Earnings Transcript for LWAY - Q2 Fiscal Year 2023

Operator: Good morning. Welcome to Lifeway Foods Second 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. The words believes, 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'd like to turn the call over to Lifeway's Chief Executive Officer, Julie Smolyansky.

Julie Smolyansky : Thank you, John, and good morning to everyone joining us today. As always, we greatly appreciate your interest in Lifeway Foods. I am thrilled to report yet another brilliant quarter for our business today. Yet before I detail the great results, I'd like to give thanks to the entire Lifeway team whose devotion and seamless execution have allowed us to perform for our customers and partners so remarkably so far in 2023. With that, I will now review our second quarter 2023 results, highlighted by our largest ever recorded net sales and very positive gross margin expansion. Net sales were $39.2 million for the period ended June 30, 2023, an increase of $5.7 million or 17.1% compared to the second quarter in 2022. The net sales increased, our 15th consecutive quarter of strong year-over-year growth was primarily driven by higher volumes of our branded drinkable kefir and to a lesser extent, the impact of price increases implemented during the fourth quarter of 2022. This net sales growth is particularly impressive as we continue to lap some strong quarters of our record-setting 2022. And when we compare to the second quarter of 2021, our net sales were up 34.5%. This value-driven growth accompanied by continued accelerating unit velocities in our core kefir line is encouraging as it once again illustrates the wide acceptance of our inflation-justified price increases by our loyal and new consumers focused on high-quality, better-for-you offerings. It's worth noting that our next quarter, we will be lapping a very difficult comparison in the third quarter of 2022, our second largest quarter in history. In addition, we reported a gross profit margin of 28.7% for the period ended June 30, 2023, increasing 1,170 basis points, compared to 17% in the second quarter of 2022. Compared to the first quarter of this year, when we reported another very strong year-over-year expansion, this quarter represents an expansion of 710 basis points. This remarkable gross margin expansion was primarily due to higher volumes of our branded products and to the favorable impact of milk pricing and to a lesser extent, the aforementioned price increases in the fourth quarter. We have consistently stated gross margin recovery was a priority of ours, and we are thrilled that the combination of our operational efficiency and subsiding inflationary impacts are now delivering us enhanced profitability. Milk is our largest raw material and was largely impacted by inflationary price increases. As the price has normalized, we have certainly benefited. We couldn't be more pleased with this result and are looking forward to consistently maintaining better levels of margins like these moving forward. We will continue to prioritize our gross margin moving forward, and we are constantly in search of incremental productivity and profitability measures. Underscoring these exceptional results is the environment we are delivering them in. Similar to last quarter, consumers across the United States are becoming more elastic in light of recessionary trends. With that has come price sensitivity and some trade down from more premium offerings to value alternatives. That said, our results have continued to prove that Lifeway premium offerings come with plenty of value, even with price increase implemented in quarter four of 2022, our consumers remain steadfast in their commitment to improved health immunity and gut health, demonstrated by our consumption trends and velocities within our key retailers, which remain strongly positive. Today, on a sales basis, Lifeway Foods is the ninth largest yogurt manufacturer in the United States and a portion of our growth efforts surround attracting new customers and increasing retention rates through effective advertising and marketing. Recent data shows that customers new to Lifeway are delivering greater velocities and proving to be more valuable than lapse buyers. Now moving on to expenses. Selling, general and administrative expenses increased $1.1 million to $6.4 million for the period ended June 30, 2023 compared to $5.3 million in the second quarter of 2022. We continue to strategically invest in our core products through targeted advertising and marketing programs to increase awareness and capture incremental customers. Our net income during the period ended June 30, 2023, was $3.2 million, reflecting EPS of $0.22 per basic and $0.21 per diluted common share compared to net income of $0.1 million or $0.01 per basic and diluted share during the second quarter in 2022. We are very pleased to see our continued top line and margin expansion now flowing down to the bottom line, a testament to the execution of our Lifeway 2.0 strategy and recovery from the high inflationary impacts we saw in the past couple of years. Capital spending increased by approximately $0.2 million from $1.7 million to $2 million during the six months ended June 30, 2023 compared to the same period in 2022, aligned with our plan. Our capital spending is focused on three core areas

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