Lifeway Foods Inc (LWAY) 2012 Q1 法說會逐字稿

Greetings and welcome to the Lifeway Foods Incorporated first-quarter 2012 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 introduce your post, Katie Turner of ICR. Thank you, Ms. Turner, you may begin.

Thank you. Good afternoon and welcome to Lifeway Foods first-quarter earnings conference call. On the call with me today are Julie Smolyansky, Chief Executive Officer; and Ed Smolyansky, Chief Financial Officer. By now everyone should have access to the first-quarter earnings release for the period ending March 31, 2012, which went out this afternoon at approximately 4.05 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. Management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and therefore, undue 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 the call on their website. With that, I'd 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 first quarter, and we will open up the call to take your questions. We are pleased with our financial performance for the first quarter of 2012. We generated strong sales growth in the quarter and were able to improve our cash flows despite higher costs due to the price of milk, our largest raw material, as well as higher fuel and freight costs that's compared to the same period last year. We believe our strong start to fiscal 2012 will help us generate record profitability in 2012.

Now focusing our sales and distribution growth in more detail, in the first quarter we reported an increase in sales attributable to the increased consumer awareness of Kefir products and in part due to our marketing and advertising efforts and our increased distribution. Our Kefir business continues to perform extremely well. Beginning in May, we nearly tripled distribution of our Kefir products in Target Stores as well as adding new Lifeway products to Target's dairy cases. Availability of our products in Target will increase from 170 stores to 453. This is the first major expansion with Target in nearly eight years, and we believe this increased distribution exhibits the growing demand for consumers for healthy and nutritious food. The increased Target distribution also includes multiple flavors and sizes of Lifeway Kefir as well as Lifeway ProBugs, our children's line of organic Kefir with a no-spill pouch in kid-friendly flavors like Goo-Berry pie. We plan to increase marketing and advertising support to raise awareness with Target customers and promote sales at the retail chain. We believe our investments in marketing continue to help drive sales as we further expand our growing product offering.

We continue to be extremely pleased with the results of Lifeway Frozen Kefir which began shipping to our distribution network just over a year ago in April of 2011. Our Frozen Kefir is now available in Kroger, Whole Foods, Jewel, Central Market, Sprouts and many, many others. We believe we can continue to grow the distribution of Frozen Kefir in the United States, and by the year end estimate that Frozen Kefir will be available in approximately 6,000 retail doors or more. As I recently mentioned, we are also very excited about the introduction of our new, frozen products, including Greek Fro-Yo and frozen ProBugs for kids. Currently these products are available in Hy-Vee, Wegmans, Giant Eagle, and several others; and we expect to further leverage our existing distribution network to further increase sales throughout 2012. Whole Foods National has already rolled out frozen ProBugs and it's available in all of their retail locations.

Lifeway is not only focused on product innovation but we also focus on ways our new products can grow within our distribution network and existing and new retail category partners and will help as a result increase Lifeway's shelf space within the grocery store. This is very important as we continue to grow our new and existing distribution relationships to expand sales long-term.

In addition our Kefir and Frozen Kefir products have a strong international distribution opportunity for increased growth. We've continued to pursue the opportunities to expand our international Kefir distribution with the launch of Frozen Kefir in the UK. We are very excited about the launch and believe it will lead to further retail distribution throughout Europe. Lifeway continues to be better positioned more than ever to capitalize on future growth opportunities in the US and internationally. I believe all this expanded distribution is a strong indication that our Kefir products will continue to expand into new and existing customers, which will translate into long-term sales growth.

Most recently, a new report from the Institute of Medicine, a not-for-profit group that advises the US government about health issues, urging increased availability of healthy food and drinks to multiple shopping and entertainment venues as an important step in combating the obesity epidemic. Rejecting the traditional view that blames obesity on a failure of personal responsibility and individual willpower, the IOM panel just last week concluded that food options are biased towards the unhealthy end of the spectrum and limits consumers' availability to control weight. We believe this focus in Washington, DC on urging healthy food options will only benefit Lifeway Foods.

Frozen yogurt continues to be a strong growth segment and our Starfruit business is riding the same wave. Starfruit Cafes comparable store sales were up 17% as compared to the same quarter last year. Most recently we announced an expansion through the Whole Foods Boston market with the first expansion of Starfruit outside of Illinois. There are many opportunities to expand the kiosk concept based on the success of Whole Foods in Boston.

In 2012 we continue to intently manage the controllable aspects of our business. As you are aware, the price of milk, our largest raw material, has started to decrease versus its highs in 2011. We just did not realize lower costs associated with the price of milk in the first quarter of 2012. We do anticipate we will begin to see a benefit from the lower prices in the second quarter. As a result, we also expect both sequential and year-over-year improvements in our milk costs. However this benefit will be partially offset by continued headwinds related to higher freight and fuel costs as compared to the prior year. In addition we continue to use our cash to make strategic investments in the growth of our business, and even with these investments we are pleased to be able to initiate a dividend and new share repurchase program.

Going forward, we are very confident in our future growth and plan to take advantage of the opportunity to expand distribution of Kefir in the US and internationally with Lifeway's leading market position. We have built a strong base of Kefir consumers that further expands as more people look for natural, healthy, convenient options that also taste good. We expect 2012 to be another record year of sales and profitability. We continue to be pleased with our ability to grow the top line and to further increase our cash flow generation. We believe our strong growth reflects the strength and depth of our Kefir product offering. And now I will turn the call over to Ed to review in more detail.

Thanks, Julie. I will now review our financial results for the first quarter of 2012 in more detail. For the first quarter of 2012, gross sales increased 13% to $21.5 million compared to $19 million for the first quarter of 2011. This increase is primarily attributable to the increase in sales and awareness of the Company's flagship Kefir line of course, as well as ProBugs, Organic Kefir and BioKefir. In addition, Lifeway's Frozen Kefir line which was launched last year in April 2011 contributed to approximately 700,000 sales during the first quarter of 2012.

First-quarter total consolidated net sales increased approximately 12% to $19.4 million from $17.3 million in the first quarter of 2011. Net sales of course are recorded as gross sales minus promotional activities and [off] invoice deductions such as [fight end piece put], paid couponing, spoilage, and other promotional allowances, as well as early [pod in the] terms given to customers.

Gross profit for the first quarter of 2012 decreased 11% to $6.8 million compared to $9.7 million in the first quarter of the prior year. The gross profit margin decreased 35% in the first quarter versus 43% in the first quarter of 2011. And that is as a percentage-of-sales number. The decrease was primarily attributable to a 30% increase in freight, expense related to higher fuel costs during the first quarter as well as a 20% increase in cost of milk, conventional and organic, the Company's largest raw material. And again, that cost was 20% higher in the first quarter of 2012, when compared to the same quarter of 2011. As Julie noted earlier, finally we have started to see a sequential decrease in the cost of milk, so we should start seeing some benefit going forward.

Operating expenses increased to $4.9 million compared to $4.3 million during the same period in 2011. And that increase was primarily attributable to increased selling and advertising expenses, $400,000, and partially offset by a decrease in amortization expense. That's a tough word. This increase is directly attributable to increases in marketing and advertising of the Company's flagship line Kefir as well as ProBugs, Organic Kefir for kids, BioKefir and of course our new Frozen Kefir line which just was introduced in April of 2011.

Moving down the income statement, the income tax expense was about $800,000 for the first quarter of 2012 compared to about $1.3 million during the same period in 2011. Total net income was $1.1 million or $0.07 per diluted share compared to $0.12 per diluted share in 2011.

Next, I will review a few of the cash flow highlights. Lifeway Foods had $1.2 million in cash and cash equivalents as of March 31, 2012 compared to $1.1 million at the same time as December 31, 2011, so an increase from three months ago or the three-month period ago. Despite our lower net income for the three months ended March 31, 2012, when compared to the same period as last year, the actual net cash provided by operating activities increased by $400,000 to $1.5 million for the first quarter of 2012. So basically, even though the net income on the income statement is a little bit lower, we are actually becoming a leaner Company and that's provided by operating efficiency. So we're actually generating more cash on less income, because our inventories are down and our Accounts Receivables are down, and so that's a very important aspect of our business as we go forward and try to become more of a lean Company.

That concludes my financial overview. I would like to open the call to the questions. Operator, if you can please move on.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) One moment please while we poll for questions. Howard Halpern with Taglich Brothers.

Hi, guys. With regard to the Target expansion, is that going to be in one or two particular regions of the US?

No, it's throughout their healthy -- there are stores that offer their healthy food options. It's national.

Okay. And with regard to that, do you have any rough estimate on a quarterly basis to how much of an increase in cases shipped that it's likely to generate for you?

I could not really draw a conclusion on that, but we can assume typically as a case a week per SKU so we can estimate that way.

Yes, it's a little bit too early to tell because we just started the increase literally last week.

So it's going to have a minimal impact in Q2, 1.5 months, I guess, right?

Well, no, it will have half of an impact in Q2, but we just won't know until we get on the call for Q2, which will be around August 15. We will know a little bit more then.

Okay. In terms of the increase in the marketing to support that program, what type of increase are we talking about, on an aggregate basis? And is it still going to leave room to draw some of that to the bottom line?

Yes, so I think -- (multiple speakers)

(Technical difficulty) Our brands, so we are more interested in investing into the brand and that continues the momentum of growth. I believe that without some of the expenses that we took in 2011 that this expansion would not have taken place if we did not spend the money.

The goal is to grow the brand. We are in a growing place, so we don't want to hurt that growth in any way. We are not really saying that we are going to advertise less or invest less into the brand. We are going to advertise as much as required to continue to grow the business in 2013 and beyond.

Okay. And in terms of the momentum with the Frozen Kefir, it looks like, just based on this small, small sample, but, what is it, the fourth quarter this year was about a $300,000 increase. At least in near term, do you think that rate of growth is sustainable on a sequential basis?

Sure.

Sorry?

Yes.

I know we see the milk prices starting to decline. What are you seeing in terms of organic milk prices?

Well, there is a strong demand for healthy and organic products. So I'm not sure -- maybe Ed can speak to the prices exactly, but we do know that even if you take a look at the Whole Foods most recent report in earnings, they are really on a strong growth pattern also. Which means that Americans are looking for healthy food, organic food options and the trend is not falling down. Organic milk is of course one of the biggest segments of the organic industry. Ed, maybe you can talk about organic milk prices?

Yes, sure, Howard, that's a very good question, obviously, about milk prices, organic and conventional. Conventional milk prices finally have started to decline year-over-year basically starting at the tail end of March and now April and May of course. We only release our figures every three months, but when you compare it from the same period last year, the conventional prices have started to decline and I think that has been evident in the market, and it is kind of known.

Organic milk prices have gone up from January 1, and they do not seem like they are following the trends of the conventional milk price decrease. So that is something that we will have to address. However, about 75% of our market and our products are of the conventional. So the increase in organic, if it's small, which it is -- (multiple speakers)

Very manageable.

It's more of a manageable (multiple speakers)

But does, like Julie had spoken about, the demand. Does that give you the opportunity for acceptance of increased prices of your organics -- (multiple speakers)

Yes, sure. We have a lot of price elasticity, because in terms of an Organic Kefir, we have Helios and Lifeway; and that is basically the brand, if you want organic or conventional, Lifeway is the go-to Company. There is price elasticity and obviously people are showing that they're willing to pay a little bit more for that organic option.

I guess one last one. The dividend, that just going to be $0.07 annually? You're going to do it one time during the year, and that is going to be funded through cash flow, I assume?

Yes, that's correct. It's an annual dividend. At this point, it's $0.07 a share, and that was announced, and that will be funded through our internal cash flows, exactly.

Okay. Keep up the good work, guys.

Thanks.

Thanks.

Thank you. (Operator Instructions) James Fronda with Sidoti & Company.

Hi, guys. Just the expansion through Whole Foods. Is that just one Whole Foods that you guys are in, in the Boston area, or is there more than one?

You're talking about the kiosk, correct?

Yes, right, the kiosk.

Yes, because our products are national with Whole Foods. They are probably one of our biggest footprint. But the kiosk is just in one store in Whole Foods in Boston. And it's a tough market right now, and if it does well, then there is an opportunity to go regionally and then nationally. But right now, we're just in one.

Okay. Is other cost savings involved with going with the kiosk?

Are there cost savings?

Yes.

There is not really expenses. I don't know what you mean. I don't know cost savings. It's their machine and our base.

And in terms of the momentum of growth, is there any way to grow the Kefir product into something else besides something like Frozen Kefir, like any other ways to diversify the product?

We're always looking for diversification within our portfolio anyway, so all different types of healthy foods and whatnot. But yes, there's ways like we expanded from just the pints into frozen yogurt into frozen ProBugs, and we certainly have a couple of other novelties that we would like to launch next year. So there's lots of opportunities, and yes.

Okay. That's all I had, thanks.

No problem.

Thank you. Ann Morrissy with GAMCO Investors.

Hi, guys, it's Anne Morrissy.

Hi, Anne.

I wanted to ask, Julie, you mentioned on the call, expansion into the UK.

Yes.

Can you elaborate on that a little bit? Is that something you're currently doing or something that is a plan for the future?

Yes, so we are in the process of teeing everything up. Basically, we have identified a partner with whom we will do the manufacturing with. And we're basically getting ready to start our sales calls, probably like in the late summer, fall. And then rolling out thereafter. But we have started the initial steps with the manufacturing agreement and whatnot. Yes, so the rollout -- (multiple speakers)

Is that all products or are you focusing on just Kefir or just Frozen Kefir?

We are focusing on a frozen product. We're not revealing yet exactly which one it will be. But we are focused on a frozen product that would be for the UK market, and European market as a result.

Okay.

We can basically, through the UK, use it as home base, and we could ship through all of Europe based on that distribution deal.

Okay, all right, that's great, thank you.

Yes.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Management for closing comments.

We look forward to continued successful 2012, and look forward to getting the foundation started for 2013 already, and we wish everyone a wonderful rest of the year. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.