Every Southern Belle has her Debutante Ball. Every Yankee daughter, her Sweet Sixteen.
Likewise, in investing circles, no company can go public without an IPO.
Nor can it fully introduce itself to the investing public until it stops being a wallflower and starts holding earnings conference calls. Which is what made Tuesday, April 3, so special for rapidly growing (but until then, mute) Lifeway Foods
Needless to say, as a longtime follower of the company and an enthusiastic consumer of its signature dairy product, kefir, I listened in on the call. For the benefit of those of you who have -- what are they called? Lives? -- and who weren't able to do the same, I took the liberty of jotting down a few notes from the discussion.
News at 11
Although new to the concept of earnings calls, Lifeway had the procedure down pretty well. First, a recitation of the ritual disclaimers against relying on forward-looking statements. Next, management came on to spin the earnings news to the best of its ability. And finally, a few questions from the (remote) audience. What follows are the highlights, organized more by subject matter than chronological order.
The news behind the news
I've never really understood why companies tell investors some things in their earnings releases, while holding back other tidbits for revelation only in the conference call. But regardless of the logic, that's what they do -- and Lifeway proved no exception last week. In contrast to the rather laconic description of business results in its April 2 earnings release, CEO Julie Smolyansky and CFO (and brother) Edward Smolyansky had a lot of color to add in their oral recitations.
For example, the firm's most innovative new product, "ProBugs" -- a snack-sized kefir package well-suited for placing in schoolchildren's lunch boxes -- has been selling well. So well, in fact, that Lifeway is already working up two new flavors to complement the existing "Sublime Lime Slime" and "Orange Creamy Crawler." (Did I mention these are targeted at a very young consumer audience?)
In addition to expanding its product line, Lifeway also confided that several distribution expansions are afoot. Ms. Smolyansky made cryptic mention that an unidentified airline has begun selling kefir from its onboard carts. Perhaps more importantly, she advised that Lifeway is specifically trying to make inroads in selling through food service and restaurant companies. Again, no names were named, but investors will probably want to keep their eyes open for deal news popping up, including names like Sysco
Pay dem bills
In other positive news, Mr. Smolyansky has made significant progress in paying off a $4.2 million "note" (read, "debt") that Lifeway took out to finance its recent purchase of archrival, erstwhile No. 1 organic kefir seller, and erstwhile No. 2 kefir seller period, Helios. Lifeway's already paid down $1.3 million worth of the note and aims to have half of this debt retired by year-end.
Hmm, more bills
What cash the company can spare from paying down its debt seems destined for investment right back into the business. In a surprise development, Lifeway announced its Q1 2007 sales results just one day after reporting its Q4 2006 earnings results. While the latter contained some disturbing trends in both sales and earnings, the former boasted remarkable news of sales growth.
Of course, while everyone covets growth, it can bring complications. In Lifeway's case, it brought two. First, a sudden explosion in demand is necessitating extra capital expenditures. No sooner had the company bought itself a brand-spanking-new warehouse than it discovered it needed to double its capacity to produce kefir to fill it. According to Mr. Smolyansky, the bill will come to $1 million in extra capital expenditures over the next two to three quarters.
Skyrocketing demand for Lifeway-brand kefir, in particular, threw another monkey wrench into Lifeway's plans. To wit, the anticipated shift of production of new acquisition Helios-brand kefir to Lifeway's own facilities must be delayed as these facilities struggle to keep up with orders under Lifeway's own brand.
Is that bad or good?
Good question. From one perspective, extraordinary demand -- and sales -- seems an unqualified boon. But it comes with a cost. You see, what torpedoed Lifeway's profit margins last quarter was the fact that Helios, um, apparently didn't have any. Profit margins, that is. Before you decide that I'm overstating the case, consider Mr. Smolyansky's explanation: Because its operations are so much more automated, and efficient, than were Helios', Lifeway's own product has been grossing roughly 40% margins. In contrast, he characterized Helios' gross as "1%."
Because the two products are so similar, the difference in profitability doesn't lie in the goods produced but in where they're produced. Thus, the faster Lifeway can shift production of Helios to Lifeway's factory, the faster it can gross 40% on its own products and on Helios'. The longer that transfer gets drawn out, the longer Lifeway will be stuck making "1%" margins at Helios.
Speaking of margins ...
Longtime Fool readers will already be aware that I'm a bit obsessed with milk prices and how they affect the profitability of dairy companies like Lifeway, Danone
At this time, Lifeway is looking for 2007 milk prices to rise about 5% to 7% in comparison with 2006. If that proves true, then the cost rise should be easily absorbable even if Lifeway decides not to pass it along to consumers. That said, I should point out that industry sources with whom I've spoken since "Dairy Drought" was published late last month are telling me that raw milk prices could well rise as much as 30% this year.
Which seems to me as good a place as any to draw today's column to a close. One year from now, as we discuss Lifeway's fifth-ever earnings conference call, will we be celebrating Lifeway's foresight and dismissing the analysts as worry-warts? Or will we be crying over the spilled milk of Lifeway's lost profits, wondering how management failed to see the "obvious?" (In retrospect, most things look obvious.)
Danged if I know. About the only thing I'm sure of is that I'll be milking this column for a follow-up.
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