Lifeway Foods, Inc. (LWAY) Earnings Call Transcript

Greetings. Welcome to Lifeway Foods, Inc. Third Quarter 2026 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to John Gudeminaco, Investor Relations from ICR. Thank you, John. You may begin.

Good afternoon. Welcome to Lifeway Foods' Third Quarter 2026 Conference Call. On the call with me today are Julie Smolyansky, Lifeway's President and Chief Executive Officer; and Eric Hansen, Lifeway's Chief Financial and Accounting 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. The words believe, expect, anticipate, plan, will 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 during today's call, except as required by law. All of the forward-looking statements contained herein speak only as of the date of this call. And with that, I will turn the call over to Julie Smolyansky.

Thank you, John, and good afternoon to everyone joining us. As always, we greatly appreciate your interest in Lifeway Foods. We're excited to be hosting a live call today, and I look forward to taking your questions in a few minutes. Before I get into the numbers, I want to acknowledge the Lifeway team. This year has tested us so far and you have answered with relentless focus and execution to continue delivering outstanding results as you always have been. We are grateful for everything you do. I will start with the highlight. Our momentum continued into Q3 as we delivered yet another record-breaking quarter. Third quarter net sales reached $67.8 million, the highest quarterly net sales in our company's history. This was our 28th consecutive quarter of year-over-year net sales growth, marking 7 years of uninterrupted quarterly growth driven once again by higher volumes of our flagship Lifeway kefir and our high-protein Lifeway Farmer Cheese and partially limited by capacity challenges that I'll get into shortly. Through the first 9 months of the year, net sales were $197.7 million, up 25.8% and equal to approximately 93% of our full year 2025 net sales we are well on pace to shatter our annual net sales record in 2026, which will build on 4 consecutive record years from $141.6 million in 2022 to $212 million in 2025, and we have plenty of runway ahead of us to keep chasing high bars that we've set for ourselves. People are noticing this consistent performance and growth engine that we've developed. In October, Fortune named Lifeway to its 2026 list of 100 fastest growing companies in America, ranking us #45. Fortune builds this list by identifying companies across every industry in the country and evaluating their past 3 years of growth in revenue, profits and stock returns, putting us in the conversation with very elite peers. This is an incredible recognition and the honor belongs to our employees, shareholders and our value customers who make Lifeway a part of their daily routine. A cultured dairy company, my father founded in 1986 now stands among the best-performing businesses in America. We do not take it lightly, and we don't plan to stop anytime soon. For 4 decades, we have built a category and defined what authentic real kefir means in the United States. Today, consumers want protein, they want gut help and they want real food made with real ingredients. Alongside that, a growing population of GLP-1 users are looking for nutrient dense probiotic rich foods that support satiation and digestive health. Kefir sits right at the corner of all those health and wellness trends and no one has spent more time and built more trust in this space than we have. That long history at the top is exactly why we are positioned to capitalize on this rapid demand. Our space is where the market is headed and our retail partners know it. They are looking for ways to dedicate more space to drinkable dairy. We have deep relationships with these retailers and as the category leaders with a track record of share gains and strong velocities, we believe we are well positioned to win that incremental space. We also greatly support the increased consumer awareness and market recognition of kefir. When more consumers discover this category, it grows and we benefit. As I mentioned before, we have encountered some capacity challenges, and I want to speak candidly about it. We've been building for the future and the future has arrived faster than we expected. Demand for our products is bumping against the limit of what we can currently produce in our own factories. Additionally, during the quarter, we scheduled a planned shutdown of our Waukesha facility for approximately 1 week to complete work related to facility improvements and the expansion project that we have discussed in previous quarters. We are working hard to get our optimized platform in Waukesha ready to meet the excessive demand we have created in this market. We will continue to add shifts and supplement production with co-manufacturing partners, but we foresee a major opportunity to capitalize on unmet demand in 2027. All that said, the solution is on its way. We expect the expanded Waukesha facility to begin manufacturing at its increased scale in the first quarter of 2027 with further packaging and automation processes slated to follow. That expansion will address the capacity challenges we have encountered and will allow us to even better serve the massive level of demand in front of us. At completion, the project will more than double the facility's capacity modernize our operations and improve efficiency. It is a worthy and necessary investment as we tackle the next stage of our growth. We are grateful to the local Waukesha and Milwaukee business community and the Wisconsin cheesemakers Association for their partnership and support of our Waukesha operations. Despite these capacity limitations, we still grew nearly 19% this quarter and we would have grown even more if we had the space and equipment. It is a good problem to have, but it is still a problem, and our team is laser-focused on resolving it. Turning to profitability. Gross margin was 18% in the third quarter, reflecting continued pressures from an elevated input cost environment. Milk prices, a key input for us rose approximately 26% in the second quarter compared to the first quarter and eased only minimally in the third quarter. Rising oil prices were a significant headwind as well. as they drive our packaging and freight costs. Looking ahead to the rest of the year, we expect our average milk cost to be higher in the fourth quarter than in the third, and we expect packaging ingredients and transportation costs to remain at elevated levels. With that said, what we can control, we are acting on. We have been working with our retail partners on price increases across our portfolio which will begin to take effect on a rolling basis through the end of the year and into first quarter 2027. In the current environment, certain retailers have been hesitant to accept price increases across the industry and we have seen that, too. Still, our partners have been collaborative and they value the performance Lifeway products bring to their stores. Overall, we view this margin pressure as temporary, but the timing of cost relief depends on factors outside of our control. However, with the pricing actions we have taken and the productivity gains we anticipate from our capacity investments, we do expect gross margin expansions and improved profitability in 2027. Selling, general and administrative expenses were 16.2% of net sales compared to 19.6% last year. leveraging more than 300 basis points. Year-to-date, SG&A was 17.2% of net sales compared to 19.1% last year. We are delivering operating expense leverage even as we continue to invest in marketing and brand awareness to drive record level growth that we're achieving in 2026. Net income was $0.3 million or $0.02 per basic and diluted share in the third quarter compared with $3.5 million or $0.23 per share last year. We remained profitable despite the elevated cost environment even while we continue to invest behind our brands and initiatives that lay the foundation for our long-term profitable growth. We have navigated inflationary environments in dairy cost cycles before. And as we have always done, we will remain disciplined. We have a strong financial base and will balance growth investments with profitability. However, we have a leading market position in growing categories and long runway ahead of us with significant household and distribution white space. And we will not trade the long-term health of our brands for a short-term fix. We believe our significant track record and growth is evident of how this team executes, and we intend to keep proving it. Alongside the strength of our flagship drink kefir, our adjacent product offerings continue to perform as well. Farmer Cheese is gaining awareness and continues to grow and has recently earned space at select Target stores. Additionally, our new organic Farmer Cheese is now on shelves at [indiscernible] and Sprouts. Muscle Mats has made its way to Kroger and Wegmans and Kefir butter is now available at buyers. This is just new product placements, and I encourage everyone to seek these incredible new items out at their local grocers. We continue to introduce Lifeway kefir to expanded audiences with new consumption occasions. We recently brought Frozen Kefir back to soft-serve machines through the food service channel. Lifeway pioneered frozen kefir back in 2008. And today, our soft serve made with real kefir rather than a powdered mix is available at trend-setting frozen yogurt destinations like drugstore, Megan and the Culture Club with a growing presence in New York, Chicago and Los Angeles and beyond. Lifeway continues to build momentum through high-impact marketing initiatives, including our recent Chicago and broadcast television debut of our popular social media, commercial featuring Chicago football starts Colston, Loveland and the Andre Swift. The debut was followed by the launch of a new digital campaign starring the athletes further expanding the partnership's reach and engagement. These campaigns mark another milestone in a standout year for Lifeway's marketing efforts, which have included viral recipes, high-profile brand collaborations, strategic partnerships, and marquee events that further elevate and awareness, drive consumption and connect with new audiences. To wrap up, the third quarter showed both the power of our platform and the size of the opportunity in front of us. We delivered the highest quarterly net sales in the company's history, extended our growth streak to 28 consecutive quarters and were recognized by Fortune as one of America's fastest-growing companies. Consumer demand and the tailwinds behind healthy functional foods remains powerful and as the category continues to grow, Lifeway continues to lead the way. Our priorities remain clear: win new consumers earn more shelf space accelerate velocities and convert today's heightened interest in Lifeway into durable repeat purchasing. We have the right team in place to meet the moment, capitalize on this demand like no one else can and deliver long-term shareholder value. With that, operator, please open the line for questions.

[Operator Instructions] Our first question comes from Rob Dickerson with U.S. Bancorp.

Maybe if I can just touch on the capacity challenges you had in the quarter and just kind of the commentary around. It sounds like demand is like kind of nearing or starting to potentially outstrip supply, but then you have the scale up of the Wisconsin facility coming on in Q1 and then the comments about how that should really help next year. So I'm just curious, as you talk to some of your core customers and maybe even potential new customers, is the idea like as soon as that facility is up and running with the modernized I guess, the modernized lines and the incremental capacity that all of a sudden like there should be an infill, right? Like I've seen before, like there's maybe more demand than you can really meet. But does that mean that like inventories are being drawn down. So it's going to get through part of next year, at least that there will be some inventory build and maybe given some growth potential that's outside beyond 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.

Okay. Great. And then I guess if I just think about a customer, I don't know, like, let's say, Costco, right, where I think you have some presence in part of the country. Would you say kind of simplistically that as the capacity increases that it's clearly a lot easier to kind of increase that overall distribution? I'm just trying to gauge like kind of what the real potential is kind of versus where the capacity is. So we fix the capacity issue. It's not -- it's kind of a high-end problem. Does the distribution gain potential kind of follow with incremental capacity?

Yes, correct. I don't expect 2027 to be a conversation around capacity. The majority of 2027 will have full capacity. So that should not be an issue. And correct. Right now, we're in a handful of Costco DCs. And those are conversations that we're having with all the DCs nationwide and planning for that. And this is growth at scale. So it's not small chunks of opportunities, but it's pretty significant growth opportunities with no more capacity restraints.

Okay. Great. And then maybe just 1 more for me. I think you had a comment that milk cost to be a little bit higher in Q4 versus Q3. And I mean, obviously, that's a fluid situation, a lot going on right now in the commodity market. in the commodity markets. I think kind of originally when we thought about or you kind of discussed '27, right? There's the profit enhancement drivers potential coming from the Wisconsin facility coming online then clearly, the pricing, right? It sounds like that starts sometime kind of later Q4.. And then there was also like this normalization of milk costs, which, again, I mean, sometimes it goes up and down, and it kind of depends on the day, So it sounds like there's still margin upside potential next year. I mean we're -- hopefully, this is trough, right? It's not good right now. But that kind of perspective on that margin kind of recovery potential next year is like, I guess, I'll just say loosely, like pretty good, but maybe like not as good if milk doesn't normalize, I trying to keep this going basic.

Yes, for sure. I totally understand. We believe that milk prices will be stable in and we are taking that pricing that's going to be going into effect on a ring basis in fourth quarter in December, throughout 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.

Our next question comes from Balzhan Tleuzhanova with Freedom Broker.

Sales growth continues to be driven mainly by higher volumes. Could you give us more color on how much growth is coming from stronger sales at existing stores versus new distribution? And are you seeing more customers coming back to buy regularly?

Yes. Our growth reflects strong consumer demand for Lifeway and the broader fair market, probiotic and fresh cheese categories. We continue to benefit from this growing interest in gut health, protein, functional nutrition and GLP-1 dietary needs. Kefir and Farmers Cheese is going to remain the foundation of our business. And while we do have a strong innovation pipeline and that creates a tremendous opportunity to reach new consumers. We're really well positioned to benefit from some of these shifts in consumer health and wellness. And there's just like an overall shift towards real food that delivers greater nutritional benefits and sort of nutritional maxing is what we're seeing along with convenience. And so yes, we'll see continued growth from our core as well as an opportunity to bring in new consumers and incremental growth with some of our new innovation that we've launched in the last few months.

So you expect margins to improve in 2027. And while cost pressure is likely we will continue in quarter 4. So could you help us understand what to expect for gross margin in quarter 4? And how quickly it could recover in 2027?

Yes. So we expect our gross margin to be somewhere between our Q2 and Q3 percentages. We expect Q4 price increases to have 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. And we do believe that with milk prices stabilizing and pricing taking effect and then some of our operational efficiencies that we see in -- we'll see in Waukesha. We should be able to get back to 25% plus in our margins. Yes, if that's helpful.

Our next question is from Ben Klieve with StoneX.

First, I have a question about the welling maintenance shutdown that you mentioned in your prepared remarks. Can you, first of all, talk about the degree to which you had a similar shutdown in Q3 the prior year. And then also, is there any planned maintenance in the fourth quarter? Are you expecting a full quarter of production out of Waukesha?

Okay. Yes. So we don't specifically disclose the impact of that shutdown, but it did give us time for much-needed maintenance for the as the plant has been running for near capacity for months, We'll make up for this in 2027. We will continue to have some capacity issues in Q4, but 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 every 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 on track. And so we do expect significant capacity increases beginning in January, followed by additional improvements every month thereafter.

Got it. Yes. And that's helpful. And then, yes, 19% revenue growth in the quarter where you had a week of maintenance is pretty impressive. So congratulations for that top line in that context.