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Operator
Good afternoon, and welcome to the 2008 year end annual 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. (Operator Instructions). I would now like to turn the conference over to Julie Smolyansky.
- President, CEO
Hello. This call -- just a couple of legal disclosures before we start. This call may contain forward-looking statements. Investors are cautioned that actual results may differ materially from such forward-looking statements. Forward-looking statements involve risks and uncertainties, including but not limited to competitive pressures and other important factors detailed in the Company's reports filed with the Securities and Exchange Commission.
Okay, now that that is done, we -- you know, it is our intention to provide to the listeners a thorough overview of the 2008 and kind of forward -- going forward business that Lifeway Foods is experiencing. For those of you who are on the webcast, on the -- online, this is the agenda, and I'll kind of be following through, and so it probably makes the best sense to follow along with us online. We will be going through our financial 2008 highlights, as well as a few 2009 initiatives that we feel comfortable talking about at this point.
I'm going to turn it over to Edward Smolyansky, the CFO, and he will go through the financials. This is Edward Smolyansky. I'm going to -- as I did last year, I'm going to kind of focus more on the fourth quarter as, you know, the nine months have already been out there for some time.
In the fourth quarter our sales increased approximately 4% to $10,575,000. This was a lot lighter than we had hoped for, but it definitely did not take us by surprise as -- given the economic conditions and the slow and the -- the slow traffic that we saw in a lot of the retailers that we do business with. Most notably were the natural and organic customers, such as Whole Foods and those higher-end customers. The Helios brand, which is primarily in these markets, actually saw a decline of 15% in the fourth quarter. So what's -- why that's important is the Lifeway brand itself grew approximately 8% to 9%, and when you factor in the decline in sales from the Helios brand, which again is primarily a higher price point, Kefir for us, the combined effect was a 4% increase in sales. For the year, sales increased about 15% year-over-year.
Cost of goods sold as a percentage of sales was 82% in the fourth quarter in 2008 compared to about 77%, again primarily due to the cost of labor and the cost of packaging supplies and transportation expenses. In Illinois, the minimum wage increased in July from $7.50 to $7.75. So when we are looking -- we're comparing year-over-year, the labor costs definitely have an impact on our costs of goods sold.
In addition, as part of our growth strategy going forward, once -- in the second half we saw sales slow -- begin to slow down, so we had to kind of come up with a way to trigger or to start to drive sales going forward. So part of this initiative was to increase product sampling and demonstration activities, couponing and other in-store promotional activities, which have a direct effect on our gross profit and our cost of goods sold. And in addition to that, we also created a reserve account for these types of promotional expenses in the amount of $75,000 that did not exist in the fourth quarter of 2007.
This -- so these types -- so this type of a growth strategy shift was -- is an investment which I'll talk about in a few -- in a few minutes, but basically 2000 -- first quarter 2009 sales came in actually much higher than the fourth quarter so they came in at -- which we are finishing off today so this is pretty much an estimate but it's very close to what it's going to end up being, which was $2,355,000. That's a 10% -- or I'm sorry -- an 11% increase from the first quarter of '08 and a 15% increase from the previous quarter in '08, so a 15% increase from the fourth quarter of 2008. So the investments that we are putting into sampling the product and demonstrations and, again, couponing and all these other promotional activities, are definitely having a positive effect on our sales going forward.
In addition, we cleaned up our balance sheet significantly this year. We wrote down approximately -- in the year we wrote down approximately $1.6 million in assets, $733,000 were realized -- were, I'm sorry, realized losses in the fourth quarter. These -- we were -- we are actually going to be able to deduct 100% of these losses on our tax return this year against capital gains that were realized on the securities in the past three years, so we are actually going to be able to -- all the taxes that we paid on the gains in the past three years we are actually going to be getting all of those taxes back from the IRS. So even though we wrote down all of these losses and we were able to -- and we took some -- took these losses, basically we are offsetting all the gains that we have had over the past couple of years and getting that benefit back. Part of the reason that we had to do this was the fact that we needed to liquidate a lot of these assets, turn them into cash and other equivalents, in order to fund the acquisition of Fresh Made which occurred in February of 2009. So a lot of these kind of rebalancing and trying to get into cash occurred in December, a lot of it occurred in January, and anything that occurred in January we wrote down and we took as an impairment. So those are the numbers that you'll see there.
Going back -- going to sales, again, so what we saw over the past five quarters is our sales peaked in the second quarter of 2008, and I think when the economy and the consumer really started to get hit, and the sentiment really started to kind of come out, we saw a decrease in the third quarter and then, like I said, the fourth quarter, which was significantly lower than we had expected -- or that we had hoped, but not a surprise to us. And then in the fourth quarter -- I'm sorry -- first quarter of 2009 sales increased again by 11%. Also in the first quarter we recorded $6 million-plus revenue weeks. The first couple of weeks in January were extremely light coming off of the Holiday and the other things that usually happen, so we really ramped up in the last 11 weeks of the quarter.
Going to my next slide, which is cash flow, this is -- right now this is kind of the big focus that we have in the Company, especially with the acquisition of Fresh Made. The cash flow in 2008, this is just for the Lifeway Company -- oops. The cash flow just off of operating -- off of operations was $473,000 compared to $247,000 in '08. In terms of the cash used in investing activities, we repurchased some stock. We purchased about 112,000 shares worth of stock, of our Company stock, and of course we purchased a lot of equipment, which is relating to finishing our capital expansion program. So now -- so we have -- again, we have invested -- and all these uses of cash for investing all came from our internal cash flows.
So I'm going to just really quickly skip back to the income statement, just to round out the numbers, 11 -- after all of the write-downs and the charges that we took, the earnings per share for the year were $0.11 versus $0.19 last year, and all these numbers I think were in the press release that we put out earlier today.
I'm now going to turn it over to Julie so she can kind of discuss -- actually, let me round out by discussing milk prices. '07 and '08 milk prices as a whole were very similar. The fourth quarter milk prices were a little bit lower than they were in 2007. However, organic milk prices remain at multiyear highs. At this point in our product mix, about 30% of our products are organic and organic milk prices, and organic raw material ingredients as a whole are only going up. They were about 10% higher in '08 than they were in '07, and like I said, conventional milk prices year-over-year were pretty much flat because they were still high in the beginning of -- sorry, they were high at the end of '07, they were low at the beginning of '07, vice versa in '08. What we saw beginning in February of '09 was a complete drop-off in prices, to where March and April were pretty much the lowest they have been on record since we went to a class system, which I think was about seven or eight years ago.
Like I said, we completed our $3 million production capacity expansion project. With this, again, we will be able to -- we had it kind of finished towards the end, towards the fourth quarter but, again, demand kind of slipped a little and we didn't really need to put it into service. We added a couple of pieces of equipment, stuff that we kind of had known that we were going to need because we were assuming that going forward that we were going to have the acquisition of Fresh Made pretty much by the fourth quarter. We were pretty -- we were already in that mode.
Something else, too, that I didn't point out, going back to the income statement, is there was a tremendous amount of expense in the third and fourth quarter, professional and legal expenses and all that, related to the acquisition of Fresh Made. So, you know, so, again, when we are talking about bottom line operations, that's a lot of -- a lot of that has to be factored in, expenses that unless we do another acquisition next year, which we don't think we will, will not be there going forward.
I'm now going to turn it over to Julie to talk more about sales, marketing, et cetera. Okay. So at this point in the presentation we'd really like to just give you an overview of what we have done, some successes that we have had, and give you a pretty good idea of the overall business and the brands, the Lifeway family of brands that at this point is under one umbrella. Some of this has already been public in press releases, and some of this is just noteworthy for your information and knowledge.
We were able to achieve new distribution through -- from our Kefir line and ProBugs, specifically at Costco, King Soopers, Shop 'n Save, and there are a handful of other retailers that are also picked up the Lifeway line. Obviously, we have new distribution, you know, pretty much weekly from a store here, a store there, a chain here and there. In addition, we have our existing retailers always adding in extra SKUs and things like that, but -- so, you know, some of the growth that we are experiencing is coming from both new distribution as well as existing distribution with new SKUs being added.
Specifically for Costco, I do want to caution our listeners in the fact that Costco is -- buys in a treasure hunt kind of mentality, so they will bring things in for a temporary amount of time and then sell them out, and then be done with that purchase. So it's not a consistent purchase like any of our other retailers that we would have, where it's not in and out and it's more stable. So right now we are in three divisions at Costco. We expect to continue on with one in the Midwest, and rotate two different variety packs into other regions as we continue to make presentations nationwide. The growth of ProBugs.
We have received -- wait. I'm sorry. I think I skipped ahead several slides. Excuse me. I'm going to go back here. There we go. ProBugs has been one of our big success stories for the year and for the product, the Company history in general. We have seen ProBugs grow 127% from 2007 to 2008 and, as a matter of fact, I was just handed the March 2008 numbers and it was a record sale for ProBugs just even in March. So we are, obviously, thrilled with the wonderful success that ProBugs is having. This is an interesting line for a few factors, especially given the economy right now. This is a pretty high-priced product, ranging anywhere between $4.59 and $6.29 on the shelf. Organic Kefir, obviously. And people are still purchasing this product, obviously, with all the growth that we are seeing.
ProBugs has been approved for Jewel-Osco for the Spring 2009 and Publix as well as for Summer 2009. Again, this is new distribution that it hasn't had. And I will note that part of this growth is also coming from one division of Costco in the north -- northwest region that was purchasing a few truckloads in the beginning of this year. ProBugs has been very popular with all the mommy blogs, pretty much all of the different top mommy blogs are writing about ProBugs, in addition to several product mentions in Family Circle and a few other very widely-distributed magazines and I think this is what's helping some of that sales in this product line .
Another product that we have launched in 2008 was Probiotic Wellness Bars that are derived with our exclusive Lifeway Kefir cultures. These were approved at Whole Foods national just last week, and have been also approved at select Jewel-Oscos for Springtime, and Kroger has also approved these in select locations. And so we are aggressively marketing the Probiotic Wellness Bars, and in general see a major interest in Probiotic foods, all types of foods including the Wellness Bars. They are to be positioned in the refrigerator right next to our Kefir, which would help give that association to our customer that this is a Kefir-like product or a product made by Lifeway Foods; again, driving that quality and brand of Lifeway for the product, and continue to see rapid -- rapid introductions of Probiotics food in general, and so we feel we are really positioned to capture a lot of this attention and growth as one of the first pioneers and a leader in the Probiotic industry.
This is just an example of a recent ad that we have done to kind of show the connection of Lifeway Kefir and the Probiotics Wellness Bars. The Probiotics Bars are again already receiving national attention through a selection of different blogs and national media outlets, and we expect to see a lot more throughout 2009.
Just want to pause this. I have heard that no one can see the slides. Is there any way to see if anyone -- if our audience is able to see our presentation online?
Operator
(Operator Instructions).
- President, CEO
Okay. I'm -- Someone is --
Operator
Okay. We have a comment from Anne Morrissy of GAMCO Investors.
- President, CEO
I'm still working through the presentation but I just want to make sure that you're able to see the slides?
- Analyst
I'm able to see the front slide and nothing after. I can't advance. I'm not going through with you. I don't know if that's just me or if it's everyone.
Operator
You also have a comment from Peter [Giannoulis].
- Analyst
No. I was just in the queue for the Q&A, not on the slide.
Operator
Sorry, sir.
- President, CEO
Hold on. We -- should we hold this, and bring in somebody to try and get this working? Hold on a second. I apologize. We were under the impression that if we can see the slides, you guys could, too. Okay. Hold on.
(Pause)
Hello.
Operator
Yes, your line is live.
- President, CEO
Okay. Great. Is anyone able to see the slides now?
Operator
One moment. We do have a comment from Howard Halpern.
- Analyst
The slides are showing as long as you don't hit the enlarged slide button.
- President, CEO
Okay.
- Analyst
So if you stay on the main screen with -- don't hidden "enlarge slides", you'll see the flow of the slides.
- President, CEO
Okay. Hold on. Okay. So we -- Howard -- We just got confirmed -- conflicting reports. So I think if you can't view the slides, you might have to refresh the browser. I think you have to click this. Yes. And then they have to -- and then, Howard, what was your suggestion? Not to click the enlarged --
- Analyst
If you click "enlarge slide," it opens another window and then that window does not move.
- President, CEO
Okay. So I hope that -- it seems like some people are able to do it. Okay. If anyone ends up missing this, I apologize. We will -- we can try and e-mail -- or it's a pretty big file but we can try and somehow get the -- We will have the whole PowerPoint presentation up on our website, and I think MultiVu also archives it for several months. So just in contact with us if you wind up missing it, but we will continue on. So if you have seen the slides, then, great. If not, then this has been a traditional conference call. I don't know if everyone is seeing it, but I'll quickly go through what we went through just now in the slides and -- Yes. Some of the slides, the financial-related slides could just be found on our press release, or they are pretty standard financial Excel documents, so we have put them out on our press release and then they will also be in our 10-K. Okay. So I'm going to continue on.
Another kind of important ingredient update in our product line is the fact that we have transitioned to 100% certified hormone-free milk. This is obviously becoming a bigger issue, as we see kind of daily reports about consumers really interested and demanding different produce and food products hormone-free, so we believe this was an important kind of opportunity for us to take advantage of as well, again, being leaders in the industry.
We successfully opened Starfruit Cafes. This is Chicago's only Kefir boutique and premiere boutique selling frozen Kefir, Kefir parfaits and Kefir smoothies. Our intention with the store is not necessarily to make money. It's more -- although that would be nice. The real goal of the store was to provide a mechanism and a vehicle to advertise, promote and publicize our Kefir to influencers and taste makers. Basically, we have single-handedly been able to make Kefir cool, at least in Chicago, and we are obviously looking for new opportunities outside of Chicago through our franchise operation. We have an additional two stores opening this year, one in Lincoln Park in the Spring and one in block 37 in the loop in Chicago in the Fall of 2009.
Starfruit has been featured in a variety of Chicago press; just about every Chicago media outlet has written about or talked about Starfruit, and when then describe what Starfruit is they always mention that Starfruit is a Lifeway brand, making frozen Kefir and Kefir parfaits, and they do a nice description of what Kefir is, and so our goal was successfully reached. We have never had such amazing press, I don't think, specifically on the products and the benefits of it. We are featured on Yelp, Yelp.com, which is a big kind of review -- self-review site, where the majority of -- we have had over 100 reviews on Starfruit, with the majority giving us three and four stars -- I'm sorry -- four and five star ratings.
We have completed our franchise registration process, and we can now begin marketing and selling our franchise concepts to other markets that are similar to Chicago. We are very interested in high-end affluent markets, with kind of an educated market and clientele. College -- college towns more -- may be similar to like a Georgetown where there -- it's an urban setting and the university, it's really kind of targeted to those type of franchise operations.
Some other notes to discuss is the fact that we continue to gain accolades for our growth and our success. Most recently, Lifeway Foods was named 49th out of 50th of Chicago's fastest growing companies by Crain's Chicago Business, and we were named 49th, up from 96th, as America's fastest-growing small public companies in the October 2008 Fortune Small Business (audio dropout). Again, we continue to see lots of media attention for our product and for our Company. Again, as we build awareness and talk about the benefits of Kefir, again, gearing up for lots of growth in the future. We continue our grassroots effort through -- you know, just as we have in other years, just ramping things up. For example, we were this year at Lollapalooza, where we were vending, not only passing out product but actually selling product for three days to over 100,000 spectators and interested people.
Going forward in 2009, we have some really exciting happenings. We are about to launch a new website that will be geared -- will have a lot more interaction and user content for our consumers, and we are really excited about this website. We just recently announced that we are the exclusive yogurt supplier to the Lincoln Park Zoo here in Chicago. For those of you who don't know, it's one of the premiere zoos in the country in Lincoln Park, which is one of the most affluent neighborhoods in the Chicago -- Chicagoland area, and a majority of the zoo goers are local residents who, you know, go to the zoo even more than once a month, and so we are going to be sold out throughout the vending and cafe areas. In addition, there's a series of sponsorship and other marketing opportunities that will really increase our visibility, which is really perfect since the Starfruit store opened just a mile away from the zoo. So we are kind of using all of our efforts to promote our product and the store in one shot.
In addition, we are going to also be sold at the new -- just about to open Illinois Holocaust Museum and Education Center here in Chicago, which really it's in Skokie but considered Chicago. It's probably one of the last museums to open in the -- North America, and the grand opening will be April 19th with Bill Clinton as the keynote speaker, and they expect 10,000 attendees at this, and so this museum will be obviously highly trafficked and many visitors in attendance over the -- you know, this year and future years.
We have a major focus on social networking. Currently we are on Twitter. Lifeway Kefir as a company for the consumer side, myself, if you kind of want to follow me, and Starfruit cafe is also on Twitter. We are interacting with our customers, interacting with interested people, whoever wants to know what's going on, taking questions. We will be -- a new person will be starting in the role as Social Networking Community Manager, where she will be engaging users in all different forms of new media, whether it be Twitter or Facebook or any of the other new media that's out there, and people are really catching on with.
We are launching a series of micro sites. These are viral micro sites, with specific campaigns and intentions. For example, the Kidsgetbugs.com has the intention to get samples of ProBugs into the hands of media and consumers. So you can go online right now to Kidsgetbugs.com and request a sample and get on a list, of course. And again, we are trying to build our database and have some clear campaign ideas around some different ideas that we have.
Going forward in terms of new products and new offerings, we have some really exciting things in the works. We have a fourth flavor of ProBugs. It's a strawberry/banana kind of flavor. We also for the very first time after many, many years, many samples and discussions, we will be launching a Holiday flavor to counter some of the eggnog sales that we lose out to. This is going to be in the fourth quarter of 2009, and I'm very excited about it. I think it will be a great holiday flavor and an alternative to, you know, eggnog, which everyone kind of gets bored of.
We have a few other very exciting innovations in the works, very ahead of trend and, again, just kind of being a leader in the industry. I'm just really excited about these new items that are in the works. I can't reveal too much about that, besides that things are in the works.
We are taking our Probiotic Wellness Bars overseas and international. We have got several initiatives going forward. We have identified six international markets that are already receptive and familiar with Kefir and Probiotics and we believe that we will have several purchase orders before the end of this year. And, for example, we do expect to ship the bars to Canada this summer. We have already received some verbal agreements with several distributors in Canada.
I'm going to turn over some of the Fresh Made conversation over to Edward. This is basically our last slide, and I just wanted to kind of -- we touched base a little bit about the Fresh Made acquisition earlier in the call but, again, we put out a press release and I just kind of wanted to gloss over some of the things that we really got attracted to with this company. Obviously, the sales in 2008 were $10 million. We think that we can definitely build on that as we increase some of the markets that they were closed off to; for instance, Chicago. Chicago is a basically -- we had closed off the market significantly to them and now that we have, obviously, we are -- their brand is under our umbrella, we are able to fold them in and, like I said, we have opened up Chicago to them and have seen some very positive results in the two months that we have been under their -- we have been under -- they have been under the umbrella, excuse me.
Besides that, the extremely strong, positive cash flows. We have identified a number of expenses from -- going from the executive compensation of the previous owners and founders, significant advertising expenses, which we can again fold into our existing advertising, so not to double up, insurance, just different -- all these different areas where basically they were doing things inefficiently, like some smaller companies do, and we are able to transition those out and really gain again some very positive cash flows. And, again, the goal is to use this excess cash generated to help fund the overall Lifeway brand as a category leader. And, again, they have very strong -- a very strong East Coast regional brand name and they make -- you know, all their products are considered Probiotics, and that is something that we are very in tune to right now, it's something that we are concentrating on, which is Kefir in general and Probiotics as well. So all of the products that we are going to be making going forward are going to be labeled Probiotic, and we think it's a real key driver for revenues in the future. Okay. And that basically leads us to the end of our kind of scripted presentation, or nonscripted presentation. And you know, I just want to close off by saying that, you know, I think the bottom line is that even though they -- there is still a recession or, you know, the economy is somewhat in shambles, we as a Company are still in growth mode. We are not at capacity by any means, and I believe that our products are still highly desired as the strong growth that, for example, ProBugs is experiencing and even Lifeway is experiencing. You know, we didn't go down in sales, and we didn't decrease in any way in our sales. Maybe we didn't grow at, you know, the record 28% that we had been doing in other years, but we are still growing.
We're, you know, just seeing daily -- a lot of the other companies and a lot of other industries are losing sales, and we are -- so we feel very positive that we are still in growth mode, and we are doing things extremely aggressively, you know, we are thinking out of the box, and we are nimble, and we are able to adjust pretty quickly, but we feel very positive going forward of our business and our Company. So I hope that we have instilled some confidence and some perspective to our audience, and we are happy to take questions and answer them as thoroughly as we can, and there's two questions right now, so -- We have been told that we are much better answering questions, so we are going to go do that. Yes. Our strength is in the -- in prompt questions. So we don't have any on the webcast, so we will open it up to the people just on the phone, I guess.
Operator
(Operator instructions). Our first question comes from Peter [Giannoulis] of Carrollton Asset Management.
- Analyst
Hi Julie, hi, Ed, thanks for taking my call. Just a couple questions here. On the acquisition, you were talking -- well, you mentioned that it had closed sometime in February, I believe that was early February. Then you also mentioned that the sales were for the first quarter of '09 up 15%. Does that -- what were the organic sales for the first quarter?
- President, CEO
I'm sorry. That was excluding any acquisition, so that's -- that's all organic. That's organic, up 15% from the fourth quarter of '08, up 11% from the first quarter of '08. So if you're comparing, you know, apples to apples, first to first, it's up 11%; sequentially it's up 15% and again, that's all organic. We have not released any sales yet for the new Company.
- Analyst
And the acquisition closed on February, you said, the beginning of February?
- President, CEO
February 6th, which was at the end of (audio dropout) on Friday.
- Analyst
So just help me understand because I'm trying to go through just some housekeeping notes here. The -- in the press release a couple months ago, you talked about a -- how it was going to be financed, excuse me, I believe $10 million of it was going to be cash. Is that -- was that how it actually closed and how was the $10 million paid for?
- President, CEO
Yes, the -- exactly. The total purchase price was approximately $14 million. $1 million of it was in Lifeway shares, Treasury shares, I believe 3 -- close to $3 million of it was in a note going back to the sellers, and the remaining $10 million was in cash to the sellers. A big portion of that cash, obviously, is cash that we had on our balance sheet from, again, some of these various -- [Maricopa] Securities and assets, and approximately, I believe close to $8 million -- let me just do my math. Yes, like close to $7 million was new finance, it was a new note that we got from a -- from our commercial bank in Chicago. We refinanced our -- our three existing real estate properties and we financed much of the equipment, the new equipment which we purchased, and we also obtained a line of credit which we have access to, and when we combined all of that with some of our own dollars, we were -- we -- the total purchase price was $14 million. Again, $10 million of it was in cash, approximately $7 million of it came from --
- Analyst
From the new note?
- President, CEO
From the new note, yes.
- Analyst
Yes, just -- I don't want to go through the minutiae here, so will those details be on the 10-K that will be released?
- President, CEO
I don't believe the details will be on the 10-K, because it's a subsequent event. However, I know that the -- we put out an 8-K which was pretty substantial in the details, and of course all of the debt -- the debt aspect of it will be in the first quarter report, which will come out sometime in the middle of May. So just stepping back, with that new note that we took on from the new bank, it's basically like a 30-year -- it's basically like a 20-year mortgage. There's a principal payment every month. Some portion of it is interest. Any portion that we have used on the line of credit obviously is interest, and we can pay that off however we choose. And then -- so, yes, more details. The exact structure of all the debt will be out in the next report. And I think it should actually -- it might have been in the 8-K, I'm not exactly sure.
- Analyst
Great. Thanks. Switching gears to commodity prices, milk prices in particular, obviously the last three, four, five months you've seen a large drop in prices, and I think Julie has mentioned that before in a couple of -- on a couple occasions. What is your outlook, Julie or -- on milk prices going for the rest of the year? I mean, clearly they spiked downwards, and they may be at five or six-year lows, but is that the same [low] or is that something that can stay there, or are you guys pretty optimistic about that?
- President, CEO
We are optimistic, again, given where the global economy is. A lot of what was going on with milk prices when they were hitting record highs was what was the emerging markets and their need for -- was emerging markets and their need for dry milk, and the dry milk market was really fueling the fluid milk market because you can't get dry milk unless you take fluid milk and dry it out. So a lot of that increase was going on because of emerging markets, and of course there were other factors in play as well, as there were with all commodities.
So what we think for -- going forward is we know that February, March and April have all been, let's say, at the rock bottom levels. From zero you can only go up. So we hope that they stay low, we are confident that they stay low, that they are going to stay low but we are of course, you know, factoring in and budgeting in that there will be some increase probably towards the second half of 2009. Given, you know, at this point other commodity-related costs finally have started to come down. Historically there's a lag, about a three or four-month lag, when the material suppliers start to implement their price decreases. Obviously they want to make as much money as they possibly can, but, you know, once -- so they are going to -- if their underlying cost comes down dramatically over the course of a month, they are going to hold their current prices up as much as they can until their customers start to scream.
And so finally, I believe in January we really started to see our -- some of our plastic-related materials come down. Having said that, our ProBugs pouches have remained high since we -- since we first started with the new product several years ago. We have renegotiated the contract going forward to where they are going to be about 20% less. I think that should start to hit in the second half of 2009.
Why that's important is because ProBugs right now is -- it's a growing product for us, obviously growing faster than any other product. So, obviously, on a smaller base, but the gross margins on that product are significantly less than our other products. Organic milk, again, has not come down. Organic sugar and the organic flavorings are going up, and the ProBugs pouches themselves were relatively expensive given the volume that we were doing. Now that we have the product, it's in a growth mode, it's growing, the numbers are getting larger on it, our suppliers are now willing to come down pretty significantly, so hopefully like any new product there's going to be a curve on it, and I think we are starting to really get that curve on ProBugs.
- Analyst
Great. That's good to know. And I guess -- I think that's -- I have one -- actually one last question, just more housekeeping as well on the marketable securities. I was a little bit confused. I don't think I understood that very well, and could you walk us through that a little bit, and then what aspect of that was fourth quarter and maybe what is -- I think you guys talked a little bit about realized gains, but I didn't see a balance sheet so it was kind of hard to figure out what was on the fourth quarter and what the unrealized value of marketable --
- President, CEO
Go back to the balance sheet. I don't know -- again, I don't know how -- you know what? We didn't put up a balance sheet, but basically what -- what we realized in 2007, we realized $733,000 in losses in 2007, and in -- I'm sorry 2008. In 2007 we had realized gains of $540,000, and then we have gains for the past, let's say, three, four, five years. All the gains -- all the taxes that we have paid on the gains in those -- in the past few years -- just looking for the language on it. Basically we were able to deduct the capital losses that we took in the fourth quarter of 2008 against the capital gains that we -- that we realized in the previous years on our tax return. So there's going to be a large tax benefit. So, you know, do you understand how that works? You're basically -- you have gains in previous years. You get to carry back your realized loss.
- Analyst
Yes. I was aware that I think they changed that recently, where you can go back against that before you could apply it to future gains, yes, but --
- President, CEO
You -- in terms of the impairment, the -- we sold a lot of the securities and assets in January and February in order to gear up for funding the acquisition. All of the assets that we sold in January and February we considered impaired because we had -- we already knew that they were going to be sold, so they -- so they would have either been, let's say, realized losses in the first quarter of '09, but we basically took all of that and threw it back into the fourth quarter. So we wrote those -- all those down to fair value and put them all in the fourth quarter of 2008, and so basically put all of that into 2008. And so going forward, all of those assets that have been -- that had been either sold or written down are now in 2008.
- Analyst
Great. Thank you. Thank you very much.
Operator
Our next question comes from Howard Halpern of Taglich Brothers.
- Analyst
Hi, guys.
- President, CEO
Hello. Hello.
- Analyst
In terms of, I guess, cost of goods sold and cost of goods sold going forward, you know, you talked about your fourth quarter program, you know, for promotions and increased labor costs. Do you see that abating and you getting back towards that gross profit of -- in the 30% area, or is it going to take some time to get back to that level?
- President, CEO
Well, the problem is, is that historically, you know, we have always had a nice -- you know, a nice cushion, but we were also growing from $10 million to $20 million, and when you're growing from, you know, $40 million or $50 million to $100 million, you have to spend more money, let's put it that way. I think that we will see -- we are going to continue to invest and increase -- or invest in the promotions and in the expenses that I had just talked about, which hit the costs of goods sold and it affected gross margin, but we could either consider that -- I think -- I think even in the past we have considered those expenses selling expenses, and so at one point in the past several years I believe we just shifted that -- we basically recategorized them.
So what you saw, let's say, three or four years ago when we had 40% gross margins but then selling -- SG&A was higher, I think what we did was we basically just recategorized expenses into costs of goods sold. But going forward we should see some extra relief from, you know, the milk prices that are at the levels they are at. In addition, the fourth quarter we -- the sales had dropped off significantly, and we put all of those expenses into the fourth quarter in order to realize sales in the future. Does that make sense?
- Analyst
Yes, yes.
- President, CEO
So the sales were almost $2 million less in the fourth quarter than they were in the first quarter, but we have basically put all of those expenses into the fourth quarter, so you're going to see kind of a skew. Also I just want to -- you know, yes, it's important to be profitable; however, we don't want to sacrifice our growth and building a brand and building awareness of Kefir. We want to make Lifeway Kefir a household name, something that everybody knows. We have, you know, exciting opportunities to be one of those brands that everybody knows and, you know, this is our opportunity to really jump off and capture some incredible growth in the next five years. And so, you know, I just want to make sure that everyone understands that we are really investing into the brand, into the product, and that there's a lot of opportunities and we can either take this chance or sit back and let somebody else take it for us.
- Analyst
That's another question I guess in terms of growth rates, and you talked a little bit about sales, but with the acquisition, if you could give some sort of a -- maybe just a general range on how much, you know, cash -- the rate of cash that you're going to be able to throw off, you know, what kind of, you know, growth rate could we be looking at increasing, you know, the cash flow?
- President, CEO
Well, again, right now it's very difficult to forecast because we have this new company which -- let's put it this way. When we acquired Helios, it was for the brand, it was for its location in the natural segment, not necessarily -- but it was also very expensive product to produce, and there's only certain price -- you can -- price level that you can charge a consumer for that product. So that -- that acquisition was slightly different. We had a slightly different reason for it.
For Fresh Made, it was a company that had very strong cash flows, and we identified a lot of expenses that we can remove the day after we acquired them. And so we know that now we can use, let's say -- I'm just throwing a general number out. Let's say they have $1 million in free cash flow. We are going to be able to take a good portion of that and use that to leverage, to continue to grow the Lifeway brand and all the other brands that we have under our umbrella.
So again, it's hard to say how much exactly because it's too early, but we do know from the cash flows that we have seen in the first quarter from both Lifeway and Fresh Made, for instance on the Lifeway side, we -- we are pretty much done buying any major equipment. So capital expenditures out of -- are back into historical levels of several years ago, so out of the -- out of ordinary course of business there shouldn't -- you know, all that $3 million that we spent in the past couple of years, you know, should come back into the pockets, and same thing with the Fresh Made acquisition, a little bit too early to know. We will have a better idea when our report comes out in May.
- Analyst
And again, this is just for general modeling purposes, we can expect the growth you talked about from the acquisition of $10 million, and you growing that, that should occur more in the second half than in the first half of '09?
- President, CEO
Correct. Right now we are basically just trying to integrate this company into ours, and see where it plays out. There's only a certain amount of energy we are going to put -- that we are going to put into the sales of Fresh Made and the brand of Fresh Made. We still don't know where it lies.
Just getting back even on the Helios brand, 2007 -- the fourth quarter was bad for the whole Company -- well, in terms of sales was lower on sales for the whole Company than we had liked, but for Helios it was exceptionally low, because they are in that very high niche market. For -- when you compare '07 to '08, the sales were flat for Helios. So, you know, we think that that brand is still very strong. It's still in the market that it needs to be in and when -- Whole Foods just approved two more SKUs for Helios, too. So we think that you know, a lot of the stuff in the higher -- in the higher echelon of retailers and higher-priced places, we think that that's temporary. You know, we saw some of that come back in the first quarter, again, like I said. And so, you know, getting back to Fresh Made, we don't -- we don't have -- we don't know how much effort we are going to put into it. You know, it's not a brand that we need to grow 20% a year. If it grows 10%, we will be fine with that. Our -- again, our main focus is to take that cash flow coming from that acquisition and use it to fund the growth of Lifeway -- of the Lifeway brand, let's say, and Kefir in general.
- Analyst
One final question I guess to you, Julie, on Costco, and you talked about how, you know, it varied, but can you give maybe a general timeframe? I guess we just on that -- on Long Island, we just popped up in the Costcos out here, so how long typically, you know, will that last, because you said they do rotate out?
- President, CEO
Yes, I think -- I think you should run to Costco today and buy up whatever you can find, because I don't think -- they will not -- that particular region is not placing -- they committed to 7 truckloads, and they finished buying those 7 truckloads.
- Analyst
Okay. But they can return later on in the year at some point?
- President, CEO
Yes. They buy in rotation, and they rotate out different regions with the same variety pack.
- Analyst
And how many total different regions are there in Costco that you can constantly be going after?
- President, CEO
There's eight or nine different regions in the United States, and one in Canada. So I think with -- the goal is the mid -- the Costco in the Midwest, I mean that's our -- we are very strong especially in Chicago, and I think that Costco in the Midwest is something that's more -- it's going to be more reliable. And what our goal is for the other ones is to continue to reintroduce and -- reintroduce these different packages that we have created to the different regions and -- Yes, I mean, I think it's our task to bring to them interesting variety packs of all different products that we manufacture, and if we make it interesting for them and kind of rotate them in -- into their rotation, then -- their regions, then we will -- you know, my goal would be to have something -- some type of Lifeway product in any region at any given point in time throughout the year.
- Analyst
Okay. And I guess with it showing up in the Northeast and with your Fresh Made acquisition, how easy/difficult might it be to get into some of the, you know, Stop 'n Shops in the Northeast region?
- President, CEO
We are actually working on that, again, pretty aggressively on the East Coast. [Buy Lows] and a couple of other East Coast markets, Pathmart, ShopRite, those are all expected to fall in line with 2009 -- in 2009, but not with Fresh made, with Lifeway.
- Analyst
Yes, but what --
- President, CEO
Not with the Fresh Made brand, more so with the Lifeway brand.
- Analyst
Okay. Okay.
- President, CEO
But the Fresh Made brand actually is in some of these stores that you mentioned, some of the Pathmarts. They are not in, let's say -- on the whole chain, but they are in -- it's select Pathmarts, it's select ShopRites and select Shop 'n Saves, so a lot of these kind of more mainstream grocery stores, they will be in select ones depending on the city or where they are located, but -- and then, again, for that, the goal is to piggyback. So, you know, we are going to end up doing is we are going to create on the Fresh Made brand kind of a cobrand, a Lifeway, you know, family of brands, and then it -- slowly kind of integrate the Lifeway name onto the Fresh Made package.
- Analyst
Okay. So it will be a whole family category brand, then?
- President, CEO
Exactly.
- Analyst
Okay. Thanks, guys.
- President, CEO
You're welcome.
Operator
Our next question comes from Ivan Zwick of Raymond James Financial.
- Analyst
Thank you. Hi Julie, Edward. I've got a couple of questions to ask you. Let me do this one here, first. I think I understand this. The impairment charge that you had on the securities and the losses come to about $1.6 million, and that would have been about $0.10 a share, right?
- President, CEO
Yes, I guess close to that.
- Analyst
Right. So -- and of course you doesn't have a -- you know, a fourth quarter, you know, like you say, the balance sheet and everything, so it appears that without the impairment charge and probably some of the legal expenses that you were encountering with the Fresh Made acquisition, the fourth quarter would have been profitable; is that right?
- President, CEO
Absolutely. And like I -- we stated that in the press release.
- Analyst
Right.
- President, CEO
We had a lot of the legal and professional fees related to the acquisition. We had -- we really ramped up on the promotional activities, which are an investment into the future but they don't -- they don't go one-to-one against the quarter sales.
- Analyst
Right.
- President, CEO
Which were $10.5 million. Those -- that investment is going to pay off in the future quarters; for instance, like I said, the first quarter, which was almost $2 million more than the previous quarter in revenue. So I guess, you know, I don't want to start -- I'm not going to -- I don't have exact numbers as to, you know, the different expenses and which ones, you know, were one-time and which ones are ongoing. We do know, again, for the legal and professional fees related to the acquisition, they were substantial in the third and mostly in the fourth quarter. There are some that will be in the first quarter, since that's when the acquisition closed, and there will be some -- some smaller, let's say, level of professional and legal fees related to the acquisition in the first and the second quarter in terms of we have to get an audit done on it, and all this other stuff. So that's that.
And in terms of the impairment and loss charge in the fourth quarter, yes, I guess your numbers are correct and I don't -- that would probably be a pretax number, so I guess you'd have to back out some taxes, but -- but I think where you're going with that is correct.
- Analyst
Okay. And also I was impressed with your Lifeway sales increase from -- sequentially. That was, I thought, very good. And just based on what -- taking Fresh Made over, what, February 6th, and on their -- last year's [miss] and all, it looks like your first quarter could be in excess of $14 million in sales, which very good, too.
- President, CEO
Well, yes. And like I said, when we -- when the third quarter started, we started to see orders decrease, and a lot of it was in our Whole Foods and UNFI category, which are the highest, which are going to be the ones that get hit first when consumers retrench. And so we had to shift focus at that, so starting sometime around October we had to shift focus on our strategy and what we were going to do, and that was press more on the lower end so we had more -- we were focusing on Costco. So -- and not only that, we had to do a lot of these promotional activities. We had to kind of bring the consumer back to our product. And, again, first -- the fourth quarter, which was tough on everybody. It was exceptionally tough in terms of revenue.
But like I said, the Helios brand decreased in sales 15% in the fourth quarter. The LIfeway -- existing Lifeway flagship brand actually went up 8%, so that's kind of a glimmer to where you can kind of pinpoint to going forward in the future. Hopefully when we do get that higher end customer segment back, and then we have already brought in kind of new customers into our flagship brand, that's just going to add on to the growth of the Company.
And one thing that Julie did not mention in terms of kind of the lower end segment is our La Fruta brand, which we are really pushing into -- on the West Coast into a lot of these kind of $1 stores, these smaller -- these kind of lower-end stores because it is lower end and it's a lower-cost product, but again I -- I think it's low-hanging fruit that we can capture.
- Analyst
Okay. Also then you mentioned the organic costs are -- they are not really coming down. They are pretty much staying the same, I guess?
- President, CEO
They -- well, they are -- the milk is, let's say, flat from period to period, but the other ingredients that go into it are all increasing. So -- Flavor. The flavoring, the organic sugar, the organic -- I'm sorry. Organic cane juice. The cane juice, the fiber -- all the other products that we are putting into that are all increasing, so we are going to have to deal with that as kind of a cost issue. And like I said, at this point probably 30%, 25% to 30% of our sales is with the organic product. Again, this is another reason why we -- we are excited and attracted to the Fresh Made acquisition. They are not doing any organic. They are doing, like I said, kind of what we were doing let's say 10 years ago; strictly kind of your regular, conventional product, low-cost manufacturing, very good margins on the product, and so we want to -- so we purchased, you know, Helios in 2006, which is an organic brand, and it's an important brand to have in our market, and now kind of we purchased another brand as, let's say, a lower -- I don't want to call it a lower-quality brand, but I would say something that's not so high end on the shelf.
- Analyst
Well, now, when you -- when you say "30% of our sales are organic," now you're talking Lifeway without the Fresh Made?
- President, CEO
Yes. Well, Fresh Made doesn't produce any organic. I'm talking organic products, not organic sales.
- Analyst
Okay. Alright. But still you're talking Lifeway excluding the Fresh Made?
- President, CEO
Yes, exactly, pre -- all pre-acquisition.
- Analyst
Okay. So that being the case, when you put the total sales together or acquisition them, not being organic, it's going to be a smaller portion of the total sales?
- President, CEO
Yes.
- Analyst
Right, so that will -- and with the costs that were experienced in the milk, and a lot of these energy costs and all, that should make a big difference in my estimation first quarter alone, and going beyond, with that smaller percentage because Fresh Made, as you said, is an organic?
- President, CEO
Exactly, yes. We are trying to cover all the basis, basically.
- Analyst
Alright. I had a couple other just little questions to ask you. It sounds like the -- that this plant and all that -- Pennsylvania on Fresh Made is a fairly efficient plant and all and costs are pretty good, and then I would assume with Fresh Made under the Lifeway umbrella, there's probably some costs not just from Fresh Made, but economies of size using the same bottles, types of things and all this, you'll experience maybe some costs savings even in Lifeway because of this acquisition?
- President, CEO
Yes. A lot of -- I would say their costs are pretty much as low as they can go, in terms of their costs of goods sold. The bottles are a little bit more expensive and we will probably end up, again, what -- our goal is to kind of have all of the drinkable products under our umbrella being produced in Morton Grove. So, yes, I would say their bottles are 20% more, 20% to 30% more expensive. So that's really the only place that we would see any cost savings, by moving the product over to Morton Grove.
So -- but besides that, the main costs that we are going to get -- or the cost savings that we are going to get out of it is pretty much administration, selling and general expenses like insurance -- again, like I said, advertising costs, which they were spending roughly $150,000, $200,000 a year, maybe closer to $150,000 a year in advertising; the same advertising, similar advertising that we are doing already, so we don't need to spend the same money twice. And a large portion of their general and administrative expenses were going towards several key employees, the founders, which are not -- they are not obviously around anymore, so that's where a lot of the cost savings are going to be generated from that, and there are some smaller items which we can probably tweak out.
- Analyst
Okay. And also the capacity of that plant in Pennsylvania, how much more volume could they do before you were maxed out, about? Do you have an idea on that?
- President, CEO
They are pretty maxed out. Yes. So that's why if they are going to grow portions of their product line, we would rather, again, make all of the drinkables here in Morton Grove because that's what we specialize in, and let them continue making the product lines that they -- The additional -- The additional products that they make, which are really great Probiotic Farmer's cheese. They make -- that's one of their best, I would say, products. So we have that -- again, that ability to switch from product place -- where the products are being produced from one location to another, to kind of open up space if we need to.
- Analyst
Okay. And I guess two other quick questions, and I'm done. On the -- I know you done the study on ProBugs, it's been a long time ago, you know, with the infant diarrhea. Do you know how long -- when we are going to have something on that?
- President, CEO
No we don't, because it's really up to the researcher to publish -- get that research into publication, and so I think they are just in that -- the research takes a long time.
- Analyst
Okay. And now let me ask you one other thing. Of course I've mentioned this to you all on this, acid reflux on Kefir. Is there a chance you might do a study on that? And the reason I ask you this is there is a chiropractor in the town I live who has this patient who has that problem, has many, many people who having taking Nexium and Prilosec can totally control it with the product, drinking it twice a day. It definitely works. Is there a chance you'll do a study on that?
- President, CEO
No, we probably won't be funding any type of research, research that's at any cost to us. We would be more than happy to supply product to any researchers that would like to investigate this and any other ailment, but, you know, research is very expensive and time-consuming, and we are going to really let the big companies initiate that research, and we will, you know, use the research to grow our business. But, you know, there are so many wonderful things that Kefir can cure and help and prevent and, you know, all these different digestive disorders, Crohn's disease, irritable bowel syndrome, the list goes on and on and on of all the wonderful benefits that Kefir has. But, you know, there's just 24 hours in a day, and we are doing as much in terms of promoting these with these different communities but, again, we just will not be spending money on doing this research.
- Analyst
Okay. And my last question is that you said you completed the paperwork and all for the franchises in your remarks. Are you looking for some announcements on that anywhere soon on possibly some?
- President, CEO
No. I mean, we don't have any -- any prospective franchisees yet. We had a lot of inquiries and mailed out a lot of applications but we -- you know, we are kind of waiting to get all the legal and registration processes done, which are now completed, and now we can really market and promote the franchise. And, you know, there's many people in this industry that have said that in kind of downturns in economy, people are looking for a business to start and, you know, they are interested in becoming a small business owner, and so there are those opportunities for people who, you know, have saved a little bit of money and are interested in being their own boss. And when we -- we kind of held back a little bit because it was the Wintertime and our product, let's say in Chicago, it's not -- it's not the hottest thing when it's really cold outside, and so when -- we're really waiting until -- Spring. -- Springtime, when our new store opens up and when the buzz starts to kick in again about the product -- or I'm sorry, about the store, which will then coincide with finishing all the legal and [selling], and now we can then kind of maximize on all the buzz that will be produced and go out and try to get into some other cities.
- Analyst
Okay. And just one other comment. On the food service area that you're starting to get into, is there anything we can look forward, expect to this year in expansion in food service with our product?
- President, CEO
No. I mean, we are -- just kind of the easy markets that we can access and have connections to. You know, food service was definitely hit by the economy, so we aren't spending -- you know, we have kind of really repositioned ourselves into growing into the grocery and mass market as opposed to food service. But we have integrated the food service sales into our general sales -- regional sales position. So those people are selling to food service but they are not -- that dedicated person was taken off that area and moved into mass market sales.
But, yes, we are definitely looking for any opportunities, including food service and convenience stores. You know, for a product like ours that is in growth mode, it's important to be in as many distribution outlets as possible.
- Analyst
Okay. Well, keep up the good work. I'm excited about this year just like you are all, and let me just say I live in a town of 17,000 people and our little Kroger in this town has 20 stock numbers of your product, and I venture they sell 10 to 12 of them every day, so --
- President, CEO
Okay. And I think we will take one question, because our time is actually up. We are actually 20 minutes behind schedule, so --
Operator
Our next question comes from Kipling Peterson of CVC.
- Analyst
Hello. I have a couple quick ones. On Starfruit, you mentioned that it was mostly a marketing-type project, and if you make money it's a bonus, and I'm just wondering does that mean you think you might have revenues of maybe $200,000 a year per store, and it costs you 300,000, so your marketing is $100,000?
- President, CEO
Those numbers are not entirely accurate. I mean, the stores will break even I would say at worst case, and our first store was more of a marketing expense because when you have one small store and you're putting all -- you're putting a -- let's say a budget into one store versus having three stores and putting that same budget and leveraging three stores on the same amount of dollars, you are not getting the biggest bang for your buck on one small store. And so, again, our goal, which we will have -- at the end of this year we will have three stores in the Chicagoland location, we could spend the same exact amount of dollars and market three stores, whereas we would have to spend the same amount and market one small store. So I think when Julie says it's an marketing expense, that is definitely entirely true, but it's not like it's -- one store is going to be pulling out $200,000 of cash from the business as a whole.
- Analyst
Okay. And next question, with your stock being so highly valued, did you try to use more stock in this acquisition of Fresh Made so that it could be incredibly accretive?
- President, CEO
Well, obviously we tried to use all of our stock. No, just kidding. We tried to use as much as we want -- as much as we could, but the sellers wanted some portion. To give historical perspective, on the Helios acquisition I believe we used $2 million worth of stock at that -- valued at that time, and in this one we used $1 million.
- Analyst
And last question, if the Dannon agreement isn't renewed at the end of the year, are there products that you would be interested in getting into or marketing that you cannot do right now?
- President, CEO
Well, we don't know if -- We have re -- we have historically renewed that license every year, and we did again in 2008. I don't see why we wouldn't renew it again in 2009.
- Analyst
So you don't feel like you're being held back, as far as marketing things you would like to?
- President, CEO
No, because really the only thing that they don't want us to actually market is yogurt, and we don't really have an interest in marketing yogurt. We are interested in marketing Kefir.
- Analyst
Perfect.
- President, CEO
Alright. I think that's it. I mean it's -- right. Yes, I think -- I can take one more question if anyone has a question. One more question, because we love answering questions.
Operator
At this time we are showing no further questions.
- President, CEO
No questions, great. We have done a good job answering all the questions then. Alright. Well, thanks everyone for listening. It was our pleasure to present this, and look forward to a great year. Bye-bye.
Operator
That does conclude today's conference call. Thank you for participating. You may now disconnect.