Greetings. Welcome to LifeWay Foods, Inc. Third Quarter 2026 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to John DiDomenico, Investor Relations from ICR. Thank you, John. You may begin.

Good afternoon. Welcome to LifeWay Foods' third quarter 2026 conference call. On the call with me today are Julie Smolyansky, LifeWay's President and Chief Executive Officer, and Eric 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, John, and good afternoon to everyone joining us. As always, we greatly appreciate your interest in Lifeway Foods. We're excited to be hosting a live call today, and I look forward to taking your questions in a few minutes. Before I get into the numbers, I want to acknowledge the Lifeway team. This year has tested us so far, and you have answered with relentless focus and execution to continue delivering outstanding results, as you always have been. We are grateful for everything you do. I will start with the highlight. Our momentum continued into Q3 as we delivered yet another record-breaking quarter. Third quarter net sales reached $67.8 million, the highest quarterly net sales in our company's history. This was our 28th consecutive quarter of year-over-year net sales growth, marking seven years of uninterrupted quarterly growth, driven once again by higher volumes of our flagship Lifeway kefir, and our high protein Lifeway Farmer's Cheese and partially limited by capacity challenges that I'll get into shortly. Through the first nine 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 four 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 number 45. Fortune builds this list by identifying companies across every industry in the country and evaluating their past three 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 four 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. Kiefer 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 one 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, a 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, growth 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 mill costs 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 growth 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 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 collaboration 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 will balance growth investments with profitability. However, we have a leading market position in growing categories and long runway ahead of us with significant household and distribution white space, and we will not trade the long-term health of our brands for a short-term fix. We believe our significant track record and growth is evident of how this team executes, and we intend to keep proving it. Alongside the strength of our flagship 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's cheese is now on shelves at Air One and Sprouts. Muscle Mates has made its way to Kroger and Wegmans, and kefir butter is now available at Meijer's. This is just 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 food service channel. Lifeway pioneered frozen kefir back in 2008, and today our soft-serve made with real kefir rather than a powdered mix is available at trend-setting frozen yogurt destinations like Drugstore, Mykonos, 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 DeAndre 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 Lifeways 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 tailwind 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.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question comes from Rob Dickerson with U.S. Bank Corp. Please go ahead.

Great. Thank you so much. Good evening. um maybe if I could just touch on the capacity challenges uh you had in the quarter then just kind of the commentary around it sounds like you know demands like kind of nearing um or starting to potentially outstrip supply but then you have you know the the scale-up of the Wisconsin facility coming on in Q1, and then the comments about how that should really help next year. So I'm just curious, as you talk to some of your core customers and maybe even potential new customers, is the idea as soon as that facility is up and running with the modernized lines and incremental capacity, that all of a sudden there should be an infill. Like I've seen before, there's maybe more demand than you can really meet, but does that mean that 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? Thank you.

Okay, so yeah, we do expect that there is going to be a continued capacity issue 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 skew offerings at our existing retailers and new accounts.

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

Yeah, correct. I don't expect 2027 to be a conversation around capacity. The majority of 2027 will have, you know, 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 more from me. You know, I think you had a comment that, you know, milk costs could be a little bit higher in Q4 versus Q3. And I mean, obviously, that's a, you know, fluid situation, a lot going on right now in the commodity market, in the commodity markets. Yeah, I think kind of originally when we thought about or you kind of discussed 27, right there is the, you know, the profit enhancement drivers potential coming from the Wisconsin facility coming online. Then clearly there's the pricing, right? That sounds like that starts sometime, you know, 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 kind of depends on the day, if you comment it said, So it sounds like there's still, you know, margin upside potential next year. I mean, we're, you know, hopefully this is trough, right? This is 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'm trying to keep this really basic.

Yeah, 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, you know, these, yeah, I mean, if that answers your question.

No, super. Thank you so much. We appreciate it, Julie.

Of course.

Thank you. Our next question comes from Balzahan Tlucenova with Freedom Broker. Please proceed with your question. Hi, good evening.

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?

Yeah, 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. Kiefer 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, yeah, we'll see, you know, 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 four. So could you help us understand what to expect for gross margin in quarter four and how quickly it could recover in 2027? Yeah.

We expect our growth 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'll see in Waukesha, we should be able to get back to 25% plus in our margins. Yeah, if that's helpful.

Thank you very much. That's very helpful. Okay, great.

Our next question is from Ben Glev with StoneX. Please go ahead.

All right. Thanks for taking my questions. First, I have a question about the Q3. week-long 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, yeah. So we don't specifically disclose the impact of that shutdown, but it did give us time for much-needed maintenance that the as the plant has been running for near capacity for months will 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 timelines on track. And so we do expect significant capacity increases beginning in January, followed by additional improvements every month thereafter.

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

And I think some of those, sorry, I just wanted to add to that. Some of those orders, they were just, 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 these capacity issues today and then the unlock coming from Waukesha can really enable a kind of expanded production of offerings beyond the kind of core, you know, quart-sized 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.

Yeah, 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's 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 longstanding history with that space. And now with all of the extra capacity, we do see just a tremendous opportunity to have continued growth.

Very good. Well, look forward to that. Thank you for taking my questions. I appreciate you doing so. I'll get back in queue.

Our next question comes from William Zaletsky with Divisadero Street Capital. Please go ahead.

Hi, Julie. How are you?

Doing great. How about yourself?

I'm good. Thanks for doing this. I think it's great. 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 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 all of our existing customers. So yeah, we have been on allocation due to those capacity restraints, and that won't be the case in 2027. 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 in 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, you know, over the course of four 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, you know, again, particularly since we haven't taken broad price increases since 2022. And the demand for our products, you know, are through the roof. So, you know, 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 the, I think your bottling rates are going from 200 a day to close to 400. Do you think there are enough conversations going on that you could be fully utilized on the on the 400-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 what capacity is today?

Yes, 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 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 yeah, 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 unlocks, should go faster than they did in 26, given 26 had capacity constraints you won't have in 27?

You know, I can't speak, you know, I don't have a total crystal ball, but we do believe that we can, you know, we can pull certain levers Thank you so much.

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

Thank you. Appreciate it. Our next question comes from Eric Delorier with Craig Hallam Capital. Please go ahead.

Great. Thanks for taking my questions and congrats on this continued success. I just kind of wanted to combine a lot of the questions that we've had today just trying to get a sense for how you're anticipating the shape of the growth overall in 2027. So first on capacity or specific lines, 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, you know, obviously lots of, I guess it sounds like pent-up demand. Is there a Thank you. Yeah, of course.

a rolling cycle and rolling distribution. And, you know, it's not like overnight every, you know, I'll just use Costco as an example. It's not like overnight every single Costco is going to be ordering, you know, 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 yeah, there is a ton of pent-up demand that we'll be able to fulfill both in kefir and farmer's cheese and other products.

That's very helpful.

Thank you for taking my question. Of course.

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 Sage Holliday. 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.