Lifeway Foods, Inc. Stock

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 Jon DeDomenico, Investor Relations from ICR. Thank you, Jon. 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 Hanson, 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, Jon 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 highlights. 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 Farmers 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 $212.5 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 valued 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 health 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 Cheese Makers 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 and dairy cost cycles before. And as we have always done, we will remain disciplined. We have a strong financial base and we 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 evidence of how this team executes and we intend to keep proving it. Alongside the strength of our flagship drinkable 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 Erewhon and Sprouts. Muscle Mates has made its way to Kroger and Wegmans and Kefir Butter is now available at Meijer. This is just a sampling of 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 foodservice 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, Mikono 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 Chicagoland broadcast television debut of our popular social media commercial featuring Chicago football stars, Colston Loveland and D'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 brand 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 could 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 you had the comments about how like that should really help next year. So I'm just curious like 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, right? There's maybe more demand than you can really meet. But does that mean that like inventories are being drawn down? So as we kind of get through part of next year, at least that there will be some inventory build and maybe even 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 of Q1 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. Like, 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 fixed 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 one for -- one more for me. I think you had a comment that milk costs could 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 markets. I think kind of originally, when we thought about or you kind of discussed '27, right, there was the profit enhancement drivers potentially coming from the Wisconsin facility coming online. And 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, you commented. 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 guess, I'm trying to keep this really basic. Is that...

Yes. We -- yes, for sure. I totally understand. We believe that milk prices will be stabilizing and we are taking that pricing that's going to be going into effect on a rolling basis in fourth quarter, in December, throughout first quarter in 2027. And with our operational efficiencies out of Waukesha, we'll have the perfect storm 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 kefir 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 Farmer 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.

Sounds great. So you expect margins to improve in 2027 and while cost pressure is likely to 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 Q3, we're calling it 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 and 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 result in that context. And can you...

And I think some of those -- just to -- sorry, I just wanted to add to that. Some of those orders, they were just -- that -- it happened to align with the end of the quarter but then they were shipped in the first few weeks of Q4.

Got it. Perfect. And then along this capacity conversation, can you talk a little bit qualitatively about the degree to which this capacity issue today and then the unlock coming from Waukesha can really enable a kind of expanded production of offerings beyond the kind of core quart-size kefir into the single-serve, into these new products that you're launching. I'm just curious kind of how -- what the effect is going to be of your SKU profile here once you're fully operational in Waukesha?

Yes, we are increasing our offerings across the whole portfolio. So increasing our core, that means all of our kefir drinks, our fresh cheese, our Farmer Cheese and all of the new items that we've introduced are all growing -- in tremendous demand. So we'll be increasing all of those offerings. The entire dairy category, the entire dairy space is on the move. Lifeway has that long-standing history with that space. And now with all the extra capacity, we do see just a tremendous opportunity to have continued growth.

Our next question comes from William Zolezzi with Divisadero Street Capital.

So I guess I just wanted to start by understanding maybe capacity demand. So my understanding is, there are a lot of exciting opportunities that you guys can pursue in 2027 once this Waukesha capacity comes online. But just so I understand, looking just at existing customers, is demand from them in such a place that there were more orders from just existing customers than you were able to fulfill in Q3? So just you're kind of on allocation? Or how should I think about that?

Yes, correct. We are on allocation and the demand is rising in our existing -- all of our existing customers. So yes, we have been on allocation due to those capacity restraints and that won't be the case in 2027. And we -- so we are on pace to shatter our growth and have a remarkable year in 2027.

Okay. And then just on the topic of the price increase, it sounds like an endorsing kind of getting back to the normal gross margins. It sounds like those conversations on price were fruitful. But just remind me the last time you guys took a price increase and kind of how that played into some of the customer conversations around price?

We've taken price over the course of 4 decades. So we have always looked at pricing and have made changes based on everything that we're seeing, margins and costs, et cetera. So the last time we took price was in 2022. And our retailer partners understand that our demand has outpaced our capacity. We've had these conversations with them. We've worked very closely with them to prioritize various service issues and minimize any disruptions. Our pricing discussions have been very constructive, like, again, particularly since we haven't taken broad price increases since 2022.

And the demand for our products are through the roof. So we think we're in a really great place. Our upcoming capacity expansion positions us really well to maintain and grow our shelf presence. So we're, I think, in a really great place. And everyone is taking price right now. It's in every headline, it's gas, it's the cost of groceries. So it's no surprise. But we are a company that builds community and has built community around our brand and consumers are seeking our brand out specifically. So we're in a really good place, I think, with it.

Okay. And then just on the capacity, it sounds like you're doubling capacity, which is a big jump up. I mean, do you think, when you look at the opportunities and the conversations you're having, you can find yourself in a place in the next kind of 12 to 18 months where you're utilizing even, I think your bottling rates are going from 200 a day to close to 400. Do you think you could -- there are enough conversations going on that you could be fully utilized on the 400 a day in the not-too-distant future? How do you think about just the demand that we can't see as a function of just where capacity is today?

Yes. We already -- we believe that even in January, we'll be able to utilize some of the new equipment. And then that will continue -- those facility upgrades will continue to roll out in February -- in January and February. And some of those elements and upgrades are continuing to process as planned. So we think overall, we're on track and we do think that we'll be able to fill those increased demands in January and more improvements each month. But yes, the way that we see it is that 2027 will be a year where we are able to fill all the demand and take a lot of new distribution at scale.

Okay. So would you -- is it fair to say that you think volumes in '27, given the capacity unlock should grow faster than they did in '26, given '26 had capacity constraints you won't have in '27?

I can't speak -- I don't have a total crystal ball but we do believe that we can pull certain levers to push more demand when we know that we have more capacity. So some of it is holding back some marketing initiatives, holding back some projects, some opportunities, having conversations that are transparent about what we can offer today. So yes, we do believe that 2027 offers us a big opportunity to shatter previous records.

Great. And then obviously, the revenue will benefit from the price, too. Great. Well, we're excited for 2027.

Our next question comes from Eric Des Lauriers with Craig-Hallum Capital.

Congrats on the continued success. I just kind of wanted to combine a lot of the questions that we've had today and just trying to get a sense for how you are anticipating the shape of the growth overall in 2027. So first on capacity or specific lines is, should we think about capacity coming online in phases? Or is it sort of the vast majority being turned on at once? And then on the demand side, obviously, lots of -- I guess, it sounds like pent-up demand. Is there a sort of phasing to servicing this demand? And just broadly, I mean, should we expect kind of steady sequential growth throughout 2027? Or is it a step-up in Q1 and then Q2 as Waukesha turns on and then a bit more incremental going forward?

Yes, of course. Well, all -- the entire sales cycle is a rolling cycle and rolling distribution. And it's not like overnight every -- I'll just use Costco as an example. It's not like overnight, every single Costco is going to be ordering our product. But they do start ordering on a rolling basis. There are -- elements of the upgrades are coming on in January but the majority will be coming on in February. And we feel that there's going to be significant capacity increases beginning in January, like I said, followed by better improvements, efficiencies, speed that come online each month after. And yes, there is a ton of pent-up demand that we'll be able to fulfill both in kefir and farmers cheese (sic) [ Farmer Cheese ] and other products.

And we have reached the end of the question-and-answer session. I would now like to turn the floor back over to Julie Smolyansky, President and CEO, for closing comments.

Thank you all for joining us and for all of your thoughtful questions and continued support. From everyone at Lifeway Foods, I would like to be one of the first to wish you a very Happy Thanksgiving and a safe holiday. We look forward to updating you on our progress when we report our fourth quarter and full year 2026. Have a wonderful evening. Thank you.

And that concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Good morning. Welcome to Lifeway Foods' Second Quarter 2026 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 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. Since our last earnings call, I'm excited to share that Julie Smolyansky, Lifeway's President and Chief Executive Officer, was honored for the second consecutive year as one of Progressive Grocer's Top Women in Grocery for 2026. This recognition reflects her leadership and the sustained impact she has had on both the company's and the category's growth trajectory. Congratulations, Julie. And with that, I'll turn the call over to you.

Thank you so much, John, and good morning to everyone joining us. As always, we greatly appreciate your interest in Lifeway Foods. Before I get going into the numbers, I want to take a moment to thank our Lifeway team. What we have delivered so far this year doesn't happen without discipline and energy you all bring to work every day. Let's begin with the headline. Lifeway delivered the highest quarterly net sales in the company's history. Second quarter net sales reached $66.9 million, an increase of 24.1% over a record second quarter last year and $3.9 million above the previous quarter record we established just 3 months ago.

This was our 27th consecutive quarter of year-over-year net sales growth, nearly 7 years of uninterrupted quarterly growth, powered once again by higher volumes of our flagship Lifeway Kefir and high-protein Lifeway Farmer Cheese. This quarter extends a much larger record of compounding growth. Lifeway achieved 4 consecutive years of record annual net sales from 2022 through 2025, increasing from $141.6 million to $212.5 million, a cumulative increase of more than 50%. In the first half of 2026 alone, net sales reached $129.9 million, up 29.9% year-over-year and equal to approximately 61% of our full year 2025 net sales. We believe that consistency demonstrates the durability of consumer demand, the strength of our brands and the repeatability of our growth model.

Drinkable kefir remains the core engine of our business. Lifeway is the brand that introduced kefir to generations of American consumers. And for 40 years, we have defined what authentic real kefir means in this market. Our heritage, proprietary know-how, trusted retail relationships, nationwide distribution and deep consumer recognition reinforce our leadership of the U.S. kefir category. We intend to keep strengthening that position through product quality, innovation, cultural relevance and investment behind the Lifeway name.

Farmer Cheese is equally rooted in our history. It is not a new product line. It is a 40-year Lifeway legacy that we are now bringing to a much broader mass market audience. The consumer trends supporting Lifeway continue to broaden. Interest in protein, digestive health and functional nutrition is moving further into mainstream. At the same time, a growing population of GLP-1 users is seeking nutrient-dense foods that can support protein intake, digestive health and satiation. Lifeway's portfolio sits at the intersection of these needs, culturally relevant, widely accessible products with protein and probiotics that consumers can incorporate into their everyday routines.

Turning to profitability. Gross margin was 19.5% in the second quarter. Elevated milk prices were the primary headwind, together with temporary increases in resin costs for packaging and oil-related transportation costs associated with the conflict in the Middle East. We currently expect these incremental resin and transportation pressures to subside as conditions normalize. While the cost pressure was significant, it does not change the strength and the underlying consumer demand or our confidence in Lifeway's long-term earning power.

SG&A was 18.4% of net sales compared with 17.6% last year, reflecting continued investments in brand building and consumer acquisition. Importantly, the year-to-date picture demonstrates operating leverage. SG&A decreased by 100 basis points as a percentage of net sales to 17.8%, while first half net sales increased nearly 30% to $129.9 million. We believe this is clear evidence that our investments are generating demand and scaling efficiently. Second quarter net income was $0.1 million or $0.01 per basic and diluted share. While milk inflation compressed near-term profitability, Lifeway remained profitable while delivering record sales and continuing to fund the growth initiatives we believe can expand the long-term value of the business.

We have managed dairy cost cycles before. We expect elevated input costs to remain a headwind in the third quarter, and we are monitoring conditions closely while evaluating commercial and operational levers to help mitigate the impact. We intend to remain disciplined, protecting the long-term health of our brands, supporting our retail partners and balancing growth investments with profitability. Our confidence is grounded in a record that now spans nearly 7 years of quarterly sales growth.

We have a strong financial foundation, leading positions in attractive categories and meaningful white space in household penetration, distribution and adjacent functional food occasions. Our priorities are clear: win new consumers, earn more shelf space, accelerate velocities and convert today's heightened interest in Lifeway into durable repeat purchasing. We believe executing against those priorities can support sustained growth and long-term shareholder value. National Kefir Day and Lifeway's 40th anniversary showed what our consumer acquisition strategy looks like in action. Activations in New York, Chicago, Miami and Los Angeles brought Lifeway directly to consumers through custom smoothies, sampling and exclusive merchandise and high-visibility talent.

At our 40th anniversary celebration in New York, U.S. soccer star Rose Lavelle, joined us for a VIP preview and Cannons performed live. We also brought the celebration into energy surrounding the World Cup with in-person activations in host cities and an online extension featuring recipes designed for at-home viewing parties. The objective was bigger than a 1-day celebration. Honor 4 decades of category leadership, introduce new consumers to Lifeway, drive trial and turn cultural attention into retail demand. The same playbook operates every day from our Lollapalooza activation to our viral frozen fruit and Kefir Ice Cream hack, which has generated more than 50 million views.

These moments demonstrate the scale of organic consumer interest we can create around Lifeway and our ability to meet consumers where culture is happening. We are expanding our creator relationships, producing content that reaches millions of consumers and directing that interest to retail. In stores, we are concentrating spending at high-impact points in the shopping journey to convert awareness into trial, repeat purchase and stronger velocities. We're also converting that brand momentum into measurable distribution gains across mass grocery and regional retail. Muscle Mates, our functional beverage combining creatine, protein and probiotics is now available in nearly 800 Walmart locations.

Kroger added Muscle Mates this month, Harris Teeter added Muscle Mates and a limited-edition Kefir offering this summer, and Wegmans is scheduled to bring in Muscle Mates in September. Busch's is adding the full Muscle Mates lineup and all 3 Lifeway Kefir Butter varieties. These wins broaden our reach and give more consumers new reasons to enter the Lifeway portfolio. Our legacy product lines are also gaining meaningful new shelf space. Farmer Cheese, a Lifeway favorite for 40 years, is newly available nationwide at Walmart and is coming soon to approximately 450 Target stores this fall, bringing this established line to an even broader mass market audience.

Target now carries Lifeway Kefir Butter. Meijer is adding Lifeway Kefir Butter in approximately 270 stores this fall and Big Y added the Butter this month. The timing gives consumers more access to Lifeway Farmer Cheese and Kefir Butter just in time for fall and holiday baking, cooking and entertaining. Together, these placements expand the occasions we serve and give us multiple avenues to deepen relationships with major retailers. Our focus now is disciplined execution, replenishment and velocity. We are also opening new channels through Sysco on the East Coast, supporting foodservice customers, college campus dining halls and fast-growing frozen yogurt concepts, including Mimi's and Drug Store in New York and Mikono in Chicago.

This is strategically important because it creates trial outside the traditional grocery aisles and introduces Lifeway to consumers in new consumption occasions. We are investing in the capacity required to support this expanding opportunity. The Waukesha facility expansion remains on track for completion in early 2027. Once complete, we expect the project to meaningfully increase production capacity, enhance operating efficiency and give Lifeway greater flexibility to serve growing demand across retail and foodservice. This is a strategic investment in our next stage of scale.

To close, the second quarter demonstrated both the strength and the resilience of Lifeway's growth platform. We delivered the highest quarterly sales in the company's history, extended our growth streak to 27 consecutive quarters, expanded distribution for both legacy and innovative products and advanced the capacity investments designed to support our future. Near-term dairy inflation is a real headwind, and we are managing it with focus and discipline. At the same time, consumer demand, brand momentum and retail opportunity remains strong. As America's original authentic kefir brand, Lifeway has spent 40 years building the trust, expertise and scale that underpin our category leadership. We believe we are well positioned to reinforce that leadership, compound growth and build long-term value for shareholders.

On a personal note, I am honored and humbled to also have been inducted into the Specialty Food Association Hall of Fame this summer alongside industry leaders and legends I deeply admire. I view this recognition as a tribute to my family, our employees and everyone who has helped build Lifeway over the past 40 years. We remain deeply grateful to our retail partners, loyal customers and the growing number of consumers discovering Lifeway for the first time. 40 years after my father founded the company, our mission remains the same, make the best-in-class probiotic foods, rich in bioavailable nutrients accessible to more people. Thank you for your continued support. We look forward to updating you on our progress when we report third quarter results in November. Have a great rest of your summer.

Good morning. Welcome to Lifeway Foods First Quarter 2026 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 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. With that, I would like to turn the call over to Lifeway's President and Chief Executive Officer, Julie Smolyansky.

Thank you, John, and good morning to everyone joining us. As always, we greatly appreciate your interest in Lifeway Foods. I'm absolutely thrilled to share what was a record-breaking first quarter for Lifeway Foods. We carried the momentum from 2025 into 2026 with blowout results that showcase the incredible strength of our business, both on the top and bottom line, well exceeding the top end of the strong preliminary outlook that we provided in April. Before getting into the specifics, I want to recognize our outstanding Lifeway team. The phenomenal results we're consistently achieving are a testament to your hard work, passion and seamless execution. Your efforts fuel this business, and I am grateful. Now I'll walk through our first quarter 2026 results. This was a historic quarter as we crossed the $60 million threshold for the first time ever, delivering net sales of $63 million, a remarkable 36.7% surge year-over-year. This record-breaking achievement extends our growth streak to 26 consecutive quarters and represents entirely volume-led expansion, fueled by our flagship Lifeway kefir and high-protein Lifeway Farmer Cheese.

We continue to set new standards at Lifeway. And as a result, each year, we face more challenging year-over-year comparisons. It is also worth noting that in the second quarter of 2025, we gained significant distribution as well as improved shelf assortments, which have helped propel the incredible results were driven over the previous 12 months, and we have begun to lap that now. Beyond our exceptional revenue performance, we saw the growth flow clearly throughout the P&L. Our gross profit margin for the first quarter was 27.5%, up 360 basis points from 23.9% last year. This impressive expansion was driven by robust volume increases in our core Lifeway branded offering, which generated enhanced manufacturing efficiencies supported by our ongoing Waukesha facility upgrades and favorable conventional milk pricing during that period.

As a reminder, our Waukesha facility expansion remains on track for completion by the end of this year. Once the full initiative comes online in Q1 2027, we will be positioned to materially increase production capacity, improve operational efficiencies, grow our workforce and further establish the Midwest as the country center for kefir manufacturing. Selling, general and administrative expenses totaled $10.9 million, a 16.8% increase from the prior year, reflecting our ongoing commitment to marketing initiatives and brand building. As a percentage of revenue, SG&A leveraged a significant 300 basis points this quarter, underscoring the strong returns that we're generating from our investments.

Our marketing approach is clearly delivering results evidenced by our growth. We are driving trial and cultivating lasting consumer relationships while our product velocities are accelerating. Net income for the first quarter came in at $4.7 million or $0.31 per basic and $0.30 per diluted common share compared to net income of $3.5 million or $0.23 per basic and diluted common share last year. This represents a sizable 32% expansion, highlighting our effectiveness in translating revenue strength into earnings growth with excellent flow-through from the top to bottom line.

Our exceptional first quarter performance was propelled by several critical factors that continue to drive our business. We remain uniquely positioned in the convergence of powerful consumer trends driving demand in our space. Today's consumer is more health conscious than ever. Gut health awareness continues to increase and the rapidly growing population of GLP-1 users is actively seeking nutrient-dense probiotic foods that support digestive health and satiation. Adding to the momentum was the validation we received from the government who included full fat dairy in the updated USDA food pyramid and keep her in the supporting documents while underscoring the significance of fermented food and digestive health to well-being. Lifeway delivers all of these benefits with our flagship product, and we expect these trends to build as consumers continue to educate themselves and focus on their health.

The consistent performance of our core Lifeway Drinkable kefir and Lifeway Farmer Cheese demonstrates our positioning and ability to capitalize on these consumer tailwinds. Our drinkable kefir remains the bellwether of our business, driving our brand strength as well as the entire kefir category, while our farmers cheese continue to grow as we broaden its reach and drive trial opportunities. These products alongside our innovative new products are capitalizing on consumer demand for functional nutrition, and we will continue to invest behind them to support their performance.

Speaking of innovation, I'll quickly highlight some of our recent developments. After the positive feedback we received presenting them at Expo West in March, we look forward to sharing our Lifeway Muscle Mates and kefir butter with a wider group of retailers and consumers as we expand our reach across the dairy landscape with these incredible items. These pioneering products bring the benefits and attributes that consumers are looking for, along with Lifeway Signature probiotic blend and reputation for quality. I'm also pleased to announce our innovative partnership with Open Farms, which incorporates Lifeway ingredients into a premium pet food line called GoodGut. We collaborated with Open Farms to formulate canine culture, a specialized blend of probiotic strains that also feature prebiotic fiber and postbiotic elements to support the thriving gut Michael Flora for pet.

The expanding consumer emphasis on health extends beyond humans. Pet owners are prioritizing nutrition for their beloved companions and digestive health is a cornerstone to long-term pet wellness. This partnership brings Lifeway into an entirely new category where we can apply our decades of cultured dairy and probiotic expertise to pet nutrition, and we are excited for the potential here. We continue to build brand recognition and stimulate trial through strategic collaborations and experiential marketing that expose Lifeway to new audiences and creative environments. We recently partnered with Erewhon to launch the Tropical Lifeway smoothie made with organic Lifeway kefir. Building on our previous successful collaborations with this iconic wellness destination, this movie delivers the ultimate summer refreshment with bright citrus, tropical fruits, coconut cream and spirulina, reminiscent of a creamy frozen lemonade while providing the added benefits of probiotics and protein. This is available through the end of June at all Air1 locations. I also hosted a retro-inspired wellness house in Palm Springs during festival weekend, where we celebrated Lifeway's 40th anniversary and brought together media, influencers, tastemakers and Lifeway super fans.

This immersive poolside experience blended 1980s and '90s in nostalgia with modern wellness and festival energy featuring performances by Debbie Gibson and Autograph alongside a menu of high-protein probiotic packed bites. These experiential collaborations help drive trial with fresh consumers and further define Lifeway as a lifestyle brand, not just a product in the dairy aisle. Digitally, we're continuing to position Lifeway at the heart of viral content. A great example of this was our advertising campaign with Chicago football stars, Colston Loveland and D'Andre Swift released just prior to big game weekend. Since its launch in February, the spot has gone truly viral, generating over 10 million views across the social platforms. Through our content, we are sharing helpful nutrition information and creating recipes to help our community enjoy Lifeway products in fresh, delicious ways. Millions of impressions help connect us with consumers who are moving from the kefir curious to dedicated fans of the brand. We're steadily growing our influencer network to build awareness of our portfolio and drive shoppers into retailers to discover their new favorite Lifeway kefir and Farmer Cheese items on the shelf.

In retail environments, we continue to strategically allocate our marketing spend and have been successful in driving velocity through high-impact programs that engage consumers at key decision points through their shopping journey. Alongside our sales and marketing investments, our retail relationships remain robust. We recently secured an expansion of our cocktail presence in select markets with a new twin pack of Plain Lifeway kefir. Our dialogues with major partners continue as we seek out incremental distribution wins across channels that align with Lifeway's growth strategy.

To wrap up, these results marked a truly extraordinary launch to 2026. We achieved record-breaking sales, strong gross margin expansion and significant bottom line growth while our core products continue to resonate with consumers. Through our continued execution, we have built a strong foundation for growth and the strategic investments we are making today in sales and marketing, innovation and manufacturing capacity will enhance our ability to serve our growing customer base, gain share and capitalize on the structural tailwinds of our category.

We remain deeply committed to our mission of bringing best-in-class probiotic and nutritious foods to our loyal and growing consumer base. Thank you for your continued support, and we look forward to updating you on our progress when we report our second quarter 2026 results. Have a wonderful day.

Good morning. Welcome to Lifeway Foods Fourth Quarter and Full Year 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 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.

Since our last quarterly earnings call, I'm pleased to share that Lifeway President and Chief Executive Officer, Julie Smolyansky, was named one of Progressive Grocer's Top Women in Grocery and honored with the Humanitarian of the Year Award from the Illinois Holocaust Museum. These recognitions highlight the leadership and values that guide Lifeway's continued growth and broader impact.

With that, I'd like to turn the call over to Lifeway's President and Chief Executive Officer, Julie Smolyansky.

Thank you, [ John ], and good morning to everyone joining us. As always, we greatly appreciate your interest in Lifeway Foods. I'm thrilled to share our exceptional fourth quarter and full year 2025 results with you today.

2025 was truly a remarkable year for Lifeway, marked by record-breaking growth, expanding margins and operational excellence across every dimension of our business.

We achieved the highest annual net sales in the company history, delivered significant gross margin expansion and grew net income by 54%, all of this while making strategic investments in capacity, marketing and innovation that position us extraordinarily well for the future.

Before diving into the details, I want to acknowledge the exceptional work of our entire Lifeway team. The outstanding results we continue to deliver are a direct reflection of your unwavering dedication. Quarter after quarter, you all execute at the highest level, and I'm truly grateful for everything you bring to this organization.

Let me start with our full year 2025 performance, which showcases the strength of our momentum in our business. We delivered record-breaking full year net sales of $212.5 million, up 13.7% year-over-year, driven by higher volumes of our Lifeway branded drinkable kefir as well as strong growth in our Lifeway Farmer Cheese.

Adjusted for 2 strategic modifications to customer relationships that we initiated in late 2024 to prioritize high-value, brand-strengthening opportunities, our growth was approximately 19% on a comparable basis.

It is worth noting that we are lapping an incredibly strong full year in 2024 when we delivered double-digit growth in every quarter and grew nearly 17% year-over-year, which emphasizes the strength of our growth this year.

This represents our sixth consecutive full year of significant volume-led annual net sales growth, a testament to the exploding customer demand for our core Lifeway offerings and the effectiveness of our marketing strategy as well as the sustainability of our growth trajectory as we maintain our foothold as the undisputed leader in kefir.

This outstanding annual performance was capped off by a very strong fourth quarter with net sales of $55.4 million, up 18% year-over-year, driven by strong volume growth of our Lifeway branded products. This was our 25th consecutive quarter of year-over-year net sales growth and gave us incredible momentum heading into 2026, which is off to a great start.

Building on our powerful top line performance, the growth flowed through the income statement as we delivered significant improvements across our core profitability metrics. Our gross profit margin for the full year was 27.4%, up 140 basis points compared to last year.

This meaningful expansion reflects the strong volume growth of our core Lifeway branded products, which provided manufacturing efficiencies that were enhanced by the ongoing investments in our Waukesha facility and the favorable impact of conventional milk pricing.

We wrapped up with our fourth quarter gross profit margin of 27.8%, an impressive 250 basis points increase compared to last year. The margin expansion we achieved throughout the year demonstrates our continued disciplined operational execution and our ability to scale the business profitably.

Selling, general and administrative expenses as a percentage of net sales were 19.6% for the full year, up slightly from last year, reflecting continued investments throughout the year in marketing, sales activations and retail expansion, all centered on growing brand recognition and driving product velocity. For the fourth quarter, SG&A as a percentage of the net sales was 20.7%, leveraging more than 200 basis points year-over-year.

Our sales performance throughout the year clearly illustrates the success of our marketing strategy. We're driving trial, accelerating product velocity and building deep customer loyalty in the product process while our products are flying off the shelf. We'll continue to invest behind our growth throughout 2026.

Net income for the full year was $13.9 million or $0.91 per basic and $0.89 per diluted common share compared to $9 million or $0.61 per basic and $0.60 per diluted common share in the prior year. This represents an exceptional 54% net income growth, showcasing our ability to convert top line strength into bottom line results.

Net income for the fourth quarter was $2.5 million or $0.17 per basic and $0.16 per diluted common share compared to a net loss of $0.2 million or a net loss of $0.01 per basic and diluted common share in the prior year. Like the full year results, the swing to meaningful profitability in Q4 demonstrates the strength of our business model and our commitment to operational excellence while we invest for growth.

Our outstanding performance in 2025 was driven by several key factors that will continue to power us forward as we look to the future. First, the demand for protein-rich probiotic functional foods shows no sign of slowing down. Today's consumer is focused on health and wellness more than ever before, and they're actively learning about the gut's critical role in their well-being.

Additionally, the prevalence of Americans on GLP-1s is surging with significant uptake projected in the coming years, particularly with the new oral GLP-1 format, and active GLP-1 users are consistently seeking out nutrient-dense foods that support gut health. Lifeway is perfectly positioned at the intersection of these powerful consumer trends.

I am particularly excited to highlight the recent validation we've received from the U.S. government. The newly released dietary guidelines for Americans specifically named kefir and emphasized the importance of fermented foods and gut health.

Fullstack dairy was included in the new USDA food pyramid and kefir was mentioned in the supplemental materials. This is an incredible opportunity for Lifeway as our products are completely aligned with those new dietary guidelines.

The government's validation of fermented dairy, kefir and gut health is not just an endorsement of our category. It's an endorsement of everything Lifeway has been advocating for decades. This is a tailwind for our business, and it will only accelerate as consumers become more educated about the critical role that cultured dairy plays in overall wellness.

The performance of our staples Lifeway drinkable kefir and Lifeway Farmer Cheese highlight our company's perfect position in today's CPG landscape. Our drinkable kefir is the significant bellwether of our business, and it continues to drive trial and generate awareness for the entire kefir category.

I'd also like to spotlight Farmer Cheese as our investment behind the cult favorite continues to pay off. In the fourth quarter, we expanded Lifeway Farmer Cheese distribution to 2,000 Walmart stores nationwide, a game-changing milestone that dramatically increases our footprint and trial.

This product is becoming a star among high-protein foods and is well positioned to lead the trend in functional nutrition by supporting not just gut health, but also the hormonal mechanisms like GLP-1 that underpin satiation and metabolic regulation.

Our retail partnerships remain very strong, and our dialogue with key partners is consistent as we continue to land incremental distribution opportunities across the channels that make sense for Lifeway. Notably, we recently extended our rotation at Costco in the San Diego region, maintaining our momentum with the key club partner.

We launched a number of on-trend innovations in 2025, which has resonated with our customers and their evolving taste. Our Probiotic Smoothie with Collagen continue to perform well, attracting shoppers in a growing global market for collagen.

Muscle Mates will soon roll out in grocery stores, fitness centers and select retailers nationwide. And it is meeting growing demand -- consumer demand for performance-driven functional beverages while attracting shoppers from the growing U.S. creatine market.

Most recently, drawing on our decades of cultured dairy expertise, we launched Lifeway Kefir Butter, a probiotic cultured butter that pairs indulgent flavors with functional nutrition, answering consumer demand for a premium butter that excels in taste, texture and versatility.

Butter is experiencing renewed momentum across retail, foodservice and culture, both in the U.S. and globally. Consumers today feel more comfortable enjoying high-quality dairy fat again, and retailers are responding. These shifts have opened meaningful white space and the Lifeway Kefir Butter is perfectly positioned to capitalize on this trend.

A couple of weeks ago at Expo West, we showcased both Muscle Mates and Kefir Butter, and received extremely enthusiastic consumer and retail reactions.

I'm also pleased to announce a new supply agreement and our first ever licensing deal and royalty agreement with Open Farm, which will source ingredients from Lifeway for a new premium pet food product called GoodGut. This partnership introduces Lifeway to an entirely new category where we can bring our decades of expertise in cultured dairy and probiotics to pet nutrition.

For years, pet owners have trusted Lifeway as part of their own wellness routine and have even shared our kefir with their pets while we continue supporting the pet community through conventions, animal welfare initiatives and relationships with leading pet nutrition experts, including certified canine nutritionist, Kayla Kowalski.

GoodGut is a natural extension of that relationship created in response to consumers asking for a probiotic specifically formulated for their pets. We see this as a strong start to our expansion into new categories that can help grow awareness and revenue with no extra cost to Lifeway.

Throughout 2025, we also continue to build brand awareness and drive trial through strategic partnership and experiential marketing that introduces Lifeway to new consumers. Following successful partnerships with Joe & The Juice and Erewhon, we launched a limited edition Lifeway Probiotic Sunrise Smoothie with Drugstore in November.

We also partnered with Barry's to launch their Lifeway Power Play shake at Barry's Fuel Bar locations nationwide in conjunction with their Find Your Strength challenge. The shake, which feature Organic Plain Whole Milk Kefir, delivers a protein and probiotic packed boost to energize workouts and support recovery. This partnership ran through Barry's Find Your Strength challenge and will continue this summer with the kefir smoothie bowl bar at Barry's Hamptons studios.

These experiential retail partnerships introduce Lifeway to new consumers in innovative settings and reinforce our position as a lifestyle brand, not just a product in the dairy case, and brings influencers to create exciting content for social media.

In stores, we continue to be strategic with our marketing dollars, successfully accelerating sales with prominent in-store programs that capture consumer attention at interruptive moments throughout their shopping journey.

Digitally, we are propelling Lifeway into the center of viral moments. Across social platforms, millions of users engage with Lifeway and many share authentic customer stories about their daily wellness benefits they gain from our product.

We continue to expand our influencer partnerships through 2025 to drive awareness of our product offerings and expand consumer knowledge of Lifeway's health benefits and showcase recipes with Lifeway Kefir and Farmer Cheese. We'll continue to push forward with our marketing strategy in 2026 to sustain the outstanding momentum we have achieved in the past number of years.

And you can see that in our latest advertising campaign with Chicago Bears stars Colston Loveland and D'Andre Swift. This campaign debuted in early February ahead of the big game and was designed to highlight our market-leading protein-forward kefir, generating significant buzz across all social channels.

In addition to our category-defining performance, 2025 was also a year of tremendous industry recognition for Lifeway, validating our significant growth trajectory. We were recognized by TIME as one of America's Growth Leaders for 2026, specifically #2 in the food and beverage space.

We were named to Inc.'s 2025 Best in Business list in the Best Challenger Brands category. We were honored as Processor of the Year by Dairy Foods. These accolades reflect the hard work and dedication of our entire team.

Looking ahead to 2026, we have a lot to be excited about, and we're already off to a great start. Our Waukesha facility expansion continues to progress as planned, and we recently celebrated the ribbon cutting for Phase 2 of our $45 million Waukesha expansion.

We're on track to double our manufacturing capacity, increase operational efficiencies, expand production hours and staffing and solidify the Midwest position as a global hub of kefir production. Phase 2, which is on target for completion by the end of 2026, focuses on installing a state-of-the-art cooling system to support our fermentation and bottling operations.

We also have recently strengthened our operations and supply chain teams with new talent that bring deep expertise in dairy industry and will help us continue scaling efficiency as the business grows.

Our momentum continues to build as we drive sustainable, profitable growth across the business. We have laid a foundation for durable long-term value creation and the investments we're making today in capacity, marketing and innovation positions us exceptionally well to capitalize on the tremendous opportunities ahead.

With our improving production capabilities and accelerating tailwinds behind consumer health and wellness, we're perfectly situated to sustain the remarkable momentum we have generated. We are reiterating our long-term target of $45 million to $50 million in adjusted EBITDA for fiscal year 2027, and we are once again poised to deliver record-breaking sales in fiscal year 2026.

Before closing, I'd like to take a moment to proudly celebrate Lifeway's 40th anniversary. For 40 years, Lifeway has been driven by a passion for culture dairy and the powerful role it plays in modern wellness.

We've grown the dream my father had when we immigrated to America into the category leader we are today. Lifeway truly symbolizes the American dream and our authenticity and heritage are priceless.

To wrap up, 2025 was truly a phenomenal year for Lifeway. We delivered record-breaking sales, significant gross margin expansion and exceptional net income growth.

We have built incredible momentum that is only accelerating as we progress through this new year. We have the right team in place, are executing at the highest level, and I'm confident in our ability to sustain these outstanding results.

We remain committed to our mission of bringing best-in-class bioavailable probiotic and nutritious foods to our loyal and growing customer base and look forward to updating you on our continued progress when we report our first quarter 2026 results.

Have a wonderful day. Thank you.

Good morning. Welcome to Lifeway Foods Third 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 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 speaks 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.

Thank you, John, and good morning to everyone joining us. As always, we greatly appreciate your interest in Lifeway Foods. I'm thrilled to announce yet another record-breaking quarter for Lifeway Foods. This quarter significantly surpassed our previous high set in Q2 and further showcases our unique and powerful growth as we continue to define our industry and deliver outstanding results across the board.

Before diving into the details, I want to applaud our incredible Lifeway team. Your relentless execution, innovation and commitment to excellence are the driving force behind our consistently extraordinary results, and you continue to raise the bar every quarter.

In the third quarter, we delivered record net sales of $57.1 million, a 24% increase year-over-year and an approximate 29% increase on a comparable basis when adjusted for 2 strategic modifications to customer relationships that we initiated in late 2024 to prioritize high-value brand strengthening opportunities. This growth was entirely volume-led and driven by the explosive demand for our flagship Lifeway Seeker and high-protein Lifeway Farmer Cheese. This growth is even more impressive when considering we delivered it on top of a strong 13% increase in Q3 of 2024.

This marks our 24th consecutive quarter of year-over-year net sales growth. In other words, 6 full years of uninterrupted growth. To put that in perspective, year-to-date, we achieved net sales of $157.1 million, which is an incredible 123% increase when compared to the same 9-month period 6 years ago in 2019. We're consistently setting records at Lifeway and have been doing so for years. Our growth trajectory is consistent and sustainable, and it's accelerating strongly as we continue to cement our position as the undisputed leader in kefir and help drive growth in the functional dairy space.

Our outstanding track record of growth recently garnered nationwide attention as we were named to the Time America's Growth Leader 2026 list. We secured the 33rd position out of 101 distinguished companies and ranked as the #2 food and beverage company, highlighting our strong growth, financial stability and leading market performance. Our business is rooted in humble beginnings and has succeeded through resilience, community and the unwavering belief that healthy food can change people's lives. This recognition is truly an honor.

The Lifeway portfolio is positioned at the intersection of numerous consumer trends, including the demand for protein-rich probiotic functional foods, heightened awareness of the gut's critical role in overall wellness and the rising prevalence of Americans on GLP-1s seeking nutrient-dense foods that naturally support digestive health. As consumers have increasingly embraced the vast nutritional and gut health benefits of our delicious products, they are flying off the shelf faster and faster, which is driving our surging product velocity.

We are at the forefront of these trends, which show no signs of slowing down, and we are investing heavily in our marketing efforts and manufacturing capabilities to support our accelerating velocities and comfortably meet the growing demand for the Lifeway brand. Alongside our outstanding top line performance, we delivered meaningful growth across our core profitability metrics. Our gross profit margin in Q3 was 28.7%, up an impressive 300 basis points from last year and up sequentially compared to our strong Q2 margin performance. This margin expansion reflects strong volume growth of our core Lifeway products, manufacturing efficiencies aided by our Waukesha facility improvements and favorable conventional milk pricing.

Selling expenses were $5 million, up slightly from last year as we continue to invest in marketing, sales activations and regional expansions to heighten brand awareness and sustain our significant growth. Our sales performance in 2025 demonstrates that these investments are paying off. Product velocities are accelerating. We are driving trial and our loyal customers keep coming back for more. Net income was $3.5 million or $0.23 per basic and diluted share compared to $3 million or $0.20 per basic and $0.19 per diluted share last year. The strong double-digit growth on the bottom line further shines a light on our operational excellence and our ability to seamlessly convert top line strength into profitable results.

I'll now touch on ongoing modernization of our state-of-the-art Waukesha facility. This strategic expansion continues to progress as planned, and we are on track to double manufacturing capacity and enhance our operational efficiencies by the end of 2026. In September, we completed the first step of our facility optimization with the successful installation of additional fermentation tanks, which are used to combine raw milk and the live kefir culture during the fermentation process to make our kefir.

As for next steps, we have recently initiated critical infrastructure enhancements to our refrigeration capabilities and milk processing systems with plans to break ground on the facility expansion in early 2026. We will realize the full production capacity benefits and efficiencies, including more than tripling our bottling speeds upon completion of the project in Q4 of 2026, enabling us to meet the accelerating demand for our products while maintaining our exceptional product quality standards.

To date, in 2025, we have invested over $9 million in this project. And upon completion, we estimate the total investment of approximately $45 million in capital expenditures. This expansion is a pivotal investment in Lifeway's future as we position ourselves to further capitalize on the rapid growth in functional dairy, consumer appetite for protein and associated GLP-1 trends.

Beyond our operational investments, we're simultaneously keeping a pulse on the consumer and their evolving taste to stay ahead of the curve on emerging trends. We recently announced Muscle Mates, our revolutionary ready-to-drink functional beverage that delivers a powerful trifecta of 20 grams of protein, 5 grams of creatine and our 12 live and active probiotic cultures. This product taps into the exploding creatine market, which has seen significant triple-digit growth at certain retailers in recent years and is notably serving a growing percentage of women.

With this product, we are advancing functional nutrition by delivering performance and wellness in one convenient and delicious bottle, and we are extremely excited for it to begin shipping to retailers. Our first-of-its-kind probiotic smoothies with collagens continue to perform very well and are resonating comfortably with the global -- growing global market for collagen, which is projected to exceed $8 billion by 2030.

We are also expanding our brand reach through strategic partnerships that introduce Lifeway to new consumers through innovative product launches and experiential settings. Our Trust Your Gut smoothie is an exciting collaboration with Joe & The Juice bringing Lifeway kefir to a wide audience of Gen Z and millennial consumers in cafes across the United States. Our second partnership with Erewhon delivered a delicious Love Your Gut pumpkin spice smoothie exclusively for the month of October, perfectly timed for seasonal wellness trends at L.A.'s iconic wellness destinations.

I'm also excited to highlight Lifeway's nationwide Sorority tour. We are currently connecting with young women across the country to introduce them to the brand and the benefits of gut health. The Gut Health Glow Up tour is yet another opportunity to build community and sample our core products and innovative kefir flavor fusion with the next generation of Lifeway kefir consumers. Our digital marketing strategy continues to launch Lifeway into the center of viral moments. Across TikTok and Instagram, millions of users are engaging with authentic customer stories about the daily wellness benefits that they're experiencing from Lifeway kefir, and we continue to expand our influencer partnerships to drive awareness of our product offerings, educate on their benefits and showcase recipes with Lifeway kefir and Farmer Cheese.

In stores, we continue to be strategic with our marketing dollars and are effectively driving velocities with high visibility programs that meet consumers at interruptive moments during their shopping experience. We also continue to expand distribution across our key product channels. We recently gained everyday placements at BJ's and are currently in rotation at Costco in San Diego.

Additionally, in Q4, we have visibility into a significant nationwide distribution expansion for our Lifeway Farmer Cheese as it continues to capture the attention of consumers nationwide. What we have accomplished is extraordinary, but our momentum is only intensifying. We're well on pace to deliver our strongest annual sales in the company history in 2025, and we're reiterating our target to achieve between $45 million and $50 million in adjusted EBITDA by fiscal year 2027. We are operating from a position of strength, dominating the kefir category, heavily investing behind our key products and expanding into high-growth adjacencies, all while scaling profitability.

With our improving production capabilities and our accelerating tailwinds behind consumer health and wellness, we are perfectly situated to sustain this remarkable momentum. The results speak for themselves. We're on an incredible growth trajectory as we finish off 2025 and head into the new year. We remain committed to our mission of bringing best-in-class bioavailable probiotic and nutritious foods to our loyal and growing customer base. Thank you for your continued support, and we look forward to updating you on our continued progress when we report our fourth quarter and full year results in March 2026. I hope you all have a wonderful holiday season. Thank you.