Lifeway Foods Inc (LWAY) 2016 Q1 法說會逐字稿

Greetings and welcome to the Lifeway Foods First Quarter 2016 Earnings Conference Call. (Operator Instructions)

As a reminder, this conference is being recorded. I would now turn the conference over to Ms. Hunter Wells of ICR. Thank you, Ms. Wells, you may begin.

Good afternoon, and welcome to Lifeway Foods earnings conference call to discuss the company's results for the first quarter 2016. On the call with me today are Julie Smolyansky, President and Chief Executive Officer; Ed Smolyansky, Chief Operating Officer; and John Waldron, Chief Financial Officer.

By now, everyone should have access to the release, 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 the www.lifewaykefir.com. 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, 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 a call posted on the website.

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

Thanks, Hunter. Good afternoon to everyone who's joined us on today's call. I'll begin with an overview of our business in the first quarter of 2016, and then provide an update on our strategic initiative. Next, John will discuss our financial results in more detail. Finally, Ed, John and I will be available to take your questions.

We started off the year well. In the first quarter, our net sales increased 10% over the prior year, approximately $33 million. Our improved top line performance demonstrates the continued demand for Lifeway's diverse portfolio of healthful probiotic and kefir dairy products. The strategic investments we made in 2015 to strengthen our business have us well positioned to achieve increased distribution and velocity as the year progresses. We're excited about growing -- about our growing brand awareness and innovative new products. Later on today's call, I'll share my thoughts on our future opportunity. But first, I'd like to review some of the highlights of our first quarter.

Our quarter sales results were primarily driven by increased distribution across new and existing customers. A few recent highlights included: 5 SKUs additional -- 5 additional SKUs at Walmart, consisting of 3 ProBugs and 2 Protein Kefir items; 3 Protein Kefir items that were brought into Waypoint Groups of stores, which include ShopRite; 2 Protein Kefir additions at Kroger; and some of these distribution increases were partially mitigated by softer performance in the natural channel.

Beginning in the second quarter to promote our recent distribution wins for ProBugs, we have began expanding our advertising and marketing initiatives around ProBugs to support continued growth. This month, we plan to host over 500 demos at Walmarts across the country to drive increased awareness and target existing and new customers. These in-store products demos coincide with our second national television commercial, which we aired for the first time last week, this time around focused specifically around ProBugs, telling the story of its initial creation and the healthful benefits it provides to children. This targeted addressable media campaign for ProBugs will continue through the end of June.

As many of you are already aware, Lifeway is a leading manufacturer and marketer of kefir in the United States. Based on recent IRI data referenced, over 92% of total U.S. households were spending their kefir dollars on the Lifeway brand. This is a tremendous accomplishment. And while we have historically been primarily focused on the development of drinks and food-related probiotic dairy products, we believe that we also have a strong opportunity to expand into new product categories behind the strength of the Lifeway brand and our successful history of innovation.

I'm excited to share that we plan to introduce probiotic supplement. For those of you who've had the pleasure of seeing -- who we had the pleasure of seeing at National Products Expo West, you may also have to have the opportunity to try our new Lifeway probiotic supplements for adults and chewables for children. Our probiotic supplements in a pill form were designed with the on-the-go travelers and women in mind. We plan to introduce 3 SKUs, each formulated with live and active cultures that keep -- help keep digestive and immune systems happy and healthy.

In addition to our new probiotic chewables for kids, our gentle and effective way to restore and balance the good bacteria in the digestive track and support healthy immune function in children 2 years of age and older, each supplement tablet includes 9 probiotics and will be available in strawberry and grape flavors.

As discussed in our previous conference call, this past February, we teamed up with designer Cynthia Rowley to launch an exciting collaboration, with a specially designed bottle and limited edition flavor Hibiscus Rhubarb Pie. We are pleased that both Fast Company, [Crane's] and other successful fashion bloggers recognize Lifeway for our successful unconventional marketing strategy and ability to make kefir relevant and exciting. The new flavor hits shelves in April, and we have been very pleased with the initial positive response from retail partners and consumers thus far.

Focusing on efforts to educate and connect with consumers on the healthful benefits of kefir and our probiotic products, we announced the appointments of 2-time Olympic Gold Medalist and FIFA World Cup champion, Carli Lloyd, as our new brand ambassador. She will star in Lifeway's third national TV commercial that will air in the 2016 Summer Olympics in Brazil. Additionally, she'll appear in a series of events on behalf of Lifeway. Like me, she will also share her experiences with Lifeway on social media where she has more than 630,000 Facebook and 670,000 Instagram followers. We're very excited to welcome Carli as our newest Lifeway representative, and look forward to partnering with her as we share our passion on how nutrition can help one achieve a healthy and happy lifestyle.

Focusing on the retail side of our business for a moment, we are currently in the process of rebranding the Starfruit Café to the Lifeway Kefir Shop. Our goal here is twofold. To both strengthen and reinforce the Lifeway brand, soft-serve frozen kefir is now being sold under the Lifeway name in over 40 Freshii locations across 4 states. This pivot to Lifeway Kefir Shop allows us to continue educating new audiences about the benefits of kefir through our expanding soft-serve vertical.

Finally, before I turn the call over to John, I'd like to welcome our newest team member at Lifeway, Jennifer Reilly, who's joined us as Senior Executive Vice President of Sales at the beginning of this month. Jennifer is a seasoned executive with a strong track record of success. She most recently led national accounts and sales planning teams for Quaker Oats, a division that generates over $3 billion in sales annually for PepsiCo. Additionally, she's led the field and retail execution teams at Gatorade, Tropicana, Quaker, Müller, Naked and Emerging Brands across North America and established retail and customer relationships. We welcome Jennifer to the Lifeway team and believe she'll play an integral role in our long-term growth plan by driving increased distribution of the Lifeway healthful, nutritious kefir and other probiotic dairy products.

In summary, we're very pleased with our start to 2016. We're confident in our strategic plan and long-term growth opportunities, which we believe have us well-positioned to achieve continued growth this year and beyond. As a remainder, these 3 -- these initiatives include: increasing Lifeway's brand awareness; developing new innovative products; and finally, expanding distribution across sales channels and geographies. We will continue to execute against this plan as we grow our business and return value to shareholders.

With that, I'd like to turn the call over to John to discuss our final results in more detail. John?

Thank you, Julie, and good afternoon to all of you on the call today. I'd like you take some time now to briefly review the financial results of Lifeway's first quarter. As Julie mentioned, first quarter net sales increased 10% to $32.6 million from $29.6 million in the same period last year. The first quarter net sales performance was driven by higher volumes of the company's Kefir products, slightly offset by increased trade promotion and customer allowances.

Lifeway's first quarter gross margin rate decreased to 26.4% from 28.3% in the same period last year, primarily due to increased manufacturing overhead costs primarily related to our Waukesha facility, which continued to expand its production volumes during the quarter. Milk prices were essentially flat versus the year-ago period.

Selling expenses decreased approximately 10.8% or $0.4 million to $2.9 million in the first quarter of 2016 from $3.3 million in the year-ago period. The lower level of selling expenses was driven in large part by lower advertising programs in the first quarter of 2016. Lifeway's general and administrative expenses increased $0.9 million to $4.4 million in the first quarter from $3.5 million in the year-ago period. The increase in our G&A costs reflects increased professional fees associated with our accounting, legal and regulatory compliance functions.

Moving to income taxes. Lifeway's effective tax rate was 38.8% in the first quarter of 2016 compared to 49.9% in the first quarter of 2015. The lower tax rate in the first quarter of 2016 was driven by the deductibility of certain operating expenses for federal income tax purposes that were not fully deductible in 2015.

Lifeway's net income for the first quarter was approximately $0.6 million or $0.04 per diluted share compared to net income of $0.7 million or $0.04 per diluted share in the same period last year.

Finally, under our share repurchase program, we bought back 39,000 shares of common stock at an aggregate cost of $440,000 during the first quarter. As of March 31, 2016, approximately 76,000 shares remain available for repurchase under our share repurchase program. As a reminder, the share repurchase program has no expiration date and may be suspended or discontinued at any time.

That concludes my planned remarks. And now, I'd like to turn the call back over to Julie for her closing remarks.

Thanks, John. We're pleased with the start of our year and expect 2016 to be an exciting year of improved performance for Lifeway. Going forward, we are focused on our long-term strategies and are confident in our ability to drive increased value for shareholders.

That includes our overview for the first quarter 2016. Ed, John and I would now like to open up the call for your questions. Operator?

(Operator Instructions) Our first question is from Eric Gottlieb of D.A. Davidson.

I'm going to jump around a little bit here. So the increase in cost for the Wisconsin facility, what are your expectations for those going forward? Are they restricted to the first quarter?

I'm happy to take that call -- or that question, Ed. Eric, it's John Waldron. I think our expectation with regards to Waukesha is that we continue to scale up. I think we've mentioned this on our prior call, but we have 2 filling lines that they are fully up and operational in Waukesha. That facility has the capacity to take on at least 10 additional filling lines. And so our expectation, over time, not necessarily obviously within the current fiscal year, is that we would scale up to that kind of level of production. And of course, consequential to that is that we would continue to lever the fixed cost structures that exist with Waukesha, and would benefit the gross profit rate over time. In terms of the balance of the fiscal year, I think we don't see much changing in the way of the existing cost structure. Our ability to deliver more throughput against that facility is consequential of what will come from our sales efforts and our marketing efforts, which I think we're bullish on what happens in the back half -- the back 3 quarters of the year in terms of top line performance. And so if we scale up more volume in the back 3 quarters of the year, we would expect some marginal rate benefit.

Okay. And then, the increase in professional fees. I think you gave a good explanation as to why. But again, are those restricted to the first quarter or are there any spillovers going forward?

Yes. No, I think our expectation is -- without pacing it by the quarters, I think our expectation on a full year basis is that we will approach a 7-figure step down in our total professional fees. Absent some unexpected event, we're seeing a step down in professional fees order of magnitude approaching $1 million.

Okay. All right. And then, tax expense. I know it's kind of an iffy number, given you're coming off of a -- you're getting the relief here, but is 38%, 39% the way to think about this?

Yes. So I think we think for the full year, the rate looks like a 39% number. And the things that could change that would be some discrete event, such as a change in the tax law, or an event with a tax authority -- an adverse event with a tax authority. So our present expectation is we're right at 39%. And so movements up or down from there would be consequential of those 2 types of events, and that would be the only thing that will move the rate.

Got it. And then, I guess this is for Julie. So the sales growth, what product lines were you seeing the most growth from? And if you can answer, where are you giving the most discount?

So we are seeing a lot of growth in whole milk, our whole milk kefir line, in our ProBugs lines, in our protein line, our conventional 32-ounce line. Those would be the top kind of the products that we're really focused on, really scaling up and have seen the biggest sort of mass appeal. And then, we always have innovation in the pipeline, and some of it is strategic. For example, we realized that there are folks that are on restrictive diets, or are traveling and they're on the go and maybe are not able to buy our products regularly. Perhaps, they're there on a dairy-free diet. And so to not miss that customer and make sure that they're still in the Lifeway product line, regular users of our brand, the supplements are necessary. So there's things like that, that we really look at and consider as we look at innovation. So -- and then in terms of -- what was the second part of the question?

Where are you giving the most discounts? I assume that's pretty much the same answer.

Yes. Yes. The products that we're pushing out the most have the most discounts.

Okay. And then the new senior sales person, Jennifer Reilly, what are her responsibilities, what are her focus? And will there be a change in strategy of any kind?

Not so much a change in strategy, just more -- a more sophisticated thoughtful approach to how we do things. And with sort of a big corporate company expertise, I guess, that Lifeway really grew from the ground up, and we're looking to Jennifer to expand and grow Lifeway, so that that capacity that we just filled out in Wisconsin gets maximized as quickly as possible. The momentum and the market forces are really at our back right now. We're not a start-up. We're a company that's been around for a long time, so we have a proven track record. We have loyalty within our customer bases and an awareness just within the food space and the dairy space. And all those things, coupled with this new capacity that we just built out, gives us the opportunity to really make kefir the next biggest food thing. And it's like take over some of the Greek yogurt space. Like Greek yogurt is pretty much flat; we want to take and transfer some of those users into kefir users. We know that the probiotic categories across the -- globally will be doubling in the next 5 years, so that's a huge market opportunity. And so Jennifer is really charged with maximizing our sales efforts, expanding our sales channels, expanding a lot of the new innovations that we've recently launched. And we're putting some of the marketing dollars in the advertising that we've never done. We've never spent any money on ProBugs, for example. A lot of that was just by word of mouth and through people learning about it. And it was really targeted to like a whole food shopper. Now that we have the extra capacity, we can push a little bit on that lever and expand the ProBugs via both distribution and market awareness. But we have a successful pilot, so we know that we can scale it.

Got it. The SG&A again. So the newer commercials with Carli Lloyd and I guess the marketing investments there, is there an increase we can expect in SG&A expense? And if so, when will those hit?

Yes. We -- I mean, we will be adding onto our marketing and advertising budget through -- I guess, through -- just after the Olympics, let's say, through the fall. And we really felt it was important to be part of the conversation around the Olympics and really connect with users and with families as they kind of join together and watch the Olympics. And certainly, the women -- U.S. women soccer team, and Carli and her team are going to be one of the most watched Olympians this summer. So we knew that it was really important that we were part of that conversation, especially at this critical time when we are trying to take market share and expand our business. And then, specifics in terms of how it's going to hit our balance sheet. I'll let John go into that.

Yes. Just in terms of the timing, Eric, in the second quarter, we currently have a advertising campaign that is live and running. And Julie can comment a little bit more, I think she had some of that in her opening remarks. But -- so in the second quarter, you should expect that we're going to have a -- you'll see a step up in our spending in the selling line, particularly in the advertising line. The shape of the advertising number is disclosed in our 10-Q. I don't have it in front of me. But you'll see -- we were soft versus a year ago on our spending in advertising the first quarter. It'll step up in the second quarter of 2016. And then we're working on programs now, the commitment's not yet firm, but I think in the third quarter, you'll see a step-up again with respect to the Olympics. And so on a full year basis, I would tell you that in terms of the advertising spend, we see the outcome for the full year being at least where we were for the 2015 year. And then likely, we would actually spend higher than that, higher than our 2015 spending, assuming we have kind of the sales performance that we're looking for here in the second quarter. So that's kind of the timing of the advertising spend for the balance of the year. That'll be reflected in the selling line.

Okay, great. And then last question. You went through kind of that, Julie, 3 ProBugs at Walmart; 3 proteins at ShopRite. Can you just repeat those or maybe I can get them offline?

Yes. It was the additional Walmart distribution of ProBugs and protein. It was the additional Wakefern distributor with ShopRite, additional Protein Kefir at Kroger. And then I mentioned that some of this was mitigated by a little bit of a softer performance within the natural channel, which, I mean, I think we are all aware that the natural channel itself is getting competing forces from mass market and stores like Walmart and Target kind of becoming hybrid stores. So just kind of keeping that in mind.

The next question is from Howard Halpern of Taglich Brothers.

First question, I guess, is in regard to, I guess, some of the relatively new distribution agreements you had in 2015, and how they are progressing in terms of the CVS take higher health stores and getting through, I guess, to that 1,700 store level at Target.

Yes. And I mean, I think that's what we are really looking to Jen to help us maximize those distribution channels. I look at just untapped opportunities within hospitality, within -- away from home sales, just lots and lots of opportunities that we haven't even scratched the surface on that I think is exciting to look at. And again, just going back to that extra capacity that we now have that we didn't have a year ago. And yes, I mean, it's exciting. I'm not sure if anybody saw a recent Google Search report that came out, but it mentioned the top trends, the most searched word in food via Google, and kefir was on that list. So I think we're on the verge of really -- we've done a great job. We're at that 150 million mark roughly, 130 million 150 million, and that's -- we've hit that milestone. And now, we are looking at that next level, and that capacity out of Wisconsin can get us to 500 million. So it's really going to all be marketing, advertising, increased consumer awareness around the benefits of probiotics. And making sure that when they think of probiotics, they think of Lifeway. And that we can deliver nutritional health based on science, not just whatever, but real science behind the benefits, which is what we're all looking for.

Okay. And now, in terms of, I guess, the supplement, are you going to manufacture that in-house?

No, that's going to be made for us based on a specification.

Okay. And what type of margins are you going to -- do you anticipate being able to drive on those cause...

Well, the margins on supplements are actually really good. But we're also looking to really market them aggressively as well and do things like subscription boxes, like I'd to look at a probiotic subscription box, looking at distribution through online sales, things like that. But specifically for margins, I don't know that we've broken down what margins we're going to be taking just yet.

Yes, it's too early to -- yes, too early for us to know and to really disclose what margins we're looking for and what the margins are on these types of products, and especially what our strategy is for going to market with those.

Oh, and one last one. You talked about, like, hosting demos and such. Now, are you going to use -- I guess, the cost involved. Is that going to maintain within that level of the allowances and the discounts, and promotions and discounts? Or is that going to bump up a little bit as you go forward?

Well, I mean, when we look at demos, we always -- we feel like there's a win-win because the product is being sold off. So yes, we're paying for a demo, but we're also selling products live off the shelf at significantly higher rates than when it's not on demo. So I don't really feel like it's a big cost. I think it's at least on that. But like the -- when product is on demo, it's dramatically off the charts on sales.

Okay. So it's really almost like a cost-plus basis. And so if that one goes up...

Yes, kind -- yes, that's how I think about it. In-store demos, especially, where the consumer has the option of purchasing it right on the spot is a solid way to spend some money and promote the product right there, where they're making a decision.

Thank you. There are no further questions at this time. I would like to turn the conference back to management for closing remarks.

Thank you for your participation today. We appreciate the hard work and dedication of our employees and the support of our loyal customers and shareholders. We look forward to sharing our 2016 quarter results with you in the next coming 6 months. Thank you.

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