Earnings Labs

Lifeway Foods, Inc. (LWAY)

Q4 2013 Earnings Call· Mon, Mar 31, 2014

$26.98

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Transcript

Operator

Operator

Greetings, and welcome to the Lifeway Foods, Inc. Fourth Quarter and Full Year 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Hunter Wells. Thank you. Please begin.

Hunter Wells

Management

Good afternoon, and welcome to Lifeway Foods fourth quarter and full year 2013 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, 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, 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 their website. And with that, I would like to turn the call over to Lifeway's CEO, Julie Smolyansky.

Julie Smolyansky

Chief Executive Officer

Thank you for joining us today. I will begin with an overview of our growth and success in 2013, including a brief discussion of our fourth quarter and full year 2013 financial results in more detail. Then, I will open up the call and take your question. We are extremely pleased with our performance in 2013. This year, we generated record sales, the highest in our company's history, and we are confident that our strong growth will continue into 2014. I am very impressed with our team's ability to closely manage the controllable aspects of our business in the face of higher milk prices, our largest raw material. In 2013, we continue to be focused on expanding our product line and increasing distribution. This past October, we were extremely honored to once again be named by Forbes Magazine as one of the Best Small Companies in America. We were ranked 48 out of 100, and I believe that this prestigious recognition speaks to the hard work and dedication of our entire team. One of the most exciting highlights this past year was the purchase of the Golden Guernsey dairy plant in Wisconsin, which will provide us with an additional manufacturing capacity for our growing business. We added the 170,000 square foot plant to our existing 50,000 square foot facility in Morton Grove, Illinois, which allows us to more than quadruple our production capacity, and provide much needed expansion abilities. Additionally, we are very pleased to be able to re-hire a portion of the workforce that lost their jobs after the plant was closed down this past January in a bankruptcy filing. We expect this facility to be fully running by the third quarter of 2014, and believe its purchase is fundamental to support our growing business long-term. We continue to…

Operator

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Thank you. Our first question comes from the line of Mitch Pinheiro with Imperial Capital. Please proceed with your question.

Mitchell Pinheiro - Imperial Capital

Analyst · Imperial Capital. Please proceed with your question

Hi, good afternoon. My first question, just on milk costs, as you look at the first quarter, it looks like milk costs are upwards sequentially from the fourth. So, we are going to see sort of a similar margin compression or do we – should we read this differently?

Edward Smolyansky

Analyst · Imperial Capital. Please proceed with your question

Hi, this is Ed. So, with regard to milk, we are looking at what we were seeing in the first quarter. It's basically either a little bit up, a couple of percentage points up from fourth quarter or flat. Keep in mind also that we have started to process our own milk in the new dairy facility in Wisconsin in about mid February. So, that's actually going to probably give us about 5% decrease in processing cost that we were paying in the fourth quarter of 2013 and previously obviously. So, we think that any increases are going to be absorbed and mitigated against by processing our own milk in that new facility. But again, that only started about mid February.

Mitchell Pinheiro - Imperial Capital

Analyst · Imperial Capital. Please proceed with your question

Okay, that's helpful. Is that -- what percentage of your total milk costs will you be able to self-process when the plants are fully running at 100%?

Edward Smolyansky

Analyst · Imperial Capital. Please proceed with your question

Mitchell Pinheiro - Imperial Capital

Analyst · Imperial Capital. Please proceed with your question

Okay. And so, that helps by maybe 5% in this quarter, which is only maybe getting half of the benefit. We might see that benefit increase in the out quarters this year?

Edward Smolyansky

Analyst · Imperial Capital. Please proceed with your question

Exactly. Yeah.

Mitchell Pinheiro - Imperial Capital

Analyst · Imperial Capital. Please proceed with your question

Okay. And then, are you going to do anything different from selling expense, advertising and marketing in 2014 to support the launch of these new products?

Julie Smolyansky

Chief Executive Officer

Yeah. Well, I think we are [continuously] [ph] doing advertising and marketing, and of course continue to scale that as the expense - our sales continue to rise and the new products are on board. And so, we continue to look for great opportunities to promote our lines to influencers and create that market.

Mitchell Pinheiro - Imperial Capital

Analyst · Imperial Capital. Please proceed with your question

Will it be anything incremental, anything different doing more in-store sampling or anything going on other than typical strategy?

Julie Smolyansky

Chief Executive Officer

Well, we haven't started our Super Bowl ad yet. So, no. I think everything else is within the normal line of business, and advertising and kind of day-to-day advertising and marketing for a product like ours. But it's in proportion to our sales.

Mitchell Pinheiro - Imperial Capital

Analyst · Imperial Capital. Please proceed with your question

Okay. And then, with all these new products and I did taste them with you at the Natural Food Show. They are terrific new products. My question is where is the shelf space, where is the new shelf space going to come from? Is it -- will you have to prune some of your space? Are you taking it from somewhere? Are there resellers adding?

Julie Smolyansky

Chief Executive Officer

Yeah, we’d be taking it from something else. We’d be taking it from some other place, not ours. We wouldn't be replacing our existing products unless there was a SKU here or there that didn't sell but pretty much everything that's on the shelf right now are the best sellers. So, we will be getting new space.

Mitchell Pinheiro - Imperial Capital

Analyst · Imperial Capital. Please proceed with your question

Okay. And then just like a short final question related to that. Do you see more kefir products hitting the shelves, different brands, obviously it's a very strong category?

Julie Smolyansky

Chief Executive Officer

We still have 97% of the space. We control 97% of the market share, and I actually see that the kefir is, if you had the insight, the data insight that I have gotten, they are actually being discontinued in many cases. And I believe that in the next two to three years, you will see a lot of discontinuation from a lot of the other brand because the sales are not there to support them actually.

Mitchell Pinheiro - Imperial Capital

Analyst · Imperial Capital. Please proceed with your question

Okay.

Julie Smolyansky

Chief Executive Officer

Kind of like whoever is there right now is paying to stay there, but that's not sustainable.

Mitchell Pinheiro - Imperial Capital

Analyst · Imperial Capital. Please proceed with your question

Okay, terrific. Thank you very much.

Julie Smolyansky

Chief Executive Officer

No problem.

Operator

Operator

Thank you. Our next question comes from the line of Howard Halpern with Taglich Brothers. Please proceed with your question.

Howard Halpern - Taglich Brothers

Analyst · Howard Halpern with Taglich Brothers. Please proceed with your question

Congratulations, great year, guys.

Edward Smolyansky

Analyst · Howard Halpern with Taglich Brothers. Please proceed with your question

Thank you.

Julie Smolyansky

Chief Executive Officer

Thank you.

Howard Halpern - Taglich Brothers

Analyst · Howard Halpern with Taglich Brothers. Please proceed with your question

I guess, almost to your last point and the new products that are coming online are you going to be able to maybe mitigate some of the higher milk prices with your own price increase down the road in 2014?

Julie Smolyansky

Chief Executive Officer

I mean, we routinely go through price increases as every other company does, because there is general inflation. So, yes, so this continues to be price elasticity, and we have the ability to incorporate those increases into our business. We are a brand. It's not a commodity. So, it's -- you pay for your brand.

Howard Halpern - Taglich Brothers

Analyst · Howard Halpern with Taglich Brothers. Please proceed with your question

Okay. And organic milk prices, are they rising in tandem with conventional milk prices?

Julie Smolyansky

Chief Executive Officer

Well, I think there is a shortage of organic milk right now in general across the country. And that's something that we continue to be challenged with, but wrap our brains around how to mitigate those shortages and work on our contracts and relationships with organic farmers. But yeah, I mean, unfortunately or fortunately, the need for organic continues to grow so high in our country and around the world that we really need to [farm] [ph] organic much quicker and that is a long lead time for a farm to be certified organic. So, we are really just encouraging as many farmers to take those steps, to supply and create more supply because the demand is so strong right now.

Howard Halpern - Taglich Brothers

Analyst · Howard Halpern with Taglich Brothers. Please proceed with your question

Okay. And you talked about Europe a little bit and your recent I guess win the U.K., do you expect by the end of this year to be beyond U.K. and into other European countries?

Julie Smolyansky

Chief Executive Officer

I don't know if it will happen specifically in 2014, but our intention is to eventually launch our drinkable line, and we are kind of -- I don't want to say, practicing with our frozen line. But we feel like there is a learning curve and opportunity to create the system that we need to have and then really launch with our drinkable line eventually. I believe that Lifeway has the opportunity to become a global brand. I think if you think about Hershey's Chocolate, Tropicana Orange Juice, these are brands when you dominate the market and then have a market share like we do and at the level that we have that Lifeway is synonymous with Kefir and that is a global story. So, long-term, I think that we should be everywhere just like Hershey's Chocolate is or Tropicana.

Howard Halpern - Taglich Brothers

Analyst · Howard Halpern with Taglich Brothers. Please proceed with your question

Keep up the great work, guys.

Julie Smolyansky

Chief Executive Officer

Thank you.

Edward Smolyansky

Analyst · Howard Halpern with Taglich Brothers. Please proceed with your question

Thank you.

Operator

Operator

Thank you. Our next question comes from the line of James Fronda with Sidoti & Company. Please proceed with your question.

James Fronda - Sidoti

Analyst · James Fronda with Sidoti & Company. Please proceed with your question

Hi guys. Just in terms of the milk prices, there is no I guess futures market out there, if you guys have -- try to offset any of this?

Edward Smolyansky

Analyst · James Fronda with Sidoti & Company. Please proceed with your question

Yeah. We get this question once every three months, but yeah, there is a futures market, it only trades, it's very limited. And we've gabbled in trying to hedge before, and then it really for our product when you are actually taking delivery of milk. If you are going to lose some of it and then you are going to gain some of that, at the end of the year you are going to end up, just doing a lot of trades and not making and not actually hedging. So, we found that it's not fruitful for us to engage in that type of business.

James Fronda - Sidoti

Analyst · James Fronda with Sidoti & Company. Please proceed with your question

Okay.

Edward Smolyansky

Analyst · James Fronda with Sidoti & Company. Please proceed with your question

Yeah. So, for us hedging is or offsetting cost of rising milk prices is in the form of the price increase which still we said -- we do periodically do. Anymore, anyway still and this year we do have one set in the next couple of months.

James Fronda - Sidoti

Analyst · James Fronda with Sidoti & Company. Please proceed with your question

Right, okay. And you said the first quarter revenue growth was in line with this quarter in terms of -- around that 20% range?

Edward Smolyansky

Analyst · James Fronda with Sidoti & Company. Please proceed with your question

The first quarter revenues, which -- first quarter ended today, we are going to be somewhere, and the net sales are going to be somewhere in the range of 30 million. And I believe that's about a 26% increase, 25-26% from last year's first quarter.

James Fronda - Sidoti

Analyst · James Fronda with Sidoti & Company. Please proceed with your question

Okay, sounds good. All right, thanks.

Edward Smolyansky

Analyst · James Fronda with Sidoti & Company. Please proceed with your question

Okay, thanks.

Operator

Operator

Thank you. Our next question comes from the line of Ivan Zwick with Raymond James. Please proceed with your question.

Ivan Zwick - Raymond James

Analyst · Ivan Zwick with Raymond James. Please proceed with your question

Well, most of my questions have been answered, but what's your plan for Canada, what's happening there?

Julie Smolyansky

Chief Executive Officer

Ed, you want to talk on that?

Edward Smolyansky

Analyst · Ivan Zwick with Raymond James. Please proceed with your question

Yeah. So, we are launching product, the product is being co-packed in Canada, at very large Canadian and actually North American dairy company. And the product will probably be in the stores second quarter. So, they have already produced product, they are out there selling it, samples are there, and we already have listings in several large retailers. And we'll just continue on. So, I think second quarter it will be in the stores …

Ivan Zwick - Raymond James

Analyst · Ivan Zwick with Raymond James. Please proceed with your question

Okay, well, thank you. Keep up with the good work.

Julie Smolyansky

Chief Executive Officer

Thank you.

Operator

Operator

We have no further questions at this time. I'll like to turn the floor back over to Julie Smolyansky for closing.

Julie Smolyansky

Chief Executive Officer

Yes. Well, thank you for your participation today. And we look forward to sharing our first quarter 2014 results with you in the coming months. Have a good evening.

Operator

Operator

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