Lifeway Foods, Inc.

Good morning. Welcome to LifeWay Foods' fourth quarter and full year 2021 earnings conference call. On the call with me today is Julie Smolenski, Chief Executive Officer. As previously announced, the company experienced delays in reporting its financial results and filing its 10-K for the year ended December 31, 2021, because of the identification of an error in accounting for income taxes of a prior year acquisition. Please see this morning's press release for more information on the delay. If you have not received the release, it is available on the investor relations portion of LifeWay's website at www.lifewayfoods.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 statement. LifeWay assumes no obligation to update any forward-looking projection and 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 Smolenski.

Thank you, John, and good morning to everyone joining us today. First, as always, thank you for your interest in LifeWay Foods. I am pleased to be speaking with you today regarding our fourth quarter and full year 2021 earnings results. Before diving into the results, I'd first like to thank the whole Lifeway family for their dedication and effort, which has allowed us to deliver efficient operations and keep our customers and partners happy, despite the industry-wide roadblocks 2021 presented. I'd like to begin by sending our thoughts and support to those who have been impacted by the conflict in Ukraine. At Lifeway, many of our staff and customers have family and friends in the country and are dealing with the stress and trauma surrounding the situation. We are praying for a rapid resolution and actively assessing how best we can support our partners and employees and all of the Ukrainian people. In the first half of this year, we completed a fundraiser for the people of Ukraine that raised over half a million dollars, and we also began distribution of a specifically marked charity relief kefir bottle to help raise money for critical needs and rebuilding efforts. We stand in solidarity with those affected by the situation and are dedicated to continue our support of the cause. I would also like to quickly reflect. This is my 20th year as CEO at Lifeway Foods, and I'm so proud of how far we have taken this business, all while staying true to the goals and values of my father. To put things in perspective, we had net sales of $10.7 million for the fiscal year of 2001 compared to $119.1 million in 2021. In addition, our share price as of June 30th was $4.97 as compared to a closing price of $1.70 in 2001. We have grown on a compound annual growth rate of 12.8% on a revenue basis. Throughout these years, we have increased new products, expanded distribution, and increased the nationwide recognition of the Lifeway brand and the benefits of Kiefer. Overall, 2021 was a very strong year for Lifeway. Year over year, on a net sales basis, we grew every single quarter, with the fourth quarter marking our ninth consecutive quarter of growth as a business. Throughout the year, we enhanced relationships with our retail partners and customers, while increasing our investment in advertising and marketing to both retain old and capture new eyes on our products. In addition, we completed the acquisition of Glen Oaks Farms and introduced some exciting new products. This momentum has placed us on a strong trajectory and we are encouraged by the demand that we see to date. This year, we are continuing to execute and deliver on our strategic priorities and remain focused on our primary goal of driving growth and value for our shareholders. Now I will review our full year 2021 results, which I'm glad to reiterate were capped off by our ninth consecutive quarter of year-over-year net sales growth. Net sales were $119.1 million for the year ended December 31st, 2021, an increase of $17 million or 16.7% compared to the prior year. This increase was primarily driven by higher volumes of our branded drinkable kefir and to a lesser extent, favorable impacts from the completed acquisition of Glen Oak Farms in the third quarter. Lively branded kefir is the core of our business and the continued increases in kefir volumes demonstrate the success of our customer acquisition strategies and the strength of our core. In addition, for the year ended December 31st, 2021, we reported a gross profit margin of 24.1%. Like many others in the industry, we have incurred incremental costs from the inflationary price increases on raw materials, packaging, and freight. As these prices continue to fluctuate, we expect to follow suit with our own prices to maintain our margins and continue our growth without bottom line erosion. Our operations team has worked tirelessly to make sure Lifeway is positioned comfortably against any shortages, and we will continue to monitor industry trends to stay a step ahead of any potential issues. Moving on to expenses. Selling expenses increased $0.9 million to $11.1 million for the year ended December 31, 2021, from $10.2 million in 2020. The increase was primarily due to increased investments in advertising and marketing programs G&A expenses had a marginal decrease of 49,000 to 11.6 million for the year ended December 31st, 2021 from 11.7 million in 2020. In summary, our net income during the year ended December 31st, 2021 increased 2.4% to 3.3 million, reflecting EPS of 21 cents per basic and diluted common share compared to net income of 3.2 million or 21 cents per basic and diluted common share during the same period in 2020. As we continue to execute on our outlined LifeWay 2.0 strategy, we should continue to see progress on our profitability, an important metric to us. Capital spending increased approximately 27,000 to 1.9 million in 2021. Our capital spending is focused on three core areas. growth capital, cost reduction, and facility improvements. Our growth capital supports new product innovation and enhancements. Spending on cost reduction and facility improvements support manufacturing efficiencies, safety, and our productivity. Our continued capital commitment reflects our goals as a business to continue growing and improving our internal efficiencies. On June 24th, 2021, our board authorized a plan to repurchase up to 250,000 shares of our common stock in the open market within 24 months at a maximum of $10 per share. In the third quarter, we repurchased all 250,000 shares of common stock at a price of $1.6 million and intend to hold repurchased shares in a treasury for general corporate purposes. In 2020, our results certainly benefited from COVID stay-at-home trends. primarily the strong growth in grocery store sales. That being said, we are very proud to have lapped our financial results in 2020 with even stronger numbers in 2021. Our strong results demonstrate our firm belief that customer demand for healthy products focused on gut health and protein will continue to grow and be a tailwind to Lifeway's addressable market and customer acquisition and retention strategy. Our belief is supported by multiple sources of objective market research. According to research from reports and data, the global probiotic strength market will reach 23.9 billion by 2028. Additionally, according to research from Mordor Intelligence, the global kefir market is projected to grow at a compound annual growth rate of 5.6% during the forecast period of 2022 to 2027. The drivers of this growth are raising global health consciousness coming out of COVID-19, increasing purchasing powder, and kefir's many health benefits, including those specifically for lactose sensitive individuals. As the leader in the kefir industry, Lifeway is very well positioned to capitalize on this enhanced consumer interest and growing global market. Our kefir products are healthy and delicious, and are extremely dynamic as they can be used in numerous recipes. With the focus on product variety, we've continued to work with notable chefs and nutrition experts to suggest healthy ingredient swaps, recipes, and snack ideas across LifeWay social media platforms and websites. Throughout the year, we consistently reiterated our focus on LifeWay's customer acquisition strategy, and this commitment can be seen through our selling expenses, which increased 0.9 million to 11.1 million for the year ended December 31st, 2021. This increased spend was dedicated primarily to targeted advertising and marketing programs aimed to connect with new customers and re-engage existing or past buyers. In the middle of 2021, we initiated a large marketing program with the Immersive Van Gogh Experience, a national exhibition that showcases Van Gogh's artwork through light, music, movement, and imagination in 22 major US cities. To date, the Van Gogh experience has garnered over 400 million media impressions and we have given out over 250,000 kefir samples to attendees. We are particularly proud of this program as this is an experiential in-person marketing opportunity that allows us to connect with customers on a deeper level while emphasizing wellness. In 2021, Lifeway was featured on the Drew Barrymore Show on many local TV segments, and worked with famous ambassadors such as Joe Amble, the star of Bachelor in Paradise, best-selling author and registered dietitian Alana Molstein, and artist Zach Shea. LifeWay received over 100 media placements with potential audience reach of over 900 million in 2021. LifeWay has also over 1 million combined followers on our many branded social accounts. including nearly $500,000 for Lifeway Oats, the company's newest offering. In early 2021, through a partnership with Telemundo, we launched our first-ever Spanish-speaking language television campaign. We strategically targeted key market areas in the U.S. with the launch of the campaign, and the marketing results came back strong. I am pleased to announce, at the beginning of 2022, we launched our second campaign with Telemundo, adding parallel advertising programs with NBC and Apple News to create a comprehensive push to introduce Lifeway Kiefer to millions of potential new customers. We are creating and engaging in marketing and promotional efforts designed to bring new customers to the brand and increase velocity. Our strong sales numbers and growth show that our efforts have been successful. As a result, I'm proud to share that we have recently regained distribution at the Fresh Market, and have been awarded a rotation at Costco Midwest stores. We look forward to capitalizing on these opportunities after a nearly three year absence. In addition to our bolstered promotional efforts, I'd like to discuss some operational events from the year that are further testament to our commitment to growth. On August 18th, we completed the acquisition of California based Glen Oaks Farm for $5.8 million and to date, The integration of their business to our platform has been seamless. Glen Oaks represents an extension into probiotic drinkable yogurt, give us additional regional strength in the Western United States, and is a very strategic complement to our Eastern-focused Freshmade brand, all under the umbrella of our dominant national presence with the Lifeway brand. Since the acquisition, we have been pleased with the brand's performance amongst its base of Western U.S. retailers. California and the West Coast is a crucial area of growth for us, and Glen Oaks should help us expand our presence in key retail partners in this important area. Moving forward, we will strategically integrate Glen Oaks into our marketing efforts to reach new customers, retailers, and channels they could not previously grasp. We still expect this acquisition to be accruative to earnings per share. Alongside the business benefits, we were very proud to acquire a business so strategically aligned with our own, as they bring to the table a drinkable yogurt that tastes great but also strongly supports gut health, immunity, and mental well-being of customers through its fermented probiotic product. I'd also like to discuss our new delicious cultured probiotic oat product, Lifeway Oat. We launched Oat on shelves in December, and it now has acceptance at four major retail partners. We're very bullish on the product as it is strategically personalized positioned at the center of multiple fast-growing categories. In addition to our new products, I would like to shine a light on the ongoing strength of our kefir products. Kefir remains the backbone of our business and represents the majority of our sales. After a very strong year in 2020, our core drinkable kefir net sales increased 18% year-over-year in 2021, and our sales of kefir ProBugs line for kids increased 16% year-over-year. As these products continue to grow, so does our business. And for the reasons stated before, we are very optimistic on this growth. In 2021, our marketing efforts and business strategy maintained a precise target on today's health-focused customer, and it has been paying dividends. LifeWay's Kiefer products provide customers with probiotics, vitamin D, and proteins that help support their gut health, immunity, and mental well-being. The probiotics in Kiefer 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 function, plays a major role in happiness and wellbeing. As today's consumers, learn and focus more on their health, they will care even more about these facts and the probiotic culture in their gut, which should be of great benefit to Lifeway's product portfolio. In addition to our best-selling kefir and farmer's cheese and our new Glen Oaks drinkable yogurt, we have a strong innovation pipeline, and I look forward to more exciting announcements in the coming months. Lifeway performed exceptionally well in 2021, And based on these results, we are very encouraged towards our prospects. Our primary target remains unchanged, delivering profitable and strategic growth while furthering our mission to provide the best in class probiotic and nutritious foods to improve the health and well-being of our customers. I remain confident that we are on the path to long-term growth and value creation for our investors. We're excited to continue serving healthy products to our customers focused on improved self-care, immunity, and gut health. To close, thank you all for listening to the call today and for your interest in LifeWay Foods. This concludes our overview for the fiscal year 2021. We hope everyone will continue to remain safe and we look forward to updating you on our ongoing progress and business momentum in our next earnings call. Have a nice day.