Lifeway Foods, Inc.
Q3 2015 Earnings Call Transcript

Published: 9 Nov 2015

[Operator:]

Greetings and welcome to the Lifeway Foods Inc. Third Quarter 2015 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Hunter Wells. Thank you, Ms. Wells. You may begin.

[Hunter Wells:]

Good afternoon and welcome to Lifeway Foods earnings conference call to discuss the company's results for the third quarter of fiscal 21015. On the call with me today are Julie Smolyansky, President and Chief Executive Officer; Ed Smolyansky, Chief Financial Officer and Chief Operating Officer; and John Waldron, Vice President of Finance. By now, everyone should have had access to the release which went up this afternoon at approximately 4

[Julie Smolyansky:]

Thank you, Hunter. Good afternoon to everyone who has joined us on today's call. I will begin with an overview of our business for the quarter and the first nine months of 2015, and then provide an update to our strategic initiatives. At the conclusion of my remarks, Ed, John and I will be available to take your questions. I am pleased to report solid results for the third quarter; net sales were approximately $30 million. Our results demonstrate our team's ability to successfully execute on our strategic initiatives, as we continue to grow our business. We made good progress in expanding distribution of our kefir products across new and existing retail channels. The innovative products we debuted earlier this year has resonated well with consumers and our marketing strategies have helped grow our brand awareness. Although capacity constraints hindered our sales growth in the third quarter, we continue to make progress in increasing the production capacity at our Wisconsin facility, which has begin producing kefir at the end of the second quarter. Increased sale volume of our kefir products, coupled with the benefit of lower milk prices, enabled us to achieve gross margin expansion of approximately 470 basis points to 30.6% and diluted earnings per share of $0.05. We expect milk prices to stay at a relatively similar level for the balance of 2015 and 2016. I'd like to now provide you all with an update of our three key initiatives; increased brand awareness; although Lifeway is the number one brand in kefir in the U.S., there are still many who have not heard of the incredible health benefits associated with consuming our drinkable kefir. There continues to be high demand for natural and organic food products. According to SPINS, today the natural channel is an $11.5 billion market opportunity. Growth of natural products was up 12% in 2015 compared to last year, and these products resonate strongly with shoppers at specialty supermarkets and increasingly at traditional grocery, mass and club retailers. We believe that Lifeway is strongly positioned to benefit from growth within these channels fueled by increased consumer brand. Consumer taste preferences are evolving, they seek unique and exotic specialty food products and more and more are concerned with health environmental and social benefits associated with the food they purchase for themselves and their families. I believe this truly would differentiate Lifeway Kefir from other products out there on the market. Not only is the Lifeway team committed to increasing and creating the highest quality product, but we are committed to the same ideal that our customers believe are important. This includes our commitment to all natural hormone and GMO-free ingredients, philanthropy, environmental responsibility and farming sustainability. From farm to fridge, we make sure that our products are good, not only for our bodies, but for the world around us, not every company can say that. In October, we teamed up with an award winning New York Chef and Restaurateur and cook-book author, Seamus Mullen, at the New York City Wine and Food Festival. Mullen represented Lifeway at this event by serving savory gluten free muffins and spreads that he has created using ingredients from Lifeway products. In the coming months, our partnership will expand into other collaborative events, recipes and blogposts on cooking and nutrition. This is a strategic and complementary partnership for us, as we both believe strongly in the benefits of healthy eating, and are excited that Seamus will be spreading the word through positive health benefits of kefir through his cookbooks, restaurants and speaking engagements. Other partnerships like this are continuing to expand. Moving on to our next area of focus, product and development and innovation. As a product category leader in kefir, we are keenly focused on growing our diverse portfolio of products. Some of the top performers from the new products we introduced earlier this year include our Protein Kefir, our Perfet12 Kefir made with stevia; Pretty Plain ProBugs, and Watermelon Flavored Kefir. Each year in March, we debut new products at Natural Products Expo West and I look forward to sharing an update on new products and introductions with you on our fourth quarter and full year conference call. And finally, expanded distribution; we made solid progress in increasing our distribution book trends in the third quarter. Some exciting highlights include Lifeway pretty Plain ProBugs accepted nationally in whole foods. Lifeway ProBugs now ship into approximately 225 Wakefern stores, Winn-Dixie and Bi-Lo. Winn-Dixie and Bi-Lo added Lifeway Kefir to over 700 stores. Publix has added our new 16-oz Kefir to approximately 1,100 stores. And Lifeway Perfect12 is now available in over 200 Ingles stores and over 175 Fresh Market stores. And lastly, Market Basket added Perfect12 and ProBugs to over 100 stores. Last quarter, I spoke about our expanded distribution outside of the U.S. Today, Lifeway products are sold in the U.K., Canada and Mexico. We have been especially impressed with our strong performance that we have seen so far in Mexico, and believe that this is a compelling expansion opportunity for us. The size of the yoghurt market in Mexico is close to $1 billion this year and is expected to grow 40% by 2018. This growth is expected to be driven by new categories dairy products such as Greek Yoghurt functioning better for you and organic products. Our initial sales in Suprema and Costco Mexico has been strong and our team is in the progress of formulating a robust business plan, coupled with strategic marketing to support our future expansion in Mexico. We are very pleased with the progress that we have made thus far this year. So the successful execution of our strategic initiatives, we have generated approximately $4.4 million in cash from operating activities. We are confident of our future opportunities, and are committed to increasing shareholder value. Additionally, the added capacity provided by our Wisconsin facility will position us strongly to meet increased demand of our products and support our continued growth for both domestically and internationally. That concludes our overview for the first nine months of fiscal 2015. Ed, John and I would now like to open the call up for your questions. Operator?

[Operator:]

[Operator Instructions]. Our first question comes from the line of Howard Halpern of Taglich Brothers. Please proceed with your question. Howard Halpern Good afternoon guys. Julie Smolyansky Hi there. Howard Halpern In terms of your increased capacity, what type of revenue ramp are you capable of at now max capacity? Ed Smolyansky Can you repeat that question? Howard Halpern With your new facility, how much revenue capacity do you have now? Ed Smolyansky Basically it's about triple what we are currently running. So close to between $450 million and $500 million in gross sales. Howard Halpern Okay. Julie Smolyansky But that's not what we are doing right now. That's going to take time, over a few years. We are just basically turning on the machines one by one as we fill out that demand and try to sink it off with our capacity, capabilities constantly. So it will take a couple of years to get to $500 million full capacity. Howard Halpern Right. In terms of the constraints that went on and the potential sales that those constraints tampered; could that miss the sales cycle, so we won't see the full -- I am not sure how to exactly convey? Julie Smolyansky I think I understand what you're saying. I think we will start to see the loosening up of capacity restraint more in the fourth quarter, which is when we agree to start shipping the Walmart product and some of those other accounts with more like the fourth quarter. This really -- we kind of touched on this last call still, it's really hard to match up the exact sales cycle, which the buyers are usually buying up to seven months in advance. Its hard to like match up exactly and then have that buy products, create purchase orders and then us say, oh sorry, we can't ship, and then [indiscernible]. And so, we don't want to ruin reputation with the retailers. So we were conservative with pushing our capabilities, and we felt that this fourth quarter was a good time and pretty much right on time with when the orders like matched up. We have been running batches, making sure that we are happy with the quality that's coming out of Wisconsin, because each facility is going to be different. So it has been a lot of test runs, sample batches, formulation tweaks, process tweaks, things like that to really get it perfect and match up with those shipping orders. Howard Halpern Okay. In terms of, I guess, G&A expenses, is there going to be any reduction in expenses that you're going to see, since you have gone I guess, with the late SEC filings? If you could quantify that amount? Julie Smolyansky I am going to let John or Ed take that. Ed Smolyansky Yeah John, you can talk about that. John Waldron Yeah. Howard, I think that to your point, and it’s a great point. We got costs in G&A that are associated with delayed filings and we also have costs associated with the change in our auditors, right? We went from Crowe Horwath to Mayer Hoffman McCann. So we expect to -- if you focus explicitly on professional fees, we expect to see a takedown in 2016 against our 2015 costs. I don't think we are prepared to give you quantification of that, but it's not insignificant. Howard Halpern Okay. And do you have some idea at this point, what full year tax rate might be to use in modeling? John Waldron We expect the full year tax rate at this time to be 50%. Howard Halpern Okay. And you think that will go down in 2016? John Waldron We are working on important strategies that are going to get us in a position to see a nice takedown in the effective tax rate. I guess we are not giving guidance, but our rate on a more normalized basis would be about 40%, and we are going to work from where we are at today 40%, over this year. Howard Halpern Okay. Well thanks for the answers and keep up the good work. I expect good things for the fourth quarter and 2016. Julie Smolyansky Thank you.

[Operator:]

[Operator Instructions]. Our next question comes from the line of Ivan Zuick. A private investor. Please proceed with your question, Ivan. Unidentified Analyst One question on the third quarter, you said the administrative expenses were up about $1.5 million, and that's up -- a lot of that was because of the costs with the SEC filings. Can you tell me what part, dollar-wise was due to that? Because I sort of look at that as a one time expense? John Waldron Ivan, this is John Waldron. It’s a great question, and I think that there was a bit of a discussion about this in the second quarter as well. Some of the lift in the G&A expenses has to do with reassignment of personnel from selling responsibilities to broader management responsibilities. So I would welcome you to take a look at the management discussion and analysis section of the 10-Q that will be filed here shortly. I mean, it helps to break out professional fees from the G&A salaries. And consistent with how we just answered the question with Howard, I think we probably quantified for you, the professional fees that will not come back to us next year, because of the fact that we will be a timely filer and not have the problems that we have. So the quantification of that is something I think we are just not prepared to give. Julie Smolyansky Also I would say, like some of those, as we think about this business that continues to grow and scale and needs more operationally and needs more legally and needs more -- from a consulting basis like that, some of the cost involves with growing a business and scaling the business. Some of those fees, I think are, filled in through that process as more is expected from a company that gets bigger and those important processes to develop for our business now and as we continue to grow and move into that $500 million corporation, and have more things set up. And so those costs have to be there anyways, as you do build those businesses out and create more structure, and operate in an environment that we do, both Sarbanes Oxley and what not. So we also look at it like that, kind of cleaning up shop, making sure that we have all of our I's dotted and T's crossed as the business grows. Unidentified Analyst And also, how soon do you expect to start showing positive sales comparison top line, and also -- Julie Smolyansky I think 2016 is going to be a knockout year for sure. I think 2015 was sort of like a lot of building, like let's build the capacity out, let's build the operations out, let's build the infrastructure out to be able to meet this new business that we are building out. Again kind of going back to our sales piece, like didn't really have that capacity to push real hard in 2015, knowing that we were pushing up against capacity issues with market growth, kind of using this year as a year to really set those things up. I think 2016 is going to be remarkable, because of some of those issues. But again, I just want to be clear, we are looking at just retail in general, as retail is kind of flat. But we are definitely looking at ways to meet consumers where they are, like if they are not going into the grocery store, well are they buying their food? Okay, they are buying -- are they buying from Amazon Flash or they are buying from an Instacart delivery. We are very aggressively making sure that we are available wherever the consumers are shopping, if they are not going to be at the grocery store. But retail is kind of down, we have seen that there is a new -- it's flat or down, because people are just going to the grocery stores a lot these days. So just making sure that we can reach those shoppers and create a lot of -- one thing that's really in development right now, is things that are easy to ship through online delivery system, so less perishable products, more things that we can sell Lifeway branded probiotics that are shelf-stable. But that would be easy to do deliveries [indiscernible]. Unidentified Analyst Okay. Can you give me a little bit flavor on one of your new product for protein? Julie Smolyansky Sure. I mean, I have mentioned in a media story a few weeks ago; one thing that we are looking at, is in the final stages of development, its probiotic pills and supplement using our kefir culture. So somebody who maybe doesn't want to go through the effort of drinking kefir or buying in the grocery store will now be shipped probiotic kefir capsules to anybody in the world. That's coming down in pipeline. Unidentified Analyst Okay. Are you planning on having your shareholders' meeting December 14? I think last time you mentioned it? Julie Smolyansky Yes. Unidentified Analyst Okay. Well, lots of success and luck going forward, and I will be watching that protein kefir, being an athlete myself. Julie Smolyansky Yeah. It's a really-really hot product, [indiscernible] size. Its getting amazing distribution and publicity, so definitely check that one out. And the other, we are in holiday season, we have a wonderful limited edition holiday lineup of pumpkin crème brulee and eggnog, definitely check those out, and then birthday cake is coming next year for our 30th anniversary, and we have a really exciting spring launch special collection that's also very close to final. But that will be very-very buzzworthy, once we launch it. Unidentified Analyst Okay. Thanks for the answers to the questions. And like I said, let's have a great year next year. Julie Smolyansky Thank you.

[Operator:]

At this time, there are no further questions in the audio portion of this conference. I will now turn the conference back to the management.

[Julie Smolyansky:]

I am sorry, I think I missed. So yeah thank you for your participation today. We appreciate the hard work and dedication of our employees and the support of all of our loyal customers and shareholders. We look forward to sharing our fourth quarter and full year results with you in the coming months. Have a happy and safe holiday season, and be well.

[Operator:]

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful rest of your day.