Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

LifeWay Foods Inc. (NASDAQ:LWAY)

Q4 2007 Earnings Call

March 31, 2008 5:00 pm ET

Executives

Julie Smolyansky – President and Chief Executive Officer, Director

Edward Smolyansky – Chief Financial Officer

Analysts

Greg Badishkanian – Citigroup

Jacklyn Rider - Lazard Capital Markets

Howard Halpern - Taglich Brothers

Ivan Zwick - Raymond James Financial

Operator

Welcome to the Lifeway Foods conference call. (Operator Instructions) Now I’d like to turn the conference over to Mr. Edward Smolyansky.

Julie Smolyansky

And Julie Smolyansky. This is the Lifeway Foods Annual call 2007 year end review. This web cast may include forward-looking statements which are subject to a number of risks and uncertainties that could cause actual results to differ materially. For a more detailed discussion of these risks and uncertainties see the text under heading “Cautionary Statements Regarding Future 10K.” The statements made during this web cast are made only as of the date of this web cast and the company undertakes no obligation to update the forward-looking statements to reflect subsequent events or circumstances. This web cast is posted solely for information purposes and is not to be construed either as an offer to sell or a solicitation to offer to buy any securities.

So Edward will get into some of the financials.

Edward Smolyansky

So everybody this is our first year of doing the call in conjunction with a web cast so this is new for us. So everybody who is on the web has the ability to look through the PowerPoint presentation which we have provided this year. The people calling just on the phone do not have that opportunity I guess. So anyone can call or email I guess and we can send you out the presentation in another format. So, I’m basically just going to…

Julie Smolyansky

For those of you who are listening only on the phone, we are going to be taking questions at the end but there is also a way to instant message questions and that information was made public on the press release which provided the URL which would offer you the opportunity to instant message us questions at the same time.

Edward Smolyansky

So I am going to kind of just start off by basically going over the highlights of 2007. I’m not going to spend too much time on a lot of the information in the first 9 months as that stuff has already been public and has been out there awhile. So going forward the first slide we have is about the balance sheet. Slide number 2, sorry…is about the balance sheet.

So some of the highlights at the end of the year 2007 was we ended up with close to $35 million in assets up from $33 million at the end of last year. We paid down a significant portion of our debt, approximately $2 million of our debt, most of it related to the note that was generated for the acquisition of Helios in 2006. We paid off roughly I believe $1.8 million of that debt. So in terms of the balance sheet things are definitely looking good and we continue to increase shareholder equity.

Moving to the next slide, which is the income statement, these two columns are just showing the yearly figures and not the quarterly. In terms of the fourth quarter sales were up about 30%. For the year they were up about 40%. Again this difference is just the result of 2007 being the first full year of the Helios acquisition.

For the fourth quarter of 2007 gross profit decreased about 10% to $2.3 million from $2.52 million in fourth quarter 2006. Obviously this decrease is primarily attributable to the cost of milk, which is our largest cost of goods sold and was approximately 110% higher in the fourth quarter of 2007 versus the fourth quarter of 2006. Of course this should come as no surprise to anyone. It has been in the news and we have discussed it previously.

In terms of the income statement, 2007 was a tale of two halves; the first being low milk prices, relatively low milk prices let’s put it that way, and margins that reflected that. In the second half starting with August we saw record high milk prices. So in a couple of slides going down there are a couple of slides that will show the trending of milk.

Going to the next slide is the cash flow statement and again basically the highlights are cash provided by income from operating activities is about $2.35 million versus $2.15 million last year. Again, we paid off a significant portion of the debt, roughly $1.95 million in debt. We also purchased $1.8 million in equipment versus purchasing $680,000 in equipment in 2006. So some people might recall a press release not too long ago where we said we had completed our $2.5 million expansion project and obviously this number reflects that. So at this point we have doubled our expansion. That is set to go online so the growing sales that we expect to have in the future and we definitely have the ability in the next 2-3 years to supply that growing demand.

Going back to the next slide, which will start the three slides which I will discuss about the milk prices…

Julie Smolyansky

That would be slides 5, 6 and 7.

Edward Smolyansky

Slides 5, 6 and 7. Slide 5 is the class I price, which is the price of milk we use for our Kefir products and the majority of it. What you’ll notice here is starting in August, September, October and November were 4-5 months of continuous record-high milk prices. This is just something that is just part of our business.

Thankfully what the trends are going to show is starting in February the decline had started to go down. March prices were actually substantially lower going all the way back to May 2007 numbers.

For Class I, April ticked up a bit but again we are still at June 2007 levels and substantially lower than the record high levels that were in 2007 at the end of the third quarter and the fourth quarter – again September through November.

Class II, which is again about 30% of our purchases of milk, the price again same type of trend line where you see the September through November months…where you see those months just again being ridiculously high and now those numbers are coming down. April was actually in fact lower than March and we’re getting back to almost year low levels.

So I can just tell you looking at our base statements that we are definitely seeing the impact of these lower milk prices, positively obviously.

The next slide, slide 7, is the nonfat dry milk price chart. Again almost the exact same type of a chart. Again, April is the lowest it has been since April of last year.

So the trend is definitely positive and we’re happy that we were able to get out of this difficult situation in the third and fourth quarters of 2007 and we’re going to move on and we still had relatively healthy margins given these difficult periods.

Also in the fourth quarter in terms of operating expenses there was a $100,000 expense related to Sarbane’s-Oxley compliance that was a one-time fee and there will be another $90,000 expense in the first quarter of 2008 related to the Sarbane’s-Oxley and while compliance expenses are recurring the expenses are going to be substantially less going forward so I view these not really as one-time expenses, but the majority of the Sarbane-Oxley expense going forward and those were two things I wanted to point out that I thought were important.

The next slide basically is our management discussion, analysis, again for those of you who are on the Internet you can download this. For those of you who are not feel free to contact us and you can get the information readily. It kind of just sums up what I had just discussed.

I’m going to hand it over to Julie who is going to talk more about the press and sales and the business as a whole.

Julie Smolyansky

Some of the things that kind of highlights of the year for the company was our increased sales and marketing efforts. For the first time this year we had three full-time outside sales reps working for the company and that we felt it was definitely time especially considering a lot of the new items and products we launched this year and the last few years. So we have benefited tremendously from their efforts obviously with such increases in sales that we have seen.

We have devoted a significant amount of effort to our new food service area of our business which previously has not really existed and basically pioneering a whole new avenue of growth that never existed and so we are gaining placement in areas like the Google Café or the Mayo Clinic Health Café, different hotels including the W Hotel and a number of other hotels and so we are seeing some nice growth and I think it is a good investment into the company’s time and money to expand this part of our business.

Our airline food service is moving nicely as well. As previously mentioned we are selling to British Airways in select markets. I think it is about 17 flights that have our Kefir on their beverage cart and they pour it and we are working on gaining new distribution in those markets.

We have also launched new products. Some of the new products, specifically Lassi which is an Indian yogurt drink. For those of you who don’t know in India Lassi is as common as Coca-Cola here in America. Similar to the way that Kefir is a staple in the Eastern European countries and that will hopefully be coming in the United States, Lassi is equally a staple in those countries. So it is so similar to what we already do in our production and it just made a nice transition into our production capacities and Lassi is already gaining distribution at Whole Foods between 4 and 10 basings and a number of other markets.

In addition, we went through a major completion of expansion last year and continue to expand currently in our capacity. With these record high sales and continued growth and trending and awareness – an all time high awareness of probiotics and Kefir and Lifeway Food products – we definitely felt the need that it was time to expand because some of these record high sale weeks were definitely tough in production. So that considering that we went through that expansion at the same time as these record high milk prices, it was certainly a very difficult time for Lifeway Foods but we completed that and so we are very excited to reap the benefits of that expansion.

In addition we gained new distribution in several chains including King Soopers in Colorado and a number of other chains. In addition, our Pro Bugs were expanded into the test market of Kroger’s of 30 stores to almost 175 stores. We gained new distribution for Pro Bugs in Harris Peter as well as Cub Foods and again we continue to see a tremendous interest in Pro Bugs.

At the National Products Expo Show we launched our first probiotic Kefir Wellness Bars in three flavors and we saw some amazing response from people. Specifically one quote was given to me that “This was the hit of the show.” I think this is going to be a really terrific product line going forward.

Also for those of you who don’t know we just launched our opening of Star Fruit, a Kefir Boutique, and we will be opening that in two weeks. This is going to help – at least in Chicago – help us market Kefir and provide awareness and opportunities for growth for Kefir and provide customers some idea of how to consume our products.

So you know the rest of the stuff I think a lot of people know some of our marketing efforts but I will just touch on them briefly. Lifeway Foods is always positioning itself through innovative new products and I don’t think anyone can argue that some of our recent product launches have been very innovative and interesting and very beneficial to filling a need in the market place. We always talk about our probiotic product and using a lot of grass roots efforts to reach our customers and really claiming that we are the original probiotic and that we are a 2,000 year old product and the gold standard in probiotics.

In slide 11, again some of the innovations have been Pro Bugs with no competition at all – a completely innovative product. Our new Lassi smoothie and the Wellness Bars were all innovative products in ways that we continue to pioneer and innovate in this category. So the rest of a couple of slides are images of the products for those of you who haven’t seen them. I am in slide 15 which is an image of the Lassi product in case some of you have not seen that in distribution yet.

We continue to increase our advertising budget as our sales grow. We certainly need to support our new markets with advertising and marketing so you can see in slide number 18 is just an example of a Pro Bugs ad that was put into a national magazine. Slide 19 was an image of Kefir that was put into advertising of Kefir in a national magazine.

Another interesting thing and kind of a big audience that we were able to touch…in the middle of the year we had a nice billboard on the NASDAQ tower in Manhattan and that was up I think all week in Times Square and certainly the number of impressions was tremendous.

We obviously participate in a number of trade shows all throughout the year. Slide 21 just lists some of those trade shows from our Fancy Food Show to the Probiotic Convention to the Restaurant shows and food service shows that we have started to attend.

Slide 23 again is just an example of some of our grass roots events that we are at consistently all throughout the United States not just in Chicago but Boston, Los Angeles and all different markets where our customers are and where we gain new distribution. Of course 2008 we will be out there a lot more.

We have seen a record high interest in probiotics from the media. We continue to see articles and reports on the benefits of probiotics from mass market media including The Today Show, Good Morning America and publications such as Good Housekeeping or Shape Magazine. Pretty much every month there is something about probiotics and Kefir is always mentioned. For example, in Men’s Health Magazine in June, Lifeway Kefir was voted best non-milk dairy drink. Things like that are consistently popping up here. I think that is going to drive our growth and awareness in Kefir and probiotics.

Another thing we are very proud of that you should be very proud of as well is for the fourth year in a row we were voted as Fortune Small Business Fastest Growing Small Companies. I believe there are only ten companies that have made the list four times in a row.

And some other interesting things in the trends in Kefir sales that I think are interesting is sort of press pieces that came out throughout 2007 but [Brandy] calls probiotics the hottest word in foot marketing and that probiotic category counting for almost $300 million in sales but that by 2010 that will grow to $500 million and certainly we will benefit from that as well.

Another very interesting quote that came out in one of our trade publications, Dairy Field Magazine, in February they write – and I quote – “Perhaps the most dramatic growth comes from the emerging Kefir category. Morton Grove, IL based Lifeway Foods Inc. by far the category leader, experienced sales increases of 55.8 and 47.9 percent for its flagship brand, while sales of Helios brand organic kefir rose 41.0 and 33.5 percent.”

So I think that is a very significant and telling sign of where the trends are and where we are headed.

And we are basically done. So I will take questions and Ed will take questions. We can take them by instant message too.

I can read some of these out loud and answer them.

Operator

Pardon me – I’m sorry, if somebody has a Blackberry near the speaker could they please move it away?

Question-And-Answer Session

Julie Smolyansky

I see that we have five instant message questions. I will read some of them and then we’ll go onto telephone questions.

One question is, “Is any other company will take over Lifeway in the future? What do you think?”

We don’t know what other company’s think or we can’t read other company’s minds, however we are in the business of continuing growing our business and we continue to thrive from all of the things that we have done and we look forward to continuing on doing that. I can’t read the minds of other company’s, so I’m not sure about that.

“Do you think Lifeway shares will increase during 2008?”

We always like to hope so but again that is up to the market to decide and I think you should talk with your financial advisor on these types of questions but certainly we are looking at tremendous growth in 2008 and again as I described with some of the milk prices that the trend for lower milk prices continues.

“What was the volume growth for each quarter during 2007? When, if at all, did you take price increases?”

Okay that’s a good question and we didn’t talk about that. We announced a price increase in December. The thing about price increases and specifically in related to milk prices is that milk prices change month to month. So you always hope that they will come down when you see that they go up and you never really know. We can’t have a knee jerk reaction to any one particular month of prices, but when we did see 3, 4 or 5 months of continued high milk prices that is when we did announce the price increase. For those of you who know a little bit about the industry typically it takes about 60-90 days to implement the price increases for customers because they put out their catalogs and promotions and what not. So we had a series of price increases throughout December and January and some of them are hitting the books right now. Literally nobody even blinked an eye when they saw the price increases. Everyone is aware that these are going on. We are seeing record inflation and everybody…it is reported on the news daily if not hourly even. So we will start seeing those hit the books.

Are there any phone questions?

Operator

Yes. At this time if you’d like to ask a question please press * then 1 on a touchtone phone. You will hear a tone to confirm that you have entered the list. If you decide that you want to withdraw your question please press * then 2 to remove yourself from the list.

Our first question comes from Mr. Greg Badishkanian with Citigroup.

Greg Badishkanian - Citigroup

Great. You guys I have just a few questions here. First of all, just in terms of the new products, the probiotic bars, the Indian product that you talked about, what is the response from your retail customers and when do they hit the shelves? How big do you think those products could be longer term?

Julie Smolyansky

We know that energy bars are so popular, obviously. These bars will be marketed in the refrigerated section and will be right next to our kefir line so that is very complementary and symbiotic. We expect to see them in the market place in about 8-12 weeks and in terms of which stores are interested in carrying them – from the trade show and of course you always hope that they follow through with their orders, but we had a great interest from Kroger and Whole Foods and just numerous, many of our customers – many of our existing customers. People are very excited to see them in the market place. I don’t know what the market opportunity for it is. I’m not completely aware of the energy bar market, but we do know that the probiotic market is growing tremendously and I think we’ll see a lot of new products that are going to be launched with probiotics but of course Lifeway Foods has a brand for 23 years and we are the leaders in kefir and in probiotics. So I think that will be very beneficial to us.

Greg Badishkanian - Citigroup

Great. Kind of looking historically you had sort of the high double-digit and mid double-digit lately type of growth at the retail level and as you look forward over the next 12 months is your growth going to come primarily from shelf space within existing stores? Is it going to come from entering new stores that you are not in now? Or just customers going in to buy that core product and just that sort of increasing at the existing stores that they go into?

Julie Smolyansky

I think it will be a combination of both. I think there are still a lot of markets that we have not penetrated. I think we are in like 35-40% of mass market grocery stores so I think that with our core flagship products we will have continued new distribution in new markets but I also think there is opportunity with some of the new products we have launched like Pro Bugs that is like a whole new round of distribution again. I think the multi-pack kefirs and the 8 ounce, those also show very promising trends with our existing customers. For example we have seen them go from three basings from the multi-pack 8 ounce kefirs from 3 basings to 9 basings in some markets. So I think that we will have some of our newer items that we have launched capturing some extra distribution in our existing customers, but I also think there will be a lot of new customers that come on board like King Soopers that never carried our products, like Ralph’s – Ralph’s only picked up the line last year. So I think there is still a lot of tremendous opportunity from our flagship brand that everyone has or a lot of customers have, and then new products being gained.

Then I also think that we will see existing sales at existing stores rise as well with all of the attention the probiotics has had in the media and the increased advertising and marketing that we are doing in the markets that we are selling our products in.

Greg Badishkanian - Citigroup

Great that is helpful. Just a final question. In terms of pricing, could you quantify the price increase that you implemented and then what percentage of your products did that account for?

Julie Smolyansky

We increased our prices about 20%. Between 10 and 15%, I’m sorry. We increased our prices about 10-15% and that included approximately at least 60-70% of our product line.

Greg Badishkanian - Citigroup

Okay great that is helpful. Thanks.

Julie Smolyansky

We have a couple more questions that came through instant messages.

“Can we talk about milk prices? Why did they go up so sharply in 2007 and why are they coming down?”

Well they went up because of worldwide demand of dairy at least that is what we have kind of learned. So there is worldwide demand of dairy that the United States has been shipping to China and what not across the world that we have never done before. Also, why are they coming down? I think there is an effort in the government to bring some of these commodity prices down because of all of the attention they have had and consumers just having a difficult time so they are trying to bring them down.

I also want to mention that in these kinds of times, people talking about recession and inflation and what not, I think that traditionally during times of recession food stocks tend to do well. What we have noticed is people might not go down to the restaurants and spend their extra money at the restaurant, but they will tend to go to the grocery store more often which gives us much more opportunity to reach that customer to buy our product and again we’re not just selling milk, we are not just selling a commodity, we are selling a functional food that offers a much larger benefit than just plain calcium. We are also selling a probiotic product that has a lot of health benefits beyond just milk.

Edward Smolyansky

If I can just add a couple of points to try to wrap up the talk about the milk products because that does seem to be on the minds of most investors. The price of milk, like any item, is driven – a lot of it is driven by supply and demand. As I have spoken of it before the price in 2004 it shot up to record highs which were record back then. In 2005 they came down and were extremely low for 2005 and 2006. Then 2007 rolled around and I think what you saw was again a factor of supply and demand hitting the market in addition to all these other demands from the world and China and so on and so forth and the price went up dramatically in 2007 and now you are hopefully going to see that same reversal occur in 2008 and things will get back to an equilibrium.

In terms of the price increase that we implemented to try to offset milk prices, we don’t do things in a knee jerk reaction. We are not going to jeopardize future growth or jeopardize the opportunity to increase our customer base just because milk prices went up for three or four months. We’re not going to try to jeopardize future growth to placate or appease short-term numbers or short-term financial goals. We’re here to create a long-term customer base and you can’t really do that if you are gauging customers left and right based on the cost of some of your inputs. So the price increases which we do implement, which we do almost every year, are just based upon the normal course of business. Even the price increase we implemented in January and February, a lot of that is coming back into the consumer’s pockets in the form of promotions and sales.

So while we may raise the price, we are also increasing our sales to those customers to at least try to attract more. I think what you are going to see is when we come out with our first quarter numbers, sales numbers, you are going to see that positive effect come to light.

Julie Smolyansky

Here is a question that came through on instant message.

“Can you update us on the status of shifting production from Helios factors to Lifeway and what will the Helios factory fate be once production has shifted?”

We have been integrating the Helios production into our Morton Grove facility where it is much more automated and our margins are better in Morton Grove than the Helios factory. Of course with our expansion of production capacity that is now possible to do 100% here. The Helios factory we have been able to find some different uses for it such as organic milk production and that we are seeing record high sales at the Helios production factory which was part of Main Street. So again we are integrating the Helios kefir production into the Morton Grove facility. We will probably see that completed 100% in the second quarter of this year, 2008, and again the Pride of Main Street products are organic milk and they have great sales.

“Do you see Lifeway product making its way into major food service distributors such as Cisco on a national basis?”

I do see it as an opportunity. I don’t know if Cisco specifically, but I do believe in the next coming years we will see increased food service distributors come on board as our production and kefir and probiotics continue to grow and main stream. The traditional trend will be to then follow in food service. So I think it is just something like I said an investment into a new pioneering market for us. So I think it will come very positive for us going forward in the future.

“Are you going to open more stores like this?” This person is talking about Star Fruit maybe out of state.

You know we have had a lot of, since we announced it, we have had a lot of interest from people interested in franchising. Right now we are going to just take it easy and see how this store opens and leave it as a test. If it turns out positive then that might be an opportunity. That might be an opportunity that we franchise and spin it off and that would be a great benefit to investors of course. But we’re really not thinking that long-term with this yet. We’re really just going to watch what happens in the next 3-5 months and make some decisions based on that. But we have had, since we announced, at least 15 people emailed and called asking for franchise packages. So there is a lot of interest in this and we haven’t even opened.

“When might we hear about the results of the Georgetown Medical kefir antibiotic clinical trials?”

They are still in the process of collecting data. As you know these trials are long and tedious and I just spoke with the researcher actually a couple of days ago and probably much later on in the year. Personally I do believe they will be pretty positive. I do believe they will be just from everything we have learned about probiotics and kefir. Specifically that study – the researcher believes, his thesis is that Pro Bugs can help prevent infantile diarrhea. So I am very excited to see those results myself but we don’t know them yet. Once we do know though there is a lot of opportunity and claims we can make on the package even and of course with the media that talks about some of these positive results, hopefully.

If there is any other questions, we have covered most of the questions through instant message. If anyone has any questions on the phone.

Operator

Yes, our next question comes from Ms. Jacklyn Rider of Lazard Capital Markets.

Jacklyn Rider - Lazard Capital Markets

Hi. Thank you. Hi Julie. Hi Edward. Wondering if you could talk about, you say in the press release the Lifeway kefir line is increased in 2007 by 30% but in the fourth quarter how did Helios kefir do?

Edward Smolyansky

Helios increased about 4-5%.

Jacklyn Rider - Lazard Capital Markets

That’s what I thought. So was there a disruption from moving production over to Morton Grove?

Edward Smolyansky

No. It’s not that there was disruption it’s just that when we take all of our ad dollars, Helios was already starting to slow down in its sales. When we take all of our ad dollars as a whole the majority of it is going towards our main Lifeway brand. So the fact that Helios grew 5% basically in the fourth quarter on its own was tremendous. So we’re not putting, like I said, out of our whole advertising and marketing expense pie, a very small percentage of it goes to the Helios line. It kind of just grows by itself.

Jacklyn Rider - Lazard Capital Markets

Okay. Are you seeing strong growth in your organic Lifeway kefir line?

Edward Smolyansky

Absolutely. And you know, again, that also could be a factor as on the shelf people might not know that both the Helios and the Lifeway organic are made by the same company. So as we see double-digit growth of the Lifeway organic line there could be some cannibalization of the Helios line but again we really are not concerned about that.

Jacklyn Rider - Lazard Capital Markets

Okay and back to the price increases. We should see the full impact of these price increases for the second quarter starting in April.

Edward Smolyansky

Yes. Again, when we are talking about the price increases they are not completely 100% across the board like we increased by 10% and that is what you are going to see sales have to go up by. There are some products that were increased 5%. Let’s say the organic line because the price of organic milk was not as volatile as the price of conventional milk. So there are different product lines that have different levels of price increases. We also when we do a price increase like that we tend to increase the amount of in store promotion and sales that we offer our retailers as incentives. So especially if we see that the price of milk is coming down we can be more aggressive in terms of in store sales and marketing.

Jacklyn Rider - Lazard Capital Markets

Okay. So on that note, you had a nice improvement in your operating expense as a percentage of sales. Should we continue to see that kind of trajectory in 2008? Or are there significant incremental advertising dollars or other dollars going into those operating expense lines or more body that you have to hire because your business is growing? What should we look for in operating expenses? Is a large part of that fixed and is there a variable percentage of sales that should be growing going forward?

Edward Smolyansky

I think what you are seeing and what you have seen historically is that we have really been able to leverage our operating expenses in our operations. A lot of that stuff is fixed. The operating expenses are not going to be growing as fast as incremental sales. That is where, especially when you are taking a lot of these one-time legal and regulatory expenses which we have incurred over the course of the past couple of years with regard to the Helios acquisition and compliance and different things like that, when those get stripped out we’ll even see further benefit from that.

Jacklyn Rider - Lazard Capital Markets

Okay great. And then you mentioned in your presentation what was going on with the tax rate. What was that exactly that your tax rate was in 25% area?

Edward Smolyansky

35?

Jacklyn Rider - Lazard Capital Markets

I’m sorry, it was around 25 in the fourth quarter.

Edward Smolyansky

That might have been a typo.

Jacklyn Rider - Lazard Capital Markets

No. If you just take your full year number and then you’re back into the fourth quarter it seems that in the fourth quarter you are at a 24% tax rate.

Edward Smolyansky

If that is the case then a lot of it again has to do with the different like amortization, like different expenses that are non-tax related.

Jacklyn Rider - Lazard Capital Markets

In this presentation here it says you had a gain on the sale of marketable securities in the fourth quarter for tax purposes only.

Edward Smolyansky

No. We took a loss in the fourth quarter for tax purposes only.

Jacklyn Rider - Lazard Capital Markets

Okay. Maybe we’ll talk about that later if we can. Then, you didn’t mention your first quarter results and I’m assuming that the sales numbers are coming out in the next couple of days. Can you give us any insight into those numbers?

Edward Smolyansky

At this point it shouldn’t be a surprise to anyone we are getting close to that $1 million per week target. We haven’t hit it yet, but the sales are strong and they are continuing to be strong and we see that. The first couple of weeks of the quarter, again for some reason maybe because of holidays and people were still traveling were slow and then after the third or fourth week of the year they really started to pick up dramatically.

Julie Smolyansky

We’ve had several record high weeks in sales that we have never had before. So just like Ed said any day now we’re going to hit that $1 million mark for the week. Traditionally our sales have been between 25-30% increase so that will probably remain the same.

Jacklyn Rider - Lazard Capital Markets

Lastly you mentioned the completion of the manufacturing expansion, bringing Helios over to Morton Grove. Can you give us some sense of what the cost savings are there? I know that manufacturing Helios has higher margins when you do it at Morton Grove but are there some numbers you can put behind that?

Edward Smolyansky

It really is still too early to tell just because there are so many other factors. We don’t have that sophisticated of information and IT system to really break down on a per unit. I know it could be somewhere – the cost per unit is probably somewhere in the 15-20% less range.

Jacklyn Rider - Lazard Capital Markets

Okay great. Actually now that you are in April, well you are not in April yet, but we know prices in April could be relatively low – well milk prices they were pretty low for March, and with your price increases put through can you give us a sense of what a [prosability] per unit is now compared to what it was like in the fourth quarter?

Edward Smolyansky

We don’t give guidance obviously it is too difficult for us to do. I could go out and just say that I’m very confident that the margins will be substantially better than they were in the fourth quarter and the third quarter as well and I think that once we start to get to a price where milk is relatively more reasonable…

Jacklyn Rider - Lazard Capital Markets

Are these fairly reasonable levels….

Julie Smolyansky

And with that price increase in effect it is like a double benefit.

Edward Smolyansky

I think it is fair to say if you are looking at where the price of milk was in April and March and it is similar to where it was in May and June…

Jacklyn Rider - Lazard Capital Markets

And now you have a price increase…

Edward Smolyansky

And now you have a price increase, it could be safe to say that those margin levels are going to return to where they were when the milk was similar to what it was last year. So again, we don’t give guidance and we don’t feel comfortable giving out guidance but I think I’m comfortable enough to say that the margins will be better than what they were in the third and fourth quarter.

Jacklyn Rider - Lazard Capital Markets

Well okay. If you can get back to first and second quarter levels I think…

Edward Smolyansky

I think if we get back to those levels obviously that is where we really feel comfortable at. So there are so many different things that are going on with the business like we talked about with bringing the Helios down and increasing our capacity and all these different things that are kind of going on at the same time. It is really hard to pinpoint it. I think we need to have a couple of quarters of where our business is pretty steady in terms of other outside activities to really get a good feel.

Jacklyn Rider - Lazard Capital Markets

Okay great. Thank you very much.

Julie Smolyansky

Are there any more questions?

Operator

Our next question comes from Mr. Howard Halpern of Taglich Brothers.

Howard Halpern - Taglich Brothers

Good afternoon. I’ll make it quick. On the Star Fruit. What is I guess the start up expenses for that and how much do you think it will cost to operate?

Julie Smolyansky

It is very small actually. It is tiny. It is a small store. It is about 700 sf. It is in a prime location in Chicago with a lot of foot traffic, especially in the nicer weather which we have been waiting for. Unfortunately we have had the seventh historic worst winter in Chicago, so it was not a good time to open this kind of store.

A soft serve machine costs about $15,000. That is probably the expense that we have in addition to construction which is under $150,000 for construction. The projections that we have heard from other stores similar to Star Fruit, some of them I don’t know if you are familiar with them but Red Mango and Pink Berry are the two stores that are opening on the east and west coast and a lot of attention has been paid to them. They are selling basically what we’ve heard is a milk and powdered formula. We’re selling our kefir which has like I said 23 years of background and quality behind it. We know probiotics inside out. In the press what these stores have quoted as saying is they get about 500 customers per day with an average ring of $6. That is pretty significant. They said that within 2-3 months of opening their initial investment comes back. I believe we will actually have a similar possible story. We are also different because we are not only offering our frozen kefir but we will also be offering kefir parfait’s where you can come in and customize your kefir with any variety of fresh fruit toppings, any dry toppings, cereals, chocolate chips, M&M’s, whatever you want to put in. Similar to what Starbucks did with coffee. Yes you can make coffee at home, but everyone goes to Starbucks and everyone wants to make their drink their own. That’s what I think we can do with this kind of concept. Taking kefir or a yogurt like product. Yogurt parfait’s are on every menu from McDonalds to Four Season’s Hotels. Every breakfast menu has a yogurt parfait. Here you can pick your flavor of kefir. You can pick your fruit. You can pick whatever kind of toppings you want on it and you can take it to go.

The website, we have had a lot of great comments from the website. The response has been really wonderful. People are just really excited for us to open. Pink Berry becomes almost addictive. We are hoping to do the same thing with Star Fruit. It is not that complicated to operate this. This is the smallest of our business, I think.

Howard Halpern - Taglich Brothers

Okay. One final question in regards to cost. I know we’ve talked excessively about milk. What about fuel costs, freight costs? Have you seen any mitigation in that area at all?

Edward Smolyansky

No. Fuel remains high I’m sure everybody knows. Oil is again off to record levels and that is going to translate down to diesel. The cost of the fuel and all these other side costs and raw material costs, resin and things like that, are going to get mitigated a little bit by the price increase that we talked about. While milk is dropping everything else is remaining high but we can get some level of benefit coming back with the price increases. Again, like I said we do these price increases as a matter of business every year. There is inflation. There is cost of business. There is insurance. All of these expenses always go up and that is the cost of doing business – for everybody – so when we do price increases it is not necessarily a reaction to milk or to any one cost going up. It is a reaction to the increased cost of doing business on all sides.

Howard Halpern - Taglich Brothers

Actually one other one. You talked about three individuals that you have hired. With the increased potential out there do you see a potential need in the second half to start hiring one or two more people to increase sales in areas that you are not in geographically?

Julie Smolyansky

Not on the sales front. Not yet because they are pretty nicely separated between east coast, west coast and food service. So I don’t think we need to hire more. But maybe, we’ll see how it goes. I can’t say that we won’t. But we also operate with brokers. These food brokers go out and sell our product and basically what can happen is the sales rep can manage the broker. That is no investment. That is a strictly commission business so we don’t have any investment in the front. But we will be probably adding more staff to our business.

Howard Halpern - Taglich Brothers

Okay. Thanks.

Operator

Our next question comes from Ivan Zwick of Raymond James Financial.

Ivan Zwick - Raymond James Financial

A couple of questions. They have actually partially been answered. They may be more of a comment. When you say that milk prices have come down to the May of 2007 levels, that quarter that ended in June of 2007 was the best quarter we ever had. We had like 39.5% gross profit margins to sales and our net profit after taxes was 14.4%. In the quarter before that ending in March they were 39.5% gross profit margin to sales and 12.5% net bottom line. With the milk prices down to those levels and the increases we have instituted in some of our product line do you think we could possible see the 13% bottom line level if the milk prices stay where they are?

Edward Smolyansky

Again, I want to kind of talk back to the question from Lazard Capital. It is too difficult for us to go out and say exactly pin down a number. I think we can do better than what we did in the third and fourth quarter. Will we reach the margin operating margins and net income margins that we saw in the first and second quarter? I don’t know. I hope so but we’ll have to see.

Ivan Zwick - Raymond James Financial

It looks pretty promising to me. I didn’t realize the comments Julie made on the Star Fruit stores I believe I heard her right that most of the stores have about 500 people through on the day.

Julie Smolyansky

That’s what they quoted in the press. So whether that is true or not that is what the press has written about their stores. I don’t know for sure but that is what they quoted and said in the media.

Edward Smolyansky

We’re not looking…to get 500 people into our tiny little store would be a tremendous success. To get even a fraction of that I think we’ll break even and don’t forget a lot of the benefit from these types of endeavors goes beyond the sales and the small amount of income we can generate. A lot of it will come back in terms of press and awareness and marketing. If we can open a couple of stores in Chicago and maybe some franchises out it is going to give us a lot of press and a lot of bang for our buck for the small amount of start up costs and in return the amount of press and attention and awareness we are going to generate from that.

Julie Smolyansky

And the management…it doesn’t really take a lot of time away from…it’s part of our business. I think it is an area of growth in our business. Some companies start with a retail store and then grow into groceries. TGIF for example where they have their restaurants and then the brand and they put that brand into the grocery. Maybe we’re doing it in a different way. It is certainly an interesting opportunity that we thought we know better than anyone else about probiotics and kefir and this is a great way to reach some people that wouldn’t otherwise come and look for kefir in the store. So it is interesting. We’ve hired a store manager, an assistant manager and a lead supervisor. That is really their responsibility. That is the extent of my hiring in that area. So for investors you kind of get one management team with two businesses for the price of one. So I think it is interesting.

I see another instant message coming through.

Ivan Zwick - Raymond James Financial

I just had one other question. Just comment on the Star Fruit thing I can see where this could become one of the most profitable parts of your business if it works out right because the margins should be better than the manufacturing of kefir.

Julie Smolyansky

Of course because it is pretty expensive. It is not cheap. You could go into the store and buy one bottle of our product or you could come into the Star Fruit and buy one serving. So but people don’t mind. We’re still paying $4-$5 for our coffee in the morning for Starbucks so clearly there is a market for these kind of products.

I definitely urge everyone to come down. April 15 is our grand opening. It is a beautiful store, a beautiful location and this product truly tastes delicious. We did a couple of test runs and it is absolutely wonderful. So I’m really looking forward to it.

Was that it Ivan?

Ivan Zwick - Raymond James Financial

I had one thing on the Pro Bugs. You may have said it but I didn’t think I heard it. The study we are doing on the Pro Bugs which we started last August. Do you know how long before it will be complete?

Julie Smolyansky

Yes that question was asked. Probably by the end of the year. Once they have completed the study they still have to go through the process of writing the article and then presenting the article for print in the medical journals. So it is a process. It is definitely a longer process. But like I said I believe there has been enough studies out there about the benefits of probiotics out there so it’s not like we are operating with our eyes shut. We know there are definitely benefits. Like I said probably by the end of the year we will know something.

Ivan Zwick - Raymond James Financial

I know there are a lot of benefits from it personally. Thank you and lots of success for the rest of the year.

Julie Smolyansky

Thank you. I think the hardest times are behind us and that is what we really have been trying to convey. Yes it was a very difficult environment. Yes we have had challenges as many businesses have had but we continue to increase our sales and awareness of our product and we are still doing wonderful things and growth of our products are just really tremendous and really nice to see. So going forward I think we can only go up. I just don’t see there being this kind of factors that took place in the last six months of 2007.

One more instant message that came through was somebody asking about the progress of the La Fruta sales and a review of where Lassi is sold.

Lassi is currently being sold at many of the Whole Foods locations as well as a lot of the independent health food stores. Feel free to ask for it by name at your Whole Foods market or independent markets. It is definitely not a mass market products although I will say we had a couple of requests from Harris Peter – I think it was Harris Peter – asking for Lassi. So we might see that getting into some mass market. But I would really start with some of the health food stores. If you kind of go and browse some of the frozen health food sections of your health food store you will already see there is a huge space being taken by a lot of the frozen Indian food products. This is because the health and holistic markets are very in tune with eating Indian foods already. In terms of La Fruta, La Fruta is sold in a lot of the Hispanic markets. We are not pushing La Fruta in mass market, strictly in the areas where we see high Hispanic populations. A lot of these independent markets, Superior markets, a lot of Bodega’s. They are a little bit harder to find but La Fruta is another part of our business that we try to grow. So I hope that answers some of the question.

That’s all I have through instant message. Are there any more phone questions?

Operator

At this time there are no further questions.

Julie Smolyansky

Okay. So it sounds like we are done. I hope that we have been able to shed some light on 2007 and 2008 going forward. We feel strong about our business. I hope you get that sense of our enthusiasm and passion for our business. I personally feel very strong and positive for our business.

So, good luck to every body and you know if you have questions we try to be available. That’s the end of our call. Thank you everyone for joining us.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: LifeWay Foods Inc. Q4 2007 Earnings Call Transcript
This Transcript
All Transcripts