Earnings Call Transcript - LWAY Q3 2020

Operator, Operator

Good afternoon. Welcome to Lifeway Foods Third Quarter 2020 Earnings Conference Call. On the call with me today is Julie Smolyansky, Chief Executive Officer. By now, everyone should have access to the press release that went out this morning. If you have not received the release, it is available on the Investor Relations portion of Lifeway's website at www.lifewaykefir.com. A recording of this call 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. The words believe, expect, anticipate and other similar expressions generally identify forward-looking statements. These statements do not guarantee future performance and therefore, undue reliance should not be placed on them. 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. All of the forward-looking statements contained herein speak only as of the date of this call. And with that, I would like to turn the call over to Lifeway's Chief Executive Officer, Julie Smolyansky.

Julie Smolyansky, CEO

Thank you, John, and good afternoon to everyone joining us. Thank you, as always, for your interest in Lifeway Foods. As like to our last earnings call, the entire world is continuing to navigate through the COVID-19 pandemic. Despite the complicated operating environment the pandemic has presented us, at Lifeway, we have persevered and continued to deliver healthy probiotic products to our customers whenever they need them. While our first priority always will be the health and safety of our team, we have adapted and become flexible to this unpredictable environment in order to support our valued retail partners and customers as well as pursuing and executing on our long-term transformational plan to deliver growth and value for our shareholders. On behalf of the entire team here at Lifeway, I'd like to continue to express our deepest sympathies to all those who are affected by COVID-19. I'd also like to reiterate our endless gratitude to essential workers, first responders and the health care professionals working to keep people safe during this crisis. In times like these, we can all make a difference by supporting our local and national communities and supporting one another. In light of the current climate, Lifeway's mission to expand access to healthy, nutritious food is one we continue to take very seriously. Today, I will review our highlights for the quarter in addition to sharing our third quarter results. Exceeding the growth from our last quarter, Lifeway's third quarter sales were up 14.6% from a year ago. We have worked with our retailers and made necessary adjustments to our supply chain to accommodate this heightened demand. The increased demand has been driven by eat-at-home trends, the stronger-than-ever grocery sector and today's consumers' propensity to eat healthy and purchase larger-sized multiservice products. These factors have positioned Lifeway incredibly well to capitalize on consumer demand in this time. Just to reiterate, we are solely focused on the grocery channel, and we have very little exposure to foodservice, which has handicapped some of our peers during this time. Moving on, marketing is one of our top priorities. And building on a theme from last quarter, we have continued to expand our online promotional presence. We have dedicated resources to ensuring we capitalize on e-commerce trends, with Instacart and AmazonFresh. We are also advertising with other major retail partners where the results are already positive and visible. Sales attributed directly to advertising as well as organic sales with online retailers are both sharply up this year. In addition to our promotional efforts, we have been focusing on expanding our retail partnerships and expanding our distribution. One recent development is our new distribution in Costco stores for two markets. Lifeway products are now available in Costco stores in Los Angeles and Hawaii. We plan to continue searching for opportunities to increase household penetration. Now on to some of our product development and growth. We'd like to highlight organic whole milk and its strong performance in Whole Foods. For the most part, organic has replaced our low-fat conventional in the chain to appeal to the core Whole Foods customer base. Whole Foods introduced whole milk organic in early Q2. Since then, we've continued to see an increase in velocity, thanks to the strategy. The plain kefir is now selling year-to-date 10 units per store per week. We have also seen success with the introduction of whole milk organic products, including an expansion of the line with mixed berries and wild berry flavors, and we're observing success with certain SKUs. Mixed berry and plain are already among the top five products in measured channels. We would also like to discuss our farmer's cheese product. This legacy product has been around for decades and has enjoyed solid performance in a niche market, but it has recently gained some distribution in traditional grocery. While we hadn't invested heavily in advertising historically, we will continue to build this item's presence in the same way we have with kefir. The marketing for this item is primarily through social and digital platforms, yet farmer cheese is now performing stronger for us. Year-to-date, it's up 23% in dollars and 19% in units in measured channels. We have a large selection of recipes featuring farmer's cheese and encourage everyone to look for them in Sprouts Farmers Market, Fresh Thyme Market, and Whole Foods. We're excited to see continued growth of this long-standing product as we discover new ways to invigorate and extend it through digital marketing, recipe placement, and chef collaboration. In the midst of this pandemic, consumers value healthy living and immunity-boosting foods now more than ever. Thus, we continue to see high demand for products associated with enhancing health and wellness. Lifeway products are uniquely positioned in the marketplace, providing both physical and mental benefits to the consumer. As a natural probiotic, kefir supports gut microbes, promoting healthy gut microbes and providing 70% of immune defense from the gut. Probiotic products such as kefir are the focus of intense research related to the microbiome's role in stress, depression, and anxiety. We now know that up to 90% of the body's serotonin comes from gut cells and the gut-brain axis, which links emotional and cognitive centers of the brain with our intestinal function and plays a major role in happiness and well-being. At Lifeway, our mission remains the same. We're here to provide the best in probiotic and nutritious food. We're here to improve the health of our customers, and we're here to leave the world a better place than when we found it. We believe these deals are more important than ever in such a time as this one. And we truly believe we are making an impact. While consumers are past the early COVID trends of heavy pantry stocking, we have benefited because more consumers today know the great impact of our products, love the taste of our products, and will continue to buy our products. As a financial update, net sales were $26 million for the third quarter of 2020, an increase of 14.6% from $22.7 million in the third quarter of 2019, marking another strong quarter of consecutive growth. We reported earnings of $0.12 per diluted share for the third quarter of 2020, an increase from earnings of $0.06 per diluted share from the second quarter of 2020 and as compared to a breakeven $0.0 per diluted share in the third quarter of 2019. We are pleased with the strong third quarter and a very strong year-to-date and believe Lifeway is well positioned for long-term growth and value creation as we serve consumers looking for increased self-care, immunity, and gut health options during this time of global health crisis and uncertainty. In closing, thank you for listening to the call today and for your interest in Lifeway. We hope everyone will continue to remain safe, and we look forward to updating you on our ongoing progress and business momentum on our next call. Have a great day. Thank you.