Lifeway Foods, Inc.

Good morning. Welcome to Lifeway Foods' third quarter 2023 earnings conference call. On the call with me today is Julie Smolanski, President and 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.lifewayfoods.com. A recording of this call will be available on the company's website. Before we begin, we'd like to remind everyone that the prepared remarks contain forward-looking statements. 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'd like to turn the call over to LifeWay's Chief Executive Officer, Julie Smolanski.

Thank you, John, and good morning to everyone joining us today. As always, we greatly appreciate your interest in Lifeway Foods. I'm excited to report a phenomenal start to the second half of 2023 as we once again set a company record for net sales and continue to deliver vastly improved profitability. Our results are a testament to the sound execution of our entire Lifeway team, and I could not be more pleased with their efforts. With that, I will now review our third quarter 2023 results. Net sales were $40.9 million for the period ended September 30, 2023, an increase of $2.8 million, or 7.2%, compared to the third quarter in 2023. The increase was primarily driven by higher volumes of our Lifeway-branded drinkable kefir, and to a lesser extent, the impact of price increases implemented during the fourth quarter of 2022. We are encouraged to see our growth driven by volumes yet again, more so than pricing, with continued accelerating unit velocities in our flagship Lifeway Kiefer line. This once more demonstrates widespread acceptance of our inflation-justified price increases as our loyal and new customers maintain their commitment to our better-for-you, high-quality product offerings. This was our 16th consecutive quarter of strong year-over-year growth, our second consecutive quarter setting a lifeway record for total net sales. The growth this quarter was even more notable when considering that the third quarter of 2022 was now our third largest quarter ever. When compared to the third quarter of 2021, we were up 38.4%. The year-over-year lapse will continue to become more difficult, yet we are excited by the challenge to continue growing. Further underscoring the strong sales we delivered is the environment in which we deliver them. It's no secret that the current U.S. macro environment is challenging consumers. A number of factors, including high interest rates, the reinstatement of student loan repayments, inflation, among others, are weighing on consumer optimism, and they are becoming more price sensitive. Despite that, and in light of the price increases we implemented in the fourth quarter of 2022, our loyal customers continue to affirm our belief that LifeWise premium product offerings come at a great value, illustrated by our great consumption trends and velocities in our key retailers. Moving on, we reported a gross profit margin of 27.2% for the period on September 30, 2023, increasing 730 basis points compared to 19.9% in the third quarter of 2023. This strong margin expansion was primarily due to higher volumes of Lifeway branded products and the favorable impact of milk pricing, and to a lesser extent, the aforementioned price increases and decreased transportation costs. We have consistently stated that growth margin recovery was a top priority of ours, and with our proactive operating discipline, along with subsiding inflationary impacts, the largest being favorable milk pricing, we are now delivering much enhanced profitability. Year-to-date, our growth profit margin has increased 810 basis points. Looking forward, we will always seek out incremental productivity and profitability measures in pursuit of margin enhancements. Now to our expenses. Selling general and administrative expenses increased $0.3 million to $6 million for the period ended September 30, 2023, compared to $6.3 million in the third quarter of 2022. The decrease was due to decreased G&A expenses, partially offset by a small increase in selling expenses as we continue to strategically invest in our core Lifeway Kiefer products and farmer cheese through targeted advertising and marketing programs in pursuit of additional brand exposure. Our net income during the period ended September 30, 2023, with $3.4 million reflecting EPS of 23 cents per basic and diluted common share compared to net income of $1 million or 6 cents per basic and diluted share during the third quarter of 2022. Our continued top line and margin expansion is slowing through the bottom line as our team continues to execute efficiently and inflationary impacts subside. Capital spending increased marginally during the nine months ended September 30, 2023, compared to the same period in 2022, aligned with our capital spending plan for the year. Our capital spending is focused on three core areas, growth capital, cost reduction, and facility improvement. Growth capital spending supports new product innovation and enhancement. Cost reduction and facility improvement support manufacturing efficiencies, safety, and productivity. Our continued capital commitment reflects our goals as a business to continue growing and improving our internal efficiencies. This was a phenomenal quarter for LifeWife. Our customers continue to prove resilient, not trading down, and delivering positive unit velocities on our core LifeWay products in spite of the macro pressures that have weighed on consumers and some of the broader industry. Because of that, we set another LifeWay record on top line, beating last quarter's record sales metrics by $1.7 million while maintaining strong profitability measures. As usual, this incredible quarter was driven by the industry-leading Drinkable Lifeway Kiefer, the core driver of our business. Net sales of our Drinkable Kiefer increased 9% to $33 million for the period ended September 30, 2023, compared to the third quarter in 2022. Lifeway's Kiefer products are tart and tangy and provide customers with probiotics, vitamin D, and protein to help support their gut health, immunity, and mental well-being. The probiotics in kefir support a healthy microbiome, and approximately 80% of immune defenses come 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 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 well-being. Health and wellness remains a powerful tailwind to customer preference in today's environment. And as the modern consumer learns and focuses more on their health, they will care even more about their microbiome. Our Kiefer products are better for you and taste incredible, which is why customers keep coming back for more. Selling our drinkable kefir is our primary business focus and exactly what we do best. We will continue to dedicate the majority of our time and investments behind our core products through both targeted marketing and incremental distribution opportunities to strategically attract further brand awareness and trial. In doing so, we hope to further our dominant U.S. kefir market share and to better position ourselves to capitalize on the health and wellness tailwind driving today's consumers and continued expansion of the global kefir market. While we remain focused on growing our core kefir sales, as we announced in August, we have recently mapped a strategy to capitalize on current consumer interest by further investing in Lifeway Farmer's Cheese. Lifeway Farmer's Cheese is a premium cultured soft cheese and a highly sought after favorite in many specialty stores. Our farmer cheese has been a cult favorite since its introduction and shows strong sales relative to its distribution. It's available nationwide. As we described on our call last quarter, one of this year's surprise trends has been the emergence of cottage cheese recipes on TikTok and Instagram. Our farmer cheese is versatile, has smooth blended texture that consumers are looking for, and we believe it would be a logical fit for many of those blended cottage cheese recipes. We are currently running a series of farmer cheese marketing campaigns to capture the attention of those seeking a probiotic upgrade to their cottage cheese recipes. Outside of this year's social media buzz, over the past few years, our farmer cheese has drawn heightened interest from consumers and retailers organically. We are acting to meet this new demand. We have initiated plans to increase cheese production, invest in technology to improve production time by more than half, and implement new automation and efficiency plans to ensure the brand is equipped for future demand and distribution opportunities. Additionally, we are seeing continued progress with our Guava Low-Fat Keeper and our new organic whole milk products. We will continue to test and develop new flavors and offerings in an effort to satisfy our consumers with differentiated assortments. I will now touch on some of the marketing and advertising updates, where our focus remains dedicated to driving increased consumer trial. Lifeway has invested heavily in advertising to consumers who are using grocery pickup and delivery options. We will be expanding our efforts with additional marketing programs in Q1 to catch new customers as they set their healthy intentions for the new year. We have also been advertising digitally on Instacart, where we have seen great success in driving trial and introducing consumers to additional varieties of lightweight products. Coincidentally, I was recently at the Fortune Most Powerful Women Summit, where I had the opportunity to meet some of Instacart's amazing leadership team. I was pleased to hear that they are already familiar with Lifeway from our appearance on their company leader boards week after week. Additionally, this summer, we continued our experience-based marketing focusing on places like New York City, where we embarked upon a yoga series with Kiefer Sampling Program in Bryant Park, a pop-up with Shellfield sampling our products in Brooklyn, and various other activations. With the warm season having ended, we are pleased to report the pop-ups were a success. To keep the momentum, we have staffed up with new field marketing team members and are looking forward to a winter season full of events, including the magnificent Mayo Life Festival in Chicago, where Lifeway will have a holiday float again this year. As we look forward, we continue to partner with our target social media influencers, including celebrity chefs and nutrition experts with notable presence on TikTok, Instagram, or Pinterest to suggest healthy ingredient swaps recipes, and snack ideas incorporating our healthy lifeway offerings. We are spending meaningful dollars on our social media advertising, and we continue to realize a positive impact on our web traffic and social following from those digital campaigns, which we have also partnered with in-store programs to incentivize retention rates and increase brand exposure. Now I will touch on some distribution updates. Since our last call, I'm pleased to report we have gained a couple of new distributions. First, I'm pleased to announce that we are working with a new food service partner that will be stocking our single-serve Lifeway Keeper at select airport retail and travel retail locations. This exposure will help the brand find new customers as they look for healthy options while traveling. We also recently received notice of new farmer's cheese distribution coming to Cub Foods, a Midwest-based grocery chain. Orders will begin shipping in Q4. On the last call, we announced distribution at roughly 140 CVS locations, our first partnership with them, where we placed in premium sets in their West Coast stores. As we alluded to, we don't expect this to be a large volume driver, but that said, we are quite excited to be placed in the front of traffic that a store like CVS draws. We also continue to perform solidly at Wawa and are maintaining consistent unit moving slightly above the initial velocities upon our introduction in late 2022. Lastly, we continue to maintain our strong relationships with key retail partners and will continue to seek out incremental distribution opportunities across a variety of channels that make sense for all great products we have to offer. Specifically, we believe there are still plenty of distribution opportunities for our top-performing kefir flavors, pro-bugs, and farmer's cheese. To wrap up this call, I would like to once again highlight the third quarter marked incredible, record-breaking results. Our core products continue to excel while our team continues to deliver operating discipline and enhanced profitability. I believe we have the right team in place to maintain this positive momentum going forward, and I'm excited to finish off 2023 strong as we continue our mission to provide best-in-class probiotic and nutritious food to improve the health and well-being of our customers. Thank you all very much for listening to the call today, and of course, for your interest in Lifeway Foods. We look forward to updating you on our progress and momentum in 2023 year-end call and in the new year. Let me be one of the first to wish you a happy holiday season, and I hope you have a great day.