Earnings Transcript for LWAY - Q1 Fiscal Year 2023

Operator: Good morning, and welcome to Lifeway Foods First Quarter 2023 Earnings Conference Call. On the call with me today is Julie Smolyansky, President and 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.lifewayfoods.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 see 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: Thank you, Anna Kate, and good morning to everyone joining us today. As always, we greatly appreciate your interest in Lifeway Foods. I'm pleased to be speaking with you today and thrilled to report that the momentum from our record-breaking fiscal year 2022 has continued to flow into 2023. Before diving into results, I'd like to thank the entire Lifeway team for the incredible efforts and execution they consistently put forth, which enable us to deliver for all of our customers and clients and further progress us towards our goal of increasing access to our best-in-class better-for-you offering. Now I will review our first quarter 2023 results, highlighted by our 14th consecutive quarter of strong year-over-year net sales growth and driven by the continued dominance of our core Lifeway Kefir assortment of offerings. Net sales were $37.9 million for the period ended March 31, 2023, an increase of $3.8 million or 11.2% compared to the first quarter in 2022. The net sales increase was primarily driven by higher volumes of our branded drinkable kefir and the impact of price increases implemented during the fourth quarter of 2022. It is worth noting that we are lapping quite a strong first quarter in 2022. And compared to first quarter of 2021, our net sales were up 29%. Additionally, while we did take further price at the end of last year, our volume continues to grow meaningfully, and our core kefir line realized accelerating unit velocities in the period, demonstrating the success of our customer acquisition strategies as well as the loyalty of our active customers focused on healthy, high-quality products. In addition, we reported a gross profit margin of 21.7% for the period ended March 31, 2023, which compares to 16.4% in the first quarter of 2022. We are thrilled with the 530 basis point increase versus the prior year, which was primarily due to the aforementioned price increases and higher volumes of our branded drinkable kefir. Last year, we often pointed to our inflationary price increases on raw materials as a hamper on our margin. While some of those macro headwinds still exist, we are seeking a favorable recovery in the price of our core commodity, milk, as we articulated on the last call and are now beginning to see cost of transportation improve as well. Margins remain a priority as we march forward, and we will continue to seek out any and all productivities to keep them as stable as possible. As an example, this year, we will be exploring productivity and profitability optimization through advanced promotional software as well as AI-powered marketing and operational tools. These emerging technologies will not only provide savings but support progress towards our goal of increased access to our offerings and growing shareholder value. Moving on to expenses. Selling, general and administrative expenses increased $0.2 million to $6.7 million for the period ended March 31, 2023, compared to $6.5 million in the first quarter of 2022. We continue to strategically invest more in advertising and marketing programs behind our core products to drive increased awareness and velocity. Our net income during the period ended March 31, 2023, was $0.8 million, reflecting EPS of $0.06 per basic and diluted common share compared to a net loss of $0.9 million of $0.06 per basic and diluted common share during the first quarter in 2022. As we continue to execute upon our Lifeway 2.0 strategy and recover from higher commodity costs over the last couple of years, we will continue working to improve our profitability metrics. Capital spending increased by approximately $1.4 million from -- $0.4 million to $1.8 million during the period ended March 31, 2023. Our capital spending is focused on three core areas

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