Lifeway Foods Inc (LWAY) 2013 Q3 法說會逐字稿

Greetings and welcome to the Lifeway Foods Incorporated third quarter 2013 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, Hunter Wells, of ICR. Thank you. You may begin.

Good afternoon and welcome to Lifeway Foods third quarter and 2013 earnings conference call. On the call with me today is Ed Smolyansky, Chief Financial Officer.

By now, everyone should have access to the third quarter earnings release for the period ending September 30, 2013, which went out this afternoon at approximately 4.05 p.m. 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 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, the descriptions of Lifeway's objectives, strategies, plans, goals, or targets contained herein are also considered forward-looking statements. Actual results could differ material (sic) 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 their website.

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

Thank you. Good afternoon and thank you for joining us. President and CEO of Lifeway, Julie Smolyansky, is traveling abroad in pursuit of global expansion and is unable to join today's call.

I would like to begin with a brief comment on our record growth and success for the third quarter. Then I will review our third quarter 2013 financial results in more detail. And, finally, I will open up the call to take your questions.

Overall, we are very pleased with the progress we have made thus far in fiscal year 2013. We are thrilled to report another quarter of record results, which demonstrates our steady progress in growing Lifeway into a leading health food brand. We believe these strong quarterly results will help generate record results for the full year.

Every day, doctors and health scientists publish new reports on the benefits of probiotics. The probiotics industry is growing, and by 2018, it is expected to have -- to be a $45 billion category around the world. Lifeway is expertly positioned to receive the benefits of this growth, as over 60% of probiotics are dairy-based.

As always, we plan to launch new products for our customers and we'll continue to make investments in our business that will create strong momentum for sales growth and increase our distribution.

In the past couple of weeks, we have started to ramp up the use of our Golden Guernsey dairy plant facility, which we purchased back in July 2013. This facility is a strategic long-term investment for Lifeway. When the facility is in full use, it will allow us to triple our current capacity and greatly increase the scale in which we manufacture Lifeway products.

We will experience lower costs when we could become our own supplier of milk in bottles. This will be very beneficial to our margins, as the expense to purchase this processed milk in bottles from outside vendors are some of our top costs. We look forward to benefits of utilizing this facility in the future.

Additionally, we have remained committed to returning capital to our shareholders. This year, we paid our second annual dividend and increased it from -- to $0.08 from $0.07. We were able to increase the dividend because of our strong cash flows, which still allowed us to increase spending in our marketing and advertising budgets.

Looking ahead, we continue to reward our shareholders for their support of Lifeway Foods. I will now review our financial results for the third quarter 2013.

For the third quarter, gross sales increased 18% to $26.6 million compared to $22.6 million same time last year. This increase is primarily attributable to increased sales from our flagship line, Kefir and ProBugs Organic Kefir for Kids.

Third quarter total consolidated net sales increased approximately 15% to $23.8 million from $20.6 million in the third quarter of 2012. Gross profit for the third quarter of 2013 was $6.9 million, which was approximately the same as the third quarter of the prior -- previous year.

Gross profit margin was 29% in the third quarter of 2013 compared to 34% in third quarter of 2012. Of course, this was primarily attributable to a 35% increase in the cost of milk, our largest raw material.

Operating expenses decreased 3% to $4.7 million from $4.8 million during same period last year. This decrease was primarily attributable to a decrease in selling-related expenses.

The third quarter 2013 effective tax rate was 29% compared to 32% in the period of the same last year. Our total net income was $1.7 million or $0.10 per diluted share compared to $1.4 million or $0.09 per diluted share in the same period last year.

Next, I will review a few balance sheet and cash flow highlights. The Company had $1.2 million in cash and cash equivalents as of September 30, 2013. Total stockholder equity was $43.4 million, which is an increase of $5 million when compared to September 30, 2012.

Net cash provided by operating activities decreased 2.5% to $3.6 million for the third quarter of 2013. Net cash used in investing activities was $7.9 million compared to $1.2 million in the same period last year.

Also, please note cash flow from investing activities includes approximately $540,000 from proceeds related to the sale of equipment and other fixed assets, as well as other income of approximately $209,000 on our income statement. These items are due to sales of assets acquired in the Wisconsin facility and subsequent income was made as a result of the transaction.

Going forward, we believe Lifeway is well-positioned for future growth with the right people, products, and of course capacity in place to support consumer demand for many years to come. That concludes our financial overview. We would now like to open up the call to your questions. Operator?

(Operator Instructions) Mitch Pinheiro, Imperial Capital.

Couple questions. One, so I imagine milk costs will stay relatively high here in the fourth quarter. Are you going to adjust pricing at all? Any plans to adjust pricing, I should ask?

No, we don't. We don't really contemplate to increase or decrease our pricing relative to where milk costs go. It takes about six months to implement a price increase anyways.

However, we do feel that since we are bringing in our own milk processing into the Golden Guernsey dairy facility in a couple of weeks or maybe next month, hopefully we will be able to decrease the costs associated with how we are getting it now. So it all depends when we start doing that.

So right -- as of now, it is not -- Golden Guernsey is not being -- is not processing milk for you?

Correct.

Okay. And it will start in a month or so, is what you are saying.

Yes. It could be in a couple of weeks or a month.

Okay. How about on the frozen side? How did the frozen -- the new frozen products perform?

I mean, they continue to perform great; double-digit growth. We don't breakout sales by product line. So -- but they are always growing 15% to 20%.

And is that --

And we also -- (multiple speakers) yes. It's new consumers, it's new stores, and, of course, we launched a bunch of new frozen products this year. We have launched the frozen ProBugs Push-ups in three flavors. We launched that to leverage the great ProBugs brand.

And then we've also launched, I believe, three flavors of the frozen bars. It is like a stick. So yes -- so those are the launches this year. And even the conventional -- our original four pints that we launched a couple years ago are also doing great.

Okay. Then just one other question. It's a balance sheet question. What was -- there was an increase in inventory. Is that related to higher milk costs? Or is there anything else into that?

It is a combination of higher milk cost and timing. The quarter ended on a Monday, which means we had a full load of products in our facility versus, I believe, last quarter it was -- the quarter ended on a Saturday or a Sunday. So there is a timing issue, of course, and then, of course -- and then, obviously, the product costs associated with the price of milk increasing.

Okay. Thank you. I will get back in the queue.

Howard Halpern, Taglich Brothers.

Congratulations. Great quarter.

Thank you.

First question is in regard to international sales. How has that progressed? And, with Julie over there, how do you view that -- how should we look at that type of ramp into next year?

Well, right now, international -- it is a rounding error in terms of volume or revenue right now. But, we are increasing all of our presence in stores.

So right now, we are in, I believe, five Whole Foods. We gotten placement into Harvey Nichols. And our brokers are really just starting to -- and salespeople are really starting to push the product.

Of course, you have to start somewhere, even in the United States. So the fact that the product is having a very good rapport and introduction into these stores and it has very good -- it's being received very well, we are confident we could increase to all the stores in London -- or, I'm sorry; in the UK. That will hopefully help us to move over to Europe for that frozen line as well.

Okay. And looking at -- and this is really for the fourth quarter -- I know the tax rate in the third quarter was 29%. For the nine months it is 37%. Would you guesstimate that we would be closer to the 37% than the 29% in the fourth quarter or is it too hard to (multiple speakers)?

You know, it is probably going to -- it's a little too hard. I am not a tax specialist. I am not an accountant. But I would say it is probably going to be somewhere in between or closer -- 35%, 37%. That is our historic number.

But we have -- you know, there is a lot of things associated with the purchase of the facility for tax depreciation and things like that. So all that kind of comes into play.

Okay. Well, just keep up the great work.

All right. Thank you.

James Fronda, Sidoti & Company.

Just on the SG&A line, why was it so much lower from a year ago? And is that a good run rate to use going forward?

For the SG&A?

Yes.

Yes. You know, we are always -- our G&A is always -- we are always very efficient with it, and the same thing with our selling. So as a percentage of sales, I think it is similar to what it has been historically. But, like I said, we gain leverage from our G&A and management and things like that.

Okay. And is that a good run rate to use going forward?

Sure (multiple speakers).

Okay. All right. Thanks.

[Ann Marcy, Janco Investors].

The fact that Dominic's is leaving the Chicago area, do you anticipate that that is going to have much of an impact on your revenues going forward?

You know, I mean, I didn't actually hear that Dominic's was leaving. But, usually when a chain of 100 or 120 stores leaves, either another chain comes in or Jewel or someone else will take up the slack. The people are leaving. The consumers aren't leaving. It is just that the stores might be.

So no, I don't anticipate -- we have had things -- we have had times where places and stores went bankrupt, things like that. And someone else just comes in and picks up the slack, or those consumers just go across the street to somewhere else and buy the same product.

Okay. Thank you.

Ivan Zwick, Raymond James.

Ed, a question on the Starfruit that you talked about quite a while ago, that you were going to do some individual small change and all, that hasn't materialized. Where are we at with the expanding that part of the Company?

Yes, I mean, it's, again, it's a rounding error to number. It is not anything significant in our full-scale business. But it is something that we are experimenting with.

We are not devoting all of our energy, per se, to that, but if opportunity pops up, we will look at it and things like that. But there is nothing majorly new on that front.

And, also, on the new plant that you purchased, that you said within a couple of weeks or a month, some of the milk, I guess, will be going through there and that will cut some of the costs down on the milk expense. Can you give me an idea of what kind of magnitude of cut that might mean?

Well, I can't give you a detailed number. What I can tell you is, historically, when a facility takes in raw milk and processes it for an end-user such as ourselves, they have -- they build in their own margins and utility fee.

Now, it is not a super high margin product or -- because it is a commodity and basically they are just skimming it and separating it and homogenizing it, whatever the end customer needs. So I would say, historically, a company that is doing this -- a dairy that is doing this for an end-user like us, it could be somewhere around 5%. I don't know what their numbers are. But it is somewhere, I think, between 5% and 10%.

Well, the amount of milk you use, that would be (multiple speakers).

But, yes, I mean, of course, we have our own expenses, don't forget. But their profit margin is what their profit margin was. But I don't know what theirs was, or what a similar dairy company would be.

Okay. Well, thank you.

(Operator Instructions) At this time, I would like to turn the conference back to Edward Smolyansky for closing comments.

Well, I think that that is it. Thank you for joining us, and hopefully Julie and I will both be on the next call. I'm sure we will. And, have a good day and holidays as well. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.