The Inventure Group Inc. Q2 2008 Earnings Call Transcript

Sep.21.08 | About: Inventure Foods, (SNAK)

The Inventure Group Inc. (NASDAQ:SNAK)

Q2 2008 Earnings Call

July 23, 2008 5:00 pm ET

Executives

Terry McDaniel - President and Chief Executive Officer

Steve Weinberger - Senior Vice President and Chief Financial Officer

Analysts

Tony Brenner – Roth Capital Partners LLC

Ian Corydon – B. Riley & Company

Operator

Welcome to The Inventure Group's second quarter 2008 earnings conference call. (Operator Instructions)

Statements contained in this presentation that are not historical facts are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Because such statements include risks and uncertainties actual results may differ materially from those expressed or implied by such forward-looking statements.

Factors that may cause actual results to differ from the forward-looking statements contained in this presentation and that may affect the Company's prospect in general include, but are not limited to, the potential need for additional financing, acquisition-related risks, significant competition, customer acceptance of existing and future products, dependence upon major customers, dependence upon existing and future licensing agreements, general risks related to the food products industry, and such other factors as described in the Company's filings with the Securities and Exchange Commission.

Actual financial results for the periods presented do not necessarily indicate the results that may be expected for any future periods. To The Inventure Group's knowledge, the information included herein is correct as of the date of this presentation, and we do not undertake any obligation to update this information in the future.

Joining us on the call today are Mr. Terry McDaniel, President and Chief Executive Officer of The Inventure Group, and Steve Weinberger, Senior Vice President and Chief Financial Officer. At this time, I would like to turn the conference over to Mr. McDaniel.

Terry McDaniel

Okay. Thank you. Welcome, ladies and gentlemen. During the call I will provide some overall highlights for the second quarter and year-to-date, as well as provide a business update. Steve Weinberger will provide more details on the financial, and then I will provide a summary at the end.

We are very pleased to report another strong quarter results highlighted by a net income increase of 108%, which equates to $0.04 a share. EBITDA was $2 million for the quarter, an increase of 51% versus prior year. Our total revenue grew from $22.9 million to $29.2 million, or 28%. The full quarter of Rader Farms contributed to the total growth. In this quarter, we were able to secure $10.1 million in revenue for Rader Farms for the quarter. On a stand-alone basis, in other words, if we look at this business as if we owned it for a full quarter last year, the volume was up 19% versus the previous second quarter.

The snack business grew 2.7% for the quarter driven by increases in net revenue for our Boulder brand, which was up by 38%. Poore Brothers was up 48% contributed by a rollout of the leading national drugstore chain and continued favorable results on the Burger King brand, which contributed $1.2 million in sales and is on pace to be the most successful new product introduction since the introduction of T.G.I.F. Cheddar & Bacon. The success was somewhat offset by the continued slippage of the T.G.I.F. brand, which I will go into greater detail later in the call.

The second quarter positive results continued the progress made in the first quarter and are the results of the efforts we have made in improving the overall business performance, diversifying our portfolio from one business into three businesses, continued diligence in managing the costs to stay ahead of the increasing cost associated by rising commodities and fuel.

As we discussed in the first quarter call, one quarter does not make a year. The total first half numbers provide further evidence of the significant progress being made in our business.

Now I would like to cover some of the first half results. Total net revenue was up 38.9%; gross profit up 39.1%; SG&A, while being up 19.7%, was down 2.3 points as a percentage of net revenue as we were able to leverage the Rader Farm acquisition. Operating income was up 171% or up 2.3 points. Net income was up 159% or 1 point. And EBITDA was up 121%, up 2.5 points. That is $3.9 million for the first half versus $1.8 million versus the first half of last year.

I would ask that each of you look at and see the reconciliation of EBITDA to net income in our earnings release filed with the SEC on the Form 8-K and posted on our website this morning. If you look at the EBITDA performance for the first half, the total number of $3.9 million is higher than the full year totals for 2005, 2006, and 2007. We significantly improved our working capital management, which Steve will go into greater detail.

Operational execution was excellent for the first half. Cost per pound within the first half was slightly less than year ago. This is despite additional cost of running the plant driven by natural gas and other rising expenses. Our total Company freight cost was on budget despite a much more dramatic increase in fuel surcharges than we had projected.

We continue our intense focus on cost reduction. SG&A was reduced by 2.3 points down to 14, and internally, we have attained $1.6 million in additional savings through organizational efficiencies. This will continue to be a concern for us going forward and driving costs is important as we face the increasing cost of commodities for 2009. We plan to offset these increases through price increases, driving operational efficiencies, and by leveraging our asset base.

We also transitioned to a new audit firm, Moss Adams.

And now I would like to turn it over to Steve Weinberger to provide more detail for the quarter and first half.

Steve Weinberger

Thank you, Terry, and good afternoon, everyone. Now I would like to review the second quarter and year-to-date financials.

As Terry said, our financial performance was quite strong in the quarter in a number of financial indicators. Some of this will be repetitive of what you have already heard, but we feel it is worthwhile repeating.

Net revenue for the quarter was $29.2 million, up 28% versus a year ago. Rader contributed $10.1 million of that total, which was up 19% on a stand-alone basis. The snack division net revenue was up $19.1 million, up 2.7% versus last year. Key drivers were the kettle chip business with both Boulder Canyon and Poore Brother chips up 38% and 48%, respectively.

Boulder is continuing the growth results we have seen over the last six quarters, and Poore Brothers' sales were up primarily attributable to the rollout of a national, as Terry said, of the leading national drug chain. This is the first national account for the Poore Brothers brand.

Burger King continues to deliver strong results delivering revenue of $1.2 million for the quarter. This is again, as Terry said, this is on pace to be our best new product launch since T.G.I. Friday's Cheddar & Bacon in the year 2000. In fact, the Burger King Corporation is so pleased with the progress that they have agreed to expand this license internationally, and Terry will get into a little bit more detail of that in a minute. And the snack revenue growth was up despite the continued softness in the Friday's brand. Terry will go into more details on Friday's and our plan to reverse this decline in the coming quarters.

Year-to-date net revenues were $55.4 million, up 39% versus the $39.9 million last year. Rader Farms contributed $19.7 million of revenue for the first half, which is an increase of 16% on a stand-alone basis. The snack division sales were $35.7 million, an increase of 0.2% versus last year. Again, the same key drivers as was seen in the second quarter, with Boulder Canyon up 33% for the half, Poore Brothers up 23% for the half, and Brger King delivering $2.5 million of net revenue year-to-date.

Gross profit for the Company was $5.3 million for the quarter, up 21% versus prior year. Key contributors here were margin improvement on the snack division of 1.5 points year over year attributable to the price increases implemented at the beginning of the year, as well as the overall plant efficiencies, as well as a full quarter of Rader Farms.

As you recall, we purchased Rader in the middle of May last year. Our gross profit margin on Rader for the full second quarter was down versus the first six weeks we reported on Rader last year. We purchased a lot more berries for the full quarter, but as we go into harvest in Q3, we expect that margin to increase. On a year-to-date basis, gross profit was $10.4 million, up 39% versus last year.

SG&A expenses, although up for the quarter in total dollars, were down as a percentage of net sales by 2.1 points. The acquisition of Rader has allowed us to leverage total costs, part of which are costs of running a public company. On a year-to-date basis, SG&A expenses were 14% of net revenue, down a full 2.3 percentage points versus prior year.

Operating income for the quarter was $1.3 million, up 74% and 1.2 percentage points versus last year. On a year-to-date basis, operating income was $4.7 million, up 172% and 2.2 percentage points versus year ago. Key drivers, again, include a full year of Rader, snack division pricing, and snack division plant efficiencies.

Getting down to net income for the second quarter, we delivered $0.7 million, or $0.04 a share, versus $0.3 million, or $0.01 a share, a year ago. Net income dollars for the quarter was up 118% versus last year. On a year-to-date basis, net income was $1.1 million, or $0.06 a share versus $0.4 million, or $0.02 a share, after six months last year.

One of the financial metrics we are focused on is EBITDA, which for the quarter was $2 million, an increase of 51% and 1.1 percentage points versus year ago. On a year-to-date basis, our EBITDA was $3.9 million, an increase of 121% and 2.6 percentage points versus 2007. And as Terry said, the EBITDA in the first half of this year exceeded the total EBITDA in each of the last three full years.

Finally, we continue to focus on working capital management to reduce our overall debt, which is down $3 million versus the end of 2007. We have developed internal metrics for inventory and receivables by which we hold people accountable and so far we are happy that we are on track.

And as Terry said, we also reported on an 8-K this week that we switched audit firms from Deloitte Touche to Moss Adams. Deloitte was a terrific partner over the last several years, but frankly, we feel that a firm like Moss Adams is better suited to meet the needs of a company our size. They have an office in Bellingham, which is about ten miles from Rader Farms, and it provides us the opportunity to save significant dollars. Terry?

Terry McDaniel

Okay. Thank you, Steve. Now I would like to go into greater detail on the three business platforms, Rader Farms, our better-for-you Boulder kettle chips, and our warehouse snack business. The Rader Farm acquisition has delivered multiple benefits. I mentioned and we have mentioned, both Steve and I, the revenue growth that continues at a double digit rate, up $19.8 million to 17% or about 16.4%.

It has been a meaningful contributor to the Company's profitability both last year and this year and has provided significant SG&A leverage. And we are very excited about our value-added branded fruit and smoothie products, which will be introduced fall of 2008. Early responses are encouraging with several major customers already accepting the smoothie program, one of those being Mayer.

Despite the cold spring, there appears to be no major crop issues so far at Rader Farms. Raspberry prices are up due mainly to a weak Chilean crop, and blueberry prices are down mainly due to increase production coming up. The net impact to the Company should be neutral to positive at current berry pricing. Bear in mind, one of our benefits at Rader Farms is we are a vertically integrated farm, meaning we farm, we process, and we have a brand. And we also grow three times more raspberries than we do blueberries.

During the past quarter, we installed a new packaging machine, which allows us to have new capabilities, a new stand-up pouch bag, which we will be introducing with our new fall launch. It has also increased our capacity and reduced our risk of dependency on the older machines.

We continue to strengthen the management team. In the past quarter, we have strengthened our management team at Rader Farms to supplement the good job that Brad Rader is doing with a new head of sales and a new head of finance.

On the warehouse snack business, the warehouse business is off 8.8%. All of this decline is driven by T.G.I.F. It is a concern. The net revenue year-to-date is off around 20%. It is being driven by a forward buy-in on the first quarter, increased competition in warehouse snacks. Some of the channels we participate in, such as C-Store and vend, is soft in the current economy and some lost distribution. We are not sitting by idle with this and we are looking for ways and coming up with more methods to turn this and reverse these declines around.

First, we are pursuing new DSE partners. As many of you know, T.G.I. Friday's is a warehouse-driven brand, but we believe we can increase our reach by signing up independent or direct store delivery partners throughout the US. We are also looking at entering new domestic and international markets. We have had success in Canada, moving in the UK. We are also having dialogue with the Friday's corporation about expanding that to other countries.

And at this point we are looking at, one of the Wal-Mart divisions in Mexico is looking at putting our products, the T.G.I.F. product in during the month of September. We are focused on new products and product forms. We need to move from just a single product form to support this broad license, and I will talk about that in more detail later.

We have increased our short-term trade investment. Our finance group, and we have talked about it over the last few quarters, have improved our infrastructure. Our finance group now is in a much better position and is providing us forward-looking information, as well as information on profitability by channel, by customer, by brand. We are in a much better position today to do targeted spending against specific brands, and we plan to increase our investment against the Friday's brand the back half of the year.

And we are also testing larger sizes in box stores. The current size that we have in supermarkets is really not competitive with some of the other products that are in the category and we are moving from a 5.5 ounce size to an 8.5 size. All of that with multiple ways to increase the volume and reverse this current decline on T.G.I.F.

Secondly, in our warehouse snack business, is our Burger King brand. We are very happy with the progress thus far. We have sold 2.5 million year-to-date and 4 million since we introduced this brand fourth quarter. Our Onion Rings product started shipping during the month of July. I welcome each of you to go to our website and see the package. It is a great product and we are also looking at introducing another product during the fourth quarter.

And as Steve mentioned, evident of the good relationship and how pleased the Burger King Corporation is with the launch, they have extended our license to the following markets: Mexico, South America, Latin America, the Caribbean, Hong Kong, Thailand, Taiwan, and the Philippines. And we are very, very excited about the opportunities of moving this brand out of the US into the international markets.

In addition to that, we continue to seek new opportunities to leverage our Bluffton plant. As we discussed during the first quarter, we are now focusing on securing private label and co-pack opportunities. We recently developed technology at our Bluffton plant that has allowed us to use existing equipment to make a pellet snack that is entirely different in appearance and taste from our product lines we currently make.

We believe this new technology will allow us to expand the T.G.I.F. Friday's brand, Burger King, and other branded snack food products. Pellet snacks are similar to products such as veggie chips, veggie sticks, the Frito-Lay Flat Earth product, and they generally have capabilities to provide unique shapes, as well as tend to be less in fat than our normal snack food products.

Moving to our kettle business, our Boulder better-for-you business overall is up 18.8% in net revenue. The Boulder brand continues to be to perform well with net revenues up 33%. Our distribution gains continue on a national basis and within the first half we picked up Jewel, Scott's Foods, BI-LO, Bruno's, Harris Teeter. We have picked up a sampling of the GreenWise stores in Publix, Smiths, and Haggen's.

In addition to the new distribution, our brand continues to perform in the markets that it is in, and we feel very good about this brand continuing the progress that we have made thus far. And as Steve mentioned, it has been growing for, now, six straight quarters.

We will be introducing the new rice and beans product and early acceptance has been very positive from the trade. Another benefit of introducing the rice and bean, and it is actually called Rice and Adzuki bean, is this is a product made in our Bluffton facility, which will allow us to leverage the Bluffton assets. Poore Brothers' growth also accelerated to 22.8% year-to-date.

So, with all that said, we feel very good about the quarter. We feel good about the progress the Company has made the first half, and despite continued commodity issues, we just completed what is on pace to be deliver record earnings.

The Inventure Group today is better positioned than it has been in recent years. If you go back to just a brief year and a half ago, we were basically focused on one major brand and one category. That was the Friday's brand.

We now have three platforms for growth. We have the Rader Farms business. It is doing very well. We are continuing to see growth and within the first year of acquisition, I think we have demonstrated we can pull a new company into The Inventure Group and perform well, and we have seen great progress in both the top line and the bottom line.

The warehouse snack food business, despite the decline in Friday's, we broadened our portfolio of snacks with Burger King, which, as we mentioned, is on pace to be the best new product introduction since the introduction of Friday's Cheddar & Bacon. We have increased capabilities beyond that in going after pellet snacks, and we have also been able to look at potential co-pack and private label opportunities, which we hope during the next quarter we will be able to provide you more of an update.

We are also focused on categories that are growing in line with consumer trends. If you look at a Company and you look at what do you want to look for and what are some important parts as far as an investment strategy, you look at categories that are growing. Berries are growing. They are going to continue to grow because of the health attributes. The all-natural category. Very important category, a high-growth category in supermarkets and the natural channel, and Boulder is performing very well in that category. And as I mentioned, we have broadened our array of products in our warehouse snack platform.

We significantly improved our systems and processes, again, evidenced by some of the information that we have internally. As we discussed last year, we went for a simplified pricing. We have improved our metrics within our plants, and we continue to focus on how we can get better in this area. And I really feel good about the group of people that we have in this Company. I think for our size of Company we have an unusually strong group of managers and employees dedicated to building shareholder value. In addition to this, we continue to review strategic opportunities as they arise.

In summary, again, we hope that you would agree we have had a very good first half and we feel very good about the possibilities of delivering that second half at a similar level.

And, again, I would now like to turn it over to questions.

Question-and-Answer Session

Operator

(Operator Instructions.) Our first question comes from Tony Brenner with Roth Capital Partners.

Tony Brenner - Roth Capital Partners LLC

Thank you. I have a couple of questions. First of all, can you talk about what is driving that 19% revenue gain at Rader Farms?

Terry McDaniel

A couple things, Tony. First of all, our base business continues to grow with our base customers because the category, for example, the mixed berry category which we do a lot of in the triple berry blend is growing at double digits, so you have got internal growth. Versus last year, we have also picked up some new business. For example, we picked up all the Safeway private label business. So, that is driving most of that growth.

Tony Brenner - Roth Capital Partners LLC

And the lower margins for Rader is the result of your purchasing a higher proportion of berries versus last year?

Terry McDaniel

Yes, I mean. Tony. If you recall, we bought that company in the middle of May, so we had six weeks of results to report on Rader Farms. We were just getting organized in that business. So over the full quarter typically, as we are learning now, the second quarter Rader Farms will be their lowest margin quarter because we are using exclusively purchased berries in the second quarter and we are building inventory of purchased berries as we go into our harvest. So, we have got a full quarter of results in for Rader and a full quarter of berry purchases. So, comparison to year-over-year is not quite appropriate, frankly, because we are comparing 6 weeks versus 12 weeks, but one thing we do know is that as we go into the third quarter, our gross profit margin on Rader will be up a fair bit over second quarter.

Tony Brenner - Roth Capital Partners LLC

Okay.

Terry McDaniel

So, the good news is as we reported in our quarterly, on our results, the gross profit on the snack business, despite the T.G.I. Friday's shortfall, which has a very high margin, our gross profit was up 1.5 points year over year, so we are quite excited about that.

Tony Brenner - Roth Capital Partners LLC

Your new Boulder rice and bean product, is that a pellet snack?

Terry McDaniel

No, that is not a pellet snack. It is made on our current Bluffton equipment as a single sheeted dough product and it is made with rice and adzuki bean. And adzuki bean is a bean that came over from Asia that is now grown in the US. But, it gives it a very flavorful taste and, like I said, the early response from the trade has been very positive thus far.

Tony Brenner - Roth Capital Partners LLC

Have you identified the drug chain that Poore Brothers and I believe…

Terry McDaniel

Tony, sometimes we are careful of mentioning companies' names on these calls out of respect for those companies, but it is a very large leading national drugstore chain.

Tony Brenner - Roth Capital Partners LLC

Okay. Last question.

Terry McDaniel

Okay.

Tony Brenner - Roth Capital Partners LLC

Versus the second quarter a year ago, you have got the same net income number, the same number of shares, and somehow you lost a $0.01 a share versus what you reported in the second quarter a year ago, which was originally $0.02. What happened to that?

Steve Weinberger

Yes, hang on one second.

Terry McDaniel

Last quarter a year ago you said we reported $0.02?

Tony Brenner - Roth Capital Partners LLC

Yes, $332,000 of net income and 19.3 million shares, $0.017.

Steve Weinberger

$0.017. Tony, I have got to go back and double check that. Something does not quite jive.

Tony Brenner - Roth Capital Partners LLC

Okay. Thank you.

Terry McDaniel

Thank you, Tony.

Operator

(Operator Instructions) We have a question from Ian Corydon with B. Riley Company.

Ian Corydon - B. Riley & Company

Thanks. A few questions actually. Just starting with gross margin, the salty snack gross margin in the 20% range. Do you think you can sustain that for this year, and when are you looking at raising prices again on salty snacks?

Terry McDaniel

Well, the gross margin for the Rader business should, yes, but I was going to say that should go up while the snack business may come down slightly. We generally perform a little bit better the first two quarters. We have taken price at the first of the year, some at the mid-year, and then we have some set up for the back half of the year and one of the key things if you remember last year that really hurt our performance was we got behind the commodity curve. I think we are ahead of it now. We have got better forward visibility and we should be able to, as I mentioned in the call, mitigate that with price or driving some efficiencies through the organization or leveraging the assets, a good portion of that coming through price. So, we know when changes will occur and we will stay ahead of it. So, there could be a slight, I do not know, Steve, if you…

Steve Weinberger

Yes, typically, the snack division as we are using local potatoes our margins are a little higher. We believe they will come down slightly in the back half of the year versus the second quarter. However, versus last year, we are going to continue to show fairly large margin gains on the snack business. So, we are going to continue the trend of margin growth year-over-year, but our absolute margin typically comes down a little bit, third quarter versus second quarter.

Ian Corydon - B. Riley & Company

And on the Rader Farms side, what are you paying for raspberries right now and how much of your Q3 needs, understanding you do not know exactly what the harvest, how it is going to come in, but how much risk is there in the third quarter or have you bought or contracted for X percent of berries you need for the third quarter?

Terry McDaniel

We are right in the middle of contracting berries right now and we are right in the middle of the harvest and we are about 25% through. The price is bouncing around out there, but we are hearing the price could be well north of $2 for IQF berries. At this point, we are not aware of any issues with being able to find enough berries to support our continued growth. But I would ask each of you as you think about it if we own a farm and berry prices, the raspberries, have gone up more than the blueberries have gone down, and we actually farm three times more raspberries than blueberries, it would seem to indicate that that would be, as I mentioned, either even or net positive to our overall performance.

Steve Weinberger

Also, typically, Ian, and correct me if I am wrong, typically if we get the yield that we expect on a harvest, we do not buy a whole lot of raspberries in the third or fourth quarter.

Terry McDaniel

Yes, in fact, I think it is safe to say last year was a very bad raspberry crop. It is one of the worst raspberry crops that we have seen in that area for many, many years.

Steve Weinberger

Twenty years.

Terry McDaniel

Yes, I do not know exact number of years. The folklore is 20 years. But this year I think it is pretty safe to estimate that it will be better than last year and that we will get more product from our farms and we will need less product from the outside. But, at the same point, we will be growing our business, so there is a balance there. At this point, in fact, I talked to Brad Rader and we were up there over the last couple of days, and at this point, we do not see any issue with procuring enough fruit. And in fact, I think we are going to broaden our perspective on strategic purchasing this year and look at other areas, as well, as we continue to look for ways to support our continued growth.

Ian Corydon - B. Riley & Company

Okay. And when do you figure the harvest will be complete?

Terry McDaniel

Harvest on raspberries should be complete in the next four weeks. We will start blueberries probably next week. That will be completed sometime the last week of August, the first week of September. A small impact to the quarter, by the way, is the fact that the raspberry crop last year came in like the third week of June. We started processing the raspberry crop. This year we had cooler weather. It delayed the crop. It did not damage the crop, but it did delay the crop and therefore we did not get the full positive impact of processing our own berries in the month of June as we did last year, although it was only for a week or two.

Steve Weinberger

Ian, pretty much we will have the whole thing harvested around the first week of September.

Terry McDaniel

Yes. Yes, and I think we will know pricing probably where all the berries are going to shake out and what we are going to have to buy. We will know that most likely in the next two to three weeks, maybe in the next couple of weeks on raspberries and then blueberries will be a couple weeks after that. And unlike a normal branded category or the snack category for that matter, in the case of most of these accounts, you go in and kind of renegotiate pricing each year based on the impact of the cost of the crop, the average cost of the crop.

Ian Corydon - B. Riley & Company

Okay. Great.

Terry McDaniel

But, so our benefit is we get the benefit of being vertically integrated and that should be a positive for us.

Ian Corydon - B. Riley & Company

Okay. Good. And then moving on to BURGER KING, it looks like just trying to get a sense for kind of the run rate you are on right now with Ketchup & Fries and then the opportunity with Onion Rings given that we think they have tested better. The $1.2 million in Ketchup & Fries you did in the second quarter, is there a lot of load-in on new…

Terry McDaniel

No, no. Not very much at all. There was more load in the first quarter, Ian. I think if you look at Ketchup & Fries, certainly we cannot predict how Onion Ring was going to sell. We know from some of our own internal information and attitude and uses study we did that the BURGER KING name goes very well with onion rings. Well, the consumers will ultimately vote. So, we expect it to be a positive and there will be some pipeline, and also, something I did mention in the call, we expect to increase our footprint of where we are selling this product into some more perhaps big box stores now that we have what we consider two good flagship brands in Ketchup & Fries and Onion Rings.

Ian Corydon - B. Riley & Company

Okay. And I think you have talked before about where you are going to be selling Onion Rings and I recall Walgreen's, I believe, but could you just talk about where…

Terry McDaniel

I mean, where we are focusing right now, I mean, where the brand is right and we mentioned first quarter we went into vending. It is not going displace Cheddar & Bacon. We do not want it to. We want to keep Cheddar & Bacon there. We do not want to do anything that would cannibalize our current Friday's business. But I do not think it is going to be at the level of sales of that in the vending channel, but in the C store channel, it has been a slow build and it is really, has picked up as of late. We are also in major other mass accounts that we are looking at, some international mass accounts, and with the introduction of the Onion Rings, we have done a limited amount of grocery. We now plan to expand that into more grocery stores.

Ian Corydon - B. Riley & Company

Okay. And in accounts that are already selling Ketchup & Fries, are they adding Onion Rings or is there any cannibalization…

Terry McDaniel

Yes. No, no. I do not think we will receive any cannibalization. The only place we may receive some cannibalization, we have the Flame Broiled product, which has been fair, and we would certainly, if we could only have two slots, we would give the direction to our organization to go with the Onion Ring and Ketchup & Fries versus the Ketchup & Fries and just Flame Broiled.

Ian Corydon - B. Riley & Company

And then taking a look at leveraging Bluffton, obviously, you need to offset the T.G.I. Friday's negative. Could you just talk in a little more detail about kind of the opportunities there, how you are looking at co-pack and private label and…

Terry McDaniel

Yes.

Ian Corydon - B. Riley & Company

Rice and beans, etc.?

Terry McDaniel

Yes. I mean, we are looking at, I mean, a couple things. Again, we were just basically on Friday's. We got Burger King up and running. This pellet snack opportunity, which was real proud of our operations team, they developed that internally. That gives us a different product form that we can expand into. The rice and bean product, we were able to take the Boulder name, which really fits better with it, which is a product that we can make within our Bluffton facility.

And then on the private label and co-pack, we are just talking to different companies about opportunities of producing some of the products that are either currently out in the marketplace or that we have in our test kitchen, if you will, to see if there is some interest in private label summon to these products or in the case of other snack manufacturers, could we make a product for a larger other snack food company. And again, I do not, if I had something specific that we had secured at this point, I certainly would bring it up. And I am hopeful by the time we get to the third quarter call we will have some positive things to say about that.

But, this is an area that the Company, yes, we have co-pack in our Goodyear facility, we are co-packing now for a couple of companies. We private label in our Goodyear facility, but we really never had any kind of serious effort to do that through our Bluffton facility. And this really started first quarter, and I think we will see some traction on that.

Ian Corydon - B. Riley & Company

And when can we expect to see the pellet snack start to come out?

Terry McDaniel

Well, again, we just got the technology out. We actually had an ideation session last week here in our offices with the folks from Carlson that are responsible for the T.G.I.F. brand, and there is some things that they are interested in. I mean, that is going to take some time unless we found someone to co-pack. There is a lot of people that have pellets out there or pellet products. But to get a brand out the door, my guess is it is going to be sometime 2009.

Ian Corydon - B. Riley & Company

And I apologize for taking so much time. I think my last question is on expenses. I believe Steve mentioned $1.6 million in annualized G&A savings. I am not sure if I got that right or when that is.

Steve Weinberger

It was not SG&A savings, [Tony]. It was overall efficiencies. We have implemented a continuous improvement program throughout the Company and it is through operations, it is through finance, it is through IT, it is through SG&A, and so on. So, we have identified $1.6 million of annualized savings throughout the Company.

Ian Corydon - B. Riley & Company

Is that in the numbers already or is that…

Steve Weinberger

Some of them. Actually, a small portion of that is in the numbers already.

Terry McDaniel

Yes, and like I said, that is on an annualized basis and those are happening throughout the year.

Steve Weinberger

Right. It will start to ramp up.

Terry McDaniel

Yes. Beyond our own internal efforts, through things such as Lean, we also even have employees' programs set up as employees find ways to improve savings. We are giving awards once a month. And it should be part of our culture, a continuous improvement culture, every day anyway, but certainly it is even more important during these times.

Ian Corydon - B. Riley & Company

Okay and lastly, I applaud you guys for looking for a cheaper audit alternative. Can you talk about what the annual savings are there?

Steve Weinberger

Well, I do not want to get into specifics on the annual savings, but leave it as it is significant.

Ian Corydon - B. Riley & Company

Several hundred thousand?

Steve Weinberger

In that ballpark.

Ian Corydon - B. Riley & Company

Thank you.

Steve Weinberger

Thanks, Ian.

Operator

Mr. McDaniel, there appear to be no further questions at this time. I will turn the call back over to you for any closing comments.

Terry McDaniel

Okay. I appreciate it. Thanks, everyone, for joining the call today. Again, we are excited about the progress that we have made. You can look at the last three years. You can look at beyond that, and I hope you would agree it has been a significant improvement over where we have been the last three years. I do believe we are much better positioned as a company, based on our three-legs of our stool versus our one. And we look forward to continuing to deliver these similar type results as we go forward throughout the year. Thank you.

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