Good afternoon. Welcome to Lifeway Foods' Fourth Quarter and Full Year 2022 Earnings Conference Call. On the call with me today is Julie Smolyansky, President and Chief Executive Officer. By now, everyone should have access to the press release that went out this afternoon.

If you have not received the release, it is available on the Investor Relations portion of Lifeway's website at www.lifewayfoods.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 believes, 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 afternoon to everyone joining us today. As always, we greatly appreciate your interest in Lifeway Foods. I'm thrilled to be speaking with you today, regarding our full year 2022 earnings results. A record-setting year of growth for our business.

Before discussing our strong results, I would like to first call out the incredible efforts of the entire Lifeway team whose efforts and impressive execution allowed us to deliver seamlessly for our valued partners and customers, despite the challenging industry-wide operative environment presented to us this year. .

Quite simply, we crushed it in 2022 and delivered the highest recorded year of sales in our company's history. This top line record reflects the efforts of the great team we have in place, as they effectively executed on our Lifeway 2.0 strategy throughout the year and the continued dominance of our core Lifeway Kefir assortment.

This was my 21st year as the CEO at Lifeway Foods. And on the back of our strongest year yet, I couldn't be more pleased with our business, as it stands today. .

Now I'll review our full year 2022 results. Our record high annual net sales were $141.5 million for the year ended December 31, 2022, an increase of $22.5 million or 18.9% compared to the prior year.

The net sales increase was primarily driven by our higher volumes of our branded drinkable kefir and the impact of price increases implemented during the year and, to a lesser extent, the favorable impact of our acquisition of GlenOaks Farms during the third quarter of 2021. .

Year-over-year, our net sales grew every single quarter this year, a result of our enhanced focus on our flagship Lifeway Kefir product with the fourth quarter, marking our 13th consecutive quarter of growth. Our growth is even more impressive when you consider we are lapping a markedly strong year in 2021.

When compared to 2020, our record net sales grew 38.8%, and we're up 51.1% when compared to 2019. .

While we did implement price increases this year, it's important to note our premium better-for-you offering grew in both consumption and dollars for the year. These increases in Lifeway Kefir volumes despite a higher price tag illustrate the success of our customer acquisition strategies and the stickiness of our active customers.

In addition, we reported a gross profit margin of 18.9% for the year ended December 31, 2022. As we've discussed throughout the year, like our industry peers, we are not immune to the broad macro headwinds that have affected our space. .

This year, we incurred incremental costs from inflationary price increases on raw materials, particularly milk, our core commodity as well as packaging and freight.

As we've disclosed previously, we thoughtfully took price throughout this year to account for the COGS inflation in an effort to minimize the negative impact to our bottom line and margin performance, while we pursued further sales growth. .

Additionally, I'm pleased to say that we are now beginning to see milk prices stabilize, which will keep a close eye on, and which could lead to more favorable milk pricing for our business later in the year. We intend to continue to prioritize margins moving forward and search for incremental productivities to keep them as stable as possible. .

Moving on to expenses. Selling, general and administrative expenses increased $1.2 million to $23.9 million for the year ended December 31, 2022, compared to $22.7 million in the prior year.

The increase is primarily result -- a result of increased legal and professional fees, which include expenses related to the fiscal year 2020 Form 10-K restatement. .

With the increased SG&A, our selling expenses increased $207,000 compared to the prior year, as we maintained high levels of strategic investments behind our core products to expand awareness and drive velocities.

Our net income during the year ended December 31, 2022, was $0.9 million reflecting an EPS of $0.06 per basic and diluted common share compared to the net income of $3.3 million reflecting an EPS of $0.21 per basic and diluted common share, during the same period in 2021. .

growth capital, cost reduction and facility improvements. .

The growth capital supports new product innovation and enhancements. Spend on cost reduction and facility improvements support manufacturing efficiencies, safety and productivity. Our continued capital commitment reflects our goals as a business to continue growing and improving our internal efficiencies. .

To summarize, 2022 was a remarkable record-breaking year for Lifeway Foods. Our brand delivered growth in each and every single quarter of the year, leading to our highest recorded annual sales of $141.5 million. .

As far as the drivers for sales growth, we continue to strategically invest in sales and marketing with a focus on promoting retention and growing awareness of our core Lifeway Kefir product.

We continue to enhance our relationships with current retail partners and customers, while also pursuing incremental distribution, highlighted by our convenience channel wins in the third quarter. Additionally, we put dollars behind our innovation strategy, highlighted by some of our recent product launches, that I will discuss momentarily. .

While the numbers themselves are strong, our performance is even more notable, given the current consumer backdrop. With high inflation and the anticipation of a recession on the minds of consumers, there is an expectation that they may begin to trade down or out of more premium products to value offerings.

That said, our strong net sales, which were weighted to the back half of the year, accompanied by positive consumption and accelerating velocities in certain key retailers demonstrate that our resilient customers do not seem willing to sacrifice their commitment to health and wellness, in spite of the increased macro pressures. .

In fact, recent data has shown that new customers to the Lifeway story are actually delivering greater velocities than previous customers who have turned. Our customer base commitment to fortifying their immune system with healthy products and the strength of our new consumers should prove to be a tailwind, as we look ahead. .

During 2022, Lifeway grew in double digits by both consumption and total dollars, putting us in a strong market position. With the acquisition of GlenOaks Farms and the growth of Lifeway brands, Lifeway Foods is now the ninth largest yogurt manufacturer in the United States by sales.

We have worked to bring new customers to the category, retain existing customers and increased the number of items purchased by current customers. Panel data from IRI shows that likely increased loyalty for existing shoppers to 75%, earning the top spot in adult yogurt and kefir drink segment. .

The first-time -- and first-time Lifeway buyers repeated at an impressive 35% rate. Panel data focused on shopper demographics show that our inclusive market efforts also produce gains among the Hispanic and Asian households. As our purchase velocities have risen, our ACV, a measure of distribution has also grown in the past year.

We have increased our distribution 2.4 points, within the multi-outlet category and have increased our distribution 7.3 points in the natural segment. .

Lifeway's Kefir 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 immune defense has come 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 the gut brain access, which links the emotional and cognitive centers of the brain with our intestinal function, and plays a major role in happiness and well-being. .

As today, customers learn and focus more on their health, they will care even more about those facts and the bacteria in their microbiome, which should be of great benefit to Lifeway product portfolio. With the dominant market share and 36 years of experience within the space, Lifeway commands the U.S.

kefir industry, and we don't expect to lose that strong foothold anytime soon. .

With that, we believe we are best positioned to capitalize on this continued growth of the addressable market within kefir. While we have been nimble in the path to adapt to customer trends and behavior through innovation.

A recent example being the rapid onset of alternative dairy products, the core driver of our business has always been our industry-leading drinkable Lifeway Kefir and it continues to grow with the market. .

After a notably strong year in 2021, our drinkable kefir net sales increased $14.4 million or 15% in 2022, when compared to the prior year. Selling Lifeway Kefir is what we do best. It's healthy, delicious and extremely dynamic in its uses, and it's exactly why our customers love us and keep coming back.

As we look ahead, we will keep pushing and pursuing incremental brand awareness and exposure with continued marketing investments, assess further distribution opportunities in current and new channels and innovate within the drinkable kefir space to increase the scope of our products within the market. .

An example of innovation within Lifeway is illustrated by our latest flavor launches. Guava Lowfat kefir, Organic strawberry-banana Whole Milk Kefir, Organic Black Cherry Whole Milk Kefir, along with seasonal flavors, Rainbow Cake and Lifeway Kefir and Campfire S'mores Lifeway Kefir.

All recently introduced at Natural Products Expo West 2023, in early March. These new products further diversify Lifeway's portfolio and present an opportunity to increase SKUs and distribution within our retail partners.

The reactions we received from retailers and customers from taste tests at Expo West were extremely positive, and we expect some of these new products to hit shelves in April. .

I'll now touch on some of the marketing and advertising strategies. In 2022, we received over 300 media placements and target outlets, including features with Fox Business, Forbes, Good Housekeeping, mindbodygreen, Women's Health and more. Resulting in a potential reach of more than 1 billion impressions.

Our strong PR presence is supported by paid omnichannel advertising campaigns that highlight the benefits of kefir and tell the Lifeway brand story. We are currently running a targeted campaign in focused markets to help us build awareness and drive trial.

This advertising effort is a combination of linear broadcast, CTV, digital and integrations in both English and Spanish. The campaigns conclude at the end of Q1, and I look forward to sharing more detail in our next call. .

As I previously mentioned, in late 2021, we began a marketing program with the Immersive Van Gogh experience, a national exhibition showcasing Van Gogh's artwork through lights, music, movement and imagination in 22 major U.S. cities.

This provided opportunities for in-person experiential marketing that allowed us to connect with our customers, on a deeper level on their path to wellness. .

We wrapped up the campaign in January of 2023, with a total of over 50 million paid in organic media impressions, over 700 yoga classes and more than 1,000 sampling sessions. Our events team is now focused on the Lifeway Kefir shop pop-up experience in Miami Beach.

This Lifeway branded Cafe will give visitors a chance to taste, a wide variety of smoothies made with Lifeway Kefir and Lifeway Oat. Located on very busy Lincoln Road, this destination location is a great way for us to connect with consumers in a warm climate, while many in the rest of the country are still experiencing chilly weather.

We look forward to serving lots of smoothies and sharing the Lifeway story with Miami locals and vacationers, from now until May. .

Additionally, we continue to work with notable chefs, influencers and nutrition experts to suggest healthy ingredient swaps, recipes and snack ideas incorporating Lifeway products, across our social media.

Lifeway social channels now have well over 1 million followers, and our brand website sessions are up significantly when compared to the prior year.

We partner with these digital campaigns and with in-store programs to attract new customers to the brand, as well as incentivize customer retention, and we look forward to strengthening our relationships with these retailers in 2023, as we introduce new items. .

Now I'll touch on some of the operational highlights from the year. In the first half of the year, we had 3 big wins. First, regaining distribution at the fresh market after a 3-year absence; second, earning a rotation at Costco Midwest; and third, converting Food Lion from private label offerings to our Lifeway branded products.

Each of these wins have further aided our efforts in continued growth and enhancing Lifeway's customer awareness. .

In the second half of the year, our most notable win was our penetration into the convenience category. In the third quarter, we announced distribution deals with Pratt Pantry, an organ-based chain and Wawa, a prominent convenience chain in the Northeast.

We began shipping with Wawa in late November, and the results have been encouraging with solid velocity metrics so far. Since our inception, Lifeway has traditionally grown its operations within the grocery channel.

This penetration into small-format convenience, reflects a new distribution strategy we are assessing as we are looking to increase our presence in high visibility away from home location. .

Additionally, though not a new strategy, I'd like to touch on Lifeway's non-U.S. business. As a reminder, while the United States accounts for nearly all of our business, we also distribute to Mexico, Ireland and France. We have recently secured placements at casino stores in France, and our performance in Mexico was notable, with sales up 11.2%.

In the year ahead, we aim to evaluate further opportunities to expand distribution at traditional grocery, as well as convenience and small formats. In an effort to get our brand name in front of as many relevant customers as we can. .

In summary, 2022 was nothing short of outstanding. This record-breaking year has given us even more confidence in the long-term strength of our business and the ongoing demand of our flagship Lifeway Kefir.

We remain committed to growth, look forward to continuing this wonderful momentum into 2023, and believe we are on the right path to achieving our primary targets.

Delivering profitable and strategic growth to our investors while furthering our mission to provide best-in-class probiotic and nutritious foods to improve the health and well-being of our customers. .

Thank you all very much for listening to the call today and, more importantly, for your interest in Lifeway Foods. I look forward to providing you further updates on our growth and in our first quarter of 2023 earnings call. Have a great evening..