FitLife Brands, Inc.

Good day and welcome to the FitLife Brands' second quarter 2024 financial results conference call. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Dayton Judd, CEO of FitLife Brands. Sir, the floor is yours.

Thank you, Paul. Welcome, everyone, to FitLife's second quarter 2024 earnings call. We appreciate you taking the time to join us this afternoon. Joining me on this call is FitLife's CFO, Jacob York, and FitLife's EVP, Ryan Hansen. For this call, we'll follow a similar pattern to our previous earnings calls. I'll provide some opening commentary about the different parts of our business and then open the call up for Q&A. Beginning with our reporting for the second quarter of 2024, We've provided some additional metrics for some groups of our brands. This reporting is in response to investor questions about the performance of brands subsequent to their acquisition by the company. We've previously provided some revenue numbers, but we are now providing a breakdown of wholesale revenue versus online revenue, gross profit and gross margin, advertising and marketing spent, as well as a metric we call contribution. There may be other companies that report a similar metric, and they may define contribution differently than we do. So for purposes of our company and our reporting and our discussion today, we define contribution as gross profit, less advertising and marketing expense for the brands in question. The reason we do this is... Other than advertising and marketing expense, almost all other operating expenses are not easily allocable to specific brands or groups of brands, which is why we utilize this metric, contribution, as a key performance metric for our brands. We're providing this level of detail for Legacy FitLife, which consists of nine brands, MRC, or Mimi's Rock, which consists of the three brands acquired in the Mimi's Rock transaction, and MusclePharm. Further, our current intention is to provide this level of detail for acquired brands for a period of no more than two years following the acquisition of the brands, after which the results of the acquired brands will be reported as part of Legacy FitLife. We hope you'll find this level of disclosure helpful and informative. I'll begin by providing a short overview of the performance of the consolidated business and then provide some commentary on the performance of the brands as outlined in the contribution tables. So first, with regard to consolidated performance, for the second quarter of 2024, total revenue increased 15% year over year, with wholesale revenue increasing 18% and online revenue increasing 13%. Gross profit increased 27%. and excluding the impact of the inventory step-up resulting from the acquisition of MRC, gross margin expanded from 41.9% last year to 44.8% this year. Contribution increased 39%, driven by the addition of MusclePharm, gross margin expansion, and the reduction in advertising and marketing spend. Net income increased 34%, basic earnings per share increased 30% and fully diluted earnings per share increased 33%. Adjusted EBITDA for the second quarter of 2024 increased 29% to 3.8 million, bringing our LTM adjusted EBITDA to 12.4 million. So now with regard to brand level performance, let me start with an overview of legacy FitLife. Total legacy FitLife revenue for the second quarter of 2024 was $6.8 million, of which roughly 62% was from wholesale customers and 38% was from online sales. This represents a 10% year-over-year decline in wholesale revenue and a 7% year-over-year increase in online revenue or a 5% decline in total revenue. Despite the revenue decline, gross profit increased slightly and due to the increase in higher margin online revenue more than offsetting the gross profit impact of the declining wholesale revenue. Gross margin increased from 42.0% last year to 44.2% in this year's second quarter. Contribution was down less than 1% due to increased advertising spend in support of online sales. We also continue to experience strong subscriber growth with subscriber count for our Legacy FitLife products increasing approximately 19% on a year-over-year basis. Moving on now to the brands acquired in the Mimi's Rock transaction, or MRC. Just as a reminder, this is a company we purchased on February 28, 2023. Total MRC revenue for the second quarter of 2024 was $7.5 million, almost all of which came from online sales. This represents a 2% year-over-year decline in total revenue. Just to drill down a little bit further, though, MRC consists of three brands, a supplement brand called Dr. Tobias, which represents about 90% of MRC's revenue, and two smaller skincare brands. Revenue for the Dr. Tobias brand was up 4% during the quarter, while revenue for the skincare brands was down 37%. The increased revenue for Dr. Tobias is encouraging, particularly given the significant reductions in advertising expenditures over the same period. At the time we acquired MRC, advertising spend in support of Dr. Tobias was materially higher and revenue was declining. Today, advertising spend is significantly lower and revenue is growing. Now, with regard to the skincare brands, at the time of the acquisition, those brands were sold in a number of geographies, different countries on Amazon. And unfortunately, the brands were experiencing negative gross margins in some markets and negative contribution in almost all markets. To address this problem, we exited a number of geographies and we raised prices in all other geographies. The result of these changes is lower revenue, but substantially higher gross margins and positive contribution as opposed to negative contribution. Overall, gross profit for MRC increased 21% year over year, while gross margin, excluding the impact of the inventory step-up resulting from the acquisition of MRC, increased from 41.7% to 48.2%. This significant increase in gross margin was due to the previously described optimization of the skincare brands, as well as beneficial product mix within the Dr. Tobias brand. Contribution for MRC for the second quarter of 2024 increased 61% year over year, driven by the skincare brand optimization, beneficial mix within the Dr. Tobias product line, and a 23% year-over-year reduction in advertising and marketing expenditures. On an LTM basis, contribution for MRC was $8.9 million, which compares very favorably to the $17.1 million we paid for the brands. In addition, I would point out that the $8.9 million LTM contribution for MRC does not yet include the full LTM impact of the skincare brand optimization and the reductions in advertising and marketing spend. For the quarter, Amazon subscribers for MRC products grew 5% year over year. Skincare subscribers declined due to the previously discussed price and geography optimization, but Dr. Tobias subscribers grew approximately 8%. So now I'll move on to discuss MusclePharm. As a reminder, we purchased the MusclePharm assets out of bankruptcy in October of last year. MusclePharm revenue was approximately $2.7 million for the second quarter of 2024, of which 52% was from online sales and 48% was from wholesale customers. Total revenue increased 27% sequentially from the first quarter of 2024 to the second quarter of 2024. with wholesale growing 24% sequentially and online revenue growing 31% sequentially. Gross profit increased 16% sequentially while gross margin declined due to increased promotional activity intended to drive revenue growth. Contribution increased 8% sequentially with contribution as a percentage of revenue declining due to increased promotional activity and increased advertising and marketing expenditures. Our subscriber growth on Amazon for MusclePharm continues to be strong. In previous calls, we disclosed that our subscriber count for MusclePharm products on Amazon grew from five subscribers as of the end of 2023, December 31st, 2023, to over 1,600 at the end of the first quarter of 2024. As of the end of the second quarter, 2024, the subscriber count was over 3,700, and it has continued to grow at an encouraging pace during the first half of the third quarter. For comparison purposes, when we began selling the legacy FitLife products on Amazon, it took more than two years to achieve the number of subscribers that MusclePharm has acquired in our first six months of selling the brand on Amazon. Now let me give a few more high-level comments about the business before moving into Q&A. For the consolidated business, approximately two-thirds of our revenue now comes from online sales. When the current management took over the company in 2018, less than 1% of revenue came from online sales. We are pleased with the results of this strategic shift, with the company achieving record growth, record gross margins, and strong cash flow, while simultaneously reducing its concentration risk with large wholesale customers. With regard to the back half of 2024, please keep in mind that our business does experience seasonality with the first half of the year being stronger than the second half of the year. You can see those trends in the five-quarter contribution tables that we provided in the press release and in the 10Q. That said, we expect to continue to deliver double-digit year-over-year revenue growth for the remainder of the year. In my remarks, I provided some commentary about Amazon subscribers. We love all of our customers, but we especially love our subscribers. Historically, revenue from subscribers has typically accounted for approximately 20% of our online revenue. Sometimes higher and sometimes lower, but in general, it's in that range. We don't plan to regularly provide subscriber counts for our individual brands or groups of brands, but as a company, we recently surpassed over 100,000 subscribers on Amazon. We're happy about this milestone, but look forward to acquiring the next 100,000 subscribers. With regard to our balance sheet, it remains strong with 15.4 million of term loan outstanding at a rate of SOFR plus 275. And we have no outstanding balance on our $3.5 million revolver. We ended the second quarter of 2024 with 3.7 million of cash, bringing net debt to 11.7 million. or approximately 0.9 times LTM adjusted EBITDA. As of the end of 2023, the company's net debt was $18.2 million. So we have reduced our net debt by $6.5 million or 36% during the first half of 2024. So now we can shift to the Q&A before we open it up for questions. We've had one investor, a long-time investor, that has emailed some questions. So I'll read you the question. He's unable, I think, to participate in the call today. So let me read the questions that he has asked, and I'll do my best to answer them, and then we can poll for additional questions. So the questions asked are, what are the goals management has for the company in five to ten years? I think we know the strategy for the next six to 12 months. So that's the first question. Next question, will share buybacks be reinitiated? The third question is, is a dividend being considered? And number four, the question is, I'm sure everyone, including me, will be very interested in hearing about progress with MusclePharm and getting some color around how much revenue we can expect from MusclePharm when it levels out. So let me address those one by one. I'll maybe go in in reverse order. Muscle Farm, we're just very reluctant to give a number. If I had a really good idea what it was going to be in 12 months or in 24 months or in five years, I would tell you. But the reality of the situation is I don't know. And I'd rather just tell you we're going to grow it without kind of putting parameters around that. I think we would be disappointed if we're not kind of if we haven't doubled our run rate in this business over the next 12 months. So we expect to continue to grow. As I indicated in my remarks, and you can see in the contribution table, we're investing in growth through promotional offers to wholesale partners, through increased advertising online, and we'll continue to invest in growth as we seek to restore the brand to what it was before. So Apologize that we're not going to give anything more specific, but we certainly expect it to grow going forward. The question on the share buybacks and dividend, let me maybe lump those two together. Those are kind of capital allocation questions. And I guess the way I would answer that is right now we think the best use of our capital is to acquire other brands, attractive multiples, and bring them into the fold. Hopefully with Mimi's Rock you can see several quarters now of history of what we've been able to do there. Again, just looking at contribution, not EBITDA. It's pretty much impossible at this point to calculate an EBITDA for those brands, given the fact that SG&A is spread across all of our brands. But again, using contribution, I mean, we're under two times contribution in terms of what we paid for that business. And we think that number will continue to improve. So we think that's the highest and best use of capital. And so we continue to look for acquisitions. If we can't find any, at that point, I think we would look to things like share buybacks and dividends. With regard to share buybacks, certainly if there was a big pullback in the stock for whatever reason, we would evaluate that on a case-by-case basis. But right now, our capital allocation strategy is first and foremost to M&A. And with regard to goals that management has for the company in five to ten years, I think that's somewhat related to what I just said regarding capital allocation. We think that the biggest opportunity here is to consolidate within the supplement industry. We've had a good track record of doing that. It's an incredibly fragmented industry, and we think there are a lot of brands that to consider. In fact, we know there are because we're looking at them. We have pretty good deal flow. We get to look at a lot of deals and we'll wait for the right pitch. But when we do, we expect to drive hopefully similar results like we have with Mimi's Rock. We hope to do the same with MusclePharm and with other brands that we may look at as well. So with that, Paul, why don't we go ahead and open the line up for questions.

Certainly, at this time, we will be conducting a question and answer session. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Once again, please press star 1 on your phone at this time if you wish to ask a question on today's call. One moment, please, while we poll for questions. Once again, that will be star 1 on your phone at this time if you wish to ask a question. Did I have a question come in? First question is from James Boggan from Legend Capital. James, your line is live.

Hello, good afternoon, and thanks for your presentation. In the last call, you spoke about MusclePharm and the acquisition and how vendors of MusclePharm products have been very disappointed by MusclePharm's demise. and that you were trying to rebuild that up. And I'd just like to get a little more color into how that's going and whether you anticipate getting to, you know, Musclepharm had huge sales and they had very few sales. I'm wondering how you're doing in building that back up, basically. I know it's a long-term project and I don't expect number estimates, but I'm just wondering, in general, how's it going in getting the faith back amongst the companies, amongst the stores and people who buy Musclepharm products? Thank you.

Yeah, thanks, James, for the question. Happy to provide commentary, but I won't talk about specific potential wholesale customers. But we have had and continue to have dialogue with a number of potential partners. And the good news is, I mean, nobody is saying, no, get out of here and don't ever talk to us again, right? The dialogue is happening, which is good. We've had a number of meetings with – kind of large national type chains, and we have others that are scheduled here during this quarter. So there are others who have indicated that they're likely to bring in some of the products, but until we see POs, we don't want to celebrate and we don't want to declare success. So those customers who have said they plan to to bring in some of the products. Again, we continue to work with them. And there are agreements that are being negotiated and documented. And again, we fully expect that we'll be starting small with some of these folks. But the good news is that I think we're getting some traction. And I hope as we continue to have these calls going forward, we'll have more to report. But the dialogue is happening. Meetings are taking place. And we're having good discussions. and the customers who have brought it in already and that are reported in our wholesale revenue numbers for MusclePharm, for example, in the contribution tables, roughly 50% of our revenue, those folks have been happy so far with what they've seen. I think with pretty much all of them, I don't have the numbers in front of me, but I can't think of an exception right now. I think every single one of them is growing with the brand. So we're seeing encouraging uptake. When we get back in, we're excited. And then kind of each week to week and month to month, we're seeing increased purchases from them and increased sales to their end consumers. So we're encouraged by the trends. It certainly is a marathon and not a sprint. So we're continuing to run the marathon and are encouraged by what we're seeing so far in the early stages.

Thank you very much.

Yeah, you're welcome.

Thank you. And once again, it will be star 1 on your phone at this time if you wish to ask a question. That's star 1 if you wish to ask a question on today's call. And there were no other questions in queue at this time. I would now like to hand the call. Actually, I think we've got James just came in with a follow-up date in just one moment, please. James, your line is live.

It's an unrelated question, but I was just wondering if given that Dayton is on the board of LifeVantage. I'm just wondering if there are any synergies between the two companies, LifeVantage and FitLife.

Yeah, the answer to that is no. We're obviously not competitors, or I couldn't be on the board of LifeVantage, and I couldn't be on the board of FitLife and run FitLife. So they operate in a completely different channel. I think many of you know my background, which is I'm an investor. Primarily, I run a hedge fund. I still run my fund, and it still invests in a number of other companies, and LifeVantage just happens to be one of those companies. FitLife has nothing to do with LifeVantage, but my fund, Sudbury Capital, does have a stake in LifeVantage. Really, anything further related to LifeVantage, I'm sure that the LifeVantage team would love to talk to more investors. Right. I appreciate the question.

I'm a shareholder in both.

I appreciate that. Thank you.

Thank you.

Thank you. And there were no other questions in queue at this time. I would now like to hand the call back to Dayton Judd for closing remarks.

All right. Well, thank you, everyone, for your participation in our call. If you have questions going forward, please feel free to reach out to us. The best way to contact us initially is through our investor relations email, which is investor. That's just singular, not investors, but investor at fitlifebrands.com. So if you send us an email with your questions, we'd be happy to answer them. We're happy to get on a call and talk about our company. But we appreciate your interest. and look forward to talking to you next quarter. Thank you.

Thank you. This does conclude today's conference call. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.