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Inventure Foods Inc (NASDAQ:SNAK)

Q2 2014 Results Earnings Conference Call

July 31, 2014, 11:00 am ET

Executives

Katie Turner - Investor Relations, ICR Inc.

Terry McDaniel - Chief Executive Officer, Director

Steve Weinberger - Chief Financial Officer

Analysts

Scott Van Winkle - Canaccord Genuity

Ian Corydon - B. Riley & Co.

Tony Brenner - ROTH Capital Partners

Mitch Pinheiro - Imperial Capital

James Fonda - Sidoti & Company

Kurt Frederick - Wedbush Securities

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2014 Inventure Foods Inc earnings release 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, this conference is being recorded.

I would like to introduce your host for today's conference, Ms Katie Turner. Ma'am, you may begin.

Katie Turner - Investor Relations, ICR Inc.

Thanks. Good morning and welcome to Inventure Foods second quarter 2014 earnings conference call. 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 June 28, 2014 that went out this afternoon at approximately 8 AM Eastern Time. If you have not received 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 that actual results may differ materially. Factors which may affect actual results are detailed in the company's SEC filings. Also please note that the company undertakes no obligation to update or revise these forward-looking statements.

With that, I would now like to turn the call over to Inventure Foods' CEO, Terry McDaniel. Terry?

Terry McDaniel

Thank you, Katie, and good morning, ladies and gentlemen, and welcome to our second quarter 2014 earnings conference call. I will begin today's discussion with an overview of our second quarter business highlights. Afterwards our CFO, Steve Weinberger will provide greater detail on the financial results for the second quarter and for six months of 2014. Then we will open the call for questions.

We are very pleased with our second quarter performance for fiscal 2014. Our team successfully executed on our ongoing initiative to drive healthy EBITDA growth through a focus on strong sales growth, improving margins and leveraging the capabilities of our newly acquired business. We reported solid EBITDA growth of 79.7% fueled by strong net revenue growth of 33.9%. The main drivers of our overall success this quarter was driven by increased sales volume with 79% growth of our Boulder Canyon brand, 13.9% growth in our frozen berries and the addition of our new businesses.

During the first half, we made conscious decisions to focus on higher margin sales growth and in turn reevaluate certain low margin business. I am pleased with the positive impact it had on our margins and bottomline performance. Importantly we believe this was a key step to better position our business for the longer-term growth. This quarter, we generated 170 basis point improvements in gross margin, largely driven by 470 basis point improvement in our snack segment. Gross margin on our frozen segment increased 20 basis points in the second quarter, primarily as a result of our increased capacity at our frozen fruit operations.

Looking ahead, we expect to further improve the margins in our frozen fruit segment, now that we have increased our internal freezing capabilities with the installation of new IQF tunnels at our berry processing facilities in Lynden, Washington and Salem, Oregon. Our vision at Inventure Foods is to continue to be a strong growth food company focused on consumer trends for healthy/natural products. During the second quarter, the healthy/natural line increased 57.5% and represents 82% of the total net revenue, compared to 69% for the second quarter of 2013. This is due to the continued strength in our healthy/natural line driven by continued success of Boulder Canyon, increased demand for frozen fruit and the addition of our newly acquired frozen vegetable business.

I will now discuss our business highlights for the second quarter in further detail. Starting with our healthy/natural category. The successful efforts of our dedicated Boulder Canyon team has continued to drive significant increase in sales quarter-after-quarter. Our Boulder Canyon brand had a record quarter with the increase of 79.1% over prior year. Our strong Boulder Canyon brand revenues growth is driven by new products, which represented 28% of the total sales increase and on a year-to-date basis, the business is up 50%.

We also benefited by small distribution gains and particularly the addition of a new club customer and increased promotional activity by key customers. Boulder Canyon's growth is driven by success in every channel. According to a recent 12 week expense data that's the information for the natural channel, Boulder Canyon kettle chips have grown by 69%. We continue to broaden our Boulder Canyon lineup by introducing Ancient Grains, Arise Cereal, Protein Crisps, Vidalia [ph] flavored kettle chips, avocado oil kettle chips and new seasonal organic kettle chips. Boulder Canyon sales increased 50% on a year-to-date basis. With Boulder Canyon up in all channels, we remain bullish about the back half of the year.

Our healthy/natural category growth was also fueled by strong demand for frozen berries. During the quarter, we experienced a double-digit sales increase in our frozen berry business. Building upon the demand of frozen berries, we officially launched our new vitamin enhanced frozen fruit product under the Rader Farms brand. Our initial rollout is now taking place in a small test market. We are also planning on launching a new fruit and vegetable blend in the third quarter, targeted toward increased consumer trends in juicing and smoothies. I believe these new concepts will bring new innovations and growth to the frozen fruit category.

The addition of sales from our fresh frozen business has also contributed to the healthy/natural sales growth during the quarter. IRI, which represents about a third of the fresh frozen sells sales on a 12 week basis shows the brand is up 30% over prior years in supermarket. The integration is going well for beginning to capitalize on synergies of the combined business in sales and operations. We are working on leveraging our existing customer relationships and expect to pick up a number of new accounts in the back half of the year. We are excited about the new sales and distribution opportunities that this new business will contribute.

Our frozen beverage expense decreased during the second quarter, primarily due to the prior-year rollout of Seattle's Best Coffee. In our frozen beverage business, we are focusing our efforts on the continued growth of the new Jamba Fusion line. Recent 12 week IRI data for Jamba shows an increase of 10.5% in the grocery channel. We continue to gain market share for our Jamba Smoothie line and we expect to see further opportunities to increase distribution in this category in the back half of the year based on gaining additional shelf space as a major player exited the category.

Moving on to the indulgent snack category. During the first half, we focused on improving our margins to drive more sales to the bottom line. As part of this effort, we made the conscious decision to discontinue approximately $1.5 million in lower margin sales from our indulgent portfolio. While this impacted our revenue growth, this decision contributes to an improvement in the gross margin of our snacks segment this quarter. TGI Friday's net revenue decreased 6% from prior year, showing an improvement from the double-digit declines in prior periods.

We added a new bacon ranch flavor to our TGI Friday's potato skin line. The new snack chip is currently available in convenience stores and vending machines. We look forward to continuing the brand's portfolio with the introduction of other new products later this year and take advantage of our new license agreement, which include snack mixes, popcorns and expansion into the international.

As discussed earlier this year, we plan to reinvest a part of our fresh frozen earnings back into our business to support future growth. We recently completed installation of two new IQF tunnels in Lynden, Washington and Salem, Oregon. We also increased our extrusion capacity in our Bluffton facility. All three of these projects ensure we can continue to grow into the future.

We recently filled our frozen division general manager position with Dan Hammer and we added additional resources in other areas of the business, including our marketing team. We continue to demonstrate top and bottom line growth and reinvest for future growth.

I would now like to turn the call over to Steve for additional details of the quarter. Steve?

Steve Weinberger

Thank you, Terry, and good morning, everyone. Consolidated net revenues for the second quarter increased $18.2 million or 33.9% to $71.9 million as compared to the second quarter of 2013. The increase in net revenues was due to a 57.5% increase in the healthy/natural product portfolio, partially offset by the company's decision to discontinue $1.5 million in lower margin sales.

Net revenues for our frozen products segment increased 58.1% to $44.1 million compared to $27.9 million in the same period last year. This was primarily driven by net sales of our frozen berries, which increased 13.9% to $26.3 million compared to $23.0 million last year and the addition of our newly acquired fresh frozen foods business. This was partially offset by 23.2% decrease in sales of our frozen beverage products, primarily due to the extent of the prior-year rollout of our Seattle's Best Coffee product.

Net revenues for our snack segment increased 7.6% to $27.7 million compared to $25.8 million in the same period last year. This increase was attributable to a 79.1% increase in sales of Boulder Canyon and 20.2% increase in our healthy/natural private label snack products. TGI Friday's net revenues also decreased about 6%, and as Terry mentioned, this decline significantly less in comparison to prior quarters.

Gross margin for the quarter increased 170 basis points to 18.7% versus 17.0% in the same quarter last year. This was largely driven by a significant improvement in gross margin within our snack segment, which was up almost 500 basis points to 22.9% in addition to a slight increase in gross margin within our frozen segment.

We outline margin improvement as an important strategic initiative and I am pleased to share our positive results with you today. We continue to evaluate new opportunities to drive cost savings and prudently manage the controllable aspects of our business. We expect to further improve the margins in our frozen fruit segment, leveraging our expanded internal freezing capabilities through our newly installed IQF tunnels at our berry processing facilities in Lynden, Washington and Salem, Oregon.

Selling, general and administrative expenses increased $2.1 million to $9.0 million, compared to $6.9 million in the second quarter of 2013. The dollar increase was primarily attributable to the addition of our two new businesses. As a percentage of net revenue, however, SG&A decreased 20 basis points to 12.6%, compared to 12.8% last year. During the quarter, we recorded two offsetting adjustments in SG&A. One was additional equity compensation costs related to the performance-based compensation. The other adjustment was a reduction to the estimated earn out of fresh frozen foods. As you may recall, the earn out target is based on double digit EBITDA growth for 2014. The range between a zero payout and the full $3 million payout is $0.5 million in EBITDA. So it's a very narrow window. Based on our most recent forecast, we unwound approximately $0.5 million of the estimated contingent consideration liability. Overall, we remain very, very excited about the addition of fresh frozen foods.

We ended the quarter with a net income of $2.5 million, compared to net income of $1.4 million during the second quarter of 2013. This resulted in fully diluted earnings per share of $0.12 compared to $0.07 last year. EBITDA for the second quarter increased almost 80% to $6.4 million or 9.0% of net revenue compared to $3.6 million or 6.7% of net revenue in the prior period. Our improvements to EBITDA are primarily due to our increased focus on improving our operational efficiencies and a volume increase. We believe this positively impacted our earnings in the second quarter and will continue to do so moving forward.

Now I would like to briefly review our financial results for the first six months of 2014. Consolidated net revenues increased $37.1 million or 36.3% to $139.4 million compared to $102.2 million last year. This increase was driven by 56.4% increase in our healthy/natural portfolio which represented, at the half-year mark, 81% of net revenue, compared to 70% last year. On a year-to-date basis, gross profit increased $7.5 million or 39.3% and as a percentage of revenue increased 40 basis points to $18.0 million.

Net income for the half increased 65.2% to $4.1 million, compared to $2.5 million the prior year and diluted earnings per share for the first half were $0.20 compared to $0.13 during the same period last year. Consolidated EBITDA increased 72.8% to $11.5 million, compared to $6.7 million last year. The company's balance sheet remains strong with stockholders equity of $64.2 million and working capital of $37.7 million as of the end of Q2. For the quarter, our bank leverage ratio was 3.2 times.

Overall, we are very pleased with our second quarter results as we continue to see strong demand for our products. Looking ahead, we expect to see earnings growth in the third and fourth quarters but given the lower margin businesses we walked away from the second quarter, this will slightly impact our topline growth.

That concludes our financial overview. I would like now to turn the call back to Terry McDaniel.

Terry McDaniel

Thanks, Steve. In summary, we believe we executed well on our strategic initiatives in the quarter and are particularly pleased with our top and bottom line growth. We believe that our positive momentum for the first half of the year will continue for the remainder of fiscal 2014. Looking ahead, our team remains focused on delivering our aggressive plan for 2014.

Our focus for the remainder of 2014 include the following. One, creating innovative products across our brand portfolio to capture consumer demand in key product categories, expanding our margins by increasing focus on higher margin sales gross and improve operational efficiencies, increasing the overall percentage of our healthy/natural portfolio of products, adding production capacity and reinvesting in our production facilities to support accelerated growth in both frozen and snack segments, continuing to leverage our new acquisitions and to use our strong balance sheet to prudently evaluate new complimentary acquisition opportunities.

These strategies have already proven have positive impact on our business. Long-term, we believe they will drive our topline growth, expand our margin profile and increase our bottomline. Most importantly, they will allow us to efficiently streamline our business in order to deliver consistent returns to our shareholders.

In conclusion, I am very pleased with our results for the first six months of fiscal 2014. We remain focused on our strategic plans and ability to provide delicious and innovative products to our customers. Looking ahead, we believe we have the right team in place for significant growth.

Steve and I are now available to take your questions. Operator?

Question-and-Answer Session

Operator

Our first question comes from Scott Van Winkle of Canaccord Genuity. Your line is open.

Scott Van Winkle - Canaccord Genuity

Hi. Thank you. Congrats, guys.

Terry McDaniel

Thanks, Scott.

Steve Weinberger

Hi Scott. Thanks.

Scott Van Winkle - Canaccord Genuity

Steve, did you say at the end of your remarks that you expect earnings growth in the back half of the year?

Steve Weinberger

Yes, indeed.

Scott Van Winkle - Canaccord Genuity

Do you want to be anymore specific?

Steve Weinberger

Not really.

Scott Van Winkle - Canaccord Genuity

Okay.

Steve Weinberger

But I did imply that, both Terry and I, in our presentation this morning that we hope to accelerate that growth in the back half.

Terry McDaniel

Yes, we mentioned the seasonality, particularly as it relates more to our frozen business. It has some seasonality, as you guys can see from previous years.

Scott Van Winkle - Canaccord Genuity

Yes. No, I think we certainly expected earnings growth. I just wanted to see if I could get more specifics out of you, but that's good. So when you talk, on the frozen side, you give us the growth numbers for the frozen berry business. If it figures or decline on the frozen beverage business, if I take some guesses there, I back into a fresh frozen contribution of $14 million in the quarter. Does that sound about right? Or that's sound a little low?

Steve Weinberger

Well, I won't commit to a number but you e are pretty good with math.

Scott Van Winkle - Canaccord Genuity

Okay, and then we can you say the IRI data was up 30% from fresh frozen, but it only covers a third, one, why did it cover third of the business, unless it's club focused? And then second, the number I came up with would have been quite a bit higher if there was 30% growth rate, or maybe I just have seasonality wrong?

Terry McDaniel

Yes, I mean, Scott, and that's the reason I wanted to qualified that. If you look at a lot of fresh frozen business, a lot of their strength is in independent markets. And by the way, they have zero club business which is a big opportunity for us. They have zero business in the independent markets. So most of business is in the independent market and that's not measured by IRI. However, some of the business that we expect to gain going forward and is one of the big opportunity will be IRI measured business.

Scott Van Winkle - Canaccord Genuity

Got you, and that's where your sales force brings some strength to bear?

Terry McDaniel

Yes, absolutely. And I think they have strengthened their sales force. I think in the case of fresh frozen, they had a great run. They are a great company and the brand is, we just couldn't be more excited about the brand, but they don't really have -- they didn't want to know take the bet or the resources going forward with some of the upfront investment that's sometimes required to go into some of these other account. And we are going to really push probably more next year. I mean, as I said, we are just now getting through the integration process but you will see us, perhaps, become even more aggressive as we go into next year.

Steve Weinberger

You know, Scott, as a matter of fact, we, Terry and I, are currently calling you from downtown Thomasville, Georgia, where we spent the last couple of days at our fresh frozen facility here. Had our Board meeting here but met with some of the senior fresh frozen sales team to put together the list of the opportunities going forward. So we are really excited about this new business.

Scott Van Winkle - Canaccord Genuity

Got you, and then one more fresh frozen. Is the frozen vegetable sector stronger in the winter months and it's a little more fresh in the summer months?

Steve Weinberger

It is definitely stronger, you know your Thanksgiving through your holiday season, all the way to the end of the year, first of the year people are eating more at home. They are having more big meals and it does skew a little bit heavier during the fall winter period.

Scott Van Winkle - Canaccord Genuity

Got you, and just one more and I will turn the call over to others. But the gross margin on the snack side of the business was very impressive. Obviously you had a positive mix by walking away from low margin business, the huge growth in Boulder Canyon had to be favorable. I assume the gross margins are probably highest on Boulder Canyon in that segment. One, are those two assumptions correct? Or is there anything else that drove that margin improvement?

Steve Weinberger

Yes, that's a good question, Scott, because you are right. The Boulder, we did make some distribution gains that that somewhat really drove the volume increase. So there wasn't a lot of investment in that growth. So margins in Boulder was good. Beyond that, I will say a couple of other things. Our plant at Goodyear is doing very well. And our purchasing group has done a very good job. So it's really a total team effort, but some of the key ones that you mentioned are correct and I see a lot of that hopefully that momentum will continue as we go into the second half. You know when you have got more businesses in your portfolio, you can be a little bit picky about the customers that you retain and at some point if you are not making money, you need to just move on. And so that was the $1.5 million and quite honestly there's probably a few others that we did the same thing during the first half.

Terry McDaniel

Yes, Scoot, and we said on a number of our conversations in the last six months or so that that was an important strategic imperative for us to figure out to getting that snack margin up. It was way too low in the last couple years, too low to support any sort of growth investment spending. So we are really happy to see some of the fruits of our labor.

Scott Van Winkle - Canaccord Genuity

Yes, Steve, the last time I see a quarterly gross margin at that level in snacks is 2010. Is that right?

Steve Weinberger

Yes, sir.

Scott Van Winkle - Canaccord Genuity

Great. Thank you very much.

Steve Weinberger

Thanks, Scott.

Operator

Thank you. Our next question comes from Ian Corydon of B. Riley & Co. Your line is open.

Ian Corydon - B. Riley & Co.

Thank you. Do you have the organic revenue growth figure for the second quarter?

Steve Weinberger

We don't give that number, excluding fresh frozen, Ian.

Ian Corydon - B. Riley & Co.

Okay and you mentioned part of the Boulder Canyon strength being driven by strong promotions from your retailers. Do you expect that to continue?

Terry McDaniel

We expect to have a strong first half. Some of those programs will continue, some will not. As you know, Ian, those things come in and out. But we are expecting to have a pretty strong second half for Boulder, just based on -- one thing I mentioned, over 28% of the growth has been new products. That should continue. Some of the distribution gains that we made, although they were small distribution gains, those should continue and we expect to make further progress in all fronts on Boulder. There's a lot of things we are excited about in this first half, but probably one of the more exciting, as you guys know, we have grown Boulder about 30% on average for five, six years and I think one year we were flat, but the average has been about 30%. But to see all the effort and energy that's been put into that brand when we created that new team two years ago and really put the energy and effort behind it is very, very positive and we are very optimistic for the back half of the year to continue with Boulder. Now I don't know if it will be as high as this quarter, but it's going to be, we expect the momentum to continue.

Steve Weinberger

It should be higher than our average over the last number of years.

Terry McDaniel

Yes.

Ian Corydon - B. Riley & Co.

Got it. I don't think you mentioned the co-pack business, how did that perform in the quarter?

Steve Weinberger

The co-pack business was solid for the quarter. We started around Q2 of last year, around May of last year. So I think we are a little up in our co-pack business, but it didn't have any significant impact on the sales growth. It didn't have any impact on the sales growth.

Ian Corydon - B. Riley & Co.

Got it.

Steve Weinberger

We like it.

Ian Corydon - B. Riley & Co.

And can you give us a sense for how much the frozen gross margin could expand, thanks to the two new IQF tunnels? Is that 1 or 20 basis points? Is it in the hundreds of basis points?

Steve Weinberger

We are not going to give that kind of guidance, Ian. Suffice to say, you have been to close this business for a long time and we all know the economics of the frozen fruit business to the extent we freeze more, we are going to make more money. We are adding two new tunnels. We are going to increase our frozen berry, our freezing number from 35%, with the two new tunnels we are now up to around 50%.

Terry McDaniel

To meet our internal needs.

Steve Weinberger

So we look at our sales needs, we are now going to freeze about 50% of our requirements versus 35% a year ago. So the good news is, obviously we are going from 35% to 50%. We hope to get a gross margin kick from that. The other good news is, we are still at only 50%. So there is still a lot of upside for us going forward in adding to our freezing capacity.

Ian Corydon - B. Riley & Co.

Appreciate it. Last question was just on the SG&A. You did mention, Steve, a couple of gives and takes in there. could you just help us out for what the right run rate is going forward?

Steve Weinberger

Well, without those give and takes, they more or less wash. So this would be a reasonable run rate on our SG&A going forward. I mean, there will be some, we did say last year that we are not taking all of the earnings from fresh frozen to bottomline. We are reinvesting in our business. We have got our two new GMs, employees. We are spending more on sales and marketing. We are hoping to spend a lot more on slotting fees, for instance on fresh frozen as we move forward. But the run rate is not too bad. I would say, those two one-timers more or less wash for the quarter.

Ian Corydon - B. Riley & Co.

Got it. Thank you.

Terry McDaniel

Thanks, Ian.

Steve Weinberger

Thank you.

Operator

Thank you. Our next question comes from Tony Brenner of ROTH Capital Partners. Your line is open.

Tony Brenner - ROTH Capital Partners

Thank you. What products were discontinued? Which of that products were discontinued?

Steve Weinberger

It was customers, Tony. I certainly don't mention a name, in case any of them are listening, but there was one large flat chip private label business that we have had since I came to the company. We never made any money on it. We kept it because of our DSD network. As you know, we sold that DSD network a couple of years ago and we just got to the point saying, okay, hey, either we are going to make money on it or we are going to, there needs to be someone else to make it. And that was the one big customer. I can tell you, there were a few other customers we were doing some business in some airline business where we were losing, beyond that $1.5 million that we also said we need to walk away and I am real proud of our sales team. Our sales team, because they grow snack, I think 7%, 8% and at the same time walking away from some unprofitable business and, by the way, part of that margin, I left this out earlier, but part of that margin improvement beyond that was some of the existing customers we had we were able to improve the margins on those customers. Some that were marginal, we were able to keep by giving them up. So anyways, it was no products. It was just really customers.

Tony Brenner - ROTH Capital Partners

Okay. Let me ask you a little about TGI Friday's. You were down 6% but last year you were down 18% in the second quarter and earlier in the year you talked about increasing your marketing efforts, new distribution, new products and none of those efforts seem to have resulted in much sales traction. So I know you have got, under license agreement there will be new product lines and new geography. But those kind of things typically are pretty slow ramp and I am wondering if we should be looking forward to adjusting at least through fiscal 2015 for ongoing sales declines for that brand?

Terry McDaniel

Well, if they are, they will be small. We are not, at this point I can tell you I have got a real optimistic sales and marketing team that's on it. They feel like they can do better than what I project. It's certainly a big focus to get it back positive. And you are right. Some of those things are international. It's going to take time. Some of the new products that are going to introduced, they are going to be introduced late fourth quarter. So right now, what you are seeing to reduce the continued decline is mainly internal better blocking and tackling. The new bacon ranch item has helped. I guess I can say one of the items we will be introducing in the back half year is the sweet potato skin. Nobody has that. So we are pretty excited about some of the new products. Friday's is an important brand for us from the snack portfolio, but it's not our largest snack brand in the quarter, and while it is most important, it is not a make or break for our company. But we are excited more about the new agreement and what it provides. But you are right, Tony, we won't see much of that until sometime early next year.

Tony Brenner - ROTH Capital Partners

It's not just largest snack brand. Is that what you said?

Terry McDaniel

That's right. Not for the quarter, it wasn't. Or maybe even for the half, I am not sure. For the half, it is tied with the largest. Yes. Hard to believe. Isn't it?

Tony Brenner - ROTH Capital Partners

Yes, it sure is.

Terry McDaniel

But we are -- I don't want to -- I mean the new team, they have got it Friday's, which we recently sold, there is a lot of positive energy there. And things like, I think we have talked some of new categories, pub mix and popcorn, I think has some promise. I mean we have been stuck in one product form or two, extrusion, which has been growing and sheeted dough, which hasn't. With the new product categories, I think it gives us an opportunity to turn it back into a positive force.

Tony Brenner - ROTH Capital Partners

Okay. Have you discontinued Seattle's Best Frozen yet?

Terry McDaniel

No, we haven't, Tony. We haven't discontinued. We still have some customers that is doing okay. But we are not investing any additional funds against it at this point.

Tony Brenner - ROTH Capital Partners

Okay. Thank you.

Steve Weinberger

Thank you.

Terry McDaniel

Thanks, Tony.

Operator

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

Mitch Pinheiro - Imperial Capital

Hello. Good morning.

Terry McDaniel

Hi Mitch. Good morning.

Mitch Pinheiro - Imperial Capital

Just a couple of line item questions. First on Boulder Canyon. Exceptional performance in the quarter and I am surprised there is no or very little distribution growth in that number and more surprise in just that, is that not a strategy for you? Are you distributed everywhere you want to be distributed? Why wouldn't we be seeing a more significant ACV expansion?

Terry McDaniel

That's a good question. First of all, we are not distributed everywhere we want to be. But we didn't have a tremendous focus on moving our ACV, if you will, on Boulder Canyon. We are still on that 30% range on grocery. We picked up a few points on that. We did pick up recently that really didn't impact the quarter. I mean one major supermarket chain. I think you will see us focused on that a little bit more going forward. But a lot of our focus, we have had great success with some of these new products and we have been able to expand our business within the customers that we have. We have been able to get, to be quite honest, one of the channels that are growing, every channel is pretty strong right now, but one that's been really strong, we have been able to grow in our club business. We have been able to grow in our grocery business. So I would say, Mitch, going forward, yes, probably more next year. When we put the next year plan together, we are going to try to expand Boulder even faster, from a distribution standpoint. We have got a lot of, actually have some great new items still to come. I think sometimes we put so much in that brand, we have got more that's in our kitchen than we can properly execute out on the street. But this quarter, very little of it was distribution gains.

Mitch Pinheiro - Imperial Capital

Okay, when you touched on the sale of your DSD a couple of years ago, it triggered some for memory. I thought there was a plan ultimately to get some your salty snacks on the Snyder's-Lance distribution system. And we haven't heard anything about that. Is that just not going to happen ever? Or where does that stand?

Terry McDaniel

I think Snyder's-Lance, if you look at their distribution, if you look at how the categories distribute, a lot of our product goes through natural distributors. We ship some customers direct. So it really varies by channel and Snyder's-Lance system and more of this category is distributed on the East Coast, and we haven't made a lot of strides and push to go into the supermarkets on the East Coast. I think we will leverage that relationship more as we push eastward. We haven't leveraged it that much at this point other than where we currently they distribute our product. They distribute our product in very important markets for us, like Denver, and they do a good job. So I think as we go more eastward with the brand, particularly supermarket focused on the east, we have got a lot of natural channels out there, but when we go to the supermarket, they are more of the DSD or the distributor of choice for a lot of these key East Coast customers. And that's where we would try to leverage our relationship with Snyder's.

Mitch Pinheiro - Imperial Capital

And when does East Coast expansion happen? Is that two years out? Is that the timeframe? Or could it happen sooner?

Steve Weinberger

Well, we haven't finalized next year's plans and we wouldn't go, we are going to go like we have been doing. I mean, one of things we did was let's stop, solidify everywhere we are at and let's was move in channels and then let's move in the right pace. But I would say, is next year do a little bit more going in that direction. I don't think we will have a full assault on the entire East Coast, but I do think we will probably do more. But, and again, we haven't finalized. We are right in the middle of that for our annual planning process.

Terry McDaniel

Mitch, one of the upsides for our margin improvement focus. So for Boulder, our new products would have to be margin accretive. New customers and new channels would have to be margin accretive. And we are really happy with what we have seen for the first half of the year or so. We are hoping that that will give us the wherewithal in the future to afford to expand onto the East Coast going forward. So we are really happy, not only with the Boulder growth, but with the margin improvement that we are starting to see in snack segment. It allows us to do more things.

Steve Weinberger

If you look at our East Coast, where we are in East Coast, I mean we are accounts like Fresh Market and that's given us a lot of East Coast exposure. We are in some club accounts that are in the east that's giving the brand a lot of exposure. We are in a lot of vending machines. We are actually in some of the East Coast airports and so we are getting some exposure before we try to go the more retail route. And the more retail route is, as you know, more expensive to get in right now.

Mitch Pinheiro - Imperial Capital

I have just two more questions. One last one, not to believe Boulder Canyon, but with Boulder, how much of the sales growth, you mentioned something about sort of like in and out or maybe club store, was there any -- how much of the growth is sustainable versus in and out type of growth?

Terry McDaniel

I think I think the majority of it. More than 50% of it. We have a large club business and some of that is in and out. But we have been doing that for several years now.

Mitch Pinheiro - Imperial Capital

Okay and then on fresh frozen, I was surprised to hear the ACV is as low at it is. Is it going to be a situation where you have heavy slotting to get them expanded? Or can you do this in a less expensive way?

Terry McDaniel

You know, I think in the case of the brands, when we did Jamba, for example, the shelf movement on a smoothie item is so much less than a -- I mean a frozen vegetable item is just amazing. I was in a store last week, I mean a small personal store and we did over $100,000 a year in the one store. So there is a lot of velocity there. So I it won't be full slotting but it will require slotting, but I think the payback on the slotting will be much faster than what we see in previous major frozen introductions.

Steve Weinberger

You know, Mitch, it's a fascinating business. We met with the salespeople yesterday. And when they gain a new customer, they get like 25 SKUs. We get a new customer for Jamba, we get three maybe four. So yes, they will be slotting but as Terry said, really importantly, the payback is a whole a lot faster because the slotting dollars are more or less the same or actually less on a per SKU basis, but the velocity so much higher, it is quite remarkable. Again, a new customers comes onboard, you have got 25 or 30 SKUs at a pop. It's amazing. You get a full door.

Mitch Pinheiro - Imperial Capital

That's a lot of broccoli. All right. Well, thank you very much. Appreciate your time.

Operator

Thank you. (Operator Instructions). Our next question comes from James Fonda of Sidoti & Company. Your line is open.

James Fonda - Sidoti & Company

Hi guys. All my questions were answered, so thank you.

Terry McDaniel

Okay. Thank you, James.

Operator

Thank you. And sorry, just waiting to see if --

Terry McDaniel

Okay.

Operator

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

Kurt Frederick - Wedbush Securities

Hi. Thanks. I just had one on the new businesses, fresh frozen. Just wondering on timing of harvest for vegetables this year? If that has any impact on sales as far moving around in the quarter versus maybe expectations in the last quarter?

Terry McDaniel

No, I mean the harvest on vegetables, one of the things that's unique in fresh frozen, we actually process vegetables year-round because unlike fruit that all comes in the summer months, vegetables are harvested, some in the fall, some of beans we can do year-round. So not a lot of impact. And the other thing that's a little bit different in the vegetable category versus the fruit, there is not as much volatility from crop year to crop year. So Steve?

Steve Weinberger

Yes, and it's all over the map, Kurt. It's just a different business. They have so many different vegetables. We do primarily berries. It's the Pacific Northwest's. There is a start and the end, more or less, of the harvest season. They are all over the map, but I think Terry mentioned earlier, there is a bit of seasonality in the frozen vegetable business. There is more in the back half than there is in the first half. More holiday time, Thanksgiving, Christmas and so on. So a little bit of revenue seasonality.

Terry McDaniel

Their fourth quarter is, obviously, their strongest quarter.

Kurt Frederick - Wedbush Securities

That's all I had. Thank you.

Terry McDaniel

Thanks, Kurt.

Steve Weinberger

Thank you.

Operator

Thank you. I see no other questions in queue at this time. I would like to turn the call back over to you, Mr. McDaniel.

Terry McDaniel

Okay. Thank you for joining us on the call today. First of all, I would like to thank all of our employees for making these results possible and I want to thank you for your interest in Inventure Foods and look forward to speaking with you again when we report our third quarter 2014 financial results. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your program. You may all disconnect. Everyone have a great day.

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Source: Inventure Foods' (SNAK) CEO Terry McDaniel on Q2 2014 Results - Earnings Call Transcript
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