Updates on Innovation Food Holdings (IVFH)

Great progress masked by old problems

After the reaction to my first write up, I really should not be bringing more attention to this stock, but what I started will continue. I will keep it short.
In case you missed the first write-up:

My current best idea: Innovation Food Holdings (IVFH)

Innovation Food Holdings reported their 2023 results today. As it was the case with Cipher last week, the numbers were irrelevant, the meat was in the comments of management. Therefore, I won’t spend much time on them. Revenue declined in the professional chef business because of the continued headwinds created by the change in technology by their biggest customer. Otherwise, their 2023 numbers are masked by the E-Commerce part and quite a lot of one-time expanses due to the separation from old management. I will focus my comments on what is important. Basically, the call gave us a great insight into how the business will look at the end of 2024.

First, I would like to explain that the Professional Chef business can be divided into two businesses: One is the drop-shipping business, where they drop-ship the specialty foods to broadline food distributors and an airline caterer. This means that currently they mainly serve US Foods and Gate Gourmet. The other is their local specialty food distribution business, where they have a warehouse in Chicago and serve restaurants in the Chicago area.

The two main concerns after my write-up were (rightly):
1) The high customer concentration of US Foods
2) How asset-light will the business be if they were to scale the part of their business where they own a warehouse?

Addressing 1): From their earnings call¹:

”Q1 has already included the signing of a new contract with an existing large customer, Gate Gourmet, and exciting progress made in relationships with 4 large new customers. We expect all of these new relationships to begin contributing to revenue in the back half of the year.” (…)

”So like Brady mentioned in his comments, the 4 new customers that we're talking about, 3 of them are large broadline distributors that have a nationwide presence. And the fourth is another airline caterer somewhat similar to Gate Gourmet. So really right within our wheelhouse, squarely within the value proposition that we've built over the years and customers that we know how to service.

Each of those, we've had top-to-top executive conversations and alignment. We don't have contracts in place, which we will announce when they are in place. But like I said, we're very excited about the additional breadth that gives us.

Certainly, we need to derisk our portfolio of customers over time. And so it's really important that we can add additional customers to that portfolio.

And then also, like Brady mentioned, I've been really eager to see how our value proposition resonates with additional customers because we've been so concentrated for so long. And to me, seeing the additional large broadliners are excited about what we have to offer really is just a vote of confidence in the uniqueness of our offering and our flexibility and our technology integrations, all of those things that make us a unique value proposition that I think is going to pay a lot of dividends for us later on.”
- From their Q4 earnings call

We don’t know the size of these deals, but just to give a reference. US Foods attributes to $34m in revenue and Gate Gourmet to about $10m. Assuming these deals start out at $5m in revenue seems more than reasonable to me.
This would bring us to $80m in revenue from H2 2024 onwards (B2B business did ca. $60m in revenue in 2023).

Regarding the Chicago warehouse:

”We're looking now at options for the warehouse in Chicago. So we talked earlier in prior calls about potentially getting a bigger warehouse in Chicago or even just expanding our existing warehouse. Those strategies are continuing. And we're continuing our research and our search for the right move to make in Chicago. Of course, we want to be extremely careful and thoughtful about how we deploy any additional capital. And that has to happen sort of in tandem with our other asset sales to generate the cash we would want to have before we make any kind of moves there. So definitely still an opportunity for us.”
- From their Q4 earnings call

So at least for the near future, they will focus on building out the drop-shopping side of the business and diversifying their customers in that part. The drop-shipping business enjoys higher margins than the traditional Food distribution model (that’s why IVFH enjoys higher margins than their competition). In addition, the drop-shipping business is a unique business. There is no real competitor offering this type of service.

“The last thing I'll say is just on the drop ship side, it's really interesting. We don't -- we're just so unique in the industry. There's not a lot of M&A opportunity. There, I feel like the opportunities are a lot more organic in nature because the model just hasn't been leaned on very hard yet.”
- From their Q4 earnings call

There was also some comment on potential M&A and general growth plans, but they are still vague. What matters now is what is in front of us. I don’t know if everybody understands this correctly, but the commentary from this quarter basically eliminates the biggest risk the thesis had (high customer concentration). Furthermore, I am more certain than ever, that they will achieve the targeted $100m in revenue and $10m in EBITDA in 2025.

And what is a then debt-free business with a unique value proposition, $17m in NOLS, potentially $10m in EBITDA and a Capex line that reads as follows, worth?

From their 10-K

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Disclaimer: This is not investment advice and meant for entertainment purposes only, I hold a position in the discussed company and therefore may be biased in my opinion. Please be aware that this is an illiquid microcap, please only buy and sell with a limit-order.

1. https://www.ivfh.com/events-presentations/events