Lifeway Foods Inc

NASDAQ:LWAY

Earnings Call Transcript 2023-Q2

[Operator]

Good morning. Welcome to Lifeway Foods Second Quarter 2023 Earnings 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 believes, 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, President and Chief Executive Officer]

Thank you, John, and good morning to everyone joining us today. As always, we greatly appreciate your interest in Lifeway Foods. I am thrilled to report yet another brilliant quarter for our business today. Yet before I detail the great results, I'd like to give thanks to the entire Lifeway team whose devotion and seamless execution have allowed us to perform for our customers and partners so remarkably so far in 2023.

With that, I will now review our second quarter 2023 results, highlighted by our largest ever recorded net sales and very positive gross margin expansion. Net sales were $39.2 million for the period ended June 30, 2023, an increase of $5.7 million or 17.1% compared to the second quarter in 2022. The net sales increased, our 15th consecutive quarter of strong year-over-year growth was primarily driven by higher volumes of our branded drinkable kefir and to a lesser extent, the impact of price increases implemented during the fourth quarter of 2022. This net sales growth is particularly impressive as we continue to lap some strong quarters of our record-setting 2022. And when we compare to the second quarter of 2021, our net sales were up 34.5%. This value-driven growth accompanied by continued accelerating unit velocities in our core kefir line is encouraging as it once again illustrates the wide acceptance of our inflation-justified price increases by our loyal and new consumers focused on high-quality, better-for-you offerings.

It's worth noting that our next quarter, we will be lapping a very difficult comparison in the third quarter of 2022, our second largest quarter in history. In addition, we reported a gross profit margin of 28.7% for the period ended June 30, 2023, increasing 1,170 basis points, compared to 17% in the second quarter of 2022. Compared to the first quarter of this year, when we reported another very strong year-over-year expansion, this quarter represents an expansion of 710 basis points. This remarkable gross margin expansion was primarily due to higher volumes of our branded products and to the favorable impact of milk pricing and to a lesser extent, the aforementioned price increases in the fourth quarter. We have consistently stated gross margin recovery was a priority of ours, and we are thrilled that the combination of our operational efficiency and subsiding inflationary impacts are now delivering us enhanced profitability.

Milk is our largest raw material and was largely impacted by inflationary price increases. As the price has normalized, we have certainly benefited. We couldn't be more pleased with this result and are looking forward to consistently maintaining better levels of margins like these moving forward. We will continue to prioritize our gross margin moving forward, and we are constantly in search of incremental productivity and profitability measures.

Underscoring these exceptional results is the environment we are delivering them in. Similar to last quarter, consumers across the United States are becoming more elastic in light of recessionary trends. With that has come price sensitivity and some trade down from more premium offerings to value alternatives. That said, our results have continued to prove that Lifeway premium offerings come with plenty of value, even with price increase implemented in quarter four of 2022, our consumers remain steadfast in their commitment to improved health immunity and gut health, demonstrated by our consumption trends and velocities within our key retailers, which remain strongly positive.

Today, on a sales basis, Lifeway Foods is the ninth largest yogurt manufacturer in the United States and a portion of our growth efforts surround attracting new customers and increasing retention rates through effective advertising and marketing. Recent data shows that customers new to Lifeway are delivering greater velocities and proving to be more valuable than lapse buyers.

Now moving on to expenses. Selling, general and administrative expenses increased $1.1 million to $6.4 million for the period ended June 30, 2023 compared to $5.3 million in the second quarter of 2022. We continue to strategically invest in our core products through targeted advertising and marketing programs to increase awareness and capture incremental customers. Our net income during the period ended June 30, 2023, was $3.2 million, reflecting EPS of $0.22 per basic and $0.21 per diluted common share compared to net income of $0.1 million or $0.01 per basic and diluted share during the second quarter in 2022.

We are very pleased to see our continued top line and margin expansion now flowing down to the bottom line, a testament to the execution of our Lifeway 2.0 strategy and recovery from the high inflationary impacts we saw in the past couple of years.

Capital spending increased by approximately $0.2 million from $1.7 million to $2 million during the six months ended June 30, 2023 compared to the same period in 2022, aligned with our plan. Our capital spending is focused on three core areas: growth capital, cost reduction and facility improvements. Growth capital spending supports new product innovation and enhancement, cost reduction and facility improvements support manufacturing efficiency, safety and productivity. Our continued capital commitment reflects our goals as a business to continue growing and improving our internal efficiencies.

Overall, the second quarter was exceptional. Our net sales of $39.2 million is outstanding and a Lifeway record performance, and we are equally pleased that it was accompanied by a very strong 1,170 basis points gross margin expansion. Our business continues to grow in spite of the macro pressures that have challenged some of the broader industry, and we're yet to see our consumers act with restraint or trade down from our premium healthy offering.

An outstanding quarter like this would not be possible without the industry-leading and core driver of our business, drinkable Lifeway kefir. Net sales of our drinkable kefir increased 20% for the period ended June 30, 2023, when compared to the second quarter in 2022.

With the dominant market share in the United States kefir industry, we remain well positioned to capitalize on continued expansion of the global kefir market and the tailwinds behind health and wellness amongst consumers.

Lifeway's kefir products are tart and tangy and provide customers with probiotics, vitamin D and protein to help support their gut health, immunity and mental wellbeing. The probiotics in kefir support a healthy microbiome and approximately 80% of immune defense comes from the gut. Probiotic products such as kefir are the focus of intense research related to the microbiomes' role in stress, depression and anxiety.

We now know that up to 90% of the body's serotonin comes from the gut cells and the gut-brain axis, which links emotional and cognitive centers of the brain with our intestinal function, plays a major role in happiness and wellbeing. Health and wellness remain a powerful tailwind to customer preferences in today's environment. And as the modern consumer learns and focuses more on their health, they will care even more about their microbiome. It is no secret that our recent strong results are driven by the fact that our customers love our healthy, delicious drinkable kefir and they keep coming back for it. Selling that kefir is both our primary focus and exactly what we do best.

To sustain our growth, we'll continue to dedicate the majority of our time and investments behind our core products, both through targeted marketing investments and additional distribution opportunities in an effort to strategically affect as much exposure and customer awareness as we can.

I'll now touch on another one of the great offerings within our portfolio of products, Lifeway Farmer Cheese. Lifeway Farmer Cheese is a premium cultured, soft cheese and a highly sought-after favorite in many specialty stores. While not as widely distributed as our drinkable kefir, our Farmers Cheese has been a staple since introduction 37 years ago. For those listeners who are active on social media, you may have seen the recent emergence of cottage cheese recipes with the term blended cottage cheese, now having over 320 million views on TikTok while also trending on Instagram.

Lifeway Farmer Cheese has that smooth, blended texture consumers are looking for. So our Farmer Cheese stays a step when substituted in all of these popular recipes. With its creamy spreadable texture and versus how flavor that works well for both sweet and savory dishes, we believe that Lifeway Farmer Cheese would be a logical fit for many of these blended cottage-cheese recipes as well as an alternative addition to new retail shelf.

Our Farmer Cheese available nationwide has seen an increase in interest from consumers and retailers in recent years, and we are acting now to meet the growing demand. We will be increasing chief production and investing in technology to cut production times by more than half, accompanied by new automation and efficiency plans to ensure the brand is equipped for future demand and distribution opportunities. We are excited about this product and plan to put calculated marketing efforts behind to support its growth and introduce it to new customers.

Additionally, we are seeing continued progress with our Guava Lowfat Kefir and our new Organic Whole Milk products. We will continue to test and develop new flavors and offerings in an effort to consistently satisfy our consumers with differentiated assortment.

I'll now touch on some of our marketing and advertising, where we have been working to create opportunities directly focused on incentivized consumer trial. As we announced on our last call, following our successful pop-up experience in Miami Beach during its busy season, we shifted our focus to places like New York City, where we have embarked upon a yoga and kefir sampling program at Bryant Park, a pop-up with Showfields sampling drinkable kefir in Williamsburg and various other activations such as Movies in the Park. We also just completed another successful year as the Kidzapalooza sponsored at Lollapalooza in Chicago. Attendees were welcomed by their Lifeway team and treated with kefir and ProBugs throughout the festival. Additionally, we continue to partner with influencers, chefs and nutrition experts with notable social media presence to suggest healthy ingredient swaps, recipes and snack ideas that incorporate Lifeway products. These partnerships are distributed across likely social media platforms, and we continue to realize positive impact through increased web traffic and steadily increasing followers to our Lifeway social accounts. We also partner these digital campaigns with in-store campaigns to incentivize retention rates and attract new eyes to the product.

Lastly, I would like to note a positive development for Lifeway that's come out of the recent Barbie craze. I was pleased to see the news that in an effort to give the actors and actresses Barbie-like skin, the skin health specialist on set was recommending the consumption of kefir. The Daily Mail, among others, reported that she gave the main star, Margot Robbie, kefir to improve her gut help. Many of the articles on the topic highlighted the skin health and beauty benefits that come from supporting gut-skin axis.

Now I will touch on some distribution updates. We've recently gained distribution at roughly 140 CVS stores, a new retail partner for us. We have been placed in the premium set in their West Coast stores. While we don't anticipate this to be a large volume driver initially, we plan on keeping an eye on the performance and are very excited to gain incremental brand exposure to the vast amount of CVS shoppers. We also continued to perform solidly at Wawa. We are maintaining consistent unit movement slightly above the initial velocities upon our introduction in late 2022. Last quarter, we announced placements of our new Lifeway Organic Whole Milk and Sprouts and Fresh Thyme. Wegmans, Fresh Thyme in Meijers have also recently authorized our new guava flavor.

Finally, we continue to maintain our strong relationships and active dialogues with our key retail partners in traditional grocery and are actively pursuing additional distribution opportunities across a variety of channels to increase the visibility and performance of the great products we have to offer. We believe there is still opportunity for our top-performing kefir flavors and Farmer Cheese to secure additional distribution.

To wrap it up, the second quarter was a phenomenal record-breaking quarter for Lifeway Foods. Our core business continues to rapidly grow, and we have improved our profitability substantially. Today, we are in a great position with an incredible team in place to continue delivering on this growth. I am very excited for the second half of this year, where I expect to further our mission to provide a best-in-class probiotic and nutritious foods to improve the health and wellbeing 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 business momentum on our third quarter earnings call. I hope you all enjoy your day.