Lifeway Foods Inc (LWAY) 2012 Q4 法說會逐字稿

Greetings and welcome to the Lifeway Foods, Incorporated, fourth-quarter and full-year 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, Katie Turner of ICR. Thank you, Ms. Turner; you may begin.

Thanks. Good afternoon and welcome to Lifeway Foods' fourth-quarter and full-year 2012 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 fourth-quarter and full-year earnings release for the period ending December 31, 2012, which went out this afternoon at approximately 4.05 p.m. Eastern Time. If you have not received our 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 would like to remind everyone that 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 projection that may be made in today's release or on the call hosted today and posted on their website.

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

Thank you, Katie, and good afternoon, everybody. I would like to begin today's call with an overview of our growth and success in 2012, including a brief discussion of our record fourth-quarter and full-year 2012 financial results in more detail. Lastly, I will open up the call to take your questions.

2012 was another year of record sales, and we are extremely pleased with our financial results. The Lifeway brand continues to grow within the expanding health and wellness category.

To support our growth and increased distribution, we continue to invest in our marketing and advertising efforts, to further expand awareness around the benefits of kefir. We believe we are in the early stages of our long-term growth trajectory, and Lifeway leads the kefir market today, controlling 97% of the kefir category.

The yogurt and kefir category grew over 20% in the last 52 weeks. Yogurt and kefir ranked the fifth largest category across all departments and ranked first in unit sales.

And the Lifeway brand is the sixth largest brand in yogurt and kefir, up over 22% in 52 weeks according to recent IRI and SPINS data. Our strategy is to remain true to our values of providing nutritious and convenient kefir products as we grow and expand our Company and deliver record sales and earnings growth.

Focusing on our record results in more detail, gross sales increased 22% to $22.9 million for the fourth quarter, and gross sales increased approximately 16% or $12.6 million to $89.8 million. This increase was primarily attributable to increased sales and awareness of our flagship line, Kefir, as well as ProBugs, our organic kefir for kids, and BioKefir.

Fourth-quarter total consolidated net sales increased approximately 24% to $20.8 million, and net sales increased 16% to $81.4 million for the year. As a reminder, net sales are recorded as gross sales less promotional activities such as slotting fee, paid couponing, spoilage, and promotional allowance, as well as early payments given to customers. The total allowance for promotions and discounts in the fourth quarter of 2012 was approximately 10% of gross sales compared to $2 million or 10.5% of gross sales in the same period last year.

Our strong sales performance combined with the continued production efficiencies allowed for us to grow our gross margins to 33% for the quarter and 34% for the year. Gross profit increased 86% from the fourth-quarter 2012 when compared to the same period in 2011, and 29% for 2012 when compared to 2011.

As a result, we reported record net income of $1.1 million or $0.07 per diluted share for the fourth quarter of 2012 compared to a loss of approximately $400,000 for the same quarter in 2011. 2012 total net income was $5.6 million or $0.34 per diluted share in 2012, compared to the total net income of $2.9 million or $0.17 per share in 2011.

In addition, we continued to strengthen our balance sheet with cash and cash equivalents of $2.3 million and total stockholder equity of $39.3 million as of December 31, 2012. The Company had a net increase of cash and cash equivalents of $1.2 million during the 12-month period ended December 31, 2012, compared to a net decrease in cash and cash equivalencies of $2.1 million during the same period in 2011.

In order to execute on our strategy it is important that we focus on our plan to include mainstream distribution beyond our strengths in the natural and organic grocery stores. We made strong distribution gains in 2012, launching our kefir products in Target, Costco Japan, Aldi, and Costco New England with the Lifeway Club Pack. We have most recently expanded distribution to Wal-Mart stores nationally and have realized very positive customer responses to our products so far.

We believe one of the best ways to continue to increase distribution and attract new customers is through the introduction of new products and innovative flavors of kefir. This past year we introduced Coconut Chia Kefir, which was voted the number-one product in Dairy Foods' Best New Products of 2012. The product received the most votes from among 25 different dairy foods and beverages nominated by publications editors and received over 13,000 votes to grab the top spot on the list.

This product blends the distinctive taste of coconut with on-trend omega-3 health benefits of chia seeds and, most importantly, contains 12 strains of probiotics for optimal digestive health. This refreshing flavor is just one example of how Lifeway transforms traditional kefir to appeal to modern-day flavors and tastes.

In March 2013, at the Natural Products Expo West, a broader healthy living and wellness product tradeshow, both new and existing retailers and distribution partners tried our products and met with our sales team. At the show we unveiled five new kefir products for our customers, with offerings for babies to adults. Our focus continues to be to expand the placement of Lifeway kefir products beyond just the cooler aisle and into other areas of the grocery store.

Lifeway ProBug Bites are a revolutionary new product that was inspired to create a nutritious baby food option for moms. It is a tiny bite of freeze-dried kefir that quickly dissolves in the baby's mouth for safe and easy self-feeding. Each shelf-stable, nonperishable pouch comes in three flavors.

Expanding our highly successful Lifeway ProBugs children's pouches, we introduced the first organic green kefir for kids in the same no-spill pouch. ProBugs Green Kefir is a yogurt-like smoothie blended with kale, broccoli, spinach, cabbage, and apple to deliver the anti-oxidant equivalent of a full serving of vegetables. Kale and kefir are two power foods that, when combined, make for one nutritious treat.

For children who have outgrown ProBugs' pouches we have introduced Lifeway ProBugs Blast, a new ProBugs low-fat smoothie with creative flavors like cherry-lime and out-of-this-world packaging designed specifically for tweens who will one day travel to Mars on vacation. Each character supports creative stories educating kids on the universe, including comets, the galaxy, moon, and stars, and positions Lifeway as a powerful partner in offering healthy and nutritious food choices to kids while teaching science in a fun, approachable way.

Lifeway Lowfat Honey Fig is the 14th flavor in the Lifeway Lowfat Kefir collection. The new Mediterranean-inspired cultured milk smoothie was created by lab participants during Chicago's Ideas Week last October.

We are also pleased to introduce Lifeway's Frozen Kefir Bars, the perfect complement to our Frozen Kefir that is already sold in pint form. These bars are a low-fat, 60-calorie indulgence that provide a healthy kick to an aisle that is traditionally full of sugary and unnutritious desserts.

Clearly there is no lack of innovation or imagination at Lifeway as we expand our product offering. In addition, we have repositioned our Helios brand, one that already supports a Greek story, with Helios being god of the sun, as our Greek kefir line offering a higher protein count, an addition of honey as a Mediterranean flavor. Helios now offers a sweet, more modern, minimalist design package, and the response to the change has been excitement.

Lifeway's Frozen Kefir, which began shipping to our distribution network at the beginning of the second quarter of 2011, continues to be a huge success. In addition, we began shipping frozen ProBugs in push-up pops last year to Whole Foods and other major outlets, and we believe we can continue to grow distribution of Frozen Kefir in the US and internationally. This is very important as we continue to grow our new and existing distribution relationships to expand sales of each of our frozen products long term.

We have continued to pursue the opportunity to expand our international kefir distribution. Starting in May, our Frozen Kefir in pints will be sold in London in several retail outlets including Harvey Nichols and [Rogan]. We have partnered with a local UK copacker to manufacture Lifeway frozen pints as we scale our already successful US operation.

By launching in the UK, we are also able to sell and distribute our brand throughout Europe. We are excited to begin to build Lifeway as a global brand that is not only known in the US but in top markets around the world as the quests for healthy food choices and probiotic food continue to grow worldwide. Using social media tools such as Facebook and Twitter, along with local grassroots sampling efforts, we feel it is the perfect opportunity to expand Lifeway brand as barriers and walls have been broken, empowering consumers with information that provide the best food options available for themselves and their family.

The most important part of having great kefir products is getting the word out to new and existing customers. We continue to invest in grassroots and traditional marketing events. Most recently we have sponsored the Food Network's South Beach Food & Wine Festival (sic), ran a pop-up Frozen Kefir Shop at Miami Lounge at the Sundance Film Festival, sponsored South by Southwest, offered our treats at the Oscars gifting suite, and participated in three events during the inauguration of the United States President, Barack Obama.

We will continue to bring Lifeway food trucks and kefir booths to marathons, music festivals, and other events across the nation to satisfy the hunger of consumers in a healthy and nutritious way. Eating healthy continues to be at the top of consumers' lists. Health and wellness research trends suggest that more and more consumers are demanding healthier alternatives and real food products.

Our kefir beverages and Frozen Kefir are ideal for the health-conscious individual that want high-protein and low-fat foods with the benefits of probiotic culture. Over 6,000 research studies have been published on the benefits of probiotics, and 98% of physicians surveyed said probiotics have a role in treating GI issues.

As more Americans obtain access to healthcare, preventative care, and alternative care, we feel more practitioners will be recommending probiotics and kefir as a daily regimen to keep their patients healthy. I am proud to lead a Company that not only provides the best in probiotics and nutritious foods to improve the health of our consumers, but one that empowers consumers to make healthy lifestyle choices every day.

I would also like to take this opportunity to thank our loyal customers and shareholders, who are as passionate as we are about providing healthy and nutritious food for themselves and our families. With 27 years of experience, Lifeway is the leading Company in manufacturing and marketing kefir.

In conclusion, we believe 2013 to be another record year of sales and profitability, as we believe we are extremely well positioned for future growth in the US and abroad with our kefir product line. As a result we expect gross revenues for our first-quarter 2013 which ended March 29, 2013, to be approximately 30% higher when compared to the same period in 2012, and we expect to continue this momentum throughout the year. It is my honor to work with our team to continue to build our future successes.

That concludes our overview and with that I would like to open up the call for your questions. Operator?

(Operator Instructions) Howard Halpern, Taglich Brothers.

Congratulations. Great quarter, great year, and great product.

Thank you.

My first question is, do you have an approximate number for Frozen Kefir revenue for the full year?

I don't have an approximate number. Eddie, maybe you have an approximate number?

Yes. It was close to like $2 million to $2.2 million. But at this point, since the product line is already over almost two years old we are not going to be giving -- breaking out numbers going forward for frozen, just like we don't for any other of our existing lines.

Okay. I would like to just -- I guess this may tie into your new Pro Bite for babies. But could you just provide like an overview of, I guess, the sales strategy in terms of -- and we could take the Frozen Kefir product, where you have the frozen pints in stores and then you distribute that as broad and as wide as you can. And now you are going to those existing customers for the bars to get them on the shelves too?

Correct.

Is that your strategy going for almost all your product lines?

Yes, exactly. They have shown a tremendous -- when we launched our frozen pints we did see a tremendous response and success and interest in these kinds of products. So the idea is to take up market share and space from other brands that are maybe weaker or not growing, with using the momentum and trends and leveraging a lot of the success and brand awareness that we have with our existing brand.

Okay. And the ProBug Bites for babies, where do you envision that, I guess, being sold first? And then where would you like to see it down the road being sold?

Sure, it will initially go into the baby aisle at most likely the natural food stores, which tend to be the early adopters for Lifeway brand products. So initially the Whole Foods of the world and other natural markets, Sprouts, MOM's, different natural food co-op locations.

But rather quickly we expect to be in mass-market stores from Kroger to Safeway, just again using our existing distribution and model to again leverage the success of the ProBugs brand in expanding that brand into other areas of the grocery store. So it would be at the baby aisle, go into Babies R Us. Of course, because it is shelf-stable it also offers us the ability to ship directly from Lifeway or an Amazon.com or another online retailer.

Okay. Has -- because we talked a little bit about healthcare and such. Have you had any successes yet in penetrating hospitals, that type of food area?

Not directly foodservice within the hospital, but we do have doctors, nutritionists, RDs, GI professionals recommending kefir and probiotics as a supplement to people's diets, especially when people are taking antibiotics. We are noticing many more doctors and practitioners recommending, almost as a side-by-side, I would say almost like another drug, that they are prescribing to that effect.

So it is a natural supplement tool that they are using, basically?

Exactly.

Okay. Two last questions. In the first quarter -- because I have done a little bit of work on this -- milk costs versus the same period last year are going to be up, I think. But of course it got so high in the middle of last year, overall for 2013 it should be flat to down. Am I correct in that assumption?

Yes, that is correct, Howard. Let me (technical difficulty) fourth-quarter milk prices were only about 5% lower. The volatility is starting to go down. It has for the last year, will continue probably for 2013. And we are looking to see flat or a minimal decrease for 2013.

Okay, and one last one. Do you envision the Board of Directors approving another $0.07 dividend this year?

Based on our current cash flows and balance sheet, we do.

Okay, thanks. Keep up the great work, guys.

(Operator Instructions) James Fronda, Sidoti & Company.

Hey, guys. My question on the price was already answered, so thank you.

(Operator Instructions) It appears we have no more questions at this time. I would like to turn the floor back over to management for their closing comments.

Thank you for your participation today, and we look forward to sharing our first-quarter of 2013 results with you in the next coming months. And have a good evening. Thank you.

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