MusclePharm Corporation
Q1 2021 Earnings Call Transcript

Published: 24 May 2021

[Operator:]

Good afternoon, everyone. And thank you for participating in today’s First Quarter 2021 Business Update Call for MusclePharm. Joining us today is MusclePharm’s Chairman and CEO, Ryan Drexler; the company’s President and CFO, Sabina Rizvi; and the company’s new Business Partner, Joe Cannata. 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, excessive strategic relationships and projections of future financial performance.

[Ryan Drexler:]

Thank you. Good afternoon, everyone. On the call today I will review our recent accomplishments and growth opportunities, and turn it over to Joe to discuss our recently announced partnership and new energy drink line, and then have Sabina review first quarter results and provide color on our strong start to the second quarter. I am very proud of our team and their hard work so far this year. We’ve achieved profitability in the first quarter despite lower sales due to temporary supply shortages. Sabina will provide more color on our first quarter results in a few moments and how we are well-positioned for continue and overall growth throughout this year. Early in the first quarter, we announced the appointment of Michael Heller to our Board of Directors. Michael is a principal of talent resources holdings and marketing visionary in the world of influencers, celebrity athletes and social media marketing. We have also recently announced the hiring of Sabina Rizvi as President and CFO. Sabina joins our company from Yum! Brands, where she held multiple C-suite roles over her 15 year tenure. We believe she is the perfect fit for MusclePharm and are very fortunate to have her join our team. The hiring of Sabina is a clear indication we are attracting top talent in order to take our company to the next level and ensure our leading brands are being leveraged to maximize shareholder value for years to come. We also dramatically improved our topline growth opportunity with the recent announcement of partnership with former Rockstar Energy executive, Joe Cannata. Joe is a top industry veteran in the beverage space and he is growing to be instrumental in elevating the MusclePharm brand and leveraging our current distribution network and industry contracts we have to enter into the energy space with the launch of our fully functional energy drink line MP Performance Energy. The energy drink business is a high margin opportunity, which is for the first time ever allows MusclePharm to expand our growing customer base with a balanced portfolio of products serving the needs of our health and fitness conscious consumer.

[Joe Cannata:]

Thank you, Ryan. I share your excitement for the partnership and new business venture for MusclePharm. We plan to rollout the new drink line under the MusclePharm brand this summer starting with three incredible product flavors, grapefruit lime, green apple, fruit punch, all on to the combat name. Fitness product launch is slated for Q4 of 2021. These three products and flavors are just the start and over the next 12 months we will be adding additional skews. So why did I decide to partner with MusclePharm to build out an energy beverage line, MP being a strong name, the beverage market is worth approximately $57 billion globally and around $14.5 billion in the U.S. alone, poised to grow at a compounded annual growth rate of close to 7% over the next five years. I was part of the original team that launched Rockstar Energy drink back in 2001 and helped grow the company from a small beverage startup, 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 real difference here, that MusclePharm is already a strong brand name. MusclePharm is a clear leader in the fitness supplement space with an established name and strong brand recognition. It’s a natural fit to extend this brand into the energy category. I understand that the company attempted to enter this arena in the past, but at the time, it wasn’t in place to fully capitalize on the opportunity. That’s changed now and the company has implemented its turnaround strategy and is in a place of strength, ready to focus the manpower and time needed to succeed. I’ll be working to leverage not only my distribution contacts, but also tapping into MusclePharm’s network in order to quickly scale our MP Performance Energy line. As Ryan said earlier, we’re excited to share that we already have our first distribution partnership in place with Odom, Northwest Beverage and Craig Stein Beverage. These companies are some of the strongest independent distributors in the United States and the reason they were so receptive to adding our new products to their premium beverage lineup was due to the strength of the MusclePharm name. All three distributors will begin selling MusclePharm products this summer in Washington, Oregon, Idaho and Alaska.

[Sabina Rizvi:]

Thank you, Joe. Good afternoon, everyone, and thank you for joining the call. I’m thrilled to be joining MusclePharm at this exciting point in our journey. The growth opportunities in the health and wellness market are very exciting and we’ve only scratched the surface with our improving platform and leading brands. We have a huge opportunity in front of us bringing Ryan’s vision to life with our three pronged growth strategy to grow the core MusclePharm brand with broaden distribution and product offerings, focus on omnichannel business meeting customers where they prefer to shop and expanding into new distribution and brand expansion opportunities. Our entry into the fully functional energy drink category is a great example of expanding one of the strongest brands in the health and fitness industry. Turning to the first quarter, we are very proud that MusclePharm delivered a profit in Q1 this year despite industry-wide supply shortages. Q1 sales were $13.1 million versus $16.2 million last year. While total Q1 sales were below last year, we had the open orders to deliver sales growth over prior year as customer’s demand exceeded our ability to fill orders due to the supply chain disruptions. We were back on track within March delivering strong sales growth versus prior year. Customer demand continued into April with April sales also delivering increases over prior year. Our gross margins also declined slightly to 28.1%, compared to 29.6% in the same period last year. The decline was primarily driven by higher freight and commodity costs.

[Q - John Mills:]

Thank you. Our first question comes from a private investor. How much of your sales were pushed into the second quarter from the first quarter?

[Sabina Rizvi:]

Hi, John. I’ll take that question. As I mentioned in the earnings release, we ended the quarter $3 million short in sales versus prior year. With the supply shortages easing we are seeing sales pick up in April and May, and we expect this trend to continue. We hope to have Q2 end with comparable sales to prior year.

[John Mills:]

Thank you. Our next question comes from a hedge fund. What specific supply shortages would you experience in the quarter? Are you still experiencing supply shortages in the second quarter?

[Sabina Rizvi:]

Yeah. This is Sabina. I’ll take that question as well. So in Q1 we experienced both protein and plastic shortages. Going into Q2 we are no longer seeing the plastic shortages, however, the protein continues to be in high demand and we could possibly see shortages in the future.

[John Mills:]

Thank you. The next question comes from a private investor. A very exciting announcement regarding your beverage sales, when will you start receiving revenue from your beverage sales?

[Joe Cannata:]

Hey. This is Joe. I’ll take that. Yeah. As we mentioned in our press release, we’ll start sales this summer in the Northwest and in Alaska with those distributors reference. So feels we -- start -- we just started to see revenues middle mid-to-late summer.

[John Mills:]

Got it. And actually, Joe, there’s a follow-up question regarding the energy drink space, the energy drink space is getting crowded. How will you differentiate your drinks from others that are in the market?

[Joe Cannata:]

A good question. I’d say that it’s not so much that we need to differentiate. It’s that we need to make sure we’re speaking to the current MusclePharm and fitness consumers that already exist today, and then, of course, broadening that base. You have to remember we’re not trying to build a new brand here. We’re taking an already known entity and creating beverages within the family of products. MusclePharm has a wide known trademark and brand in the nutrition supplement space and entering into the -- this category, the energy category is a model that makes sense and we’ve seen it work with other nutrition supplement brands. And then, of course, there’s fitness, we’re now seeing female consumers targeted in the energy space by other companies and I feel like -- I’ve said it before, I feel like the female consumer has been overlooked for quite some time in the energy space and we’re starting to see a lot of interest with certain types of products targeted towards females. I feel like the fitness name and the brand itself has the potential the -- of massive player in the space and I -- John, it’s a small space now but it’s growing and it’s going to get quite large.

[John Mills:]

Thank you. Next question comes from a hedge fund. Will the drinks have higher or lower gross margins than the current company’s results?

[Joe Cannata:]

I’ll take that. Yeah. Definitely higher gross margins than supplements, a typical margin in energy is 40% plus. So I would say certainly higher gross margins.

[John Mills:]

Thank you. The next question comes from a private investor. MusclePharm tried to launch a drink about five years ago and was not successful. Why do you think you’ll be able to be successful this time and why do you think energy drinks is a big opportunity for MusclePharm?

[Ryan Drexler:]

Yes. This is Ryan. I’ll answer the question. I think before it was a very tough space and again being nutritional supplements, it’s very hard to cross over without having the right partnership. And I believe that, in the last couple of years, find the right partners. Joe really understands the business and his team and building a team together to build the business to the next level is going to be the difference. The partnership, and obviously, getting Odom on Board shows absolutely that we’re with the right partner moving forward with Joe and his team to move the brand to the next level. So it’s really in the partnership.

[Joe Cannata:]

Yeah. I’d like to add to that. This is Joe, by the way. I’m really going to be leaning into my experience from spending almost 18 years at Rockstar and lever -- leverage that success and my contacts with the MusclePharm brand and Fitness brands, specifically targeting retailers and distributors, who I know need and want a brand like this. One examples, Ryan, just references is Odom and the other Northwest distributors, who just signed the agreement with. They all know me. They’ve worked with me. They were very familiar with MusclePharm when I brought them the opportunity and we’re very excited to help grow this brand and make it into a player in the game. So they realize it’s a well established brand and trademark. And we continue and we expect to see much more continued success with other distributors, as well as targeting specific retailers to start who are very interested in this product. I’d also say the timing is good. The -- now the functional energy spaces is now more developed versus when MusclePharm tried this years ago. So it’s a more developed category. We also have the right team in place and we’re bringing in additional team members now and interviewing personnel who I’ve worked with in the past with relevant beverage experience. Again, there’s -- it’s just -- it’s a familiar trademark with millions of people who see our nutrition products regularly in traditional retailers such as Costco, an existing brand, with the strong and loyal consumers already following it. And then, again, I go back to Fitness, which represents an entirely new opportunity for MusclePharm. Again, the female consumer has been overlooked for decades, and finally, there are now energy products speaking to the female consumer. I know that Fitness will resonate with millions upon millions of them.

[Operator:]

This concludes today’s conference. Thank you for your participation and have a great day.

[John Mills:]

Operator, we actually have a one more question.

[Operator:]

I’m sorry. It sounded like the line had gone dead. I was -- I just got that. I’m sorry.

[John Mills:]

Yeah. All right. There is one more question. Do you plan to hold our shareholder meeting in the near future?

[Ryan Drexler:]

Yeah. This is Ryan. Yes. We definitely do. We will have a share -- our shareholders meeting in late 2021.

[John Mills:]

The next question comes from a fund. In the U.S., are there any priority regions or channels that you will focus on for the energy line build out?

[Joe Cannata:]

Yeah. I will take that…

[Ryan Drexler:]

Could you repeat that again? Sure. Yeah. Okay. Go ahead, Joe.

[Joe Cannata:]

So, we are starting in the Northwest. There’s definitely an opportunity there with distributors that have lost other brands to Pepsi and other wholesalers out there. And this present -- the MusclePharm product line started in Colorado and is really well known in Colorado, obviously, and then neighboring states. So we’re being very strategic about where we’re introducing this product first and we’ll have more announcements about expansion markets soon.

[Ryan Drexler:]

I can definitely…

[John Mills:]

Thank you.

[Ryan Drexler:]

I can definitely add to that. Yes. I can definitely add to that. It’s Ryan. We’re very excited for the opportunity, especially with our distribution partners and the MusclePharm brand, a lot of our main distribution partners have been asking for the functional drinks space for a very, very long time. So we’re very excited. We’ll have some great announcements moving forward with some great partners, moving the drink offering forward. So it’s exciting for us, obviously, to partner with Joe and move the distribution forward with our distribution network, because the drinks -- the functional drink space right now is ever growing and we definitely want to jump on that. It’s a great opportunity. It’s high margin. And obviously, it gives us a great opportunity to gauge and get back to what we do really well is get back into the marketing, getting back into the engagement, getting back into influencers and really driving our product forward and using our social media platform and bring some new talent on to move the business and the product line forward.

[John Mills:]

Thank you. And we have one final question coming from a private investor. Are there any plans to partner with a social media influencer or celebrities to rollout our energy drink?

[Ryan Drexler:]

Yes. This is Ryan. I can answer that. So we’re going back to who we were as a company. We are opening a new gym space soon and we’re going to be engaging a lot of influencers. We’re opening in the new region, a region that we feel that we’re going to have a lot more of social media influencers and we’re going to use the gym to move the product line forward and MusclePharm. So there’ll be some announcements down the road of where the space will be opening and who we will be partnering with.

[John Mills:]

Got it. And Mr. Drexler, as of right now, we do not have any further questions. I will turn it over to you for closing remarks.

[Ryan Drexler:]

Thank you. I really want to talk about the team and how we got here today. And I’m very excited Sabina has joined the team, and obviously, our partner with Joe Cannata and very much looking forward to the future. And again, very much looking forward to being transparent with all the investors and moving on to have a lot more calls down the road. Thank you and have a great day.

[Operator:]

Ladies and gentlemen, we have reached the end of our conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.