Lifeway Foods, Inc. (NASDAQ:LWAY) Q3 2023 Earnings Call Transcript

Lifeway Foods, Inc. (NASDAQ:LWAY) Q3 2023 Earnings Call Transcript November 13, 2023

Lifeway Foods, Inc. beats earnings expectations. Reported EPS is $0.23, expectations were $0.16.

Operator: Good morning. Welcome to Lifeway Foods’ Third 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 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: 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 report a phenomenal start to the second half of 2023 as we once again set a company record for net sales and continue to deliver vastly improved profitability. Our results are a testament to the sound execution of our entire Lifeway team and I could not be more pleased with their efforts. With that, I will now review our third quarter 2023 results. Net sales were $40.9 million for the period ended September 30, 2023, an increase of $2.8 million or 7.2% compared to the third quarter in 2023. The increase was primarily driven by higher volumes of our Lifeway branded drinkable kefir and to a lesser extent, the impact of price increases implemented during the fourth quarter of 2022.

We are encouraged to see our growth driven by volumes yet again, more so than pricing with continued accelerating unit velocities in our flagship Lifeway Kefir line. This once more demonstrates widespread acceptance of our inflation justified price increases as our loyal and new customers maintain their commitment to our better-for-you high-quality product offerings. This was our 16th consecutive quarter of strong year-over-year growth, our second consecutive quarter setting a Lifeway record for total net sales. The growth this quarter was even more notable when considering that the third quarter of 2022 was now our third largest quarter ever. When compared to the third quarter of 2021, we were up 38.4%. The year-over-year lapse will continue to become more difficult, yet we are excited by the challenge to continue growing.

Further underscoring the strong sales we delivered is the environment in which we delivered that. It’s no secret that the current US macro environment is challenging consumers. A number of factors, including high interest rates, the reinstatement of student loan repayments, inflation, among others are weighing on consumer optimism and they are becoming more price sensitive. Despite that and in light of the price increases we implemented in the fourth quarter of 2022, our loyal customers continue to affirm our belief that Lifeway’s premium product offering comes at a great value illustrated by our great consumption trends and velocities in our key retailers. Moving on, we reported a gross profit margin of 27.2% for the period ended September 30, 2023, increasing 730 basis points compared to 19.9% in the third quarter of 2023.

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Q&A Session

This strong margin expansion was primarily due to higher volumes of Lifeway branded products and the favorable impact of milk pricing and, to a lesser extent, the aforementioned price increases and decreased transportation costs. We have consistently stated that gross margin recovery was a top priority of ours and with our proactive operating discipline, along with subsiding inflationary impact, the largest being favorable milk pricing, we are now delivering much enhanced profitability. Year-to-date, our gross profit margin has increased 810 basis points. Looking forward, we will always seek out incremental productivity and profitability measures in pursuit of margin enhancement. Now to our expenses. Selling, general and administrative expenses increased $0.3 million to $6 million for the period ended September 30, 2023, compared to $6.3 million in the third quarter of 2022.

The decrease was due to decreased G&A expenses, partially offset by a small increase in selling expenses as we continue to strategically invest in our core Lifeway Kefir products and Farmer Cheese through targeted advertising and marketing programs, in pursuit of additional brand exposure. Our net income during the period ended September 30, 2023, was $3.4 million, reflecting EPS of $0.23 per basic and diluted common share compared to net income of $1 million or $0.06 per basic and diluted share during the third quarter of 2022. Our continued top line and margin expansion is flowing through the bottom line as our team continues to execute efficiently and inflationary impacts subside. Capital spending increased marginally during the nine months ended September 30, 2023, compared to the same period in 2022, aligned with our capital spending plan for the year.

Our capital spending is focused on three core areas. Growth capital, cost reduction and facility improvement. Growth capital spending supports new product innovation and enhancement, cost reduction and facility improvement support manufacturing efficiencies, safety and productivity. Our continued capital commitment reflects our goals as a business to continue growing and improving our internal efficiencies. This was a phenomenal quarter for Lifeway. Our customers continue to prove resilient, not trading down and delivering positive unit velocities at our core Lifeway product in spite of the macro pressures that have weighed on consumers and some of the broader industry. Because of that, we set another Lifeway record on top line beating last quarter’s record sales metrics by $1.7 million, while maintaining strong profitability measures.

As usual, this incredible quarter was driven by the industry-leading drinkable Lifeway Kefir, the core driver of our business. Net sales of our drinkable kefir increased 9% to $33 million for the period ended September 30, 2023, compared to the third quarter in 2022. Lifeway 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 90% of the body’s serotonin comes from gut cells and the gut brain access, which links the emotional and cognitive centers of the brain with our intestinal function plays a major role in happiness and well-being.

Health and wellness remains a powerful tailwind to customer preference in today’s environment. And as the modern consumer learns and focuses more on their health, they will care even more about their microbiome. Our kefir products are better for you and taste incredible, which is why customers keep coming back for more. Selling our drinkable kefir is our primary business focus and exactly what we do best. We will continue to dedicate the majority of our time and investments behind our core products through both targeted marketing and incremental distribution opportunities to strategically attract further brand awareness and trial. In doing so, we hope to further our dominant US kefir market share and to better position ourselves to capitalize on the health and wellness tailwinds driving today’s consumers and continued expansion of the global kefir market.