Good afternoon. Welcome to Lifeway Foods First Quarter 2021 Earnings Conference Call. On the call with me today is Julie Smolyansky, Chief Executive Officer. By now, everyone should have access to the press release that went out this morning.

If you have not received the release, it is available on the Investor Relations portion of Lifeway's website at www.lifewaykefir.com. A recording of this call 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. The words believe, expect, anticipate and other similar expressions generally identify forward-looking statements.

These statements do not guarantee future performance and therefore, undue reliance should not be placed on them. 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 call.

All of the forward-looking statements contained herein speak only as of the date of this call. .

And with that, I would like to turn the call over to Lifeway's Chief Executive Officer, Julie Smolyansky. .

Thank you, John, and good morning to everyone joining us. It is my pleasure to be speaking with you regarding our first quarter 2021 earnings report, and thank you, as always, for your interest in Lifeway Foods.

The first quarter of 2021 marked yet another quarter of revenue growth, our sixth in a row and has provided us a strong platform for what we know will be a great year here at Lifeway. I want to start today by thanking our employees for their commitment to take care of our customers throughout these unique times. .

Looking to the future, we are encouraged by the vaccine rollout and remain optimistic that by year-end, we will be emerging from this pandemic.

Despite a volatile environment over the last 18 months, Lifeway has deepened our relationship with our valued retail partners and customers while pivoting to meet the operational and marketing challenges of the current landscape.

Our dynamism and agility during this time has served us well, and we continue to pursue and successfully execute on our plan to drive growth and deliver value to our shareholders. .

Today, I'll review our first quarter 2021 results, which I'm proud to say, deliver our sixth consecutive quarter of year-over-year net sales increases. Net sales were $29.4 million for the quarter ended March 31, 2021, an increase of $4 million or 15.7% versus 2020.

This increase was primarily driven by higher volumes of our branded drinkable Kefir, approximately 30% of the increase in sales resulted from the Farmers to Families Food Box program with the United States Department of Agriculture, which began during the middle of the first quarter 2021. .

The Farmers to Families Food Box program, which began in May of last year, was designed as a temporary relief effort in response to the economic disruption caused by the pandemic. To date, the USDA contractors have delivered nearly 166 million boxes of fresh produce, milk, dairy and cooked meats to disadvantaged Americans across the country.

When we were contacted by partners assisting the USDA about manufacturing nutritious Kefir for the boxes, we were prepared and proud to participate. .

Operating leverage, and to a lesser extent, favorable milk pricing has also driven an increase in our gross profit margins from 23.6% in the first quarter of 2020, to 27.4% for 2021. .

Finally, with increased revenues and greater margins, our net income increased nearly 800% from approximately $150,000 in the first quarter of 2020 to $1.3 million in 2021. We continue to make progress in profitability as a result of our previously outlined Lifeway 2.0 strategy. .

growth, cost reduction and facility improvements. The growth capital spending supports new product innovation and enhancements. .

The cost reduction and facility improvements support manufacturing efficiency, safety and productivity.

While we understand that our results in 2020 benefited from increased demand due to stay at home trends and strong increase in grocery sales, our first quarter results underscore our confidence that strong demand for our healthy products will continue as we emerge from the pandemic and awareness around gut health and Kefir's contribution to the immune system as well as its contribution to mental health becomes more widely known.

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According to a 2021 survey conducted by the consumer market research firm Hunter, 71% of U.S. consumers say they will continue to cook more at home after the pandemic ends.

Also with structural shift towards working at home and therefore, eating at home, we believe our products will continue to gain traction with new consumers and have a high retention rate among existing consumers. .

Lifeway is positioned very well with regards to today's consumer interest.

Exciting scientific research surrounding Kefir, rising health consciousness, increasing attention to high-protein products such as Lifeway Kefir, and the benefits of Kefir for lactose-sensitive individuals are expected to drive growth in the global Kefir market by an estimated compound annual growth rate of 5% and expected to reach $146 billion by 2027, according to an analysis by Grand View Research.

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We are well positioned to capitalize on this growth in the market because our Kefir products are healthy, taste great and can act as the key ingredients and smoothies, soups, dips, dressings, desserts and so much more.

Lifeway works with celebrated chefs and nutrition experts to offer of healthy ingredient swaps, recipes and snack ideas on social media, which can be found -- also be found on our website. As we have mentioned in our previous quarters, we have stepped up our marketing campaigns to reach new consumers and reengage lapsed buyers. .

In the first quarter of 2021, we ran extended TV and digital marketing campaigns supplemented by brand integrations on the Drew Barrymore Show, The Dr. OZ Show and more. Further, we highlight our new distribution channel to Costco locations in Hawaii and California as being exciting opportunities and additive to our results. .

From a business standpoint, targeting today's health-oriented and tech-savvy consumer has paid dividends.

We continue to acquire new customers and see increased sales at our key retailers, building off the strong momentum from last year, sales attributed to advertising as well as our organic sales through online retailers are up substantially year-over-year.

Our products provide customers with probiotics, vitamin D and protein that help to support their gut health, immunity and mental well-being. The probiotics in Kefir support a healthy microbiome and approximately 80% of the immune defense comes from the gut. .

Probiotic products such as Kefir, are the focus of intense research related to the microbiomes role in stress, depression and anxiety.

We now know that up to 90% of the body serotonin comes from gut cells and that the brain-gut access, which links the emotional and cognitive centers of the brain with our intestinal function plays a major role in happiness and well-being. .

Consumers are more interested in these facts than ever before, and that is why Lifeway continues to resonate with consumers. We are very pleased with our first quarter 2021 results. Lifeway is emerging from the crisis focused on delivering profitable strategic growth. Our mission remains the same.

We're here to provide top-class probiotic and nutritious cooked food and to improve the health and well-being of our customers. I am looking forward to furthering our mission through the remainder of 2021 and into 2022. .

As a financial update, once again, net sales were $29.4 million for the quarter ended March 31, 2021, an increase of 15.7% from $25.4 million in the first quarter of 2020. .

Selling expenses increased to $0.6 million or 25.1% to $3.2 million in the first quarter of 2021 from $2.6 million in the prior year quarter. And we reported earnings of $0.008 (sic)[ $0.08 ] per diluted share for the first quarter of 2021, an increase from earnings of $0.01 per diluted share in the first quarter of 2020. .

We are very encouraged by the strong start to 2021 and believe we are well positioned for long-term growth and value creation and look forward to serving consumers with focus on increase in self-care, immunity and gut health. .

In closing, thank you for listening to this call today and for your interest in Lifeway. This concludes our overview for the first quarter of 2021. We hope everyone will continue to remain safe and we look forward to updating you on our ongoing progress and business momentum on our next call. Have a great day. .

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