Does Inventure have the recipe for success as competition in natural heats up?

Does Inventure have the recipe for success as competition in natural heats up?

The management at Inventure Foods took the opportunity to present a roadmap for returning the US group to profitability at the ICR conference in Florida this week. However, with shares remaining at a 52-week low, it would appear the market remains as yet unconvinced by the company's prospects. Katy Askew reports.

In April last year Inventure Foods was hit by a massive recall at its frozen vegetable business. The US group was forced to recall 100% of product out of its Jefferson facility in Georgia after listeria was detected at the site.

The significance of the recall for Inventure was underlined in the group's most recent financial update, for the third quarter of 2015, released in November. Inventure said its sales fell 3.7% in the three-month period and the cost of the recall forced Inventure into a loss of $533,000 versus income of $5.3m in the prior-year period.

Speaking at the ICR investor conference in Florida this week, Inventure CEO Terry McDaniel was keen to detail the work the company has done to put the recall behind it. 

"This is a business that we recently bought. We believe we bought it with this issue but didn't discover it until later. The recall itself has certainly impacted our revenue and earnings," he noted. "The status of the plant – which we closed for about two months, we were out of the market for three months – the plant is back up and running. It is doing well. We have added some new machinery and we have changed the whole food safety [process]."

McDaniel insisted the new standards are "stronger than anyone else in the frozen vegetable sector". And he believes  the strength of the Fresh Frozen brand will enable the business to bounce back. "We retained 95% of our customers. It is a testament to the strength of that brand. We did not hurt anybody... through the product that was on the shelf. We are slowly ramping up to pre-recall volume and every quarter should get sequentially better when it comes to volume," he revealed. 

But it's not just in frozen vegetables that Inventure is facing challenges. The company's flagship Boulder Canyon snack brand has also struggled this year, with margins under pressure. According to McDaniel, the primary problem facing Boulder Canyon is Inventure has run out of capacity to manufacture its kettle snacks. As a result, the company had to turn to co-pack arrangements that are costing the group $500,000 per month. 

McDaniel explained: "Boulder Canyon has been growing north of 30% for five years. It's one of the fastest-growing healthy natural brands. This year we ran out of capacity. Some of it was driven by...  growing that business faster than we would have hoped. Some of it was driven by Sprouts and others [that Inventure produces private label for] in that same facility. It is a long lead time for kettle equipment and we have ordered it, but that has caused us to use a lot of co-packers."

Inventure brought two new kettles online at its Goodyear facility in December, with a further two on order, while the group's Boston facility is expecting a further four kettle drums. As this new capacity comes online, the group will reduce its co-pack costs and bring margins back up for the Boulder Canyon brand. 

Elsewhere, margins at Inventure's frozen fruit business are also struggling due to the hot summer, which had an impact on regional fruit production and pushed up raw material costs. 

Inventure is facing challenges across all of its key businesses, meaning the company's stock has fallen to a 52-week low and trades at $5.50 a share versus northwards of $12 a share at this time last year. 

Alongside changes to its production base, Inventure also believes it has got the right strategy in place.

Looking at the company's record from 2011 to 2014, Inventure has reported consistent sales and earnings growth well ahead of the US food sector average. Over the period, Inventure's sales and net earnings show a compound annual growth rate of 15.27% and 38.38% respectively. 

The growth has largely been achieved through a focus on innovation behind its brands, as well as reaping the benefits of operating in the higher growth natural and healthy segments. During this period, the group also completed a number of acquisitions including the Fresh Frozen and Willamette Valley Fruit Company deals in 2013.

For 2016, the market can expect a focus on organic growth and on expanding sales of Inventure's branded stable. McDaniel believes the company will be able to bring all its units back to growth through innovation and taking the range into new customers and geographies. 

In frozen fruit, he said the company has "a high growing brand" in Radar. "We are trying to move more towards branded. Third quarter we were up over 70% on our Radar brand and in the year-to-date we were up 36%." This should lift margin at the unit. 

Likewise, in frozen vegetables, the group's focus will be bringing its Fresh Frozen brand back to growth. "One of the things we learned in the recall as painful as it was is we have a great brand," he suggested noting the clear window in the packaging is an important point of difference – but one not technically easy to replicate. 

Throughout 2016, as the company is able to ramp up capacity, growth at Boulder Canyon will be supported by product innovation. Inventure is rolling out a new popcorn products that have "70% less fat" and "25% less calories" than the leading popcorn brand but with a "very similar taste". Inventure is also looking at introducing a product outside the snack category this year, McDaniel revealed. "Boulder Canyon is a brand that is very transferable to other healthy natural categories. It is not limited to just snacks. We expect to continue to grow that business and improve the margin by reducing the co-pack."

Inventure also hopes to exploit cross-selling opportunities for its brands, bringing them into more retailers throughout the US. This represents a significant "white space" for the group, McDaniel argued. 

"Being in the right categories is key to the food industry. It is hard to grow in the food industry if you have a category that is not. The frozen fruit category has been growing at about 10%, the natural category on the snacks side is up 16%. It bodes well for our future and we believe it is not a trend - it is a reality. You see a lot of big CPGs trying to buy into the space."

Certainly, the growth in natural and healthy categories has attracted more attention from large CPG companies in recent years, with the likes of General Mills, Campbell Soup Co. expanding via M&A. 

But should that be interpreted as a sign of the strong fundamentals of the categories in which Inventure operates or a warning of the likelihood of growing competition? 

While Inventure's brands – particularly Boulder Canyon – are well established and differentiated, they are increasingly vying for position against much larger and more efficient corporations. Significantly, looking at data for 2014 – Inventure's most recent full-year numbers – it is clear Inventure's margin profile is significantly weaker than the US packaged food sector average. 

In 2014, Inventure was operating at a net margin of 3.4%. Data compiled by researchers at the NYU Stern School of Business taking in 89 food companies operating in the US food sector found the industry average net margin stood at 6.89%. 

That is important because it speaks to Inventure's ability to invest in its brands via pricing, promotion or marketing. Inventure recently completed a refinancing exercise that, McDaniel said, "should provide enough funding to do the things that are important". But should its investment needs change due to increasing category competition, the company may find it difficult to compensate.