revenue growth rate for the frozen division as a whole, and then the amount of contribution you got from Fresh Frozen in the fourth quarter?

Steve Weinberger

Well, one second here, so Fresh Frozen in the fourth quarter was – remember it was only about – we only had it for about seven weeks in the quarter, was $8.9 million. And so the frozen growth – as I alluded to in my section for the frozen – sorry I’m looking back at my notes here, our frozen growth at – the acquisition was about 19% at Fresh Frozen.

Ian Corydon – B. Riley & Co. LLC

Got it. I appreciate that. And then on the cereal products what channels are you testing that in, and what can we be looking at in terms of slotting if that actually gets rolled out?

Steve Weinberger

Well, right now we’re testing that product in a large natural customer, and a few retail customers. Okay, and it’s early stages of the test. And the same with the protein, we will probably roll out the protein at a much faster rate, but I don’t see any major slotting push as we did with Jamba and Seattle’s Best at this point.

Not that I don’t believe in the product. I believe in the product, it gives at this point we would probably not even roll at national of that quickly. The natural channel rolls a whole lot slower than the grocery channel.

Ian Corydon – B. Riley & Co. LLC

Got it. And then on T.G.I. Friday’s do you have an estimate or when you think you can return to year-over-year growth for that product?

Steve Weinberger

I mean Ian, I are hoping plan sort of try to do that this year, and we’re cautiously optimistic. The decline in the fourth quarter was less, if you take out the one promotion and hopefully first quarter will continue to make progress with the exception of that going into promotion. We are targeting, we have certain internal targets where we’re targeting this show return to possible momentum on the brand.

Well I can’t – we don’t give guidance or estimates on that, but that’s our expectation. I can tell you from a company standpoint, there is a lot of resources pushing and driving. And we take, T.G.I. Friday's if you look at our license brands, if you take out Rader and Nathan's and T.G.I. Friday's those are as you all know they are very nice margin businesses, so if you look at the total license brands business we are expecting to see increases this year.

Ian Corydon – B. Riley & Co. LLC

Got it. And then the last two questions are one, could you provide us the CapEx budget for the year and then if you could help us at all with the new run rate of SG&A with Fresh Frozen fully baked in or kind of a quarterly range of run rates for SG&A now that you’ve got that acquisition fully on board?

Steve Weinberger

You know, Ian on the second one first, we’re not going to give guidance on an SG&A forecasted run rate. Suffice to say I think the fourth quarter, when you take out some of the noise, beauty of this acquisition; we pick it up on – as a percentage of revenue keeps coming down. We are leveraging our public company fixed cost and so on. Suffice to say, I think a run rate if you take out the noise in Q4 its reasonably representative of how we are going to be tracking going forward and the CapEx spending this year is going to be in the neighborhood of roughly $10 million are so.

Ian Corydon – B. Riley & Co. LLC

All right, thank you very much.

Operator

Thank you. Our next question comes from Mitch Pinheiro of Imperial Capital. Your line is now open.

Mitch Pinheiro – Imperial Capital

Yeah. Hey, good morning.

Steve Weinberger

Good morning, Mitch.

Mitch Pinheiro – Imperial Capital

So, just staying on a last question on SG&A, so you had a portion of Fresh Frozen SG&A in the quarter there is that?

Steve Weinberger

Yes. Sorry, Mitch, we had Fresh Frozen for about seven weeks of the quarter and we had as we identified we had a deal cost in that for the quarter.

Mitch Pinheiro – Imperial Capital

Right. So when I backup the deal cost, the SG&A is only up about $300,000 sequentially.

Steve Weinberger

Right.

Mitch Pinheiro – Imperial Capital

Will that be fair to represent the seven weeks of Fresh Frozen or?

Steve Weinberger

Well. I mean Fresh Frozen to be honest with you, doesn’t have a large infrastructure. It is a private company, it is not burdened with any of the public company costs, what’s in there is largely broker’s commission and if you went through the 8-KA, we have in there sort of the amortization of intangibles and so on. So when we’re looking at it percent of net revenue, SG&A expenses were about 13.2% in the quarter.

Mitch Pinheiro – Imperial Capital

Including the one time?

Steve Weinberger

Yes.

Mitch Pinheiro – Imperial Capital

Okay. And in that 8-K, there was your amortization amount in there that I can look at for next year?

Steve Weinberger

Yes, indeed. Okay, for this acquisition. Yeah.

Mitch Pinheiro – Imperial Capital

Okay. When we talk about the break-even on Willamette, it’s simply because you don’t have any production there is no berries to freeze right now, is that right?

Steve Weinberger

We pretty much sold all of our group at this point going into harvest there is very little left. We are doing little bagging, but pretty much everything that we had in the system we have solved at that point.

Terry E. McDaniel

Right, again if we look at the 8-KA, I mean we will have Vidalia as a standalone is that accretive to our earnings is just not in the first quarter.

Mitch Pinheiro – Imperial Capital

Right. So as we look at 2014 on Willamette, what are the primary differences this year versus last year? You will have two new IQF tunnels year-over-year or just one?

Terry E. McDaniel

One new one year-over-year as we’re buying the business last year, we were installing one and we got some benefit from that last year mix, but there is a little bit of learning curve. The advantage that we will have this year in a couple of areas, I mean one we will have that second tunnel, which means we will freeze more fruits, which means we’ll get more revenue and margin from the business.

Now some of that second tunnel and all of those will not show-up, it’s not showing up late third or early fourth quarter of the and that’s when you’ll see most of that benefit of that expert tunnel, beyond the freezing more berries I think also we’ve got commitments this year to sell more products industrial and sell more internally to Rader, which improves the overall margin of Rader.

Steve Weinberger

And Mitch, I mean, we did announce two new tunnels, one of which is going through our Willamette Valley plant, the other one is going through our Rader plant in Lynden, Washington.

Mitch Pinheiro – Imperial Capital

Okay, okay.

Terry E. McDaniel

That food category is growing at 13% to 14% sale, but we are out there – I mean, working with farmers, committing the acres, getting the commitments from their new plant and pushing to get more products to our tunnel.

Mitch Pinheiro – Imperial Capital

IF you look at 2014 compared to 2013 what percentage of your fruit will be internally processed in the coming year versus the last year?

Terry E. McDaniel

That’s a good question. Just round numbers we talked about this before. We are going to probably I don’t know, get 50%, 60% of our fruit will be able to freeze our sales of our fruit needs in that ballpark in our retail pack absolutely. So again as you know Mitch the deal in the frozen fruit business is you freeze berries yourself and you’re going to make more margins. So that’s why we are doing this. It will be in the 50% to 60%.

Mitch Pinheiro – Imperial Capital

In 2013 roughly?

Terry E. McDaniel

In 2013 roughly it was probably I don’t know 35%.

Steve Weinberger

Yes 30%, 35%.

Mitch Pinheiro – Imperial Capital

Okay. That's very helpful, thanks. And then, staying on frozen berries, so we will see the vitamin fortification, I mean you are going to be able to get better pricing, or is this going to hurt margins?

Terry E. McDaniel

You know in the beginning we’ll be paying a little bit of floating for it, but in the long-term, just we'll not be in the same size bag as our regulatory and it should improve our overall margin.

We are rolling our side as I mentioned in the call, there will be some, I mean, a little bit of sliding pause, but overall we have kind of an internal rule that we can improve our overall gross margin we’re not going do a major new product introduction unless we believe that there will be margin improvement by introducing those new product groups and that certainly the case with this product.

Mitch Pinheiro – Imperial Capital

And from a consumer point of view I mean fruit's pretty healthy all by itself. I mean have you done studies, have you done research that says that people that eat fruit want even more vitamins per serving or what's the – sort of the genesis behind fortifying through?

Terry E. McDaniel

Yeah. We did we actually did past that. And a consumer said that was a very positive perception of being able to develop a fruit that add addition vitamin. Yes, food is healthy for you and there are certain things that the product already has in like blueberries [indiscernible].

But from Willamette’s standpoint, if you can take a good product and make it much better and, as you know a lot of consumers are looking, how do I get more vitamins approaching big, vitamins are big, to be able to do that and not in a fake way. I mean, I think there has been people that have introduced. No, I don’t want to get into different cut it, but people have introduced vitamin this and vitamin that and come to find out it really didn’t deliver.

This product really delivered, and I mean we’re pretty excited about that because I think this is the first true innovation in Frozen Fruits and maybe the Caveman Frozen Fruits. So we got a great reception from our customers that we had showed this product too, and we got to test it and we got to make sure it’s going to work. And that we can communicate with the customer what this means, what is the product it’s called fruit plus vitamins it will be under the Weaver Farms name and so we’re fully optimistic about the potential of what this can do for us.

Mitch Pinheiro – Imperial Capital

Okay, thanks. Two more quick questions one, what did you say the Boulder Canyon growth rate was in the quarter?

Terry E. McDaniel

It was 47%, Mitch.

Mitch Pinheiro – Imperial Capital

And is that distribution growth what’s the consumption growth?

Terry E. McDaniel

There was a little bit stronger promotional business during the quarter, but if you look at Boulder for the full year we picked up a little bit more APV in the natural channel not much in the grocery channel most of it was fewer churn 15% of our growth last year were new products.

I mean that’s a very sizable increase of volume. Some of the products that we mentioned and we did an organic potato chip. We only had enough supply to do it for a few customers in and out. We are going to do more of that this year. So, the good news about last year wasn’t just going out and buying a bunch of distribution, it was more around the velocity of the product and the strength of the category. We didn’t share any of the SPINS numbers or IRI numbers but we are one of the fastest growing natural brands in those SPINS and IRI right now.

Mitch Pinheiro – Imperial Capital

Okay, thanks. And last question we will see at its best. So it’s not performed up to your expectation, did I understand you’re not going of increase distribution just going to keep where it is and then what happens after that?

Terry E. McDaniel

That’s absolutely correct. I mean we actually lost a few of our customers with the sales, but didn’t kind of get the expectations. It’s not up to the speed where Jamba was. However, we had some customers that are committed to us right now it’s an innovated different product. We did a consumer research project on in Friday’s fourth quarter and we asked consumers about Seattle’s Best.

The repeat and we compared it with some other items like the Starbucks Frappuccino, with a very large brand it then paired very well. And what consumers told us, it was a 92% repeat, the exposure is not strong enough and they are also price-sensitive on it. So it’s given us some direction on what we want to try to do this year. We want to retrench, take our base, try to make our base work and then we’ll look later down the road to see if it worked this year and then we’ll make the decision if we want to expand it further.

We haven’t given up on it, but I wanted to let everyone know that is not, we’re not going to be expanding, don’t look the growth side of that product this year, but we are going to kind of retrench, focus on the base and we got some great news on the resource but we got to turn that into results on the show.

Mitch Pinheiro – Imperial Capital

Okay. Thank you very much for the color.

Terry E. McDaniel

Thank you.

Steve Weinberger

Thank you. Thanks.

Operator

Thank you. Our next question comes from Jonathan Feeney of Janney. Your line is now open.

Jonathan Feeney – Janney Montgomery Scott

Good morning, thank you very much.

Terry E. McDaniel

Good morning.

Jonathan Feeney – Janney Montgomery Scott

Just three questions for you. First, just to clarify x the Cold Pack effect, would gross margin for the company be flat or how big was that?

Steve Weinberger

Well I mean Cold Pack effect was big, I mean, we said our Snack division for the quarter was down 600 basis points.

Jonathan Feeney – Janney Montgomery Scott

You got it.

Steve Weinberger

And so, while our revenue was pretty solid, the tradeoff primarily between price and co-pack the nature of co-pack is it’s incremental in total business I mean it’s exponential improvement in your margin. If it is offset high margin product like T.G.I. Friday's that math doesn’t quite work. Having said all that if we can get Friday’s back to at least flat or a little bit of growth, and then later on top of that continue to co-pack business, we are looking at potentially a big upside.

Jonathan Feeney – Janney Montgomery Scott

It makes a lot of sense. I guess I am just trying to give my hands around, is there any other negative gross margin impact within snacks that you besides that co-pack effect?

Steve Weinberger

No, I mean, it’s the co-pack effect and our premium private label and some of the best margin we have in the house. Boulder has got a nice margin Friday’s always had a very nice margin and when Friday’s still a very sizable part of our snack division revenue, I mean Friday’s declines as it have in 2013 you can offset a revenue you can’t quite offset the margin.

So as Terry said earlier that T.G.I. Friday's is a very important brand for us. We got a lot of eyes and hands working on getting that brand back on track. You got to keep that co-packing business still. As I said, we can get that Friday’s back to break-even or growing a few points, we should see a significant increase in our margin.

Terry E. McDaniel

Yeah. Carlson, the restaurant company announced that Friday’s I mean they are working very close with it; they have been a great partner. We are getting new products to the system quickly and as I mentioned last year we didn’t have enough new products and some of the channels we are starting to see some positive response from the new products, but that is the major, I mean, you just can’t make-up that margin with co-packed product.

Jonathan Feeney – Janney Montgomery Scott

Understood, thank you. The commodity effect as a whole I know you buy a lot of different stuff, but what do you expect that to be in 2014 or is it up by how much and what was it on the quarter?

Terry E. McDaniel

So, what was the first part of your question?

Jonathan Feeney – Janney Montgomery Scott

The cost of inputs, inputs as a whole. Are you looking for 2014 to be up, is it inflationary flat, deflationary?

Steve Weinberger

No, I mean commodities have been behaving quite nicely over the last couple of years. So we haven’t seen any dramatic changes in commodity costs certainly in 2013, we don’t anticipate at this point any dramatic change in commodity costs in 2015. We’re seeing a little spike in natural gas cost as they are weather-related with the harsh winter in most of this country, but by in large we’re not expecting any dramatic things in our input costs in 2014.

Terry E. McDaniel

The only perhaps, could be an exception, but we can price through it because we do that in the Frozen reset price once a year, maybe from last year we had a an increase raspberry prices and blueberries went down. So when there be a little bit there, but generally we can price for the snack division as little bit more difficult in snack you saw grain prices moderate this year that actually come down. That effects you are at below and some of the key components and one of things that we focused on we have a special team of senior people including Steve and Brian Foster, VP of Ops, [indiscernible] VP of Purchasing, they all get together once a week and we are looking that how do we take cost out of this business.

We have targeted this year and totaled about $4 million and they are doing a pretty good job of making progress and some of that area is how can we take our critical math now that we have and buy better.

Jonathan Feeney – Janney Montgomery Scott

I got you. And I know that blueberries are growing and berries are growing all over the place in the U.S., but is there any drought effect at all on any of the berries that you use, in California?

Terry E. McDaniel

Most of them are irrigated, we don’t buy. Actually we bought just a couple of loads of blueberries last year at California. Most of our blueberries come out of the north-west and there’s been no effect on blueberries at this point. With this new plan in Georgia, we are hoping to be able to freeze some berries out of Georgia this year and Georgia was kind of hit with the bad weather as well, but most of that was Atlanta North, most of these berries are grown in the further southern part of Georgia.

So I haven’t heard of any impact there. The thing with blueberries, anyone can grow them, every state is growing them, every country is trying to grow them, because of the demand for blueberries and I don’t really expect to see a lot of, I mean who knows, I mean we don't know until the crop comes in, but there is a lot of supply of blueberries out there right now.

Jonathan Feeney – Janney Montgomery Scott

Understood, thank you. And finally, at full capacity how much of revenue can a tunnel or these two tunnels of freezing capacity whether volume or revenue how do you want to think about it, I mean how much can they support? Can you guys do all that in 2014 and just how much could they support at full capacity?

Steve Weinberger

I mean full capacity is a tough question to answer, because on berries, only for a few months of the year in the berry business, I mean you got freeze 7 million pounds, 8 million pounds, 9 million pounds of berries per tunnel. The hard part is getting those berries; I mean the higher part is working with the growers to get the berries in the house, so that’s 9 million or 10 million pounds per tunnel in two and a half months.

And if we can figure out a way as berries have been trying to figure out, we get fresh frozen for instance, as they are pretty items throughout the year. Willamette Valley is freezing items like onions and mushrooms and so on outside of the berry season. So very hard to close, wet those assets a little bit more outside of the normal berry growing session.

Terry E. McDaniel

Actually, if you can freeze year around would you – you can’t so you can’t take this number. You could at Fresh Frozen because their doing that pretty much year around, but in a berry operation if you could free berry you have access of freezing year around, you’ll probably do $45 million to $50 million through one tunnel.

As Steve mentioned we got 2.5 months, depending on year. We’ll I’m going to get a little more, but they’ll do cranberries, they’ll do different type blackberries, they’ll also do some mushrooms and a few other things. But, so that’s about where you would be with that capacity and we better be able to get that expert capacity and the commitment from the farmers to push you through the tunnel. I don’t think the numbers speak around, I think you can get all of that the first year, but I think probably take that around, I think you can get all that the first year, but I think probably going to do, probably a more accurate assessment.

Jonathan Feeney – Janney Montgomery Scott

And there is just a – you said about fresh, there is one in Oregon but there is one in Georgia of the new tunnels. Are there other products you can think of, you mentioned mushrooms blackberries already doing that deal you could fill that capacity when it's not berry season?

Terry E. McDaniel

Yeah, we have the new tunnels ones going into the Oregon, and ones going into our Washington operations.

Jonathan Feeney – Janney Montgomery Scott

Yeah.

Terry E. McDaniel

That was kind of committed before we even closed the deal on Fresh Frozen.

Jonathan Feeney – Janney Montgomery Scott

I got you, okay.

Terry E. McDaniel

At tunnels in Georgia, and I can tell you Fresh Frozen business continue to grow like they have grown in the past, but we keep doing – able to add to that growth, then we’ll look at perhaps adding more there. But in Georgia we are looking at potentially blueberry may be some other fruits that are grown there.

And then up in Washington and Oregon, we expand at Oregon a little bit last year through some cranberries and mushrooms, there may be an opportunity to actually do some add through of vegetables that are West Coast’s vegetables in our two facilities on the West Coast and in tandem through the Fresh Frozen route in the South East. So there is a lot of possibilities. As you know, the key with any piece of asset is, you got it screw up the assets. If we only run at 2.5 months it’s very accretive I mean to our margin it’s been half our margin.

However, we can find a way to run it mostly around is even better and we’re looking at things like that all the time, we’re looking at, is there any other fruit, cherry, that is there something else we can fully that would help us to stretch the season of freezing if you will.

Jonathan Feeney – Janney Montgomery Scott

Makes a lot of senses on the Smoothie business it seems to be up there but, anyway I have taken more of your time. Thank you very much.

Steve Weinberger

Thank you.

Terry E. McDaniel

Thank you, John.

Operator

Thank you. Our next question comes from Kurt Frederick of Wedbush Securities. Your line is now open.

Kurt Frederick – Wedbush Securities

Hi thanks, congratulations on the quarter.

Terry E. McDaniel

Thanks.

Steve Weinberger

Thank you.

Kurt Frederick – Wedbush Securities

Each quarter prepare, I was just wondering on the Fresh Frozen Food, just talk a little bit trying to expand distribution, I was wondering if you could talk a little bit on kind of where you are focusing on whether it be geographic or distribution channel. Any comments you have on that?

Terry E. McDaniel

Okay, yeah sure. Fresh Frozen (inaudible) and it’s part of the company Steven personally is kind of Head of Sales, head of – kind of General Manager position. Now they’ve built the business very methodically and they tried less, probably 12 to 13 major retailers. They do a little bit of industrial. I think what we bring to the party to help them is one, there’s some customers within those geographies, it’s currently caring the product and the product is performing well.

We now have 15% growth on average. So we have connections with pretty much every retail in the country with some of our product whether they know Jamba works some thing ACB on Jamba, so we are going to able take and hopefully utilize some of those relations to help them gain new distribution that is adjacent to current geography or within their current geography that will be our first focus.

Second of all, they do mainly a two pound clear bag, quality you can see it’s a unique positioning they own that positioning. We believe there is an opportunity to look at different other vegetables in that same format whether that be organic or vegetable brands or certain vegetable are not currently producing.

Second of all we believe there is other form of packing, stainables as a big percentage of the frozen vegetables sold in retail stores. They will not be sustainable we believe, so we can do. So our goal is to grow about innovation and packaging new products and just doing what they are doing now and picking up some more customers. And we think we have the infrastructure and the relations in our current growing organization to help them do that.

Kurt Frederick – Wedbush Securities

And then supply is not an issue for that?

Terry E. McDaniel

Supply.

Steve Weinberger

No, not at this point, there’s nothing that we’re running short. Certainly just like fruit we have to think ahead and we have to project what we’re going to sell, but it seems in comparison and we’re early into this that frozen vegetables are much more readily available during the year if you need them than frozen fruits, generally it kind of contract with frozen food upfront and there could be some shortages. I don’t think that is bigger issue on the Frozen vegetable side.

Kurt Frederick – Wedbush Securities

And then if you kind of explained this already but T.G.I. Friday's you talked about new products that coming on Q2 and Q3?

Steve Weinberger

Yeah.

Kurt Frederick – Wedbush Securities

So license expires in May, I just wonder if you could comment on that?

Steve Weinberger

Yeah, we‘re working on that. We expect no problems that have that fine, prior to the exploration I mean order they could give us an extension I don’t think we’ll need it, but we’re very close on that. We want to sign up, they want to sign up, we committed Friday’s over the long-term and hopefully good news will be coming on that soon.

Terry E. McDaniel

Kurt, we are about, 99% there on T.G.I. Friday's it’s been in the hands of the lawyer, we have agreed to the terms and being there as lawyers back and forth fairly lengthy just in this, legal document, but we’re about 99% there and we expect to make some sort of announcement in the next upcoming weeks.

Steve Weinberger

Yeah, I mean we want to, in fact part of the kind of going back and forth and getting the right things in time as we expand the relationship and hopefully we will be to accomplish that through with new contract.

Kurt Frederick – Wedbush Securities

Okay, sounds good thank you.

Steve Weinberger

Thank you.

Operator

Thank you. And our next question comes from James Fonda of Sidoti & Company. Your line is now opened.

James Fonda – Sidoti & Company

Hi guys, how are you?

Steve Weinberger

Hi, James, how are you?

James Fonda – Sidoti & Company

Good, could you just talk about I guess the marketing spending that’s involved with Fresh Frozen fruits and imagine there is no sliding fees or anything like that?

Steve Weinberger

Yeah, it’s very low.

James Fonda – Sidoti & Company

Okay.

Steve Weinberger

Refreshing concept is the trade sending is fairly low just like it is in the Frozen fruit at our business much last in like frozen beverages is now. Sliding yeah there will be some sliding costs, but not the impact that you see again because the velocity, you get a frozen vegetable on the shelf the average new mix probably four times that of a frozen beverage.

So it’s a faster payback and marketing costs there is no marketing cost at this point and the big part obviously don’t have a marketing group, they’re using our marketing group to develop packaging and all of that, but we don’t expect being increase the marketing spending, there maybe a little bit of an increase in the just from a sliding standpoint, but it shouldn’t have a lifting impact on the earnings.

Terry E. McDaniel

Yeah James, if you saw our 8-KA filings we have full financials in there, Fresh Frozen audited.

Steve Weinberger

There’s sort of lean and very healthy margin portfolio.

James Fonda – Sidoti & Company

Okay. All right thank you.

Steve Weinberger

Actually our synergies, do you know, they are lean, our synergies aren’t going to come from reducing, they’re really going to come from freezing fruits, they are going after new customers.

James Fonda – Sidoti & Company

All right.

Steve Weinberger

Food in the South East that we have that they don’t have, so really synergies are more about teaming up and utilizing each others resources.

James Fonda – Sidoti & Company

Okay, cool. Thank you.

Steve Weinberger

Thank you.

Operator

Thank you. And at this time, I’m not showing any further questions. I would like to turn the call back to management for any closing comments.

Terry E. McDaniel

Thank you for joining us on the call today. If you’ll be at the Natural Products Expo West, please be feel free to stop our boots and we enjoy meeting with you. We thank you for your interest and investment in our company.

Operator

Ladies and gentlemen thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a wonderful day.

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