Interview with Lifeway Foods CFO Edward Smolyansky

| About: Lifeway Foods, (LWAY)

On August 18, The Wall Street Transcript interviewed Edward Smolyansky, Chief Financial Officer of Lifeway Foods, Inc. (NASDAQ:LWAY). Key excerpts follow: 

TWST: We would like to begin with a brief historical sketch of the company and a picture of the things you are doing at the present time.

Mr. Smolyansky: I will begin with the founding of the company in May 1986. The company was founded by my father, Michael Smolyansky, who emigrated from the former Soviet Union in the late 1970s and one of the products that was made traditionally in Eastern Europe and is a staple in Eastern Europe was a product called kefir.  He wanted the product here and the product did not exist, so they began making it themselves and formed the company and became very successful in reaching the immigrant population in Chicago.

In 1999, the company had about $6 million or $7 million in sales. Taking notice from a company called Group Danone, a group that is renowned in France, a very large company, they took a 20% stake in the corporation in 1999. They still hold that stake today. Today we are on pace to do roughly $47 million to $50 million in revenue. And that's where we sit today.

TWST: What have been the principal drivers of the company's success?

Mr. Smolyansky: Like I said, we were one of the first companies in the United States to offer this type of a product. In general, in Europe and Eastern Europe and Europe itself, kefir is a staple. So it's like drinking Coca-Cola in the United States. People have at least a cup of kefir a day. People grow up on it, having one or two cups a day. In general, in America, people can consume cultured dairy — various products like yogurt or kefir or even sour cream, which is technically a cultured dairy product, of course. They consume these at the rate of about one to two cups per week. So significantly we are still far behind our friends in Europe. And that also has contributed to some of our growth.

As the US population has become more educated and has become more accepting toward yogurts, kefir and things like that, the whole tide of all these cultured dairy products and probiotics has risen, and we have grown with that. The whole industry has grown maybe about 5%, 6%, 7%, which is very large and very fast for a developed or relatively developed food segment. Our segment itself, kefir, a specific segment, we have grown about 25% to 30% per year. We attribute that to very strong marketing, a very great tasting product, of course, and, like I said, the tremendous health benefits that our product offers over similar types of products, such as yogurts, drinkable yogurts and products like that.

TWST: I understand that changes in packaging have played a significant role in your success.

Mr. Smolyansky: Yes. Back when the current management started up in 2002, we had a very plain medicinal looking bottle, just a white milk bottle with a very small sticker label and very basic graphics. And we said to ourselves, how are we going to reach the masses? People can look at the product on the shelf, but they are not going to pick it up. And so you know, we had good distribution at least in Chicago and some of the health food stores like Whole Foods and Wild Oats, places like that, but the product wasn't getting picked up. What we did is we completely invested in a new type of a packaging, which is a full body sleeve and it wraps around the whole bottle and gives us 360 degrees worth of real estate in which to educate the customer. Not to mention, the graphics are super. So once we did that, overnight we noticed a 30% or 40% increase in sales of those products that we had switched over to that new packaging. And then over the course of 2002 and 2003, we switched all of our products to the new packaging. And that has been something that was a game changer for us. Like I said, it gave us a lot of real estate to market and educate on the product and that type of educational space is much more efficiently done on store shelves than through advertising, through newspaper or print and much more cost efficient. So we really got a lot out of that and we continue to.

TWST: What are the main items on your agenda, as you look out over the next two to three years?

Mr. Smolyansky: We want to continue to increase our distribution. Recently we have gotten into some club distribution; we have designed a special 12 pack for Costco in the Midwest, and we hope to expand that to different regions throughout the country. So we are looking definitely to expand to more of the, let's say, mass market distribution outlets as well as food service, which is something that we have been aggressively trying to implement for the past year and a half.

We have a dedicated sales team that's doing strictly food service, which is going to hospitality, hotels, restaurants, gyms, places like that and we think the away-from-home aspect of our business is really important, because it will translate hopefully when the customer does go back to their home, they will go to the grocery store and do the regular shopping and they have already noticed the product. So the food service and the away-from-home sales outlet I think are things that we are focused on for the future.

TWST: What about challenges and problems? Is there anything to worry about over the next few years?

Mr. Smolyansky: Obviously in 2007, commodity costs were a big headache for us and the whole food industry in general, not just dairy, but we saw milk prices which are about 70%-75% of our total raw material costs increase to record levels and stay there from about August 2007 to about November or December 2007. What we have seen now is, basically, a supply/demand equilibrium getting back into where it should normally be, which is more reasonable prices for milk. In August we have seen milk prices at the second lowest level of the year. May 2008 was the lowest, so we are definitely seeing a trend down and we believe that this trend to lower milk prices will continue over the next 18 months. What that will do obviously is help us increase our margins hopefully over the near term and give us a bit more money to do some more promotional activity, some more advertising and some more marketing, so we are not so hamstrung. Milk prices and commodity prices are the biggest thing that we watch over, and then everything else should take care of itself.