Hunter Wells - IR, ICR Julie Smolyansky - President and CEO Ed Smolyansky - President and CFO John Waldron - VP, Finance.

Howard Halpern - Taglich Brothers.

Presentation:.

Greetings and welcome to the Lifeway Foods Inc. Third Quarter 2015 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms.

Hunter Wells. Thank you, Ms. Wells. You may begin..

Good afternoon and welcome to Lifeway Foods earnings conference call to discuss the company's results for the third quarter of fiscal 21015. On the call with me today are Julie Smolyansky, President and Chief Executive Officer; Ed Smolyansky, Chief Financial Officer and Chief Operating Officer; and John Waldron, Vice President of Finance.

By now, everyone should have had access to the release which went up this afternoon at approximately 4:05 PM Eastern Time. If you have not received the release, it is available on the Investor Relations portion of Lifeway's web site at www.lifewaykefir.com. This call is being web cast and a replay will be available on the company's web site.

Before we begin, we would like to remind everyone that the prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and therefore undue reliance should not be placed on them.

Similarly, descriptions of Lifeway's objectives, strategies, plans, goals or targets contained herein are also considered forward-looking statements. 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 a call posted on their web site. And with that, I would like to turn the call over to Lifeway's CEO, Julie Smolyansky..

Thank you, Hunter. Good afternoon to everyone who has joined us on today's call. I will begin with an overview of our business for the quarter and the first nine months of 2015, and then provide an update to our strategic initiatives. At the conclusion of my remarks, Ed, John and I will be available to take your questions.

I am pleased to report solid results for the third quarter; net sales were approximately $30 million. Our results demonstrate our team's ability to successfully execute on our strategic initiatives, as we continue to grow our business. We made good progress in expanding distribution of our kefir products across new and existing retail channels.

The innovative products we debuted earlier this year has resonated well with consumers and our marketing strategies have helped grow our brand awareness.

Although capacity constraints hindered our sales growth in the third quarter, we continue to make progress in increasing the production capacity at our Wisconsin facility, which has begin producing kefir at the end of the second quarter.

Increased sale volume of our kefir products, coupled with the benefit of lower milk prices, enabled us to achieve gross margin expansion of approximately 470 basis points to 30.6% and diluted earnings per share of $0.05. We expect milk prices to stay at a relatively similar level for the balance of 2015 and 2016.

I'd like to now provide you all with an update of our three key initiatives; increased brand awareness; although Lifeway is the number one brand in kefir in the U.S., there are still many who have not heard of the incredible health benefits associated with consuming our drinkable kefir.

There continues to be high demand for natural and organic food products. According to SPINS, today the natural channel is an $11.5 billion market opportunity.

Growth of natural products was up 12% in 2015 compared to last year, and these products resonate strongly with shoppers at specialty supermarkets and increasingly at traditional grocery, mass and club retailers. We believe that Lifeway is strongly positioned to benefit from growth within these channels fueled by increased consumer brand.

Consumer taste preferences are evolving, they seek unique and exotic specialty food products and more and more are concerned with health environmental and social benefits associated with the food they purchase for themselves and their families. I believe this truly would differentiate Lifeway Kefir from other products out there on the market.

Not only is the Lifeway team committed to increasing and creating the highest quality product, but we are committed to the same ideal that our customers believe are important. This includes our commitment to all natural hormone and GMO-free ingredients, philanthropy, environmental responsibility and farming sustainability.

From farm to fridge, we make sure that our products are good, not only for our bodies, but for the world around us, not every company can say that. In October, we teamed up with an award winning New York Chef and Restaurateur and cook-book author, Seamus Mullen, at the New York City Wine and Food Festival.

Mullen represented Lifeway at this event by serving savory gluten free muffins and spreads that he has created using ingredients from Lifeway products. In the coming months, our partnership will expand into other collaborative events, recipes and blogposts on cooking and nutrition.

This is a strategic and complementary partnership for us, as we both believe strongly in the benefits of healthy eating, and are excited that Seamus will be spreading the word through positive health benefits of kefir through his cookbooks, restaurants and speaking engagements. Other partnerships like this are continuing to expand.

Moving on to our next area of focus, product and development and innovation. As a product category leader in kefir, we are keenly focused on growing our diverse portfolio of products.

Some of the top performers from the new products we introduced earlier this year include our Protein Kefir, our Perfet12 Kefir made with stevia; Pretty Plain ProBugs, and Watermelon Flavored Kefir.

Each year in March, we debut new products at Natural Products Expo West and I look forward to sharing an update on new products and introductions with you on our fourth quarter and full year conference call. And finally, expanded distribution; we made solid progress in increasing our distribution book trends in the third quarter.

Some exciting highlights include Lifeway pretty Plain ProBugs accepted nationally in whole foods. Lifeway ProBugs now ship into approximately 225 Wakefern stores, Winn-Dixie and Bi-Lo. Winn-Dixie and Bi-Lo added Lifeway Kefir to over 700 stores. Publix has added our new 16-oz Kefir to approximately 1,100 stores.

And Lifeway Perfect12 is now available in over 200 Ingles stores and over 175 Fresh Market stores. And lastly, Market Basket added Perfect12 and ProBugs to over 100 stores. Last quarter, I spoke about our expanded distribution outside of the U.S. Today, Lifeway products are sold in the U.K., Canada and Mexico.

We have been especially impressed with our strong performance that we have seen so far in Mexico, and believe that this is a compelling expansion opportunity for us. The size of the yoghurt market in Mexico is close to $1 billion this year and is expected to grow 40% by 2018.

This growth is expected to be driven by new categories dairy products such as Greek Yoghurt functioning better for you and organic products. Our initial sales in Suprema and Costco Mexico has been strong and our team is in the progress of formulating a robust business plan, coupled with strategic marketing to support our future expansion in Mexico.

We are very pleased with the progress that we have made thus far this year. So the successful execution of our strategic initiatives, we have generated approximately $4.4 million in cash from operating activities. We are confident of our future opportunities, and are committed to increasing shareholder value.

Additionally, the added capacity provided by our Wisconsin facility will position us strongly to meet increased demand of our products and support our continued growth for both domestically and internationally. That concludes our overview for the first nine months of fiscal 2015. Ed, John and I would now like to open the call up for your questions.

Operator?.

[Operator Instructions]. Our first question comes from the line of Howard Halpern of Taglich Brothers. Please proceed with your question..

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[Operator Instructions]. Our next question comes from the line of Ivan Zuick. A private investor. Please proceed with your question, Ivan..

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At this time, there are no further questions in the audio portion of this conference. I will now turn the conference back to the management..

I am sorry, I think I missed. So yeah thank you for your participation today. We appreciate the hard work and dedication of our employees and the support of all of our loyal customers and shareholders. We look forward to sharing our fourth quarter and full year results with you in the coming months. Have a happy and safe holiday season, and be well..

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful rest of your day..