BowFlex Inc (BFX) 2012 Q1 法說會逐字稿

Welcome to the Nautilus, Inc. Q1 2012 conference call. During the presentation, participant lines will be in a listen-only mode. Afterwards, we will conduct a question-and-session. (Operator Instructions), As a reminder this conference is being recorded, Monday, May 7, 2012. I would now like to turn the call over to John Mills of ICR. Please go ahead, sir.

Great, thank you. Good afternoon and welcome to Nautilus' first quarter 2012 conference call.

Participants on the call today from Nautilus are Bruce Cazenave, Chief Executive Officer, and Bill McMahon, Chief Operating Officer. Remarks during today's conference call may include forward-looking statements concerning the Company's prospects, current or future financial and operating trends, or new product introductions. These statements, along with other information, presented that are not historical facts are subject to a number of risks and uncertainties. Actual results may differ materially from these forward-looking statements.

Nautilus undertakes no obligation to publicly update any forward-looking statements to reflect new information, events, or circumstances, after they are made or to reflect the occurrence of unanticipated events. Please refer to our quarterly and annual reported filed with the SEC for more information about the risks and uncertainties that could cause actual results to differ. Unless otherwise indicated, all information and comments regarding our operating results pertain to our continuing operations.

And with that, it's my pleasure to turn the call over to Bruce. Go ahead, Bruce.

Thank you, John. Good afternoon, everyone, and thank you for joining our call today. Overall, we are very pleased with our first quarter results and the start to fiscal 2012. Last year, we worked hard to build a platform that would facilitate steady, long-term, increasingly more profitable growth, and although there's still work to do, our first quarter performance confirms that we are on the right track.

We continue to work on our targeted key initiatives that we previously disclosed. These include, one, to ramp-up new product development, including expanding our product portfolio; two, to stabilize and improve our product margins; and three, to tightly manage our operation costs and create leverage as we grow revenues.

Concurrent to advancing these operational initiatives during Q1, we also made a significant strategic investment in our future by advancing the comprehensive market and brand research mentioned in our Q4 earnings call. This research will guide us to deliver superior innovative product, help us determine how to best leverage our strong portfolio of brands for our products, and, finally, give us the basis for pursuing further successful licensing opportunities.

Now, let me provide some further detail on our financial results for the first quarter. In the first quarter, net sales totaled $51.3 million, an increase of over 6% as compared to the same period last year. Gross margins improved 90 basis points to 46.6% verses 45.7% last year. Income from continuing operations increased to $2.6 million for the first quarter of 2012, compared to $1.1 million in the first quarter last year.

The diluted income per share from continuing operations for the first quarter was $0.09 compared to $0.04 per share for the first quarter last year. A significant improvement in results from continuing operations reflects increased sales, improved margins in both the retail and direct businesses, and a 90 basis point decrease in operating expenses as a percentage of sales, primarily due to lower G&A costs.

We reported total net income, including discontinued operation, of $2.5 million for the first quarter 2012, which compares favorably to net income of $1.6 million for the same quarter prior year. Diluted net income per share for the 2012 first quarter was $0.08, as compared to diluted net income per share of $0.05 for the same quarter prior year.

Net income for Q1 2012 included a loss from discontinued operation of $125,000, which equates to a loss of 1% per diluted share as compared to income from discontinued operations of $485,000, or $0.01 per diluted share last year. We continue to make steady progress towards closing down foreign subsidiaries connected with our former commercial equipment business, which represents the primary source of loss from our discontinued operations.

Total operating expenses for the first quarter as a percentage of sales decreased to 41.1% from 42% in the first quarter last year, underscoring the results of our efforts to leverage our operating infrastructure across higher sales. Selling and marketing expenses totaled $16.1 million, or 31.3% of sales for the first quarter, compared to $14.9 million, or 30.8% of sales for the first quarter last year.

General and administrative expenses amounted to $4 million, or 7.8% of sales for the first quarter, a decrease from $4.7 million, or 9.7% of sales in the first quarter last year, primarily due to lower personnel, occupancy, and depreciation costs.

Now turning to our segment results. Net sales in the direct business totaled $33.7 million for the first quarter, an 11.5% increase over the same quarter last year. The sales increase reflects continued strong demand for our cardio products and is also partly attributable to increased advertising effectiveness and higher consumer credit approval rates.

Credit approval rates rose to 30% in the quarter, up from 21% the same period last year. I'm very pleased with our direct team's ability to continually find the right combination of creative, media tight mix and media plan, overall, to generate strong leads and optimize our sales and marketing expenditures.

Operating income for the first quarter in our direct segment improve to $3 million, a 37.6% improvement over the prior year. This improvement is due to the increase in sales and a more effective media advertising content. The gain in efficiency drove a 90 basis point improvement in selling and marketing spend as a percentage of direct sales.

Gross margin for our direct business was 56.5% for the first quarter, an increase of 20 basis points from a comparable period last year. Net sales in our retail segment for the first quarter were $16.6 million, compared to $17 million in the first quarter last year. As Bill will comment on further, we saw a slight order shift -- flow shift from Q1 to Q2, which is not unlike what we experienced in Q3 and Q4 last year.

Operating income for the retail segment in the first quarter of 2012 was $2.3 million, essentially flat as compared to the prior year period. Retail gross margin was 23.8% for the first quarter 2012, an increase of 40 basis points from the first quarter last year. While retail margin improvement is directionally positive, we expect continued challenges in this area until our action plans take effect in the second half of the year.

Turning now to our consolidated balance sheet. Cash and cash equivalents increased to $20.4 million as of March 31, 2012, compared to $17.4 million at the end of 2011, and $16.6 million same time last year. At the end of March 2012, we also paid off a $5.5 million long-term note payable, which represented all of the Company's outstanding debt.

Inventories were $13.5 million as of March 31, 2012, compared to $11.6 million at the end of 2011, and up from $10.9 million same time last year. Trade receivables were $11.9 million at the end of March, up slightly from $11.1 million the same time last year. Also we have $79 million in federal net operating loss carryforwards available to offset future taxable income.

In summary, we are pleased with our overall improved financial results. Our team's hard work and successful exclusion of key initiatives launched early last year is enabling us to remain on track and achieve our stated path of delivering sustainable profitable growth.

At this time, I'd like to turn the call over to Bill McMahon, our Chief Operating Officer, who will provide some additional insights into our business and key product initiatives. Bill?

Thank, Bruce. I'd like to make a few brief comments regarding our operations to provide some additional background on our results. Our direct channel continues to see growth largely driven by the continued success of the Bowflex TreadClimber Cardio Machine. In Q1 2012, we achieved a new high mark for quarterly sales in this product category, as the combination of strong advertising and media performance, along with refresh product and reasonable consumer financial approval rates drove continued improvement.

Also in April, we announced that the Bowflex TreadClimber Model TC20, which we launched last October, was selected as the About.com 2012 Readers' Choice Award for best premium treadmill. Now, in it's fifth year, the About.com Readers' Choice Award honors the best products, features, and services across more than a dozen categories, and we are very proud that our product was recognized.

Other contributors to direct channel growth in Q1 include our Canadian direct to consumer business, which experienced significant growth as compared to the same period in 2011, as well as the Nautilus CoreBody Reformer product, which also grew over the prior quarter. CoreBody Reformer is still in its early awareness phase, and we are taking the learnings to date from the initial response and results to adjust and evolve our television marketing message.

Updated advertising for CoreBody Reformer will launch in Q3. Meanwhile, online advertising continues to be ongoing and successful for this product. Our expectation is that the adjustments we make will accelerate CoreBody Reformer sales in the second half of 2012, and this product has been an excellent platform for us to improve our ability to sell lower priced products, which will be an important competency in future product launches.

The growth in TreadClimber CoreBody Reformer and in Canada continues to more than offset erosion of sales in the traditional home gym category. We anticipate this trend to continue. Our product development pipeline for direct continues to advance products towards launch, we have multiple product ideas entering the late stages of development, where we test and verify the final product prototypes, as well as potential creative messages. We'll provide additional information on these product launches later this year as we approach their planned deployment dates.

Turning to our retail business channel, our sales in Q1 2012 were slightly off from prior year. Based on our current knowledge of order trends and timing, we feel this situation is similar to that scene in Q3 and Q4 of 2011, where, overall, the second half of the year showed growth, but order shifts led to uneven distribution of that growth. We currently anticipate a similar trend to occur in Q2, leading to modest overall growth in the first half of 2012.

Our retail business continues to see stronger growth in sales with our ecommerce partners continuing a trend from 2011. The ability to adapt our product development efforts to support the evolving needs of our bricks and mortar partners, while still maintaining that dot-com growth will be a key success factor in balance retail channel growth going forward.

In terms of product performance, our line of Schwinn Upright, Recumbent, IC, and Airdyne bikes grew in Q1 2012, as compared to the same quarter prior year. We have also seen a resurgence in retail home gym sales, primarily with our partners in Canada, leading to a year-over-year improvement in quarterly sales in that category.

The Elliptical and Select Rise weight categories were down year-over-year in retail slightly. In the case of Select Rise weights, this is primarily due to order timing and the continuing strong trend towards online sales in this product area.

New product development efforts in support of the retail channel continue to be an important aspect of our business. In addition to the multiple products we launched last fall, we also recently announced the launch of Bowflex BodyTower. BodyTower is a multi-station own body weight resistance work out tower, with more than 20 exercises available. We're excited to see the early strong reviews on this product online.

We're also targeting other new products for the retail channel in time for fall 2012, including innovation in the growing elliptical market, as well as a new market approach in the Select Rise weight category, where we have historically been a market leader. We hope to restore a healthy growth trajectory to both categories with these new product initiatives.

As noted in our March conference call, we have identified a strategic need to invest in business intelligence related to products, brands, and markets. The comprehensive research project that Bruce noted in his remarks has been underway throughout Q1, with the intent of arming ourselves with the better understanding of the fitness market and our opportunities wherein that market. The research has been a significant investment, and the majority of expenses for this investment have occurred in Q1.

While our operating income would have been higher without this work, we feel the investment of a portion of our ongoing profitability is critical towards driving profitable growth in the future. We expect to have the research results in-hand by mid-year, and it will be actionable for our product and marketing road maps going forward.

Finally, we have seen stabilization or even slight improvement in our gross margins as compared to prior year. Halting the erosion of margins has been a primary focus of our efforts for several months. While we are happy to achieve some progress against this goal, we are not yet satisfied with the results.

We are continuing to strive for improvement here via multiple paths, including new pricing for the second half of 2012, and intensive efforts to find cost optimization in our products and our supply chain. Through these actions and others, we hope to deliver measurable gross margin gains before the end of the year.

I'm pleased with the results our team achieved in Q1, and with the continued improvement in our quarterly results over prior year. We have set strategic performance targets for our business, which require continued improvement, and our momentum over the last few quarters has been encouraging. Going forward, our success at delivering winning products with improved margin will be a key to achieving our results.

As such, we will continue to invest resources into our product development and marketing research capabilities. Over time, we feel these investments, along with our existing ability to reach consumers across the retail, ecommerce, and direct to consumer spectrum, will be a competitive advantage and drive profitable growth.

And now, I'd like to turn the call back over to Bruce for his final comments. Bruce?

Thank you, Bill. I'd like to make some final comments before opening up the call for questions. We are very encouraged by the start to the new year. By continuing to focus and execute on our key initiatives mentioned at the beginning of this call, we are building the capability to deliver improved short-term results and the capacity to sustain healthy growth over the long-term.

I'm extremely proud of our team and the progress we've made. Fortunately, many of the good things that are happening in the business were being advanced well before I arrived nearly a year ago. We do continue to face various challenges in the marketplace, including an uncertain retail and macro economic environment, in addition to cost pressures in Asia.

Our focus is on managing as best we can the controllable aspects of our own operations, and to effectively navigate through uncontrollable headwinds that might arise, all in order to remain on track and deliver steady improvements in our financial performance. We have a number of significant growth and financial improvement opportunities available to us, and I'm confident that with our team's talent, dedication, and abilities, we can achieve our goals of delivering improved year-over-year financial results.

That concludes our prepared remarks for today. Thank you, and we would now like to open up the call for questions.

Thank you. (Operator Instructions). And our first question comes from the line of Reed Anderson with Northland Securities. Please go ahead.

Good afternoon.

Hi, Reed.

Hey, a couple questions. First on the margin side, when you look at kind of what you saw, and I'll just kind of take it by segment in the direct side. Is that sort of -- I think it was 20 basis points. Knowing what you know there in terms of the sales trend and kind of where product costs are etc., is that sort of -- is that the start to things getting better? Is that kind of what we should see over the near term? Just provide a little -- give a little color on where that ranks and sort of what you were expecting and what you might expect by the end of the year.

Hi, Reed, this is Bill. We expect that that margin should at least maintain its current position, if not continue to improve. We're pleased with the progress we made in margin beginning in Q4 for our direct segment. We'd like to continue to drive it further and we'll continue to look for those gains throughout this year.

And then you had made -- Bill, you made a comment I think towards the end of your prepared remarks talking about pricing, new pricing second half of 2012. I'm just curious what is the scope of that in terms of is it across a line, order of magnitude? Just some thoughts on what impact might come from that.

We'd rather not quantify the amount.

Sure.

It's significant, and let's say that it is in excess of some of our cost increases that we haven't been able to mitigate with other actions. But I think I'd rather just leave it at that, Reed. So it's understandable why it is what it is, and it is significant, and it is something that we don't take lightly in terms of what impact it could have, but it's being readily received in the marketplace.

Okay. That's fine. And then on the retail side, on the -- kind of the sales piece there, it's always kind of a difficult thing to predict because you have a lot of fluctuations there. But it sounded like we've got a first half here a little more challenging, but -- we get maybe make some of that up in the back half, is that -- if you look at it on the full year basis, Bruce, do you think it's a situation where this is a year where that business if it's kind of flattish that will be up a little bit, that's probably about as good as it gets with kind of a better second half making up for the first half?

I think that we would expect some modest growth in retail this year, maybe not to the degree that we might see in direct as relative.

Okay. Okay. And then on the brand awareness piece you talked about, which has been ongoing, did you -- I don't recall, did you say what you were going to spend on that last year for the six months? What was the investment you were making? I think you did talk about that, if you could just remind us what that is.

It is -- I'd rather not give you the precise number, but fair to say that it's in the several hundred thousands of dollars for the research.

Okay. And then lastly, and I'll let somebody else jump in, just a little bit higher level question. You've had a lot of good success with TreadClimber. You've kind of refreshed it. You've got some new iterations coming. You're making some headway here with a newer product in the CoreBody, but the point is, is you have had some recent success here, and do you look at the existing products, Bruce, and start to think that maybe the addressable market is a little bit bigger than you might have thought a year or two ago? I know you are looking at new markets with your research, etc., but I'm wondering if you are starting to feel a little more optimist about the existing markets given what you're seeing, particularly in TreadClimber?

Yeah, Reed, this is Bill. I'll take that. It is interesting you bring that up. We periodically sort of revisit, for example, the reasons we went off TV with rod gyms or with other products that we may have previously advertised. And with our new credit approval rates, is it possible to go back into those markets and make some hay with them? So I'm not going to say that we won't do that, but we're not going that way in the near term, or at least we wouldn't in regards to strength product. We might potentially look at some other products, though.

And I think there's more -- I mean our direct team on the creative side is looking at messages to continue to extend the TreadClimber, and that's part of what we have seen over the last six or seven months in terms of continued growth there, even after five or six years of being in the market is through finding new markets and new people that can come in in a big way.

That's great. Well, best of luck, and I'll let somebody else jump in. Thank you.

Thank you, Reed.

(Operator Instructions). Our next question comes from the line of Joe Mondillo with Sidoti & Company. Please go ahead.

Good afternoon, guys. Thanks for taking my questions.

Good afternoon, Joe.

Real quick, just some housekeeping issues and I'll get into some questions. You had mentioned you paid down the debt, was there any interest expense in the quarter? I'm just looking at the relief and I'm trying to piece it together here?

Yeah, the actual principal amount was $5 million, and the interest was about a little over $0.5 million, for a total of $5.5 million.

Okay. And the $0.5 million was incurred in Q1, you're saying.

That's correct.

And that hit the P&L?

Yes.

All right.

Well, it's -- well, you will see in our 10-Q, which we'll have on Wednesday. I think we are issuing our 10-Q, you will see where the $520,000 worth of interest hit.

Okay. And then what was CapEx spend in the quarter?

Roughly about $500,000.

Okay. Now, in regards to CapEx, $500,000, it looks like it normalized somewhere equivalent to what last year's was. Is that what you guys are anticipating going forward in 2012?

Yes.

Okay.

Approximately the same if you looked out for the full year.

Okay. And then on the tax rate, it seems to be fluctuating a little bit, 9.1% this quarter. From a modeling standpoint, what can we look at a rate to use in our models?

Honestly, I don't know that I can answer that. I'd have to get back to you, Joe.

All right.

There's so many things going on on tax and as I mentioned with our NOLs. We do have to pay taxes in Canada because NOLs don't apply there. And in certain states where they have a certain type of tax, we have to pay, like Texas, I believe. But, generally, obviously, it'll be a lot less than what we normally pay if we didn't have the NOLs.

Okay. You guys also talked about the research study you guys are doing. Any early developments you can shed some light on?

No. Joe, this is Bill, We have not yet received preliminary results. We know that the field work is done and the work in terms of compiling the data and sorting is it in progress. We expect to learn something probably next month.

I'm sorry, I know somebody mentioned it before, what is going to be the total cost in your estimation of this study?

Joe, it would be in the several hundred thousands of dollars.

Okay.

Mostly incurred already in Q1.

Okay. And I think Bill went into the Body Tower as a new product you guys just launched, what's the price point on that?

It is currently $299 in the retail space.

$299. And, Bill, you talk add little bit -- sorry I'm jumping around here, but you talked a little bit about Bowflex TreadClimber and CoreBody Reformer sales, but there was no mention of the actual numbers (inaudible). Can you ballpark it for us?

We generally don't -- try not to disclose too much around that number. It's competitive information. But I can tell you that Bow --

If you want to put them combined, that's fine. I just want to get a rough idea.

Combined as a percent of direct total sales, I'd say the two products account for probably 70% to 75% of sales in the channel.

Of direct?

Yes.

Okay. And, Bruce, you talked about improving credit environment, and so basically, what I'm trying to get here is with all these new products, what is your sweet spot as far as a price point you think? Is it -- you've got Body Tower coming out at $299, you have some higher end ellipticals, you had some higher end treadmills, what do you guys feel like is a good price point where you can still grow margin and still attract new customers without them shying away from the price?

Yeah, Joe, it depends on the channel in one part. So in the retail space, you have what we call discreet price points that products are sold on the floor, and we need to be respectful to those competitive facts. In the direct space, it sort of depends on what is the value proposition that we think we can put forth in our ability to convert against that. So we have a near-term focus on some lower price products because we think we were under-represented in that area, but we're still doing quite well in the TreadClimber, for example, which is multiple thousands of dollars to purchase on average.

Yeah.

So we aren't necessarily abandoning higher price per se as much as we're trying to get a balanced portfolio of product, and so that's a long answer, and the short answer is it sort of varies where we are going to sell it at. A lot of times, there's a big factor determining what the right price is.

Okay. I mean with the retailers, how has the response been with them? Has there been any early indications on some push back on the pricing?

Not more than what you would expect normally.

Okay.

Joe, let me also come back and clarify your question on the interest on the note. Actually, the interest expense was incurred mostly in 2011. We had been accruing it all along. There was actually a benefit that occurred in terms of previously incurred interest expense, there was a benefit of $200,000 in Q1 because we had actually over-accrued the interest.

Okay.

But you'll see the cash -- the cash went out in Q1. The $500,000 I was mentioning.

You guys had mentioned -- my last and final question -- you guys had mentioned with paying down that debt, it gives you more flexibility, the balance sheet is cleaned up. Are you guys looking, actively looking at stuff right now, or are you waiting for the results of this research study to really make a more conscious decision on where to pursue a new opportunity?

Yes, I think that's insightful, your comment, because although we're always looking and certainly we would be opportunistic if the right thing came along that made sense, that fit with our stated strategic plan over the next three to four years. But I would say it's not something we spend a lot of time on right now because we have other things that we feel are more higher priority. But, certainly, the research will help us formulate, in terms of brands, in terms of product opportunities, where the sweet spots are, and potentially an acquisition could fit into that. But I would say, again, that it's not one of our high priority activities.

Okay. Thanks, guys. I'll hop back in the coup.

Okay. Thank you, Joe.

Our next question comes from the line of Jason Stankowski with Clayton Partners. Please go ahead.

Hi, guys nice quarter. Good to see the cash building in our favor.

Thank you, Jason.

Just had a question for you on -- you have had some licensing opportunities that looked like the royalty rate came down a little bit in Q1, is that just kind of a reset to the year, and should that start to pick up as we continue throughout the year?

We feel it's just that. We think it's mostly about timing in Q1 and these things have a tendency to balance themselves out. The majority of variance in our royalties has to do with the timing of sales for the folks whose are licensing the IP from us involved and we haven't seen anything that indicates there's a longer term trend negative here, but definitely we're looking to see what happens the rest of the year on that.

You have out-licensed the commercial version of the TreadClimber, any update on whether that is being engineered and are they getting close to actually having something that might work for gyms, or is that still pretty far out?

The update is I've talked to the folk who are working on it, and I've seen their success to date. They also were able to show proof of concept version of this at the last ERSA Show, which was held a few months back, and had very favorable response to it. So they are making good progress. I don't want to steal their thunder in terms of launch date; it wouldn't be appropriate. But we feel like that project is going quite well, and there's some early buzz in the commercial world around the run of that product to that space. So hopefully we can continue to partner with them and build on that.

And would that be something that would be launched all at once, or would you start putting them in pilots and things like that before say ERSA of next year?

That, I couldn't answer. It would really be in the hands of folks who are licensing the product in terms of their launch strategy. But based on discussions, I would say it is similar to what you are describing in that they will go out in a pilot phase, and they are -- to my knowledge, several groups who have volunteered to be in that pilot phase, so just really to make sure that product is done right and is going to work in the market before they go for a full blown deployment. But based on what we know now, I would say you're description of it is accurate.

Great. Okay, got it. Good job on the cost controls and look forward to seeing more. Thanks.

Thank you, Jason.

Our next question comes from the line of Carter Dunlap with Dunlap Equity Management. Please go ahead.

Hi, guys. I was interrupted while you were talking about the research effort, and I just wanted to understand something. You said in the CoreBody Reformer, you are -- I believe you used the word adjusting and evolving the marketing TV message, and I thought I heard you say that the replacement or evolution would be launched in Q3. Does whatever you are doing there have anything to do with the research effort, and if not, or if so, why the quarter delay?

It's peripherally related to the research effort, but, primarily, it's related to us shooting some additional content for use in the TV, which is ongoing right now and continuing to evolve that message. That, unfortunately, takes some time, but we think that it will really help drive the boost we want to see in that product towards the second half of the year.

I think part of it, Carter, if I may add to what Bill is saying, part of what is a normal part of our launch for a product is understanding, okay, we had a nice success in Q4 when we launched, it built in Q1, continued to build, but it's -- we think the potential is much larger and the trajectory should even be faster than our current what we're seeing. And what we do is we go out and ask, "Okay, why aren't people that become aware of it buying it?" And from that, we determine that there were certain obstacles that if we address them, we could bring those people into the fold. And that's what the creative message that's being tweaked that Bill mentioned is primarily what we're working on right now for Q3.

So do you reign in the budget for that while you fix the message or do you keep it constant?

We reign in the TV budget, our online performance, we're pretty happy with. The website is quite strong, so we sort of adjust our spend around and save some of our dollars for when we are going out with a stronger message.

Got it, thanks.

Thank you, Carter.

We have no further questions at this time. I will now turn the call back to you, Mr. Cazenave, to continue with your presentation or closing remarks.

Well, I just wanted to thank everyone for participating on the call today. We're, obviously -- we have a lot of work to do, progress has been good, and I look forward to touching base with everyone in another three months for our Q2 earnings call. Thank you all, and have a great day.

Ladies and gentlemen, that does conclude your conference call for today. We do thank you again for your participation, and ask that you please disconnect your lines.