Nautilus Inc (NLS) 2002 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Nautilus Group, 4th Quarter 2002 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 the conference please press the star followed by the zero. As a reminder this conference is being recorded today, Thursday, February 6, 2003. I would now like to turn the conference over to Mr. Brian Cook, CEO of Nautilus group. Please go ahead, sir.

Thank you, operator. Good afternoon, everyone, and thanks for joining us today. With me are Kevin Lamar our President and Rod Rice our Chief Financial Officer. On this call today we will be reviewing our financial and operational results for the 4th Quarter and year ending December 31st, 2002, discussing guidance for 2003, and updating you on current business trends in our direct-end commercial and retail businesses.

Today we released our 4th Quarter 2002 results, and we're pleased with these results and believe they substantiate our position as a proven leader in the marketing of fitness products through our direct, commercial, and retail channels. Before I get into greater detail, I would like to turn the call over to Rod Rice to review our 4th Quarter results and 2003 guidance. Then Kevin Lamar and I will come back, to update you on current business in our direct and commercial and retail sales units. Thank you. Rod?

Thanks, Brian. Before we begin, I need to remind everyone that part of our discussion this afternoon will include forward looking statements, and they are not guarantees of future performance and, therefore, undue reliance should not be placed on them. We refer all of you to our filings with the Securities and Exchange Commission for a more detailed discussion of the risks that may have a direct bearing on our offering, results, performance, and financial condition. That said our revenue and earnings for the 4th Quarter were at the upper end of guidance range we discussed in our preliminary call on January 13th. Net sales for the 4th Quarter were $155.5 m, a 24% increase over $125.3 m for the corresponding period last year. Earnings per share for the 4th Quarter were 69 cents compared to 57 cents for the corresponding period in the previous year. A 21% increase year-over-year. Gross profit margin for the 4th Quarter was 53.4% compared to 54.8% for 2001. The reduction in gross margin was due to a higher percentage of commercial and retail products which have lower margins than our directed marketed products. Selling and marketing expenses for the 4th Quarter were $38.9 m or 25% of net sales, compared to $28.9 m or 23.1% of net sales in the 4th Quarter of 2001.

The increase in sales and marketing is mainly due to the increase in direct marketing advertising which we have discussed at length in the past. General and administrative expenses for the 4th Quarter were $6.7 m, up from $5.2 m for the same period in 2001. As a percent of, net sales, however, G and A were 4.3% essentially unchanged from the same period last year. Operating income for the 4th Quarter was $35.2 m, equating to a 22.6% operating income margin compared to $32.2 m and a 25.7% operating margin for the 4th Quarter of 2001.

The reduction in operating margin was primarily due to higher percentage of commercial and retail products combined with higher direct advertising rates. For the full year ending December 31, 2002, the Company reported a 50.7% increase in revenue to $584.6 m, compared to $363.9 m in 2001. Earnings for the full year were $2.79 per share compared to $1.85 per share in 2001. Another impressive increase of approximately 50%.

For the 4th Quarter, sales from our direct segment were $91.4 m compared to $82 m for the fourth quarter of last year. Direct earnings statement per share for the 4th Quarter were 57 cents compared to 50 cents for the same period last year. For our commercial and retail segment net sales were $64.1 m for the 4th Quarter compared to $43.3 m for the same quarter last year, a 48% increase.

Commercial and retail segment earnings per share for the 4th Quarter were 12 cents compared to 7 cents for the same period last year. Please note many the 4th Quarter of last year we did not own StairMaster. Our caps and short term investment position was $49.3 m at the end of 2002. After repurchasing approximately $30 m of our common stock and spending approximately $6.2 m on capital expenditures for the 4th Quarter. Cash flow from operations was $22.8 m in the 4th Quarter. Our accounts receivable at the end of the 4th Quarter were $50.1 m, up from $24.9 m at the end of 2001. The increase in receivables was due to the acquisition of StairMaster and our 48% increase in commercial retail sales in the 4th Quarter 2002 compared to the 4th Quarter of 2001. Our receivables also increased, as result of commercial and retail sales heavily loaded back in the 4th Quarter due to shipping 16 new retail products in the latter part of the 4th Quarter 2002. DSOs improved in the 4th Quarter to 68 days from 72 days in the 3rd Quarter. Inventories were $63.8 m, up from $45.5 m at the end of 2001. Approximately the same level as the 3rd Quarter of 2002. We are very comfortable with the current inventory level.

Moving forward to guidance, as we had mentioned on our preliminary call in January we expect revenues for the full year to range from $580 to $600 m. Therefore, we believe earnings per share for the full year will likely be in the range of $2.50 to $2.60. With cash flow from operations in the range of $85 to $95 m. We are projecting our gross margin for the year to be in the range of 54 to 56%. We are projecting our operating margin for the year to be in the range of 20 to 22%. In terms of quarterly breakdown of earnings for 2003, we believe the first quarter will represent approximately 25 to 27% of earnings for 2003. The second quarter will represent approximately to 20 to 22, the 3rd Quarter will represent approximately 23 to 25, and we project the 4th Quarter will represent approximately 28 to 30% of 2003 earnings.

In addition, we expect that our commercial and retail segment will account for about 35 to 38% of our total sales in 2003. Before we get off the topic of guidance, I would like to add that we arrived at our guidance based on extensive budget review, relying on our many years experience in direct marketing and health and fitness industry. Also we've evaluated the current advertising and consumer spending trend that we are seeing for 2003. In summary, I would like to report that the company is in a very strong financial position. To endorse this fact our Board of Directors recently initiated the company's first ever annual dividend. Starting this year we will have a 40 cent annual dividend payable quarterly. The initial quarterly dividend of 10 cents per share will be payable March 10, 2003, to shareholders of record on close of business on February 20, 2003. In addition to the dividend, the board authorized a $50 m share repurchase program from February 10 to June 30 of 2003. We believe that buy back will yield the best return for investors relative to other investment alternatives at this time. Now, we'll turn the call back over to Brian to discuss current and future business trends. Brian?

Thanks, Rod. 2002 was a tremendous year for the Nautilus Group. We achieved sales of nearly $585 m and diversified our revenue base by integrating two leading brand names, Schwinn Fitness and StairMaster into our business. We also increased the sales of our Nautilus Sleep System through our direct channel by over 60%. As we enter into 2003, we are excited to be introducing a new product into our direct marketing sales channels and will continue to leverage the synergies of our Nautilus, Schwinn, and StairMaster brands in the commercial and retail distribution channels.

Even though we're excited about the opportunities just mentioned, we realize that the latter half of 2002 saw direct advertising rates increase for the first time in a couple of years. Remember, as we discussed in the January preliminary earnings call, there were a couple of extraordinary events that affected sales in late 2000 and the first half of -- late 2001 and the first half of 2002.

First, the nesting effect as a result of the events of 9/11/2001 and the low price and high availability of advertising. Both of these contributed very positively to sales of both legs during the first half of 2002, as evidenced by the results in the last part of 2002, the nesting effect of 9/11 seems to be receding, and the advertising environment has changed dramatically. Because of this, we are projecting both leg sales on average will be at or slightly above 4th Quarter 2002 levels for the year 2003. Before I go into more detail on our new product launch, the Nautilus Sleep System progress and the retail test we are conducting on the Bowflex, I'd like the turn the call over to Kevin Lamar, our President, to discuss the progress on our commercial and retail side of the business and what we have to look forward to for 2003 and beyond. Kevin?

Thanks, Brian. We're excited by our progress during 2002 in the commercial and retail business segment. I believe the 4th Quarter illustrates a glimpse of what we are going to see out of this business segment for years to come. By the end of 2002, we completed the heavy lifting of the integration. We closed the StairMaster corporate headquarters, consolidated the StairMaster manufacturing facilities, combined the worldwide commercial and retail sales force, developed an over all retail and commercial brand strategy and introduced 16 new retail products. We invested both time and money to position our company for long-term future growth in the commercial and retail markets.

For the 4th Quarter our performance in the commercial and retail business was certainly a step in the right direction from both a sales and profitability standpoint. As Rod stated earlier, we achieved sales of $64 m and operating income of $5.5 m in the 4th Quarter, and we believe we can achieve double-digit operating margins during 2003. In 2003 we will continue to streamline and refine our business process and support our brand position and introduce more new product as we continue our quest to be the dominant global fitness leader over the long-term. I believe our combination of strong brand names, distribution channels, product development capabilities, and broad range of quality cardiovascular and strength training products are unmatched in the industry. They are unmatched today and will continue to be the differentiating factor for this company for years to come. Now back to you, Brian.

Thanks, Kevin. Before we open up the call for questions, I would like to take a few minutes to give some more detail about our new product launch on the direct side, discussion of progress on the Nautilus Sleep System in 2002, and discuss the initial feedback we are getting on our Bowflex retail tests.

I'm very excited to announce during the second quarter we plan to introduce a new product that will be the third direct marketed product line joining the Bowflex and the Nautilus Sleep System products. This product is a revolutionary patented cardiovascular fitness product that we believe will be complimentary to our Bowflex strength training products. This new product will be unveiled in New York City on March 11th and will be sold through our direct marketing channel. This unique, revolutionary new product is a culmination of joint efforts of our direct and commercial and retail R&D teams working together, and at this time I would like to thank all members for their long hours and dedication shown in turning the product concept into reality.

Another product in our direct marketing sales channel is the Nautilus Sleep System. We introduced this product approximately three years ago and have been gradually growing sales of this product each and every year. In fact, we are very proud that we saw sales of this product increase over 60 percent in 2002. And even in this tougher advertising market, we expect to see this product line grow 30 to 40% in sales in 2003.

Now I'd like to talk a little bit about our initial feedback from our Bowflex retail tests. The company began to test the Bowflex Pro through select retailers in three different markets starting the second week of January 2003. While three weeks is certainly not enough time to fully evaluate the success of this test, we are very pleased with the initial feedback we are receiving from our retail partners. Additionally, we displayed several models of Bowflex approximately two weeks ago at the Super Show, which is one of the largest sporting goods retailer products shows in the United States. We were not taking orders for Bowflex. We were merely talking to retailers about their interest in the product line. The response was very positive. When you spend the hundreds of millions of dollars we have advertising and promoting the Bowflex products, it obviously creates retail demand because there is a large segment of the consuming population that will not by-products such as Bowflex direct but insist on trying a product before they purchase. Based on initial feedback from retailers, we believe there is strong retail demand for the Bowflex. On the first quarter conference call, we intend to discuss the retail program in more depth, but please understand right now, with only three weeks of feedback, we are not in a position to elaborate more on the retail plans.

In summary, because of the significant cash flow from operations, over $100 million in 2002, the Nautilus group will continue to focus on its core businesses, look for strategic acquisitions like Schwinn and StairMaster, strive to improve our internal efficiencies, and introduce new products through all of our sales channels. Additionally, we will focus on improving shareholder value by repurchasing shares, when appropriate, and exploring other ways to increase shareholder value like our recently-announced dividend. We truly believe that we have made tremendous strides over the past few years by diversifying our business. We have acquired the strongest brand names in the industry and are deploying complete fitness product lines into our multiple sales channels. We are really just at the beginning of this opportunity and are excited about our ability to execute our strategy over the long run. At this time Kevin, Rod, and myself will be happy to answer your questions. Operator?

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 one on your push button phone. If you would like to decline from the polling process, press the star followed by two. You will hear a three tone prompt followed by your selection. If you are using speaker equipment you will need to lift the hand set before pressing numbers. One moment before the first question. Our first question comes from Eric Wold. Please state your company followed by your question.

High, good afternoon, RTX Securities. One question and two really quick ones after that. For the air beds, can you comment a little bit more detail in terms of what trends you see over the past year, specifically just general trends on the sales rates how they vary throughout the year as well as ASPs how they vary from the recent years to your beginning periods?

Well, Eric, as I stated earlier we're very happy that we were able to grow the product lines by over 60%, I think the exact percentage is 64, for the year 2002. We expect this to be a growing part of our business going forward, even with tougher advertising environment we expect to see growth of 30 to 40% in the product line this year. We're pretty pleased with where it's at. Rod, do you have anything to add as far as average sales price?

Yeah, average sales price is doing very well throughout the year. It's been trending up and was at its highest level through the 4th Quarter of this year.

Are those still in the $1800 range?

It's a little bit above that, it's above the $1900 range.

And two quick questions. I just want to confirm when the patent expires on the Bowflex line in April of '04, you will no longer be required to pay any royalties on any Bowflex sales from that point forward, correct?

That is correct. That's one of the advantages when the, you know, patents expire we will not pay any royalty whatsoever, and we really think we're in the driver's seat, the leadership position, we have the brands, we have the quality products that we've been producing for years. We have the retail distribution. We still believe we're going to be the market leader at that time.

And the last question, what were the shares outstanding, the common shares outstanding at the end of the quarter?

It was 32.5 million.

Thanks a lot, guys.

Our next question comes from Douglas Woodcock please state your company followed by your question.

Hi it's Douglas Woodcock with DA Davidson. [ph] Fellows would you share with us what the direct selling and marketing expense were in Q4 as a result of direct sales?

Sure, not a problem. It was 35.6 percent and as compared to the 3rd Quarter, for example, 31.9%. Going forward into 2003 what we expect, from our budgeting profits, you can see them go slightly up, and the reason you're going to see them go slightly up in 2003 is due to launching a new product because when you launch a new product you're going to be -- you've got marketing materials that you produce, the commercials that you produce and also you're going to be testing different marketing messages to perfect that different marketing model in the first year.

Rod, can you give us any sense of either what component of those costs were represented by advertising or how much advertising went up on a per-unit basis in the quarter year-over-year?

Most of the increase, what you're seeing is due to a tougher advertising environment out there at this time, but, you know, we were very profitable, to give you a for an example, on the income from operations, on the direct side for the 4th Quarter, even in this tough advertising environment, we still made 32.5%, so it's not -- it's affecting us, but not that bad.

So is that to suggest that all of this increase was driven by higher ad costs?

I would say the majority.

Thank you.

Our next question comes from Maynard Arif, please state your company followed by your question.

Good afternoon, Wells Fargo Securities. Couple of questions, guys. First of all, can you give us an ASP [ph] for your Bowflex product during the 4th Quarter?

Sure, it was essentially unchanged from the 3rd Quarter, right around $1540.

Okay. And then, Brian, I know it's too early, but when you tried to sell Bowflex on the retail channel, have you seen any kind of like pricing pressure, or what kind of pricing pressure did you expect?

Well, actually, great question, Maynard. And first, again just to clarify when I say the retail channel we're talking about selling through retailers, not openings stores. I think everybody is clear on that, but I always like to make sure. Actually, no, we have not. Retailers have preliminarily indicated the demand for the product may be so strong that they don't see pricing pressure.

And, lastly, for Rod, what is the, kind of like, you know, in terms of DSO for your commercial and retail division what is the kind of like normal DSO?

You know, it really depends on the time of year, because you have to look at seasonality. I use the simple analogy, put January on the left-hand side of the paper and December on the right-hand side. It's really a smile. Demand is high in January. Then it tapers off throughout the first quarter. Then in June, July, the lowest part, then it starts increasing from there. So in December is actually a very good month for the business, one of the better months for the year so it's naturally back in loaded quarter. So I would say for this time of year 68 is in the range, what you'll see DSOs will come down in the first quarter, then come down in the second quarter and then start increasing in the 3rd Quarter and 4th Quarter again.

Thank you.

Our next question comes from Jeff Lick, please state your company followed by your question.

Yes, Jeff Lick, Par Capital.[ph] Rod, just to confirm the Bowflex sales were 54,000?

That is correct and rounded to the closest thousand.

So I just want to, you know, run past, run through a quick, you know, math here. At 35.6% that means you're at, what, $32.5 m in selling and marketing for direct?

Selling and marketing for direct was $32.6m.

Okay. So, you know, usually, you're ad expenditures run about 70% of that and if you're look -- so that gives you about $22.7 m. You've got Bowflex sales in the $83 m, so that means, basically, that you spent $3.65 -- or basically $1 to get $3.65 in Bowflex revenue, which that's pretty consistent with what you've been doing, so if one was to say, you know, is it really more expensive to buy a Bowflex sale, the answer is, not really, not dramatically.

Yeah, I would -- I would say we've seen some -- you know, our selling and marketing go up but we still have a pretty good income from operations at 32.5%. I don't think that's too bad.

Uh-huh. Kevin, I wouldn't mind getting your take on what the adding Bowflex to your -- basically, your operation will do in improving your ability to sell other products into your channel, you know, vis-à-vis, you know, you'll be able to say well, if we're offering the Bowflex, and -- you know, if you provide someone with, say, exclusivity on the Bowflex, that might help you in selling other products as well?

Jeff, it's way too early in the test to tell one way or the other with the Bowflex. It obviously, as Brian indicated earlier, when you spend this kind of money you do create strong product awareness for the product at retail, and that's what we're very excited about. And I during the Super Show we heard that clearly, but it's too early to tell on how we do with that. Brian indicated the demand and results for the product as retail we think are strong.

Finally Brian I wouldn't mind just taking a big picture of things here. If you look, take the midpoint of your cash flow from operations for this year at -- or basically your free cash flow of $90 m and, you know, you effectively took what you -- would be a fair discount rate, you know, say 15%, you gets a enterprise value of $600 m, you add the $50 m of cash divided by the amount of shares, you get a number that actually works out to be exactly $20 a share.. With the share price where it is right now, I guess what you would have to say is that the -- you know, the market doesn't believe that this $90 m cash flow stream is at least a perpetuity [ph] going forward, and I'm curious as to, you know, what your vision is in how you see things playing out. And just to use a quick rule of thumb, if you lose 10,000 Bowflex sales per year you basically lose about, you know, $3.4 m of that cash flow stream.

And right now Bowflex is about, you know, give or take, you know, 70% of that cash flow stream, so, obviously, if Bowflex were the client you're going to have to replace that loss with something else. I'm just curious -- you know, let's just assume this is a perpetuity, I'm assuming maybe you'll say it's a growing annuity. I'm curious what your vision is of how this is all going to -- you know, how that $90m stays $90 m or to put it bluntly what's the market missing here?

Great -- a great question. I've been wondering that myself. You know, when we look at it, we like to say we're very proud of what we've put together here, both on the direct side and direct expertise, expertise and also systems infrastructure surrounding that expertise. We're feeding our third new product line that we've announced and will unveil in March 11 in New York. Through that system we've grown the Nautilus sleep system consistently since we introduced it. I mean, on the direct side its new products and growth in other existing product lines that will ultimately re place the Bowflex.

But, you know, more than that, we've diversified the company through our acquisition of Nautilus, Schwinn, and StairMaster into an entirely different distribution channels and product lines. So if you ask us, you know, we're at the first stage of a long journey, one that we think has got very exciting opportunities.

Okay. I guess, just, you know, the good news and the bad news about Bowflex is that it is so profitable so that, you know, if you lose a unit of revenue, you know, you'll lose a lot of profit, and it's hard to make that up, or it's more difficult to make that up, and so I'm -- obviously, that's what the story is, that's what people believe, is that, hey, you know, this Bowflex is dropping, and, yeah, you might do a nice business with commercial and retail, you might do a nice business with the bed, but, you know, it's pretty obvious that, you know, the market doesn't look at this $90 m as a perpetuity. I'm just curious to see how -- you know, if you had a thought process, you know --

I think, you know, Jeff, we've given guidance on Bowflex on the direct side for 2003, given the tougher advertising environment, we're certainly comfortable with that at this time. We don't have any guidance on the retail side of it yet because we're not far enough into the test, but demand for the Bowflex is still very strong.

Ladies and gentlemen, as a reminder, please restrict your questions to one question and one follow-up. Our next question comes from Jim Bellessa, please state your name followed by your company.

DA Davidson and Company. Good afternoon.

Good afternoon.

I'd like to just dry to ascertain how much StairMaster may have contributed or another way to say it is how much would sales increased in the 4th Quarter had you not acquired StairMaster?

Jim, what we do is we look at the business. At this point forward we've already integrated the business. At the end of the 3rd Quarter we closed the manufacturing facility. In the beginning of the 3rd Quarter we closed down the corporate headquarters. So we look at that as one business unit that, if I would take a general range I would say you'd be in the 34 to 35% range on internal growth.

4th Quarter, the 4th Quarter?

Yes.

And when you purchased StairMaster, you thought that it was going to be a maybe just slightly accretive during 2003 or, excuse me, during 2002. Did it meet your expectations?

You know, Jim, the StairMaster, you know, that's fully integrated. We like where we are. We've just completed the 4th Quarter. We came in at 12 cents earnings per share. We launched 16 new products. We think we're positioned very well for future growth in our business.

Those were my two questions. I have a number of others but I'll pass it on and come back later.

Thank you.

Our next question comes from Brent Rystrom please state your company followed by your question.

Hi, this is Brent Rystrom, U.S. bank Corp Piper Jaffray. Can you give us the first quarter for Bowflex?

Yeah we sold 54,000 units the same as we sold in 4th Quarter 2001 but we actually increased our ASP over 10% last year.

So over $1900 -- oh is that --

To just over 1500 -- oh.

That's right. And can you give us the gross profit margins for both the direct and commercial businesses?

Sure, the gross profit margins for the direct was 74.3% for the 4th Quarter, where the commercial retail, it was 23.6.

Great. Thank you.

Thanks.

Our next question comes from john Fox, please state your company followed by your question.

It's Adams, Harkness and Hail, [ph] just wondering your new product is that going to be in a similar price margin similar to our other direct marketed products?

Yes, it will, it will be very comparatively priced to our other products.

Okay. And when was the patent filed on that?

Well, let's see, the original patent on that -- I'm not exactly sure of the exact filing date, but I know that there's well over a decade left on the patent.

Okay. Thank you.

Our next question comes from Brian Smith. Please state your company followed by your question.

Red Chip Company. Just a quick housekeeping question for Rod. Rod, you had mentioned cap ex for the 4th Quarter and then also I think what you thought it was going to be for 2003, but I missed those figures.

Sure. For the 4th Quarter of $6.1 m. Going forward, we have done our investing in 2002 on a new computer system for our direct side of our business. We have new corporate headquarters for our corporate retail. We've added capacity to our consumer treadmill manufacturing so this year is what I call maintenance cap ex and it should be in the $8m to $10 m range.

Thank you.

Our next question comes from Ed Erin, please state your name followed by your company and question.

Hi, RBC Capital Markets. A couple questions relate to go your new direct product. I was just hoping you could elaborate a little bit on it and talk about what is proprietary about it and how do you see the ramp up taking place? Is it fair to use, say, the -- kind of the sales that you saw a few years ago when you introduced -- first introduced the Sleep System, you know, where I think you had maybe 10 million the first year, and it doubled and last year you had 60% plus. Is that a fair assumption to use for this product as well.

First, it's proprietary I think I'll have to ask you to wait until March 11 then I think you'll agree that it's a very unique, revolutionary cardiovascular product.

As far as we ramp up products in general, that is how we ramp up products. We do it slowly. And we openly stated we do so because you learn a lot those first two or three years that you're direct marketing a new product, and you probably increase your overall profitability on that product by doing it that way, at least that's our belief.

So maybe a $10 m estimate for the first year would be ballpark, kind of in the range?

Well, you know, again, not commenting specifically. I think you're certainly in the range.

Thank you.

Our next question comes from Ian Ellis. [ph] Please state your company followed by your question.

Micro Capital. Two quick questions, please. First of all, Rod, if you assume you brought back $50 m of the stock at today's price and that the net income you've guided to for this year continued, what sort of earnings per share accretion would that be?

Second question is, with regard to Bowflex at retail, obviously it's tantalizing to appreciate that, perhaps, the majority of the home fitness market prefers to purchase retail than direct. Have you any data, gentlemen, on how the market actually splits out between direct and retail for the home fitness equipment industry?

Sure. And, Ian, I'll answer your first question. If we were to buy back $50 m of our stock, and we do believe it's undervalued at these prices, we would buy about 10% of our outstanding shares back. That would add, you know, 25 to 26 cents of accretion to earnings per share and over a 12-month period. So you would have to weigh it for this year, so it would probably be in the lower 20s.

Great. Thank you, Rod.

Ian, would you restate the other question you had, please, repeat it for me? Ian?

One moment, please.

Hello?

Please go ahead, sir.

Ian, this is Brian, would you please repeat the last half of your question?

Yeah, it's really simple, Brian, looking at the home fitness industry as a whole do you have any data or thinking in your minds as to what proportion of the market is retail and what proportion of the market is direct? And I guess we're talking about a $6 b industry total, right?

Well, you know, I don't have any data, precise data, but I can just -- you know, if you look at the other direct marketers out there and the retail out there, I'm going to say it's probably more than 50% retail, probably maybe a 60/40 split retail to direct, at least.

Great. Thanks.

Our next question comes from Jeremy Fish. [ph] Please state your company followed by your question.

Hey, East Point Capital. Hey, I'm trying to see figure out where you guys see Bowflex revenues coming in next year. I tried to do the math and I just wanted to run it by you. Roughly, do you see it down, maybe, like 10% or so in dollars?

Well, you know, I think where we see it overall for the year is at or about, slightly above 4th Quarter levels, 4th Quarter 2002 levels.

Okay. Good enough. Thanks.

Thanks.

We have time for one final question. It comes from Greg Hillman. [ph] Please state your company followed by your question.

Yeah. I'm at Chris Wilshire Securities Management. Just quickly, what percent of your sales are international?

They roughly were 10% in 2002.

Could you talk about the international opportunity a little bit, in particular, well, number one, you know, do your brands mean anything, you know, in Europe or Asia or Latin America?

And also can you talk about whether the infomercial format whether that's lodged in Europe or Asia or Latin America? And also can you talk about health club penetration, those various markets, I guess the market for retail exercise equipment and your strategy and capabilities, whether that's going to fly and make a lot of money for you around the world?

Okay. Great question. Let me see if I can take it in parts. First, with regard to the direct marketing opportunities internationally for products like the Bowflex and the Nautilus sleep system, today they are limited. There are some. Obviously, North America. When I'm talking about international, Canada, we do market the products. In Europe we do think there are some opportunities. But we think most of the opportunities on the direct side are in the future, as most of the fitness industry internationally today is still a commercial or club-based industry. And, Kevin, I might toss it over to you and let you expand on that.

Yeah, Greg. Today, as we see the international markets, they are primarily a commercial opportunity with a large number of health clubs in Europe, a growing number of health clubs in the Asia Pacific markets, and the bulk of the business being done in South America, as far as the dollar volume business being commercially as well. We do see an opportunity growing in a couple of categories.

One is hospitality, which is hotel/motels for travelers who want to work out, and that type of equipment, we see as hospitality offering an amenity globally. On the retail side of the business, the product that is most sowed internationally is the lower end price products and we typically offer a better quality product than is currently sold internationally. However, one of the big opportunities that we have as we go forward to grow our international business is our strong brand names. Our strong brand names have a great presence in the health club business, and we feel we can bring up the price points and the quality of products that are sold internationally because we think many of the international retailers will follow the direction of the U.S., which is moving a lot more towards higher-priced point products and better quality products, so we think we've got a great future in our international business.

If you do a joint venture with a hotel chain to put, let's say, Bowflex or Nautilus in all their hotels, does that mean anything? Does that name, Bowflex or Nautilus mean anything in Asia?

What I'd tell you, Greg, is those brand names are recognized worldwide. Nautilus, Schwinn, StairMaster are worldwide recognized, and I can tell you even with the prominence of Bowflex in the United States, it's a well-recognized brand name. We do think it has some meaning. We also think that some of those purchasers will think it has some meaning, and we definitely think for those travelers who use that product that they will feel comfortable using it in those settings.

Does your international strategy bring your sales up to 25% any time soon or is this a long-term thing?

It's more longer term. I can tell you I can't control the maturing of the retail market internationally and the way that we think some of the retail will grow, but I do think that international will continue to grow as a part of our business.

Okay. Thanks very much.

This concludes the question and answer session. Gentlemen, please continue with any closing remarks.

Okay. Well, I just want to thank everybody for joining us today, and I look forward to talking with you again at our next conference call at the end of the first quarter. Thank you.

Ladies and gentlemen, this concludes the Nautilus group 4th Quarter 2002 earnings conference call. If you would like to listen to a replay of today's call, please dial 1-800-405-2236 or 303-590-3000 followed by the access number of 523218 once again if you would like to listen to a replay of today's call you can dial -- or 303-593-3000 followed by the access number of 523218. Thank you for participating. You may now disconnect.