Lifeway Foods, Inc.
Q4 2012 Earnings Call Transcript

Published: 1 Apr 2013

[Operator:]

Greetings, and welcome to the Lifeway Foods Incorporated Fourth Quarter and Full Year 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Katie Turner of ICR. Thank you. Ms. Turner, you may begin.

[Katie M. Turner:]

Thanks. Good afternoon, and welcome to Lifeway Foods fourth quarter and full year 2012 earnings conference call. On the call with me today are Julie Smolyansky, President and Chief Executive Officer; and Ed Smolyansky, Chief Financial Officer. By now, everyone should have access to the fourth quarter and full year earnings release for the period ending December 31, 2012, which went out this afternoon at approximately 4

[Julie Smolyansky:]

Thank you, Katie, and afternoon, everybody. I would like to begin today's call with an overview of our growth and success in 2012, including a brief discussion of our record fourth quarter and full year 2012 financial results in more detail. Lastly, I will open up the call to take your questions. 2012 was another year of record sales, and we are extremely pleased with our financial results. The Lifeway brand continues to grow within the expanding health and wellness product category. To support our growth and increase distribution, we continue to invest in our marketing and advertising efforts to further consumer awareness around the benefits of Kefir. We believe we are in the early stages of our long-term growth trajectory, and Lifeway leads the Kefir market today controlling 97% of the Kefir category. The yogurt and Kefir category grew over 20% in the last 52 weeks. Yogurt and Kefir ranked the 5th largest category across all departments and ranked first in unit sales, and the Lifeway brand is the sixth largest brand in the yogurt and Kefir up over 22% in 52 weeks according to recent IRI instant data. Our strategy is to remain true to our value to providing nutritious and convenient Kefir products as we grow and expand our company and deliver record sales and earnings growth. Focusing on our record results in more detail, growth sales increased 22% to $22.9 million for the fourth quarter, and gross sales increased approximately 16% or $12.6 million to $89.8 million. This increase was primarily attributable to increased sales and awareness of our flagship line, Kefir, as well as ProBugs, our Organic Kefir and secure, and BioKefir. Fourth quarter total consolidated net sales increased approximately 24% to $20.8 million, and net sales increased 16% to $81.4 million for the year. As a reminder, net sales are recorded as gross sales less promotional activities such as slotting fee paid, couponing, spoilage and promotional allowance, as well as early payment terms given to customers. The total allowance for promotions and discounts in the fourth quarter of 2012 was approximately 10% of gross sales compared to $2 million or 10.5% of gross sales in the same period last year. Our strong sales performance, combined with the continued production efficiencies, allowed for us to grow our gross margins to 33% for the quarter and 34% for the year. Gross profit increased 86% from the fourth quarter of 2012, when compared to the same period in 2011, and 29% for 2012, when compared to 2011. And as a result, we reported record net income of $1.1 million or $0.07 per share -- diluted share for the fourth quarter of 2012 compared to a loss of approximately $400,000 for the same quarter in 2011. 2012 total net income was $5.6 million or a $0.34 per diluted share in 2012 compared to the total net income of $2.9 million or $0.17 per share in 2011. In addition, we continue to strengthen our balance sheet with cash and cash equivalents of $2.3 million and total stockholder equity of $39.3 million as of December 31, 2012. The company had a net increase of cash and cash equivalents of $1.2 million during the 12-month period ended December 31, 2012, compared to a net decrease in cash and cash equivalent fees of $2.1 million during the same period in 2011. In order to execute on our strategy, it is important that we focus on our plan to include mainstream distribution beyond our strengths and the natural and organic growth grocery stores. We made strong distribution gains in 2010 launching our Kefir product in Target, Costco Japan, Aldi and Costco New England with the Lifeway Club Pack. We have most recently expanded distribution to Wal-mart stores nationally and have realized very positive customer responses to our products thus far. We believe one of the best ways to continue to increase distribution and attract new customers is through the introduction of new products and innovative flavors of Kefir. This past year, we introduced Coconut-Chia Kefir, which was voted the #1 product in Dairy Food's Best New Products of 2012. The product received the most votes from among 25 different dairy foods and beverages nominated by the publications editors and received over 13,000 votes to grab the top spot on the list. This product lends a distinctive taste of coconut with on-trend Omega-3 health benefits of chia seeds and, most importantly, contains 12 strains of probiotics for optimal digestive health. This refreshing flavor is just one example of how Lifeway transforms traditional Kefir to appeal to modern-day flavors and tastes. In March 2013 at the Natural Products Expo West, a broader healthy living and wellness product trade show, both new and existing retails and distribution partners tried our products and met with our sales team. At the show we unveiled 5 new Kefir products for our customers with offerings for babies to adults. Our focus continues to be to expand the placement of Lifeway Kefir products beyond just the cooler aisle and into other areas of the grocery store. Lifeway ProBugs Bites are a revolutionary new product that was inspired to create a nutritious baby food option for moms. It is a tiny bite of freeze-dried Kefir that quickly dissolves in the baby's mouth for safe and easy self feeding. Each shelf table, nonperishable pouch comes in 3 flavors. Expanding our highly successful Lifeway ProBugs children's pouches, we introduced the first organic Green Kefir for kids in the same nonperishable pouch. ProBugs Green Kefir is a yogurt-like smoothie blended with kale, broccoli, spinach cabbage and apple to deliver the antioxidant equivalent of a full serving of vegetable. Kale and Kefir are 2 power foods that, when combined, make for 1 nutritious treat. For children who've outgrown ProBugs pouches, we have introduced Lifeway ProBugs Blast, a new ProBugs lowfat smoothie with creative flavors like cherry lime and out-of-this-world packaging designed specifically for tweens who will one day travel to Mars on vacation. Each character supports creative stories educating kids on the universe, including comets, the galaxy, moon and stars and positions Lifeway as a powerful partner in offering healthy and nutritious food choices to kids, while teaching science in a fun, approachable way. Lifeway Lowfat Honey Fig is the 14th flavor in the lowfat -- Lifeway lowfat Kefir collection. The new Mediterranean-inspired cultured milk smoothie was created by lab participants during Chicago's Ideas Week last October. We are also pleased to introduce Lifeway's Frozen Kefir Bars, the perfect complement to our Frozen Kefir that's already sold in pint form. These bars are lowfat 60-calorie indulgence that provide a healthy kick to an aisle that's traditionally full of sugary and un-nutritious desserts. Clearly, there is no lack of innovation or imagination outweighs weight [ph]as we expand our product offering. In addition, we have repositioned our Helios brand, one that already supports a Greek story with Helios being god of the sun, as our Greek Kefir line, offering a higher protein count in addition of honey as a Mediterranean flavor. Helios now offers a sleek, more modern, minimalist design package and the response to the changes and excitement. Lifeway's Frozen Kefir, which began shipping through our distribution network at the beginning of the second quarter of 2011, continues to be a huge success. In addition, we began shipping Frozen ProBugs and push-up pops last year to Whole Foods and other major outlets, and we believe we can continue to grow distribution of Frozen Kefir in the U.S. and internationally. This is very important as we continue to grow our new and existing distribution relationships to expand sales of each of our Frozen products long term. We have continued to pursue the opportunity to expand our international Kefir distribution. Starting in May, our Frozen Kefir in pints will be sold in London in several retail outlets, including Harvey Nichols and Rogan's [ph]. We have partnered with a local U.K. copacker to manufacture Lifeway frozen pints as we scale our already successful U.S. operations. By launching in the U.K., we are also able to sell and distribute our brand throughout Europe. We are excited to begin to build Lifeway as a global brand that is not only known in the U.S., but in top markets around the world as the quest for health food -- healthy food choices and probiotic food continue to grow worldwide. Using social media tools such as Facebook and Twitter, along with local grassroots sampling efforts, we feel it's a perfect opportunity to expand Lifeway brands as barriers and walls have been broken empowering consumers with information that provide the best food options available for themselves and their families. The most important part of having great Kefir products is getting the word out to new and existing customers. We continue to invest in grassroots and traditional marketing events. Most recently, we have sponsored the Food Network South Beach Food and Wine Festival, ran a top up Frozen Kefir shop at Miami Lounge at the Sundance Film Festival, sponsored by South by Southwest, offered our treats at the Oscars guesting suites, and participated in 3 events during the inauguration of the United States President, Barack Obama. We will continue to bring Lifeway Food trucks and Kefir booths to marathons, music festivals and other events across the nation to satisfy the hunger of consumers in a healthy and nutritious way. Eating healthy continues to be at the top of consumers' list. Health and wellness research trends suggest that more and more consumers are demanding healthier alternatives and real food products. Our Kefir beverages and Frozen Kefir are ideal for the health-conscious individual that want high-protein and low-fat foods with the benefit of probiotic culture. Over 6,000 research studies have been published on the benefits of probiotics, and 98% of physicians surveyed said probiotic have a role in treating GI issue. As more Americans obtain access to health care, preventative care and alternative care, we feel more practitioners will be recommending probiotics and Kefir as a daily regiment to keep their patients healthy. I am proud to lead a company that not only provides the best in probiotic and nutritious food to improve the health of our consumers, but one that empower consumers to make healthy lifestyle choices everyday I would also like to take this opportunity to thank our loyal customers and shareholders, who are as passionate as we are about providing healthy and nutritious food for themselves and our families. With 27 years of experience, Lifeway is the leading company in manufacturing and marketing Kefir. In conclusion, we believe 2013 to be another record year of sales and profitability as we believe we are extremely well positioned for future growth in the U.S. and abroad with our Kefir product line. As a result, we expect gross revenues for our first quarter of 2013, which ended March 29, 2013, to be approximately 30% higher when compared to the same period in 2012, and we expect to continue this momentum throughout the year. It is my honor to work with our team to continue to build our future successes. That concludes our overview. And with that, I would like to open up the call for your questions. Operator?

[Operator:]

[Operator Instructions] Our first question comes from the line of Howard Halpern with Taglich Brothers.

[Howard Halpern:]

My first question is, do you have an approximate number for Frozen Kefir revenue for the full year?

[Julie Smolyansky:]

I don't have an exact -- an approximate number. Eddie, maybe you have an approximate number?

[Edward P. Smolyansky:]

Yes, it was close to, like, $2 million to $2.2 million. But at this point, since the product is already -- the product line is already over almost 2 years old, we're not going to be giving breakout numbers going forward for Frozen just like we don't for any other of our existing lines.

[Howard Halpern:]

Okay. And I'd like to just -- I guess, this may tie into your new ProBite for babies. But could you just provide like an overview of, I guess, the sales strategy in terms of -- and we can take the Frozen Kefir product where you have the frozen pints in stores. And then, you distribute that as broad and as wide as you can. And now you're going to those existing customers for the bars to get them on the shelves, too.

[Julie Smolyansky:]

Correct.

[Howard Halpern:]

Is that your strategy going for almost all your product lines?

[Julie Smolyansky:]

Yes, exactly. I mean, they have shown a tremendous -- when we launched our Frozen pints, we did see a tremendous response and success and interest in these kinds of products. And so the idea is to take up market share and space from other brands that are maybe weaker or not growing with using the momentum in trends and leveraging a lot of the success and brand awareness that we have with our existing brand.

[Howard Halpern:]

Okay. And the ProBugs Bites for babies, where do you envision that, I guess, being sold first? And then where would you like to see it down the road being sold?

[Julie Smolyansky:]

Sure. It will initially go into the baby aisle at probably -- most likely the natural food stores, which tend to be the early adaptors for Lifeway brand products. So initially, the Whole Foods of the world and other natural food markets, Sprouts, moms, different national food co-op locations. But rather quickly, we expect to be in mass-market stores from Kroger to Safeway. Just again using our existing distribution and model to again leverage the success of the ProBugs brand and kind of expanding that brand into other areas of the grocery store, so beyond the baby aisle, go into Babies "R" Us. Of course, because it's shelf-stable, it also offers us the ability to shift directly from Lifeway or an Amazon.com or another online retailer.

[Howard Halpern:]

Okay. And has -- because we talked a little bit about healthcare and such, have you had any successes yet or -- in penetrating hospitals, that type of food area?

[Julie Smolyansky:]

Not directly food service within the hospital, but we do have doctors, nutritionists, RDs, GI professionals recommending Kefir and probiotics as a supplement to people's diets, especially when people are taking antibiotics. We are noticing many more doctors and practitioners recommending almost as a side-by-side, I would say, almost like another drug that they're kind of prescribing to that affect.

[Howard Halpern:]

So it's a natural supplement tool that they're using basically sort of like that?

[Julie Smolyansky:]

Exactly.

[Howard Halpern:]

Okay. Two last questions. In the first quarter, because I've done a little bit of work on this, milk cost versus the same period last year are going to be up, I think. I mean but -- because it got so high in the middle of last year, overall for 2013, it should be flat to down. Am I correct in that assumption?

[Edward P. Smolyansky:]

Yes, that is correct, Howard. You can -- like fourth quarter, milk prices were only about 5% lower. The volatility started to go down. It has for the last year. We'll continue probably for 2013. And we're looking to see flat or a minimal decrease for 2013.

[Howard Halpern:]

Okay. And one last one. Do you envision the board of directors approving another $0.07 dividend this year?

[Edward P. Smolyansky:]

Based on our current cash flows and balance sheet, we do.

[Operator:]

[Operator Instructions] Our next question comes from the line of James Fronda with Sidoti & Company.

[James Fronda:]

My question on milk price was already answered.

[Operator:]

[Operator Instructions] It appears we have no more questions at this time. I would like to turn the floor back over to management for their closing comments.

[Julie Smolyansky:]

Thank you for your participation today, and we look forward to sharing our first quarter of 2013 results with you in the next coming months. And have a good evening. Thank you.

[Operator:]

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.