Lifeway Foods Inc (LWAY) 2011 Q3 法說會逐字稿

Greetings and welcome to the Lifeway Foods third quarter 2011 earnings conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to use introduce your host Miss Katie Turner of ICR.

Good Afternoon and welcome to Lifeway Foods third-quarter 2011 earnings conference call. On the call with me today are Julie Smolyansky, Chief Executive Officer, and Edward Smolyansky, Chief Financial Officer. By now everyone should have access to the third quarter earnings release for the period ended September 30, 2011 which went out this afternoon at approximately 4.15 pm Eastern time. If you have not received the release, it is available on the investor relations portion of Lifeway 's website at www.Lifeway.net. This call is being webcast and a replay will be available on the company's website.

Before we begin, we'd like to remind everyone that the prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and therefore undo reliance should not be placed on them. Similarly, descriptions of Lifeway's objectives, strategies, plans, goals or targets contained herein, are also considered forward-looking statements. Actual results could differ materially from those projected in any forward-looking statement. Lifeway assumes no obligation to update any forward-looking projections that may be made in today's release or on our call today.

With that, I would like to turn the call over to Lifeway CEO, Julie Smolyansky.

Thank you for joining us today. I will begin with an overview of our growth and success in the quarter, then Ed will review our third-quarter financial results in more detail. And finally, we will open up the call to take your questions. We are pleased to report that we generated record sales in the third quarter of 2011. Our record sales numbers were met despite higher costs in the price of milk our largest raw material.

In this past quarter, we enjoyed an increase in sales we believe is attributed to the increase in consumer awareness and benefits of our Kefir products and our increased distribution in the quarter. Our base Kefir business continues to perform extreme well and the consumers increasingly respond well to our ProBugs organic Kefir for kids. Our bio Kefir, a condensed pro biotic offering has also been leading the growth in this year. We believe our investments in marketing continue to help drive our sales as we further expand our growing product offering.

This quarter we focused on expanding our Kefir product line, retail shelf space, and increasing our number of retail partners. We are extremely pleased with the results of our Lifeway frozen Kefir which began shipping to our distribution network in mid-April. By the end of the third quarter, it was available in approximately in 50 mass chains nationwide and we have been shipping roughly 4000 cases per month and growing. We believe we can continue to grow distribution with frozen Kefir. Currently, we are seeing that it is driving 100% of the frozen dessert growth since its launch. With the success of frozen Kefir we will also be introducing a variety of new offerings in 2012 regarding the frozen Kefir line. Long term we believe we also have strong international opportunities for this line and can leverage our existing retail distribution network for increased growth.

As we mentioned on the last quarter's call, Lifeway celebrated its 25th year anniversary with an 11 week coast-to-coast marketing tour. We believe this marketing campaign and our focus on grassroots marketing events is as important as we expand consumer awareness of Kefir and frozen Kefir. We have always been pioneers in social media and this quarter was no exception. Through Facebook and Twitter consumers have shown greater interest and awareness of Lifeway Foods and Kefir products and are utilizing social media platforms to talk about their favorite Kefir flavors, share recipes and discuss the health benefits of Kefir with one another.

At the end of third quarter, Lifeway Foods has had approximately 30,000 likes on Facebook and 33,000 followers on Twitter and over 250 unique hits to our website. We continue to explore new and innovative ways to reach the consumer. Specifically, at such events like Mercedes-Benz Fashion Week where 25,000 samples of our 90 calorie frozen Kefir was sampled by an internationally known audience, designers, models, magazine editors, fashion bloggers, actresses and pop stars. Fashion lovers were also able to instantly text Facebook, email, tweet photos of themselves and join frozen Kefir at the Lifeway sleek and modern digital photo booth in the Lincoln Center stand lobby.

Frozen Kefir was also sold at Wrigley Field, Ravinia Music Festival, the Taste of Chicago, Lollapalooza, a number of Chicago area celebrations where we estimated we sold more than 50,000 units of frozen Kefir and sampled over 100,000 samples. These events provided us with unique opportunities to showcase our frozen product to a variety of different consumers, who we might not otherwise be able to reach.

Our campaign with Christy Turlington and Every Mother Counts has generate over 250 million media impressions alone. We will continue to expand our relationship. In addition, we continue to pursue the opportunity to expand our international Kefir distribution with the launch of frozen Kefir in the UK with a target date of 2012. We are very excited about the launch and believe it will lead to further retail distribution in the UK and Europe. Lifeway continues to be better positioned than ever to capitalize on future growth opportunities in the US and internationally.

Frozen Kefir continues to be a strong growth segment and our Starfruit Cafe business is riding the same wave. Starfruit Cafe comparable same-store sales were up 10% as compared to the same quarter last year. The Lifeway frozen Kefir truck was met with great success when it debuted at that the taste of Chicago this summer and will soon hit the road and head to California where Ralph's retail stores will be launching frozen Kefir. Samples of the frozen Kefir will be distributed and sold in locations where the product will be available. We are certain that food truck marketing initiative will generate buzz and help generate successful sales of frozen Kefir in California.

Today, the total Kefir industry represents 160 -- approximately $160 million in retail sales and we believe the interest in this industry is growing in excess of 20%, as new people every day are learning about Kefir and its many benefits. As we see it, Lifeway has only begun to realize this market-leading industry position. Health and wellness research trends continue to suggest that more and more consumers are demanding healthier alternatives and real food products. We have already have a loyal following of Kefir customers and believe this number will only continue to grow as more consumers learn about Kefir.

Over the last 25 years, we've built a huge base of Kefir consumers that further expands as people look for more natural healthy convenient food options that also taste good. We expect to end the fourth quarter and the full year 2011 with record sales and profitability. We are pleased with our ability to grow the top line and to further increase our cash flow generation, even as the consumer discretionary environment remains challenging. We believe our strong growth reflects the strength and depth of our Kefir product offering.

And now, I'd like to turn the call over to Ed to review our third quarter 2011 and financial results in more detail.

Thank you, Julie. I will now review our financial results for the third quarter, and first 9 months of 2011 in more detail. For the third quarter 2011, gross sales increased 22% to $19.4 million, compared to $15.9 million for the third quarter 2011. This increase is primarily attributable to increased sales and growing awareness of the benefits of our flagship line Kefir as well as ProBugs for kids and the successful introduction of new product lines such as BioKefir. In addition, Lifeway frozen Kefir distributed approximately $300,000 in revenue during the first -- I'm sorry, during the third of 2011. Gross profit for the third quarter of 2011 increased 19% to $6.2 million, compared to $5.3 million in the third quarter of the previous year.

Our gross profit margin decreased to 35% versus 36% in the same period of last year. The gross profit was negatively impacted by increased prices of transportation, other petroleum-based production supplies, as well as of course the increased price of conventional milk, our largest raw material. The cost of the milk was approximately 30% to 40% higher in the third quarter of 2011 compared to last year. This increase, however, was partially offset by the USDA reclassification of Kefir drinks as a class 2 product, and the milk used to produce Kefir carried approximately 10% lower price. In general, the prices were 40% to 50% higher had it not been for the reclassification so, we actually were able to minimize that by 10% and the increase was only 30% to 40% for the third quarter.

In addition, please keep in mind in the -- during the third quarter we purchased approximately 20% more milk than the prior year's quarter to support the growing product line, production, and increased retail distribution. As a reminder, to try to help partially offset our raw material cost increases, we started a 5% product price increase beginning July 1, on about 50% of our line. Basically, the 5% product increase only went to our core Lifeway product line not large other items like ProBugs, Helios, some of our higher priced organic products, mostly our core line which is about 50% to 60% of our total sales. We believe we continued to have price elasticity with our products as consumers are increasingly more aware of the food they eat and what it is made out of. So, and if we need to increase our prices, you know in the coming 2012, we shouldn't have a problem with that.

Operating expenses, as a percentage of net sales were approximately 26%, during the third quarter of 2011, compared to approximately 23% during the same period last year. This increase is primarily attributable to increased selling expenses, compared to the same period in 2011. Selling related expenses increased $900,000, or approximately 50% to $2.7 million during the third quarter of 2011, from $1.8 million during the same period last year. This increase is directly attributable to the increases in marketing and advertising expenses of all of our lines especially our flagship Kefir line, ProBugs, and of course the new rollout of frozen Kefir in April.

Operating expenses decreased to $1.6 million, in the third quarter of 2011, compared to $1.9 million during the same period last year. The decrease in operating -- sorry operating income decreased, the decrease in operating income is due to increase in operating expenses during the third quarter, when compared to the same period last year. A provision for income taxes were $400,000, or 30% effective tax rate for the third quarter of 2011, when compared to $1 million or a 53% effective tax rate during the same period last year.

As mentioned, in our press release, the decline of the effective tax rate is primarily the result of changes in estimates reflected in the current period, additionally, if you recall last year we had an audit which resulted in $220,000 in taxes from 2007, 2008, filing returns that were not present in this year's quarter. So, that obviously drove the comparable tax rate down. We reported net income of $1 million or earnings of $0.06 per diluted share compared to net income of $900,000 or $0.05 per diluted share in the third quarter of 2010.

Next, I will review a few balance sheet and cash flow highlights. Net cash provided by operating activities was $2.6 million during the 9 months ended September 30, 2011, which is a decrease of $1.4 million when compared to the same period last year, and this decrease is primarily attributable to a decrease in net income of $600,000. Net cash used in investing activities was $2.1 million during the 9-months, which is an increase in $1.7 million compared to the same period last year. The net increase in investing activities is primarily due to a decrease in proceeds from the sale of investments of $1.9 million.

We had a net increase in cash and cash equivalents of $11,000. So, basically we had the same amount of cash at the end of the period, slightly higher from -- you know, as of September 30 when compared to the same amount as of September 30 of just over $800,000. Total stockholders equity was $35.8 million as of September 30, which is an increase of $2.2 million when compared to December 31, 2010. This increase is primarily due to an increase in retained earnings of $3.2 million when compared to that December 31 date, and total stockholder equity increased by $1.3 million when compared to September 30 of last year.

In conclusion, as Julie mentioned we believe we are extremely well-positioned for future growth in the US and abroad with our Kefir product line. Going forward, we plan to realize approximately $100,000 of costs -- related costs and expenses related to the launch of Lifeway Kefir in the UK in the fourth quarter. That concludes our financial overview and we would now like to open up the call to your questions, and I think we have about 15 to 20 minutes hopefully.

Thank you. We would now be conducting a question-and-answer session. (Operator Instructions). Howard Halpern, Taglich Brothers.

Hi, guys. For the full year, what do you estimate the tax rate to be? Somewhere around 40%?

Yes, I would say between 37% and 39%. Something like that.

And the $100,000 for the launch of Lifeway kefir in the UK, is that going to be under G&A or sales? Or, a combination?

It will be under a combination. You know, it's a combination of direct selling, development as well -- you know development of the product line and different things like that as well as the people that are involved in doing that.

All right. And --

Legal expenses and all the different types of things like that.

Okay. For the frozen kefir, I guess if you can walk me through the sales process from, I guess, April in terms of how many cases did you produce in the beginning? How is it in ramping? What capacity is? And, then should that sort of mirror what we are going to see in the UK? I know it's a lot but if you could sort of develop that product line.

Well, we've -- you know it's not like we've produced it once it's an ongoing production process. We are selling about 4000 cases a month right now. We pushed really hard to get into retailers for spring and summer and even fall. We -- I don't know will be conservative then think that we'll -- through the winter months at least in the north part of the country we'll see maybe stabilizing there but we still see tremendous opportunities in the southern and west coast markets. So, on one hand we are a little out of review cycle for the categories but a lot of retailers were also clamoring to pick it up. In the UK, in some -- in some -- basically we are starting from scratch. So, we don't have a distribution network there.

We have an existing network here, but we are essentially starting up using the assets that we've already have that we've already invested in terms of formulation, graphics, copy, marketing, know-how, all of that and trying to scale that to almost a start up in another country. And, testing out the waters there. And we believe there is a lot of opportunities but it's not like there's an existing distribution system that we have here. So, but it's exciting and it's an exciting line and the industry is very excited about it. The frozen yogurt is very much on trend, frozen yogurt shops globally are opening up and so this is a very nice, competitive packaged goods product. So, but we are seeing retailers trying to pick more space up for the line and we have a number of kind of new and exciting extensions in the frozen line for 2012. Flavor extension, brand extension, things like that we're -- that we'll be launching for 2012.

Okay, in terms of route, how many stores and how many cases I guess will that be adding?

Yes. I don't know that yet.

Okay.

A guesstimate, a case per week per store.

Okay.

How many stores are going to end up with the actual product is -- I don't know yet.

Okay. On just the last one on kefir, how many Whole Foods stores do you guesstimate that they're in right now?

It would probably be 50% and growing.

And what's the capacity that you have?

We won't have any issues with capacity.

Okay. And, in terms of sales growth for 2012 next year, it's primarily going to be driven based on your marketing and pull through by customers of these new and existing products?

Yes. I mean, it's growing -- you know, continuing to get more shape -- to gain more shelf space for existing SKUs, getting new SKUs on the shelf, getting new retailers on board. You know we've increased our Wal-Mart distribution, we increased -- Target, we will be shipping in January, hope -- if all things go so well. A number of other accounts that are taking kefir on.

Okay, okay well --

It's a combination really.

Okay, thanks and keep up the great work, guys.

As long as there's -- is there another question?

Yes. (Operator Instructions). James Fronda, Sidoti and Company.

Hey, guys how are you? I guess in terms of the products internationally, I mean you don't have any kefir products out there internationally now, right?

No.

Okay so frozen kefir will be the big push?

Yes.

And I guess with all the marketing you've done over the summer, do you -- not including the frozen kefir going out into the UK, do you see marketing expenses coming down a bit going forward?

I don't see marketing coming down ever. Because we're growing at -- we you know we are about to be -- will be about an $80 million company roughly and marketing expenses just need to continue to go up with that sales expense. The business, continue to grow it and what not, but I don't see them coming down.

Okay, all right. And I guess in terms of the no costs being higher in the last two quarters, is there any way to hedge this, besides price increases? Is there anything you can you on the cost side?

Only if you add less product into the bottle. Which you can't really do. There's not -- it is what it is, I mean there's no way to hedge the amount that we're buying effectively. There's just not liquid -- even a liquid futures market.

But it's stabilizing.

You know so If we're purchasing $1 million worth a product, I'm just using rough estimates, you know $1 million worth of milk every month. There's no way you could buy even $0.5 million worth of futures contracts. You can't hedge that. So, you do what you can here and there. Where we get our -- you know a lot of our efficiencies and we save a lot of our money is not, we're -- even though milk is up 30%, 40%, 50%, whatever the numbers are in any given period, we're not -- our gross margins aren't going down to those same types of levels. Because we're saving in another places of our business. We're becoming more efficient in our production. Economies of scale are getting bigger. We're using -- we're saving on packaging. We're finding new suppliers for different items that we can, so we're trying to -- were trying to do and mitigate the expenses that are controllable. The commodity, unfortunately, that it -- it just is what it is.

All right. that's all I had. Thanks guys.

It's still about price elasticity I mean, I mentioned earlier -- not in this meeting but the fact that Greek yogurt is selling three, four times the price of kind of your mainstream yogurt and breaking records all over the place so that goes to show that, for good quality food, people are willing to pay more for it. And so being the 97% category leader in the space, there is absolutely price elasticity if we needed it to you know -- if we needed to raise prices we can.

Right, okay.

And we have it hasn't affected our sales and people -- retailers certainly moan about it but they take it and consumers take it and it doesn't affect our sales negatively. So, yes. So there you go.

So yes, I mean basically we -- like I said we did a 5% increase for about 50% to 60% of our line in July, starting July 1. And our sales ended up going up 20%, 25%, so in price of elasticity that's a really good answer right there.

Right, okay. All right. Thanks, guys.

Thank you. (Operator Instructions). Ivan Zwick, Raymond James.

Yes, I just have a couple of questions. On the a -- you mentioned that you had -- having increases from Wal-Mart and I think Target, of what size?

Honestly, what do you mean what size? You mean 20%, 30%?

I mean the new prices you're getting into I guess in the stores?

We don't go in to 100% of an account, very rarely. Those stores aren't all great. I mean, we don't know exactly how many stores when they placed the order. We don't know.

Okay. And, where do you see milk prices going from here?

Well, in summer they were -- people say we're going to go down but they haven't. They went down 5%, 6%, 7% from, call it August to November and October, but they are leveling off and I don't see them really going down for the rest of the year. I don't think there's any given -- any catalyst for it and that's probably going to be the same for the first two or three months of 2012 for sure. So that's where we think we are unless there is some other catalyst we just think that they're leveling off. They're off the highs of the year but they're not 30% to 40% off the highs. They are more like 5% off the highs.

And also are you going to do anything in Canada any where soon?

Yes. We continue to explore those opportunities. We're working again through the political -- we will -- we will get there, it's just a matter of how we do it and when. What's the best strategy for the brand and the opportunities. So, we're looking at a number, via exporting, and that's working through the political climate which is always ever-changing every couple of months and the possibility of a co-packing agreement, if exporting doesn't work, those would be like the two options that are on the table right now.

Okay. And one other thing on the UK thing. Now you're just going to do frozen kefir there is that right?

To start yes.

How are you going to -- are you making here and shipping it? Or is someone --

No through a -- (technical difficulties)

Pardon?

Through a co-packing agreement.

Co-packing? Okay very good. Okay. Thank you.

We have no further questions at this time.

Okay, I will just add that there was a nice little article -- I don't know, little anything in force becomes big but there was a feature in Forbes this afternoon, about the Company and so I urge everybody to go out and do a little Google search for Forbes and Lifeway the -- and it was in the Forbes women's section, specifically, by Emily Bennington. And please feel free to share that and tweet the article, that would help us great with spreading the word.

Thank you.

And that sounds like it.

Ladies and gentlemen this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.