Lifeway Foods, Inc. (LWAY) Earnings Call Transcript & Summary

Hello, and welcome to the Annual Meeting of Stockholders of Lifeway Foods, Inc. Please note, today's meeting is being recorded. During the meeting, we'll have a question-and-answer session. [Operator Instructions] Questions about a specific proposal will be answered directly after the announcement of that proposal and general questions will be answered at the end of the meeting. It is now my pleasure to turn today's meeting over to Julie Smolyansky, Chief Executive Officer, President and Secretary of Lifeway. Ms. Smolyansky, floor is yours.

Thank you, operator. Good afternoon, ladies and gentlemen. It is now 2:00 in the afternoon on Friday, October 16, 2020, and I would like to call the meeting to order. My name is Julie Smolyansky, and I am the Chief Executive Officer, President, Secretary and Director of Lifeway Foods, Inc. Welcome to the 2020 Annual Meeting of Shareholders of Lifeway Foods. Before I go any further, I would like to dedicate this meeting to our brave essential workers. I speak for everyone when I say how inspired we all are. Now I would like to introduce the company's director nominees and nominees who are attending today. Ludmila Smolyansky is the Chairperson of the Board and consultant for the company. Edward Smolyansky is the Chief Operating Officer of the company. Pol Sikar is the President of Montrose Mirror & Glass (sic) [ Montrose Glass & Mirror ] and member of the Audit Committee. Renzo Bernardi is the President and Founder of Renzo & Sons. Jason Scher is a principal investor and adviser, focused on early-stage companies. Jody Levy is the Founder, Creative Director and Chief Executive Officer of World Waters, the parent company of Watermelon Water. Dorri McWhorter is the CEO of YWCA Metropolitan Chicago and independent Board Director of William Blair Funds and a Board -- and a Board Director and Audit Committee Chairperson of Skyway Concession Company. In addition to the members of the Board here today, we also have a number of company officers here with us. Joining me today are Amy Feldman, the company's Senior Vice President of Sales; Eric Hanson, the company's Chief Financial and Accounting Officer; [ Rocky Newton ] 0226, Project Manager, who will act as the Secretary of the meeting; and Kevin Chiappetta, partner at Mayer Hoffman McCann, our independent registered accounting firm. An agenda that outlines the order of business for the meeting has been made available on our proxy statement. The matters on which the shareholders and stockholders of the -- at the meeting are voting on are to elect 8 directors, ratify the appointment of Mayer Hoffman McCann as our company's independent registered public accounting firm for the year ending December 31, 2020, and transact any other business that may properly come before the meeting. The meeting will take place as described in the agenda. When an item of business on the agenda is before the meeting for consideration, questions and comments should be limited to that item. If a stockholder has a question or comment not related to a business item on the agenda, other questions and comments will be addressed after my presentation about Lifeway and our business. The meeting rules of conduct. Computershare Communication Services has delivered an affidavit to the distribution of the notice of the meeting, which states that on September 3, 2020, notice of the meeting together with the related proxy materials and/or notice of the Internet availability of proxy materials was distributed to all stockholders of record as of the close of business on August 17, 2020, the record date for the meeting. This affidavit is available if any stockholder wishes to examine it and will be maintained with the minutes of this meeting after my presentation -- sorry, after my presentation, we will accept general questions from shareholders or proxy holders. [Operator Instructions] As of August 17 record date, there were 15,604,480 shares of the company's common stock, no par value issued and outstanding and entitled to vote at this meeting. If you have previously returned your proxy and do not wish to change your vote, no further action is required on your part. Stockholders of record may vote or change their previously recorded vote during the meeting by clicking on the Vote for your Shares icon. A quorum is present at the meeting in person or by proxy. So I declare the meeting duly and lawfully convened. The meeting is now open and ready for business. For voting, the polls are now open. Proposal one, it is now in order to consider the election of individuals who have been nominated to serve on the Board of Directors until the 2021 Annual Meeting of Shareholders. The candidates for directors who have been nominated to serve as directors are: one, Ludmila Smolyansky; two, Julie Smolyansky; three, Edward Smolyansky; four, Pol Sikar; five, Renzo Bernardi; six, Jason Scher; seven, Jody Levy; and eight, Dorri McWhorter. All of the nominees have indicated a willingness to serve if elected. In accordance with the bylaws of the company, stockholders are required to provide advance notice of their intent to nominate candidates for directors. No such notice was received and therefore, I declare the nominations for directors closed. A motion to elect 8 directors is now in order. I move for a vote on this proposal. If you intend to vote virtually or change your vote, please do so now. If you have any questions about this proposal, please ask now. The second item of business is to ratify the appointment of Mayer Hoffman McCann P.C. as the company's independent registered public accounting firm for the fiscal year ending December 31, 2020. The appointment of Mayer Hoffman McCann is discussed in the proxy statement that was made available to you. I move for a vote on this proposal. If you intend to vote virtually or change your vote, please do so now. If you have any questions about this proposal, please ask. We will report on the results of the voting later in the meeting after tabulation has been completed. At this time, I would like to make some remarks about Lifeway and our business. There should be -- you should have access to a slide presentation. And this is the legal forward-looking statements about -- that I'm not required to share with you all. So as just a little bit of history about Lifeway for those who might be new or joining us for the first time. Lifeway Foods was founded in 1986 by my family, my parents, Michael Smolyansky and Ludmila Smolyansky. And we are the largest kefir supplier in the United States, controlling well over 90%, I would say, probably closer to 97%, and I'll get into that further into the presentation. But we are dedicated to providing probiotic fermented, cultured, protein-rich kefir across the country and sharing a 2,000-year-old superfood, super-healing product that offers immunity, gut health, mood boosting element and so much more. Our business is also international now in parts of Ireland and Mexico that we've been focused on expanding, not just in the United States, but across the country -- across the world. And our mission is really simple to provide the best-tasting probiotic, nutrient-rich kefir products to improve the health of our customers and to leave the world better than when we found it. Our products and our brands likely has the highest consumer brand loyalty in the kefir category. This year, more than ever, we have been able to show the strength of our brands. The -- our customers have an unwavering commitment to the brand and the company itself has an unwavering commitment to quality and sustainability. We are best-in-class in distribution. You can find Lifeway across the country in some of the top retail accounts that we all shop at, including Whole Foods, Walmart, Target, Publix, Wegmans, Kroger, Rally's, the list is really endless, but we are really nationwide in every grocer, independent, small health food co-op and really nationwide where food products are sold. So as I mentioned, the strength of Lifeway really shined through this year more than ever. At a time when so much was uncertain and supply chain was so disrupted, the strength of Lifeway really, really came through. We have successfully -- our team successfully was able to reduce competition on shelf, including at accounts like Safeway, Publix and Whole Foods. So we were able to -- well, politely say there's no polite way to say it, but we were able to knock out some of the competitors that have entered the arena in the last 5 years, tried to sell kefir and have given up, I would say. So that's a real positive that will show and will kind of come through the remainder of 2020 and into 2021. And I could not be more proud of the brand. Some of the powerful trends that are supporting Lifeway are the protein-packed elements as well as the fact that it's on-the-go convenience probiotics, these are 2 trends that are just -- we're in the center of it in the sweet spot. And that's what consumers are really looking for. Consumers, as I mentioned, looking for high-protein, convenient wellness products. They're looking to avoid sugar, that's a top concern. But really, they're looking for -- over 60% of folks are looking for healthy food products, over 50% for convenience and over 52% are looking for speciation and feel the sense of fullness, and that's what's really driving that protein piece. Searches for self-care are 25% higher today than they were at this time last year. Nutrition plays a key role in self-care. Self-care cannot be hotter in this moment of COVID when people are feeling so unsure of what's going to happen. Self-care is really something that likely is dedicated to helping our consumers feel empowered that they have the ability to control. 95% of Americans link self-care with wellness and health, 88% feel confident about taking responsibility for their health decisions. And most people just feel that -- they report a sense of well-being when they are actively making good self-care choices. The trends for probiotic are just blowing up. Gut health is one of the hottest things. Again, now more than ever during COVID, if you look at the level of searches for gut health and immunity and probiotics, is just growing exponentially. The global market for probiotic products in 2017 was valued at $36 billion. That's going to more than double by 2023. So we're right in the center of that growth. The global kefir market is expected to reach $2.4 billion by 2024. There is a growing sense of awareness about the link between gut health and overall health. And that's both immunity, mood-boosting elements, prevention for key diseases. We know that we can help empower folks with kefir and the message that we're sharing. There is a generational appeal across generations from cradle to grave. Lifeway has something for everyone. We're -- 21% of consumers are interested in small shots -- probiotic shot drinks. So we were able to relaunch our BioKefir with these attributes in packaging which resulted in an uptick in sales at some of our key retailers. The microbiome and probiotic research is fascinating. It's something that we've been really driving home right now, more than ever when mental health is such a top concern and priority for so many of us. The evidence between the gut-brain connection shows this complex communication that not only directly impacts the state of our microbiome, but affects the physiological and mental state as well. Our immune system is highly impacted by the microbiome and the condition of our gut and diet choices. Studies show that the use of probiotics like kefir can change and improve gut microbes and confirms that microbes affect anxiety by influencing brain neurochemistry and emotional behavior. Probiotics can also improve gut dysfunction, induced by stress and normalizing the adrenal system, which controls our state of stress. Beneficial cultures, including probiotics and life cultures in fermented foods can contribute towards the health of the general population, which could not be more important today. And we even find that a recent study found that men who we eat fermented dairy products like kefir have a smaller risk of coronary heart disease than men who eat less of these products. Again, super important research that's just backing up, what 2,000 years of our ancestor is knowing intuitively in their gut that kefir helps you feel better. Oops, I don't know I just moved ahead, sorry. In 2020, this is, of course, a time of incredible challenges for so many across the world, I would say that we were in a really strong place and we were really prepared for COVID-19. I would say that our existing emergency management plans and protocols were in place. This was in part due to some of the Homeland Security food manufacturing protocols that we had set up shortly after 9/11 but these protocols were ramped up. And I would even say that we were well ahead of government mandates. On March 20. We started our mask mandate long before the national mask mandate occurred, before we had any guidance from any government official. We were already social distancing. We had already installed air filters for our essential workers. And the health and safety of our staff was our #1 priority. And I would say we really delivered and reduced risk in -- within our facilities, which led to completely uninterrupted supply chain which I'm just could not be more proud of how the team handled it. We were able to ramp up our inventory in early March to accommodate the surge that we were seeing internationally and in the United States. We were in communication with all of our supply chain, our truck drivers, all of our ingredient suppliers, or everyone within supply chain to make sure that we were able to offer uninterrupted service and meet this increased demand in grocery store. As a result, we were able to communicate this and offer a national ad campaign where we think our frontline heroes. We implemented this in quarter 2 of 2020. And we'll be launching another new campaign in Q4, in the last couple of weeks of 2020 and into Q1 to kind of really drive home the message around immunity and the fact that you can buy our products at the grocery store and educating -- really using this time to educate new consumers about Lifeway. New consumers that maybe weren't really paying attention to us before, weren't maybe going to the grocery store but in 2020 and 2021, we're all going to the grocery store much more often. And we want to make sure that consumers have Lifeway on top of their grocery store list, whether that's in-person or virtual. So really amplifying those messages that I've shared today. While I can't play the commercial for you, if you'd like to see it, feel free to Google Lifeway Kefir - Frontline Heroes commercial, and I'm sure you can find it and/or reach out to somebody at Lifeway, and we can share that with you if you haven't had the chance of seeing it. Again, I mentioned that the immunity messaging for 2020 was really important when today, everyone -- immunity is top of mind for all of us, for our families, for our community. And now more than ever, it's apparent that our health is linked to each other. So we are really highlighting that by sharing the benefits of kefir and probiotics through social media, through PR, through advertising, through our sales material, and just really making sure that consumers are empowered with this information. At this time, we know that there are so many people across the world and here in the United States in need. We've been able to support COVID-19 relief efforts through donations of our kefir products and immune-boosting kefir products to food pantries across the country. We have served over 200,000 servings in this time, which I would just say, it's not very easy to move perishable products during a pandemic, but we've been able to ramp all of that up to be there for our communities. Some of the organizations that we've worked with in this time include the Salvation Army, Meals on Wheels, My Block, My Hood, My City, the local food banks in New York, in Chicago and various ones all across the country. We also took great pride in making sure that our health care workers were able to receive our protein -- high-protein and immune-supporting products. This is, obviously, so important for doctors, nurses and all of those who really don't have a lot of time to sit down for a nutritious meal. The fact that we're able to help increase their immune system right now is something that we're all very proud of. We've donated kefir products to over 38 hospitals, over 14,000 bottles of products and over 90 cases have been given to frontline heroes and health care workers. As I mentioned, we -- the donations and continue to do donations to food pantries across the country. This is just some specifics on those. We've been able to pivot -- well, I'll go back into virtual, but we were able to get back into doing some live events in a safe way. And there's a handful of outdoor events that we were able to activate on. As many of you know, it's important for our marketing efforts and our customers to try our products, especially if we have some new items that we've launched, but we were able to do a several activations in communities that are offering outdoor activities, including drive-in movie theaters, which became really popular this summer. There's some outdoor yoga events that we've been able to activate at, and we'll continue to find events and activations that make sense where we know that we could keep participants safe, including -- and our staff safe. But -- and these were -- that was some in Chicago that I just shared, the ones we've been doing them in New York and Los Angeles, as well. We have also pivoted to more -- many more online digital influencer marketing. We've reached over 11 million people through our influencer campaign in 2020. And we've had over 2,000 posts created from our 2020 influencer campaign, which is the highest we've ever had, but really pivoting to a more virtual digital communication strategy, given 2020's challenges. We've been able to -- I would say we're best-in-class in social media, really staying relevant to today's consumers. We've had over 81 million impressions, over 1 million engagements and over 300,000 post clicks in 2020. These are record-high engagements for us. We've been -- we pivoted very quickly to virtual online events, really being -- offering the ability to, I would say, demystify a lot of the self-care practices that are really unattainable for so many people. We've been trying to democratize those and make sure that anyone who wants to participate in yoga can have a nice experience or practice of sound bath or learn healthy cooking techniques through our celebrity chef. And so we're really proud that we were able to take our kind of the things that we do live at our events and bring them online for folks to practice at home in a safe way during this pandemic. And I would say that these events, these digital virtual events, have really created a chance for our community to feel that they are less alone in this time when we are so isolated. We want people to know that though we're isolated that our community is not alone and that we are all here for each other. And that really showed through our online social media, and feel free to take a look at some of those on our like Instagram page, probably all the platforms include the same content through Instagram, Facebook, Twitter. So we offer a weekly calendar -- event calendar, where folks can take a look at what we'll be offering in any particular week. You can just tune into those things and then we share them to remain live often after the online event. But it really shows how relevant the brand is in 2020 when so many brands are unsure of what to say or how to communicate right now. I would say that we're really showing up for our community. Another highlight is our e-commerce advertising initiatives. With so many people buying and shopping online using Instacart or whatever their local grocery online delivery platform is, I think we're really doing best-in-class e-commerce advertising, including Instacart and on Amazon. On Instacart, we've had over $367,000 in sales since April attributed to some of that over 17 million impressions since April, over 1,000 clicks through Instacart since April. This is just really phenomenal. It's interesting to see how the marketplace has really accepted Instacart. So many people -- while it was available, not many people were really using it. But Instacart saw a record high number of downloads of their app. And I believe over 80% of people report that even when the pandemic is over that they've become so comfortable using Instacart and online grocery shopping that they'll continue that. So it's really important for Lifeway to be top of mind for consumers on their digital shopping cart. Their digital shopping cart, people tend to just buy the same things over and over. They're stable. So that's why right now when people are creating those online shopping carts, we want to make sure that Lifeway is in that cart. Same can be said on the Amazon advertising that we conduct over almost $200,000 in sales for 2020 just through Amazon, over about 800,000 impressions for 2020 and over 4,000 clicks. So really, really positive. Through -- because of all of these wonderful great things that we've been doing in this pandemic, the spirit of uplifting our consumers and all the great work that our digital social media team has been doing, the media has obviously noticed this. We've had some great publicity in Wall Street Journal. In Good Housekeeping, ProBugs received an award. We were featured on mindbodygreen and so many others. As we know my cookbook is out there, the kefir cookbook has been resource for people as they're staying home to cook at home, we've been able to use the cookbook that I wrote a few years ago and help people find all of the versatility that kefir offers. A few years ago -- 2 years ago, we announced the Lifeway 2.0 strategic plan to reinvigorate growth, and we've been executing on that plan, which is why we're receiving all that success with -- including new labeling, new products, a focus on the core of our business, which includes rebuilding some of our core kefir distribution in new and existing channels, partnering with our mass grocery and natural partners, supporting club stores, food service, drug stores, e-commerce, hospitals and some of those various channels. We've got another piece of the strategic growth included compelling product innovation. So again, focus on-the-go, healthy and wellness, single-serve using our organic -- releasing some new organic products that are doing really, really well, which I'll talk a little bit more about in a few minutes. We enhanced our consumer experience by all of the ways that I had just mentioned, but increasing our trials even though it's hard right now to try to get those trials, but definitely working in ways that we can, expanding kefir household penetration, which is definitely happening, increasing our single-serve purchasing and trying to support demos where it's possible to do demos that does -- is difficult in 2020, which is why we've shifted so much of that to our online digital marketing. So in the rebuilding of our core distribution, that included some new packaging and increasing the distribution at some of the core sales channels at mass-market grocery and clubs and other accounts. We're not as focused on food service right now because most people are not really working on -- shopping through food service. And so we are really focused and maintaining our focus on grocery and club stores. Some of the new products that we've launched, which are hitting nationwide with great success include -- and you've probably seen them, but our whole milk, coconut, Blood Orange, lemon and wild berry flavors, those are now nationwide at Whole Foods, Harris Teeter and many other accounts across the country with great success. Consumers are looking for a whole milk product more so now than like our non-fat line or even our low-fat line, the organic whole milk line is really turning out to be a big hit. Another line that we recently launched was Kefir Minis. These are small, little kefir shots for the tween markets. Sort of the market in between ProBugs and the big bottles of Kefir, we have our tween product. Though adults enjoy these lines too, and they come in fun flavors like unicorn cake and campfire S'mores and some other great flavors, that those are turning out to be quite favorite as well. We recently brought on a new Board member, Dorri, who's on the call, I believe. But Dorri McWhorter has over 20 years of management, consulting and accounting experience. And since 2013, she is the current CEO of YWCA, Chicago where she's expanded the company's digital service to transform their 140 years social service agency into a 21st century social enterprise. She's led the development for an exchange-traded fund, EST, for women's empowerment in partnership with impact shares. And she has been included in the inaugural list of the Blue Network comprised of the top 100 innovators in Chicago by Chicago Tribune's Blue Sky Innovation and has received the National Association of Women Business Owners' Visionary Leadership Award. And so we are so lucky to have such a dedicated and socially conscious leader on our team to help guide our business approach. So welcome, Dorri. For some of these financial highlights, I think if I will let Eric Hanson jump in and share a little bit on the financial highlights.

Sure. Thanks, Julie. For the first half of the year, we're obviously pleased with all the efforts Julie mentioned around selling, distribution and production. And for the first half of the year, we're pleased our top line revenue is up 5.5%, almost 6% versus last year. We've had a few challenging years with the category, but we've turned the corner. So we're trending positively on the top line. That translates into further gross margin expansion. As you know, we continue to focus on operational efficiency. And as Julie mentioned, our supply chain did a phenomenal job through the last 6 to 8 months. On the SG&A side, we continue to look for ways to be efficient with our spend. The last couple of years, as Julie mentioned, we've done some targeted advertising and marketing campaigns that have generated a good ROI for us. And we're also starting to see some of the operational -- organizational change. Savings come from moves we've made in the last year or 2 to rightsize the business where it's needed. So we've had a good year-to-date financial results so far and look forward to releasing further financial information here in the next month. So thanks, Julie.

Thank You, Eric. That was great. So in summary, thanks to our 30-year heritage of disruptive, probiotic, protein-rich kefir products, our innovation across all the classes of retail trade, we're excited by our large and growing market opportunity, which is addressing consumers' health and wellness needs now more than ever, our ability to scale manufacturing and support for future growth here in the U.S. and internationally. We're really proud on continuing to execute the Lifeway 2.0 strategy. And we're focused on shareholder value creation. This is what we're most excited about. So if there are any questions for me or any of the other officers or directors of the company that relate to the company, but not to the matters already voted on at the meeting, please ask now. Only matters that may concern all stockholders should be raised at this time. And any matter of individual concern to a shareholder should be addressed directly to the company attention of Investor Relations by phone or mail -- email. I don't think there's any questions that I am aware of. I am pleased to announce that the preliminary results of the tabulated shares indicate that each director nominee received more than a majority of the votes cast at the meeting and has been elected and that the ratification of the appointment of Mayer Hoffman McCann has been approved by the stockholders by more than a majority of the votes cast at the meeting. The final vote tallies will be disclosed on Form 8-K filed by Lifeway. You have now heard the results of the voting, and this completes the business to be conducted at the meeting. Since there are no other matters to come before the meeting, I now declare this meeting formally adjourned and all matters before it closed. I would like to express my appreciation on behalf of all of the newly elected directors to the stockholders for your continued support. We appreciate your interest and courtesy, and thank you for joining us today. I hope that everyone continues to remain safe and healthy. And this will conclude our meeting.

This concludes the meeting. You may now disconnect.