Lifeway Foods Inc

NASDAQ:LWAY

Earnings Call Transcript 2024-Q1

[Operator]

Good morning. Welcome to Lifeway Foods' First Quarter 2024 Conference Call. On the call with me today is Julie Smolyansky, 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 Smolyansky.

[Julie Smolyansky, executive]

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 be speaking with you today. I'm thrilled to report that the momentum from our record-breaking fiscal year 2023 has flowed smoothly into yet another strong quarter to start 2024.

For the fourth quarter in a row, we have broken the company record for quarterly net sales, all while consistently delivering improved profitability metrics. Our consistent growth and the excellent level of service we are providing to our valued customers and clients would not be possible without the effort and execution of our entire Lifeway team, and we could not be more pleased with their efforts.

With that said, I will now review our results for the first quarter of 2024. Net sales were $44.6 million for the period ended March 31, 2024, which is yet another record high quarter for Lifeway and an increase of $6.7 million or 17.8% compared to the first quarter in 2023. The net sales growth was primarily driven by higher volumes of our branded Drinkable kefir. After a year of consistent volume growth in 2023, we're excited to continue the trend in the first quarter. This is further evidence that our strategic sales and marketing investments in our core items continue to accelerate velocities, grow awareness, and win new consumers who are seeking out premium healthy products at great values.

This record quarter also marked our 18th consecutive quarter of year-over-year net revenue growth. Consumers continue to face well-documented macro headwinds, including inflation and high interest rates. And with that comes cautious spending. However, we continue to see strengthening in results, demonstrating both the steadfast loyalty and the growth of our core customer base who rely on our high-quality, better-for-you products.

Given our record-breaking 2023, which saw sequential growth in each quarter, our year-over-year laps will continue to get more difficult, yet we aspire to continue clearing the high bars we have set for ourselves. We reported a gross profit margin of 25.8% for the period ended March 31, 2024, increasing 410 basis points when compared to 21.7% in the first quarter of 2023.

This significant margin expansion was primarily due to higher volumes of Lifeway-branded products and, to a lesser extent, favorable transportation costs. Following a year of notable margin expansion, we are pleased to see margins improve on a year-over-year basis once again. Our margins remain a top priority for us and our team continues to proactively manage the supply and transportation of the materials used to make, package, and deliver our products to our customers. This proactive discipline has allowed us to consistently match the increasing demand, and we believe as the shipment volumes of our Lifeway-branded products grows, we will continue to become more efficient.

Now to our expenses. Selling, general and administrative expenses increased $1.2 million to $7.8 million for the period ended March 31, 2024, compared to $6.7 million in the first quarter of 2023. While our net spending increased, SG&A as a percentage of net sales remained in line with the first quarter of 2023. Selling expenses specifically increased marginally, but as a percentage of net sales, they decreased to 8.3% compared to 9.3% in the first quarter of 2023.

Given our strong net sales increase, this demonstrates the increasing returns we are generating on our strategic sales and marketing investments. Our net income during the period ended March 31, 2024, was $2.4 million, reflecting EPS of $0.17 per basic and $0.16 per diluted common share compared to the net income of $0.8 million or $0.06 per basic and diluted common share during the first quarter of 2023. Nearly tripling on our year-over-year basis, this demonstrates that our top line and margin improvements continue to flow through well to the bottom line.

Capital spending increased approximately $0.7 million to $2.5 million during the period ended March 31, 2024, compared to first quarter of 2023. The increase in cash used reflects our planned increases during 2024 compared to 2023 to support our continued growth. Our capital spending is focused on 3 core areas: growth capital, cost reduction and facility improvements.

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.

This is another remarkable quarter for Lifeway, delivering record high top line results yet again, accompanied by our notable improvements in our profitability measures. Our growing customer base continues to prove resilient to macro pressures and demonstrate their loyalty to our core products as seen through our accelerating velocity. This is a testament to the staying power of modern health and wellness trends, which should remain a tailwind for Lifeway as today's consumer continues to focus on high-quality, better-for-you foods that are affordable.

Our entire premium product portfolio led by our flagship kefir is nutritious, delicious, and reasonably priced, which is why consumers come back for more and are eagerly awaiting new flavors and line extensions. Our Kefir 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 up to 90% of the body serotonin comes from gut cells and the gut-brain access, which links emotional and cognitive centers of the brain with our intestinal functions, plays a major role in happiness and well-being. A recent study published by BMC Medicine also suggests that probiotics and dairy kefir show potential promise in improving the gut health of ICU patients, and a small study protocol in the U.K. examined the effects and potential benefits on children with ADHD who consume kefir. It's an exciting time for microbiome research, and we applaud the recent efforts to uncover new and amazing ways that fermented and cultured foods can positively impact our health.

As you would expect, this record-breaking quarter was spearheaded by the core driver of our business, our industry-leading drinkable, best-in-class Lifeway kefir. Net sales of our drinkable kefir increased 22.6% to $36.5 million for the period ended March 31, 2024, compared to the first quarter in 2023. We continue to dominate the U.S. Kefer market, an industry that we have built. And the majority of our time and investments will be dedicated to our core product through both strategic marketing and incremental distribution opportunities to drive brand exposure and capture a greater share of today's health-focused consumers and the expanding global kefir market.

While selling our branded Drinkable kefir is our primary focus and exactly what we do best, we also continuously evaluate trends within the probiotic market and health food space to improve and diversify the suite of products we offer to satisfy our consumers' evolving preferences. Within kefir, these insights lead to numerous product innovations, including our guava low-fat kefir and our organic whole milk products, which continue to gain popularity, and our organic grass-fed kefir flavors that have begun to attract consumers within the growing grassed dairy market.

In addition to our innovations within the kefir category, we are strategically marketing and have invested behind Lifeway Farmers Cheese to capitalize on the growing consumer interest in soft cheese products. Our Farmers Cheese has been a cult favorite ever since its introduction, selling strongly relative to distribution in specialty stores nationwide. It is also a logical alternative to blended cottage cheese recipes that continue to buzz through social media. It has a smooth, blended texture that consumers are looking for while being a much healthier ingredient for full protein and probiotics.

Our Farmers Cheese also has no added salt, which allows it to complement a far more diverse set of flavors. It is important to note that while we are consistently assessing trends and growth opportunities, we only enter a new product category if we view the product or innovation as sustainable and a profitable endeavor. For example, we've sold Farmer Cheese for years as small yet profitable measures, which gives us confidence to strategically market and invest behind it today to match heightened demand within the space. One last note on our Farmer Cheese. In April, we're excited to announce that it was named as a winner in the Good Housekeeping 2024 Best Snack Award.

Congratulations. I'll now touch on some marketing and advertising updates. We had a great brand experience at Coachella last month. Our products were featured at the Kardashian's Camp Poosh Activation with Air1, receiving coveted influencer impressions. We look forward to a packed summer with participation at music festivals, yoga events, and more. We enjoy these in-person experiences as they allow us to connect with our consumers on a deeper level during their wellness journey.

As part of our efforts to create a deeper connection with customers, I recently appeared on NBC's California Live to talk about celebrating Mother's Day with probiotic Lifeway products, highlighting their versatility in breakfast and brunch recipes. We remain hyper-focused on marketing that moves units. As we mentioned last quarter, we ran a large in-store promotion across many retailers, creating temporary refrigerated spaces showcasing Lifeway-branded products and placing them at high traffic end caps.

This promotion was successful and we plan to initiate another similar campaign in the coming months. We continue to deepen relationships with our retailers and in-store partners with the goal of making sure Lifeway products appear at interruptive moments within the store to drive trial, capture new customers who don't typically shop in our section, and boost retention rates.

We are also committed to our e-commerce strategy. We are investing in targeted advertising on our retail partner sites and general e-commerce platforms such as Instacart with the same goal as before, to drive trial and loyalty amongst our growing consumer base. These e-commerce efforts are supported by our advertising and search display and social.

We continue to partner with social media influencers including celebrities, chefs, and nutrition experts with notable followings. Through them, we deliver widespread advertising aimed at educating consumers on our healthy products and the various recipes they can be used in. We have an in-house ambassador program that we augment with our additional influencer agency campaigns to generate brand and category awareness.

We then leverage our internal creative marketing team to drive demand for specific items that best match each audience profile. Our nimble and efficient marketing strategy allows us to connect customers with Lifeway products they will enjoy the most, while also keeping our advertising spend in check.

Now I'll touch on some distribution updates. We recently gained limited rotation for our twin pack of 32-ounce kefir at two major club stores. This is a trial basis but with strong sell-through, we could attain additional periodic rotations which could eventually lead to an everyday placement.

We are excited about our pipeline of opportunities and the continued engagement from large additional retailer locations. As we mentioned last quarter, we have recently gained incremental placement for Lifeway products at Publix, Gelson's, Cub, Air1, and Kroger. We are maintaining our strong relationships with key partners and are consistently seeking out distribution opportunities across a variety of channels that make sense for each of our offerings with a focus on our flagship Lifeway drinkable kefir.

With that, I'd like to thank you all for joining us today. The first quarter was an incredible start to 2024 as we eclipsed our quarterly sales record once again while delivering vastly improved profitability measures. I am confident that we have the right team in place to carry our strong momentum and growth throughout the year, and I am excited to continue delivering on our mission to bring best-in-class probiotic and nutritious food to our growing base of health-conscious consumers.

And on a personal note, May 4 marked what would have been Michael Smolyansky, my father, and Lifeway Foods Founders 77 birthday, and in the coming weeks on June 9 will mark 22 years since his sudden passing and my 22 year as Lifeway CEO.

Michael arrived to the United States as a Soviet refugee in 1976 with $116, no English language, and a young family with an unwavering pursuit of the American dream and entrepreneurial aspirations. Michael was obsessed with the microbiome and the science and health benefits of kefir.

He recommended kefir to everyone he met and intuitively knew it could heal the body inside and out and he regularly quoted research findings of Dr. Elie Metchnikoff, the godfather of immunity. Michael dreamed of a time when more people recognized the health benefits of kefir and a time when Lifeway kefir was available in every refrigerator in the United States and every day the team at Lifeway worked to realize that dream.

I know with certainty Michael would be proud and in awe of all that Lifeway has accomplished and I too am proud of my leadership and perseverance especially during the many challenging times over the last 22 years. It is my privilege and honor to be at the helm of Lifeway.

Together we have built something truly special and I'm confident that our best days are still ahead of us. With your continued support and dedication and passion there is no limit to what we can achieve.

We look forward to updating you on our progress during our second quarter call in August. We hope everyone has a fun, safe and memorable summer and I hope you have a nice day. Thank you.