Nautilus Inc (NLS) 2003 Q1 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to The Nautilus Group Q1 Earnings Conference Call. At this time all participants are in a listen-only mode. On today's presentation instructions will be given for the question-and-answer session. If anyone needs assistance at anytime during the conference, please press the "*" followed by the "0". As a reminder this conference is being recorded April 30, 2003. I'd now like to turn the conference over to 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 operating results for the first quarter ending March 31, 2003. We'll also be updating you on recent initiatives and current business trends in our direct and commercial retail businesses. Today we released our first quarter 2003 results. During the first quarter we like many other consumer companies experienced the challenging business environment. That said, we continue to have the leading portfolio of health and fitness products and maintain the strongest financial position in our industry. Also we are encouraged by our recent initiates during the quarter and believe over the long-term these initiatives will continue to position us as the leading marketer, developer, and manufacturer of branded health and fitness products. Before I get into greater detail, I would like to turn the call over to Rod Rice to review our first quarter results and revise 2003 guidance. Then Kevin Lamar and I will come back to update you on the current business in our direct and commercial retail sale segments. Rod…

Thanks Brian. Before we begin, I need to remind everyone that part of our discussions this afternoon we will include report forward-looking statements that 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 and may have a direct [bearing] on our operating results performance and financial conditions. That’s said, our revenue and earnings for the first quarter were at the upper end of the revised guidance trends. Net sales for the first quarter were $129.4m compared to $135.9m for the corresponding period last year. Earnings per share for the first quarter were 42 cents per share compared to 57 cents for the corresponding period in the previous year. Gross profit margin for the first quarter was 54% compared to 57% for the first quarter of 2002. The reduction in gross profit margin was mainly due to the higher percentage of commercial and retail products, which are lower margins in our direct market products. The [value] marketing expense for the first quarter was $39.5m or 31% of net sales compared to $31.6m or 23% net sales for the first quarter in [2002]. The increase in selling and marketing expenses is mainly due to the increase in direct marketing and advertising expenses, which increased [normally] compared to the first quarter of 2002.

General and administrative expenses for the first quarter were $6.9m up from $6.3m for the same period in 2002. Consolidated operating income for the first quarter was $21.5m equated to a 17% operating income margin compared to $37m and a 27% operating margin for the first quarter of 2002. The reduction in operating margin was primarily due to higher percentage of commercial and retail products combined with higher direct marketing expenses to increase advertising cost. Our financial statements will now reflect a third statement comprised of our corporate holding company, which included investor relations expenses, direct cost, general, legal, and the guarantees and salaries of corporate personnel as well as other costs that are typically attributable to the other two segments. In addition, treasury is a corporate function so interest income is included in the corporate segment. While financial reporting purposes we have reclassified prior year balances to confirm to just three segment presentations. During the first quarter net sales of our direct segments were $78.9m compared to $91.1m for the first quarter last year. Earnings per share for the first quarter were 37 cents per share compared to [63] cents per share for the same period last year. The first quarter represented a challenging business environment; this was due to the increased competition, higher advertising expenses and overall consumer confidence.

Two points I would like to make about the advertising costs; one direct TV [Media buy] as a whole, we have seen advertising costs increased compared to this period last year. As we have mentioned before this time last year, we saw a drop in advertising rates because of 9/11. And two, we increased the amount of advertisement we ran because for the first time we saw two [inaudible] stock, we believe because of lower consumer component due to the war and concerns about the economy and increased competition. For our commercial retail segments, net sales were $50.5m for the first quarter compared to the $44.8m for the same quarter last year, a 13% increase. For commercial retail statements the earnings per share for the first quarter were 8 cents per share compared to 5 cents for the same period last year. Please note we acquired fair amount during the first quarter of 2002. Also sales of our Bowflex retail tax equated to $4.6m or 9% of the overall commercial retail sales. The operating expenses for the holding company in the Q1 2003 were $1.6m compared to $1.7m in the first quarter of 2002. Our cash in short term investment position improved to $60.4m at the end of the fourth quarter. After repurchasing approximately $1.4m of our common stock, added average price of $14.17 paying $3.3m in dividends and been approximately $3.6m of capital expenditures. Cash flow from operations was $19.2m. Our accounts receivable at the end of the first quarter were $41.5m down 17% from $50.1m at the end of 2002. The decrease in receivables is due to the seasonal buying patterns and commercial retail customers.

Inventories were at $66.8m up from $63.8m at the end of 2002. The increase in inventory was due to slower than expected sales as well as inventory associated with the Bowflex [inaudible]. We are comfortable of current inventory levels.

Moving guidance as we mentioned earlier this month based on the current business environment that we see extending beyond the first quarter. We expect revenues for full year to be in the range from $525-545m. Furthermore we believe earnings per share for the full year were right through in the range of $1.60-1.70 with operating cash flow for 2003 in the range of $55-65m. We are projecting our gross profit margin for the year to be in the range of 52-54% and we are projecting our operating margins for the year to be in the range of 15-17%. And turning to the quarterly breakdown for the remainder of 2003, we believe the second quarter will represent approximately 16-18% of earnings for 2003. The third will quarter will represent approximately 24-26% and we project the in fourth quarter we will represent approximately 33-35% of 2003 earnings.

In addition, we expect our commercial retail segments will account for 39-42% total sales in 2003. Despite the business climate, I would like to inform that company is in a very strong financial position. To endorse this fact during the first quarter our Board of Directors initiated the company's first ever annual dividend, 40 cents per share payable 10 cents per quarter. As of today that equates to a greater than a 3% yield. The first dividend will payable March 10th and the second dividend will be payable June 10th, 2003 to shareholders that records at the close of business on May 20, 2003. In addition to the dividend the board offer as a share repurchase program that remains in fact until June 30. Now we also will continue to evaluate all usage of cash. Now I would like to turn the call back over to Brian to address future and current business trends.

Thanks Rod. During the first quarter of 2003, both of our business segments encountered a challenging business environment. And as we are now one month into the second quarter, we see this environment extending beyond the first quarter. And providing guidance as Rod mentioned before we have taken the current environment into consideration; that said we have the leading portfolio of branded health and fitness products and maintained the strongest financial position in our industry. We are also excited and very encouraged by our recent introduction of a new direct segment product the TreadClimber and initial results of the Bowflex retail program. Before I go into more detail on our new direct products and the retail launch in Bowflex. I would like now to turn the call over to our President, Kevin Lamar to discuss the progress on the commercial retail side of the business. Kevin.

Thanks Brian. Year-over-year growth for the commercial retail segment increased 13% compared to this period last year. 9% of this growth was due to the introduction of the Bowflex products in our retail channel. We believe the steps we have taken will continue to show improvement in our sales and earnings especially when the economy begins to improve. During 2002, we completed the heavy listing of the integration of Nautilus, Schwinn and StairMaster and combined our worldwide commercial and retail sales forces. These actions are starting to produce results by leveraging our superior brand and developing opportunities to cross sell multiple products into the same customer. And now we will also be offering products with the Bowflex Power Rod technology through our retail channels. Which we believe over the long term will create more cross selling opportunities.

Overall our commercial sales were a larger percent of total commercial retail business than in previous quarters. This is due to the continued improvement in our commercial business, but also because we experienced weaker than expected performance in our retail business. In our commercial business we continue to become more competitive because of our ability to quote and win more business due to our combined offering of Nautilus, Schwinn and StairMaster. By combining cardiovascular and strength products together we have the ability to sell our products as a packaged offering to more customers. Concerning new cardiovascular products for the commercial side we are excited about the response to the new StairMaster treadmill line. We introduced the new StairMaster treadmill at the [inaudible] show in late February and expect to be in full production and shipping during the third quarter of this year.

Moving to retail, we saw softness in retail especially during the latter part of the first quarter. We believe this softness is due to war and worry about the economy. And we believe this business will improve as the economy recovers during the second half of 2003. We are encouraged by the initial retailer feedback on our new product line and are especially excited about the opportunity we see for the products featuring Bowflex Power Rod technology. The new products we have introduced over the past year are examples of the results that can be achieved by our research and development team. With this team we believe we are able to bring new products to market faster and look to gain new forward space and new distribution opportunities. We believe our R&D team is second to none in developing quality in health and fitness products. We continue to streamline the business and position ourselves as a global leader of fitness over the long term. We believe our combination of brand names, distribution channels, product development capabilities and broad range of cardiovascular and strength products are unmatched in the industry and we 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'd like to take a few minutes to give some more details about the direct segment of our business. The initial launch of the Bowflex into retail and our new direct products the TreadClimber. Concerning our direct business we saw a drop in sales and earnings during the first quarter that we believe was due to increased competition, higher marketing cost, and lower consumer confidence due to war and worry about the economy. As many of you know in late 2002, Icon Health and Fitness introduced a product called [inaudible]. In December we filed a pattern infringement [inaudible] against Icon Health and Fitness, because we believe that product infringes upon patterns relating to the Bowflex. That competition has impacted our sales; you must ask what are we doing about it.

The company began to test Bowflex Pro through select retailers starting in early January of 2003. When you spend a 100s of millions of dollars that we have on advertising and promoting the Bowflex products, it obviously could increase retail demand because there is a large segment of the consuming population that will not buy products such as the Bowflex direct, but insists on trying those products before they purchase. Initial results of our retail sales have been solid and toward the end of the first quarter we expanded the test series of our retail plan. We expect to expand retail distribution and products with the Bowflex and Power Rod technology during the second quarter and throughout the year.

In the retail market we expect to sell products featuring the Bowflex and Power Rod technologies under both the Bowflex and Schwinn brands and will be offering differentiated products to address different markets and different price points. We believe we'll do well in the retail channel, but we remain conservative in our excellence at this time and we will keep you updated on a quarter-to-quarter basis. Within the direct business, we expect to introduce a new Bowflex product late in the second quarter, and additionally we will introduce three new models and price points of our popular Bowflex ultimate product. Beyond that I have decided to announce during the first quarter, we launched the TreadClimber a new product that is the third direct marketed product joining Bowflex and Nautilus Sleep Systems. The TreadClimber is a revolutionary patented cardiovascular business product that we believe will be complementary to our Bowflex strength turning products.

[inaudible] New York March 11 and concurrently began selling the product through our direct channels. There is a combination of the joint efforts of our direct and commercial retailer product development teams and at this time, I would like to thank them all for their long hours and dedication they showed in making this a product, Nautilus is proud to market. The TreadClimber has three models and the prices range from $1499-$2199. We have been marketing this product for little over a month now and even though we are in the very early stages of the product introduction, we are very encouraged by the initial results. These initial results indicate the consumer needs the TreadClimber as a product that offers significant benefits and at price points that are customers comfortable in.

In summary, we are excited about the new initiatives and we'll continue to be prudent with our cash flow. We are going to continue to focus on our core business, working to improve internal efficiencies and continue to introduce new products through multiple sales channels. Additionally, we will focus on improving shareholder value by repurchasing shares when and where appropriate, exploring other ways to increase shareholder value like our recently announced dividend. We certainly believe that we have made tremendous strides over the past few years by diversifying our business. We are one of strongest brand names in the industry and are deploying broad line fitness products into our multiple sales channels. We believe we have a tremendous platform to build upon and to execute our strategy over the long run. At this time, I would like to open up the call to questions and answers.

Alright, thank you sir. Ladies and gentleman at this time we'll begin the question and answer session. If you have a question, please press the "*" followed by the "1" on your pushbutton phone, if you would like to decline from the polling process, press the "*" followed by the "2". You will hear three tone prompt acknowledging your selection. The questions will be pulled in the order they are received. Using speaker equipment, you will need to lift the handset for pressing the numbers. One moment please for our first question. The first question comes from Ed Aaron with RBC Capital Markets. Please go ahead with your question.

Hi, good afternoon, I have just a few questions. First I was hoping that you could give gross margin and operating margins to both the direct and commercial and retail divisions? And second I was hoping if you could just elaborate a little bit more on the increase in selling and marketing expenses, particularly with advertising on the direct side, and how much of the increase is resulting from lower ad yields, and how much of it is coming from higher ad rates, and then finally [I thought] you could about TV viewing trends, how much they -- how much they changed with the war and if you’ve seen any change, now that the war is over? Thanks.

Okay, I’ll take that in several parts and I’ll have to ask you to repeat a few of those questions. To start out with the direct statements and then gross profit margins, we came in at roughly 71% in the first quarter compared to 72% from the previous year. Income from operations was roughly 24% compared to 39% in the previous year, and now move on to the commercial and retail, they had, remember these numbers do include the Bowflex retail [pass] that we did in the first quarter. And their gross profit margin in the first quarter of 2003 was 27% and as compared to 26% in the first quarter of 2002. Income from operations in 2003 Q1 was roughly $4.5m, and in the previous year for the same period was $3m. Now, if you could help me with repeating the other questions and I will then be happy to answer to them

Yes, the second one was on the advertising front, and how much of the increase in selling and marketing on the direct side was from, you know, lower advertising yields and how much of it came from higher advertising rates?

You know it’s a combination of both. You know what we’ve seen in Q1 like we did in the middle of Q3 last year and the advertising environment has changed since 9/11. Its getting more competitive, but we do have the experience to continue to advertise in this environment. What we’ve also seen in the first quarter was our convergence rate was slowing and going down, and we believe that is due to, you know, the overall economy, consumer confidence, though we also see competition as being a part of that. You know, I would say we are seeing the convergence slowing. You see more of that effect here in the first quarter, so we did advertise more in the first quarter. It’s very hard to quantify typically on those numbers.

Okay, and then the last question was just the TV viewing trends, how much those changed, you know, during when the war was going on and then have you seen kind of a [say] reversion back to normal patterns since the war ended?

I think as expected, the TV viewing patterns during the first couple of weeks of the war heavily went to the news channels. I think we’re seeing those patterns start to get back to more typical second quarter [patterns].

Okay, thank you.

Your next question comes from Raymond Jones with Delafield Hambrecht. Please go ahead.

Hi, good afternoon. I was wondering if you could elaborate more on what you feel the better the situation is, like competition is it direct, are you saying that the Icon was the only major situation you had to deal with or is there other direct products out there that you feel are impacting the direct business and if so are we talking price competition or we’re talking innovative product competition, could you please address that?

Well, on the direct side of business, the predominant product is the Icon product that we’ve initiated our ad infringement litigations over. On the retail side of our business, as I mentioned earlier, we are extending that side of the business. We’re extending it now [aligning] with prototype product line and also with lower price point products to meet sporting and channel needs.

Okay, for I had a hard time getting and understanding of what other competitive products are making an impact and is that something like maybe another one like the Total Gym is impacting or are you seeing that there’s more of a trend of consumers watching the direct commercials and then going to retail and purchasing another product or as [adding] in the pass that you guys have done with Bowflex?

Yes, I think, you know, what we’ve seen in the first quarter of the direct side of business, you know, what’s different from first quarter is you know consumer confidence is more impacted because of the war, this is a new situation [inaudible] commencing war. So, on the competitive front I mean we do have products out there as we believe [inaudible] our pattern and push that out to the retail environment which we believe there's are lot of people in the retail environment. There are lot of sales we have there and that’s what we are [launching] to have, so really if you look at competition and there are the main competition.

Okay, well in terms of new product launches that you guys have referred to this new product with Bowflex technology, are we talking of the Power Rod technology and that will be a direct product?

The new product we are launching -- the new Bowflex product we are launching through the direct channels that I have referred to in late in the second quarter is a new different model of Bowflex type product, substantially different we think than some of the products we have today but it does lead you to Bowflex Power Rod technology.

Okay, will it be protected by some type of patents or [otherwise]?

Yes it's covered by that.

Then looking forward at the second half of the year, do you anticipate this could be just a yes or no, do you anticipate looking or launching other innovative products?

Well I think our trend has been always to launch innovative products. I think that’s -- I think we demonstrate that through the [inaudible] products that we recently launched on the direct side of our business. I think it's been demonstrated multiple times that the products on the retail, commercial side of our business over the past years. So, I think, you know going forward we certainly intend on continuing to innovate and introduce product.

Sure, what I would think is -- what I am looking at more is there going to be loss in innovative products on the [scale] and order of the Treadclimber in the second half of the year?

Oh no, not at all.

Okay, thank you very much.

Your next question comes from Laura Richardson with Adams, Harkness, & Hill. Please go ahead with your question.

Yes, thanks. If you mentioned this already I apologize but what were the average selling prices in units for Bowflex in direct and then can you contrast that to what you are selling through your retailers?

Sure on the direct side of our business we sold 46,000 units. The ASP held up very well. It came at fairly close to what it was in the first quarter at $1540. On the retail price of our business, we sold 4.6m and due to competitive reasons out there right now, we don't want to disclose how many units that we sold.

Okay, [May have missed it], you sold 4.6m units.

46,000 units on the direct side of the business.

How about in retail, what did you say about retail?

$4.6m in revenue generated and for competitive reason at this time we do not want to breakdown units sales on retail side

Okay, or pricing?

yes.

So is it fair to assume your strategy there to be very price competitive, with that [inaudible]?

I think [inaudible] that we understand that you different price point products that are different to different channels

Okay, it means are you selling different variation of Bowflex than you are in direct or just a lower-end Bowflex?

Actually we have just introduced this month for the retail for the sporting -- what I would consider the sporting goods channel, the product called the Schwinn Bowflex comp that retailed [inaudible]. We are also distributing the Bowflex [line] out there that retails in especially fitness and certain sporting goods at $999 to about $1399.

Okay, and finally -- can you just expand on the strategy you touched on before briefing some more Bowflex line extensions?

Well really Laura and there is really isn't much difference in what we have done in the past. Over the past from to time to time we have introduced new Bowflex models. It keeps -- the new models that we are going to introduce in late June is an additional product. We think that these -- by adding new models you keep your product line and your product offering fresh to the consumer and you extended it to consumers beyond your existing consumers.

Okay and I just wonder at what point you might confuse people about the differences between this Bowflex and that Bowflex?

No think a lot of it is physical appeal and what visually and physically appeals to which consumers.

Okay. Thanks. And I just -- I wanted to clarify one more thing, I thought I heard Kevin say that commercial retail sales were up 13% year-over-year and 9 point to that was because of Bowflex?

It was 9% of the overall sales for commercial and retail were in Bowflex retail.

Okay and that -- and it was none this time last year?

That is correct 9% of the overall sales, 9% of the increase.

Okay. Thanks.

Okay.

The next question comes from James Bellessa with DA Davidson & Co.; please go ahead with your question.

Good morning or afternoon.

Good afternoon.

For the retail sale of the Bowflex, what division sells those?

It is the commercial and retail division and those are reflected in our numbers, the 4.6m.

And so it is in the commercial and retail division, but is it the segment -- StairMaster segment [kind of less]; what is the segment that sells it or it gets it.?

It probably -- we divide our segments by management functions and the commercial retail divisions one that sell the Bowflex retail. So it is going to be included in the commercial retail segment numbers.

You said that you are going to introduce new Bowflex model in late second quarter and then three different versions of the Ultimate, is that correct?

Yes.

And can you tell us about this new Bowflex model that you might be introducing?

[Rod Rice] here but Jim as you know, we don't really talk about the product that we do introduce it. It really is going to be late June or probably late second quarter; this is -- just to take a look at it.

Is it in the top end or is it a new bottom end offering?

Jim we would like to elaborate more, but at this point in time where I think that I have to say it will introduce it sometime during late second quarter and everyone will see it then.

The sales for the direct side in the most recent quarter was $78.9m, was that correct?

On the direct side, yes.

And the commercial and retail side was how much?

Sure.

What was the comparison?

50.5m.

50.5 versus?

44.8 and 4.6 of that was for Bowflex retail.

Thank you very much.

Your next question comes from Maynard Arif with Wells Fargo Securities. Please go ahead with your question.

Thanks. Good afternoon guys. Brian you mentioned about selling Bowflex Pro on the retail channel -- do you still sell Bowflex Pro at the direct channel as well?

Well absolutely. Products have been -- as you know most our products -- most of sales today on the direct side of our business come from the Bow line and the Ultimate line.

Now, you know a lot of new Bowflex model that you plan to introduce, I guess several models later on Q2 -- did you plan to, kind of like, eliminate some of the Bowflex Pro on, not eliminate but move from direct channel to retail channel and under the direct channel you just compete with Ultimate or some of the new Bowflex that you plan to introduce later?

Well, we certainly plan to sell all the products on the direct channel. We also plan to sell pro line of product on the retail and as well as our Schwinn Bowflex. And [inaudible] that may be additional product models introduced overtime.

Okay. And for the ASP within direct and retail, is it the same?

No Maynard, the ASP we give the retail order -- a discount rate, now they are in the first quarter it outflows with the Power Pro, and for competitive reasons we are not going to disclose those retail numbers at this time. [inaudible] on this direct side of $1,540 with the ASPs.

Okay and lastly do you have a target how many retail channels you want to have by the end of the year?

Maynard I am not sure I understood that question.

I guess you plan to continue to expand number of retail channels you want to use for Bowflex product. I guess do you have any target, how many stores or how many --?

You are talking store fronts?

Yes.

Well I'd expect this to be in several 100 store fronts or more by year end.

Maynard I may jump in there for a second, on specialty business obviously the upper price points will be in several 100 or more store fronts. We are currently shipping some sporting goods to dealers. And we don't have a set amount, but we are currently working with all the major sporting goods channels.

Okay. Thank you.

Your next question comes from Brent Rystrom from Piper Jaffray. Please go ahead with your question.

Yes, I apologize, if you already said this. I got cut off actually on [EBIT]; the given specifics on the Nautilus Sleep Systems both the units and the average selling price or the total revenue from them?

Brent the Nautilus Sleep System Q1 over Q1 although we don't give out specific information on each product, and we will say that we didn't see double digit growth in the category.

And you define double digit growth in terms of revenues or --

We don't.

Okay. And so last year revenues were, I believe, in the $7.5m range, is that correct?

Yes, you know Brent, we don't give those numbers out, but I think you are in a relative range. And wait -- what we have seen in the first quarter is a very tough advertising environment. But it did grow from Q1 2003 and from Q1 2002.

All right. Thank you.

Your next question comes Heath Ritchie (ph.) with Delphi Management. Please go ahead with your question.

Hi, couple of quick questions here. Do you say CAPEX in the quarter was $3.6m?

That's correct.

Can I get the D&A number?

Yes the D&A was right around $2.4m

2.4, and how about for the whole year CAPEX and D&A?

I think CAPEX would be in the range of $10-12m. I think D&A is going to be approximately, probably about $12.8m.

12.8, great. And do you talk about international sales; did you any international revenue, I mean that is meaningful?

It is pretty meaningful we got operations internationally in Germany and Switzerland and Italy and UK sales offices in Japan represent outside United States about 10% of overall sales.

10%; that is in Q1 10%; is that changing?

Yes.

Al right. And then the other question I had was about the advertising costs. I know -- I talked to Rod before, he said that you were the advertising cost to come up in this quarter, so that is -- were the increases that you saw in line with your expectations or were you surprised on the upside?

I mean we [met] the quarter. We were surprised a little bit on the upside -- the conversion of [inaudible]. So it is really hard for us to get in the current environment when we had a war going on, consumer confidence was continuing to drop. We think we have the better [inaudible] at going forward there.

Great. So -- but I guess I would just [disrupt] by one comment that you made comparing last years ad rates being sort of artificially depressed by the then current events?

Yes.

Would you say that the expenses that we are seeing now in the first quarter are more typical of what we should expect going forward?

This is -- again in our projections going forward this is what we expect in the environment to do.

So the --

I would say they are more typical what we expect going forward. Even in the previous year it was a little bit higher than what we have seen even before 9/11.

So the selling and marketing and general, administrative margins that we are seeing now, would be a good projection of the future?

For the year 2003, yes.

Fair enough. Thanks a lot.

We have a follow up question from Ed Aaron with RBC Capital markets. Please go ahead.

Hi. Good afternoon it is actually Carole. Just three follow-up questions. One I was wondering if you can comment on the operating margin of Bowflex at retail? Second, I am just further clarifying on the Nautilus Sleep Systems, were you seeing your yields improve or increase on advertising? And then finally on the balance sheet, what were DSOs for the commercial and retail?

Sure, on the Bowflex retail, our strategy right now is that we want to [give out] revenue numbers, we want to get information [industry] but for competitive reasons we don’t want to give out a lot of information. On the Nautilus research and yield on advertising, I mean, we are just [gifted] in same environment both lots which cover advertising rates. Our yield was not as good as it was in the previous quarter and on the DSOs you could -- there were roughly 64 days for the commercial retail business in Q1. There were 68 in Q4 of this year. On the direct side of our business, our DSOs were 6 days compared to, I believe, it was 3 days in Q4 2002 but efforts in the DSOs for the [inaudible] was we did a very successful task as of Bowflex product on QVC. So that was the difference in the DSO from the direct sales.

Kind of -- what were the DSOs on direct a year ago?

They tend to -- I don’t have that information in front of me, they tend to run about between one and three days.

Not [inaudible] I mean it is on commercial retail?

Commercial retail a year ago in the first quarter, it would be in the 52-54 day range. We had a different seasonality upset this quarter that more sales occurred in March, and it is due to the Bowflex's retails up, and we started getting that product out there.

And then can I just go back to on the Nautilus Sleep System. I know it is quite early in its infancy, I know you don’t like to give out information on it but what are you seeing on a competitive front with -- like comfort and their advertising but they are having direct stores. Do you feel that some of your advertisements benefits them?

[Nautilus] brand. I think that is two way street, I think some of their advertising benefits us and some of ours benefits them. I think, what we like about the entire segment is it is a $7.5b a year segment of business that being the breadth. The air sleep segment is a growing segment, and I think it should be a good segment of our business for many years to come.

Then would you actually consider taking the Nautilus Sleep Systems in going into retail?

Now, as we have mentioned before one of the goals of our retail program is to see what -- you know, how well retail and direct product can co-exist. So I guess, I would say based on what we find out, on that front and then how we differentiate products to keep retail stimulated and direct stimulated, all I can say is I will eliminate any possibilities but there is no point right now.

Okay, thank you.

Our next question comes from Allen Roupe (ph.) with Principal Capital Management. Please go ahead with your question.

Hi, I don't suppose that you would want to give any volume revenue information about the TreadClimber, but I had to ask? And then just a follow up, your share buyback just want to want sure that you are going to be active or continue to buy shares? Thanks.

Well, let's see, [and I hope you are right and we are wrong]. It is little early to giving volume information on the TreadClimber. I think that based on initial results we are extremely encouraged by the TreadClimber and it is cardiovascular product. The market is general for cardiovascular product are about twice that, there is the market for strength products, you know, that certainly be willing to ask the question again in 90 days from now on our next quarter call. We may ring up; it will give you more information.

Okay.

And with regard to the share buyback, Rod.

Yes, I mean we are still generating lot of cash flow. We are going to look for P&L, for lot of opportunities that we are going to use that cash flow. We are not just [healthy streak], specifically, what criteria for use -- can be use to be active but in our history we have been active purchaser of our stock.

Okay, thanks.

and our final question is a follow-up question from James Bellessa with Davidson & Co. Please go ahead.

You actual share count at the end o the quarter was what?

It was 32.6m roughly, 32,550,000.

And can you give us some line item details so that C&R business?

Sure. Gross profit margin was 27% and that is compared to 25.5% in the previous year. Total operating expenses was 18% compared to 19% in the previous year. Income from [ops] was roughly 9% compared to 7% for the year before and then net income was roughly 6% compared to 4% for the year before.

Thank you very much.

Okay, this concludes our QA session. At this time, I would like to turn the call back to Mr. Brian Cook.

Okay, well thank you again for joining our call this quarter and we look forward to speaking with you again next quarter.

Okay, ladies and gentlemen, this does conclude the Nautilus Group Q1 earnings conference call. If you would like to listen to the replay of today’s conference call, please dial 303-590-3000 or 1-800-405-2236, again its, 800-405-2236, and enter the pass code of 534585, again 534585 for a replay. This does concludes the conference, you may now disconnect. Thank you very much.