Innovative Food Holdings, Inc. (OTCQB:IVFH) Q4 2015 Earnings Conference Call March 31, 2016 8:30 AM ET
Samuel Klepfish - Chief Executive Officer
Justin Wiernasz - President
Good afternoon, everyone. With me on today's call from Innovative Food Holdings is Sam Klepfish, CEO; and Justin Wiernasz, President.
Throughout this conference call, we will be presenting both GAAP and non-GAAP financial measures including among others, adjusted pro forma fully diluted EPS, which is a non-GAAP metric of fully diluted GAAP EPS via treasury method and excluding stock related gains, losses, and amortization expenses.
EBITDA and cash EBITDA, which is a non-GAAP metric of EBITDA without add-back to income of converted or exercised securities, but excluding equity related gains and losses; and adjusted net income, which is a non-GAAP metric of net income without recurring gains/losses or stock related gains/losses and amortization expenses; as well as both historical and estimated modified pro forma net income and modified pro forma earnings per share.
These measures are not calculated in accordance with GAAP and may be calculated differently than other companies similarly titled non-GAAP financial measures. Quantitative reconciliations of certain of our non-GAAP financial measures to their most directly comparable GAAP financial measures appear in today's press release. In addition, much of the numbers discussed on today's call including EPS, adjusted EPS, cash EBITDA, and revenues relate to Innovative Food Holdings continuing operations and do not include results from discontinued operations.
Before we begin with the company's formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements including statements regarding Innovative Food Holdings’ expected financial performance. Such forward looking statements are not guarantees of future performance, and therefore, you should not put undue reliance on them.
These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what the company expects. Some of these risks are mentioned in today's release by Innovative Food Holdings. Others are discussed in Innovative Food Holdings Annual Report on Form 10-K and Quarterly Report on Form 10-Q, which are available at no cost at www.sec.gov. Of course, we cannot guarantee that any of the plans discussed here will come to fruition, but the company wanted the opportunity to share its plans and thoughts. Today's conference is being recorded.
And with that, I would like to turn the call over to Sam Klepfish. Sam?
Good morning, everyone. Thank you everybody for joining us on the call today. Glad you took the time from your busy schedule to hear us talk about Innovative Food Holdings. So I'm pleased to share with you the details about our specialty food business in 2015 as well as some discussion of 2016 as well.
One note, as mentioned, I'll be focusing on continuing operations, so the numbers will be specifically referring to that segment, unless specified otherwise.
Total revenues were $30.6 million, which is an increase of approximately 18% compared to 2014. Cash EBITDA, which is again EBITDA excluding stock-related expenses, was about $3 million versus $2.3 million, a 30% increase over 2014.
As we move forward, just one note on the cash EBITDA. As we move forward in '16 and '17, based on our current core structure and our expectations, in terms of what we need to do to make sure we have the right people in place and properly incentivize and align with IVFH as a whole, we do expect a decline in stock-related expenses in '16 and '17 as much as 30% or more going forward.
In addition, our Artisan Specialty subsidiary continues to do really well and growing its new building, its expanding the warehouse, as Artisan Specialty Food GAAP sales grew about 32% compared to 2014. In addition, we had a strong fourth quarter in 2015. The sales grew by about 22% to $8.4 million versus last year. So the increase in sales in the fourth quarter combined with solid margins and pretty flat cash-related SGA in Q4 resulted in Q4 cash EBITDA growing by over 200%, so over $880,000 compared to Q4 last year.
And for more details on the financials and the information I just discussed, you can see, please see the updated PR updated table on our website at www.ivfh.com, the full Investor Relations section there as well. Finally, adjusted EPS was $0.09 versus $0.10 in 2014. Q4 was strong with over 100% increase in adjusted EPS compared to 2014.
In direct-to-chef segment, we continue to see growing demand for our specialty food products offered by our platform. As you may know, the platform includes over 7,000 specialty products, both imported and domestically sourced, and we're really pleased with our topline and bottomline growth, as once again we exceeded our own internal expectations relating to 2015 for our chef specialty foodservice business.
On a national restaurant front of our direct-to-chef business, we have built a reputation as the go-to company to source and deliver high-quality specialty ingredients, and we currently manage the logistics and product supply of many specialty products for several regional and national restaurant chains across the country through our distribution partners. This is a growing segment and we look forward to increasing those relationships and assisting additional restaurant chains with their food product and logistics need.
Also on the direct-to-chef distribution side, the Artisan Specialty Food segment, again, continued to grow and we are looking at specific expansion opportunities there as the business develops. As a reminder, Artisan is a supplier of over 1,500 niche gourmet products, many of them actually offered under the Artisan Specialty private label and deliver to over 500 customers directly in the Greater Chicago area.
Also Artisan Specialty Foods serves as our essentially located Chicago area based national fulfillment center for our other specialty programs, and so it's really piece of the platform that allow us to do what we do. We believe that there are multiple growth and expansion opportunities within Artisan, and we continue to explore those opportunities. Taken as a whole, the specialty food business continues to grow really strong bottomline numbers for us, and we believe it has good opportunity for growth with little infrastructure spend required in multiple markets.
On the financial results side, our team continues, as mentioned just before, it continues to deliver really good results across the board. As an example, just to go in some detail, we experienced really an excellent fourth quarter. We had sales growth of 22% and our cash EBITDA margin going above 10% of sales.
So just barring any additional unexpected expenses, we expect, if we have sales growth with steady margins, it would result in continued improvement on the cash EBITDA margin basis. So if cash SGA levels, for example, increased in 2014 mainly as a result of special expenses, but if we -- to put things in perspective, if we have a steady increase in sales and we would have a pretty flat SGA, the additional amount that would flow down to the bottomline would continue to contribute to that EBITDA margin increase.
Our only additional expected expenses would relate to one additional employee for every additional $3 million to $5 million in sales to support those sales. So again, essentially the platform at work, as you saw in Q4, where we had nice sales growth, pretty flat SGA in terms of increase over year-over-year, and we had additional gross margin dollars to work with and that slowed down mostly to the bottomline.
In terms of our balance sheet, we continue to move to manage working capital really well, including our inventory management, as inventory turnover for '15 was 33x versus 27x, and it's a number we're proud of. Our inventory actually was lower this year versus last year overall.
In terms of debt and liquidity, towards the end of 2015, we paid down $1 million loan provided to us by Fifth Third Bank, and in Q1 of 2016 we further paid down $660,000 mainly principal, and some interest in a bridge loan to institution which had extended the loan in this Q4 related to our discontinued operation.
In addition, while we had significant capital expenditures related to 2015 related to discontinued operations, we do not expect any significant material spend related to discounted operations or any material liabilities associated with discontinued operations in 2016. That's our current expectation.
We currently expect, based on our internal forecast and current expectations that our debt servicing needs during 2016 to be not more than $350,000, mainly consisting of about $250,000 in principal and about $75,000 in interest payments. About all those interest payments are associated with interest on loans and that's in 2015 as well. The Fifth Third Bank and the interest is LIBOR at about plus-2.7%, so it is that interest rate now about 3.2% to 3.5% based on today's LIBOR rates, that's currently the interest paid on most of our debt.
In addition, we currently have a mortgage with a principal balance of approximately $390,000 out of Bonita building. However, the building was carried on the balance sheet by us at a cost of $770,000. We believe it has an estimated market value of over $1.4 million. So we do have significant equity in our property.
Obviously, we're not in the real estate business, but just pointing out in terms of balance sheet. We also have equity in our Chicago building based on market value and build out value that is also not reflected on our balance sheet. However, based on the strength of our business, our working capital position and our improving asset mix, based on our current internal expectations, we currently anticipate a strong and improving balance sheet in 2016.
So I obviously realize that 2015 was a challenging year across the board, as we had discontinued operations contribute negatively, again. And while we believe there still exists a strong opportunity for the fresh meal business, we hope that under a new owner they'll be able to provide better numbers for all its investors.
As we look forward to 2016 and at the strength of our core business, which is now doing over $30 million in sales with strong cash EBITDA as discussed, and we believe we have a strong potential outside in a really strong growing specialty food market. As a result, we look forward to really growing that business and growing significant value for our shareholders in 2016 and beyond.
Now, we're happy to answer any questions that you guys may have.
[Operator Instructions] And it looks like I currently have no questions at this time.
End of Q&A
Thank you everyone for joining the call. I appreciate the interest you guys have in Innovative Foods. And of course, feel free to reach out to us anytime with any additional questions that you guys may have. Thank you very much.
And this concludes today's call. Thank you for your participation. You may now disconnect.
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