Lifeway Foods, Inc.

Good afternoon. Welcome to LifeWay Foods' fourth quarter and full year 2020 earnings conference call. On the call with me today is Julie Smolenski, Chief Executive Officer. By now, everyone should have access to the press release that went out this morning. If you have not received the release, it is available on the investor relations portion of LifeWay's website at www.lifewaykiefer.com. A recording of this call will be available on the company's website. Before we begin, we would like to remind everyone that the prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. The words believe, expect, anticipate, and other similar expressions generally identify forward-looking statements. These statements do not guarantee future performance and therefore, undue reliance should not be placed on them. Actual results could differ materially from those projected in any forward-looking statements. LifeWay assumes no obligation to update any forward-looking projections that may be made in today's release or call. All of the forward-looking statements contained herein speak only as of the date of this call. And with that, I would like to turn the call over to LifeWay's Chief Executive Officer, Julie Smolanski.

Thank you, John. and good morning to everyone joining us. It is my pleasure to be speaking with you regarding our full year 2020 earnings report. And thank you as always for your interest in Lifeway Foods. I would like to start by expressing our condolences to the Boulder community and our customers at King Super and that community. Our thoughts and prayers are with those impacted by the recent violence. Similar to our last earnings call, The world is still navigating through COVID-19. And on behalf of our entire team, I would like to express our sympathy and support for all those who remain affected by this virus. Yet today we have more reason for optimism as vaccines are being distributed at a remarkable pace. And hopefully by the end of this year, we will finally be emerging from the right side of this pandemic. Throughout this unique year, the health and safety of our team has been our number one priority. Yet despite the complicated and unpredictable environment, at Lifeway, we haven't missed a beat and continue to deliver our healthy probiotic products to each and every one of our consumers whenever they need them. We have maintained our great relationship with each of our valued partners and continue to pursue and deliver on our long-term transformational plan to deliver growth and value to our shareholders. Before I get into the results, I would like to say a huge thank you to all of our employees for working together through this very difficult time and leading Lifeway to a year full of amazing growth and a year where we accomplished our mission of expanding consumer access to healthy and nutritious food. Today, I will review our highlights for the year in addition to sharing our full year 2020 results. Net sales were $102 million for the year ended December 31st, 2020, an increase of $8.4 million or almost 9% versus 2019. This increase was driven largely by higher volumes of our branded drinkable kefir and was partially offset by lower cream revenues with a decline in the market price for butterfat. The increase in volume combined with favorable milk pricing has also driven an increase in our growth profit margin from 23.6% in 2019 to 26.4% in 2020. Finally, with increased revenue and greater margins, our net income increased more than sixfold from half a million dollars in 2019 all the way to 3.2 million in 2020. We understand that due to the pandemic, the market trended in our favor this year. Our increased demand was undoubtedly driven by eat-at-home trends and the strong grocery sector and today's consumers' propensity to eat healthy and purchase multi-serve products. However, we don't believe that these consumer trends were a one-off and we expect a meaningful portion of post-pandemic consumers to still cook at home and eat healthier than they had prior to the virus. In fact, according to a new report conducted by Deloitte researchers, 42% of consumers said they expect to cook more after the pandemic than they had before, and one-third of consumers expect to dine out less than they did previously. LifeWay is very well positioned with regards to today's consumers' interests and proved this year is more than capable of adjusting the supply chain to accommodate increased demand. Just to reiterate, LifeWay is focused primarily on the grocery channel, and we have very minimal exposure to the food service sector. As we touched on throughout the year, we have stepped up our marketing campaigns to reach new consumers and drive incremental purchases from existing consumers. And we have seen great results stemming from these efforts. Among these initiatives, we have analyzed and reconfigured retail promotions to be more productive and more aligned with the current consumer environment. We were early adopters of e-commerce advertising solutions with platforms such as Instacart and Amazon Fresh, in addition to our advertising efforts throughout major retail partners. We've established partnerships with chefs, dieticians, fitness professionals, and influencers in the wellness space, hosting over 220 live events on Instagram and recorded over 70 podcasts and radio interviews. We have put a spotlight on our 32-ounce product and recipes incorporating kefir and farmer's cheese to capitalize on customers who have shifted in buying in bulk and cooking at home. From a business standpoint, targeting today's health-oriented consumer has paid off. We've acquired many new customers, seen greater sales at our most key retailers and sales attributed directly to advertising, as well as organic sales through online retailers. are both up substantially this year. Our products provide customers with necessary probiotics, vitamin D, and protein that truly improve their gut health, immunities, and mental well-being. The probiotics in kefir support a healthy microbiome, and approximately 80% of immune defense comes from the gut. Probiotic products such as kefir are the focus of intense research related to the microbiome's role in stress, depression, and anxiety. We now know that up to 90% of the body's serotonin comes from gut cells and the gut-brain access, which links the emotional and cognitive centers of the brain with our intestinal functions and plays major roles in happiness and well-being. Consumers are more interested in these facts than ever before, and that is why Lifeway is winning. While our promotional efforts have been of top interest this year, we have also expanded our retail partnerships and distribution. A big win initiated in the third quarter was the distribution of our products into Costco stores into Los Angeles and Hawaii. Preliminary results from these rotations have been promising. Moving forward, we will continue to search for strategic opportunities to increase doors and household penetration for LifeWay products. Before I wrap up, I would like to highlight some of our product wins from the calendar year. First, organic whole milk has performed exceptionally well in whole food stores since its kickoff in the second quarter. It has effectively replaced our low fat conventional milk that previously occupied the store shelves as it appeals more directly to the core whole foods consumer base. While our plain kefir is consistently the sales leader because of its versatility, we are encouraged by the performance of our customer favorites like mixed berry and coconut honey and are excited to see how they develop. Second, the legacy product Farmer's Cheese has had an outstanding 2020. Having been around for decades, it's particularly pleasing to see this product pick up distribution in certain traditional grocery stores. Similar to Kiefer, marketing for Farmer's Cheese has been done primarily through social and digital channels as opposed to traditional TV and print advertising. Yet in 2020, its sales and units went up sharply. Moving forward, we hope to see further growth of this legacy product, and we'll look for new ways to gain consumer traction via digital marketing, recipe placements, and chef collaborations. Farmer's Cheese is in a lot of our recipes, and we encourage consumers to keep an eye out for it in their local sprouts markets, fresh thyme markets, and whole foods. We are very proud of the year we had at LifeWay, and 2020 saw impressive growth and numbers that shouldn't be overlooked. Yet forgetting the numbers, our mission remains the same. We are here to provide top class probiotic and nutritious food and to improve the health and well-being of our customers. I believe we truly made an impact and accomplished that goal in 2020. I am looking forward to furthering our mission in 2021. While the COVID trends that benefit us may continue to subside as time goes on, more people today know and love Lifeway products than they did in 2019. They know our story, they definitely understand the benefits of our products, and we believe they will continue to buy our products. As a financial update, once again, net sales were $102 million for the year ended December 31, 2020. An increase of almost 9% from 93.7 million in 2019. Selling expenses decreased 0.9 million or 7.8% to 10.2 million in 2020 from 11.1 million in 2019. And we reported earnings of 21 cents per diluted share for the full year 2020. An increase from earnings of 3 cents per diluted share in the full year 2019. We are very pleased with this strong year, believe we are well positioned for long-term growth and value creation, and look forward to further serving customers interested in increased self-care, immunity, and gut health. In closing, thank you for listening to this call today and for your interest in Lifeway. We hope everyone will continue to remain safe, and we look forward to updating you on our ongoing progress and business momentum on our next call. Have a great day.