MusclePharm Corporation (MSLP) Q2 2021 Earnings Conference Call August 16, 2021 4:30 PM ET
John Mills – Managing Partner-ICR, Inc.
Ryan Drexler – Chairman and Chief Executive Officer
Joe Cannata – General Manager-MusclePharm Beverage
Sabina Rizvi – President and Chief Financial Officer
Conference Call Participants
Good afternoon, everyone. And thank you for participating on today’s Second Quarter 2021 Business Update Call for MusclePharm. Joining us today is MusclePharm’s Chairman and CEO, Ryan Drexler; then company’s new Business Partner, leading the Beverage Group, Joe Cannata; and the company’s President and CFO, Sabina Rizvi.
Following prepared remarks, we will take your questions. As a reminder, in order to ask a question, please go to the Investor Relations section of the company’s website at www.musclepharm.com and you will be able to submit your name and questions on the webcast link.
The discussion today will include forward-looking statements except for historical information herein matters set forth on this call are forward-looking within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements about the company’s commercial progress, success of its strategic relationships and projections of future financial performance.
These forward-looking statements are identified by the use of words such as grow, expand, anticipate, intend, estimate, believe, expect, plan, should, hypothetical, potential, forecast, and project, continue, could, may, predict, and will, and variations of such words and similar expressions are intended to identify such forward-looking statements.
All statements other than the statements of historical facts that address activities, events or developments that the company believes or anticipates will or may occur in the future are forward-looking statements.
These statements are based on current assumptions made based on experience, expected future developments and other factors that the company believes are appropriate under the circumstances.
Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond the control of the company. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements.
Accordingly, investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they’re made. The contents of this call should be considered in conjunction with the company’s recent filings with the Securities and Exchange Commission, including its annual report on Form 10-K and the quarterly reports on Form 10-Q and current reports on Form 8-K, including any warnings, risk factors and cautionary statements contained therein.
Furthermore, the company expressly disclaims any current intentions to update publicly any forward-looking statements after this call, whether as a result of new information, future events, changes in assumptions or otherwise.
In order to aid in the understanding of the company’s business performance, the company is also presenting certain non-GAAP measures, including adjusted EBITDA, which are reconciled in a table in today’s press release announcing our second quarter 2021 results to the most comparable GAAP measures.
Management believes that adjusted EBITDA provides useful information to the investor because management uses adjusted EBITDA as a supplement to GAAP measures to further evaluate period-to-period operating performance, as well as the company’s ability to meet future working capital requirements.
The exclusion of non-cash charges including stock-based compensation, depreciation and amortization is useful in measuring the company’s cash available for operations and performance of the company.
Now, I will turn the call over to the CEO of MusclePharm, Ryan Drexler. Please go ahead.
Thank you. Good afternoon, everyone. On the call today, I will provide a brief overview of our operational results for the second quarter. And then Joe Cannata will talk about the initial success of the MP Energy line. And then Sabina will review the financial results in more detail. After that, we will open up the call and take your questions.
For the first time in our company's history, we'll be providing long-term guidance for our beverage line. The initial reaction to our beverage line is very strong and once fully rolled out, we expect to quickly hit our goal of 1 million in sales in the near-term, and fully expect to achieve 30 million in annual sales from MP Performance and Fitness products in 2023.
Last quarter, we announced the company had teamed up with former Rockstar Energy executive, Joe Cannata to build out the national distribution network for our new fully functional drink line, MP Performance and Fitness. In quick succession, we have now eight multi-state distribution deal with world-class distributors. Signing distributors before product has even been launched is almost unheard of in the beverage industry and is a testament to the power of the MusclePharm name and as well as Joe's industry contacts.
Our base business continues to deliver strong top line results with 14% sequential revenue growth in the second quarter, despite industry-wide supply chain shortages. This is a testament to the strength of our brand and the restructure we undertook two years ago and are well positioned to return to profitability when the protein market normalizes. I'm excited to announce we are getting back to our marketing roots with a digitally focused plan. As part of this plan, we are engaging T.J. Dillashaw, two-time Bantamweight UFC Champion for marketing and business development. We will leverage his unbelievable marketing skills of how we built 1.4 million social media followers to significantly grow our social media engagement over the next 12 months.
Now we'll turn the call over to Joe to tell more about our beverage line.
Thanks, Ryan. As Ryan just mentioned, I too am very confident in this beverage business hitting $30 million in annual sales from both the MusclePharm and fitness products in 2023. My confidence is bolstered by the success we have had in signing on distributors before product launch. As you saw in our latest press release this morning, we announced we have signed our eighth distributor, New Age Beverage based in Colorado. We are beyond excited about this partnership, not only because New Age is one of the best independent beverage distributors in the region with the portfolio of premium products, but also because MusclePharm originated in Colorado and has a strong consumer following and trademark familiarity in this geography. In a very short period of time, we have secured top markets in the United States, Australia, New Zealand and online. This certainly speaks to the strength of our reputation, brand and product offerings.
The beverage market is worth $14.5 billion in the United States and over $57 billion globally with a projected annual growth rate over the next five years of close to 7%. We have a tremendous opportunity with our drink brands, fitness and MusclePharm performance energy to capture share of this large and growing market and are committed to being a significant player in the performance and fitness energy categories.
We look forward to rolling out our MusclePharm energy beverage line, which will be on shelf starting this September in our initial markets. We will then follow-up with our fitness functional energy line of products launching in market by close of 2021. We will continue to update you as we sign on additional distributors and hit our sales milestones.
Having been involved in the energy drink market for over 20 years, I know the importance of ingredients and brands as major driving forces of success. At MusclePharm, we have these two factors and this is the reason we have already been able to roll out eight new distributor partners. I was part of the original team that launched Rockstar Energy Drink back in 2001 and helped grow the team from a small beverage startup to the number three global energy drink brand. I wouldn't be joining this company if I didn't see the same potential I saw 20 years ago with Rockstar, but the difference here is that MusclePharm is already a strong brand name.
Our brand is a natural fit to extend into the energy category and I'll be working to leverage not only my distribution contacts, but also tapping into MusclePharm’s network in order to quickly scale our MusclePharm performance energy lines. I believe we will have continued success and be met with similar enthusiasm by distributors as we continue our conversations and build out our distribution network. We expect that more announcements as the year progresses and are in talks with the number of wholesale distributors. Early distributor and retailer feedback has been very positive and I'm confident we have the right proposition to successfully lead MusclePharm and fitness into the beverage sector.
I'll now turn the call over to Sabina.
Thank you, Joe. Good afternoon, everyone, and thank you for joining the call. As Ryan said moments ago, our industry along with others continue to experience supply chain shortages, higher freight costs and significant increases in protein costs in the second quarter. Despite these temporary challenges, we delivered sequential net revenue growth of 14% with net revenue for the second quarter of 2021 at $14.9 million compared to $13.1 million in the first quarter of 2021. Our gross margins in the quarter declined to 14.6% compared to 29.3% in the same quarter previous year. This was primarily due to increased protein and freight costs.
Operating expenses improved by over $700,000 or 15% compared to the same quarter last year due to the strong focus on cost control and restructuring the business for growth. The main drivers of the operating expense declined are reduced compensation expense due to the restructure of MusclePharm, reduction in office expenses associated with the closure of headquarters and warehouses in addition to a reduction in professional fees.
Adjusted EBITDA was a loss of $900,000 compared to a gain of $700,000 in the second quarter of the prior year. This loss is primarily due to significant increases in protein costs in addition to increased freight that is currently affecting the entire industry. I am pleased that our adjusted EBITDA loss was less than $1 million considering the significant increases in year-over-year protein. This is due to the strength of the brand and the ability to grow sales in a challenging macro environment in addition to our improved efficiencies and cost containment compared to this quarter last year.
Overall, we were operating in a dynamic environment and believe the cost pressures we faced in the quarter to be mostly transitory and will not have a long-term impact on our business. We are excited about the growth opportunities in our existing business, as well as our new energy beverage business. And we'll continue to focus on top line growth while keeping a tight control on operating costs to mitigate the temporary headwinds we are currently seeing in the protein market.
I will now turn it over to the operator for questions.
A - John Mills
Great. Thank you, Sabina. As a reminder, in order to ask a question, please go to the Investor Relations section of the company's website at musclepharm.com, and you'll be able to submit your name and questions on the webcast link. [Operator Instructions] First question comes from an institutional investor. What specific supply shortages did you experience in the quarter?
Hi, John. I'll take – yes, I'll take that question. So in Q2, we continue to experience plastic shortages, but I just mentioned in my remarks, our biggest challenge was protein with prices rising significantly over prior year. In Q3, we're continuing to see elevated protein prices, and to mitigate this, we're going to continue our focus on cost control while growing the top line. On the top line, we see a significant opportunity. We're all set to launch beverage, which is a big opportunity for us. And we see a lot of other top line opportunities, including the bar business and other non-protein SKUs.
Very good. And a follow-up to that, Sabina. Are you still experiencing supply shortages as we entered the third quarter?
Yes, the supply shortages have started to ease in the third quarter. And the biggest challenge we are now seeing in the third quarter is continued elevating in protein prices.
Thank you. The next question comes from an institutional investor. I'm very excited about the annual sales guidance you gave. You had guided to $30 million in annual sales in 2023 from your beverage line. What can we expect from margins for the beverage business?
I'll take that call, Ryan. This is Joe Cannata. Longer-term as we get more scale and get to $30 million in beverage business annually, we should see margins north of 40%. We're extremely excited about the launch of the beverages. The distributor feedback's been fantastic, the flavors are amazing, and I really feel like the fitness brand is just a sleeping giant. I think there's tremendous opportunity with that product line. I've said it on past calls, I feel like the female consumer has been completely overlooked in the energy space for almost 20 years now. So with all that, I'm extremely confident in this business being $30 million plus within the next two years annually.
Thank you, Joe. The next question comes from a retail investor. In the U.S., are there any priority regions or channels that you will focus on for the energy line build-out?
I'll take that, John. We're starting in the Northwest, that's our targeted geography initially. There's a huge opportunity there with our distributor partners, many who have lost other brands to Pepsi. And there's quite a few other wholesalers out there too that need a big void to fill from losing a big brand. We're being strategic about where we're introducing the product first, while more announcements about our expansion market soon. A lot of our main distributor partners have been asking for the functional drink space for a very long time. These are primarily the distributors that MusclePharm used for their supplement line. So that whole gym and fitness world, I mean, that's just huge exposure, great brand building opportunities for our beverage products. And we'll have some great announcements moving forward with some additional partners that are going to help us expand the drink offering.
The functional drink space right now both performance and functional energy is ever-growing. And we definitely want to jump on that and I feel like the timing is still really strong for us. It's a great opportunity.
Great, Joe. And I definitely want to add we're very excited for our existing distribution network. They've been excited about this product literally for the past eight months. Again, we feel that launching a performance energy drink and the fitness, we have the perfect distribution network to really execute our plan to move forward. The plan that Joe is instituting with the distribution model and our distribution within the space that we are in all our great distribution partners, they've already tasted all of the drinks, they’re waiting for some finished product, and we feel that we're very excited to move this forward to hit our $30 million in 2023.
Thank you, Ryan. You all have touched on this question, but I think it's a very pertinent question. Joe, you've been involved in the energy space for many years and working with one of the leading brands. What do you think it is about your current rollout, where you've had eight distributorships signup without even really having product to initially sell? What are the attributes that's really setting this product apart?
Well, primarily the category continues to grow. Consumers are continued to look for more in their energy drinks than just B vitamins and taurine and caffeine. They want more functionality. And that's a big portion of the growth we're seeing in the overall sector. And then again, the female targeted product line is growing. We're seeing that with other brands where retailers are telling us they're carving out additional space for those types of products in their energy sets. So we're going to see further expansion in the functional space and in the more gender-specific space as well. And I think that's what's really driving the interest from the distributors. We also have a great team with very relevant beverage experience, MusclePharm’s known entity, I mean, you walk into any Costco in the U.S. or other countries, you see our protein powders on end caps in the buildings.
I mean, it's out there, it's a known brand. We're not starting from scratch. This is a familiar trademark to millions of people across the world, especially in the United States. So I think the distributor enthusiasm really is because of the continued growth in the category, the continued growth in the functional energy segment within the category, the gender-specific products, and the fact that we have a known entity, a known name brand with strong consumer following that exists today.
Very good. Thank you. Thank you, Joe. The next question that comes in from an institutional investor, are there any plans to partner with social media influencers or celebrities to roll out your energy drink line?
Yes. So I'll take this question. We're very excited for the launch of energy and fitness. We're going to get back to our roots of social media and influencers. We're very, very excited. We have a really great plan that we're going to roll out. One of the great things about MusclePharm is that we have a very, very strong foundation of social media followers between Facebook, Instagram, and Twitter. We will also partnering with T.J. Dillashaw. He's coming on as not an athlete, he's coming on as marketing and business development. We've been talking for quite some time. T.J. has been using the product for many, many years. He has built a tremendous platform, social media for himself. He's coming aboard.
We're going to partner on building this brand together and building the MusclePharm name. We're also very excited to get back into the ambassador program. We are opening up a gym in Las Vegas, Nevada. We do feel that this is going to be the most exciting gym that we have opened up. There's a tremendous amount of traffic that comes through Las Vegas. We're going to grab a lot of content. We're going to have a lot of cool things. We're going to have a podcast. We're really going to create an environment where we're really going to be giving back and doing a lot of things for not only our customers, for our followers and people following the brand. We're very excited to launch a multi-tiered approach to social media and marketing.
Very good. Thank you, Ryan.
At this time, we do not have any additional questions. We want to thank everyone for taking the time to dial-in and listen to our second quarter results. And we look forward to speaking with everyone at the early part of November, so we can update you on our third quarter progress. Thank you very much. Bye-bye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.