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

Good afternoon, and welcome to the conference call for Lifeway Foods' third quarter of 2026. Joining me on today's call are Julie Smolyansky, who serves as President and Chief Executive Officer of Lifeway, and Eric Hansen, Lifeway's Chief Financial and Accounting Officer. By this point, everyone ought to have the press release that was issued this afternoon. Should you not have gotten it, you can find it in the Investor Relations section of Lifeway's website, www. lifewayfoods.com. A recording of today's call will be posted on the company's website. Before we get started, we want to remind all of you that the prepared remarks include forward-looking statements. Terms such as believe, expect, anticipate, plan, will and other comparable expressions typically signal forward-looking statements. Such statements are not a guarantee of future performance. and so they should not be relied upon unduly. Actual results might differ materially from what any forward-looking statements project. Lifeway undertakes no obligation to update any forward-looking projections that might be made on today's call, except as required by law. Every forward-looking statement contained herein speaks only as of the date of this call; and with that, I will hand the call over to Julie Smolyansky.

Thanks, John, and good afternoon everyone joining us. We always appreciate the interest you show in Lifeway Foods; it's great to host a live call today, and I'm eager to take your questions shortly. Before getting into the numbers, I want to acknowledge the Lifeway team; so far this year has tested us, and you've responded with relentless focus and execution, continuing to deliver outstanding results just as you always do. We're grateful for all that you do. I'll start with the highlight: our momentum carried into Q3 as we posted yet another record-breaking quarter. For the third quarter, net sales came in at $67.8 million — a record quarterly figure for the company. That makes 28 quarters in a row where net sales have risen compared with the same period a year earlier, which works out to seven straight years of quarterly gains. Once again, the increase was fueled by greater volumes of our flagship Lifeway kefir along with our high-protein Lifeway Farmer Cheese, though it was partly held back by capacity constraints, which I'll discuss shortly. For the first nine months of this year, net sales reached $197.7 million, a 25.8% increase, which works out to roughly 93% of the net sales we posted for all of 2025. We're clearly on track to break our annual net sales record in 2026, and that would extend a streak of 4 record years in a row, going from $141.6 million in 2022 to $212 million in 2025. There's still lots of room left for us to keep reaching for the ambitious targets we've set. Our steady results and the growth engine we've built are getting attention. This October, Fortune put Lifeway on its 2026 list of 100 fastest growing companies in America, at #45. Fortune compiles this list by finding businesses in all sectors nationwide and assessing how much they grew over the last three years in revenue, profits, and stock returns — which places us alongside extremely elite peers. That's an amazing acknowledgment, and the credit goes to our team members, our investors, and our loyal customers who include Lifeway in their everyday lives. A cultured dairy business that my father started in 1986 is now ranked among America's top-performing companies. We treat this seriously, and we have no intention of slowing down; across 4 decades, we have established a category and set the standard for what genuine real kefir means in the United States. Right now, shoppers are after protein, they want support for gut health, and they want genuine food produced from genuine ingredients. On top of that, a rising number of GLP-1 users are seeking out foods that are nutrient dense and rich in probiotics to help with satiation and digestive health. Kefir lands precisely at the intersection of all those wellness trends, and nobody has devoted more time or earned more trust in this category than we have. That lengthy record as the leader is precisely why we're positioned to seize this surging demand. The market is moving toward our category, and our retail partners recognize that. They're looking at ways to give more shelf space to drinkable dairy. Our ties with these retailers run deep, and since we lead the category with a history of gaining share and strong velocities, we think we’re well positioned to capture that additional space. We’re also very supportive of greater consumer awareness and market recognition for kefir. As more consumers find this category, it expands, and we gain from that. As I said earlier, we’ve run into some capacity challenges, and I want to address them frankly. We’ve been building for the future, and that future has come sooner than we anticipated. Demand for our products is pressing against the ceiling of what our own factories can currently make. Also, we took roughly one week this quarter for a scheduled shutdown at Waukesha, which allowed us to complete facility improvement work and the expansion project mentioned in earlier quarters. We're putting in serious effort to have our optimized platform at Waukesha ready to serve the excessive demand we've generated in this market. We'll continue adding shifts and using co-manufacturing partners to supplement output, but we believe there's a major opportunity to capture unmet demand in 2027. Even so, relief is on the way. The expanded Waukesha facility should begin manufacturing at its higher scale in Q1 2027, with additional packaging and automation processes expected to come afterward. This enlargement is going to solve the capacity issues we've run into, and it will allow us to meet the enormous demand sitting in front of us even more effectively. Once finished, the project will increase the plant's capacity by more than twofold, upgrade how we operate, and boost efficiency. This is both a deserving and essential investment as we move into the next phase of our growth; we're thankful to the Waukesha and Milwaukee local business community along with the Wisconsin Cheesemakers Association for partnering with us and backing our Waukesha operations. Even with those capacity constraints, our growth this quarter still came in at almost 19%, and with additional space and equipment, we would have grown by an even larger amount. Having too much demand is a nice dilemma, yet it remains a dilemma, and our people are devoting full attention to fixing it. Moving on to profitability: gross margin came in at 18% for the third quarter, which shows the ongoing strain of a costly input environment. Milk prices—one of our main inputs—climbed roughly 26% during the second quarter versus the first, and they declined only slightly in the third quarter. Higher oil prices also created a major obstacle, since they push up what we pay for packaging and freight. As we look toward the remainder of the year, our forecast is that average milk costs will be greater during Q4 compared with Q3, while expenses for packaging ingredients and transportation should stay at heightened levels. That being said, we are taking action on the things within our control. We have been working alongside our retail partners on price increases across our portfolio, and those increases will begin taking effect on a rolling basis through year-end and into the first quarter of 2027. Given the present climate, certain retailers have shown reluctance to go along with industry-wide price increases, and that is something we have noticed too. That said, our partners have collaborated closely with us, and they value how Lifeway products perform on their shelves. Broadly speaking, we view this margin pressure as short-term, though the timing of any cost relief rests on factors outside our control; still, with the pricing moves we’ve put in place and the efficiency gains we expect from our capacity investments, we do expect gross margin to expand and profitability to improve in 2027. SG&A expenses represented 16.2% of net sales, compared with 19.6% a year ago—more than 300 basis points of leverage. On a year-to-date basis, SG&A stood at 17.2% of net sales versus 19.1% last year. We're getting leverage on operating expenses even as we continue putting money into marketing and brand awareness, which is fueling the record growth we're posting for 2026. For the third quarter, net income came in at $0.3 million, equal to $0.02 per basic and diluted share, versus $3.5 million, or $0.23 per share, in the prior year.

We stayed profitable even with costs running high, and at the same time we keep putting money behind our brands and the initiatives that build the groundwork for profitable growth over the long haul. We've been through inflationary periods and dairy cost cycles before. And just as we've always done, we'll stay disciplined. Our financial base is strong, and we'll balance investments in growth against profitability. That said, we hold a leading market position in categories that are growing, and there's a long runway in front of us with substantial white space in households and distribution. And we won't swap the long-term health of our brands for a short-term fix. Our strong history and expansion, in our view, demonstrate how this team delivers, and we intend to continue demonstrating that. In addition to the strength of our flagship kefir drink, our neighboring product lines continue to perform well. Farmer Cheese is increasing awareness, continues to grow, and recently secured space at select Target stores. Furthermore, our new organic Farmer Cheese is now available on shelves at < > and Sprouts. Muscle Mats has reached Kroger and Wegmans, and Kefir butter is now offered to buyers; these are merely new product placements, and I urge everyone to look for these fantastic new items at their local grocers; we continue introducing Lifeway kefir to broader audiences with new consumption occasions. We just reintroduced Frozen Kefir to soft-serve machines through the food service channel. Back in 2008, Lifeway was the first to create frozen kefir. Today, our soft serve—crafted with real kefir instead of a powdered mix—can be found at trend-setting frozen yogurt spots such as drugstore, Megan and the Culture Club, and we're expanding in New York, Chicago and Los Angeles and beyond. Lifeway continues gaining momentum with high-impact marketing efforts, including the recent Chicago and broadcast TV premiere of our widely popular social media ad featuring Chicago football starts Colston, Loveland and the Andre Swift. After that debut came the rollout of a fresh digital campaign starring those athletes, which further widens the partnership's reach and engagement. Those campaigns represent yet another milestone in what has been a standout year for Lifeway's marketing, which has featured viral recipes, high-profile brand collaborations, strategic partnerships, and marquee events — all of which further elevate awareness, drive consumption, and connect with new audiences. In closing, the third quarter demonstrated both the strength of our platform and how large the opportunity before us is. We posted the highest quarterly net sales in company history, pushed our growth streak to 28 consecutive quarters, and were named by Fortune as one of America's fastest-growing companies. Consumer demand, along with the tailwinds supporting healthy functional foods, remains powerful, and as the category keeps expanding, Lifeway keeps leading the way. We know what we need to focus on: bringing in new customers, gaining additional shelf space, boosting velocities, and turning the current surge of interest in Lifeway into repeat buying that lasts. Our team is the right group to meet this moment, seize this demand in a way no one else can, and build long-term value for shareholders. With that said, operator, please open the line so we can take questions.

Perhaps I could start by addressing the capacity issues you faced during the quarter and the discussion surrounding them. It seems demand is close to, or perhaps beginning to exceed, supply, yet the Wisconsin facility ramps up in Q1, and then there were remarks about how much that should help next year. So I'm wondering, when you speak with some of your main customers and perhaps even prospective new ones, is the thinking that once that facility is operational with the modernized, I suppose, the modernized lines and the added capacity, suddenly there should be an infill, correct? Like I've seen happen before, where there's possibly more demand than you can actually satisfy. But does that mean inventories are getting drawn down? So it will carry through part of next year, at least, that there will be some inventory build and perhaps some growth potential that goes beyond the current run rate of demand.

Okay. So yes, we will — we do expect that there is going to be a continued capacity issue in '04 — in Q4. and slightly in the first quarter but we're going to be increasing from 200 bottles per minute to more than double that speed; so capacity is going to be rolling out every quarter. And it's going to be an ongoing rollout for more capacity and taking on additional SKU offerings at our existing retailers and new accounts.

All right, great. So then, I suppose, if I'm just picturing a customer — I don't know, say, Costco, right — where I believe you've got some footprint in certain regions of the country. Would you put it in simple terms that, as capacity goes up, it becomes clearly much simpler to grow that overall distribution? I'm just attempting to get a sense of, like, what the true potential looks like, kind of compared with where capacity stands. So we resolve the capacity problem. It's not — it's sort of a high-end issue. Does the potential for distribution gains sort of come along with added capacity?

Yes, that's right. I don't anticipate that 2027 will be a discussion about capacity. For most of 2027, we'll have full capacity. So that shouldn't be a problem. And that's correct. At present, we're in a handful of Costco DCs. And those are discussions we're holding with all the DCs across the country and planning for that. And this is growth at scale, so it isn't small pieces of opportunity, but rather pretty meaningful growth opportunities without any further capacity constraints.

All right, that's great, and maybe one more thing from me. I believe you mentioned that milk costs would be somewhat higher in Q4 compared with Q3. And obviously, that's a moving situation, with plenty happening in the commodity market right now; in the commodity markets. I think originally, when we were thinking about it, or when you discussed '27, right? There are potential profit enhancement drivers from the Wisconsin facility coming online at that point, and clearly the pricing, right? It sounds like that begins at some point later in Q4. And then there was also this normalization of milk costs, which, again, sometimes rises and falls, and it sort of depends on the day. So it sounds like there's still margin upside potential next year. I mean, we're hoping this is the trough, right? It's not good right now. But that perspective on margin recovery potential next year is, I guess I'll put it loosely, pretty good, though maybe not as good if milk doesn't normalize. I'm trying to keep this basic.

Yes, absolutely. I completely understand. We believe milk prices will be stable, and we are taking that pricing, which is going to take effect on a ring basis in the fourth quarter in December, throughout the first quarter in 2027. And with our operational efficiencies out of Waukesha, we'll have the perfect, and we believe we can rebound to our historic margins of 25% plus. And these — yes, I mean, if that answers your question.

Increased volume is still the main driver of our sales gains. Could you elaborate on how much of that growth stems from better sales at stores we already serve versus added distribution? And are you seeing more shoppers come back to buy on a regular basis?

Right. Our growth mirrors robust consumer demand for Lifeway and for the broader fair market, probiotic and fresh cheese segments. We continue to gain from growing interest in gut health, protein, functional nutrition and GLP-1 dietary needs. Kefir and Farmers Cheese will remain the core of our business. And we do have a robust innovation pipeline, which opens a tremendous opportunity to reach new consumers. We are in a strong position to gain from several changes taking place in how people approach health and wellness. Beyond that, there is a broad movement toward genuine food offering bigger nutritional advantages, and what we observe is consumers pursuing maximum nutrition, together with ease. So indeed, we expect ongoing expansion from our core business, plus the chance to attract additional customers and generate extra growth through certain new products we introduced over recent months.

So you're looking for margins to get better in 2027. And although cost pressure is likely, we will keep going in quarter 4. So can you help us get a sense of what to expect for gross margin in quarter 4? And how fast could it recover in 2027?

Yes. So we expect our gross margin to land somewhere between our Q2 and Q3 percentages. We expect Q4 price increases to deliver a small gain in the impact of increased milk pricing. And our consumer price increases take effect at the end of this quarter, Q4 and into Q1. We're confident that as milk prices level out, pricing starts to take effect, and we capture some of the operational efficiencies we expect in Waukesha, we can return to margins of 25% or more. That's helpful, yes.

To start, I want to ask about the maintenance shutdown at the welling facility that you brought up in your prepared remarks. Could you begin by describing how much of a similar shutdown you had during Q3 of the previous year? And beyond that, is any maintenance scheduled for the fourth quarter? Do you anticipate a full quarter of production from Waukesha?

All right. Yes. We don't break out the specific impact of that shutdown, but it gave us an opportunity for much-needed maintenance, since the plant has been operating at near capacity for months, and we'll make up for this in 2027. We'll keep facing some capacity constraints in Q4, yet we do believe that in Q1 2027 we'll see an increase from 200 bottles per minute to more than double, with continued speed capacity rolling out each quarter. And some of those specific elements are coming online in February, and those upgrades are progressing as planned, within all of our overall time lines, which are on track. And so we do expect significant capacity increases starting in January, followed by additional improvements every month after that.

Understood. Yes, that's useful. And then, indeed, 19% revenue growth during a quarter in which you had a week of maintenance is quite impressive, so congratulations on that top line given those circumstances.