Earnings Transcript for LWAY - Q4 Fiscal Year 2023

Operator: Good morning. Welcome to Lifeway Foods' Fourth Quarter and Full-Year 2023 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 atwww.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 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'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 be speaking with you today and to report an outstanding finish to our record-breaking 2023. Before taking you through the numbers, I would first like to thank the entire Lifeway team, whose excellent efforts all year long allowed us to deliver seamless performance for all of our valued customers. Our strong results this year are a testament to your execution. With that, I will now review our results for the full year of 2023. Net sales were $160.1 million for the year ended December 31, 2023, an increase of $18.6 million or 13.1% compared to the prior year and a record high annual top-line result for Lifeway. The net sales growth was primarily driven by higher volumes of our flagship Lifeway-branded drinkable kefir, and to a lesser extent, the impact of price increases during the fourth quarter of 2022. We are particularly pleased by the consistent volume growth we saw throughout the year, which outweighed the benefit from pricing and was a positive differentiator for us within the broader industry. This consistent volume growth illustrates both the stickiness of our active customer base and the effectiveness of our strategic sales and marketing investment at driving velocities in our core products. It is important to note that this impressive year was culminated by our highest-ever quarterly net sales of $42.1 million in the fourth quarter, which was our seventeenth consecutive quarter of year-over-year net revenue growth. This was our third consecutive quarter, setting a Lifeway record on the top line. And this year, we grew sales sequentially in all four quarters. Despite the challenging macroenvironment consumers faced in 2023 and continue to face today, including high interest rates and inflation, we have not experienced disruption or trade down on the demand side, and our strengthening results continue to demonstrate that Lifeway's premium products come at an exceptional value to our consumers focused on high-quality and healthy products. Naturally, our year over year laps will continue to get more challenging, yet our business is strong, and we are excited to keep driving growth. We reported a gross profit margin of 26.5% for the year ended December 31, 2023, increasing 760 basis points compared to the prior year. This impressive margin expansion was primarily due to the higher volumes of Lifeway-branded products and the favorable impact of milk pricing. And on a smaller scale, the inflation justified price increase in 2022. Following a period where we were hampered by the industry-wide inflation, we greatly prioritized recovery in our margins. Through our proactive operating discipline, along with subsiding input costs, particularly favorable milk pricing, I'm pleased that we have now returned to a strong margin level. I will note the margin impact in 2022 did carry over into the first quarter of 2023. And if you focus just on the last three quarters of 2023, we had a gross profit margin of 28%. We will continue to pursue incremental productivity and profitability measures in an effort to maintain and expand upon our current margin levels and believe as the shipment volumes of our Lifeway-branded products grow, we will continue to become more efficient. Now to our expenses. Selling, general, and administrative expenses increased $1 million to $24.9 million for the year ended December 31, 2023, compared to $23.9 million in the prior year. While net dollars increased, our SG&A expenses as a percentage of net sales decreased to 15.6% in 2023 compared to 16.9% in 2022. We are seeing great returns on our selling expenses as we invest strategically in growing brand exposure and driving velocities of our core Lifeway Kefir products and Farmer Cheese through targeted advertising and marketing. Our net income during the year ended December 31, 2023, was $11.4 million, reflecting EPS of $0.77 per basic and $0.75 per diluted common share, compared to net income of $0.9 million or $0.06 per basic and diluted common share in the prior year. This is a very strong expansion of profitability and illustrates that our top-line and margin improvement is flowing through -- well to the bottom line. Capital spending increased approximately $0.9 million to $4.4 million during the year ended December 31, 2023. The increase in cash used was in line with our planned increases in 2023 compared to 2022. Our capital spending is focused on three core areas

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