Lifeway Foods, Inc. (NASDAQ:LWAY) Q1 2023 Earnings Call Transcript May 15, 2023

Lifeway Foods, Inc. misses on earnings expectations. Reported EPS is $-0.06 EPS, expectations were $0.08.

Operator: Good morning, and welcome to Lifeway Foods First 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, and management may make additional forward-looking statements in response to your questions. The words believe, expect, anticipate and other similar expressions generally identify forward-looking statements.

These statements do not see 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 would like to turn the call over to Lifeway’s Chief Executive Officer, Julie Smolyansky.

Julie Smolyansky: Thank you, Anna Kate, and good morning to everyone joining us today. As always, we greatly appreciate your interest in Lifeway Foods. I’m pleased to be speaking with you today and thrilled to report that the momentum from our record-breaking fiscal year 2022 has continued to flow into 2023. Before diving into results, I’d like to thank the entire Lifeway team for the incredible efforts and execution they consistently put forth, which enable us to deliver for all of our customers and clients and further progress us towards our goal of increasing access to our best-in-class better-for-you offering. Now I will review our first quarter 2023 results, highlighted by our 14th consecutive quarter of strong year-over-year net sales growth and driven by the continued dominance of our core Lifeway Kefir assortment of offerings.

Net sales were $37.9 million for the period ended March 31, 2023, an increase of $3.8 million or 11.2% compared to the first quarter in 2022. The net sales increase was primarily driven by higher volumes of our branded drinkable kefir and the impact of price increases implemented during the fourth quarter of 2022. It is worth noting that we are lapping quite a strong first quarter in 2022. And compared to first quarter of 2021, our net sales were up 29%. Additionally, while we did take further price at the end of last year, our volume continues to grow meaningfully, and our core kefir line realized accelerating unit velocities in the period, demonstrating the success of our customer acquisition strategies as well as the loyalty of our active customers focused on healthy, high-quality products.

In addition, we reported a gross profit margin of 21.7% for the period ended March 31, 2023, which compares to 16.4% in the first quarter of 2022. We are thrilled with the 530 basis point increase versus the prior year, which was primarily due to the aforementioned price increases and higher volumes of our branded drinkable kefir. Last year, we often pointed to our inflationary price increases on raw materials as a hamper on our margin. While some of those macro headwinds still exist, we are seeking a favorable recovery in the price of our core commodity, milk, as we articulated on the last call and are now beginning to see cost of transportation improve as well. Margins remain a priority as we march forward, and we will continue to seek out any and all productivities to keep them as stable as possible.

As an example, this year, we will be exploring productivity and profitability optimization through advanced promotional software as well as AI-powered marketing and operational tools. These emerging technologies will not only provide savings but support progress towards our goal of increased access to our offerings and growing shareholder value. Moving on to expenses. Selling, general and administrative expenses increased $0.2 million to $6.7 million for the period ended March 31, 2023, compared to $6.5 million in the first quarter of 2022. We continue to strategically invest more in advertising and marketing programs behind our core products to drive increased awareness and velocity. Our net income during the period ended March 31, 2023, was $0.8 million, reflecting EPS of $0.06 per basic and diluted common share compared to a net loss of $0.9 million of $0.06 per basic and diluted common share during the first quarter in 2022.

As we continue to execute upon our Lifeway 2.0 strategy and recover from higher commodity costs over the last couple of years, we will continue working to improve our profitability metrics. Capital spending increased by approximately $1.4 million from — $0.4 million to $1.8 million during the period ended March 31, 2023. Our capital spending is focused on three core areas: growth capital, cost reduction and facility improvement. The growth capital supports new product innovation and enhancement, spending on cost reduction and facility improvements help support marketing, manufacturing efficiency, safety and productivity. Our continued capital commitments reflect our goals as a business to continue growing and improving our internal efficiencies.

We are exceptionally pleased with the business performance given our current macro environment. In light of high inflation and recessionary trends in the United States, many customers have become increasingly sensitive to price and have become more inclined to trade down from premium to value alternatives. Despite that trend, our premium products continue to grow in consumption and velocities within our key retailers, which demonstrates that both our premium products come with great value and our customers are not willing to feed their commitments to supporting their health or their microbiome and immune system despite the broader pressures they are facing. According to Spin’s syndicated data, Lifeway-branded products grew 21% in total dollars and 9% in units in the first quarter.

Recent data shows that customers new to Lifeway are delivering greater velocities and proving to be more valuable than lapse fires. Today, on a sales basis, Lifeway Foods is the ninth largest yogurt manufacturer in the United States and a large portion of our growth efforts surrounding attracting new customers and increasing retention rates throughout effective advertising and marketing. 2022 panel data from IRI shows that Lifeway increase loyalty for existing shoppers to 75% earning the top spot in the adult and kefir drink segment. And first-time Lifeway buyers repeated at an impressive 35% rate, as our core purchase velocities have risen, our ACV, a measure of distribution, also grew in the past year. In 2022, we increased our distribution 2.4 points within the multi-outlet category and have increased our distribution 7.3 points in the Natural segment.

To summarize, the first quarter was a phenomenal start to 2023. Our net sales of $37.9 million marked our 14th consecutive quarter of strong year-over-year net sales growth, and our continued dominance within the U.S. kefir industry. Demand remains high for our products and our customers while facing macro pressures have not displayed any signs of restraint or trading down as it relates to purchasing our premium healthy products even as we have implemented pricing actions. Lifeway’s kefir products are tart and tangy and provide customers with probiotics, vitamin D and protein that helps to support their gut health, immunity and mental well-being. The probiotics in kefir support a healthy microbiome and approximately 80% of our immune defense comes from the gut.

Probiotic products such as kefir are the focus of intense research and related to the microbiomes’ role in stress, depression and anxiety. We now know that up to 90% of the body serotonin comes from gut cells, the gut brain access, which links our emotional and cognitive centers of the brain with our intestinal function and plays a major role in happiness and well-being. Health and wellness remain a powerful tailwind to consumer preference in today’s environment. And as modern consumers learn about and focus on their health, they will care even more about these facts and probiotic cultures in their gut. The core driver of our business is our industry-leading drinkable Lifeway Kefir. We continue to command the dominant market share in the United States kefir industry and believe we are best positioned to capitalize on the tailwinds behind health and wellness and the continued expansion of the global kefir market.

That notion has consistently shown within the results of our drinkable kefir. After record performance in 2022, our drinkable kefir net sales were up 13% for the period ended March 31, 2023. When compared to the first quarter in 2022, while we have a diverse portfolio of products, our customers come back because they love our kefir and selling that is what we do best. To sustain our growth, we will continue to focus on getting our core products in front of as many eyes as possible through the continued marketing investments and expanded distribution outlet opportunities within current and new channels, and we will look to further innovate within the kefir space to diversify the offerings we already have within the market and deliver additional optionality to our loyal customers.

Regarding market trends, we have seen positive movement in the soft cheese pace and renewed focus on cottage cheese. Our sales team will pursue Lifeway farmers cheese with retailers in order to increase distribution of this product, which I believe has strong potential. We are also modernizing our ProBugs operations with new equipment that will open up opportunities for our Kids segment. I look forward to sharing more on our ProBug progress in future calls. On our last call, we highlighted our latest kefir flavor launches: guava, organic strawberry banana, organic black cherry as well as the seasonal flavors rainbow cake and campfire smores. The initial reaction has been positive, and we will continue to develop flavors that taste great and bring new attention to the brand.

These new products represent an opportunity to increase SKUs and distribution with our retailers and attract new customers with varied assortments. This is a path we will continue to explore as we look to satisfy our customers with differentiated offerings. I will now touch on some of our marketing and advertising strategies. We continue to partner with influencers, chefs and nutrition experts with notable social media presences to suggest healthy ingredient swaps, recipes and snack ideas that incorporate Lifeway products. They are distributed across Lifeway’s social media platform, and we continue to realize a positive impact through increased web traffic and steadily increasing followers to our Lifeway social accounts. In an effort to strengthen relationships with retailers, we also partner these digital campaigns with in-store programs to incentivize retention rates and attract new eyes to the product.

On our last call, we announced that we were running a targeted ad campaign in focused markets to help us build awareness and drive trial. This targeted advertising effort combined linear broadcast, CTV, digital and integrations in both English and Spanish and concluded at the end of the first quarter. We will continue to post similar campaigns throughout the year when needed to boost our visibility. Additionally, I’d like to provide an update on the Lifeway Kefir pop-up experience in Miami Beach. For background, we have been hosting a Lifeway-branded cafe, which gives Miami visitors the opportunity to try a diverse assortment of smoothies created with Lifeway kefir and Lifeway oats as the base. And what has been a rather chile season so far across the country, we were pleased to share the Lifeway story with locals and vacationers in the sunshine state during its busy season.

We will now shift some of the focus to places like New York City as we embark upon yoga and kefir sampling at Bryant Park and a pop-up with snowfield sampling, drinkable kefir and William Bert. Now I will touch on our operational strategy. Sprouts and Fresh Time shoppers should be on the lookout for new Lifeway Organic home milk products. Both chains have agreed to bring in our organic whole milk black cherry and strawberry banana flavors, which should be hitting shelves now. Fresh Time has also agreed to stock our new lowfat guava flavor, a personal favorite of mine. I encourage everyone to try these amazing new offerings from Lifeway and connect with us on social to share your feedback. I know you’ll love them. Our metrics from Wawa remain encouraging, and we are seeing very solid unit velocities per store per week so far.

This penetration accomplishes one of our primary goals of placing Lifeway in front of new eyes, creating an opportunity to convert them into bulkier buyers. We maintain very strong relationships and active dialogues with our key retail partners in traditional grocery and continue to seek out avenues for further distribution opportunities and expansion while also evaluating further opportunities within convenience and small format to increase our presence in high visibility away from home locations. Overall, the first quarter was a wonderful start to 2023. Today, I believe we are in a great position to continue delivering strong growth and awareness of the Lifeway brand throughout this year, and I have the utmost confidence in our team to make it happen.

And as a business, I believe we are on the right track to achieving our primary target, delivering profitable and strategic growth to our investors, while furthering our mission to provide best-in-class probiotic and nutritious food to improve the health and well-being 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 second quarter earnings call. I hope you all enjoy your day.

End of Q&A: