Lifeway Foods, Inc.

Good morning. Welcome to Lifeway Foods' fourth quarter and full year 2023 conference call. On the call with me today is Julie Smolenski, 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 would 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 food. I'm thrilled to be speaking with you today and to report an outstanding finish to our record breaking 2023. Before taking you through the numbers, I would first like to thank the entire Lifeway team whose excellent efforts all year long allowed us to deliver seamless performance for all of our valued customers. Our strong results this year are a testament to your execution. With that, I will now review our results for the full year of 2023. Net sales were $160.1 million for the year ended December 31st, 2023, an increase of $18.6 million or 13.1% compared to the prior year and a record high annual top line result for Lifeway. The net sales growth was primarily driven by higher volumes of our flagship Lifeway branded drinkable kefir and to a lesser extent, the impact of price increases during the fourth quarter of 2022. We are particularly pleased by the consistent volume growth we saw throughout the year, which outweighed the benefits from pricing and was a positive differentiator for us within the broader industry. This consistent volume growth illustrates both the stickiness of our active customer base and the effectiveness of our strategic sales and marketing investment at driving velocities in our core products. It is important to note that this impressive year was culminated by our highest ever quarterly net sales of $42.1 million in the fourth quarter, which was our 17th consecutive quarter of year-over-year net revenue growth. This was our third consecutive quarter, setting a lifeway record on the top line, and this year we grew sales sequentially in all four quarters. Despite the challenging macro environment consumers faced in 2023 and continue to face today, including high interest rates and inflation, we have not experienced disruption or trade down on the demand side. And our strengthening results continue to demonstrate that LifeWay's premium products come at an exceptional value to our consumers focused on high quality and healthy products. Naturally, our year-over-year lapse will continue to get more challenging, yet our business is strong and we are excited to keep driving growth. We reported a growth profit margin of 26.5% for the year ended December 31st, 2023, increasing 760 basis points compared to the prior year. This impressive margin expansion was primarily due to the higher volumes of Lifeway branded products and the favorable impact of milk pricing. And on a smaller scale, the inflation justified price increase in 2022. Following a period where we were hampered by the industry-wide inflation, we greatly prioritized recovery in our margins. Through our proactive operating discipline, along with subsiding input costs, particularly favorable milk pricing, I'm pleased that we have now returned to a strong margin level. I will note the margin impact in 2022 did carry over into the first quarter of 2023. And if you focus just on the last three quarters of 2023, we had a growth profit margin of 28%. We will continue to pursue incremental productivity and profitability measures in an effort to maintain and expand upon our current margin levels and believe as the shipment volumes of our Lifeway branded products grow, we will continue to become more efficient. Now to our expenses. Selling general and administrative expenses increased $1 million to $24.9 million for the year ended December 31, 2023, compared to $23.9 million in the prior year. While net dollars increased, our SG&A expenses as a percentage of net sales decreased to 15.6% in 2023 compared to 16.9% in 2022. We are seeing great returns on our selling expenses as we invest strategically in growing brand exposure and driving velocities of our core Lifeway kefir products and farmer's cheese through targeted advertising and marketing. Our net income during the year ended December 31, 2023, was $11.4 million, reflecting EPS of $0.77 per basic and $0.75 per diluted common share, compared to net income of $0.9 million or $0.06 per basic and diluted common share in the prior year. This is a very strong expansion of profitability and illustrates that our top line and margin improvement is flowing through well to the bottom line. Capital spending increased approximately $0.9 million to $4.4 million during the year ended December 31, 2023. The increase in cash used was in line with our planned increases in 2023 compared to 2022. Our capital spending is focused on three core areas, growth capital, cost reduction, and facility improvement. Growth capital spending supports new product innovation and enhancements. Cost reduction and facility improvements support manufacturing efficiency, safety, and productivity. Our CapEx spending is efficient and we generate a strong return when installing additional tanks as we leverage existing infrastructure to scale the business. As we continue to grow, we continue to repair and modernize our facilities to improve our internal efficiencies. On that note, I'm happy to share that we are approaching our 10-year anniversary of operations in our Waukesha, Wisconsin facility, where we have continued growing production at a rapid rate. In 2023, we produced over 30 million bottles of kefir in our Waukesha plant, an amazing milestone, and I applaud our team there for their tremendous work. Overall, this was an outstanding, record-breaking year for Lifeway Foods. We delivered our highest-ever top-line results, which consistently grew throughout the year and was accompanied by major improvements in our key profitability metrics. Our customers are sticking with us, delivering impressive volume growth despite macro pressures that have weighed on the broader industry. We believe this indicates that consumers' focus on healthy, high-quality, and affordable foods remains paramount, and our product portfolio is comprised of delicious, nutritious foods that check those boxes. LifeWaste 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 Kiefer 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 functions and play a major role in happiness and well-being. Just a few weeks ago, a recent study published in BMC Medicine concludes that kefir shows promise in improving gut health of ICU patients. Our flagship drinkable Lifeway Kiefer continues to be at the core driver of our business and helps us maintain our long-held dominant position within the U.S. Kiefer industry, a category we built and continue to expand. With health and wellness as a tailwind to our consumer preferences, we believe the addressable market for Kiefer will continue to grow, and so will we. Customers love Lifeway Kiefer because it's healthy, delicious, and dynamic in its uses, and selling it is our number one priority. The majority of our time and investments will continue to be spent on our core products by way of strategic marketing and incremental distribution opportunities to drive brand awareness and trial. While we are focused on selling our core kefir, we are also evaluating trends in our space and seeking incremental sales to improve the scope of our products within the market. These insights often lead to product innovations within the drinkable kefir space to satisfy our consumers with differentiated assortments. For example, our guava low-fat kefir and our organic whole milk products continue to see steady progress. Additionally, we recently introduced organic grass-fed kefir flavors to meet growing consumer demand for grass-fed dairy. Lastly, within kefir, our latest product, Kefir Plus, is a potent probiotic shot, which we're excited about unveiling at meetings and trade shows. Part of our constant evaluation in trends and opportunities leads us to pivot towards more sustainable and profitable endeavors. An example, as we have discussed previously, is our initiative to capitalize on heightened consumer interest in soft cheese products by further investing in LifeWay Farmer's Cheese. Over the past few years, including in 2023, our Farmer's Cheese has seen increased demand from customers and retailers. Additionally, our farmer's cheese is a logical, healthy upgrade to the blended cottage cheese recipes that have emerged and buzzed throughout social media in 2023. We have strategically activated media to drive engagement and have begun to increase cheese production and invest in more efficient production to match the increased demand. I will now touch on some marketing and advertising updates. In the winter, we staffed up our field marketing teams and continued our experience-based marketing with numerous events. Recently, Lifeway Kiefer and Farmer's Cheese were featured alongside Cravings Mixes at a brunch hosted by Chrissy Teigen during Natural Products Expo West. We're looking forward to Coachella next month, where Lifeway products will be featured at Camp Poosh Activations with Air One. We also have a packed spring and summer with participation at music festivals, yoga events, and much more. We believe these in-person experiences will allow us to connect with our consumers on a deeper level during their wellness journeys. We have continued increasing our investments in targeted advertising toward consumers who shop online and use retail websites for their product discovery. We further expanded these programs in Q1 of 2024 in an effort to capture healthy New Year's intentions. We advertise consistently on retailer e-commerce sites and generally e-commerce platforms, such as Instacart, to acquire new customers, grow basket size, introduce adjacent Lifeway offerings, and build loyalty. Our e-commerce efforts are supported by search, display, social, and influencer advertising to educate those unfamiliar with Kiefer and stimulate demand. We also partner with dieticians and experts for local news segments, where we are able to highlight our brand attributes and demonstrate how Versatile Lifeway products are in smoothies, recipes, and on the go. We employ a wide range of marketing tactics with public relations to support the growth of the Kiefer category and Lifeway-specific products and initiatives. In January 2024, we ran a large in-store promotion across many retailers, placing Lifeway-branded products on visible end caps and creating new temporary refrigerated spaces to showcase our items. These interruptive placements help to expose new customers to the Lifeway brand and create kefir customers from customers who do not typically shop our section. Our online, in-person, and in-store efforts are all coordinated to drive trial and boost retention rates. Now I'll touch on some distribution updates. As we announced last quarter, we started working with a food service partner to begin stocking single-serve Lifeway kefir at some airport and travel retail locations. This is a great opportunity to gain exposure to traveling customers seeking healthy foods from around the country. Farmer's Cheese orders also began shipping in Q4 to Cubs Foods, a Midwest-based grocery chain. We are excited by this development as we continue to drive awareness of our Farmer's Cheese. We believe there are plenty of incremental distribution opportunities for the brand in the future. Our relationships with our key retail partners remain very strong, and we maintain a constant dialogue with them as we seek incremental distribution opportunities that make sense for each of our great products, including our top-performing Kiefer flavors, ProBugs, and Farmer's Cheese. We have recently seen incremental placements on Lifeway products at Publix, Gelson's, Kroger, and others. Before closing the call, I would like once again to thank the Lifeway team for their incredible efforts in 2023. We have broken multiple company sales records throughout this year and delivered greatly enhanced profitability throughout the year, and that's a testament to the efforts of our team. We have the right people in place to deliver exceptional results once more in 2024. I am so excited to carry this momentum into the year ahead and continue our mission to deliver best-in-class probiotic and nutritious foods to our health-conscious consumers. With that, thank you very much for listening to this call today and your interest in Lifeway Foods. We look forward to updating you on our progress and momentum on our first quarter 2024 call. Have a nice day.