Lifeway Foods, Inc.

Good morning. Welcome to Lifeway Foods' third quarter 2024 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, plan, will, 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 during today's call, except as required by law. 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 President and Chief Executive Officer, Julie Smolanski.

Thank you, John, and good morning to everyone joining us. As always, we greatly appreciate your interest in Lifeway Foods. I'm pleased to be speaking with you today and happy to report that our strong momentum in 2024 has continued. We delivered another excellent quarter highlighted by our double digit growth on the top line and notably our second largest ever quarterly net sales result driven by volume growth of our flagship Lifeway drinkable kefir. Before we go into the results, I want to express my thanks to the entire Lifeway team for their unwavering commitment, and seamless execution. Your dedication allows us to consistently deliver the high level of service and quality our clients and customers have come to expect. We've navigated an unpredictable environment over recent years, yet our team has always risen to the occasion, allowing us to deliver on our growth plan for Lifeway. With that said, I will now review our results for the third quarter of 2024. Our net sales were $46.1 million for the period ended September 30, 2024, an increase of $5.2 million, or 12.7%, compared to the third quarter of 2023. This double-digit growth was primarily volume-driven from our branded drinkable kefir. Notably, this was our 20th consecutive quarter of quarterly net sales growth, which marks an incredible milestone of five consecutive years worth of quarterly growth for Lifeway. As we said before, this was our second highest quarterly net sales ever, and we are thrilled to continue seeing powerful volume-led growth, demonstrating the continued high levels of consumer demand for Lifeway Kefir products. This sustained volume growth clearly demonstrates the success of our strategic sales and marketing investments at driving demand and trial usage to capitalize on the growing consumer interest in protein-rich foods with probiotic and bioavailable nutrients. Let's also remember that 2023 was a record-breaking year for Lifeway, which makes our exceptional growth to date in 2024 even more noteworthy. For the nine months ended September 30, 2024, our net sales were $139.9 million. an 18.5% increase compared to the first nine months of 2023. This performance continues a trajectory of strong growth over the past five years, with our year-to-date net sales increasing 98.4% compared to the same period in 2019. With robust results and growing customer base of Loyola Kiefer drinkers, we are well on our way to setting a new Lifeway annual sales record and remain confident and Lifeway's ability to continue with the sales momentum. We reported a growth profit margin of 25.7% for the quarter ended September 30, 2024, resulting in a growth profit margin of 26.2% for the nine months ended September 30, 2024, up 30 basis points compared to the same period in 2023. As we continue to ship higher volumes of our Lifeway branded products, we will continue to realize manufacturing efficiencies and favorable fixed cost absorption, driving operating leverages across the business and positioning us for additional margin expansion ahead. Now to our expenses. Selling general and administrative expenses were $7.5 million for the period ended September 30th, 2024. Our consistent top line strength demonstrates the success of our strategic sales and marketing investments. We will continue to invest across the LifeWay brand and product portfolio as we remain focused on driving trials and accelerating product velocities. Our net income during the period ended September 30, 2024, with $3 million, reflecting EPS of 20 cents per basic and 19 cents per diluted common share. Capital spending increased $2.2 million to $5.4 million during the nine-month period ended September 30, 2024, compared to the first nine months of 2023. The increase in cash used accurately reflects our planned increases during 2024 compared to 2023 to increase manufacturing capacity to meet demand and support our continued strong business growth. We focus our capital spending on three core areas, supporting growth, cost reductions, and facility improvements. Our spending is very efficient and we have plenty of capacity and the operations in place to support continued rapid sales growth. Today, the consumer continues to face macro headwinds, including higher prices and high interest rates and an uncertain geopolitical landscape. Our customers are budgeting carefully and seeking value in core everyday household spending, but also prioritize their health with a focus on active, healthy nutrition. As you can see from our results, we continue to deliver strong, volume-led growth as our growing customer base has proven resilient, demonstrating that our premium offerings come with exceptional value. While consumers are seeking value, They also have proven that they will not sacrifice their health and wellness and remain committed to consuming high-quality, nutritious products at affordable prices. This trend has led to rising demand for healthy foods like our Better For You LifeWay branded products, which offer consumers high-quality protein, probiotics, calcium, and vitamin D, and help everyone from children to aging adults improve their health and nutrition. Our flagship LifeWay drinkable kefir is a bottle of bioactive nutrients, protein, and probiotics, and it has allowed us to build and anchor the kefir market in the United States. The probiotics in kefir support a healthy microbiome, and between 70 to 80% of immune cells 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 almost 90% of the body's serotonin comes from gut cells and the gut-brain axis, which links the emotional and cognitive centers of the brain with our intestinal functions. If you want to be healthy and happy, your gut should always be on your mind. Gut health and its connection to brain and skin health is an emerging field of research, and we look forward to more fascinating developments in the coming years that we expect will further increase interest in healthy probiotic foods. Microbiome research is an exciting space, and we're always encouraged to hear the amazing ways fermented and cultured foods can positively impact our health. A study published by BMC Medicine suggests that the probiotics in dairy kefir show potential promise in improving the gut health of ICU patients, and a small study protocol in the UK recently examined the effects and potential benefits of kefir consumption on children with ADHD. I'm pleased to note that in October 2024, we began to roll out our first ever product with 100% lactose-free labeling. Our products were already up to 99% lactose-free, so we are pleased to further attract consumers with our new organic whole milk flavor fusion items that have this added benefit. along with decreased sugar content. New on-trend flavors like hot honey, matcha latte, and passion fruit lychee are just to name a few, are amazing additions to our portfolio, and I encourage everyone to seek them out or request them in your local grocers. The entire lineup is loaded with high-quality, bioavailable nutrients and plays to our strengths as our organic products have been incredibly successful to date. We expect health and wellness trends will continue to be a tailwind for our entire premium product portfolio. Our offering delivers delicious taste, nutritious ingredients, and value. This is why we are successfully reaching new customers while also engaging existing customers to grow their basket with new LifeWay products. As you may be seeing on shelves already, an additional SKU, Our strawberry banana flavor of Lifeway Keeper is now available at select Walmart locations. We expect it to reach an estimated 1,100 stores once resets are complete. We built the U.S. Keeper market and continue to invest behind it to grow our brand and the drinkables category. Our investments combined with tailwinds from today's health-focused consumer are paying off tremendously. Year to date, our drinkable kefir sales have increased more than 22%, which is phenomenal. As the anchor of the kefir category, we own the space and we know how to make an impact with our space. We also continue to evaluate consumer behavior to ensure our offerings remain well aligned with consumer interests so that we can continue to capture a greater share of the growing market. These insights have allowed us to be a brand on the move. spotting emerging trends early and actively improving and diversifying our product offerings. We have called out many successful product innovations in the past, including our ProBugs and organic grass bed keeper flavors. I'm pleased to share that the two SKUs of Lifeway ProBugs will gain mass market for the first time ever since launching at Whole Foods in 2008 with new distribution at an estimated 200 stores in a regional retailer in December, which will boost our visibility to a new segment of shoppers in these stores. We also continue to strategically invest behind the cult favorite Lifeway Farmer's Cheese. Consumer demand for soft cheese products remain elevated, and our Farmer's Cheese is protein rich and full of probiotics and bioavailable nutrients. Lifeway Farmer's Cheese is an elevated alternative to blended cottage cheese in recipes that continue to buzz throughout social media. It has the highly desirable smooth texture right from our package, plus the benefits of probiotics. We are pleased to see our support behind Farmer's Cheese paying off as we saw solid growth in the quarter. We have a strong position in this category and we believe we are just getting started. In Q1 of 2025, Our farmer's cheese, for the first time ever, will gain mass market placement in an estimated 1,400 stores at a large national retail partner. We look forward to sharing more once product is on shelf. I'll now touch on some marketing and advertising updates. We continue to be strategic with our marketing dollars, focusing on programs that effectively drive velocity and drive higher ROIs. Similar to what I mentioned before on innovation, we regularly evaluate the market to spot emerging trends that can lead to growth opportunities. This proactiveness has led to Lifeway being early to digital advertising, e-commerce, partnerships with retailers, and events in the wellness community, such as our Yoga in the Sky series in New York City, which can help spring brands into cultural relevance. In September, we initiated a strategic in-store program to capitalize on the back-to-school snacking season. Consistent with our previous in-store investments, our goal was to make sure Lifeway products are placed at interruptive moments such as high traffic end caps to drive new exposure to customers who may not normally shop in our section. We plan to continue investing in innovative, eye-catching marketing endeavors that reach new consumers in-store to drive trial. In September, we announced our sponsorship of the Charity Miles running, walking, and biking app. This app enables users to earn money for charities when they walk, run, or bike, tracking distance traveled and triggering a financial donation to the user selected organization. During the campaign, we are sponsoring $10,000 worth of donations in support of mental health initiatives. We are excited to feature our products on this fitness application and promote our microbiome support in an effort to foster better mental and emotional well-being while supporting a great cause all at once. We also continue to invest in our e-commerce sales strategy to drive velocities and awareness. Supporting these e-commerce efforts and our continued partnerships with social media influencers, including celebrities, chefs, and nutrition experts with notable following. Through our work with them, we advertise to a wide network of customers and educate them on the Kiefer category. our healthy offerings, and the recipes they can be used in. Our targeted advertising on retail partner sites and general e-commerce platforms such as Instacart has proven to be very effective, and we plan to continue investing in this channel to further sales growth. Now I will touch on some distribution updates. In September, we announced our first expansion of Lifeway Keeper distribution in the South African market. Our Lifeway Keefer and ProBugs are shipping and available on shelves at a mix of independent and health food stores in the country, with limited initial placements at certain established chains. And just last week, we announced our expansion within Dubai and the UAE. The offerings of 32-ounce Lifeway Keefer, 8-ounce lactose-free Lifeway Keefer flavor fusions, ProBugs, and farmer's cheese exported from the United States is expected to begin shipping in the fourth quarter of 2024 and will become available in supermarkets and hypermarkets in Dubai and across the Emirates. Dubai and the UAE are of particular interest to us given the unique demographics there with large numbers of our core target customer segments. We are taking a measured and thoughtful approach to global expansion as we seek markets that are primed for success and can be accessed without major initial investment. As usual, we also maintained our active dialogues with our key retail partners. We have deep partnerships with them and are consistently seeking out incremental distribution opportunities for our Lifeway drinkable kefir, farmer's cheese, and other core products across a number of channels. With our distribution and overall strategy, we are focused on elevating our brand name products to ensure our long-term success and the category leadership. With that, we continue to deprioritize private label manufacturing during the quarter. Our strategy to reduce private label and focus on branded products is designed to protect Lifeway's category dominance and visibility, streamline operations, and further improve margins. To close, we had another great quarter here at Lifeway and on pace for a tremendous, record-breaking 2024. With five consecutive years worth of quarterly growth in our business and soaring consumer demand for probiotic foods with bioavailable nutrients, we have never been in a stronger position. We have the right team in place and we plan to continue investing behind our key products to capture more and more of this growing market as we further pursue our mission to provide the best in class bioavailable probiotic and nutritious foods to improve the health and well-being of our customers. We look forward to updating you on our continued momentum on our year-end call in March. Thanks again for joining us today, and I hope everyone has a wonderful holiday season and a happy new year.