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John Mills: Good morning. Welcome to Lifeway Foods First Quarter 2025 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 morning. 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’d 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 here and speak only as of the date of this call. And with that, I would like to turn the call over to Lifeway’s President and Chief Executive Officer, Julie Smolyansky

Julie Smolyansky: Thank you, John, and good morning to everyone joining us. As always, we greatly appreciate your interest in Lifeway Foods. After a monumental year in 2024, I am pleased to report that our strong business momentum has flowed into this year with yet another order of strong volume-led growth to kick off 2025. In the first quarter, we continued to execute on our growth strategy, invested behind our key Lifeway brands, and furthered our position as the keeper category leader. Before diving into the results, I want to applaud the efforts and execution of our entire Lifeway team. Our consistent growth and outstanding level of service that our customers and partners rely on would not be possible without you. With that, I will now review our results for the first quarter of 2025.

Net sales were $46.1 million for the period ended March 31, 2025, an increase of $1.5 million or 3.3% compared to the first quarter in 2024. The net sales growth was primarily driven by higher volumes of our Lifeway branded drinkable Kefir and Farmer’s Cheese. After a year of significant volume growth in 2024, we were excited to sustain this trend in the first quarter, despite lapping an incredibly strong first quarter in 2024, a period where we achieved nearly 18% year-over -year growth. It is important to call out a few nuances on the top line that make this performance particularly impressive. First, in the second half of last year, we strategically eliminated a retail relationship that contributed meaningfully to net sales on a quarterly basis in a broader effort to prioritize our Lifeway branded offerings over private label and to enhance our margins.

Second, in late 2024, we adjusted the relationship with one of our partner distributors. We previously delivered product directly to them, and they are now directly picking products up from our facilities. Under the new agreement, we now bill them less, but we have less freight costs. Overall, this is accretive to profits and margins. On a like-for-like basis, excluding those nuances, we achieved greater than 10% volume led growth in the quarter, a testament to the strength of our Lifeway branded products and the loyalty of our growing customer base. This also marked our 22nd consecutive quarter of net sales growth, an outstanding track record that dates back more than 5 years now. Over that time, consumers have collectively embraced a health and wellness-oriented movement that we expect will continue to grow.

Within that movement, consumer interest and demand for bioavailable, protein-rich foods with probiotics like our Lifeway Kefir and Lifeway Farmers’ Cheese has soared as well. The focus on protein, gut health, and select nutrients is especially true for consumers currently using GLP-1 medications and those who are looking for foods that naturally stimulate GLP-1 hormone production. As a result, our target addressable market has rapidly grown, and we continue to successfully capitalize on that trend. Our consistent growth and the enduring strength of our brand speaks to the effectiveness of our strategic sales and marketing investments that resonate with consumers and driving exposure and demand for our core Lifeway products. Given our sustained high level of growth, we believe the factors I mentioned before will drive continued volume growth in our core Lifeway products.

Moving on, we reported a gross profit margin of 24% for the period ended March 31, 2025. Our margins continue to benefit from heightened volumes of our Lifeway branded products while we incurred headwinds from continued inflationary pricing in milk, our largest raw material, as well as promotions and slotting fees related to distribution expansion and new placements for our popular Farmers’ Cheese and other branded Lifeway Kefir offerings, including our new lactose-free Kefir flavor fusions. We remain focused on margin expansion and as we continue to deliver increased shipment volumes of our Lifeway branded products, we should realize further operating efficiencies across the business. Now to our expenses. Selling in general administrative expenses were $9.3 million for the period ended March 31, 2025.

Our top line performance is a reflection of our effective investments in sales and marketing initiatives, which continue to deliver exceptional returns and drive growth in our key Lifeway products. As we announced last quarter, we are investing in 2025 to further boost our growth, and this includes accelerated investments behind our key product lines to grow our market-leading position and enhance our brand awareness. Our marketing expenses in the quarter were in line with our plans for the year, and we will continue to invest behind our brand to match the rising consumer demand for healthy foods. Our net income during the period ended March 31, 2025 with $3.5 million, reflecting EPS of $0.23 per basic and diluted common share compared to net income of $2.4 million or $0.17 per basic and $0.16 per diluted common share during the first quarter of 2024.

A driver of the growth here was the net gain resulting from Lifeway’s early investment into Simple Mills, which was officially acquired by Flower Foods at the end of February. We were early believers in the Simple Mills growth story, and we were proven correct. I’m happy for their team, but even more so, I’m thrilled for our shareholders who have benefited from our early investments into the branch. Capital funding decreased approximately $0.3 million to $2.2 million during the period ended March 31, 2025 compared to the first quarter of 2024. Our capital spend is very efficient, and we generate a great return when installing additional tanks as we leverage existing infrastructure to scale the business. The decreases spend compared to last year is in line with our expectations.

We have been investing for some time now in capacity to meet increasing demand and facilities upgrades to improve our efficiency and have now developed a state-of-the-art facility in Waukesha, Wisconsin. We are continuing to invest this year and expect that at completion, we will have almost doubled our production capacity and more than tripled our bottling speed. As we stand today, we have the operations in place and abundant capacity to support further sales growth. This strong quarter reinforced our conviction in the strategy and path to continued profitable growth and shareholder value creation. With our business stronger than ever, I am pleased to reiterate our expectation to achieve between $45 million to $50 million in adjusted EBITDA in fiscal year 2027.

Our expanding target market and customer base continues to prove resilient, as evidenced by our growth so far this year. Notably, at the end of April, we delivered a Lifeway record high week of sales, surpassing $5 million in gross sales for the first time ever, representing a 35% increase from the same week in the prior year and propelled by demand for our Lifeway Kefir and Lifeway Farmers’ Cheese. This is a milestone we are immensely proud of, and it illustrates the continued consumer commitment to our branded products. Lifeway continues to perform strongly, and that speaks to the staying power of the consumer, health and wellness trends that I mentioned before. Despite being cost conscious, the consumer is proving they will not sacrifice their well-being and are focused on nutritious, better-for-you foods that are affordable.

Our premium branded Lifeway products are extremely healthy and come at excellent value, which is why our loyal customers keep coming back to the shelves. Our gut healthy premium Lifeway products are delicious and are loaded with high quality bioavailable nutrients including protein, calcium, vitamin D, and live and active probiotic cultures. The probiotics in Kefir help support a healthy microbiome, and between 70% to 80% of immune cells come from the gut. Probiotic products such as Kefir are the focus of intense research related to the microbiome’s role in stress, depression and anxiety. We now know that almost 90% of the body’s serotonin comes from gut cells and the gut-brain access, which links the emotional and cognitive centers of the brain with our intestinal functions.

In the past couple of quarters, we have also called out numerous recent studies correlating potential long-term health benefits with the consumption of probiotic fermented dairy products like our own, and we are always keeping an eye out for new research on the microbiome and its positive impact on human beings. We are obsessed with supporting our customers’ pursuit of healthy lives and our Lifeway offerings packed with probiotics and bioavailable nutrients that nourish the body and the mind. If you want to be healthy and happy, your gut should always be a top priority. We expect modern health and wellness trends to be a tailwind to our entire premium product portfolio for years to come. While health and wellness trends among consumers are natural benefit to our industry, as the dominant leader in the Kefir space, we are consistently evaluating consumer tastes and trends within our target market to stay ahead of the curve and diversify offerings for our growing consumer base.

These insights have led to consistent innovations and new hit on trend products within our portfolio that keep our customers excited and on their toes. We are a brand on the move and one that meets the moment and are always looking to extend the strength of our Lifeway brand across the categories and channels. Focusing specifically on the core driver of our business, our flagship Lifeway drinkable Kefir, we built the U.S. Kefir market on the back of this product and continue to anchor the market today by dedicating the majority of our time and investment behind our key products. Lifeway drinkable Kefir has propelled the massive growth of our business in recent years, and our consumer insights and innovation have enabled us to keep this product fresh and new for our loyal customers as we maintain our dominant market position and impressive growth.

Some of the recent innovations within the category include our innovative lactose-free organic whole milk Kefir flavor fusions, our Probiotic Smoothies with Collagen, made with Kefir cultures and offered in 4 delicious flavors, and most recently, our new conventional whole milk Kefir flavors. To date, we are encouraged by consumer acceptance of these new healthy offerings. Each product and branded set of flavors were inspired by research and customer insights and are extremely healthy, packed with probiotics and bioavailable nutrients. We believe the Kefir market will continue growing, and as the leader of the space, we will continue to invest behind and position our offerings in line with evolving consumer interests to further capitalize on the tremendous market opportunities in front of us.

As we have touched on a number of times over the past year and a half, our secondary product focus has been on our Lifeway Farmers’ Cheese. Our consumer insights allowed us to identify the growing customer demand for soft cheese products at the right time, and our strategic investments behind this category have started to pay off exceptionally. In the first quarter, our cheese category, driven by Lifeway’s Farmer Cheese was up significantly compared to the first quarter of 2024. Our Farmer’s Cheese is protein rich, packed full of probiotics and bioavailable nutrients, and it is a healthy, delicious alternative to popular blended cottage cheese recipes. Our recent expansion of Farmer’s Cheese into 1,400 Albertsons stores across the United States, plus an additional almost 1,000 new store commitments through spring, summer, and fall, demonstrate how excited we are about the product and will continue to appropriately invest behind it to ensure its success.

I’ll now touch on some marketing and advertising updates. First, I’m excited to announce that I’ll be attending the Wall Street Journal Global Food Forum on June 16 and 17 in Chicago. I’m honored to have been invited to speak at the forum in our home state alongside numerous influential business leaders in the food and agricultural space, and I look forward to telling the Lifeway story and discussing our great expectations for Lifeway’s future at this esteemed and high visibility event. Just this weekend, we held a high-profile Mother’s Day Pancake and Kefir celebration with some of the top influencers in collaboration with artist, model and entrepreneur Chrissy Teigen, and artist John Legend and their cravings brand. I also recently joined iconic Katie Couric on stage at South by Southwest in Austin to discuss the newest [indiscernible] microbiome and colon cancer research out of Boston that followed 130,000 people over 30 years and found that those who regularly consumed fermented dairy foods, including products containing certain cultures like those found in Lifeway Kefir, had a 20% to 30% reduction in certain colon cancers, as well as the alarming trends around the increase in colon cancer among young adults.

As pioneers in the probiotic and beverage space, it is our duty to lead conversations that raise awareness around key issues related to digestive health. Lifeway will continue to communicate relevant research and data to the market and our customers. We have earned the trust of our customers over almost 4 decades and see it as a privilege and a responsibility to maintain this important dialogue. Focusing on our overall marketing actions, our efforts have been laser focused on moving units and building awareness of our core Lifeway branded products. In the first quarter, we completed new year, new got promotions across retailers to capture additional health-focused customers as they began their New Year’s resolutions in January. Like last year, in the first quarter, we also re-launched a large in-store promotion across many retailers to create a temporary Lifeway-dedicated refrigerated spaces, showcasing our branded products at high traffic and caps.

By placing Lifeway’s products at interruptive moments within the store, we have been effective at driving trial and increasing brand exposure to shoppers who don’t typically browse our section. We’ve had success with this style of campaign and we will continue to focus our retail efforts on the greatest ROI opportunities for our marketing dollars. Outside of the store, we continue to invest behind our e-commerce as a cornerstone of our current sales strategy. We are investing more in targeted advertising on our retail partner sites and platforms such as Instacart to drive trial. Our comprehensive digital approach combines targeted-search display, and social advertising supplemented by influencer campaigns that generate both brand and category awareness.

We’ve allocated significant resources to those digital channels and continue to partner with celebrities, chefs, and nutrition experts with notable followings to advertise to a growing network of customer. These relationships educate potential customers on our Better-For-You offerings and demonstrate the versatility of our products in various recipes. Our nimble e-com strategy has allowed us to guide customers through their purchasing journey while maintaining cost effective advertising spend. Our continued top line performance gives us conviction that our sales and marketing strategies have been effective. I will now touch on some distribution updates. We have new commitments for expanded distribution through key channels including new SKUs at CVS, Target, Publix, Amazon Fresh, and Walmart from now through fall, and Lifeway products can now be found at 40 airports through distribution at WHSmith, including new vending machine distribution at O’Hare just last week.

As we touched on before, our distribution expansion of Lifeway Farmers’ Cheese into 1,400 incremental Albertsons stores has greatly boosted visibility for this product line. Additionally, almost 1,000 new retail stores have committed to Farmer’s Cheese, including at King Soopers, Fred Meyer, Ralph’s, QFC’s, Hannaford, and Lowe’s. We’ve increased placements for our new flavor fusions at Amazon and probiotics smoothies, and collagen during this quarter as well. Our new products are gaining customer following, and we are pleased with the results so far. As an update to our smaller international business, we continue to see promising performance from our initial shipments in Dubai and the UAE. Our target consumer has a higher density in that region, and we will continue to monitor the performance and initial trends, but I would remind you, this is a small percentage of our sales.

Through both our marketing and distribution efforts, we are maintaining active dialogue and strong relationships with our key retail partners. Our strategy on both fronts is to elevate our brand exposure and drive trial and velocities of our core Lifeway products with the focus on our drinkable Kefir and Farmer’s Cheese. To conclude, I’d like to express my gratitude to everyone joining us today. We had yet another incredible quarter here at Lifeway and are set up for another great year in 2025 as we kick off our 40th anniversary. Lifeway is in a position of strength as consumer interests in healthy foods like our own continues to rise, and I’m confident that we have the best team assembled to maintain our positive trajectory. We are committed to investing behind our key products to continue growing and pursuing our mission to provide best-in-class bio-available, probiotic and nutritious food to our growing base of health conscious customers.

I’m truly excited about the opportunities that lie ahead as we continue this journey together. We look forward to providing another progress update on our second quarter call in August. Have an amazing day and a wonderful summer.

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