Lifeway Foods, Inc. (LWAY) Q4 2014 Earnings Report, Transcript and Summary

Greetings and welcome to the Lifeway Foods announces full-year and fourth quarter 2014 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. I would now like to turn the conference over to your host, Hunter Wells with ICR. Please proceed.

Good afternoon and welcome to Lifeway Foods full-year and fourth quarter 2014 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 fourth quarter and full-year earnings release for the period ending December 31, 2014, 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.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 maybe 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.

Thank you Hunter and good afternoon to everyone on the call. Fiscal 2014 was another exciting year for Lifeway and I am pleased to share our results with you all today. I will begin with an overview of the fourth quarter and full-year, and then I will provide an update on our growth and strategic initiatives for 2015. At the conclusion of my remarks, both Ed and myself will be available to take your questions. In 2014, we made strong progress within our business, and recorded a year of solid financial performance. In the fourth quarter, net sales increased double digits to $30.2 million, and for the year, net sales increased 22% to $119 million, and gross sales were up to $130 million. These results were driven by increased distribution of our Kefir across retail channels and improved brand awareness of Lifeway, which helped straighten our already dominant 95% share of the U.S. Kefir category. We experienced an approximate 15% increase in the cost of milk in the fourth quarter compared to last year. In the first quarter of 2015, milk prices were approximately 40% to 50% lower compared to the same period the prior year, and we expect prices to stay at this level for the duration of 2015. Overall I am very pleased with the topline growth we achieved in 2014 and look forward to seeing the benefits of improved milk prices in the upcoming four quarters. Brand recognition and awareness are important components in our long-term growth strategy. While we increased our investment in marketing in 2014, our marketing spend, as a percent of sales, remained comparable to the prior year period. When deciding what marketing opportunities to engage in, we carefully and prudently evaluate how we may optimize the return on our marketing investment. This past April, we launched our largest ever print advertising campaign in which our full page ad were featured in nationally distributed publications such as People, American Baby, Health, InStyle, Time, and Shape Magazine and resulted in over 30 million impressions. Even more exciting was the debut of our first ever national TV commercial, which aired during the 2015 Golden Globe and also ran during the Saturday Night Live 40th anniversary special. For each spot, we generated approximately 20 million impressions. And on YouTube, there have been approximately 1 million views up to date. This number of impressions generated by this campaign surpassed our expectations, and we are thrilled with these results, which has allowed us to increase our engagement with new and existing customers. While our first priority at Lifeway is Kefir, we believe that creating and maintaining a well-rounded organization that contributes positively to our world is extremely important both to our customers and our employees. We have updated the Lifeway mission statement to reflect this belief. We are here to provide the best in probiotic foods, while keeping the world a better place than we found it. Through all natural and organic ingredients, philanthropy, environmental responsibility, and farming sustainability, we are committed to our mission and believe that aligning our corporate interests with these key initiatives will lead to a better world and a sustainable success opportunity for Lifeway. It was exciting to see many of you a couple of weeks ago at the largest ever Natural Products Expo West in Anaheim, California, which showed that the growing interest and demand for healthy food continues to increase. Over 70,000 industry experts attended this expo, and this show grew over 7.2% this year. We also, at this show, debuted our first ever Protein Kefir, a special product developed to aid in muscle recovery after exercise. While all of our Kefir products are already high in protein, usually containing around 11 grams, our Protein Kefir packs 20 grams into each serving, the optimal amount as recommended by sports nutritionists. This extra protein helps decrease food cravings while nourishing the body with essential nutrients postworkout and will be available in banana, mixed berry, and vanilla flavors. We feel strongly that our Protein Kefir is an opportune product exploring potential new retail channels outside of traditional grocery and mass-market retailers such as gyms and specialty fitness studios, and this product is already generating industry buzz as a Top 10 product on the shelf floor by just-food.com and other industry experts. So we are on trend. With our already successful line of probiotic kids' Kefir products for children, ProBugs, we have already developed a new and no-sugar-added flavor called Pretty Plain, personified on the packaging is a new cartoon bug character named Pretty Plain Pearl, who likes her clean life, created to keep kids entertained while enjoying this nutritious snack. As a mother of two young girls, I understand how important it is to parents to provide their children with healthy [ph] foods. Just this past February, the USDA and Department of Health and Human Services announced a new recommendation for the reduced consumption of sugar in an effort to help improve widespread obesity, noting that the sugar consumption by children is of particular concern. Our team is passionate about creating products that are both healthy and delicious and I believe with our new Pretty Plain ProBugs Kefir, we have a great example of this. A few other products I would like to mention include a new flavor, Lifeway Lowfat Watermelon Kefir, a tasty and refreshing summertime treat and a new smaller size bottle for some of our best-selling Kefir flavors, which will now be available in 16 ounce form. The idea for a 16 ounce bottle of Kefir came directly from customers who expressed their desire for a bottle size between our 8 ounce single serve bottle and our larger family size 32 ounce bottles. We will not be replacing any current SKUs with our new 16 ounce bottle, but rather will be adding new SKUs with existing retailers and new retailers and view this new bottle sizes as a significant incremental revenue opportunity. These 16 ounce bottles are already going into distribution at 600 Target stores and 600 [indiscernible] stores. Looking ahead, we will continue to develop innovative new flavors and new products for our customers in order to grow the Lifeway product portfolio. We finished 2014 with strong results, and I believe that we are well-positioned for another successful year. Our balance sheet remains strong with working capital at approximately $46 million and a 6% increase in stockholders equity compared to last year. Cash and cash equivalents at the end of December 31, 2014, were about $3.3 million and equal to cash and cash equivalents in the same period last year. Our continued growth will be driven by these key strategies. One, increased distribution fueled by new product innovation and expansion into new retail channels. Two, heightened consumer awareness of the Lifeway brand and the helpful benefits of probiotics and Kefir. Three and finally, the opportunity for additional expansion into new markets. I have heard countless testimonies from customers who believe that Lifeway Kefir and its myriad of nutritional benefits have helped cure their mild to severe health maladies. Increasingly doctors, scientific journals, and news organizations are reporting on the helpful benefits of probiotics found in our Kefir that are proven to help promote the beneficial bacteria that helps support our digestive system. One serving of Lifeway Kefir is both lowfat and high in protein, calcium and other essential nutrients. It is truly a superfood. Consumers are increasingly seeking healthier, better for you products, and we have built a solid and growing business upon these trends and will continue to benefit from this positive momentum. We are committed to executing on our strategic plan and I believe that we are well-positioned to capitalize on our tremendous growth opportunities in 2015 and beyond. That concludes our fourth quarter and full year overview. Ed and I would now like to open up the call for your questions. Operator?

[Operator Instructions]. Our first question comes from the line of Howard Halpern with Taglich Brothers. Please proceed with your question.

Congratulations on a great year, guys.

Thank you.

With regards to the national advertisement that you placed, which was great, was that cost absorbed in the fourth quarter? Do you have to basically prepay for that?

Halpern, this is Ed. So the national advertisement was approximately a $2 million spend. Half of it was expensed in the fourth quarter of 2014, the production value. The second half of the $2 million will be expensed in the first quarter of 2015 when the actual advertisement took place. So, out of the $2 million, its half-and-half. So $1 million was in the fourth quarter and $1 million approximately again will be in the first quarter.

Okay, and now your acquisition of the Golden Guernsey and everything that's occurred in 2014, do you think G&A expense is going to remain pretty much within maybe 5% to 10% window going forward?

Yes. That's safe to assume, of course. We have already started to make Kefir this past week in Wisconsin. So a lot of the acquisition costs and purchase of property, plant and equipment lines, we made a tremendous amount of investment this year. That's only going to really tail ourselves down.

Okay and in terms of the new product, the protein product which you just put out, in terms of the channel, are you still going to do retail stores next to maybe like the BioKefir and go for gyms and fitness centers and maybe --?

Yes, absolutely. Yes. Protein is one of the hottest food trends right now. So this product is something that's going to go into all mass-market accounts. It's being presented at all of our existing accounts. We believe that there will be a lot of increased distribution, because it is such a hot food trend and it is something that everyone wants to have some kind of high-protein products on their shelves, sort of the next step of evolution from Greek is sort of this high-protein alternative. So, Lifeway has that and of course we have got the probiotics in addition to the protein. So it's like a double win. And like I said, it is already generating quite a bit of buzz within the industry, even with just one week launch.

And any thoughts on being able to maybe get that distribution into the hospital chain in terms of like physical therapy or as an alternative to what they currently serve as a protein for maybe older people? Any thoughts on that?

Well, we are always looking for and exploring lots of new distribution options and alternative channels. So it's not like -- yes, we are open to college campuses, gyms, vitamin, and nutrition supplement stores. We are open to all different channels as we can sell it if there is a demand for it. So that would be up to a hospital nutritionist to say that this is a product that they feel is important that they have for their patients and their clients. But of course, our main objective is the consumer marketplace where we have a brand presence and continue to grow our brand. The probiotic market is expected to grow to $52 billion globally by 2020, and the dairy piece of that is about 70% and growing it out of 7.6% clip around the world. And with our new facility, we have the ability to meet the demand of this increased need basically.

Okay, and one last one. In comparison to your initial planning, how would you characterize your European sales now, the Canadian sales as compared to what you initially thought going into it?

Well, I think it's meeting expectation, like we have always said that we are laying the foundation for a long-term strategy, that this is sort of something that we believe and align. We need to create that foundation to build and be a part of the global growth. But I think we are happy that we have been able to execute on the strategy and the plan and will continue to look for opportunities. We are expanding and exporting into Mexico, into the Caribbean, into Hong Kong, into Kuwait, and looking at all different models from licensing to co-packing to exporting when there is that opportunity. And so and we look at it as an entire international expansion and opportunities globally in the areas where it makes sense. And again, this is something that is a long-term strategy. This is not short-term, tomorrow. This is something that is, we believe, for the future of the Lifeway brand and my vision is that the way that Hershey's is to chocolate or Tropicana is to orange juice, Lifeway is to Kefir as the dominant category leader in the United States, that this is something that we should start to create the brand outside of the borders of the United States. And so that is really the vision long-term -- and I mean long-term.

Right.

We are sort of walking and doing them at the same time.

Right. As brand awareness grows, you hope sales will grow all around the world then?

Exactly, and all the trends really point to that and the market seems to point to that and there will be different models based on either first goal is to try to export, when that's possible in countries where they have an open trade agreement with the United States, like in Mexico, that's an opportunity. Like actually in Kuwait, that's an opportunity. If we don't have to re-create the wheel, that's the best ideal situation. So, yes.

Okay. Well, keep up the great work, guys.

Thank you.

Thank you. Our next question comes from the line of Ivan Zwick, who is a private investor. Please proceed with your question.

Yes. I am real interested in the new product, your protein drink. Are you going to do any kind of special marketing different from your other products in promoting it?

Yes. We will be targeting some male consumer a little bit more than some of our other mass-market products. We are definitely going to be looking at men's fitness market. But we don't want to exclude and alienate anyone because this is not just for lifters, it's really for everybody and in response to a general increased desire for more protein in our diets.

And also I may have missed it, what you are looking for as far as milk prices going forward for this year?

I will let Ed answer that one.

Well, milk prices have completely plummeted, as [indiscernible]. They have completely plummeted as the whole oil and utility, some of that's gone down as food has as well. So we expect to see a lot of that same trend continue with the rest of the year.

So we should have some real benefit compared to this past year? [indiscernible].

We think so.

Yes. Well, we have a lot of tailwind, instead of headwind this year, of course.

Okay and did say on the national ad you did half of in fourth quarter and half of it in the first quarter?

Correct, yes.

Yes, for the advertisement cost.

Okay.

The production happened in the fourth quarter and the placement of the actual ad happened in the first quarter.

Okay. Well, keep up the good work. I think this protein will be on the right track by introducing now.

Yes. Thank you.

Thank you.

Thank you. There are no other questions in the queue at this time. I would now like to turn the call back over to management for any closing comments.

So, thank you for joining us on the call. I would like to also thank all of our associates and staff and individuals who work to make sure that Lifeway is successful and thank you to our shareholders for joining us on this call and we look forward to hearing from you soon. Thanks.

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