IVFH - Innovative Food Holdings Inc. (IVFH) Q2 2023 Earnings Call Transcript
2023-08-13 22:04:04 ET
Innovative Food Holdings, Inc. (IVFH)
Q2 2023 Earnings Conference Call
August 10, 2023 09:00 AM ET
Company Participants
Ronit Wallerstein - Investor Relations
Bill Bennett - Chief Executive Officer
Rich Tang - Chief Financial Officer
Conference Call Participants
Presentation
Ronit Wallerstein
Good morning, and welcome to the Innovative Food Holdings Second Quarter 2023 Earnings Conference Call. My name is Ronit Wallerstein, and I will be moderating today's call. With me on today's call for Innovative Food Holdings is Bill Bennett, our CEO; and Richard Tang, our CFO.
Throughout the conference, we will be presenting both GAAP and non-GAAP financial measures, including, among others, historical and estimated EPS, adjusted EBITDA, which is net income before costs associated with amortization, depreciation, interest and taxes and excluding certain onetime expenses and adjusted fully diluted EBITDA per share using the weighted average shares outstanding for the quarter ended June 30, 2023. These measures are not calculated in accordance with GAAP. Quantitative reconciliations of certain of our non-GAAP financial measures to their most directly comparable GAAP financial measures appear in today's press release.
I would like to remind everyone that, today's call will contain forward-looking statements from our management made within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities and Exchange Act of 1934 as amended, concerning future events.
Words such as aim, may, could, should, projects, expects, intend, plans, believes, anticipates, hopes, estimates, goal and variations of such and similar expressions are intended to identify forward-looking statements. These statements involve significant known and unknown risks and are based upon a number of assumptions and estimates, which are inherently subject to significant risk, uncertainties and contingencies and many of which are on the company's control.
Actual results, including without limitation, the results of our company's growth strategy, operational plans as well as future potential results of operations or operating metrics and other measures to be addressed by our management in this conference call may differ materially and adversely from those expressed or implied by such forward-looking statements.
Factors that could cause actual results to differ materially include, but are not limited to, the risk factors described and other disclosures contained in our filings with the Securities and Exchange Commission, including the risk factors and other disclosures in our Form 10-K for the year ended December 31, 2022, and our other filings with the SEC, all of which are accessible on www.sec.gov. Except to the extent required by law, we assume no obligation to update statements as circumstances change.
With that, I would like to turn the call over to Mr. Bill Bennett. Please go ahead.
Bill Bennett
Sorry about that, working on mute here. Hello, everyone, and good morning. I'm thrilled to welcome you to our first earnings call since 2016. We'll be discussing the results from our second quarter of 2023, which was my first full quarter in the role as CEO of IVFH. Hopefully, you saw the press release this morning, with some highlights from the quarter. We'll also be filing our full 10-Q later today for your reference.
With this call and today's 10-Q filing, we are pleased to file our 10-Q several days before the deadline. We believe we've improved our internal closing processes, data flows, communications paths and collaboration with our auditors and expect we will file on time going forward. One of my key early Investor Relations goals is to drive confidence and trust with our investors and filing on time is an important first step here.
I want to start my comments today by giving some strategic context to the moment we're in as a company. Our goal at IVFH is to build shareholder value by building a company that delivers long-term profitable growth to our investors. With my arrival at the company a few months ago, I outlined to our Board a three-phase approach we're taking to build towards that goal.
Our first phase is focused on the stabilization of our business. We need to build credibility that we can consistently deliver a profitable business model and positive cash flow. This is why we've been focused so heavily on rightsizing our margins, our expenses and our uses of cash. We anticipate that this phase will last for my first year. We're calling our second phase, laying the foundation for growth which will entail considering making several strategic investments to build a next-generation business model. Our goal will be to design a best-in-class value proposition that differentiates us from our competition and transparently demonstrates the profitable business model we expect to build. We anticipate this phase will last 12 to 18 months.
Then we'll move to Phase III, which we're calling build and scale. By this point, we will have a clear view of where we're headed and the outsized benefits of getting there. As we traverse this path, I think it's helpful to remember that we are still squarely in our stabilization phase, but our commitment to investors is transparency and candor, and I hope you'll see that commitment on display today.
With that introduction, let's jump into results for Q2 2023. During the second quarter, our revenue declined by approximately 8.2% compared to the same period in 2022. Both our e-commerce and specialty food service businesses contributed to the declines, so both declined less than our expectations as we work through the stabilization phase of our plan.
Let's start with the e-commerce business, which we're now calling home Gourmet to help our teams better focus on the end consumer. We continue to restrict marketing spend relative to historical levels as we improve the business model, which led to declines of 30.7%, in line with trends in the prior three quarters. Now that we've run four back-to-back quarters of marketing cuts and revenue declines, we expect these revenue headwinds to subside in future quarters.
We've been mentioning these marketing cuts for a while, but I'd like to give you a little more insight into how we're thinking about them. We break down the business' fundamentals by comparing the cost of acquiring a new customer versus the revenue we expect to earn from that customer over their lifetime. You may have heard other companies refer to this as the lifetime value to customer acquisition cost ratio or LTV to CAC ratio.
To grow our business sustainably, we would ideally want to see that ratio between 4:1 and 5:1. For the last several years, we've been consistently operating far below this benchmark, which has been a large driver of our lack of profitability as a company. Therefore, to get this business back on a growth trajectory now, we believe it would require significant cash investment, which we aren't in a position to do yet. So as we work to improve the business' fundamentals, we're focused on how we can improve both pieces of that LTV to CAC ratio. We're testing various approaches to achieving these improvements. But most importantly, we do not plan to initiate any additional marketing expenditures, unless we determine that they will be a good investment for the company.
Now moving to specialty food service side of the business, which we're now calling Professional Chef, again to help our teams focus on the end customer. Here, revenue declined 5.1%, as post-COVID reopening trends normalized. This normalization combined with our recent price increases and a change in the technology platform used by a key customer have led to a smaller though significantly more profitable business for us. We expect this specialty food service revenue softness to continue at a similar magnitude for the remainder of the year while our new growth plans begin to take shape as part of our stabilization phase.
I'd also like to remind the group that our specialty food service revenue is still up 58% compared to Q2 of 2021, two years ago. So we've held on the majority of our post-COVID sales growth but are now operating with an improved business model, which I'll get to in a moment.
Now I mentioned some headwinds, but we also saw very exciting growth in some areas. You may have noticed that we are now identifying Gate Gourmet as a key customer in our SEC filings. Gate Gourmet is the leading global provider of catering solutions to airlines. We've established a very nice partnership with them by shipping their specialty foods needs to airports across the country.
We also have a relationship with another large airline caterer and with multiple smaller broadline customers, who we continue to see strong double-digit gains with, trends like these give us confidence that we have an attractive value proposition with broad appeal.
Now let's discuss gross margin. Our gross margins improved by approximately 377 basis points compared to Q2 of 2022. This is a massive improvement and counters the declines of the prior year before my arrival. I hope you're as excited about our margin improvements as we are because this is our largest area of focus this quarter. As we dug into the margin declines over the last couple of years, we found hundreds of items which hadn't had a price adjustment since 2020, even in the face of five or six supplier cost increases with the significant inflation we faced.
The opportunities were most egregious on the Professional Chef business, but there were opportunities everywhere. We went business by business, mapped out the current price change process and establish new procedures. We even found we were lacking management margin reporting for large swaths of the business that made it hard to know when we had an issue to address. We now have that margin reporting largely in place.
Where we had to make price adjustments, we took a thoughtful and cautious approach to ensure we didn't disrupt our customer relationships, but we've seen very little negative response as we found we simply were underpricing what customers expected to pay for our products.
Now to selling, general and administrative expense. We saw SG&A as a percent of sales declined by approximately 271 basis points. The majority of the savings comes from the e-commerce marketing cuts that I referred to earlier, but we are highly focused on rightsizing our SG&A to enable a profitable corporate structure. And many of the changes we are making now have yet to flow through to the P&L. This will hopefully lead to nice tailwinds in the future.
We are getting extremely deep into the weeds to understand every dollar the company is spending and why. I'm personally reviewing every single check that goes out the door before we process it. We still have lots of opportunity on the SG&A front, and we're committed to resetting the company's cost structure to give us a profitable base to grow from.
Now to profit. Our GAAP net income came in just above breakeven, at approximately $13,000. This is a $1.2 million improvement, compared to the same period last year. If you've watched our company for a while, you may know that Q2 is not typically a profitable quarter for us. So we're extremely proud of the progress. In fact, this is our first profitable Q2 since 2019.
Adjusted EBITDA swung for a loss of approximately $715,000 last year, to a profit of approximately $453,000 this year, an increase of $1.2 million. This adjusted EBITDA amounts to 2.4% of revenue this quarter and $0.09 of EBITDA per share. This profit also flowed through to generate significant cash of approximately $1.3 million, which is a $1.7 million improvement over Q2 last year. This demonstrates how our focus up and down the P&L, is helping us to create a sustainable business model.
Lastly, I want to call out that we're exiting our second quarter, with a dramatically reshaped balance sheet, enabled by the capital restructuring we did this quarter. Rich is going to go into more detail of the restructuring.
So I'll just say that, we saw an improvement in net working capital of over $9 million. As part of the transaction, MapleMark Bank has also increased our revolver by an additional $1 million.
With our improved operations performance along with our restructured balance sheet, we believe that we now have the near-term liquidity necessary to implement our business plan.
I hope you'll also see that we're being incredibly prudent in managing share dilution. None of our leadership team has received any stock grants. Our packages are all based on achieving significant share price appreciation, aligning our interest with investors.
With that, I'll turn the mic, over to our CFO, Rich Tang.
Rich Tang
Thank you, Bill, and thank you, everyone, for joining us today and for your interest in our Innovative Food Holdings Investor Call. My name is Richard Tang, and I've been the CFO at IVFH for the past 2.5 years.
As Bill just mentioned, the company has made meaningful operational progress. As you have read or will read from this morning's press release, Q2 has been the culmination of quite a few laid out plans that have positively come together. I'd like to take you through one in particular that should provide you some confidence in our final financial future, as of investor or potential investor.
If you've been keeping track of our progress on that back in June 2022, we entered into a loan agreement with MapleMark Bank to refinance our loans, previously held at Fifth Third Bank. MapleMark has a relationship with the USDA Business & Industry group.
The advantage of the Business & Industry group has had a back lending banks with an 80% guarantee of a loan amount for companies, specifically in the food industry. But that needs to pass certain and forward-looking financial hurdles in the review process, in order to be approved.
While we waited for the USDA's full sign-off, a Bridge Loan Agreement was signed with bridge loan agreement was signed with Maple Mark for the outstanding loan amounts with a maturity date of one year, and that's the loan that was held as a short-term liability on our balance sheet. The incremental proceeds in the application requests were to be dispersed upon full approval from the USDA.
This past June, the USDA provided its full approval of our $9.1 million main loan application to MapleMark Bank, amongst other benefits of now being part of this USDA program, the refinance loan provides for a maturity date extension of a main loan from one to 25 years and an increase in borrowing capacity on the loan in our revolving line of credit. Summed up, it provides for incremental proceeds of approximately $4.7 million in additional available capital.
From an audit perspective, this alleviates all going concern issues and puts IVFH on a much stronger financial foothold that will give us flexibility in implementing our strategic objectives. Additionally, with the maturity debt extension to 25 years, this allowed us to move a total of $5.5 million from current liabilities into long-term liabilities on our balance sheet. Resulting in Q2 net working capital of $4.5 million positive versus a negative $4.7 million last quarter, or a favorable swing of $9.2 million, as Bill mentioned earlier.
Operationally, to further bolster cash. We continue to be aggressive in driving down accounts receivable, and we are more analytical in our inventory procurement process, allowing for less cash outlay, while lowering on-hand inventory balances. We have renegotiated legacy payment terms with our product vendors by extending terms to Net 30 and now mandate these terms for new vendors.
Also, as Bill mentioned earlier, we scrutinize each payment that leaves the building, looking for opportunities to renegotiate contracts and/or cut costs out altogether. We have other process improvements still in the pipeline, and we expect more of these similar highlights to come. Thank you.
Bill Bennett
Thanks, Rich. Hopefully, you can get a sense of how excited we were about this quarter and that despite the revenue declines, revenue is performing better than we expected, and we're in a great position to stabilize the company this year, cement a much stronger business model and prepare to begin investing for the future.
As a reminder, we are actively working on a bigger long-term strategy presentation for later this year. So we will refrain from revealing too much forward-looking detail at this point. But we're happy to take some Q&A. So I'll turn it back over to Ronit to moderate the Q&A for us.
Question-and-Answer Session
A - Ronit Wallerstein
We'll now move to the Q&A section of this call. [Operator Instructions] Please limit your comments to one question and one follow-up if needed and please keep your comments professional and respectful. We've allocated approximately 20 minutes to this portion of the call. So wait a minute to see for the raised hands and the dial-in and then we'll get started with.
Bill Bennett
Ronit, I am -- I actually got a couple of anonymous questions forwarded to me that maybe I'll start off with. Is that work?
Ronit Wallerstein
Yes. That would be great.
Bill Bennett
Yes. So one question I got was about the comment we made on a key partner switching technology platform. And the question was, does that mean that we lost a customer and good opportunities to just clarify that's not at all what happened. It's an existing customer with whom we have a great relationship who made a change to the existing technology integration that we have with them. So this actually started late last year, but the revenue impact or it wasn't apparent as we were still feeling tailwinds from the continued post-COVID, kind of, reopening positivity.
So anyway, this is one piece of one customer's business. Our relationship with this customer is actually stronger than ever. We now have a sales team in place that's holding in-person meetings with our counterparts there and actually building a growth plan together, which we've never had before. So they continue to bring us new growth opportunities and invest in the partnership. And that's why we say it's -- to us, this is a onetime impact. It's going to impact us over the 12 months while we cycle it. But we don't think it's a material change to our overall business model. And like I reiterated a few times, I think an important part of the stabilization phase we're establishing our go-forward business model.
Ronit Wallerstein
All right. I just wanted to clarify the raise hand function. At the bottom of your screen, you'll see reaction. You will have a little emoji there. You could click on that. That will raise your hand. All right. We have a question coming from Brian Harper. If you could please unmute yourself, introduce yourself and please state what company you are calling from.
Unidentified Analyst
Hey, thanks, everybody. Great to see the conference calls to resume. And I appreciate all the financial detail. So yes, my question is with regard to e-comm and how it pertains to the [indiscernible], just so the e-comm -- last quarter was $2.2 million. I mean it's basically I think the run rate now is sort of less than just the [indiscernible] piece alone when that was purchased. That's pretty much large facility. So I was wondering about the utilization of that facility. I was wondering if it's a valuable asset. I was wondering if you can comment at all on the plans for that.
Historically, you guys have managed to supply everything from food service out of primarily, Chicago and Florida. So I was curious about that as a cost center in SG&A and then what your plans are for how you're thinking about that. One of the things you guys have -- sorry, I might hear please fill it. You also have not historically reported margins for the kind of separate business I don't know if there was -- you've considered changing reporting contribution margin or rate gross margins for the separate specialty and -- or professional shift now and then e-comm. So multiple questions there. But anyway, so what you say.
Ronit Wallerstein
Yes. Great. Thanks for your question, Brian. I appreciate you joining the call this morning, too. So first of all, on the Pennsylvania warehouse, it's important to note that we don't only run e-commerce out of that building. It initially was purchased for that. But over time, we actually run the entire Gate Gourmet business out of that building as well. And you can see from our filing that Gate Gourmet has actually become a bigger business now than e-commerce and really keeps that building humming.
So currently, no plans to do anything different with the building. There's definitely opportunity to utilize it more. And that's something that we're actively looking at. I'd also call your attention to the small, the increase in revenue in our logistics business, that's effectively the business that utilizes underutilized space in our warehouses. So we have several completely unrelated businesses that we lease space out to from the warehouse to make sure that we're still getting as much bang for our buck out of the space as we can.
So there have been -- sometimes we manage products for consumer packaged goods companies. You need to stage products between production runs, there's even a solar company that we do business with, that we warehouse their product and they sort of stage it all out of our warehouse.
So, we find ways to make sure we're getting full utilization of our assets. But the nice thing about owning the building is it gives us flexibility, right? So, when we design our go-forward plan and continue to evolve our business model, we'll have that space ready to go to utilize however we need to for our strategy. So a few thoughts on the Pennsylvania warehouse.
As far as margins, it's definitely something we're talking about. I know it would be helpful for investors to see the breakout of the two businesses. So, we'll I'm going to punt that as we continue to think about it, but it's definitely a valid question.
Bill Bennett
Ronit, I got one other anonymous question here. Do you expect calendar 2024 to be a growth year for the specialty food service business? Definitely mine answer that. If you look at -- if you look at the -- if you segment out the foodservice business across our various customers and pieces today, we're seeing very nice growth in several different areas of food service. And as we sort of lap -- like I mentioned from some of those headwinds that we're facing this year, we expect to be back on a growth trajectory next year.
I mean I think the -- that's where our operating profit is going to come from going forward, right? You're going to see us focus a lot more on food service than we have historically. And that's really the play, right? It's how do you grow foodservice, which is a profitable business and then manage our e-commerce business manage the losses of our e-commerce business to get back to flat. If we can do both of those things, we will see dramatic impacts to operating income going forward.
All right. Quite good today. Awesome attendance. I'm so excited that so many people joined our call this morning. I had one more anonymous question and then Ronit if we don't see another hands, and we call it a day there.
Ronit Wallerstein
The question here was Gate Gourmet has been a great case study on how a new business can scale. How many more partners are out there like this? How do you plan on getting them? And how does that scale with the asset-light nature of the specialty food service platform?
Yes, it's why I called it out. We're so excited about the relationship we've built with Gate Gourmet. And we think the platform we've built has value to a tremendous number of retailers, distributors, a whole host of customers across the country. And when you hear us talk about our longer term strategy later this year, you'll see a very intentional focus on adding customers to the specialty food service business.
The comment on asset lite, I love. It's -- if you look at how we run this business, the majority of our specialty food service business, we don't even own the inventory, right? It's -- the value we add is in connecting hundreds of small vendors who would otherwise not be doing business with a big distributor. We connect them into a single pipeline of product and inventory and item information to these distributors so that the distributors have to deal with 500 different vendors, right?
The -- that's a valuable service that we provide. And it means that as we add customers and as we add sales to the food service business, it scales almost indefinitely without additional assets. Really, the only expenses that get added as we grow those businesses are in salespeople and customer service, but those scale very nicely compared to the margins that we make on the foodservice side of the business. So thanks for that question. And I think we have one more, Ronit.
Operator
Our next question is from Daniel Wilson, if you can please unmute yourself, introduce yourself and please state what company you are calling from
Q – Unidentified Analyst
Hi, there. Thank you for taking my questions. Daniel Wilson [ph], Private Investor. Bill, I just had a question about the reductions to the digital advertising budget. If you could talk about the framework and decision-making process on those -- I don't know, economic hurdles. So if you're thinking of this in terms of lifetime value of maybe e-comm customers. But if you could just talk about that business a little bit, that would be helpful.
A – Bill Bennett
Yes, happy to. Thanks for joining the call. I appreciate it. And thanks for your question, Daniel. So -- we talk about the cuts, this is not a cost-saving initiative. The cuts are an opportunity for us to completely rethink the go-to-market strategy and how we convert newly acquired customers into long-term loyal customers.
Today, we retain very few of the new customers that we acquire to the igourmet and mouth.com businesses. And so you end up looking like -- I think about it like a mattress company, right? How many times are you going to sell mattress? You've got to make your money on the first transaction because that customer is never going to come back. This is a food business, though. We should have the ability to acquire a customer and have them come back again and again because they have such an awesome experience with us. So what we really have to do is work on that customer retention so that the lifetime value of the customer goes up.
If you look at the e-commerce industry, historically, it's sort of been leaned on for growth, right? And the whole industry justified its losses because of the tremendous growth that it was delivering. But over -- even just I'd say the last like 12 months, you've seen pretty much every single major company rethink sort of their resource allocation to e-commerce. If you know my background, I spent many years at both Walmart and Kroger and e-commerce, and it's always been a tough business to make money with. And if both those companies are as part of a drastic strategy shift, where we had to rethink the profit profile of the e-commerce business to be able to get it to actually contribute to company financials.
So if you think about that ratio I mentioned earlier, lifetime value to customer acquisition costs. And we just break down some of the things we're doing on both of those. So on customer acquisition costs, we're evaluating our entire marketing strategy, our marketing mix, our marketing creative, even our promotional plan to understand what customers will respond the best to. The more appealing our marketing, the less we have to spend to get a customer to click on an ad and to come to the site. We're also working on every element of the actual site experience. So the higher percentage of new customers that come to the site who actually finish their transaction, the lower our marketing expenses relative to acquisition, right? We've already seen significant gains in our site conversion over the last 9 or 10 months as we've been working on these different work streams.
Now, similarly on the lifetime value side, we're working to drive higher frequency and retention. So a very small percentage, like I mentioned, of our newly acquired customers ever come back to the site. This quarter, we launched two new tests to understand how we can sort of shape this behavior better. So one is a new points-based loyalty program and a second is an entry into a new category for us, which is specialty meat.
The goal is to find new occasions that will bring customers back outside of specialty cheese, which is the majority of that business for us today. So now customers can actually buy high-end cuts of things like beef, chicken and pork, but also exotic meats like rabbit, kangaroo and alligator. And we're testing out to see how that changes that repeat rate and that retention rate with the new customers that we acquire.
So, and I hope that offer a little context, Daniel, and was able to help you see how we're thinking through that process. Like I said in the upfront comments, our goal is to push that ratio to the 4:1 or 5:1 range, and then investing in marketing in this business will be a no-brainer because every customer we acquire will fund the acquisition of the next five customers, right? And then it becomes self-sustaining and we don't need to cloud capped anymore. That's ultimately the goal there.
We got another question in the chat. Adam wanted to know when to expect an Investor Day. That's really in line with my comment earlier on sort of our longer-term strategy discussion. We haven't set a date for it, but it will be later this year.
Ronit Wallerstein
Thank you, everyone, for your questions. I'll now turn the call over to Bill to wrap-up.
Bill Bennett
Awesome. Thanks, Ronit. Thank you, everyone, for your attendance and engagement on the call today. It really is inspiring to see the level of interest in IVFH. As always, I'm happy to make myself, and my leadership team available to connect with investors, who have further questions about publicly available data.
Please reach out to Richard Tang, whose contact info is included in our press release, if you'd like to schedule a touch base. Take care, and we look forward to our strategy presentation later this year, and our next quarterly update in November. Thanks all. Have a great day.
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Innovative Food Holdings, Inc. (IVFH) Q2 2023 Earnings Call Transcript