Lifeway Foods, Inc.

Good morning. Welcome to Lifeway Foods' second quarter 2025 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 Smolenski.

Thank you, John, and good morning to everyone joining us. As always, we greatly appreciate your interest in Lifeway Foods. I'm excited to be speaking with you today following another extraordinary quarter for Lifeway Foods, a quarter that reinforces our momentum, showcases our market leadership, and demonstrates the expanding scale of our platform. In the second quarter of 2025, we delivered record net sales of $53.9 million, with approximately 18% volume-led growth when adjusted for strategic portfolio changes. This performance builds on an exceptional 2024 and underscores how Lifeway's growth engine is accelerating. We are not just growing. We are expanding our leadership in the Kiefer category, winning shares, strengthening our brand equity, and broadening our distribution reach across multiple channels. Before I walk through the details, I want to recognize our Lifeway team. The consistency of our results and the exceptional service we deliver to customers and partners stem directly from your dedication and execution. You are driving the success, and we are so grateful. Our net sales growth this quarter was powered primarily by higher volumes of Lifeway branded drinkable kefir and farmer's cheese. The significance of this performance is even greater when you remember that in Q2 2024, was already a record-setting quarter with over 25% growth, and yet we built on that with additional double-digit gains. We achieved this while executing deliberate strategic changes to sharpen our focus on high-margin brand-building opportunities. In late 2024, we exited a lower-margin retail relationship and adjusted terms with a distributor to reduce build sales but improve freight cost efficiency. Even with these adjustments and a temporary sales lag from a partner's distributor cyber attack in early June, our momentum was undeniable. This marks our 23rd consecutive quarter of year-over-year sales growth, nearly six years of uninterrupted expansion, and that growth is not slowing. We are riding powerful consumer trends that continue to accelerate. Demand for protein-rich, probiotic functional foods, and heightened awareness of gut health's role in overall wellness. This is particularly pronounced among the more than 15% of Americans now on GLP-1 medications who are seeking nutrient-dense, satisfying foods that naturally support GLP-1 hormone production and digestive health. LifeWay's portfolio is perfectly aligned with these needs. Gross profit margin in Q2 was 28.6%. up 160 basis points from last year and over 460 basis points from Q1, our strongest performance since 2023. This improvement came from branded volume growth, manufacturing efficiencies, and favorable conventional milk pricing, partially offset by higher organic milk costs and planned trade investments to support distribution and innovation. Selling general and administrative expenses were $9.5 million as we continue to invest in marketing, sales activation, and retail expansion. These investments are paying off. They are driving trials, accelerating velocities, and strengthening consumer loyalty. Net income was 4.2 million or 28 cents per share compared to 3.8 million or 26 cents per share last year. This reflects a clean flow through from top line to bottom line demonstrating that our growth is both sustainable and profitable. Collagen is a perfect example of our ability to lead emerging wellness trends. The global collagen market is projected to exceed $8 billion by 2030, and LifeWeave was first in the category to combine probiotics and collagen in our probiotic smoothies with collagen. This innovation taps into our dual consumer priorities of gut health and beauty from within. Our Berry Blast was recently named a 2025 Good Housekeeping Snack Award winner, and the entire line is resonating strongly with consumers. Our marketing is embedding Lifeway into the heart of culture and sparking viral moments. On TikTok, millions of consumers are discovering Lifeway Kiefer through authentic testimonials about how they feel better after drinking it daily. National Kiefer Day made its debut this June with official proclamations from Illinois, Wisconsin, and other states, celebrations coast to coast, and a stunning probiotic-powered drone show lighting up Chicago's skyline. At the Chicago Loop 110 NASCAR race, our bold Lifeway branding took center stage on Josh Velicki's car, tapping into one of the fastest-growing fan demographics, women 16 to 24 and under 35 audiences, and connecting athletic performance with gut health in front of millions of viewers. This is how we make Lifeway not just a brand in the dairy aisle, but a lifestyle icon in the public consciousness. Our distribution expansion continues across channels, Target is adding over 1,100 new 32-ounce kefir placements. Publix is launching new 8-ounce items. And Whole Foods, BJ's, Costco, Amazon Fresh, Ingles, and Kroger divisions are expanding their LifeWay sets. Farmer Cheese is gaining distribution in HEV, Hy-Vee, Albertsons, and Lowe's food. We recently began shipping 8-ounce kefir 12-packs to over 60 Costco locations in San Diego. a key step towards national club expansion. Capital spending was $4.5 million in the first half of 2025 as we expanded capacity and upgraded facilities. Our state-of-the-art Waukesha plant is already enhancing efficiencies, and once all planned investments are complete, we expect to nearly double production capacity and more than triple bottling speed. Our growth strategy is working. We are reiterating our target to achieve between 45 and 50 million in adjusted EBITDA by fiscal year 2027, and our early Q3 results show continued acceleration. Our unaudited estimate Q3 2025 net sales through 8-11 has already surpassed $26.4 million, over a 20% increase from the same time last year. In July, we delivered our highest week of gross sales in the company history, $5.5 million, up 66% year over year. Lifeway is operating from a position of strength, leading the category, expanding our platform, building cultural relevance, and scaling profitability. We see significant runway ahead as more consumers embrace gut health, functional nutrition, and the benefits of probiotics. This was another defining quarter for our business and our momentum is only building. We are executing with discipline, innovating with purpose, and expanding our reach to bring LifeWay to more people in more places than ever before. The results speak for themselves. With continued investments behind our key LifeWay branded products alongside the growing consumer embrace of health and wellness, we are well positioned to continue this incredible momentum through the back half of the year and to further pursue our mission to provide best-in-class bioavailable probiotic and nutritious foods to our growing base of consumers. We look forward to providing another progress update on our third quarter call in November. Have an amazing day and incredible rest of your summer.