Innovative Food Holdings' (IVFH) CEO Sam Klepfish on Q1 2016 Results - Earnings Call Transcript

| About: Innovative Food (IVFH)

Innovative Food Holdings, Inc. (OTCQB:IVFH) Q1 2016 Earnings Conference Call May 16, 2016 6:30 PM ET

Executives

Sam Klepfish - CEO

Justin Wiernasz - President

Analysts

Neil Cataldi - Blueprint Capital Management

Denver Smith - 73114 Investments

Operator

Greetings and welcome to the Innovative Food Holdings' First Quarter 2016 Earnings Conference Call. Good afternoon everyone.

With me on today's call from Innovative Food Holdings is Sam Klepfish, CEO, and Justin Wiernasz.

Throughout this conference call we will be presenting both GAAP and non-GAAP financial measures including, among others, historical and adjusted EPS which is a non-GAAP metric of EPS stock-related gains or losses, and certain amortization expenses, EBITDA and cash EBITDA which is a non-GAAP metric of EBITDA without stock-related gains or losses, and adjusted net income which is a non-GAAP metric of net income, stock-related gains and losses, and certain 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 different 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 appears in today's press release.

Before we begin with the Company's -- 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' quarterly reports on Form 10-Q which are available at no cost at www.sec.com. 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.

With that, I would like to turn the call over to Sam Klepfish. Sam?

Sam Klepfish

Thank you. Thanks to everyone for joining us on the call today. Pleased to share with you the details about exciting and positive achievements that took place in the first quarter of 2016.

One note, I'll be focused on GAAP continuing operations, so the numbers to be mentioned will be referring to that segment unless specified otherwise. In addition, please see the PR and our filings for more detailed information on our financial results.

So for the first quarter of 2016, total revenue was $8 million, which is an increase of approximately 22% compared to the first quarter of 2015. Those numbers drove our strong bottom-line growth for Q1, resulting in GAAP net income of $380,000 and GAAP EPS of $0.015 per share in the first quarter.

As it relates to the bottom line, cash SGA expenses overall were flat, with a less than 2% increase overall. And as a result of our ability to efficiently manage that and our 22% increase in revenues, the cash SGA declined to approximately 20% of revenues versus 24% of revenues, you know, which is something relating to what we've been saying about our platform.

As a result, the cash EBITDA, which is EBITDA excluding stock-related expenses, grew to about $857,000 versus $446,000, which is a 90% -- over 90% increase compared to the first quarter of 2015.

We continue to see growing demand for our specialty food products offered by our platform. We are pleased with our top line and bottom line growth as they once again exceeded our internal expectations. As shown by the numbers, we have a unique platform which has the ability to scale and accelerate bottom line margin with sales growth. This powerful specialty food platform provides unparalleled solutions for both customers and vendors [ph].

We view the platform as several components, two of which is the [inaudible] with 7,000 quality products, chefs [ph] across the country in partnership with leading broad-liners. Future growth with -- potential future growth opportunity from this part of the platform will come via existing partners, growth at existing partners, and through expansion to additional partners. As mentioned, that expansion to additional partners continues to be a long sales cycle.

The second part of the platform is the RSM [ph] specialty food types of offering. Currently the key component of that is led by Artisan Specialty Foods out of Chicago. The portion of the business -- this portion of the business is a hybrid specialty food distribution business which combines a standalone specialty distribution directly to chefs in the Chicago area, with the ability to offer national fulfillment to our national broad-line customers, as well as to offer additional value-added services to existing and potential future partners. So we're currently in beta phase with those services which have shown -- that have shown strong opportunity.

Growth opportunities in this part of the business includes increasing sales within the direct chef to local chef market, as well as expansion of the RSM [ph] model to additional markets and geographical areas which fit our criteria related to key current future operating metrics.

As a whole, we executed well in our business on the top and bottom line in Q1 and we believe that our business has strong opportunities for growth in multiple markets and multiple market segments.

In terms of our overall balance sheet, we continue to manage working capital well, including our inventory management as inventory turnover continues to improve. And we paid down approximately $660,000 of a bridge loan which we had taken out in 2015. We continue to focus on further improving our balance sheet and allocating capital to provide the best return for our shareholders. This would include, when warranted, both open market buyback of IVFH stock, and we continue -- and we also continue to explore to the extent that there are available and satisfy FD [ph] requirements, other buyback opportunities, which would alleviate the legal corporate trading volume restriction which limit our ability to aggressively buy back stocks.

Overall, based on the strength of our business, our working capital position, and our improving asset mix, we currently anticipate a further improving balance sheet in 2016.

As we look through that through 2016, we continue to believe that our specialty food platform has strong opportunity within the fast-growing specialty food market. We will continue to focus on executing on that opportunity and building inherent value for IVFH shareholders.

Now I'd like to open up the call to any questions listeners may have.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]

We'll go first to Neil Cataldi with Blueprint Capital Management.

Neil Cataldi - Blueprint Capital Management

Hi guys. A couple of questions if I may. First, is the growth this quarter a result of strength with U.S. Foods or is it maybe more related to Artisan which you decided not to break out this quarter like you did last quarter?

Sam Klepfish

So, basic overview, if you look at the Q, the growth in U.S. foods was about 17%, and we certainly experienced growth in other parts of the business. The reason why we [inaudible] last quarter specialty was just overall a very, you know, particularly strong growth quarter for Artisan in that particular quarter. But we don't, to the future, necessarily intend to break out Artisan on a regular ongoing basis.

Neil Cataldi - Blueprint Capital Management

Okay. So U.S. was 17% and I guess Artisan drove the majority of that incremental overall growth from 17% up to 23%?

Sam Klepfish

There's Artisan and other parts of the business as well contributed. So overall it's, you know, that 17% and combined with the other areas of the business.

Neil Cataldi - Blueprint Capital Management

Okay. Do you think the U.S. food business will increase year over year relative to 2015?

Sam Klepfish

So, just without giving specific projections about the U.S. foods business, I think that I'll certainly turn that over to Justin to sort of give his general perspective on where he sees the U.S. foods business going overall and may get some answers to that question. Justin?

Justin Wiernasz

Thanks, Sam. And Neil, thank you for your question.

You know, with the historicals being, you know, the run rate upon historicals being where they are and really we -- the increase of the specialty demand within the broad-line food service space, we really see no indication that we won't have sustainable growth year over year. There's no market conditions or no market -- or any market changes that are affecting any kind of a negative trend line at this point.

Neil Cataldi - Blueprint Capital Management

Okay. So just making an assumption, U.S. foods grew 8% in 2014 and grew 20% in 2015, but this quarter it was only 17%. So, is it a safe assumption that, as we move through the balance of the year, maybe the first quarter is seasonally weak for them or whatever it may be through the year, that business is going to contribute even more than it did the first quarter?

Sam Klepfish

Again, and I think that, to sort of, you know, add to that -- answer that question a bit, and again turn it back again to Justin. Overall there's certainly different factors, including last year's growth relating to the different growth in U.S. foods quarter by quarter. Certainly overall we expect that, you know, we believe that we'll see positive growth in U.S. foods. I mean --

Neil Cataldi - Blueprint Capital Management

Okay. Justin, were you -- okay. I got two more and then I'll get back to the queue.

So the share price has been straight down practically for eight to nine months now. And I'm sure that has a -- that's a result of divesting fresh diet. The first part of my question is, can you talk about the growth strategy in any more detail than what you already provided today within a few months since it was divested? Is there a new plan? What should investors expect over the next year or two? Are you going to focus specifically on distributors, you know, the other top ten that you don't have, or are there opportunities outside of that focus that you may look to take advantage of?

Sam Klepfish

Neil, thanks for the question. So I've sort of touched on a bit on the -- in my comments on the call. There's two areas of growth. Obviously the existing broad-liners, the growth within that area, that you guys know, and then the potential for additional broad-liners, that's, as we said on the call, is a longer sales cycle, so, certainly there's that opportunity, but different variables there. And it's a longer sales cycle for a number of different reasons.

The other area of growth, which we also sort of touched on, potentially area of growth we touched on in the call as well, relates to the Artisan specialty business model. And that area of growth again would come from the existing Artisan business, going to local chefs in the local area that it currently serves, as well as potentially in turn select areas, expanding that model to other areas that we feel are opportunistic and fit into what we're doing, as well as some additional let's call it hybrid type of services and distribution type of models that we've been working with within Artisan that we've seen some success with potentially expanding that as well.

Neil Cataldi - Blueprint Capital Management

Okay. And as the business grows, $30 million, $40 million, $50 million, whatever it may be, what kind of leverage is there in the model on the SG&A line?

Sam Klepfish

So, again without projecting but just sort of putting it in perspective, if assuming margins would remain at where they are now and assuming, let's just say, there was a scenario which let's say there was additional 20% growth, based on our current cost structure and, like you said, the leverage, a significant portion of that additional growth margin dollars would flow down to the bottom line. Or putting it another way, that [inaudible] as a percentage of revenues would -- should be able to decline further than the number that it already had declined to.

Neil Cataldi - Blueprint Capital Management

All right. So if the business is $40 million, there wouldn't be a lot of incremental SG&A?

Sam Klepfish

Currently the way -- under our current cost structure, that would be the case. Obviously there's certain other -- yeah, that [inaudible].

Neil Cataldi - Blueprint Capital Management

Okay. All right, thanks, guys. I'll let somebody else ask a question now. Thanks.

Operator

And the next question comes from Denver Smith with 73114 Investments.

Denver Smith - 73114 Investments

Hi guys. My first question is for Justin. I'm just going to see if I could get you to talk a little bit more maybe about your business with the other broad-liners other than U.S., U.S. foods, and maybe also potential leads, are there any discussions ongoing to increase the amount of broad-liners?

Sam Klepfish

Justin, go ahead. Yeah, Justin, go ahead.

Justin Wiernasz

Yeah. Denver, thank you for the question, appreciate it. We've been blessed to have interest in our program being the leader in this specialty food market, our business has been noticed by additional broad-liners and have, you know, had garnered interest from outside. So we continue to pursue those discussions. I don't really want to get too far into any details as far as where we're at for, really, for competitive reasons and for partnership reasons, that I don't want to, you know, and it's not we're trying to keep it clandestine or secretive, but there's certainly partnerships and relationships that we have to be conscious of, so.

But the short answer is we are absolutely looking at and pursuing other opportunities that are either coming internally out or externally in.

Denver Smith - 73114 Investments

Okay. I don't know if there's [inaudible] have relationships?

Justin Wiernasz

Denver, you broke up. Can you repeat the question?

Sam Klepfish

We're not hearing Denver, so --

Justin Wiernasz

Yeah, we lost Denver, I think.

Sam Klepfish

So maybe go to the next question then see if Denver can get back on.

Justin Wiernasz

Yes. I didn't hear that question at all.

Operator

[Operator Instructions]

We'll go next to Daniel Wilson [ph].

Unidentified Participant

Hey guys. Thanks for taking my questions.

Looking at your filings, you guys consistently mentioned acquisitions as a growth opportunity. I just want to see if you could discuss your strategy a little bit more, maybe your return hurdles and what your pipeline looks like today.

Sam Klepfish

Say again? Could you repeat that? I didn't hear that clearly.

Unidentified Participant

Just wanting to see if you could discuss your acquisition strategy a little bit more, and your return hurdles, and what your pipeline looks like.

Sam Klepfish

We certainly, at this point in time, haven't, you know, we're not going to go into details as any specifics. Obviously we just had an acquisition which we sold. And so at this point in time that's not something we want to comment on.

Unidentified Participant

All right. Thank you very much. That's all I had.

Operator

And it looks like Mr. Smith re-prompted. Go ahead, sir.

Denver Smith - 73114 Investments

Hi. Can you guys hear me now?

Justin Wiernasz

Much better.

Denver Smith - 73114 Investments

Okay.

Sam Klepfish

Denver, we're having trouble hearing you. So maybe it may make sense, we'll take the calls after -- the questions after the call, because we're not hearing you well. Let's go to the next poll.

Operator

And it comes again from Neil Cataldi with Blueprint Capital Management.

Neil Cataldi - Blueprint Capital Management

Hey guys. Just one more. In the news today we saw headlines about Amazon looking to get into private labeling their own various grocery items. And I was just wondering, having followed your company for years, I know you guys have talked to Amazon in the past and worked on some things with them, although obviously nothing really become material. Are there sourcing opportunities for you with a company like them as the space really starts to evolve more? It seems like they're disrupting food and I'm curious high level if that means there could be more opportunities for you guys.

Sam Klepfish

Neil, obviously a very timely question in terms of Amazon. We certainly do some things with them, but as you correctly pointed out, it's not material. What we've seen is that they're very broad, so to speak, so, almost like in some a broad-liner in that sense, but at the same time the probably label opportunities, what I've seen, are more related to more, even if there's some specialty, it's more mainstream specialty. So while there may be some opportunities down the line, certainly with the initial plans which seem to be more broadly targeted, probably it's something that we will probably be sort of a little too specialty for that. But it's something certainly we're keeping an eye on.

Neil Cataldi - Blueprint Capital Management

Okay. All right, thanks.

Operator

And we have no further questions at this time. I'd like to turn the conference back to our speakers for any additional or closing remarks.

Sam Klepfish

All right. Thank you very much for -- everyone for joining the call. And as always, please feel free to reach out with any additional questions and have a good evening everyone.

Operator

That concludes today's presentation. Thank you for your participation.

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