Lifeway Foods, Inc. (NASDAQ:LWAY) Q3 2022 Earnings Conference Call November 14, 2022 10:00 AM ET
Company Participants
John Waldron – Chief Financial Officer
Julie Smolyansky – Chief Executive Officer
Conference Call Participants
John Waldron
Good afternoon. Welcome to Lifeway Foods Fourth Quarter and Full Year 2020 Earnings Conference Call. On the call, with me today are Julie Smolyansky, Chief Executive Officer.
By now, everyone should have access to the press release that went out this morning. If you’ve not received the release, it is available on the Investor Relations portion of Lifeway’s website at, www.lifewaykefir.com. The recording of this call 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. The words, believe, expect anticipate, and other similar expressions, generally identify forward looking statements. These statements do not guarantee future performance, and therefore undue Reliance should not be placed on them. 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. All of the forward looking statements contained here and speak only as of the date of this call.
And with that, I would like to turn the call over to Lifeway’s Chief Executive Officer, Julie Smolyansky.
Julie Smolyansky
Thank you, John. And good morning to everyone joining us today. First, as always, thank you for your interest in Lifeway Foods. I am very pleased to be speaking with you today about our third quarter, another strong period of growth for our business. Before discussing the results, I’d like to thank the whole Lifeway team for their impressive efforts and commitment, which have enabled us to seamlessly navigate the challenging operating environment our industry has faced this year and deliver for our valued partners and customers.
Now I will review our third quarter 2022 results. This quarter’s record-breaking top line numbers are a result of our focus on the core Lifeway Kefir business. The strategy we’ve put in place to build awareness for our flagship product has yielded our twelfth consecutive quarter of year-over-year growth at Lifeway, and we are grateful to our customers who have made this milestone possible.
Net sales were $38.1 for the period ended September 30, 2022, an increase of $8.6 million, or 29.1% compared to the third quarter in 2021. The net sales increase was primarily driven by higher volumes of our branded drinkable Kefir and the impact of our price increases implemented during the first quarter of 2022 and to a lesser extent the favorable impact of our acquisition of GlenOaks Farms during the third quarter of 2021.
It’s important to note that even though we implemented price increases this year, branded Lifeway unit sales also increased by double-digits during the third quarter. Our branded drinkable Kefir is the core driver of our business and the consistent growth of Lifeway Kefir illustrates both the stickiness of our active customers and the success of our customer acquisition efforts.
In addition, we reported a gross profit margin of 19.9% for the period ended September 30, 2022. Like others in the industry, we are not immune to the inflationary pressures of the current economic market. We continue to incur incremental costs from our price increases on raw material, including milk, our core commodity, packaging and freight.
That said, as we have disclosed previously. We have taken a price increase throughout this year to offset certain costs and maintain our growth without bottom-line erosion. Our operations team has also consistently delivered in monitoring industry trends and ensuring that we have been positioned comfortably against any potential shortages as well. We intend to continue to prioritize margins moving forward and searching for efficiencies to keep them as stable as possible.
Moving on to expenses; selling, general and administrative expenses increased $0.4 million to $6.3 million for the period ended September 30, 2022, from $5.9 million during the same period in 2021. Our net income during the period and September 30, 2022 was $1 million, reflecting EPS of $0.06 per basic and diluted share compared to a net income of $5 million or $0.03 per diluted common share during the prior year period.
As we work to stabilize our margins and continue to execute on our outlined Lifeway 2.0 strategy, we expect to see progress on our profitability metrics. Capital spending increased approximately $0.9 million to $2.6 million during the same nine-month period ended September 30, 2022.
We focus our capital spend on three core areas; growth capital, cost reduction and facility improvement. The growth capital supports new product innovation and enhancements and on cost reduction and facility improvements, support manufacturing efficiencies, safety and productivity. Our continued capital commitment reflects our goals as a business to continue growing and improving our internal efficiencies.
In summary, the third quarter was a record-breaking quarter for Lifeway. Our net sales of $39.1 million were the highest for any quarter in the company’s history. This also marked our twelfth straight quarter of year-over-year net sales growth and furthered the exceptional performance of our brand year-to-date.
In addition to the results, we continue to enhance our relationship with our retail partners and customers, increase our investment in sales and marketing to promote retention and attract new eyes to the brand and have put pen to paper on multiple new distribution deals, which I’ll discuss shortly and I’m quite excited about.
We’re particularly encouraged by our third quarter performance as consumer trends affected by inflation and recessionary expectations have indicated a trade down to value items and overall decreased willingness to spend. Despite that, demand for Lifeway products has increased meaningfully and we have expanded distribution and seen accelerating velocities with certain key retail partners.
Our strong results throughout this quarter and this year to date, illustrate that our target consumers remain very focused on gut health and nutrition, which is a strong tailwind to Lifeway’s addressable markets. Based on multiple market research reports, we believe this tailwind will continue to accelerate us for years to come. For a September report from Brainy Insights, the global Kefir market is expected to grow from $1.46 billion in 2021 to $2.45 billion by 2030 at a CAGR of 5.9% during the forecast period 2022 to 2030.
Cited drivers include the increased preference for healthy drinks and snacks during the forecast period expanding demand. For an August report from Mordor Intelligence. The global Kefir market is expected to grow at a CAGR of 6.4% during the forecast period of 2022 to 2027 up from their previous report this year, which cited a 5.6 % CAGR. They cite the increasing demand for probiotic drinks as one of the key drivers, noting the efficacy of probiotics in treating certain health concerns such as lactose intolerance.
As the dominant market leaders in the US Kefir industry, Lifeway is extremely well positioned to capitalize on this growing market and consumer interest. Our drinkable Kefir is the backbone of our business and accounts for the vast majority of sales. In the 36 years since Lifeway was founded, we have established ourselves as the leading brand in Kefir and dominate the category.
While innovation and the ability to adapt to consumer trends and behaviors is crucial for success in this industry, it’s important to also recognize that consumer fads come and go. We’ve seen money shift in dynamics in the dairy and dairy alternative space over the past years in particular and our core Lifeway Kefir business has remained steady and consistent in comparison.
After very strong years in both 2020 and 2021, our drinkable Kefir net sales were up 27.1% and 14.6% for the third quarter and nine months ended September 30, 2022 respectively, when compared to the same periods in 2021. As we aim ahead to Lifeway’s continued expansion within the growing market, we are focused on doing what we do well over and over again and that is selling our Kefir.
Our products are healthy, delicious and can be incorporated very dynamically amongst a variety of recipes, which have consistently received positive attention from customers and in the press.
To continue delivering Lifeway to more and more consumers, we plan to consistently deliver on our customer acquisition strategy through advertising and marketing program and to focus on our distribution network to increase access.
I’ll now touch on some of our marketing and advertising strategies. In the middle of 2021, We initiated a large marketing program with the immersive Van Gogh experience, a national exhibition showcases Van Gogh’s artwork through light, music and movement and imagination in 22 major US cities. This in-person marketing opportunity emphasizes wellness and allows us to connect with our consumers on a deep level.
To date, Van Gogh experience has netted over 275 million impression and leave distributed over 250,000 Lifeway Kefir samples to attendees. In Q3 of 2022, Lifeway received 60 media placements and target outlets, resulting in a potential reach of more than 875 million impressions, including prominent features with Fox business, Forbes, Good Housekeeping, Mindbodygreen, Women’s Health, and much more.
To demonstrate the versatility of Lifeway Kefir and expand reach, we’ve continued our work with notable influencers, chefs and nutrition experts to suggest healthy ingredients, flaps, recipes and snack ideas incorporating our products. We distribute these across Lifeway social media platforms and website, which have both seen large increases this year. Lifeway social channels have now amassed over one million followers and brand website sessions were up 26.5% year-over-year for Q3 of 2022. Moving forward, we’ll continue to evaluate all potential marketing and promotional opportunities to onboard new customers and increase the velocities of our brand.
Now I’ll touch on some operational highlights; as we mentioned previously in the first half of this year, we had two big wins. Lifeway regained distribution at the fresh market after a three-year absence and was awarded a rotation at Costco Midwest stores. Lifeway also converted Food Lion from a private label to branded product, increasing our brand recognition and building consumer awareness for our leadership position in the category.
The grocery channel has long been our traditional approach. Our first large customer was Whole Foods who we grew with during the nineties and along the way, we have picked up distribution through multiple other large grocery chains. Yet, as we alluded to previously, we have been evaluating options to increase our presence in high visibility away from home location such as small format convenience stores, universities and healthcare settings.
With that said, I’m pleased to announce two new distribution deals that we have recently secured. First, we received authorization with Plaid Pantry, an Oregon based chain, which represents Lifeway’s expansion into the Pacific Northwest, a region we see as a potential growth area. Second, we plan to begin shipping to Wawa in late Q4. Wawa is the dominant convenience chain in the Northeast, with over 900 stores, and we are energized and optimistic about our opportunities with such an amazing partner.
These new placements represent a strong gain into the convenience segment. We’re very excited about the prospects of both new opportunities as they serve both sales and marketing functions for the brand because of their high visibility. I believe both of these deals and our activity throughout 2022 illustrate Lifeway’s clear commitment to growth and will continue to search for and evaluate expansion opportunities across all of our distribution channels.
Lifeway’s Kefir product provide customers with probiotics, vitamin D and protein that helps to support their gut health, immunity and mental wellbeing. The probiotics and Kefir support a healthy microbiome and approximately 80% of immune defense comes from the gut. Probiotic products such as Kefir are the focus of intense research related to the microbiome’s role in stress, depression and anxiety.
We now know that up to 90% of the body serotonin comes from gut cells and the gut brain access, which links the emotional and cognitive centers of the brain with our intestinal function plays a major role in happiness and wellbeing.
As today’s consumers learns and focuses on their health, they will carry even more about those facts and the probiotic culture in their gut, which should be of great benefit to Lifeway’s product portfolio. In addition to our best-selling Kefir and farmers cheese, our new GlenOaks drinkable yogurt, we are evaluating innovation opportunities and i look forward to more exciting announcements in the coming.
Lifeway’s performance in 2022, so far highlighted by this record-breaking third quarter has our team very encouraged and we believe we’re currently on the right path achieving our primary targets, delivering profitable and strategic growth to our investors while furthering our mission to provide best-in-class probiotic and nutritious food to improving the health and well-being of our customers.
To close, thank you all very much for listening to the call today and of course, for your interest in Lifeway Foods. We look forward to updating you on our progress and our business momentum on our next earnings call. And finally, I want to wish you and your families a happy and healthy holiday season. Thank you.
Question-and-Answer Session
End of Q&A
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