BowFlex Inc (BFX) 2004 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. And welcome to the Nautilus Group third quarter earnings conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. If anyone needs assistance at any time during today's conference, please press the star, followed by the 0. As a reminder, this conference is being recorded Tuesday, October 26, 2004. I'd now like to turn the conference over to Mr. Gregg Hammann, Chairman, President, and Chief Executive Officer. Please go ahead, sir.

Thanks, Jeff. Good afternoon, and thank you for joining us for our review of the third quarter ended September 30, 2004. With us today is Rod Rice, who is our Chief Financial Officer. On the call today, we're going to update you on the progress of our turnaround plan. This includes how we're beginning to experience results from diversifying our products, brands, and channels. Our objective is to position Nautilus for long-term diversified growth opportunities as we seek to become the global leader in health and fitness. Rod is going to take us through our operating and financial results for the third quarter. He'll also reaffirm our guidance for the fourth quarter of 2004. I'll then conclude this section of the call with a summary of our current trends in our overall business and then we'll open the call up for questions.

So, before I get started, I want to review the Safe Harbor statement and remind everyone that our prepared remarks contain forward-looking statements. We may make additional forward-looking statements in response to your questions. These statements include statements about our products, brands, and multi-channel marketing plans. They do not guarantee future performance and undue reliance should not be placed on them. We refer you to our most recent periodic reports in the Form of 10-K and 10-Q as filed with the Securities and Exchange Commission for more detailed discussions of the factors that could cause actual results to differ materially from those projected in our forward-looking statements.

Okay, so, before we get into our third quarter, I want to state that our management team is very excited to have our Company back in the growth mode. And we're enthused about the opportunities we see in front of us. I'm encouraged by our financial and operating results for the third quarter and the fact that we've now met or exceeded our revenue and earnings guidance for the fifth straight quarter. These results are clear indicators that our fit one principles and our turnaround plan are on track as we enter the final phase, the growth phase of our plan. For the third quarter, we delivered approximately 123 million in revenue by maintaining our focus on the customer and addressing the demand for strength and cardiovascular equipment in the appropriate distribution channels domestically as well as internationally. Also, our cash flow from operations continues to be strong. As of September 30th, 2004, our cash position was approximately $100 million with no debt. Our cash position has increased by more than 57% since we began this turnaround a little bit more than a year ago.

On this quarterly call, 1 year ago, we introduced a 3-phase turnaround plan that emphasized 1, gaining control, 2, stabilizing, and then 3, growing again. We also discussed the timing of each phase. Each phase has met our timing expectations. We're on track for the fourth quarter to begin our final phase, and return the Company to growth. To keep our changes over the past year in perspective, just a few years ago, this Company relied on the direct sales channel for over 80% of its sales, with retail and commercial sales comprising the other 20%. Today, that number is about 50/50, showing that we now have a far better balance, and illustrating that we are managing our presence in all channels. In a few years, we anticipate that share to look more like 65% retail and commercial business to a 35% direct business as we align our Company's products, brands and channels according to where people shop. Importantly, we expect to hit the balance while continuing to increase sales through our direct channel.

So, when we look to the future, we can envision growing our market share of this $5 billion domestic fitness equipment wholesale market and growing our business internationally, while we continue to assess opportunities that are before us in related categories, including nutrition. Now, let me be clear, however, our organization has experienced substantial changes, and we have a great deal of work to do until we unlock the full potential of our plan. And I'll give you a more complete update of our progress on that front in just a moment. At this point, I'd like to turn the call over to Rod Rice, who is going to take you through a review of our operating and financial results for the third quarter, and reaffirm our guidance for the fourth quarter. With, that Rod?

Thanks, Gregg. As we look at the third quarter results, I'd like to remind you that, historically, this quarter is the second slowest quarter for our business and for fitness equipment, because people exercise more outdoors in the summertime. We are now moving into the fourth quarter, our strongest quarter of the year. Turning to the financials, our third quarter 2004 revenues slightly exceeded guidance we gave at the beginning of the third quarter, and our earnings were in line with our guidance. Net sales for the third quarter were 123.2 million, compared to 115.9 million for the corresponding period last year. This is a 6% increase. Net income during the period was 7.4 million, and earnings per share for the third quarter were 22 cents. This can be compared to 6.6 million, or 20 cent per diluted share, for the corresponding quarter in 2003, a 10% increase. The third quarter 2004 does include a one-time pre-tax gain of 1.8 million from the sale of land.

Gross profit margin for the third quarter was 47.6%, compared to 49.4% for the third quarter of 2003. The reduction in gross profit margin was mainly due to a large sale in the Bowflex home gym in Costco in the third quarter of last year. Selling and marketing expense for the third quarter was 38 million or 30.9% for -- of net sales, compared to 34.5 million, or 29.7% of net sales, for the third quarter of 2003. General and administrative expenses for the third quarter were 6.5 million. This is down from 9.3 million for the same period in 2003. The difference does include a $1.8 million gain on the sale of land and another million dollars in reduction in salary and legal fees. Consolidated operating income for the third quarter was 11.2 million, or a 9.2% operating income margin. This can be compared to 9.8 million and an 8.4% operating margin for the third quarter of 2003. It's an improvement of about 70 basis points.

Our cash and short-term position was 99.9 million at the end of the third quarter of 2004, compared to approximately 72.6 million at the end of 2003. Our accounts receivable at the end of the third quarter were 60 million, compared to 57.3 million at the end of third quarter of 2003. Our DSOs were 55 days in the quarter, compared to 45 days in the third quarter of 2003. This is really reflecting a strong retail sales in September, as the fall selling season got under way. Our inventory decreased to 42.7 million at the end of third quarter from 53.1 million when we began the year. This is our lowest inventory level in 3 years. Our cash flow from operations was 14.1 million for the third quarter of 2004, compared to 8.3 million for the same period last year. We continue to generate positive cash flow to pay our dividends to shareholders, increase our investments in research and innovation, and we are positioned to make acquisitions if the right opportunity presents itself.

During our Company's turnaround, we have increased our cash position by 57%, compared to the end of the third quarter last year. Here are a few of the highlights by segment. For the third quarter, operating expenses for the holding company were 1.5 million, compared to 4.2 million in third quarter of 2003. This is due to the -- the decrease is really due to the gain on the sale of the land and reduced legal expenses. Net sales for the third quarter from the direct segment were 62 million, compared to 51.9 million for the third quarter last year, due to stronger Bowflex sales and TreadClimber sales. Direct segment earnings per share for the third quarter were 14 cents per diluted share, compared to 5 cents per diluted share for the same period last year. For our commercial and retail segment, net sales were 61.1 million for the third quarter, compared to 64 million for the same quarter last year. Commercial and retail segment earnings per share for the third quarter were 11 cents, compared to 23 cents for the same period last year.

Third quarter 1 year ago, we had the initial large sell in of Bowflex home gyms at Costco. This year, we're selling a more diverse line-up of products into the retail channel in preparation of post-holiday exercise equipment season. For the 9 months, commercial and retail revenues increased by 11.4% and now account for about 50% of our overall revenue. We also expect fourth quarter commercial and retail revenues to constitute a higher percentage of revenue, based on normal seasonality. The international market showed healthy growth in the third quarter, with sales up more than 40% to $11 million in revenue. Here are a few highlights in specific products.

Our Bowflex home gym products have begun to grow again. We sold a total of 52,000 units in all channels, compared to 49,000 units in the third quarter last year. Now, direct sales for the quarter reached 34,000 units, up from 29,000 units for the same quarter last year. This marks the largest direct-channel home gym of Bowflex unit sales and volume since the first quarter of 2003. You know, we believe this is due to product innovation and less presence of competitive products in the market. We continue to be pleased with TreadClimber sales. The product added another 11 million in sales in this quarter, up from 6.7 million for the same period last year. TreadClimber sales have reached 36 million so far this year, and should approach 50 million by year-end, which is on the low end of our guidance of 50 to 60 million earlier in 2004. With year-over-year sales growth of more than 150%, TreadClimber is the most successful product introduction in the history of our Company.

Moving to guidance, we are reaffirming the guidance we gave you on our second quarter conference call. We expect earnings to increase by more than 40% in the fourth quarter of 2004, compared to the same period last year. Obviously, market conditions can always change, but at this time, our fourth quarter revenue is expected to be in the range of 155 to 165 million, with earnings per diluted share in the range of 38 to 40 cents. We expect to update you on 2005 guidance during our fourth quarter conference call. Finally, the Company announced today that our Board of Directors has declared a regular quarterly dividend of 10 cents per common share, payable December 10th, 2004 to shareholders of record as of November 20, 2004. I will now turn the call back to Gregg. Gregg?

Thanks, Rod. So, I'd like to provide a little more detail on the third quarter results that Rod outlined. First, I'd like to spend a few minutes on the leadership team. To begin with, I'm pleased to say this team is functioning in the spirit of our power one initiative. One example of that is Holly Valkama, who is our Senior V.P. of Manufacturing and Operations. And the third quarter was her complete quarter with us. She'd been pursuing 2 major initiatives, in addition to her core responsibilities. First, she's working closely with Pat Warner, our Senior Vice President of Product Development to introduce a Nautilus quality standard the which meets or exceeds all known standards, and then some, for every product we make. In addition, she is nearing completion of a quality review of every product we currently make and market. This includes both safety and durability. This is precisely what people expect of a quality leader, and Holly's team is getting us into proper position.

I might also mention that Holly was able to help us navigate a challenging shipping season with specific seaways experiencing typhoons and port backlogs. She is just beginning to introduce the lean manufacturing philosophy in our manufacturing facilities, which will help us keep manufacturing costs in check despite working through a wave of innovative new products. So, as we move into the growth phase, our Company needs to step up communication with all audiences. To address that, we've added Ron Arp as our Senior Vice President of Corporate Communications, reporting to me. For 16 years, Ron consulted leading companies for global P.R. giant, Fleishman-Hillard. First, recently, Ron headed a firm's Portland office, and he's considered one of the top communication professionals in the business. He has 6 Silver Anvils, which is the P.R. industry's Oscar. And he has the global honor for programs supported by the best research in planning. I know a number of you already have noticed results of his efforts on the investor relations front. And you'll see it even more through the news pages on television, on the big screen, and elsewhere.

We've also given Tim Hawkins the title of Chief Marketing Officer in addition to his Chief Customer Officer role. These functions are closely interrelated, and Tim and his team are proving themselves up to the challenge. Our marketing team will be assisted by several divisions of the large advertising and marketing agency, Interpublic Group. Our Company certainly has an expertise in direct marketing. However, we will rely on Interpublic's expertise to help us in leveraging that advertising investment across multiple channels. In addition, they will help us roll out new marketing campaigns for the Nautilus brand, which will drive people to clubs and facilities that use or sell Nautilus equipment. We also finished our brand analysis and planning to provide us with maximum selling opportunities with minimal channel conflict.

Going forward, will you see Nautilus as our lead brand in commercial clubs and speciality fitness segments. This brand appeals to the enthusiast athlete who exercises or trains nearly every day. StairMaster, a brand synonymous with steppers, will be positioned for those same segments. Meanwhile, Bowflex will be our lead brand in the direct and sporting goods channels for customers who want quick results from exercising 3 times a week. Schwinn Fitness, known for exercise bikes and indoor cycling, will largely follow Bowflex. To help get ourselves in position for this brand alignment, we've moved our current version of TreadClimber to Bowflex. We also introduced a slightly different version of SelectTech Dumbbells to the Bowflex brand.

Now, regarding customer service, we've re-organized our Company to have a single customer service department. This helps us be more responsive to customers, and helps us provide any necessary feedback to the product development teams for making next-generation products. We also have moved our first person from an inside sales position to an outside sales territory, giving people in our call center another career path for growth. In addition, we're entering the process of revamping our website to bring all products and information together in a single web platform. Phase 1 is completed and our official site is now www.nautilus.com. We have at least 1 more quarter of work before we can move into the maintenance mode with our website.

Turning to finance. I'm pleased to report that our Sarbanes-Oxley compliance is moving along very well. It has created extra work, to be sure, but we feel it has helped us in the transition of centralizing our financial management, which used to be handled by several divisions. Finally, Darryl Thomas is helping us put the final touches on both a 1-year and 3-year business plan that has involved virtually everyone in our Company. He's doing an excellent job of positioning our international business for growth in the commercial side and possibly through other channels.

I would like to wrap up by giving you a quick overview of key business developments by channel. Now, as Rod mentioned, new products are on pace to account for more than 30% of our revenue for the year, as we bring a wave of innovation to the marketplace. Remaining nimble and responsive to market conditions, we've accelerated some introductions and stretched a few out. So, here's just a quick overview. Let's start with direct. For the third quarter, we led with the Bowflex Xtreme home gym. In the fourth quarter, we'll be showcasing the Bowflex Xtreme 2 home gym. It is a popular new addition to the Bowflex home gym family because it does not require any cable changes.

In addition, we recently introduced Bowflex SelectTech Dumbbells through the direct channel. This is a very popular new product for us. Our product development and marketing teams were wise to introduce a companion stand, bench, and mat, which can bring the package price up to almost 800 bucks. SelectTech products can be found under both the Nautilus and Bowflex brand with slight product variations. In the first quarter of 2005, we expect to introduce our most functional, most complete Bowflex home gym using Power Rod technology. It will be named the Ultimate 2, and will be the first home gym to come with an electronics package. In addition, we expect to formally launch Bowflex home gym that, for the first time, will not include Power Rod technology. Instead, it will have a resistance mechanism, or modality, that has been used by NASA at the International Space Station. It also represents substantial improvements in industrial design by sporting a stylish new flare. And it gives us the intellectual property protection to continue as the innovator in home gyms. We'll formally launch this product in the first quarter of 2005. To be sure that our go to market process is executed properly and to take completed advantage of the number of home gym innovations we've brought to market.

So, now let's talk about commercial. For the fourth quarter, our most important innovation comes not from the product side but from the financing side of our business. To help our commercial customers, we've formed an alliance with GE Commercial Finance, which will help us provide leases and other innovative financing arrangements to a broader number of commercial organizations around the world. GE is an excellent partner, and can turn approvals around in just 1 to 2 days, depending on the financing requirement. Our sales staff is reporting positive feedback from conversations with commercial customers. This arrangement will not create any additional financial exposure to Nautilus. We demonstrated the prototypes for 3 new commercial products at the Health and Fitness Business show in August, and a club industry show in October, and have received an enthusiastic response.

Now, this includes a commercial version of TreadClimber, which is larger and built to endure the pounding that equipment takes at commercial facilities. Second, we presented a commercial variable-stride elliptical trainer, which has intellectual property that will allow people to automatically adjust the length of their stride versus the half stride limitation of most models that are out there today. Third, we demonstrated a new line of top-end commercial treadmills. Our treadmills feature a large running surface, new shock absorption technology, and highly programmable electronics that allow runners to track progress and simulate external races such as the Boston marathon. The Nautilus treadmills and variable-stride ellipticals will make their debut in the first quarter of 2005 in commercial and specialty fitness channels. The commercial TreadClimber will be introduced in the second quarter of 2005. Interestingly, all 3 are cardio products, reflecting our commitment to build out the cardio side of our Nautilus brand along with its 30-year heritage of strength equipment.

Now, let's talk about retail. We're continuing to build a strategic relationships with the major players in sporting goods and warehouse club channels. Here's just a few highlights. We have Bowflex Elite and Nautilus cable crossover weight stacks at Costco. Both products are new. We have Schwinn exercise bikes at Sam's. We expect to be in every store of The Sports Authority with a strategic assortment in branded merchandise in a padded concept with our equipment. We have a Bowflex Schwinn -- excuse me, we have Bowflex and Schwinn assortments in Canadian Tire, a 450-store leading chain in Canada. We also have a branded of the assortment of G.I. Joe's, a 22-store regional chain of sporting good stores in the Pacific northwest. And we have a 30-store test of Schwinn bikes underway with Sears.

So, despite this progress, we're still in the initial stages of our retail segment business strategy. We're going to continue to expand doors and SKUs and introduce new innovative products. As the assortments are installed this winter, sporting goods customers are going to see Bowflex home gyms, SelectTech Dumbbells, strength equipment, treadmills and Schwinn equipment. For those who have been following our innovation, it won't surprise you to know that we're heading into introducing a Bowflex branded treadmill in sporting goods. This is in keeping with our research that shows Bowflex has become a fitness brand, not just the name of America's favorite home gym.

In summary, we're looking forward to getting this Company back on a growth track, and in the fourth quarter, as we roll into 2005, and beyond. That having been said, we still have plenty of room for improvement in every area of the business as we enter the final phase of our turnaround process. We have innovation and change happening throughout our Company. That's precisely what is required to change the game in health and fitness. Now, I would like to open up the call for questions. Jeff?

Thank you, sir. Ladies and gentlemen, at this time, we will begin the question-and-answer session. If you have a question, please press the star, followed by the 1 on your push-button phone. If you'd like to decline from the polling process, please press the star, followed by the 2. You will hear a 3-tone prompt acknowledging your selection, and your questions will be polled in the order received. If you are using speaker equipment, you will need to lift the handset before pressing the numbers. First question comes from Carol Buyers with RBC Capital Markets. Please go ahead.

Hi, good afternoon. Just a few questions. On the direct business of Bowflex in retail, can you give us the average selling price in each of those divisions?

Sure. Sure, Carol, when you look at , for the direct division, it's over 14 -- it's about $1,455 on the direct side. And that's compared to about $1,500 on the previous quarter. When you look at ASP for the third quarter on the retail side, it's actually starting to move up. It's about $570, and that's comparable to right around $450 from the second quarter. And the TreadClimber is still over $2,100.

Okay. And then what about -- what about gross margin by each of those divisions, direct and retail/commercial?

Sure. When you look at the direct side of the business, we had a 67.7% gross profit margin, and that's compared to in 3000 -- in 2003, of a 66.2%. Then when you look at the commercial and retail side, in 2004, third quarter, it was 27.2%, compared to a 35.8% in 2003. The major -- the difference in that is really due to -- that was our initial sell in with Costco.

Okay. So last year when you had your sell in with Costco, the margins were much higher?

Yeah. We were selling in a Power Pro product with a retail ASP of $1,399.

Okay. Got you. And then just -- you mentioned the legal fees this quarter. What were they last year? You said it was about a million this quarter. What were they last year? And what should we expect going forward as you have the -- continue to fight with Icon?

I think last year they were about $1.8 million. We were hot and heavy with all of our litigation. I think, going forward, in the fourth quarter, they're going to run similar to the third quarter, then are going to pick up, probably, to about the 1.5, 1.8 million. Hard to predict at this point. But as we get closer to the trial.

Okay. So, for now, we should just assume that's part of life today.

It's part of it, yeah.

Okay. Then just back to -- you mentioned The Sports Authority, that you guys are doing -- you expect to be in all doors. What should we expect, as far as products and the number of SKUs at each of those -- at each Sports Authority?

We're actually looking at a store within a store concept. With them. And it will vary for the fourth quarter, Carol, by how we roll it out based on the different size footprints they have. But anywhere from 2 to 10 SKUs, depending on the type of store they have.

Okay. It would consist mostly of Bowflex and Schwinn products?

Yes. In fact, those two items.

What are the -- what's the initial test from Sears telling you so far? Or is it too early?

I think it is a little early for that. But, you know, we've got an upright and a recumbent bike that we've got in there in the test. It's primary in the Midwest where the test is taking place. And they haven't given us any feedback on that yet. So that's yet to be seen.

And then TreadClimber seemed a little soft. Is there anything that's going on with the brand today or -- and has it changed your outlook, going forward?

That's a great question. You know, it is one of those things. This is the first big innovation we did in the cardio segment for our business, right? And we tried to look at several models. One, we looked at, you know, what is a percentage of cardio versus strength equipment done. That was part of the equation. The second thing we looked at was how did Bowflex ramp up when we went through its initial introduction. That was the second part of the equation. Then the third part was really what's the trends in the retail industry right now, and what are things that are going on out there. So, you put those three things together, that's where we came up with our estimate. I think as we've gotten into this, we've realized that the cardio side and with the complexity of this product and the fact that it's a new exercise modality that people haven't seen before, until they see and touch and feel and test it, it's a little bit slower ramp up than we anticipated. The Bowflex was a fairly simple thing. People could look at it and say, okay, I get it. TreadClimber is a little more complicated. And I think, you know, as we get this thing into the commercial club side of our business, and people actually have an opportunity to use it, I think you're going to see the business pick up. The other side of it, though, that, you know, as we look at them, we say we're at the low end of the estimate, we have to remind ourselves every now and then, because we're tough on ourselves on occasion, that this product is up 150%. So, we're really pretty pleased with its performance. We just did a -- an average job of modeling it, I guess is what I would say.

Okay. Great. Thanks a lot.

Thanks, Carol.

Thank you. Our next question comes from Eric Wold with Merriman, Curhan, Ford and Company. Please go ahead.

Hi. Good afternoon. Just a quick follow-up on Carol's question on the TreadClimber. Maybe talk about it with the launch of SelectTech into the direct channel, did you re-allocate any of your marketing budget that you might have spent towards the TreadClimber to that product? And then, maybe talk about on the TreadClimber, what kind of response rates you're seeing with the ads that you're running. Is the change or the estimate more what you're seeing for response rates? Or is it also a factor of re-allocating market, maybe away from that product near term, and putting it towards SelectTech or the Bowflex?

Well, we actually -- we debated, you know, whether we should shift marketing dollars and move things around and TreadClimber was actually performing very well for us, so we didn't want to pull media dollars from it. So we kept that constant. But we have -- we have invested, to your point, Eric, pretty heavily on the SelectTech Dumbbell side here, on the Bowflex brand. And we're seeing that ramp up pretty quickly. So, you know, I think part of it is, as you bring innovation to the marketplace, we're having to be very appropriate in how we're rolling these things out. And as you get more and more in the pipeline here, we're trying to be very selective. No pun intended, in how we're rolling these products.

Okay. Now, on the Bowflex side, you, obviously -- it's nice to see that return to, you know, some positive growth on the direct side, first time in almost 2 years. Maybe talk about what you think is driving that specific -- I know, you know, you brought some new product innovations and -- but maybe talk about the trade in, trade up program that you're running. How much of an impact that had on the quarter in terms of unit sales. Then, kind of, what the average gross margin on -- at the operating margin on those sales versus, maybe, a typical Bowflex sale that's not a trade up, trade in.

Yeah, so, although that appears to be kind of a big idea for us, it's really a pretty small output. On the trade in, trade up. We've had -- I think somewhere around 700 units or so that have actually gone through that program, it's called 7800. As you look at the total sales for the quarter, obviously not a significant number there. So, I think what's really driving it on the Bowflex side is we've brought innovation to the marketplace. I think we've got some good, crisp, new advertising out there. We've shifted our media mix a little bit into, you know, some other TV stations and trying to target some different consumer groups that I think are bringing a fresh audience to the Bowflex brand for the first time. So, I think, you know, it's a combination of those 3 things as well as -- you know, I think the marketplace starting to head into the fitness season here, it's been pretty positive for us on that brand.

Okay. Now, then last question on gross margins. Maybe talk about what you've been experiencing, you know, in Q3. And then, maybe what you're seeing going into Q4 in terms of the margin impact of, you know, steel, you know, fuel, you know, and just general commodities that go into your products.

Rod, you want to touch on that one?

Sure. You know, the -- from the steel prices and commodities and all that, I mean, you know, we are improving our operations this time with Holly aboard. It's really in our guidance. I mean, we're seeing steel prices have a little bit of an impact. We did take an increase in our commercial and retail side of our business of price increases. So, we don't see any kind of major impact on that. Fuel costs, you know, continue to go up on that side, but I think we have enough efficiencies in our operation to offset that at this point. You know, we'll be analyzing that and talking about that on the February call. But we have a lot of confidence in her ability to do that. And, in general, what you should see on a consolidated basis in the Q4's margin is it is slightly going down. And it's just due to product mix. One thing that we're very impressed with the direct gross profit margin at this time. It is a little bit -- not a lot -- a little bit higher than we expected. You should see the commercial retail margin going up just because of leverage. In the fourth quarter you do a bigger percentage of your overall sales.

Now with that down gross margin year-over-year Q3 to Q4, or both?

It was -- it was -- when you --

That you're looking at for Q4.

It shouldn't be really too much. Should be pretty flat compared to that. Q3 is -- a lot of it is due to -- and our official -- our, the first load into Costco. Our initial sales, that was last year. And it was a higher-priced product at that point. It was at $1,399. A dollar retail price of a power pro.

Okay. This last question, and kind of a conceptual question. You're sitting here with, you know, $100 million in cash. Maybe talk about what's, kind of, the minimum level of cash that you believe you need to have on hand to run the business. And, you know, after what time period, you know, kind of, what, you know, war chest that you got and don't find anything interesting to acquire before you, kind of, make the decision to do something else with the cash than sit on it?

Yeah, I'll take this one. I think, you know, Eric, as we look at our cash, you know, we continue to generate positive cash flow, which is the first thing. So, as far as a reserve, you know, I think it will be somewhat dependent on the growth rates that we talk about for 2005 as we go forward. So, we'll look at that as we get a little bit farther through the fourth quarter here. From a, what are we going to do with the cash, I think there's -- from an acquisition standpoint, there're several things we're taking a look at right now. If we go through the due diligence process and those turn out to be positive for us, that will be a use of cash. If not, I think, you know, the other 2 things we'll start taking a look at is, you know, should we take the dividend up or do we want to do some kind of stock buyback. So, you know, we're -- you know, we want to go through that first part of it to make sure that if there is a good synergistic opportunity out there that we take advantage of it in helping to accelerate shareholder value here. But barring that, there's other things, as you know, we can do with that cash, including the dividend or stock buyback.

Well then since you obviously haven't given '05 guidance, maybe just, what's the level of cash you'd need on hand to run the business if your business doesn't grow from here? Just so I can get a base rate of what you need to have on hand and what's, kind of, excess?

Well, I think that's a pretty difficult question to answer right now. I mean, as we're heading into the Q4. You know, it's certainly not $100 million. But, we'll, if I can, Eric, on this one, I'm going to defer that question for another quarter and let's go back and revisit it at that point.

Okay. Thanks, guys.

Thanks, Eric.

Thank you. Our next question comes from Mark Rupe from Adams Harkness. Please go ahead.

Hey, guys. Just curious to see when we'll actually see some of the new products at The Sports Authority stores. Is that rolling out as we speak, or is it going to be out a month from now?

Yeah, we're probably looking at 3 to 4 weeks, here, before you really start to see it showing up on the floor. We're trying to get it in there before Thanksgiving in some of their key stores. But based on their shipping, we may be, you know, actually showing up in December and January as well. So, we'll have to keep you posted on that as we move forward. But we're -- you know, it's a big chain. A lot of stores to fill up there. And they're trying to pace it, as well, because they're heading into the holiday season. It's a pretty busy time for them, so, we're working collaboratively along with The Sports Authority team to make sure we do this the right way for them.

Sure. Any update on possibly expanding the SKU's with Dick's?

Well, we'd sure like to. But we're in the middle of conversations on that one. And we'll just have to see how that comes out, but we have not gotten any firm answers back from them on actions that they want to take at this point.

Okay. And I think a couple of the products may have been pushed out a quarter, the super Bowflex and the commercial TreadClimber. Just curious to see if it was just marketing or just getting the product ready. Was there anything other involved?

Well, yes. It's more of what we talked about earlier. You know, on -- so for commercial TreadClimbers as an example, is we've -- we introduced the elliptical product. That was something that we are planning on introducing at a later time, and we actually moved the time line up on that. So, in our cardio development process, as we put that elliptical product in there, and then we moved up the Bowflex treadmills and the Nautilus treadmills, we had to slide the commercial TreadClimber back a quarter in order to fit those 3 items that were planned for a later date earlier, because of customer demand. So, our customers wanted those more quickly, and we wanted to make sure we pulled them forward as best we could. So, that's really what drove that part of it. On the super Bowflex thing, it is more of a marketing issue than a product readiness issue. We've got so much innovation in the pipeline on the Bowflex brand right now, we didn't want to put too much of it out on the marketplace at one time. So, we've purposely slid that one back a quarter, just to make sure that the other things that we have out there have an opportunity to really get seated in the marketplace in the right way.

And then lastly on the competitive front, it looked like Icon put up weak results in the strength side in their most recent quarter. Do you think you benefited from that on the direct side for the Bowflex?

Well, you know, I don't -- I don't, you know, want to comment too much on competitors' situations. But what I will say is, I think we've done a great job of repositioning our brands. I think our marketing right now is pretty crisp, for the most part. We've got some gaps, but we're working on that. I feel pretty confident about the pipeline we've got, both in the marketplace today, as well as what we've got coming forward. So, you know, in the spirit of the competitive world, if that puts pressure on the other guys, you know, that's all part of the game, right?

Thank you.

Thanks, Mark.

Thank you. Next question comes from Steven Martin with Slater Capital. Please go ahead.

Hi, thanks a lot. Most of my questions have been answered. Thank you.

Thank you. And at this time, we have no further questions. I'd like to turn the conference back over for any concluding comments.

Well, thank you, all, for listening today. We're, once again, I mean, we're very excited about the opportunities that we have. We know we've got work to get done here. And, certainly don't want to tell you that we've got it all figured out yet. But I think we're making a hell of a lot of progress. I feel very good about it. I'm excited about the management team we've got in place and their capabilities of driving this business, not only in the fourth quarter, but well into the future for this Company. So, you know, stay tuned. And I think more good things to come. Thank you for listening.

Thank you. Ladies and gentlemen, this concludes the Nautilus Group's third quarter earnings conference call. If you'd like to listen to the replay of today's conference, please dial 303-590-3000 or 1-800-405-2236, and you will need to enter the passcode of 11010495, followed by the pound sign. Once again, thank you for participating in today's conference. At this time, you may now disconnect.