Lifeway Foods' (LWAY) CEO Julie Smolyansky on Q1 2014 Results - Earnings Call Transcript

May.12.14 | About: Lifeway Foods, (LWAY)

Lifeway Foods, Inc. (NASDAQ:LWAY)

Q1 2014 Results Earnings Conference Call

May 12, 2014, 4:30 pm ET

Executives

Hunter Wells - Investor Relations, Vice President of ICR

Julie Smolyansky - President, Chief Executive Officer, Director

Ed Smolyansky - Chief Financial and Accounting Officer, Treasurer

Analysts

Howard Halpern - Taglich Brothers

James Fronda - Sidoti & Company

Ivan Zwick - Raymond James

Victoria Konstantinova - THB Incorporated

Operator

Greetings, and welcome to the Lifeway Foods first quarter 2014 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host for today, Ms. Hunter Wells. Thank you, Ms. Wells. You may begin.

Hunter Wells - Investor Relations, Vice President of ICR

Good afternoon, and welcome to Lifeway Foods first quarter 2014 earnings conference call. On the call with me today are Julie Smolyansky, Chief Executive Officer and Ed Smolyansky, Chief Financial Officer.

By now, everyone should have access to the first quarter earnings release for the period ending March 31, 2013, which went out this afternoon at approximately 4:05 p.m. Eastern Time. If you have not received the release, it is available on the Investor Relations portion of Lifeway's website at www.lifeway.net. This call is being webcast, and a replay 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. These statements do not guarantee future performance and therefore undue reliance should not be placed upon them.

Similarly, descriptions of Lifeway's objectives, strategies, plans, goals or targets contained herein are also considered forward-looking statements. 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 posted on their website.

And with that, I would like to turn the call over to Lifeway's CEO, Julie Smolyansky.

Julie Smolyansky

Thank you. Good afternoon, everyone, and thank you for joining us. I will begin our call today with a brief overview of our growth in the first quarter and briefly review our financial results. Then we will open up the call and take your question.

We are pleased with our growth in the first quarter in which we achieved 20% increase in net sales to $29.1 million. As expected, we experienced gross margin pressure due to increased milk prices. This past February and March, milk prices reached a record high. However prices have appeared to peak and we now expect to see a downward trend. Additionally we plan to adjust our pricing accordingly to help partially offset these higher costs.

In the first quarter, we made further strides in increasing distribution of our products at major retailers including Kroger, Walmart, Target, Costco, Whole Foods and many more. In the natural channel, yogurts and kefir drinks are up 10% in dollars and Lifeway is outpacing the category at over 24% due to increased demand, distribution and improved velocity rate.

Healthy eating is a global trend and we will continue to prudently seek and evaluate international opportunities. Sales of our Kefir branded products continue to grow in both Canada and the U.K. We are dedicated to focusing our time and resources to increasing distribution and remain optimistic about our opportunities in 2014 and beyond.

Last May we announced the purchase of Golden Guernsey dairy plant. We have made solid progress in ramping up production of this plant which we expect to be fully operational by third quarter. Our team remains extremely focused on the task due to the long-term benefits of this plan. The purchase of this plant was an investment in our future, and I look forward to keeping you updated on our progress.

We believe that an important part of our future growth is increased awareness of our products. We consistently invest in our marketing and advertising and look for unique ways to connect with our consumers, I believe these benefits are paying off. In celebration of mothers everywhere and just in time for Mother's Day, which we celebrated yesterday, we recently debuted a national ad campaign that is very close to me personally.

To-date it has been our largest media spend but I have little doubt that its impact will be very meaningful to our long-term growth. The national ad campaign began on May 5 with full page ads featured around the theme of mother culture. This plan words also invokes the benefits of cultured dairy products and also the culture that surrounds mother to nurture their children through food, attention and love.

The ad placements will continue through the summer and can be found in publications such as People, American Baby, Healthy Eating and Style, Shape and others. In addition to targeted digital platforms, there is a series of digital video ads, which will be distributed throughout areas like Yahoo, YouTube, et cetera. This campaign coincides with strategic and interactive social media campaign in which readers can share their own thoughts on what being a mother means to them using the hashtag #MotherCulture. We believe this as well thought out and dynamic, expertly executed national ad campaign will greatly improve our overall consumer awareness to current and target potential customers across the United States.

I would like to also now review our first quarter financial results in more detail. For the first quarter of 2014 gross sales increased approximately 16% to $32.1 million compared to $27.6 million for the first quarter of 2013. This increase is primarily attributable to the increased sales and awareness of the company's flagship line Kefir as well as ProBugs, Organic Kefir for kids and BioKefir.

The first quarter total consolidated net sales increased approximately 20% to $20.9 million from $24.4 million in the first quarter of 2013. Net sales are recorded as gross sales less promotional activities such as slotting fees paid, couponing, spoilage and promotional allowances as well as early placement terms given to customers.

Gross profit for the first quarter of 2014 decreased 18% to approximately $7.1 million compared to approximately $8.6 million in the first quarter of the prior year. The gross profit margin decreased to 24% in the first quarter versus 35% in the first quarter of 2013. The decrease is primarily attributable to a 35% increase in the cost of milk, the company's largest raw material. As I mentioned this past quarter, milk prices reached a record high, but are now trending downward. Furthermore, we expect slight cost reductions to occur in the future as we make progress in ramping up production in our Wisconsin dairy plant.

Operating expenses increased 24.3% to $6 million from $4.9 million during the same period in 2013. Operating expense as a percentage of net sales were approximately 21% during the first quarter of 2014, compared to 20% in the prior year. This increase was primarily due to an increase in selling related expenses, as well as costs attributed to a significant ramp-up of expenses to get our new Wisconsin facility up and running.

Starting in April, we began to process approximately 70% of our milk needs and produce approximately 50% of the bottles we now use, the top two cost in unit of bottles of Kefir. These investments have already begun to pay dividends, and will continue to help offset record high input cost. As a reminder, this plant will eventually allow us to quadruple our manufacturing capacity.

Income tax expenses was $0.3 million or a 34% effective tax rate for the first quarter of 2014, compared to an income tax expense of $1.4 million or a 37% effective tax rate during the same period in 2013. Our total net income was $700,000 or $0.04 per share compared to $2.4 million and $0.14 per share in the same period of 2013.

Next I will review a few balance sheet and cash flow highlights. The company had $2.5 million in cash and cash equivalents as of March 31, 2014. Total stockholder equity was $43.6 million, which is an increase of $700,000 when compared to the December 31, 2013.

That ends our financial overview. In conclusion, our focus has and will continue to be successful growth of our brand, attracting new customers and growing our sales to increase value for our shareholders. Lifeway continues to be better positioned than ever to capitalize on the future growth opportunities in the United States and internationally in the grocery store and beyond.

We would now like to open up the call to your questions. Operator?

Question-and-Answer Session

Operator

Thank you. At this time we will be conducting a question-and-answer session. (Operator Instructions). Our first question comes from Howard Halpern with Taglich Brothers. Please proceed with your question.

Howard Halpern - Taglich Brothers

The commodity and milk prices out there. You did say you see it trending down but it is still going to be substantially up from the year ago period. Correct?

Ed Smolyansky

Sorry. The beginning of your questions kind of cut out. Can you repeat that?

Howard Halpern - Taglich Brothers

Yes. The price of milk, it is starting to trend down, as you stated, but year-over-year, it is still going to be in the second quarter, it is still going to be significantly higher.

Ed Smolyansky

Yes. That's correct. March was a record high for all time. April was lower and it looks like it is trending down. It is still going to be higher than last year and we feel that with our price increase that has gone into effect in May and June as well the processing of our own milk in Wisconsin, which we started in April, as Julie said, we feel we can somewhat mitigate those costs. Do we know yet if we can mitigate them 100%? No, it is too early to tell, but there will be some help there.

Howard Halpern - Taglich Brothers

You wouldn't care to disclose the average products the price increase that you are doing?

Ed Smolyansky

It's not standard across the board but if you take probably everything with all the customers, it's probably somewhere around 5%.

Howard Halpern - Taglich Brothers

Okay, and in terms of the promotional expenses, the slotting fees promotional expenses or allowances, that number, I guess, more is a consequence of the higher revenue but do you fuel that it is going to stay in this 9% or little above 9%area for the foreseeable future?

Ed Smolyansky

Yes. We believe so. Historically, we have always been between 9% and 11%. Sometimes it goes up a little bit as well. I think we are fairly comfortable between 9% and 10% as we move to do other types of advertising.

Howard Halpern - Taglich Brothers

Okay, and how is the move into Canada been proceeding?

Ed Smolyansky

Well, we just basically did a soft launch for middle of May and it is still too early to tell what the actual reception is. We are planning on doing a full launch sometime first week of June and our partner in Canada is ready. A lot of placements and we have our own contacts in Canada. So we are confident we will be very successful in Canada very quickly.

Howard Halpern - Taglich Brothers

Okay. Well, congratulations and keep up the great work, guys.

Ed Smolyansky

Thanks.

Operator

At this time there are no further questions in queue. I will like to turn the call back over to Ms. Julie Smolyansky. We do have a call come in from James Fronda with Sidoti & Company. Please proceed with your question.

James Fronda - Sidoti & Company

Hi, guys. How are you?

Julie Smolyansky

Good.

James Fronda - Sidoti & Company

Just with the revenue line. Are you guys seeing any increased competition at all?

Julie Smolyansky

We are not really seeing anything of significance. I would say, there is only one really company that is really out there and from what we are seeing right now, they are just spending money on slotting dollars, sort of pay to play, but in terms of long-term sustainable sales from those companies, we are not really seeing anything that's making a dent. We are still at about 97% of the dominating Kefir brands between the Lifeway brand, Helios, Fresh Made and private label that we do for Trader Joe's. We don't really feel like there is any really true competition out there.

James Fronda - Sidoti & Company

Okay. Do you any -- sorry.

Ed Smolyansky

Sorry. We haven't seen any new entrants into the Kefir category in the last 52 weeks. If anything, we have seen a couple of people actually get out of the category. No new entrants, at least in the last 52 weeks.

James Fronda - Sidoti & Company

Okay, and does any of your sales right now coming from U.K. at all?

Julie Smolyansky

Yes. We are currently -- So it's still relatively small. Again this is a new market and a very different market and we are just really laying the foundation and starting the process of expansion and it's really a long-term project. In the U.K., we are currently sold in about 400 stores. We will be adding another 600 stores between now. We have been adding these additional 600 stores over the last few weeks and building on that through spring and summer. So that by the time we are full peak summer, we will be in about 1,000 stores throughout the U.K.

James Fronda - Sidoti & Company

Okay. All right. Thanks, guys.

Ed Smolyansky

Thank you.

Operator

Our next question comes from Ivan Zwick with Raymond James. Please proceed with your question.

Ivan Zwick - Raymond James

I have got another little question to ask you on the U.K. My understanding now is, you are new in the frozen products. When will you start doing the liquid like you do here?

Julie Smolyansky

We expect to launch the liquid by next year, 2015 first quarter.

Ivan Zwick - Raymond James

Okay, and what about any plans outside of U.K.? In Europe?

Julie Smolyansky

Yes. We are expanding throughout Europe, kind of nothing to confirm but looking throughout the entire European Union for distribution.

Ivan Zwick - Raymond James

Okay. So you won't be doing anything like in Germany or elsewhere through 2015?

Julie Smolyansky

Yes. I mean on the frozen, we are already for opportunities now on the frozen side but on our drinkable, we won't be entering the market until 2015.

Ivan Zwick - Raymond James

Okay. Well, thank you very much.

Operator

Our next question comes from Victoria Konstantinova with THB Incorporated. Please proceed with your question.

Victoria Konstantinova - THB Incorporated

Hi. Thank you for taking my questions. I was wondering if you gather any data of the distribution penetration? You haven't talked recently about any new doors in the U.S.? In terms of ACV, what would be an average ACV penetration in major retailers?

Julie Smolyansky

We are always looking for additional distribution points. We would say that we are probably, and I don't have the exact data in front of me, but majority of the retailers throughout the United States have at least one Lifeway SKU and majority, on an average, have four of our top SKUs. Then our bigger customers, first early adapters and pioneers in the food space, in natural food space, have up to 120 SKUs in some cases and are the first take any of the new items that we have innovated and put into the market. So there is always expanded opportunities to pull in some of our other newer SKUs into mass-market distribution. So its hard to say because there is a number of different UPC codes that are out there, but there is still a lot of opportunities for growth.

Victoria Konstantinova - THB Incorporated

Any new products, like in terms of innovation coming along?

Julie Smolyansky

Yes. So we, in the first quarter, which I didn't mention in the press release but we did launch a series of new items in the first quarter. Some of the exciting products include a savory veggie kefir line in three different flavors, including beet, tomato and cucumber. So no sugar added. It's very, kind of an emerging food trends to have a veggie savory type cultured dairy product. So that has just been launched in addition to a line of breakfast smoothie drinks with either oat based with high fiber. Another emerging food trend is the dairy-based fiber based oat products. So those are launching in three different flavors. We also transitioned from our Slim6 line, which included Splenda into a little pivot of a product, still low sugar, low glycemic product sweetened with stevia instead of Splenda for the alternative sweetener for those who are diabetic or have some other restrictive sugar needs. So we have those that we have launched. So there has been a series of new items that we have innovated over the last few years that we are just putting in distribution now in to a more mass-market distribution. So there s always something innovative every year pretty much. We put out something for the early adapters, build the base of those first users and then expand it into mass-market.

Victoria Konstantinova - THB Incorporated

Okay. I don't have any other questions.

Operator

There are no questions in queue at this time. So at this time, I would like to turn the call back over to Ms. Julie Smolyansky for closing comments.

Julie Smolyansky

Thank you for your participation today. We appreciate the hard work and dedication of our employees and the support of our local customers and shareholders. We look forward to sharing our second quarter of 2014 results with you in the next coming months. Thank you.

Operator

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

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