Hunter Wells - ICR Julie Smolyansky - CEO Ed Smolyansky - COO John Waldron - CFO.

Eric Gottlieb - DA Davidson Howard Halpern - Taglich Brothers.

Welcome to the Lifeway Foods First Quarter 2016 Earnings 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 turn the conference over to Ms. Hunter Wells of ICR. 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 first quarter of 2016. On the call with me today are Julie Smolyansky, President and Chief Executive Officer; Ed Smolyansky, Chief Operating Officer; and John Waldron, Chief Financial Officer.

By now, everyone should have had access to the release which went up yesterday 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 website at www.lifewaykefir.com. This call is being webcast and a replay 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 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 the website. And with that, I would like to turn the call over to Lifeway's CEO, Julie Smolyansky..

Thanks, Hunter. Good afternoon to everyone who has joined us on today’s call. I'll begin with an overview of our business in the first quarter of 2016 and then provide an update on our strategic initiative. Next, John we'll discuss our financial results in more detail. Finally, Ed, John and I will be available to take your questions.

We started off the year well. In this first quarter our net sales increased 10% over the prior year approximately $33 million. Our improved top-line performance demonstrates the continued demand for Lifeway's diverse portfolio of household probiotic and kefir dairy products.

The strategic investments we made in 2015 to strengthen our business, have us well positioned to achieve increased distribution and velocity as the year progresses. We are excited about our growing brand around us and innovative new products. Later on today's call I'll share my thoughts on our future opportunity.

But first I'd like to review some of the highlights of our first quarter. Our quarterly sales results were primarily driven by increased distribution across new and existing customers. A few recent highlights included the five SKUs additional -- five additional SKUs at Walmart consisting of three Kroger and two Protein Kefir items.

Three Protein Kefir items that were brought into Waypoint Group of stores which include ShopRite. Two Protein Kefir addition at Kroger and some of these distribution increases were partially mitigated by softer performance in the natural channel.

Beginning in the second quarter to promote our recent distribution wins for ProBugs, we have begun expanding our advertising and marketing initiatives that are on ProBugs to support continued growth. This month we plan to host over 500 demos at Walmart across the country to drive increased awareness and target existing and new customers.

These in store products panels coincide with our second national television commercial which we aired for the first time last week. This time around focused specially around ProBugs telling the story of its initial creation and the multiple benefit to provide to children.

This targeted addressable media campaigns for ProBugs will continue through the end of June. As many of you are already aware Lifeway is a leading manufacturer and marketer of Kefir in the United States. Based on recent IRI data referenced over 92% of total U.S. households were spending their Kefir dollars on the Lifeway's brand.

This is a tremendous accomplishments and while we have historically been primarily focused on the development of drinks and food related probiotic dairy products we believe that we also have a strong opportunity to expand into new product categories behind the strength of the Lifeway brand and our successful history of innovation.

I'm excited to share that we plan to introduce probiotic supplement. For those of you who have the pleasure of seeing -- who we had the pleasure of seeing at National Products Expo you may also have to have the opportunity to try our new Lifeway probiotic supplements for adult and chewable's for children.

Our probiotic supplements in a pill form were designed with the on the go travelers and women in mind. We plan to introduce three spheres each formulated with live and active cultures that help keep digestive and immune systems happy and healthy.

In addition to our new probiotic chewable's for kids for a gentle and the effective way to restore and balance the good bacteria in the digestive track and support healthy immune function in children three years of age and older. Each supplement tablet includes nine probiotic and will be available in strawberry and grapes flavors.

As discussed in our previous conference call this past February we teamed up with designer Cynthia Rowley to launch an exciting collaboration with the specially design battle and limited edition flavor Hibiscus Rhubarb Pie.

We are pleased that both that companies [ph], Crane and other successful fashion bloggers recognized Lifeway through our successful unconventional marketing strategy and ability to make Kefir relevant and exciting.

The new flavor hits shelves in April and we have been very pleased with the initial positive response from retail partners and consumers so far.

Focusing on efforts to educate and connect with consumers on the multiple benefits of Kefir and our probiotic products we announced the appointments of two time Olympic gold medalist and FIFA World Cup Champion Carli Lloyd as our new brand ambassador.

She will star in Lifeway's third national TV commercial that will air in the 2016 Summer Olympics in Brazil. Additionally. She will appear in a series of events on behalf of Lifeway. Like me she will also share her experiences with Lifeway on social media where she has more than 638,000 Facebook and 670,000 Instagram followers.

We're very excited to welcome Carli as our newest Lifeway representative and look forward to partnering with her as we share our passion and how nutrition can help one to achieve a healthy and happy lifestyle.

Focusing on the retail side of our business for a moment, we are currently in the process of rebranding the Starfruit Café to the Lifeway Kefir Shop. Our goal here is twofold, to both strengthen and reinforce a Lifeway brand, Soft Serve Frozen Kefir is now being sold under the Lifeway name in over 40 locations across four states.

This Pivot to the Lifeway Kefir shop allows us to continue educating new audiences about the benefits of Kefir who are expanding faster vertical.

Finally, before I turn the call over to John, I'd like to welcome our newest team member at Lifeway, Jennifer Reilly who has joined us as Senior Executive Vice President of Sales at the beginning of this month.

Jennifer is a seasoned executive with strong track record of success, she most recently led National Accounts and Sales Planning Teams for Quaker Oats, a division that generates over 3 billion in sales annually for PepsiCo.

Additionally, she led the sales and retail execution teams at Gatorade, Tropicana, Quaker, Müller, Naked and Emerging Brands across North America and established retail and customer relationships.

We welcome Jennifer to the Lifeway team and believe she will play an integral role in our long-term growth plan by driving increase distribution of the Lifeway's healthful, nutritious kefir and other probiotic products. In summary, we are very pleased with our results for 2016.

We're confident in our strategic plan and long-term growth opportunities which we believe have well positioned to achieve continued growth this year and beyond and as a remainder, these initiatives increasing Lifeway's brand awareness, developing new innovative products and finally expanding distribution across sales channels and geographies.

We will continue to execute against this plan as we grow our business and return value to shareholders. With that I'd like to turn the call over to John to discuss our final results in more details.

John?.

Thank you, Julie. Good afternoon to all of you on the call today. I'd like to take some time now to briefly review the financial results of Lifeway's first quarter. As Julie mentioned first quarter net sales increased 10% to $32.6 million from $29.6 million in the same period last year.

The first quarter net sales performance continued by higher volumes by the company's Lifeway Kefir products slightly offset by increased trade promotions and customer allowances.

Lifeway's first quarter gross margin rate decreased to 26.4% from 28.3% in the same period last year, primarily due to increased manufacturing overhead cost primarily related to Waukesha facility which continued to expand its production volumes during the quarter. Milk prices were essentially flat versus the year ago period.

Selling expenses decreased approximately 10.8% or $0.4 million to $2.9 million during in the first quarter of 2016 from $3.3 million in the year ago period. The lower of selling expenses was driven in large parts by lower advertising programs in the first quarter of 2016.

Lifeway's general and administrative expenses increased $0.9 million to $4.4 million into first quarter from $3.5 million in the year ago period. The increase in our G&A cost reflects increased professional fees associated with accounting, legal and regulatory compliance functions.

Moving to income taxes, Lifeway's effective tax rate was 38.8% in the first quarter of 2016, compared to 49.9% in the first quarter of 2015. The lower tax rate in the first quarter of 2016 was driven by the deductibility of certain operating expenses for federal income tax purposes that were not fully deductible in 2015.

Lifeway's Net income for the first quarter was approximately $0.6 million, or $0.04 per diluted share compared to net income of $0.7 million or $0.04 per diluted share in the same period last year. Finally, under our share repurchase program we bought back 39,000 shares of common stock at an average cost of $440,000 during the first quarter.

As of March 31, 2016 approximately 76,000 shares remain available for repurchase under our share repurchase program. As a remainder the share repurchase programs have no expiration date and maybe suspended or discontinued at any time. That concludes my planned remarks and now I'd like to turn the call back over to Julie for her closing remarks. .

Thanks, John. We are pleased with the start of our year and expect 2016 to be an exciting year of improved performance for Lifeway. Going forward, we are focused on our long-term strategies and our confidence in our ability to drive increased value for shareholders. That concludes our overview for the first quarter 2016.

Ed, John and I would now like to open your call for questions.

Operator?.

Thank you. [Operator Instructions] Our first question is from Eric Gottlieb of DA Davidson. Please go ahead..

I'm going jump around a little bit here.

So the increase in cost for the Wisconsin facility what are your expectations for those going forward, are they restricted to the first quarter?.

Eric. This is John Waldron. I think our expectations with regards to Waukesha is that we continue to scale up.

I think we've mentioned this on or prior call but we have two filling lines and they are fully up and operational in walker shop that facility has the capacity to take on at least 10 additional filling lines and so our expectation overtime not necessarily obviously within the current physical year is that we would scale up to that kind of level of production and of course consequential to that we would continue to lever the fixed cost structures that exist with Waukesha and would benefit of the gross profit late overtime.

In terms of the balance of the fiscal year I think we don’t see much changing near the way of the existing cost structures, our ability to deliver more throughput against that facility is consequential of what will come from our sales efforts and our marketing efforts, which I think were bullish on what's happened in the back half of the back three quarters of the year in terms of top line performance.

And so if we scale up more volume in the back three quarters of the year we would expect some marginal late benefit..

Okay and then the increase in professional fees I think you gave a good explanation as to why but again are those restricted to the first quarter are there any spill over's going forward?.

I don’t think our expectation is without pacing it by the quarters, I think our expectation on a full year basis is that we will approach a seven figures step down in our total professional fees absence some unexpected events, we’re seeing a step down in the professional fees order of magnitude approaching million dollars. .

Okay alright. And then tax expense. I know it's a kind of an iffy number of given you’re coming off of -- you’re getting the relief here.

But is 38% to 39% the way to think about this?.

Yes, so I think we think for the full year the rate looks like a 39% number and the things that could change that would be some discreet events such as a change in the tax law or an event with a tax authority and adverse event with the tax authority, so our present expectations is, we’re right at 39% and so movements up or down from there would be consequential of those two types of events and that will be the only thing that will move the rate..

Got it and then I guess this is for Julie.

So the sales growth, what product lines were you seeing in the most growth from and if you can answer, where are you giving the most discount?.

So we are seeing a lot of growth in whole milk, our whole milk Kefir lines and our ProBugs line and our Protein line, our conventional 32ounc line those would be the top kind of the products that we’re really focused on really scaling up and have seen the biggest sort of mass appeal.

And then we always have innovation in the pipeline and some of it is strategic, for example we realized that there are folks that are on restrictive diets or are travelling and they’re on the go and maybe are not able to buy our product regularly and perhaps they’re on a dairy free diet and so to not missed that customer and make sure that they are still in the Lifeway product lines as regularly uses of our brand, the supplements are necessary.

So there is things like that that we really look at and consider as we look at innovation. So -- and then in terms of -- what was the second part of the question..

Where are you giving the most discounts, I assume that's a pretty much the same answer..

Yes the product that we are pushing out the most have the most discounts..

And then the new senior sales person, Jennifer Riley what are her responsibility, what are her focus and will there be a change in strategy of any kind?.

Not so much a change in strategy just more sophisticated thoughtful approach to how we do things and with start of the big corporate company expertise I guess the Lifeway really grew from the ground up and we are looking to Jennifer to expand and grow Lifeway.

So that capacity that we just filled out in Wisconsin gets maximize as quickly as possible, the momentum and the market forces are really at our back right now, we are not a startup, we are a company that’s been around so a long time, we have a proven track record, we have royalty within our customer basis and an awareness within the food space and the diary space and all those things coupled with this new capacity that we just build out, gives us the opportunity to really make Kefir the next biggest food thing, take over some of the Greek Yogurt.

Greek Yogurt is pretty much flat, we want to take and transfer some of those users into Kefir users.

We know that's a probiotic categories across globally will be doubling in the next five years, so that means a huge market opportunity and so Jennifer is really charged with maximizing our sales efforts, expanding our sales channel, expanding a lot of the new innovations that we've recently launched and we're putting some of the marketing dollars and the advertising that we've never done, we've never spent any money on ProBugs for example.

A lot of that was just by word of mouth and through people learning about it and it was really targeted to like a whole food shopper. Now that we have the extra capacity we can push a little bit on that lever and expand the ProBugs via both distribution and market awareness. But we have the successful pilot. So, we know that we can scale it. .

Got it. The SG&A again, so the newer commercials with Carli Lloyd and I guess the marketing investment there, is there an increase we can expect in SG&A expense and if so when will those hit.

Yes, we will be adding into our marketing and advertising budget through -- just after the Olympics, let say through the fall and we really felt it was important to be part of the conversation around the Olympics and really connect with users and with families as they come and join together and watch the Olympics and certainly the women, U.S.

women soccer team and Carli and her team are going to be one of the most watched Olympians this summer.

So we knew that it was really important that we were part of that conversation and especially at this critical time, when we're trying to take market share and expand our business and then specifics in terms of how it's going to hit our balance sheet all that time go into that..

Just in terms of the timing Eric, in the second quarter, we currently have an advertising campaign that is live and running, Julie, can comment on that a little bit more and she have some of that [indiscernible], so in the second quarter you should expect that we're going to have this -- you will see a step up in our spending in the selling line particularly in the advertising line, the shape of the advertising number is disclosed in our 10-Q, I don't have it in front of me but you will see, we were soft versus a year ago on our spending in advertising in the first quarter.

It will steps up in the second quarter of 2016 and then we're working on programs now, commitment not yet confirmed, but I think in the third quarter you will see a steps up again with respect to the Olympics and so on a full year basis, I would tell you that, in terms of the advertising spend, we see the outcome for the full year being at least where we were with the 2015 year and then likely we would actually spend higher than that, higher than our 2015 spending, assuming we have the sales performance that we're looking forward here in the second quarter.

So that's kind if the timing of these advertising spends for the balance of the year that will be reflected in the selling line..

Okay, great and then last question. Do you went through kind of as Julie, free ProBugs at Wal-Mart, free Proteins at ShopRite, could you just repeat those or may that can get offline..

Yes, it was additional Wal-Mart distribution of ProBugs and Protein. It was the additional wake fund distributor with ShopRite.

Additional, Protein Kefir at Kroger and then I mentioned that some of it was mitigated by a little bit of softer performance with the natural channel which I mean, I think we all are aware that the national channel itself is getting -- competing forces from mass market, stores like Wal-Mart and Target and becoming hybrid stores.

So, just keeping that in mind. .

Great, thanks for the additional color. I'll pass it on..

Thank you. The next is question is from Howard Halpern of Taglich Brothers. Please go ahead. .

First question, I guess, in regard to just some of the relatively new distribution agreement you had in 2015 and how they're progressing in terms of the [indiscernible], they acquire heath stores and getting through I guess to that 1,700 store level at Target..

Yes, I think that's what we are really looking to help us maximize those distribution channels, I look at just untapped opportunities within hospitality, within away from home sales, just lots and lots of opportunity, we haven’t even scratched the surface on.

That I think is exciting to look at and again to going back to that extra capacity that we now have that we didn’t have a year ago and I mean is exciting. I'm not sure if anybody saw a recent Google search report that came out, but as mentioned that top trend, the most researched work in food via Google and Kefir was on that list.

So I think we are on the verge of really -- you know we've done a great job where at that 150 million mark roughly 130 to 150 and that is where we’ll hit that milestone and now we are looking at that next level and that capacity out of Wisconsin can get us the 500 million.

So it's really going to all be marketing, advertising, increased consumer awareness around the benefits of probiotics and making sure that when they think of probiotic they think of Lifeway and then we can deliver nutritional health based on science, not just whatever.

But real science behind the benefits, which is what we’re all looking for?.

Okay and then in terms of I guess the supplement are you going to manufacture that in house?.

No that's going to be made for us based on a specification..

Okay.

And what type of margins are you going to -- do you anticipate being able to drive on those?.

There was the margins on supplement are actually really good, but we are also looking to really market them aggressively as well and do you think like subscription boxes, like I like to look at a probiotic subscription box looking at distribution or online sale, things like that.

But specifically for margins, I don’t know that we've broken down what margins we’re going to be taking to --..

It's too early for us to know and too really disclose what margins we are looking for and what the margins are on these types of products and especially what are our strategy is for going to market with those?.

Alright, and one last one, you talked about hosting demos and such now are you going to use, I guess the cost involved, is that going to maintaining within that level of the allowances and discounts and promotions in the discounts or is that going to bump up a little bit as you go forward..

So I mean when we look at demos we always -- we feel like that's a win-win because the product is being sold off. So yes we are paying for a demo but we are also selling products live off the shelf at significantly higher rate than when it's not on demo.

So I don’t really feel like it's a big cost I think it's at least a math, when products is on demo it dramatically offs the chart on sales. .

Okay so it's really almost on a cost plus basis, if the accelerator of that one goes up..

Yes, kind of yes. That's how I think about it. In store demos especially where the consumer has the option of purchasing it right on the spot a solid way to reader earn some money and promote the product right there, where they are making a decision. .

Okay while keep up the great work guys..

Thank you. There are no further questions at this time. I would like to turn the conference back to management for closing remarks..

Thank you for your participating today. We appreciate the hard work and dedication of our employees and the support of our loyal customers and shareholders. We look forward to sharing our 2016 quarter results with you in the next coming six months. Thank you..

Thank you. Ladies and gentlemen, this does concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation..