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Operator
Good afternoon and welcome to Lifeway Foods conference call. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. An operator will give instructions on how to ask your questions at that time. (OPERATOR INSTRUCTIONS). Please note, this conference is being recorded. Now I would like to turn over the conference to Mr. Edward Smolyansky.
Julia Smolyansky - President, CEO
And Julia Smolyansky. This is the Lifeway Foods annual call 2007 year-end review, and this webcast 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 10-K. Those statements made during this webcast are only made as of the date of this webcast, and the Company undertakes no obligation to update the forward-looking statements to reflect subsequent events and circumstances.
This web site is posted solely for your information purposes and is not to be construed either as an offer to sell or a solicitation of offer to buy any securities.
Okay, so Edward will get into some of the financials.
Edward Smolyansky - CFO, Chief Accounting Officer, Controller
So everybody -- this is our first year of doing the call in conjunction with the webcast, 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 could obviously call and e-mail us and we can send you out the presentation in another format. So I'm basically just going to --
Julia Smolyansky - President, CEO
For those of you who are listening only on the phone, we're going to be taking questions at the end. But there's also a way to instant message questions, and that information is available -- that was made public on the press release that provided the URL which would then offer you the opportunity to instant message us questions at the same time.
Edward Smolyansky - CFO, Chief Accounting Officer, Controller
So I'm going to just start off by basically going over some of the highlights in 2007. I'm not going to spend too much time on a lot of the information in the first nine months, as that stuff has already been public and out there for a while. So going forward, the first slide that we have is about the balance sheet -- slide number two, sorry -- is about the balance sheet.
So some of the highlights -- at the end of the year 2007, 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, about $1.8 million of that debt.
So in terms of the balance sheet, things are definitely looking good, and we continue to increase the shareholder equity.
Moving to the next slide, which is the income statement, these two columns -- they are just showing the yearly figures and not the quarterlies. But in terms of the fourth quarter, sales were up about 30%. For the year, they were up about 40%. Again, this difference just is a result of 2007 being the first full year of the Helios acquisition. For the fourth quarter 2007, gross profit decreased about 10% to $2.3 million from $2.52 million in the fourth quarter of 2006. And 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 to surprise to anyone; it's been in the news, and we've discussed it previously.
Basically, in terms of the income statement, 2007 was a tale of two halves, the first half 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 September, we saw -- actually, starting with August, we saw record high milk prices. So in a couple of slides going down, there's 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. Some people might recall the press release we made not too long ago, which we said that we just completed our $2.5 million expansion project, and obviously this number reflects that. So at this point, we've doubled our expansion. That's set to come online, so the growing sales that we expect to have in the future, and we definitely have the ability for the next two or three years to supply that growing demand.
Going back to next slide, which will start the three slides which I will discuss about the milk prices.
Julia Smolyansky - President, CEO
That would be slides 5, 6 and 7.
Edward Smolyansky - CFO, Chief Accounting Officer, Controller
Slide 5 is the class one price, which is the price of milk we use for our Kefir products, and the majority of it. And what you will notice here is, starting in August, September, October, November were four to five months of continuous, let's put it, record high milk prices. This is something that's just part of our business.
Thankfully, what the trends are going to show is that, starting in February, the decline had started to go down. In March, March prices were actually substantially lower all the way, going all way back to May of 2007 numbers. For class one April picked up a bit, but again, we're still at June 2007 levels and substantially lower than the record high levels that were in 2007 that ended the third quarter and the fourth quarter. Again, September through November.
Class two, which is, again, about 30% of our purchases of milk -- the price, again, same type of a trend line where you see the September through November months -- actually, I guess, September, October and November -- 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 bank statements, that we are definitely seeing the impact of these lower milk prices positively, obviously.
The next slide, which is slide seven, is the nonfat dry milk price chart -- again, almost the exact same type of a chart, and again, April is the lowest it has been since about April of last year. So the trend is definitely positive, and we're happy that we're able to get out of this difficult situation in the third and fourth quarters of 2007, and we're going to move on. We still had relatively healthy margins, given this difficult period.
Also in the fourth quarter, in terms of operating expenses, there was a $100,000 expense related to Sarbanes-Oxley compliance that was -- that one was a one-time fee, and there will be another $90,000 expense in the first quarter of '08 related to the Sarbanes-Oxley. 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 Sarbanes-Oxley compliance expense going forward. So those were two things that I wanted to point out that I thought were important.
The next slide basically is our Management Discussion and 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 we can get you this information readily. And it kind of just sums up what I just discussed.
I'm going to hand over to Julia, who is going to talk more about the press and the sales and the business as a whole.
Julia Smolyansky - President, CEO
So 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, was definitely [time], especially considering a lot of the new items and products that we've launched in this year and the last few years. So we have benefited tremendously from their efforts, obviously, with such increases in sales that we've seen.
We've spent a lot of effort or devoted a significant amount of effort to our new foodservice area of our business, which previously has not really existed, and basically pioneering a whole new avenue of growth that never existed. So we are gaining placement in areas like the Google Cafe or the Mayo Clinic Health Cafe; different hotels, including the W Hotel and a number of other hotels. So that we're seeing some nice growth. I think it's 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's about 17 flights that have our Kefir on their beverage cart, and they pour it. We're working on gaining new distribution in those markets.
We've also a launched a new product. 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 is here in America. Similar to the way that Kefir is their staple in the Eastern European countries and now hopefully becoming in the United States, Lassi is equally a staple in those countries. So it's so similar to what we already do in our production, and so it just made a nice transition into our production capacities. Lassi is already gaining distribution at Whole Foods, between four and 10 SKUs, 10 facings in 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 treading and an awareness, an all-time high if awareness of probiotics and Kefir and Lifeway Foods 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, considering that we went through that expansion at the same time with these record high milk prices, certainly a very difficult time for Lifeway Foods. But we've completed that, and so we're very excited to reap the benefits of that expansion.
In addition, we gained new distribution in several chains, including King Sooper in Colorado and a number of other chains. But in addition, our ProBugs were expanded into the test market of Krogers from 30 stores to almost 175 stores. We gained new distribution for ProBugs in Harris Teeter as well as Cub Foods, and again we continue to see a great, tremendous interest in ProBugs.
At the National Products Expo show, we launched the first probiotic Kefir Wellness Bar in three flavors, and we saw some amazing response from people. Specifically, one quote was given to me that this is the hit of the show. So I think this will be a brilliant, terrific product line going forward.
Also, for those of you who don't know, we also just announced our opening of Starfruit, 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 opportunity for growth for Kefir and provide customers some ideas of how to consume our product.
So the rest of the stuff I think a lot of people know some of our marketing efforts, but I'll 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 marketplace. We always talk about our probiotic product, and using a lot of grass-roots efforts to reach our customer and really claiming that we are the original probiotic and we are a 2000-year-old product and the gold standard of probiotics.
I'm in slide number 11. Again, some of the innovations have been ProBugs, with no competition at all, completely innovative product. Our new Lassi smoothie and the Wellness Bar were all innovative products and ways that we continue to pioneer and innovate in this category.
So some of the -- the rest, a couple of slides are some images of the products, if those of you who haven't seen them. And on slide 15, which is in 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, as you can see, slide number 18 is just an example of like a ProBugs ad that was put into a national magazine. Slide 19 is an image of Kefir that was put into an advertising of Kefir in a national magazine. Another interesting thing, kind of a big audience that we were able to touch. In the middle of the year, in July, we had a nice billboard on the NASDAQ Tower in Manhattan, and that was up, I think, all week in Times Square. So certainly the number of impressions was tremendous.
We obviously participate in a number of trade shows all throughout the year. Slide 21 kind of just lists some of those trade shows, from our Fancy Food Show to the Probiotic Convention to just restaurant shows and foodservice shows that we've started to attend.
Slide 23, again, just an example of some of our grass-roots events that we're at consistently throughout the United States, not just Chicago, but Boston and Los Angeles and all different markets where our customers are [for] when we gain new distribution. Of course, 2008, we'll even be out there a lot more.
We've 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 or Good Morning America and publications such as Good Housekeeping or Shape Magazine. Pretty much every month, there's something about probiotics, and Kefir is always mentioned.
For example, in Men's Health Magazine in June, Lifeway Kefir was voted as best non-milk dairy drink. Things like that are consistently popping up here. So I think that's going to drive our growth and awareness in Kefir and in probiotics.
Another thing that we're very proud of that you should all be proud of as well is, for the fourth year in a row, we were voted as Fortune small-business fastest-growing small company. I believe there's less than ten companies that have ever made the list four times in a row.
Again, some other interesting things and trends in Kefir's sales that I think that are interesting is to see press pieces that came out throughout 2007, but Brand Week called probiotics the hottest word in food marketing and that probiotics yogurt, the category accounted for almost $300 million in sales, and they project that by 2010 that will grow to $500 million, and certainly Lifeway will benefit from that as well.
And 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, Illinois-based Lifeway Foods, by far the category leader, experienced sales increase of 55.8% and 47.9% for its flagship brand Kefir, while sales of Helios brand Organic rose 41% and 33%. So I think that's a very significant and telling sign of for the trends are and where we're headed.
And we are basically done, so I will take questions and Edward will take questions. And, we can take them by instant message, too. Okay, I can read some of these out loud and answer them.
Julia Smolyansky - President, CEO
I see that we have five instant message questions. I'll read some of them, and then we'll go on to telephone questions. One question is -- is there any other company -- is any other company -- will take over Lifeway in the future? What do you think?
We don't know what other companies think, or we can't read other companies' minds. However, we're in the business of continuing growing our business, and we continue to thrive from all of the things that we've done, and we look forward to continuing on doing that. So I can't read the minds of other companies, 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's up to the market to decide. I think you should talk with your financial adviser on these types of questions. But certainly, we are looking at tremendous growth in 2008. And again, as I've described, some of the milk prices, we do hope that the trend for lower milk prices continues.
Okay. 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. So we announced a price increase in December. The thing about price increases, and specifically and 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. And we can't have a knee-jerk reaction to any one particular month of prices.
But when we did see that -- we saw three, four, five 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 between 60 and 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. So of course, with our higher increase in prices, and literally nobody even blinked an eye when they saw the price increases, everyone is aware that these are going on. We're seeing record inflation, and that's obvious to everybody. It's reported on the news daily, if not hourly, even. So we will start seeing those hit the books.
Are there any phone questions?
Operator
(OPERATOR INSTRUCTIONS) Greg Badishkanian, Citigroup.
Greg Badishkanian - Analyst
Just in terms of the new products, the probiotic bars, the Indian product that you talked about -- what's the response from your retail customers, and when do they hit the shelves? How big do you think those products could be, longer-term?
Julia Smolyansky - President, CEO
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's very complementary and symbiotic. We expect to see them in the marketplace in about eight to 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 have a great interest from Kroger and Whole Foods and just numerous, many of our customers, many of our existing customers, and people are very excited to see them in the marketplace.
I don't really 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. 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 - Analyst
Looking historically, you have had a high double-digit and mid double-digit, lately, type of growth at the retail level. I'm wondering, as you look forward over the next 12 months, call it, is your growth primarily going to come from shelf space within the existing stores? Is it going to come from entering new stores that you're not in now, or just the core -- are customers going in and buying that core product and just that sort of increasing at the existing stores that they go into?
Julia Smolyansky - President, CEO
I think it will be a combination of both. I think there are still a lot of markets that we have not even penetrated. I think we are only in like 35, 40% of mass-market grocery stores. So I think that with our core flagship product, I think that we will have continued new distribution in new markets. But I also think that there is just opportunities with some of the new products that we launched like ProBugs being -- that's like a whole new round of distribution again. I think that multipack Kefirs in the 8-ounce -- those also showed very promising trends with our existing customers. We've seen them, for example, go from three facings of the multipack 8-ounce Kefirs, from three facings to nine facings in some markets. So I think that we'll have some of our newer items that we've launched capturing some extra distribution in our existing customers, but I also think there will be a lot of new customers that come onboard like King Soopers that ever carried our products, like Ralph's. Ralph's only picked up the line last year. So I think that there's still a lot of tremendous opportunities just from like our flagship brand that everyone has got or a lot of our customers have and then new products being gained.
And then I also think that we'll see existing sales at existing stores rise as well, with all the attention that probiotics has had in the media and the increased advertising and marketing that we're doing in the markets that we're selling our products in.
Greg Badishkanian - Analyst
In terms of pricing, could you quantify the price increase that you implemented? And then, what percentage of your products did that account for?
Julia Smolyansky - President, CEO
We increased our prices about 20% -- between -- I'm sorry -- between 10% and 15% -- and that included probably at least 60% to 70% of our existing -- in our product lines.
Greg Badishkanian - Analyst
Okay, great, that's helpful, thanks.
Julia Smolyansky - President, CEO
We have a couple more questions that came through instant messages.
Can we talk about milk prices, why they went up so sharply in 2007 and why are they coming down?
Well, they went up because of worldwide demand of dairy, at least, that's what we've learned. So there's a worldwide demand on dairy that we, United States, has been shipping to China and what not, across the country, across the world, that we've never done before.
Also, why are they coming down? I think there's an effort in the government to try and bring some of these commodity prices down because of all the attention that they have had and consumers just having a difficult time. So they are trying to bring (technical difficulty). I also want to mention that in these kinds of times, the way that people are talking about recessions and inflation and what not, I think that traditionally, during times of recessions, food stocks tend to do well. What we've noticed his people might not go down to the restaurants and spend their money, extra money, at the restaurant, but they will tend to go to the grocery store more often, which gives us much more opportunities to reach that customer and for them to buy our product. Again, we're not just selling milk, we're not just selling a commodity, we are selling a functional food that offers a much greater benefit than just plain calcium. We're also selling a probiotic product that has a lot of health benefits beyond just milk.
Edward Smolyansky - CFO, Chief Accounting Officer, Controller
If I can just add a couple of points to try to wrap up this talk about them our prices, because that does seem to be on the minds of most investors, is that the sales, the price of milk, like any item, a lot of it is driven by supply and demand. As I've spoken before, in 2004 the price was -- shot up to record highs, which were a record back in. 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.
Now, you are going to see that -- hopefully, you're going to see that same reversal occur in 2008, and things will get back into equilibrium.
In terms of the price increases that we implement to try to offset milk prices, we don't do things in a knee-jerk reaction. We're not going to jeopardize the future growth and 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, again, like I said, future growth to try to placate or appease short-term numbers and financial goals. We're here to create a long-term customer base, and you can't really do that if you're gouging customers left and right based on the cost of, let's say, some of your inputs.
So the price increases that we do implement, which we do almost every year, are based upon just normal course of business. Even the price increase that we implemented in January and February, a lot of that is coming back into the consumers' pockets in the form of promotions and sales. So, while we may raise the price, we're also increasing our sales to those customers to at least try to attract more. I think what you're going to see is, when we come out with our first-quarter numbers, sales numbers, this week, you are going to see that positive effect come to light.
Julia Smolyansky - President, CEO
Here's a question that came through on instant message. Can you update us on the status of shifting production from Helios factory to Lifeways? And what will the Helios factory's state be, once production has shifted?
We have (technical difficulty) and integrating the Helios production into our Morton Grove facility, where it's much more automated and our margins are much more -- 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, such as organic milk production and that we're seeing record high sales at the Helios production factory, which is Pride 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 second quarter of this year, 2008. Again, the Pride of Main Street products are organic milk, and they have great sales.
Do you foresee Lifeway's products making its way into major foodservice distributors, such as SYSCO, on a national basis?
I do see it as an opportunity. I don't know if SYSCO specifically, but I do believe that in the next coming years, we will see increased foodservice distributors come onboard are our production and as Kefir and probiotics continue to grow in mainstream. The natural trend will be to then follow in foodservice. So I think it's just something -- like I said, it's an investment into a new pioneering market for us. So I think that it will come very positive for us, going forward, in the future.
Are you going to open more stores like this in -- this person is talking about Starfruit -- maybe out-of-state?
Since we've announced it or talked about it in the press, we've had a lot of interest from people interested in franchising. Right now, we're going to just take it easy and see how this store opens, and just leave it as a test. If it turns out positive, then that might be an opportunity. It might be an opportunity that we franchise and spin it off, and this 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 for the next three, four, five months, and make some decisions based on that.
But since we've announced, at least 15 people e-mailed and called, asking for franchise packages. So there's 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 very long and tedious. So I've just spoken with a researcher, actually, a couple days ago. Probably much later on in the year. I personally do believe that they will be pretty positive. I think that they will be, just from everything we've learned about probiotics and Kefir. Specifically, that study is -- the researcher believed -- his thesis or proposal is that ProBugs can help prevent infantile diarrhea. So I'm very excited and eager to see those results myself, but we don't know them yet.
Once we do know, though, there's a lot of opportunities and claims that we can make on the package, even, and of course with the media that talks about some of these positive results, hopefully.
If there's any other questions, we've covered most of all the questions through instant message. If anyone has any questions on the phone?
Operator
Yes. Our next phone question comes from Jacklyn Rider, Lazard.
Jacklyn Rider - Analyst
Wondering if you could tell the -- you say in the press release the Lifeway Kefir line did increase in 2007 by 30%. But in the fourth quarter, how did Helios Kefir do?
Edward Smolyansky - CFO, Chief Accounting Officer, Controller
Helios increased by about 4% or 5%.
Jacklyn Rider - Analyst
That's what I thought. So there was a disruption from moving production over to Morton Grove, or -- ?
Edward Smolyansky - CFO, Chief Accounting Officer, Controller
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 through the Helios line. It kind of just grows by itself.
Jacklyn Rider - Analyst
Are you seeing strong growth in your organic Lifeway Kefir line?
Edward Smolyansky - CFO, Chief Accounting Officer, Controller
Absolutely. Again, that also could be a factor as on the shelf people might not know that both to the Helios and 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're really not concerned about that.
Jacklyn Rider - Analyst
Back to the price increases. We should see the full impact of these price increases for the second quarter, starting in April?
Edward Smolyansky - CFO, Chief Accounting Officer, Controller
Yes. Again, when we're talking about the price increases, they are not completely, 100% across the board like we increased by 10%, and that's what you're going to see sales have to go up by. There are some products that were increased 5%, let's say, the organic line because organic milk was not -- the price of organic milk was not so volatile like the price of conventional milk. So there's 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 - Analyst
So then, on that note, you have had a nice improvement in your operating expenses as a percentage of sales. Should we continue to see that kind of trajectory into '08, or are there significant incremental advertising dollars or other dollars going into those operating expense lines, or more bodies that you have to hire because your business is growing? What should we look for in operating expenses, or is a large part of that fixed and there's just a variable percentage of sales that should be growing, going forward?
Edward Smolyansky - CFO, Chief Accounting Officer, Controller
Yes. I think what you are seeing and what you have seen historically is that we have really been able to leverage our operating expenses and our operations, and a lot of that stuff is fixed. So the operating expenses are not going to be growing as fast as incremental sales. That's where, especially when you are taking a lot of these, let's say, one-time legal and regulatory expenses which we've 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 will even see a further benefit in that.
Jacklyn Rider - Analyst
You mentioned in your presentation what was going on with the tax rate. But what was that, exactly, that your tax rate was down in the 25% area?
Edward Smolyansky - CFO, Chief Accounting Officer, Controller
No -- 35?
Jacklyn Rider - Analyst
I'm sorry; it was around 25% in the fourth quarter?
Edward Smolyansky - CFO, Chief Accounting Officer, Controller
That might have been a typo.
Jacklyn Rider - Analyst
No. If, if you just add up, if you just take your full-year number and then you back into the fourth quarter, it seems to be the fourth quarter that's you're at a 24% tax rate.
Edward Smolyansky - CFO, Chief Accounting Officer, Controller
Well, if that is the case, then a lot of that, again, has to do with the different -- like amortization expense -- like different expenses that are non-tax related.
Jacklyn Rider - Analyst
In this presentation here, it says you had, I guess, a gain on the sale of marketable securities in the fourth quarter for tax purposes only.
Edward Smolyansky - CFO, Chief Accounting Officer, Controller
No; we took a loss in the fourth quarter for tax purposes only.
Jacklyn Rider - Analyst
Maybe we'll talk about that later, if we can. You did mention your first-quarter results, and I'm assuming they are coming out -- the sales numbers are coming out in the next couple of days. Can you give us any insight into those numbers, or -- ?
Edward Smolyansky - CFO, Chief Accounting Officer, Controller
Yes. At this point it shouldn't be a surprise to anyone we're getting close to that $1 million a week target. We haven't hit it yet, but the sales, they 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 because people are still traveling, we are slow. And then, after the third or fourth week of the year, they really started to pick up dramatically.
Julia Smolyansky - President, CEO
We've had several record high weeks in sales that we've never had before. So, just like Ed said, it's like any day now we're going to hit that $1 million mark for the week. So traditionally, our sales have been between 25% and 35% increase, so that will probably remain the same.
Jacklyn Rider - Analyst
Lastly, I know 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 manufacturing Helios has higher margin when you do it at Morton Grove. So are there some numbers you can put behind that?
Edward Smolyansky - CFO, Chief Accounting Officer, Controller
No. Again, it's still really too early to tell, just because there's so many other factors. We don't have that sophisticated of, let's say, an 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% to 20% less range.
Jacklyn Rider - Analyst
Actually, could you, now that you are in April -- well, you're not in April yet. But we know prices in April are going to be relatively low, milk prices. They were pretty low for March. With your price increases put through, could you give us a sense of what profitability per unit is now, compared to what it was like in the fourth quarter?
Edward Smolyansky - CFO, Chief Accounting Officer, Controller
We don't give guidance, obviously; it's too difficult for us to do. But 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 probably in the third quarter, as well. And I think that, once we start to get to a price where milk is relatively, again, more reasonable --
Jacklyn Rider - Analyst
But are these -- these are fairly reasonable levels.
Edward Smolyansky - CFO, Chief Accounting Officer, Controller
Exactly. Yes.
Julia Smolyansky - President, CEO
And with the price increase in effect, it's like a double benefit.
Edward Smolyansky - CFO, Chief Accounting Officer, Controller
I think it's safe to say, if you're looking at where the price of milk was in April and March, and it's similar to where it was in May and June
Jacklyn Rider - Analyst
And now, you have the price increase.
Edward Smolyansky - CFO, Chief Accounting Officer, Controller
And now there's a price increase, I think 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] out 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 - Analyst
Well, if you could get back to first and second-quarter levels, I think (multiple speakers) --
Edward Smolyansky - CFO, Chief Accounting Officer, Controller
If we can get back to those levels, obviously, that's where we really feel comfortable at. There's so many different things that are going on with the business, that -- like we talked about with bringing in other -- bringing the Helios down and increasing our capacity and all these different things that are going on at the same time, it's really hard to pinpoint it. I think we need to have a couple of quarters where our business is pretty steady in terms of other outside activities, to really get a better feel.
Julia Smolyansky - President, CEO
Are there any more questions?
Operator
Howard Halpern, Taglich Brothers.
Howard Halpern - Analyst
On the Starfruit, what is the startup expenses for that, and how much do you think it will cost to operate?
Julia Smolyansky - President, CEO
It's very small, actually. It's tiny. It's a small store; it's about 700 square feet. It is in a prime location in Chicago with a lot of foot traffic, especially in the nicer weather, which we've been waiting for. Unfortunately, we had the seventh historic worst winter in Chicago. So it was not a good time to open this kind of store.
A [Taylor] -- a machine, a (inaudible) 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've heard from other stores similar to Starfruit, some of the ones being -- I don't know if you are familiar with them, but Red Mango and Pinkberry are some of the stores are opening on the East and West Coast. There are really -- a lot of attention has been made to them, and they are just selling -- well, basically what we've heard is a milk in powdered formula. And we are selling our Kefir, which has, like I said, 23 years of background and quality behind it. We know probiotics inside out.
So what's in the press, what these stores have quoted as saying is that they get about 500 customers -- what was it -- 500 customers per day? 500 customers per day with an average range of $6. That's pretty significant. They said that within two to three months of opening, their initial investment comes back. So I believe that we'll actually have a similar possible story.
We're also different because we're not only offering our frozen Kefir, but we're also going to be offering Kefir parfaits, where you can come in and customize your Kefir with any variety of the fresh fruit topping, any dried topping -- cereal, chocolate chips, M&Ms, whatever you want to put in -- basically like similar to the way that Starbucks did with customizing your 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 is taking Kefir or a yogurt-like product. Yogurt parfaits are on every menu from McDonald's (technical difficulty) Four Seasons hotels. Every breakfast menu has a yogurt parfait. Here, you can pick your Kefir, you can pick your fruit. You can put on any kind of toppings you want, and you can take it to go. The web site is -- we've had a lot of great comments from the web site. The response has been really wonderful. People are just really excited for us to open. Pinkberry becomes almost addictive. So we're hoping to the same thing with Starfruit. It's not that complicated to operate this; this is the smallest of our business, I think.
Howard Halpern - Analyst
In regards to costs, I know we've talked, and you've talked extensively about milk. But what about fuel costs, freight costs? Have you seen any mitigation in that area at all?
Edward Smolyansky - CFO, Chief Accounting Officer, Controller
No. Fuel again remains high. I'm sure, as everybody knows, oil is again also at record levels, and that's going to translate down to diesel fuel. So the cost of the fuel and all these other, let's say, side costs and raw material costs, resin and things like that -- they are going to get mitigated a little bit by the price increase, again that we talked about. So, while milk is dropping, everything else, let's say, 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 practice every year. There's inflation, there's cost of business, insurance. All these expenses always goes up, and that's the cost of doing business.
Julia Smolyansky - President, CEO
For everybody.
Edward Smolyansky - CFO, Chief Accounting Officer, Controller
And the cost of inflation, for everybody. So when we do a price increase, it's not necessarily as a reaction to milk or to any one cost going up. It's a reaction to the increased cost of doing business on all sides.
Howard Halpern - Analyst
Actually, one final one. You talked about the three individuals that you've hired. But with the increased potential out there, do you see, potentially, the need, in effect, to have to start hiring maybe one or two more people to increase sales in areas that you're not in geographically?
Julia Smolyansky - President, CEO
Not on the sales front, not yet, because they are pretty nicely separated between East Coast, West Coast and foodservice. So I don't necessarily think that we need to hire more, but I think -- maybe; we'll see how it goes. I can't say that we won't.
But again, we also operate with brokers. So these food brokers go out and sell our products, and basically what can happen is these sales reps can manage the brokers. So that's one place, and that's no investment; it's like a strictly commission kind of basis. So we don't have any investment in the front. But we will be, probably, adding more staff to our business.
Operator
Ivan Zwick, Raymond James Financial.
Ivan Zwick - Analyst
When you said that milk prices had come down to the May of '07 levels, that quarter that ended in June of '07 was the best quarter we ever had. We had like 39.5% gross profit [for] margins of sales, and our net profit after taxes was 14.4%. The quarter before that, ending in March, they were 39.5% gross profit margins of sales and 12.5% net bottom-line.
With the milk prices down to those levels and the increases that we've instituted in some of our product lines, do you think we can possibly see the 13% bottom-line level if milk prices stay where their they are (multiple speakers) second quarter?
Edward Smolyansky - CFO, Chief Accounting Officer, Controller
Yes. Again, I want to hark back to the question from Lazard Capital about -- it's too difficult for us to go out and say exactly -- pin down a number. I think that we can do better than what we did in the third and fourth quarter. Will we reach the 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 - Analyst
Well, it looks pretty promising to me. And I didn't realize the comments I guess Julie made on the Starfruit stores that, I believe I heard her right, that most of the stores have, what, about 500 people through in a day?
Julia Smolyansky - President, CEO
Correct.
Edward Smolyansky - CFO, Chief Accounting Officer, Controller
And we don't even --
Julia Smolyansky - President, CEO
That's what they quoted in the press. So whether that's true or not, that's what the press has written about their stores. I don't know for sure, but that's what they quoted and said in the media.
Edward Smolyansky - CFO, Chief Accounting Officer, Controller
We are not looking -- to get 500 people into our tiny little store would be a tremendous success. If we can get a fraction of that, I think we'll break even. Don't forget, a lot of the benefit from these types of endeavors goes beyond the sales and the income, the small amount of income we can generate. A lot of it is going to 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's going to give us a lot of press and a lot of bang for our buck, for the small amount of startup costs and, in return, the amount of press and attention and awareness that we're going to generate from that.
Julia Smolyansky - President, CEO
And the management -- it doesn't really take too much time away from -- it's part of our business, I think it's an area of growth in our business. Some companies start with a retail store and then grow into grocery, like TGIF, for example, where they have their restaurants and then they have a brand and then they put that brand into the grocery. Maybe we're doing it in a different way. But it's certainly an interesting opportunity that we've got that we know better than anyone else about probiotics and Kefir. This is a great way to reach some people that wouldn't otherwise come and look for Kefir in the store.
So it's interesting. We've hired a store manager and an assistant manager and a lead supervisor. So that's really their responsibility; that's the extent of my hiring in that area.
So for investors, you get one management team with two businesses for the price of one. So I think it's interesting.
Now I see another instant message just came through.
Ivan Zwick - Analyst
I just had one other question.
Julia Smolyansky - President, CEO
Sure, sure. Go ahead, Ivan.
Ivan Zwick - Analyst
Just a comment on the Starfruit thing. I could 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 in the manufacturing of the Kefir.
Julia Smolyansky - President, CEO
Of course. It's a pretty expensive product; it's not cheap. You could go into the store and buy one bottle of our product, or you can come into the Starfruit location and buy one serving. But people don't mind. We're still paying $4 or $5 for our coffee in the morning at Starbucks. So clearly, there's a market for these kinds of products.
But I definitely urge everyone to come down. April 15 is kind of our grand opening. It's a beautiful store, beautiful location. And the product is truly -- it tastes delicious. We did a couple of test runs, and it's absolutely wonderful. So I'm really looking forward to it.
Was that it, Ivan?
Ivan Zwick - Analyst
Yes. No, no. (technical difficulty) I had one thing on the ProBugs. You may have said it, but I didn't think I heard it. The study that we're doing on the ProBugs, which we started last August -- do you know how long before it will be completed?
Julia Smolyansky - President, CEO
Yes, that question was asked -- probably the end of the year. Once they complete the study, they still have to go through the process of writing the article and then presenting the article for print in the journals, the medical journals. So it's a process, it's definitely a longer process. But like I said, I believe there's been enough studies out there about the benefits of probiotics, so it's not like we're just operating with our eyes shut. We know that there are definitely benefits. But like I said, probably by the end of the year we'll know something.
Ivan Zwick - Analyst
I know there are a lot of benefits from it, personally. Well, thank you, and lots of success for the rest of the year.
Julia Smolyansky - President, CEO
Thank you. Yes, I think the hardest times are behind us, and that's what we really want to -- have been trying to convey, that yes, it was a very difficult environment; yes, we've had challenges, as many businesses have had, but we have continued to increase our sales and awareness of our product, and we're still doing wonderful things. The 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 -- the 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 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's definitely not a mass-market product, though I will say that we have had a couple of requests from Harris Teeter -- I think it was Harris Teeter -- 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 food sections of your health food store, you'll already see that there's a huge space that's being taken by a lot of the frozen Indian food products. This is because the health in 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. So a lot of these independent markets, Superior Markets, markets such as a those -- a lot of bodegas, they are a little bit more harder to find. But yes, La Fruta is another part of our business that we try to grow. So I hope that answered some of the questions.
That's all I have through instant message. Are there any more phone questions?
Operator
At this time, there are no further questions.
Julia Smolyansky - President, CEO
So it sounds like we are done. I hope that we've 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. So I personally feel very strong and positive for our business.
So good luck to everybody, and if you have questions, we try to be available. That's the end of our call. Okay, thank you, everyone, for joining us.
Edward Smolyansky - CFO, Chief Accounting Officer, Controller
Thank you.