MusclePharm Corp. (MSLP) CEO Brad Pyatt on Q2 2014 Results - Earnings Call Transcript

Aug. 5.14 | About: MusclePharm Corp. (MSLP)

MusclePharm Corp. (OTCQB:MSLP) Q2 2014 Earnings Conference Call August 5, 2014 8:30 AM ET

Executives

Matt Sheldon - IR

Brad Pyatt - President and CEO

Don Prosser - CFO

Analysts

Keay Nikae - Ascendiant Capital

Jack Wallace - Sidoti & Company

Operator

Greetings and welcome to the MusclePharm Corporation Second Quarter 2014 Conference Call. At this time, all participants are in a listen-only mode. A 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 Corporation. Thank you. You may begin.

Matt Sheldon

Thank you, operator and good morning everyone. Welcome to MusclePharm’s 2014 second quarter conference call. On today’s call are Brad Pyatt, Chief Executive Officer, Richard Estalella, President; Don Prosser, Chief Financial Officer; James J. Greenwell, Chief Operating Officer; and Sydney Rollock, Chief Marketing Officer.

First some housekeeping before we begin. Yesterday MusclePharm issued a news release announcing the Company’s financial results for the second quarter of 2014 and this morning filed its quarterly report on Form 10-Q. If you have not received this information or if you'd like to change your contact information please contact MusclePharm Investor Relations at investors@musclepharm.com. In addition, I’d like to remind everyone that today’s call is being webcast at www.musclepharmcorp.com. Following the conclusion of the call the webcast maybe accessed on that site will be archived for one year.

During today’s call including the question-and-answer session, I would like to remind you that any projections and forward-looking statements made regarding future events or MusclePharm's future financial performance are covered by the Safe Harbor provisions of the Federal 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 to Brad Pyatt, Chief Executive Officer of MusclePharm. Brad?

Brad Pyatt

Thank you Matt and good morning everyone. As I did last quarter I will start with some brief remarks and then open the call up to the Q&A.

Let me begin with the results we reported yesterday. We are very proud to report a solid second quarter that period that has historically been a challenge for us based on the timing of domestic industry event. MusclePharm net sales of $46.7 million for the quarter and $96.9 million for the first six months demonstrate the strength of our brands and attraction they are gaining with consumers throughout the world.

As MusclePharm continues to build up following; we are in a unique position to further differentiate ourselves by providing customers relevant and effective products backed by clinical research and a sure experience to quality that appeal to athletes of all levels male and female. We are making excellent progress in building market share and what appears to be a growing category. I’d like to take a moment to highlight a few recent accomplishments.

During the quarter, we expand our relationship with GNC doubling the number of stores carrying our products and obtaining its dedicated wall featuring our products. This is something we worked really hard to earn in a development that presents a significant opportunity for future product exposure and growth. With Walgreens I'm pleased to announce that we are expanding our relationship by adding two fitness products in the store Burn and Ignite. In addition, we are currently working on a ready to trigger version of our women’s protein delight for Walgreens that we anticipate to launch sometime in 2015. Through unique promotions and products we help drive consumers to stores such as appearances at COSCO with Colin Kaepernick. Yesterday we also announced that Johnny Manziel is joining the MusclePharm team.

Along with expanding our relations with stores and athletes, we’re also introducing new products within each of our brands. In fact we launched over 60 new items in the second quarter consisting of new products flavors and sizes. We are also hard at work on new products such as Amino1 ready to drink as well as several other products and brands that I look forward to discussing in the near future.

Our goal is to have our brand portfolio with broad and diverse lifestyle appeal and MusclePharm’s relationship with Tiger Woods helps us achieve this goal. The relationship is already delivering value with the exposure that MusclePharm received at the Open Championship. Over 7 million people watch the Open and with a total bag exposure of nearly an hour and half which translates to helping build our brand awareness for MusclePharm.

As we continue to develop and introduce new products, our overall product mix will continue to diversify. This will lead to some variability quarter to quarter in gross profit margin. Near term we continue to expect that gross margins will be around 32% and gradually increase as we optimize our mix and vertically integrate. We are truly pleased with our progress and the opportunity ahead.

With that I would like now to open up the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Keay Nikae with Ascendiant Capital. Please proceed with your question.

Keay Nikae - Ascendiant Capital

My first question for you guys is with respect to the Arnold product line. Obviously we had a very strong contribution in Q1 that I'm wondering with a lot of the initial sales that you generated in Q1. What kind of follow up price in sales did you see in Q2 from those accounts?

Brad Pyatt

Yes so it actually broke down into three different categories for us, again continues to be very strong. We had much of our international follow up orders continued to happen in Q2. We saw some of the Arnold classic tradeshow orders flow into Q2 and of course regular reorders on the domestic side. So we continue to be very happy with the progress in that product line.

Keay Nikae - Ascendiant Capital

Second as it relates to COSCO and the number of skews that you have there, what should we anticipate looking forward there in terms of adding additional products sold through COSCO?

Brad Pyatt

We’re currently working on about two to three additional items at this time. The timing we believe is in next two quarters. We should have few of those placed and we’re also growing internationally and work on few other additional countries to Australia, Canada and Korea that we’re currently in.

Keay Nikae - Ascendiant Capital

And then with respect to GMC, good to see you able to strengthen that long-term relationship by adding more skews there. Can you help us understand how the employee -- the sales people at GMC are now incentivized or maybe better incentivized to sell your product versus some of the other branded GMC products?

Brad Pyatt

I think the biggest strength of the relationship now is the dedicated wall. That’s how the sales associates at corporate and the decision makers are very happy with MusclePharm and are really getting in engaged with MusclePharm. So I think that’s the biggest strength to us -- is getting that dedicated wall which maybe five for other brands have. So that’s what’s the biggest incentive where the sales associates know that GMC is serious about us and we’re serious about them and we’re just excited about the next level of opportunities that that account presents for us.

Keay Nikae - Ascendiant Capital

And then just one final question, and I’ll get back in queue. Any update on the SEC investigation?

Brad Pyatt

At this time Keay, we're currently working at it, the process, but at this time we can’t really comment on it. You should consult the Company statements about the investigation in 10-Q and prior files.

Keay Nikae - Ascendiant Capital

Is it fair to say that the ball is still in the SEC’s court or has there been any other further requests by them for information from you related to the prior disclosed issues?

Brad Pyatt

Since the last quarter I can tell that we’re further ahead in the process. Again it’s a process and we’re being very diligent with them and very transparent and very forthcoming. So every time they ask for requests, we’re following what they’re asking. So we’re further in the process than we were last quarter, I can just tell you that.

Operator

(Operator Instructions). Our next question comes from the line of Jack Wallace with Sidoti & Company. Please proceed with your question.

Jack Wallace - Sidoti & Company

I was wondering if you could give me a better idea for what the international sales looked like, a slightly more granular level. What brands were overseas? Is it fair to think that Arnold was in charge there?

Brad Pyatt

I think as you guys go forward Jack, what we’re trying to present is we have multiple brands and we’re breaking this into FDM specialty international. And within the international market Arnold has done very well for us based on who Arnold is in the brand awareness, but fitness is now getting traction there and MusclePharm is continuing to grow. So all in all we’re happy with all three brands and as we continue to add new brands and new products you continue to see international market share expand.

Jack Wallace - Sidoti & Company

And are there particular areas outside the U.S. that are worth highlighting, say anywhere in Asia or South America, Europe?

Brad Pyatt

We’re doing very strong Jack in Canada. The EU is really, really taking off extremely well this year and continued to grow as we would expect and of course in general South America is a very, very strong market for us. So we’re doing very well. We’re in 110 markets as you all know and we’re doing well across the board. And as Brad mentioned our focus isn’t on Arnold or MP or Fitness. It’s all three lines across every distributor and we’re doing very well in having all lines represented by every distributor and every market we’re in.

Don Prosser

And Jack I can follow up with that just to give you some data inside of kind of how many products we launched in Q2. Last call we discussed how we have to do what we call BTO, Built To Order products which are special labels, special formulas for international markets which takes time and development. But last quarter alone we launched 50 new product versions and we currently have a number of other versions going through the process now.

Jack Wallace - Sidoti & Company

Just couple other questions here, can you just give us I guess an update on how the BioZone acquisition is going and what's that’s been for distribution capabilities among others?

Brad Pyatt

Yes, it’s done extremely well. I mean you guys have probably looked at the numbers in the past when BioZone was a standalone entity and we’ve integrated without significant burden to the Company. And it basically run the first six months at pretty darn close to breakeven, which is a dramatic change over what the last six months were for them if you look at the prior year. And we expect profitability this quarter. So standalone, they are accretive to the organization, not to mention the fact that the vertical integration of the strength that we now have in liquids and gels, it makes us stronger ongoing.

As I’ve mentioned before, we have plenty of strategic partners that do a great job with us in the area of capsules, tablets and powders. Our weakness was finding somebody that we could really partner with on the liquid and gel side, and now we have it within our organization and it’s done very well. We’re both a combination of equipment and formulation that we’re working on for new products there, probably won’t see anything significant till Q1 of ’15 but a lot of products in play that will help us in the next fiscal year.

Jack Wallace - Sidoti & Company

Okay, thanks. And then last before I hop back in queue, are there any other significant assay endorsement fields that you’re working on?

Brad Pyatt

That’s part of our brand Jack. As you know we’ve been here long enough. So the Tiger Woods, the Johnny Manziel, those are opportunities we knew that were going to present themselves this year and we've put that into our budget when we started the year. For 2015 we have a few assets, we’ve kind of found that we believe can help diversify our portfolio of brand ambassadors and that aligns with our global strategy. And at the end of the day we believe that MusclePharm is an emerging lifestyle brand and for that we got to continue to pursue all sports arenas and lifestyles to continue to build the brand awareness.

Operator

(Operator Instructions) Our next question comes from the line of Keay Nikae with Ascendiant Capital. Please proceed with your question.

Keay Nikae - Ascendiant Capital

Just two more questions. First one is on operating expense. You followed up last quarter’s 15.4 with 15.2 this quarter on slightly lower sales. But as you move forward to the back half of the year, what’s the sort of a target range for that OpEx that we should be thinking about?

Brad Pyatt

So I guess the easiest way to answer that would be to put it as a percent of net revenue, right. Because again needless to say, as we scale top line it moves proportionately and we can also -- to an extent now we’re operating at a level where we can trend down if we have to. So we’re managing that extremely well. I think we can operate in the 30% to 31%, which is basically either at or better what we operated in Q2. And longer term I think we’ve got about 3% of play in that category that will get leverage as we grow top line. Again, and I'm referring to in the next 12 to 18 months and probably long term in the next three years or so probably another three points on top of that to give you a little bit of forward thinking of where we’re heading towards. So we do expect to see leverage as top line growth. At this point we’ve established our base and you’ll see that that number's right in that $15 million range on a quarterly basis.

Keay Nikae - Ascendiant Capital

And leverage if I'm thinking about it correctly is perhaps lower salary and wage expense offsetting increased advertising expense?

Brad Pyatt

It’s probably a combination of some leverage in SG&A and salaries offset by continued focus on advertising and promotions and R&D expense.

Keay Nikae - Ascendiant Capital

Okay. And then just last question, just about the gross margin. Nice to see some better consistency in first half of this year versus last year. As we go forward, what are the points of leverage there to try to improve that?

Brad Pyatt

Well, I think volume in itself and then in addition to that, again continued negotiations on our procurement and supply chain processes along with additional potential vertical integration. So I think that we’ve got another 200 to 300 basis points in the next 12 to 18 months. And again we’d like to eventually see the Company grow over the next number of years into the low to mid-40s range.

Operator

Thank you. Our next question comes from the line of Jack Wallace with Sidoti & Company. Please proceed with your question.

Jack Wallace - Sidoti & Company

Just a quick follow up on the motion and advertising arena. You have got yourself a couple of certainly nationally well-known and international brands and then some of the athletes that are endorsing your products Tiger, Arnold, Kaep, Johnny. Could we see any national or even international commercial, something on TV or that sort to leverage those brands that you have associated with your own?

Brad Pyatt

That’s kind of been our focus. We tested out a commercial about a year ago with Kaepernick and for that reason, it just didn’t get the play that we thought the ROI needed to have. But now with, I think the brand being a year more mature and adding the likes of Johnny Manziel, Tiger Woods and Kaepernick continued to get huge exposure. I think we’re at a level now with the athletes we have with us and our brand that you can start I guess getting prepared that we will start venturing into the commercials in 2015.

Operator

Thank you. We’ve come to the end of our time for questions. I would like to turn the floor back over to Mr. Pyatt for closing comments.

Brad Pyatt

I just want to thank you again for your support. We look forward to updating you on our progress as we continue to grow and work to enhance shareholder value. Thanks again.

Operator

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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