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

Hello, and welcome to the Annual Meeting of Stockholders of Lifeway Foods, Inc. Please note that today's meeting is being recorded. [Operator Instructions] It is now my pleasure to turn the meeting over to Julie Smolyansky, Chief Executive Officer, President and Secretary of Lifeway. Ms. Smolyansky, the floor is yours.

Good afternoon, ladies and gentlemen. It is now 2 p.m. in the afternoon, and I would like to call the meeting to order. My name is Julie Smolyansky, I am the Chief Executive Officer, President, Secretary and the Director of Lifeway Foods. Welcome to the 2021 Annual Meeting of Stockholders of Lifeway Foods. Before I go any further, I'd like to introduce the company's director nominees who are attending today. Ludmila Smolyansky is the company's Chairperson of the Board and consultant to the company. Edward Smolyansky is the Chief Operating Officer of the company. Pol Sikar is the President of Montrose Mirror & Glass and member of the Audit Committee. Jason Scher is a principal investor and adviser focused on early-stage companies. He serves as our Lead Independent Director and the Chairperson of our Audit and Corporate Governance Committee and Compensation Committee. Jody Levy is the Founder, Creative Director and the Chief Executive Officer of World Waters, LLC, the parent company of Watermelon Water, a partner and adviser to various brands. She is a member of both our Audit and Corporate Governance Committee and Compensation Committee. Dorri McWhorter is the CEO of the YWCA Metropolitan Chicago, an Independent Board Director of William Blair Funds and Board Director and Audit Committee Chairperson of Skyway Concession Company. She is a member of our Audit and Corporate Governance Committee and Compensation Committee. 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 Eric Hanson, the company's Chief Financial Officer and Accounting Officer; [ Faki Newton ], Project Manager, will act as Secretary of the meeting; and Kevin Chiappetta, partner at Mayer Hoffman McCann, our independent registered accounting firm. And we have 3 inspectors of election from Computershare present: June Lutes Relationship Manager; Shirley Nessralla, Vice President and Manager; and [ Andrew Wafford ], Relationship Manager. An agenda that outlines the order of business for the meeting has been made available in our proxy statement. The matters on which the stockholders at the meeting are voting to are: one, to elect 7 directors; and two, to ratify the appointment of Mayer Hoffman McCann as the company's independent registered public accounting firm for the year ending December 31, 2021; and three, transact any other business that may properly come up before the meeting. The meeting will take place as described on 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. Computershare Communication Services has delivered an affidavit to the distribution of the notice of the meeting. which states that on September 1, 2020, notice of the meeting, together with the related proxy materials and/or notice of Internet availability of proxy materials, was distributed to all stockholders of record as of the close of business on August 2021, the record date for the meeting -- 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 the meeting. After my presentation, we will accept general questions from stockholders or proxy holders. You may ask questions by clicking the Q&A icon in the upper right-hand corner of the meeting center. As of the August 20 record date, there were 15,434,936 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 icon. Computershare has reported to me that 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. The polls are now open. Proposal 1. It is now in order to consider the election of individuals have been -- who have been nominated to serve on the Board of Directors until the 2022 Annual Meeting of Shareholders. The candidates for director who have been nominated to serve as directors are: one, Ludmila Smolyansky; two, Julie Smolyansky; three, Edward Smolyansky, four, Pol Sikar; five, Jason Scher; six, Jody Levy; and seven, Dorri McWhorter. All of the nominees have indicated a willingness to serve if elected. And as set forth in the company's proxy statement, stockholders are required to provide advanced notice of their intent to nominate candidates for directors. No such timely notice was received. Therefore, I declare the nominations of directors closed. A motion to elect 7 directors is now in order. I move for a vote on this proposal. If you intend to vote or change your vote, please do so now. If you have any questions about this proposal, please ask now. [Voting]

The second item of business is to ratify the appointment of Mayer Hoffman McCann as the company's independent registered public accounting firm for the fiscal year ending December 31, 2021. 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 now. [Voting]

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. I will go through a brief slide we can follow along. One second here. Sorry, folks, we're just having a technical difficulty with seeing the slides here. Are you able to see the slides on your screen?

You have to email.

No, I'll just -- what I have here that I'll do -- I know I'll do.

[indiscernible].

Okay. Here. That's okay.

Julie, I can see the slides from my perspective, yes.

Okay. Then -- okay. Hold on. I'm going to do -- okay. I got it. Okay. So as everyone knows, Lifeway has been in the -- was started in 1986 by Michael Smolyansky. We are in the business of manufacturing kefir and other probiotic drinks for over 30 years. And hold on, we are just working through some technical difficulties. I can't get -- how can I make -- one second. We're going to try to make this bigger because I can't see the slides on my side. Hold on. Okay. Sorry, folks. We were having technical difficulties, and these slides were like 3 millimeters on my computer. So I had to figure out how to expand them. So we're all good now. Sorry about that. So as I was mentioning, Lifeway was founded in 1986, and we are the largest kefir manufacturer and control over 90% of the U.S. kefir category. For over 35 years, we've disrupted the probiotic and protein-rich kefir product, innovation across all classes of retail trade. We are an environmentally and socially responsible health- and wellness-centric brand built around the contemporary consumer. We have been defining what good gut health is and the ways that consumers can enjoy our kefir for multiple decades. And we have a scalable business model that we are able to grow in the U.S., the U.K., Ireland, France, Mexico and other parts of the world. Our mission is to provide the best in probiotic, nutrient-rich kefir products to improve the health of our consumers and to leave the world a better place than we have found it. Our products include the highest consumer brand loyalty in our category. We have an unwavering commitment to the quality and sustainability and robust product catalog that fuels consumers' trial and velocity. We are the leader of kefir and best-in-class distribution. We have a compelling and innovation and nutrient-rich product offering, diversified broad-based distribution across retail and consumer formats. And Lifeway's main kefir competitors has recently been reduced at key retailers. Several years ago, I announced the Lifeway 2.0 strategic plan to reinvigorate growth, so I will be updating you on that plan. The plan included multiple pillars: focusing on the core, competitive product innovation and enhanced consumer experience. In the first pillar, focusing on the core, we set out to rebuild our core kefir product distribution in new and existing sales channels. That included mass, grocery and natural retail partners; in addition, C-stores, clubs, food service, drug stores, e-commerce, hospitals and university sales channels. In the compelling innovation, product innovation, we focus on the on-the-go health and wellness innovation, single-serve and 8-ounce kefir, newly-released organic products and new dairy-free plant-based probiotic drinks. For the enhanced consumer experience pillar, our goal was to increase trial and repurchase rates, expand kefir household penetration, increase single-serve purchases and show that more -- include more shopper occasions and new consumers. For the rebuilding core kefir distribution pillar, we were able to -- we kind of just expand that for people that had a hard time seeing. This is the slide that shows our intention around rebuilding the core kefir distribution, and the life weight exists within the intersection of very -- 2 very powerful macro trends. Consumers want access to protein pack nutrition as well as convenient on-the-go and health and wellness products, and Lifeway sits in the center of these 2 trends. The top 10 healthy food trends to expect in 2021, the #1 top healthy food trend was the inclusion of gut healthy food. As much as 80% of the immune system is tied to the gut and makes sense to us that many of us will be focused on enhanced gut health, especially now. The demand for protein and convenient health and wellness products is at an all-time high. Demand for high-protein products is growing at 21%. 21% of consumers are interested in probiotic yogurt shot drinks. Consumer cite healthy at 58% and convenience at 53% and filling at 52% as the most important attributes when they're selecting a breakfast option. The global kefir market for probiotics ingredients are expected to exceed $64 billion by 2023. The growing consumer awareness between the link between gut health and overall health is driving the renowned focus on fermented food. 95% of Americans link self-care with healthy habits. The microbiome and probiotic research is peaking at an all-time high. Evidence on the gut brain health connection shows a complex communication that does not only directly impact the state of the microbiome but affects our physiological and mental state as well. The immune system is highly impacted by the microbiota condition and by diet choices. Studies found that the use of probiotics can change gut microbia and confirms that microbia affects anxiety by influencing brain neurochemistry and emotional behavior. Probiotics can improve gut dysfunction introduced by stress and normalizing the adrenal system, which controls our state of stress. Beneficial cultures, including the probiotics and life cultured and fermented foods, including Lifeway Kefir, can contribute towards the health in general population. And new studies show that men who eat plenty of fermented dairy products have smaller risks of incident coronary heart disease than men who eat less of these products. The 3 most important attributes that we found when people are purchasing a yogurt or kefir drink is: one, high protein, 45%; high probiotics, 43%; and low sugar 40%. Yogurt and kefir drinks are expected to grow over 11% in the United States over the next 5 years. Consumers have become more engaged with Lifeway and increase loyalty in 2020. Basket dollars increased by $26 when Lifeway is in the basket. Lifeway buyers made more trips and spent more money on Lifeway. Lifeway has the highest loyalty among key adult and kefir drink competitors. We have been prepared and ready for the challenges of the pandemic response. Lifeway was very well prepared coming into 2019, in large part because we had already laid out the Lifeway 2.0 plan. Existing emergency management plans and protocols were in place, and we ramped up inventory and communication with supply chain partners for uninterrupted service to meet the increased demand. Lifeway employee vaccination drive with Jewel and Albertsons has been super successful with over 140 employees vaccinated through Jewel -- through a partnership with Jewel. And 87% of our staff is fully vaccinated across Lifeway facilities, and we expect that number to continue to grow. Lifeway gains over 464,000 new buyers. Of those buyers, 41% continue to purchase Lifeway after April 2020. Our donations ramped up also during COVID with supporting COVID relief efforts through donations of meal and immune-boosting foods across the United States. Over 224,000 people has been provided with one of our products. We supplied a variety of -- just continuing on the donations. Have partnered up with a variety of food and pantry organizations across the country. One year out, we continue to stay relevant, current and active. For example, through a partnership with the Van Gogh: Immersive art exhibit across 20 cities, we have been sponsoring the Van Gogh: Immersive Experience with yoga, live yoga and sampling of our products after. We've supported outdoor fitness classes. For example, Bryant Park yoga in New York City, STAY FIT 305 series in Miami, Navy Pier yoga in Chicago and the Wellness Experience at Kroger just to name a few. We have continued to sponsor Lollapalooza and ACL in Chicago and other events that offer us the opportunity to provide trial to our consumers. We've been able to impact and communicate and have touch points with over 8 million influencer impressions and over 20 million social media mentions. Our public relations were very active through the first 3 quarters of 2021. We have received over 96 media placements in Target outlets, resulting in the potential audience reach of more than 911 million people in top wellness food and lifestyle trade outlets. In 1 week, New York Times reported on kefir 2x. good Housekeeping wrote a beautiful article. And a whole number of other outlets have reported on the importance of kefir, probiotics and gut health and especially as individuals are battling COVID. We embarked on a national TV campaign: our national advertising campaign Frontline Heroes of -- in 2020 as well as our holiday campaign during Q4 of 2020, Staying Healthy Takes Guts in Q1 of 2021. And we've recently started a Spanish language ad campaign in Q2 of 2021, which included TV, YouTube and social distribution and integrations with Dr. Oz, Telemundo's Access Total (sic) [ Accesso Total ] Morning Show and even Drew Barrymore. We focus on the Lifeway branding and educating consumers about kefir and product attributes. This is an example of the Drew Barrymore integration, one of the communications, which received a record number of impressions of almost 5.5 million impressions for the first campaign. Dr. Oz delivered almost 2.5 million impressions for their first ad campaign -- air campaign. We have spent a significant effort on digital marketing and influencer marketing to drive awareness. We recently partnered with Bachelor in Paradise Joe Amabile; and Zach, ZHC, a famous TikToker, which offered high visibility and supported the natural and -- fitness communities and covered target markets that we feel critical to our success. Our campaign has reached almost 10 million viewers through these influencers and have created almost 2,000 posts. As I mentioned, we are growing our TikTok space. ZHC, Zach, has over 15 million followers. He's a big fan of the brand. And others like [ Ilana ], [ Molsen ] and [ Sara Grace ] have several million followers, and we have found that some of the biggest creators on the platform really love sharing Lifeway with their millions of followers in their community. As I mentioned, our social media highlights include working with leaders and partners in the social space to connect consumers through digital and mobile platforms. We were able to gain over 74 million impressions, over 1 million engagements, over 317,000 website visits and over 29,000 new followers. Our retail activation is connecting social campaigns to in-store sales through retail digital loyalty programs. As we know, so many folks are using online shopping. So we were there to really capitalize on this trend through media campaign, promotional landing pages and various digital coupons. Our e-commerce advertising initiatives were activated and accelerated e-commerce ads to help meet the demand of the anxious pandemic market looking for nutritional benefits. We worked with partners like Instacart and Amazon Fresh to help provide delivery from America's top retailers. Millions of ad impressions were created per month, and it increased sales 3x compared to 2019. Amazon Fresh, we targeted keyword advertising, which helped generate over 2x the monthly sales compared to 2019. We also continue to maximize the use of The Kefir Cookbook, a cookbook that I wrote to help tell the story of kefir and help provide a variety of ways to use kefir in everyday life. We also embarked on a Spanish language social marketing campaign as I mentioned. We provide healthy recipes, healthy news and targeted offers. This campaign has already reached over 1 million impressions and over 10,000 likes, comments and clicks. Our Spanish language marketing and events and collaborations, where Lifeway participates in a variety of events throughout Hispanic markets and works with Hispanic chefs and influencers, these included events throughout Los Angeles, through Miami as well as virtually. The targeted Telemundo schedule, we were able to collaborate with NBC through their in-house team to create Spanish language spot that targeted these key markets. Through the partnership, we were able to garnish over 9.8 million impressions. This is an example of some of those impressions: Accesso Total, Facebook and a whole number of other outlets. Our international sales and domestic growth opportunities are tremendous. We will go into some of these opportunities right now. As some folks know, we made an acquisition of GlenOaks Farms out on the West Coast. GlenOaks was headquartered -- previously headquartered in California. They were founded in 1980. They use a co-packer, and they are one of the top adult drinks in the 24- and 32-ounce sizes. Lifeway made an acquisition earlier in the year. As you can see, the distribution outlets through which GlenOaks is sold is primarily out on the West Coast. They have 60% ACV in California and 47% ACV in the West Coast. They were able to have over $8 million in sales and represent 8% of the national ACV, and Lifeway acquired them in the end of summer. We -- the strategy for GlenOaks is to maintain the existing distribution, to improve our brand presence online and to review and optimize retail and marketing programs. The sales team is able to identify new distribution opportunities. For 2022, we do expect to expand the GlenOaks distribution within the West Coast region and to target new customers in central states and to develop some new innovation. Beyond that, we intend to optimize cross-brand broker agreements and use our co-packer and retailer distribution relationships to launch new items and expand our portfolio nationally. The global kefir market is expected to grow over 6% from 2020 to 2025. So for that reason, Lifeway has expanded our international distribution with new distribution at Costco France and Galeries Gorman, and we expect more distribution to come in the coming weeks and months. We've also expanded our distribution in variety in Ireland with new distribution at Tesco with a new one leader size targeted to families and a strong presence in Dunnes and SuperValu stores. New distribution is continuing to grow within Mexico. We have new distribution at Walmart, Costco and Sam's Club, with new flavors for Mexico, including strawberry banana mixed berry and vanilla; and increased penetration and success within the Mexico City market, which leads other influencers and other regions. We also recently announced the innovation of milk -- probiotic oat kefir, no, I'm sorry, probiotic oat beverage. The plant-based food market in the United States is continuing to grow with -- it currently is at $5.6 billion, and it is expected to grow to $10.7 billion to -- in 2027. Oat milk is the second largest refrigerated plant-based milk and gaining a lot of shares from almond milk and soy milk. In the United States, the oat milk category grew over 150% in dollars in the last 24 weeks. 40% of U.S. households now use a dairy alternative, and there is no -- not currently any probiotic within the oat milk space, which is why Lifeway announced the launch of our oat line. Also to be mentioned that Oatly, the leading category influence, is soon to be publicly traded. The market cap the Oatly brand is over $8 billion after their initial public offering and sold in over 70,000 stores across the world, including Starbucks and Dunkin' Donuts. And it's a relatively new space. Oatly recently only entered the market in 2017, and their revenue has doubled from 2019 to 2020 to $420 million with lots of celebrity endorsements and whatnot. So we do feel that this is a really important time to capitalize and leverage the success of the oat space as well as the success of probiotics and kefir to bring together a new innovation to the category. This is the lineup of the new oat line. It has already been approved nationwide at Whole Foods, Kroger, Publix, Sprouts and through our partnerships with our distributors, including UNFI and KeHE. We're very excited about that. In addition, before I pass over to our CFO, Eric Hanson, I did want to mention that Lifeway was also able to garnish new distribution with our existing kefir line at the Albertsons-Safeway chain, where they will be adding 3 to 4 new SKUs within their slot -- within their shelves, which is going to bring us between $2 million to $3 million extra through that account for the upcoming year. And for the first time ever, Whole Foods has also authorized the distribution of a holiday SKU or limited edition SKUs, which run throughout the entire year. So there's spring, summer, fall and winter variety of SKUs for the first time ever, which will start showing up in Q1 of 2021. And that is the biggest part of my presentation, and now I will pass off to Eric to talk about some of the financial highlights.