MusclePharm's CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: MusclePharm Corp. (MSLP)

MusclePharm Corp. (OTCQB:MSLP) Q4 2013 Results Earnings Conference Call March 31, 2014 11:00 AM ET

Executives

Matt Sheldon - Investor Relations

Brad Pyatt - Chief Executive Officer and Chairman

Richard Estalella - Chief Operating Officer

Sydney Rollock - Chief Marketing Officer

Analysts

Jack Wallace - Sidoti & Company

Keay Nikae - Ascendiant Capital

Todd Rowley - Deutsche Bank

Operator

Greetings and welcome to the MusclePharm Fourth Quarter 2013 Earnings Call. At this time, all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Matt Sheldon, Investor Relations for MusclePharm. Thank you, Matt, you may begin.

Matt Sheldon

Thank you, operator, and good morning everyone. Welcome to MusclePharm's 2013 fourth quarter and full year conference call.

Presenting today are Brad Pyatt, Chief Executive Officer; Richard Estalella, Chief Operating Officer; Sydney Rollock, Chief Marketing Officer; and Gary Davis, Chief Financial Officer is travelling today on personal business.

Following a review of the company's business highlights, financial results, and discussion of the company's strategy, we will open the call up for questions. The call is scheduled for one hour.

Before we begin today, I would like to remind you that today's conference call including the question-and-answer session, any projections and forward-looking statements made regarding future events are MusclePharm's future financial performance are covered by the Safe Harbor provisions of the Private Securities Litigation Reform Act.

These forward-looking statements are qualified by the cautionary statements contained in MusclePharm's press releases, and SEC filings including its Annual Report on Form 10-K and quarterly reports on Form 10-Q. Actual events may differ materially from those forward-looking statements.

With that said, I will now turn the call over Brad Pyatt. Brad?

Brad Pyatt

Thank you. I want to thank everyone for attending today's call. In 2013, we focused on building a world-class business infrastructure and teeing to support the ramp-up of our future quality growth.

Our 2013 business objectives were expanding the market share in a $30 billion sport nutrition industry by investing in aggressive growth in key marketing initiatives as well as adding critical management members and key business leaders to build the infrastructure that will support profitable growth.

The dietary supplement market in the United States grew 7.5% in 2012 to reach $32.5 billion in consumer sales, that's more than $2 billion in incremental revenue.

In 2013, our net sales grew by $43.8 million to $110 million net revenues, which is 65% year-over-year growth yielding a two-year 150% compounded annual growth rate.

We refer to our business into three different distribution channels; Specialty, FDM, which is Food, Drug and Mass, and International. This gives us the necessary diversification within our distribution model and brand portfolio to minimize risk.

In 2013, our Specialty channel grew 46% compared to 2012. Our International distribution channel grew upwards 59.1% and our Food, Drug and Mass channel grew by 100% to $8.2 million.

The growth was fueled by combination of innovation, strategic partnerships, and the addition of several key business leaders that have years of industry experience as well as relationships.

This resulting in our brand emergence into new distribution channels which will support introduction of future brands, as well as future products and expansions.

At MusclePharm, we employ master brand strategy driven by science, customer experience, and innovation. We market our branded products in multiple performance and active lifestyle channel that reach athletes of all demographics. Our goal is to serve the needs of all types of athletes while fueling the engine of sport for all ages and genders.

The consumer is continuing to challenge us to do more and bring more products and brands to the market as we push the limits of sport and more products are traditionally sold. We currently three brands that are in our portfolio of brands that target every type of fitness enthusiasts from football, combat sports, weight training, body building, runners, basketball, crossfit, golf, outdoor activities and athletic and recreational enthusiasts.

Sydney Rollock will eventually go over this later in the call and explain each brand's unique positioning for the consumer.

Marketing and advertising is a very important component of building our brand and what we believe sets us apart from the competition. Our advertising promotional spend increased by 2% from 2012 and represented 14% of our revenues.

Key partners like UFC have catapulted our growth globally and we're very excited that we have renewed the partnership for an additional three years that ends in November of 2015. Within this partnership, we're the official nutritional supplement of the UFC.

The partnership includes a UFC logo on our bottles of MusclePharm Hybrid and Core Series, MP logo on Octagon [candies] (ph) as well as Octagon bumpers that will be seen on both pay-per-view and FOX events.

UFC is now seen in over 820 million homes worldwide and is a key driver to our future growth in current growth in international markets.

In addition, we have an integration package that includes digital media activation to the social media which has over 6 million fans and growing as well as a MusclePharm Nutrition section on UFC.com.

Lastly, we will be featured in in the Ultimate Fighter Show on FOX Sports 1 that will have our logo placed on the mat, and our sports nutrition products featured throughout the program. The average viewership is approximately 300,000 viewers per episode of the top nations.

Science and quality is an important component of who MusclePharm is. Our commitment to leading the charge in sports nutrition is driven by our science. We were adding a new level of sophistication to an industry that needs a leader to set the bar for quality control and safety. And we believe what we're doing and what we're currently going to be doing will set the bar.

In 2014, we will be conducting over 28 different clinical studies that will test for safety, efficacy, and performance of our products. These will be a combination of university studies as well as in-house studies at our MP Sport Science Institute in Denver, Colorado.

A few of the universities we have partnered up with are North Carolina, Chapel Hill, Auburn, South Florida and Wichita State to name a few. In 2012, our research and development budget was $1 million. And in 2014, we look to expand our R&D budget and investment to $4 million. We believe this type of commitment to science is our insurance policy for the future and will be a large contributor to our overall future success.

Operations and logistics. In 2013, we built-out the operational infrastructure to support and manage future profitable growth. We added a distribution center in Tennessee and improved inventories in 2013 by $15.7 million compared to zero inventory in 2012. We have implemented a high level ERP/CRM system to analyze growth trends, inventory levels, and improved sales cycles.

Another focus was margin expansion. Our margins improved in 2013 by 900 basis points to 30% compared to 21% in 2012. Richard Estalella will go over the margin strategy and how we're going to in the future continue to grow margins year-by-year.

Lastly, we're very excited about 2014. As we continue to execute our growth initiatives, enhance profitability and deliver a one of a kind customer experience for science-driven products.

We're reaffirming our guidance calling for total revenue of approximately $150 million and fully diluted earnings per share of $0.20 to $0.22, we're seeing increased momentum in first quarter and we're excited about the year ahead.

NASDAQ listing we believe will happen this year. It’s not a question of this; it’s a question of when. And we feel confident this will happen this year.

I will now turn over the call to Richard Estalella, our Chief Operating Officer and Director to go over financial and operational results.

Richard Estalella

Thanks Brad. I'll start-off by going through some of the financial highlights and then with some of the operational accomplishments. So, first of all, from a net sales standpoint, in Q4 of 2013, sales came in at $37.5 million, an increase of 127% over the $16.5 million for the same quarter in 2012.

We also saw the year end up at just under $111 million, 65% increase over the $67 million that we had in 2012. Couple of key points I'd like to make here is there's diversification in our revenue amongst our top customers.

We've got six customers currently trending over $10 million for 2014 and another seven customers trending over $5 million in 2014. The mix of our large customers is approximately 50% domestically and 50% internationally. So, we were very, very happy with how we started to diversify our sales across multiple large customers.

From a gross margin standpoint, in Q4, we operated at just under 26% for Q4 versus 25% in 2012. And for the year, just under 30% versus 21% in 2012 for the fiscal year. Couple of things I wanted to really share in this category is we've really assembled a top notch accounting team throughout 2013 that now has a complete control of our accruals and tying cost of goods to revenue.

We saw expenses and tying revenue to cost of goods kind of strata periods in 2012. In Q1 of 2013, margins were reported at 36% only because discounts transitioned into and float into Q2. So, with that quarter revised, when you look at the proper accrual process that we now have in place, would have been 30%.

Same thing for Q4 of 2013, it was 20% -- 26% for the quarter only because of rebate programs that were not accrued throughout the year and we had to reconcile before the close of 2013. Had these two factors -- with these two factors taken into consideration, our margins would have been very stable quarter-to-quarter within 1% of any given quarter throughout the year.

We strongly feel that our gross margins will grow to 33% in 2014 and will continue to work to grow those numbers in the future years closer to 40%, but that's -- it will evolve with line extensions and with additional products and supply chain management. It's just not something that will happen overnight.

From an operating expense standpoint, we ran at $15.7 million or 41.8% of net sales versus $6.6 million and 40.3% of net sales in 2012. For the year, we ran at $47.5 million or 42.8% for the year of net sales versus $23.1 million or 34.4% in 2012.

I think it's important to point out that again operating expenses in Q4 ran slightly below the 2013 run rate and we expect to continue to leverage this category down throughout 2014.

From an operating loss standpoint, we saw the losses in Q4 of 2013 at just under $6 million or 15.9% of net sales, versus $2.5 million in Q4 of 2012 or 15.4% of net sales. For the year that number was $14.3 million or 12.9% of gross sales versus $8.7 million in fiscal 2012 and 13% of gross sales.

Again, the loss from operations in 2013 included $10.5 million of one-time charges. In the fiscal year, we feel very confident that we will generate an operating profit in 2014.

Last but not least in this area, earnings per share, we saw earnings per share at a negative $0.45 or I should say a loss per share of $0.45 for the quarter versus $1.12 for Q4 in the same period last year and for the year at $2.46 loss versus $13 loss for the same -- for the fiscal year 2012.

We significantly reduced our loss per share in 2013 and expect to provide positive earnings per share in 2014. From a balance sheet standpoint, again, very proud to see that our assets have grown to over $52 million, up from just under $7 million at the end of 2012, that's a 670% increase in assets. Strong management of liabilities yielded an increase in shareholder equity of over $29 million.

Last but not least, from a financial highlight update, we were cash flow positive in 2013. Cash flow positive, primarily due to financing activities. The nice is that we feel strongly that in 2014, we'll be cash flow positive driven our revenue projections and our expense control targets without the need for any additional financing.

So, from financial highlights, that's pretty much it there. From an operation standpoint, I wanted to give you a few highlights of what we've accomplished throughout the fiscal year. Established a supply chain organization inclusive of a world-class forecasting system, we took control of our inventory and ended the year at $15.7 million versus the consignment inventory model that we had prior years.

We established a world-class fulfillment and distribution network that soft build rates and on-time delivery increased to over 90% from just over 50% in 2012. We've implemented an IT platform that provides a scalable ERP system and top notch CRM system as Brad mentioned earlier, and network connectivity across all of our company locations throughout North America.

Lastly, we implemented a robust budgeting and expense control process that will support a profitable growth in 2014.

In closing, I'd like to say that I feel that we're well-positioned to support our aggressive growth plans in 2014 and beyond.

With that, I'd like to transition over to Sid Rollock who will review kind of business strategy and capital markets. Sid?

Sydney Rollock

Thank you, Richard. Today I will cover our business strategy, our products and brands, and our strategy and results in the capital markets. The MP vision is focused on being the global leader in sports nutrition. We're building a world-class consumer branded lifestyle company based on superior consumer experiences driven by scientific innovation by the MusclePharm Scientific Institute.

Strategic partnerships, best sales force and social engagement. Our products focused on fueling the passion of sport and overall wellness, from world champion athlete to recreational enthusiast across all demographics.

We employ a master brand strategy driven by targeted consumer benefit that fuels sport and wellness. We're constantly being challenged by consumers to innovate and leverage our science into existing and new brands across our channel strategy.

Today, our integrated brand channel strategy aligns the MP Hybrid and Core series to our specialty channel, which is defined by distributors, specialty brick-and-mortar, ecommerce and strategically with Costco. Our new Arnold Schwarzenegger series is aligned globally to Specialty and Food, Drug, Mass. And FitMiss is aligned globally to Specialty and Food, Drug, Mass.

The MusclePharm Hybrid and Core series is a scientifically advanced line of performance driven supplements that fuel athletics performance needs. Our new Arnold Schwarzenegger series is based on legendary cutting edge physic and shape supplement tailored for fitness and body building enthusiasts. And our FitMiss brand is designed and formulated specifically for the active women's lifestyle utilizing clinically proven ingredients.

Our global strategy is gaining momentum in the market. Our master brand strategy is recording great results both with consumers and customers as measured by sales, consumer engagement and new incremental channels.

We're gaining market share in the plus $32 billion sport nutrition market with our growth coming in at plus 65% versus category growth of 7.5%. We are expanding the category by brining new younger consumers into the market, as well as bringing women into the emerging space in the category.

Next, our three-prong channel strategy is working with specialty up plus 46%, international growing plus 70% and in just three short months, FDM now represents over 7% of our business. This is allowing us to diversify our customer channel mix to limit our risk profile with international and FDM representing over 38%. Our goal over the next two to three years for international is for that channel to represent between 40% and 50% of our global enterprise.

Next, our strategic partnerships are working. The new Arnold Schwarzenegger series is exceeding internal and customer expectations; and the marketing initiatives going on in the marketplace are yielding crowds and lots of excitement.

Most recently at the Arnold Expo, where we attracted over 0.5 million consumer -- our booths -- the MusclePharm booths were swarmed with 2.5 hour wait just to interact with our teams, our celebrity endorsers and have the opportunity to experience our products, not only the Arnold line, but our MusclePharm series as well as our FitMiss series. The Arnold event was so successful that we sold out of product on site after day one of a three-day event.

Our partnerships are yielding tremendous value, both with our customers and our consumers. Most recently we just signed on with the U.S.A. wrestling team as we partnered with them in their quest for gold in the 2016 Olympics.

Also, as Brad mentioned, our new global UFC partnership is paying tremendous dividends where we're leveraging that platform to grow in high growth markets globally such as Australia, Brazil, the U.K. and Canada.

Our next pillar is also yielding tremendous results in the short period of time. (indiscernible) leveraging by GlaxoSmithKline Pharma OTC experience, we're bringing best practice and continuing education to our industry based on science and clinical and product efficacy and safety, implementing a new university continuing education certification program with all of our retail sales teams.

In addition, one that I'm most excited about is investing in a state-of-the-art technology that will integrated our ERP and CRM systems with a new noble apps that will allow our retail sales team to not only engage with our customers, but also educate our consumer.

And last but not least, our social engagement strategy led by Co-Founder and EVP, Cory Gregory, is delivering top cortile social engagement metrics as measured by industry sources. To-date, our social engagement is delivering double-digit ROI as measured by our marketing mix analysis.

In summary, our strategy is gaining momentum and our strategic pillars are delivering. Our scientific innovation continues to bring new products and brands to market, our strategic partnerships are yielding tremendous growth opportunities with customers and consumers, our best sales force effort is starting to have a ripple effect in the marketplace around education, safety and efficacy, and our social engagement platform continue to distinguish us within the sports nutrition market.

At this time, I'd like to turn it back over to Brad Pyatt, our CEO and Founder.

Brad Pyatt

Thanks, Sydney. We are extremely well-positioned within the sports nutrition market. And 2013 proved that we are well on our way to becoming the world leader in the sports nutrition industry. We are very excited about our progress and appreciate your continued support as shareholders as we look forward to our first profitable year in 2014.

I will now turn over the call to the operator to open up the Q&A session.

Question-and-Answer Session

Operator

Thank you. At this time, we'll be conducting a question-and-answer session. (Operator Instructions) Our first question today is coming from Jack Wallace from Sidoti & Company. Please proceed with your question.

Jack Wallace - Sidoti & Company

Good morning, Brad, Richard and Sydney. Thanks for taking my questions. Can you go ahead and break out some of the revenue contribution from the Costco, FitMiss and Arnold lines?

Richard Estalella

We don't necessarily breakout our sales at that level of detail, but I will tell you that we are demonstrating tremendous growth opportunities and understand that within Costco you will just see our Combat brand within that channel strategically as well as our FitMiss brand. So there will not be an Arnold brand within the Costco distribution channel at this time.

Jack Wallace - Sidoti & Company

And are there plans to bring on additional SKUs into Arnold, particularly in the Combat, right. So you got Amino 1 and the Combat. Is there -- so no Creatine at least on the near-term horizon?

Sydney Rollock

With regards to Costco, Jack?

Jack Wallace - Sidoti & Company

Correct.

Richard Estalella

Yeah. You'll see here in the near future we're really excited about the Costco partnership. We're going to be coming out with new SKUs in the MusclePharm line shortly. I mean, we're going to do a coconut protein water. That's going to be launching, we're hoping some time in Q4 with Costco. And that was a collaboration with Costco and us trying to figure out a way to attack the ready-to-drink business within their portfolio. So we feel pretty confident about what is going to happen this year.

As far as Creatine and some of the other additional SKUs, we're not seeing that on the near horizon, but you will see in FitMiss we're hoping to have the Delight, protein in Costco sometime in 2014 as well. And then, hopefully add upon that with the FitMiss brand with Burn or Tone more few additional SKUs in the FitMiss line.

Jack Wallace - Sidoti & Company

Okay. Thank you. That's helpful. Now you've been in Costco for five, six, seven months now, what kind of competitive landscape changes have you seen? How your competitors reacted to your presence in Costco?

Richard Estalella

Well, I think the biggest thing you've seen if you go into Costco is they're heavily discounting to try to stay competitive with us. And we're really excited about how successful our Combat protein is. We ran a -- which called an MBM program for three weeks I believe which was a promotional. I think it was $10 off. You think -- yeah $10 off.

Sydney Rollock

$9.

Richard Estalella

$9 off for three weeks. And we went from averaging $500 to $700 a week per store to roughly around $850 to $900 during those three weeks; and after we stopped that promotion, we have now been able to hold a level of about $800 to $900 per week.

So, not only did the promotion help us get awareness, it's now driven our sales dramatically across each store where we're not having the discount as heavily, but we're seeing our competition now having to try to play that game and discount, which is fine with us because we now don't have to discount because we believe we have a superior product and that we believe its competitively priced.

Sydney Rollock

Right. And to build on that the other thing that we've seen is again, we strategically went into Costco with the MusclePharm brand because to build the awareness and to start to debunk some of the industry myths. And what we've seen is that by launching with the unique SKU within Costco, it has actually helped to grow our entire Combat line. So we're very, very encouraged with our strategy.

Richard Estalella

Jack, and lastly on this topic, I mean one of the things that we've been able to do that I think are most of our competitors, if not all of them, had not been able to do is that our success in the U.S. is very quickly sprung -- allowed us a spring board into the international markets for Costco, so we've already launched Canada, Australia and most recently Taiwan on the heals of the U.S. launch, which is really helping us to grow market share abroad in those markets where those warehouses are doing so well for them.

Jack Wallace - Sidoti & Company

Great. Thank you. That's all extremely helpful. And then, moving into 2014 (inaudible) what amount of promotional discounting do you have factored into that guidance?

Richard Estalella

So we feel that we'll operate -- it will vary throughout the quarters based on different things that happen with the business. For example, in Q1 we always go through special Arnold promotion to support that major event. In Q3, we do special things; Q3 and Q4, startling those quarters for the Olympia event.

But we feel very strongly that our discounting will range anywhere between 9% and 12% strategically on the lower end normally and on the higher end when we're gobbling up market share. And we're doing it again, so that we got additional placement and ROI longer term when we're in the higher end of that spectrum.

So I think we've got this area very well under control. We're managing extremely well. We're making sure that it delivers top line and bottom line growth as part of whatever we do from a promotional perspective. But I know, Sid's got a lot more feedback in this category too.

Sydney Rollock

Yeah. I think -- thank you, Richard. I think what you'll also see is, as you know, this is a very competitive category. So we'd like to also reserve the right as we continue to expand into new segments with new products that we'll adjust our promotion strategy accordingly, knowing that we have a deliverable to hit on the bottom line.

So as Richard said, he's given you a range, but also understand that as we continue to pursue aggressive growth and enter new categories, we will exercise some financial flexibility there to hit our top, but also more importantly, to hit that bottom line.

Jack Wallace - Sidoti & Company

Great. Thank you. I'll take my additional questions that might get back in the queue. Thank you.

Operator

Thank you. Our next question today is come from Keay Nikae from Ascendiant. Please proceed with your question.

Keay Nikae - Ascendiant Capital

Thank you. Can you give us split in Q4 of U.S. versus international sales?

Richard Estalella

I'm sorry. Can you repeat the question?

Keay Nikae - Ascendiant Capital

What is the mix in terms of U.S. sales versus international sales in Q4 revenue?

Richard Estalella

Yeah. I think as you look at where we're coming in to end 2013, you'll see that international now represents about 31% of our mix, and domestic representing the other 69%, so that's where we're coming in today, but know that we're continuing to see momentum. And as stated, you will see that our goal is to get international upward to 40% of the total business. And let's just say that we're on track relative to that objective.

Keay Nikae - Ascendiant Capital

Okay. My next question pertain to the gross margin, you talked about that number going up to another 3%. Help us understand what types of things you are doing that allow you to get there this year.

Richard Estalella

Yeah. So again, we ended the year at 30%. We've given guidance at 33% for 2014. We feel very comfortable that we'll meet that number. We've, again, looked at leveraging our incremental volume to purchase better.

We're working with our strategic partners on the manufacturing side to optimize our purchasing, so that again converges to more gross margin. And we're also working internally with our sales team to manage the mix. So I think that it's very, very important that all of those run in parallel, and I think we've got a real good strategy to do that.

Keay Nikae - Ascendiant Capital

Okay. Is any of those three a larger contributor to the 3% increase?

Richard Estalella

No. I really think that again, we're managing them all, as I said, in parallel. I think they all bring equal importance to them -- to the incremental 10% margin we want to grow this year.

And that I think that it will set the platform for what we want to accomplish over the next few years where we eventually -- it's not going to happen overnight as I said earlier, but eventually with line extensions, with new product categories we want to eventually grow that number closer to 40%. So this is kind of -- this puts the foundation in place to see a steady increase year-over-year ongoing.

Keay Nikae - Ascendiant Capital

Okay. And then a final question has to do with your salary and wage expense. In the last quarter on the Q3 call you talked about an amortization rate of about $2.4 million per quarter going forward, and help us understand what that number is that you are using now.

Richard Estalella

Yeah. So again, it's pretty much in that same ballpark. And again, it's kind of a steadily kind of transition in number as different thing -- different past RSAs and so forth either phase out or new ones phase in.

But again, we feel from a salary standpoint, we put the infrastructure in place to support the business and now we'll star to see nice leverage going forward. We also feel that we built the management team and need to continue to kind of make sure that that team is poised to grow going forward.

So again, we just need to turn around and make sure that folks are properly bring compensated at all levels for the significant and extraordinary effort we're putting to grow this company the way we plan over the next five years.

Keay Nikae - Ascendiant Capital

Right. So what I guess what I'm looking for is just for that particular expense line what type of quarterly run rate should we expect?

Richard Estalella

So I think that we're -- I think that if you look at our salaries year-over-year, I'll give you kind of a headcount comparison. I think it's probably the easiest way to put it. So in 2013 we increased our headcount by 53 people, taking us to 95 overall.

We anticipate that number to go to a 128 in 2014 with the primary -- with almost predominantly that full number being headcount to staff a west coast distribution center. So it will be incremental salaries that will really benefit us from a freight, and time and transit standpoint to our customer. So it's really a win-win there.

Outside of that we've got probably 10 or less new hires that will turn around and support the transactional activity that's happening throughout the organization to stay on top of what the infrastructure we put in place. So the run rate -- the spend will be very similar to the run rate that we've got and we'll start to see leverage in that category.

Keay Nikae - Ascendiant Capital

Okay. Thanks for that. And just the final question, were in the last day of Q1 any commentary you guys want to make on the sales trend for Q1?

Sydney Rollock

Yeah. I think our sales trend for Q1 is let's just say probably ahead of plan. And we're feeling very good about those strategic pillars that we discussed continuing to gain momentum. So we're very confident on the guidance that we've given and our sales rate continues to support that guidance.

Richard Estalella

Yeah. Q1 is the strong quarter for us, so we feel comfortable that the annual projections we gave are good. And as we finalize Q1, we'll kind of reassess what that means to 2014 and keep you updated.

Brad Pyatt

And I think lastly, we want to emphasize that this profitable growth this year. We had a lot of things that were legacy for the years passed that were continuing to follow us. And going into 2014 you're going to see a very clean balance sheet, a very clean 10-Ks and 10-Qs going forward. That's easy to read and see that the company is operating very aggressively on the growth, but also we are still focused on now delivering profitability for the shareholders.

Keay Nikae - Ascendiant Capital

Okay. Thanks.

Operator

Thank you. Our next question today is coming from Todd Rowley from Deutsche Bank. Please proceed with your question. Well, Mr. Rowley, your line is now live. Please proceed with your question.

Todd Rowley - Deutsche Bank

Hi guys. How are you?

Sydney Rollock

Hi, Todd. Good morning.

Brad Pyatt

Hi.

Todd Rowley - Deutsche Bank

A quick question, can you possibly break down the international sales by region? I mean where do you see stronger sales internationally coming from at the moment?

Sydney Rollock

Yeah. I think what you see in terms of our growth is we're experiencing phenomenal growth in -- I'll call it the Asia-Pacific region, especially through Australia and New Zealand. In addition, we're starting to really ramp up in South America in terms of Brazil. And we're also starting to see some really nice growth as well up in Canada.

So -- and then also, if you look on the European continent, we're getting some really nice growth within the U.K. as well. So those are the four major areas that we're demonstrating some strong growth right now.

Todd Rowley - Deutsche Bank

And is there differentiation between the product that they're buying in these regions? I mean is there one product that's sort of selling better internationally than others?

Richard Estalella

I think you'll see, Todd, the MusclePharm line has done very well internationally. And it's still growing, which is obviously -- I'm sorry hero brand. We always stay focused on that book.

The additional Arnold and FitMiss where international is starting to grow expediently and there even a broadening in their distribution channels and within their regions because now we're giving them a platform of brands and because MusclePharm has two of the biggest, I'd say, marketing platforms with the Ultimate Fighting Championship and Arnold himself, international customers trust the MusclePharm name.

So as we brought Arnold and FitMiss, we're starting to see new sales channels that we never would have been able to take the MusclePharm Hybrid and Core series into. So we're really seeing our business internationally leverage at a very high growth rate.

Todd Rowley - Deutsche Bank

Do you have any estimates pertaining to potentially percentage of overall sales that international will be this year as oppose to last year?

Richard Estalella

We think we're going to be in the ballpark of 40% this year will be international.

Brad Pyatt

Okay. And Todd, to add to that, one of the things that really has helped us internationally is working with our head of international sales, we've really focused on custom packaging, multi-lingual packaging, things that allow the product to be perceived much better abroad and it's working very, very successfully for us.

Richard Estalella

Exactly.

Sydney Rollock

And in line with our safety and efficacy we're creating specialty formulated products within our MusclePharm Arnold and FitMiss series to meet all the regulatory requirements within those respective countries.

Brad Pyatt

And in addition, you're going to see that we've announced that we're going to start this year putting distribution centers in Brazil, western Canada, U.K….

Todd Rowley - Deutsche Bank

Yeah. We'll that's -- that’s kind of like that second link to my question there is what type of cost do you anticipate if any building out distribution centers in these regions? I mean do you have any of that kind of building?

Brad Pyatt

Everything we did this year in terms of guidance of the 150 and the additional distribution centers, our cash flow will fund that. So we're very confident that what we put out there to the public of our plan we're going to execute it with our own business model that we're leveraging now.

Richard Estalella

Exactly, plus our international distribution partners, we're creating some unique partnerships in that space thereby keeping our cost structure down. Yeah, so keep in mind that if you look at 2012 and even early 2013, everything we did globally was a funnel through one distribution spot. And what we'll be able to do going forward is, we've gone from just basically one manufacturer and distribution operation in Tennessee to now having a presence in the east coast, southwest, west coast. We're going with our second distribution center. We've got a Canadian operation that's servicing all of Canada out of the eastern part of the country. We've got our first Canadian manufacturer.

So our goal is that through 2013 we increase international manufacturing capabilities to three markets on various continents. And then we also turn around and increase our distribution and manufacturing domestically to reduce freight cost.

A lot what we'll be doing, as Brad said, we'll all of what we're doing is factored into our guidance, but a lot of what we'll be doing will be funded by freight savings, which as you know, is the fastest creeping up category of all expenses. So it's really a win-win in all cases. We'll reduce our cost overall and we'll increase our time to market to our customer so that they can get their product faster. We'll be within 48 hours of every one of our customers once we complete this process, which is pretty -- which exceeds their expectations which is where we want to always be.

Todd Rowley - Deutsche Bank

All right. Great. Just one last question to the west coast manufacturing facility you were talking about. Was that pursuit to the BioZone acquisition?

Brad Pyatt

Yeah. So it's part of that -- integrating that operation which we've done very successfully this quarter. We will leverage our distribution center within that same infrastructure. So that's been, again, another win-win of that transaction.

Todd Rowley - Deutsche Bank

Is it up online yet, or if not, what's the timeline to have it running?

Brad Pyatt

We'll currently kind of finalizing the design. We'll be kind of stocking the distribution center this quarter and hope to be distributing at that facilities I should say, this next quarter. And hope to be distributing to our customer out of that distribution center either early May or late May. It will be in that May timeframe at one point or another.

Todd Rowley - Deutsche Bank

Okay. Great. All right. Thanks guys.

Richard Estalella

Thanks Todd.

Operator

Thank you. Our next question today is coming from Matthew Kimble (indiscernible). Please proceed with your question.

Unidentified Analyst

Yeah. Good morning, gentlemen. Wondering if you look at your OpEx, implementing the CRM and the ERP, how much did that cost? And was that one-time item for 2013?

Richard Estalella

So it's that actually we've been very creative by what we've done in that category. And I think we not only prevented a significant amount of start-up expense, but also our ongoing expenses. So it's not unusual for a company our size building an infrastructure for the size we want to get to, to spend anywhere in the area about $3 million to $5 million in capital to setup a data center and an IT infrastructure, and another $3 million to $5 million annually to maintain it.

We've gone to a very creative, cutting edge, cloud-based technology and infrastructure which reduced our start-up to a very small percentage of that start-up cost and our ongoing expense to a very small percentage. So we accomplished two things, we built what we built last year at a much lower cost than traditional IT infrastructure is setup to be and ongoing we basically we'll keep that expense low.

So again, that $5 million -- $3 million to $5 million of CapEx and $3 million to $5 million of OpEx in our infrastructure will probably be under $1 million in CapEx and well under $1 million in OpEx. So you can see the difference.

And quite frankly, I mean we're not prepared to announce it yet, but a lot of our partners have actually submitted us for a various ROI awards and creative infrastructure awards because of how we've done this in a very cutting edge standpoint. And I think that as the year goes on, you'll see more and more about what we've been able to accomplish and you'll see a lot of folks kind of leveraging and emulating what we did, which to me again copying is the most sincere form of flattery so I'm up for that.

Unidentified Analyst

Right, right. That's interesting. Just so I'm clear, you have -- your earnings guidance of $0.20 to $0.22 of earnings per share, does that include your non-cash based compensation?

Richard Estalella

So, it's basically, again, a calculation totally based on GAAP. So it's basically our operating profit divided by the number of shares outstanding. So yeah, it includes everything. And then, of course, there'll be a series that diluted and all the various categories; as you know, there could be two or three different ways that earnings per share is calculated, but we're basing it on operating profit.

Unidentified Analyst

Got it. So basically, on a pro forma basis, you are earning over a $1 a share. It's one way to look at you possibly as acquisition candidate, they would ex that out. So, I mean I applaud for taking advantage of the weakness in your share price and buying back stock, I think that's a smart move. Are you still -- you didn’t mention a buyback in your -- on the call so far, so I was wondering is that buyback still active?

Brad Pyatt

Yeah. The buyback is still active. However, we have not participated buying since late December due to the blackout period. So, we'll probably start to seeing backup the fourth -- third or fourth day after Q1 is announced and I think you saw too the management repurchased over almost $275,000 with the stock ourselves.

We're very confident in our business plan and we believe the price of the stock right now is a very good buying opportunity and we wish we could be in there doing it, but unfortunately during the blackout period, the company and executives can't participate until after Q1 is announced.

Unidentified Analyst

All right. That's great. I love seeing that. If you don't mind, we haven’t talked about the SEC. In your letter, Brad, I think you said that those discussions are continuing to go forward, but said that, everything -- the way I read it; everything was based on the past and had nothing to do with going forward. So, wondering if you could kind of expand upon that at this point.

Brad Pyatt

Yeah. I mean we've -- collective work with SEC for almost a year. It has taken longer than we all anticipated, however, we've been very thorough in the way we've been given them the documentation they needed and we feel pretty confident that the biggest things are looking at us past perks that may be weren’t disclosed properly, but we're talking to number that's less than $200,000 for three years, but if you look at the 10-K, we now have put all the perks in from the last three years and that was the biggest table that the SEC was concerned about and wanted to see that we disclose which we just did now.

However, we didn’t do it in the past for several reasons, partly not having the prophecy of our legal team to help us point that out and as a young CEO at that time, I take full responsibility, but I've learned from those mistakes and going forward, we have as you've seen the management team has grown to ensure that going forward shareholders won't have to go through another investigation and that's why I'm confident this is all based off 2010, 2011, and 2012 perks.

And there were some related transactions particularly with Bodybuilding.com that we didn’t disclose back in 2010 and 2011 that we have now disclosed and we've also implemented a disclosure committee to ensure going forward that we have several people involved in what we disclose and don't disclose.

So, those are the biggest things that the SEC was looking at. We feel that we've given them everything and satisfied with a vast and now we're hoping to have a resolution here in the next quarter. We're hoping to have this thing resolved in Q2.

Unidentified Analyst

That's great news. And lastly, do you guys expect to get out on the road and kind of communicate to investors in the near future?

Brad Pyatt

Yeah, we thought that this last quarter, we kind of went quite just to focus on our business we -- you'll see in Q1 when we announced, we had such a heavy start in sales and we have a lot of initiatives that we'll be announcing shortly, our new brand expansions, products distribution partners.

So, Q1 we really focused on just getting the infrastructure set for 2014's growth. We will be going out now that 10-K is announced. In the next couple of weeks, we'll be participating in some road shows and telling the story about MusclePharm.

Unidentified Analyst

Great. Well, thank you very much for answering the questions. And god luck.

Brad Pyatt

Thank you.

Operator

Thank you. Our next question is coming from Jack Wallace from Sidoti & Company. Please proceed with your question.

Jack Wallace - Sidoti & Company

When we see some new product lines or new formulations that are incorporate more those BioZone assets that you acquired late last year.

Brad Pyatt

We're -- we've been heavily in development for the last six months working on a line called DROPZ and we're probably in the Q4 to Q1 timeframe of launching that. There's a big trade show in October that's more tailored to the 7/11 and C stores that will be going to and so what you can look for about Q4 launch time of that and we're going to launch first will be an energy-based product that will combine the pure energy relationship that we have with ChromaDex which we believe is a safer caffeine substance and that allows us attack that market with a new delivery system combined with Qzone.

And if you look at -- we're really excited about the energy market because it’s a such a big market, controlled by obviously three or four dominant players and based off our research if you kind of look through the history of energy drinks, the kind of one from pop, joules, Mountain Dews, then it went to Red Bull, then it went to a bigger can of Monster, then it went back down to a five-hour energy shot.

So, delivery is always the -- an innovation is always the driver for new products in that distribution channel and if you look new energy, I believe last year, their first year off the gate, they did almost $70 million in sales. Granted they have a huge partner of distributing their brand, but we feel that our DROPZ energy product has a substantial upside in the C store channel in 2015.

Richard Estalella

And just to add to that by the way, I mean we've got -- as Brad mentioned, not only that category, but about eight to 10 products in the development stage to manufacture out of that operation to support the MusclePharm.

What we also fully embraced and plan to continue to support the existing contract manufacturing that that facility did, we've been able to kind of rekindle relationships and really start to expand and partner strategically with some of the contract -- some of the customers here that complete their products through us and see that category also growing.

So, the nice thing is that both those mutually -- most of those independent contract manufacturing efforts will feed off each other to develop a very profitable structure there in the long run.

Jack Wallace - Sidoti & Company

Great. Thank you. And then I haven’t been necessarily seen here in New York, but is the capronic commercial going to be nation-wide or is it still say a regional tool?

Brad Pyatt

Yeah, we're still messing around with that a little bit in figuring out what we want to do with the commercial. We've kind of kept that regional and we don't feel like the ROI on that is wanting us to go national. And we believe for a several reasons, we're still a young brand. We're not fully distributed through all the places we want to be. So, we're going to pull back on the national campaign and probably channel it for 2015, but we're still testing some markets regionally to see where the ROI is for our shareholders.

Jack Wallace - Sidoti & Company

Okay. Thank you.

Operator

Thank you. We have reached the schedule of one hour timer for this call. If you have any further questions, please contact Investor Relations.

I'd now like to turn the call over to Brad Pyatt for closing remarks.

Brad Pyatt

So, as you guys can see we had a very successful 2013 from a growth standpoint. I want to make it very clear to our shareholders that we understand the profitability and the requirement to take to get there and we appreciation your guys' confidence with us and your patience through the years. And we're excited in 2014 to for the first time to give our shareholders profitable growth as we continue to have aggressive growth on the topline.

And in close, I'd just like to say that we're going to still be very focused on topline growth, but again, our margins will continue to improve year-over-year and we feel very confident in our business plan. So, thank you again. And look forward to speaking with you guys in a couple of months after the Q1 results.

Operator

Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!