Lifeway Foods Inc (LWAY) 2012 Q2 法說會逐字稿

Greetings and welcome to the Lifeway Foods second-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 host Ms. Hunter Wells of ICR. Thank you, Ms. Wells, you may begin.

Good afternoon and welcome to Lifeway Foods second-quarter and 2012 earnings conference call. On the call with me today are Julie Smolyansky, President and Chief Executive Officer, and Ed Smolyansky, Chief Financial Officer.

By now everyone should have access to the second-quarter earnings release for the period ending June 30, 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 replay will be available on the Company's website.

Before we begin, we would like to remind everyone that the prepared remarks contain forward-looking statements and Management may make additional forward-looking statements in response to your questions. 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 statements. Lifeway assumes no obligation to update any forward-looking projections that may be made in today's release or call posted on the website.

And with that, I'd like to turn the call over to Lifeway's CEO, Julie Smolyansky.

Thank you for joining us today. I'll begin with an overview of our record growth and success in the second quarter and then Ed will review our second-quarter 2012 financial results in more detail. And finally we'll open the call up to take your questions.

We're extremely pleased with our financial performance in the second quarter of 2012 in which we reported a quarterly, I can't even say this straight, a quarterly earnings increase of 650%. Yes, that is correct, 650%, the strongest in our Company's history. We were able to achieve these results through higher net sales combined with the benefit of lower milk prices and a tightly controlled expense sheet. We believe these strong quarterly results will help generate a record year of growth in 2012.

We consistently invest in our marketing and advertising efforts to increase consumer awareness of Kefir and these investments are paying off as more people learn about the health benefits of our product, our sales and products distribution increase. Focusing on distribution, our Lifeway products are now available in every Aldi store in the United States. And we continue to grow our distribution in Target stores and our products are currently available around -- stores around the country.

Our growing presence in Aldi and Target stores speak to our sales growth with the average American consumer not just a niche market of health-conscious consumers. Healthy living trends have gone mainstream as American and international consumers our demanding healthyful and nutritious products such as Lifeway's Kefir to be available at their local grocery stores.

As we work to increase marketing and advertising support to raise awareness with customers and promote sales at retail chains, we also work to expand our growing product offering. One new product release this year was coconut chia flavored Kefir, chia seeds and coconut were both very popular ingredients with consumers this year as a growing body of researchers was recently published to support health claims of these ancient super foods. We updated packaging on some drinkable Kefir products such as Madagascar vanilla and mango, so our products continue to stand out against the competition in the dairy aisle.

New packaging for ProBugs drinkable Kefir for kids has allowed us to decrease the cost of packaging, and we expect to realize cost savings as a result in the third quarter and remainder of the year. As always, we continue to focus on product innovation to increase the availability of Kefir products in food retail chains around the country. Our expansion into frozen Kefir opened up a new category for us as we increase the availability of Kefir from the dairy and yogurt aisle to the frozen food aisle.

We continue to be extremely pleased with the results of Lifeway frozen Kefir which began shipping through our distribution network in April 2012. And this quarter, Lifeway frozen Kefir generated roughly $800,000 in sales for our Company, a 14% increase from the first quarter of 2012. And we've generated over $1.5 million in sales for the first six months of the year. Our frozen Kefir is available in about 2000 or so retail locations and we believe we can grow our distribution on frozen Kefir in the US. By the year end, we expect that frozen Kefir will be in roughly twice those number of stores and by next-- by 2013 three times.

As we mentioned last quarter, we continue to see increased sales in frozen Kefir due to our new frozen products including Greek frozen-- Greek Fro-Yo and frozen ProBugs for kids. We expect to increase distribution of all of our frozen products and believe sales for frozen Kefir will continue to grow in 2012 as consumers learn of the healthy benefits of consuming probiotic bacteria found in this low-calorie frozen yogurt alternative.

At Lifeway we're not only focused on product innovation, but also focused on the way our new products can grow distribution within existing and new retail partners. And we believe that our product innovation will help us continue to gain shelf space for Lifeway within the grocery stores. This is very important as we look forward and continue to grow our new and existing distribution relationships to expand sales long term. Lifeway continues to be better positioned than ever to capitalize on future growth opportunities in the US, internationally, in the grocery store and beyond.

We believe that the best way to attract new consumers to buy Lifeway is for them to sample our products themselves and that's why we've dedicated to meeting new and existing customers at various nationwide marketing events to sample our new flavors of Kefir and frozen Kefir. Most recently we attended Lollapalooza, will be attending the Chicago Marathon, Pitchfork Music Festival and Wanderlust, a yoga and music retreat in Vermont, Colorado and California. Our sample size portions of Lifeway are the perfect accompaniment to a summer event and make for lifelong customers who fall in love with our products within first taste.

The next best thing to meeting our customers face-to-face is meeting them in their favorite social media platform. Our Facebook page has grown to over 100,000 fans and we have over 40,000 followers on Twitter. Our new Pintrest page has been a phenomenally successful way to display recipes and pictures from the Lifeway kitchen.

Our Company blog, Kefir connection, covers topics from stay-at-home dads to breaking health news and has driven website traffic to our website. We have had a 51% increase in site visits from 2010 to 2011, and we expect to continue to invest into 2012. And we continue to invest in our social media presence and look forward to interacting with thousands of consumers who use our products and reach out to us through these online communities.

In June, we marked the 10-year anniversary death of Michael Smolyansky, my father and the founder of Lifeway Foods. He came to this country as a Russian immigrant and through hard work and dedication built a multi million dollar heath food Company. At Lifeway, we continue his tradition of entrepreneurship and aim to carry on his lifelong mission.

In addition, it is very fitting then in June, Lifeway surpassed the $2 million in weekly sales figure, a milestone for our Company and an accomplishment my father would have been very proud of. Already this year we have seen tremendous success and expect this momentum to continue. Our focus has and will be to continue the successful growth of our brand of attracting new customers and growing our sales to increase value for our shareholders.

And now, I would like to turn over the call to Ed to review our second-quarter financial results in more detail.

Thank you, Julie. I will now review our financial results for the second quarter ended June 30, 2012 in a little bit more detail.

For the quarter, I'm sorry, for the second quarter, gross sales increased 14% to $22.7 million compared to $19.9 million for the second quarter of last year. And this increase is primarily attributable to increased sales and awareness of the Company's flagship line, Kefir, as well as ProBugs organic Kefir and BioKefir. In addition, Lifeway's frozen Kefir line which was launched last year, April 2011, contributed to approximately $800,000 in sales during the second quarter of 2012.

Total net sales increased approximately 13% to $20.6 million from $18.2 million in the same period a year ago. Net sales are recorded as gross sales less promotional activities, such as slotting fees, couponing, spoilage and promotional allowances as well as early payment terms given to customers.

Gross profit for the second quarter of 2012 increased 46% to $8 million, compared to $5.5 million in the same quarter a year ago. Gross profit margin increased to 39% in the second quarter versus 30% in the second quarter of last year. The increase is primarily attributable to an approximate 20% decrease in the cost of conventional milk, the Company's largest raw material, partially offset by about a 5% increase in the cost of organic milk.

Operating expenses increased about 2% to $4.9 million from $4.8 million during the same period last year. And this increase was primarily attributable to increased general and administration expenses and partially offset by a decrease in selling expenses. The income -- our total net income was approximately $2 million, or $0.13 per diluted share, compared to $300,000, or $0.02 per diluted share, which is an increase again as Julie said of about 650%.

And now I'll briefly review a few financial highlights for the first six months of 2012 ended June 30. Total consolidated sales increased by about $5.3 million, or approximately 14%, to $44.3 million for the first six months compared to $39 million during the same period -- same six-month period, a year ago. Similar to our results for this quarter, the increase is again primarily attributable to increased sales and awareness of our flagship line Kefir as well as ProBugs organic Kefir and BioKefir. Frozen Kefir for the first six months was about 1.7 -- I'm sorry $1.5 million for the first six months.

And total consolidated net sales increased by about $4.5 million, or approximately 13%, to $40 million compared to 40, I'm sorry, compared to $36 million in the first six months of last year. Total operating income increased by about $1 million, or approximately 26%, to $5 million during the same-- during the six-month period ended June 30, 2012 from $4 million during the same period of last year. And total net income was approximately $3.3 million or 20, I'm sorry, was approximately $3 million, or $0.19 per share, during the six-month period compared to $2.2 million, or $0.13 per share, in the first six months of last year.

Next, I will review a few financial balance sheet items and cash flow highlights. The Company ended June 30, 2012 with about $2 million in cash and cash equivalents. Total stockholders equity was approximately $37.1 million, which is an increase of approximately $2.3 million when compared to the same time June 30 of 2011.

Net cash provided by operating activities increased $3.3 million to $4.1 million for the second quarter of 2012. This increase reflects our improvement in operating efficiencies as well as our increase in earnings per share.

And then that concludes our financial overview. We would now like to open up a call to questions from our listeners and the Operator can handle that.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session.

(Operator Instructions)

Howard Halpern of Taglich Brothers.

Actually it is John Nobile at Taglich Brothers, I'm just filling in for Howard. But I just wanted to have a few questions, Howard had wanted to cover with you. Actually, one in particular I want to make sure I got this correct, earlier in the call you said that by the end of 2012 you expect approximately twice as many stores to be selling Kefir, is that correct?

Frozen Kefir.

Frozen Kefir, okay. And a question Howard was hoping to get answered. If milk prices begin to trend higher, will you be able to raise prices in order to retain a healthy gross margin?

Yes, we still do have some price elasticity and the product has a brand, so yes there is price elasticity on the--

Okay, great.

But just a point on the milk prices, as I'm sure it'll come up in maybe someone else's question, but it's still relatively -- it's still historically very low compared to the last couple of years. And I just want to point out that in 2000 -- January 1, 2011 we -- Kefir got reclassified as a class 2 milk price or milk dairy product. And class 1, which it used to be previous in-- previous 2011 class 1 milk, which is a regular fluid milk, it's the milk that you would buy at the store in your gallon jug. That commodity has been going up faster and higher than class 2 milk and that's due to obviously the drought and price increases for corn and grain and feed.

So even though the headline might be that food and commodity prices are increasing and going up because of the drought in the Midwest and whatnot, the actual price for our class 2 milk is not as severe as it has been for the other classes. And that'll obviously help us continue to maintain our margins going forward for the rest of the year.

Okay, great. And when can we anticipate seeing international frozen Kefir sales?

Well, we are already seeing some of that since we're shipping into Costco in Japan and a handful of other accounts. And so we're already kind of ramping up our international sales and will continue to ramp that up in scale what we are doing already.

Yes, we hope to see our first purchase orders for the UK probably towards the latter part of this year.

Or early next year.

I mean, could you actually quantify in the quarter what the international frozen Kefir sales were?

No, we are not --

We haven't booked any Kefir -- frozen Kefir sales internationally this year yet.

Okay.

Our regular Kefir has-- is currently on sale internationally.

Oh, okay. The frozen Kefir is not, okay. And how has the Boston Whole Foods kiosk performed and will it be expanded to additional Whole Foods stores?

We're not sure, it's doing well. It's doing well by our account and by their account and we can't reveal if they're-- we don't have anything yet in terms of expanding. But there will probably be an analysis kind of as the summer winds down and they crunch some numbers and we make plans for 2013. And it's based on their expectations, too and we'll base that on their agenda [upside].

And just one more question, when do you anticipate frozen Kefir quarterly sales to exceed $1 million?

It's already.

Yes, they're very close, I mean they were for the second quarter they were $800,000 probably for the third quarter--

And higher than that.

Yes, they'll be close--

Okay so there's a good chance in Q3 that we could see that number then?

Yes. We anticipate continuing to increase basically increase the sales on frozen consistently on a quarter-to-quarter basis. Obviously, the fourth quarter and first quarter 2013 because of the winter, that could potentially flat line in that time.

But at the same time we're everyday expanding distribution based on the really outstanding results that we're seeing a week after week as kind of grocery category managers get to review some of those numbers and take our meetings that we can continue to increase. So we'll have to just see how that goes, but definitely a huge success and we'll anticipate dramatic increases and jumps on distribution on that line, on the frozen line.

Okay, great. That's all I have right now. Thank you very much.

James Fronda with Sidoti.

My question on raising prices was already asked. But just in terms of growth was it more new distribution to newer retailers or is it more ongoing demand for the products that you have at existing retailers or just a mix?

It's a whole combination because on one hand it's existing, it's increase in sales on existing products that's been in distribution with increase in business in certain retail accounts. As well as increase in distribution on new products and innovations that we've had in the last few years. So it's really a combination of everything.

Right, okay. And what is the breakdown of the input cost for conventional milk versus organic milk? Have you mentioned that before?

I'm sorry can you repeat that question?

The breakdown of how much the cost is verse-- of conventional milk versus the organic milk?

We've never broken it down, but--

Okay.

We believe that the amount of conventional units that we sell is about three to one organic.

All right. And have you guys been looking to expand into any other categories like how you went into the frozen Kefir, and if you do, would it be-- how early could it be? Could it be 2013?

For what types of new products?

Just any type of new category that you might venture into? Have you guys thought about it?

No, I mean our core competency is Kefir, it's dairy. And then after that it is probiotics in the health food industry, but I don't think that you're going to see us start to make whole wheat pancakes.

Right, okay.

Know what I mean. So yes, we'll stick with Kefir in different forms, probiotics after that and that's--

All right, that works. Thanks, guys.

(Operator Instructions)

Ivan Zwick of Raymond James.

I just have a couple of questions. I guess this would be for Edward. What should we look for the tax rate in the third quarter -- income tax?

Our historic percentage, which is about 40%, I'm sorry, 38%.

38? Okay.

Yes. The federal, which is 32%, 33%, 34%, 35% and then the local state, which is an extra 2% or 3%. So it's historic, if you look at our percentages for a full year let's call it 2011 and 2012, I think you'll see it between 38% and 39%.

Okay. And is anything new developing in the Starfruit part of the business?

Aside from what the first question was, regarding the kiosk in Whole Foods in Boston which is a test market, we are -- we don't have any plans to open up new stores. In Chicago, we are obviously still always on the lookout for opening up with franchises in different cities and we've always had some interest in other cities. So we'll continued to pursue that opportunity. But nothing of material note.

Okay. And anything new on Canada expansion?

Yes, we hope -- we're working with -- (multiple speakers). I don't want to step on Julie's thoughts, but we're working right now with a very large co-packer in Canada, one of the largest dairy producers in Canada.

And we hope to come to some sort of an agreement whether it's a test market where we could import the product directly while we work with them to develop a formula and develop a product and develop the labeling and all that we're up for the Canadian market. And that's been moving pretty significantly forward. So, hopefully again, just like we anticipate with the international, in the frozen Kefir for the UK, we hope to see some purchase orders for the latter part of 2012 and, or the first part of 2013.

Okay, but Canada then what is that going to be 2013 before anything is done there?

Same thing, yes. Again latter part of 2012 or early part of 2013.

Okay. That was my question.

But it's coming, so --

Well that should be a big market for you. So, it will be nice to see you enter.

Yes.

Keep up the good work.

It's a sizable market and its right next to us, we're neighbors, so there is some interesting similarities. And it's a market that we should be, it's actually like we have to be there as well.

Okay. Any thoughts on anything in the other direction south of the border?

No, nothing in the works. And nothing that is on our mind.

Yes, I think were so focused tremendously on the US.

But we have a number of projects sort of in the middle of-- we're half pregnant with. And so we'd like to see those be implemented and come to fruition so we're using our resources right now to complete those projects and get them off the ground.

Yes and we still think there's a tremendous -- there's obviously still a tremendous amount of growth to be had in the United States. We're still not even penetrated more than 40% in mass markets. So I think that the US is still a focus, of course.

Yes, but we have -- we must simultaneously work on all of our distribution in all the different markets that are appropriate for a product like ours as we see global and international interest in healthy eating and probiotics. And specifically in the United States, there's obviously a major focus and attention on alternative beverages and healthier eating models and how it impacts our health overall. And so I think it is a good time for a Company like ours with years of experience in this field, so it's a promising future.

Okay, well thanks for the questions.

Yes.

(Operator Instructions)

Anne Morrissy of GAMCO Investors.

Hi, guys congratulations on a good quarter. Could you give me a little bit more color on milk? Our milk prices continuing to decline? And how much do you anticipate, I am reading a lot about how dairy is going to be really impacted negatively from a class base due to the drought, can you put some quantification on that?

Sure, well we can only look for one month out, so right now we know what August price is and they've only gone up about 5% from the lows of June and July. So I don't believe that they're not decline -- I'm sorry, I believe they're not declining anymore because there's really no where for them to go any more down. But we are not seeing a sharp increase as we have let's say a year ago or even nine months ago.

So to that extent, we don't anticipate having to even increase prices. The prices will stay the same for our product to the consumer as they were last year, as they were in the second quarter of last year, as they were in the third quarter of last year and the fourth. So we don't see the need to have to increase in prices.

We-- again we look we're confident that we'll be able to maintain our margins unless something dramatic were to happen. But again we can only really see one or two months out. At this point, we're still extremely confident where they're going or where they look like to be headed. So like I said in that respect, it's just business as usual for us.

Okay. Thanks.

I hope that helps.

Thank you. We have no further questions in queue at this time. I'd like to turn the floor back over to Management for closing remarks.

Those were our -- we don't have really any. We look forward to ending up the year, we're kind of halfway in and are excited to finish off 2012 and move into an incredible 2013 as well.

Yes and just one other point that I don't know if we touched on with regard to our cash, cash position and cash flow. Which is on June 27 we paid a $0.07 per share dividend and we still ended the quarter two-- I'm sorry, three days later with $2 million in cash and cash equivalents and operating cash, three days after we paid that dividend out. So I think that that's just really kind of positive sign of where our cash flows are, how we're managing our expenses, and of course, where our top line growth is. And I think that's a tremendous point that maybe we didn't talk about.

And that's-- I think that's all for our prepared remarks and our answers -- question-and-answer portion. And we look forward to sharing our third quarter 2012 result with you in the coming months, which will probably be around November 14 or 15. And with that, we'll end the call and we'll talk to everyone soon.

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