Nautilus Inc (NLS) 2003 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Nautilus Group second-quarter earnings conference call. (CALLER INSTRUCTIONS). I would now like to turn the conference over to Brian Cook, Chairman of Nautilus Group.

Good afternoon everyone and thanks for joining us for our review of the second quarter and six months ended June 30. With us today from the Nautilus Group are Greg Hammann, who joined the Company on July 16th as President and Chief Executive Officer. Also, we have Kevin Lamar, President of our Commercial Retail business, and Rod Rice, our Chief Financial Officer.

On this call today, I will be introducing Greg to you. Then Rod will review our financial and operating results for the second quarter and six months ended June 30. Kevin Lamar will give you an update on our commercial and retail business segment, and I will then wrap up this section of the call with comments concerning our new initiatives and our current business trends. We will then open the call up for questions.

Before we begin, I would like to remind everyone that part of our discussion this afternoon will include forward-looking statements, but they are not guarantees of future performance, and therefore, undo reliance should not be placed on them. We refer all of you to filings with the Securities and Exchange Commission for detailed discussions of risks that may have direct bearing on our operating results, performance and financial condition.

With that said, two weeks ago on July 16 we announced the hiring of Greg Hamman as President and Chief Executive Officer. Greg brings a successful record of working with consumer branded products and very valuable skill sets, particularly in the areas of leadership, strategy, brand management, and customer focus. His passion for the underlying strength and potential of our brands and products coupled with his marketing and branding expertise make our Board of Directors and all employees very excited about the future of the Nautilus Group under his leadership.

I would like to remind everyone that Greg has only been with the company for about two weeks. So Kevin, Rod and I will be answering questions today relating to the Company. However, Greg will be leading future conference calls. Now I would like to introduce to you the Nautilus Group's new President and CEO Greg Hamman.

Before Brian, Kevin and Rod discuss results for the quarter, I would like to take a few minutes and review my career today and tell you why I chose to join the team at the Nautilus Group. Prior to joining Nautilus, I was the Chief Customer Officer of North American and President of Latin American Canada from Levi Strauss & Co. where I held and lead the development programs and practices to expand our product availability, streamlined processes to improve our speed to market and importantly drive innovation.

To properly inform and drive these strategies, I spend a significant amount of time with retail customers to discuss how we can best add value and grow mutual businesses. I believe many of these insights and strategies are transferrable and can add value to the Nautilus Group. These programs helped reverse a significant decline in Levi's business and put the company in a position to grow their business going forward.

Prior to Levi Strauss, I held senior management positions at MacLeod USA and the Coca-Cola Company. In both companies, my focus was on strategy and developing consumer and customer driven initiatives with the supporting infrastructure to drive growth. While at Coca-Cola, I was able to take a division of the company from a stagnant position over many years to high single and double-digit growth. This was done by starting with an understanding of consumer needs, developing the programs and processes to deliver upon those needs with customers, and then executing those initiatives with what rigor and attention to detail.

Now in addition to those positions, I began my career at Procter & Gamble, and P&G is a great training ground for learning how to develop brands and strategies. I had the opportunity to learn from some of the brightest minds in the company. I also had the opportunity to test and development my own approaches on speed to market, new initiatives and getting product into the pipeline much more quickly.

I was excited about the Nautilus Group first and foremost because I was a consumer who used their brands to work out and keep fit. As an athlete and fitness enthusiast, they help me perform my best, and as a businessperson, I believe that they are the strongest brand in the industry with tremendous potential for growth. The Nautilus Group is a true leader in the fitness industry. Their current portfolio of brands, strong balance sheet and no debt puts this company in a great position to continue to lead industry growth for the long-term. I am excited to lead Nautilus and build upon its strong position in this industry.

We've got a lot of work to do. The company has stumbled of late, and you are keenly aware of it. You are also aware of the power that these brands have in the marketplace and their opportunity when positioned and delivered properly with strategically executed marketing and operational programs. My immediate focus will be to develop a segmentation strategy and a marketing plan, properly position these brands in the marketplace. On a parallel task, we need to have strong emphasis on maximizing financial results as we go forward with our business as well.

At this point, I would like to turn the call back over to Brian to focus on the second quarter and the first six months results.

Thank you, Greg. This second quarter was challenging. Increased competition had adverse effect on the direct sales of the Bowflex productline, and we believe the soft economy negatively impacted both our direct and commercial retail divisions. We obviously did not have control over the economy; however, we believe we are taking the proper steps to position our company to maximize results for years to come.

The Nautilus Group is a company defined as a leading marketer and innovator of health and fitness products. This focus drives virtually every aspect of our business from daily operations and product development through marketing. We continue to have the leading portfolio of branded health and fitness products and maintain the strongest financial position in our industry. We believe over the long-term continued initiatives like the ones we have introduced during the first six months of this year, combined with our existing portfolio of leading brands 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 second quarter and first six months of 2003 financial results and discuss guidance for the remainder of the year.

Our revenue and earnings for the second quarter were within the revised guidance (inaudible). Net sales for the second quarter were 100.6 million compared to 140.4 million for the same quarter last year. Net income for the quarter was 4.6 million, and earnings per share for the second quarter were 14 cents per diluted share compared to 25.8 million or 72 cents per diluted share for the second quarter of 2002.

Net sales for the first six months ended June 30, 2003 were 230.1 million compared to 276.3 million for the comparable period last year. Net income during the six months was 18.4 million or 56 cents per diluted share compared to 49.8 million or $1.39 per diluted share for the comparable period last year. Gross profit margin for the second quarter was 52.1 percent compared to 59.7 percent for the second quarter of 2002.

For the first six of months of 2003, it was 53.2 percent compared to 58.2 percent in the first six months of 2002. The reduction in gross profit margin was mainly due to the higher percentage of commercial and retail products which have lower margins than our direct direct marketed products. Selling and marketing expense for the second quarter was 35.7 million or 35.5 percent of net sales compared to 34.1 million or 24.3 percent of net sales for the second quarter of 2002. For the six months, selling and marketing expense was 75.2 million compared to 65.7 million last year. The increase in selling and marketing expense is mainly due to the increased marketing advertisement expense.

General and administrative expenses for the second quarter was 8.8 million, up from 7.4 million for the same period in 2002. For the six months, G&A expense was 15.7 million compared to 13.6 million for the same period last year. Consolidated operating income for the second quarter was 6.2 million equated to a 6.1 percent operating margin compared to 39.7 million and a 28.3 percent operating margin for the second quarter of 2002. For six months, operating income was 27.7 million compared to 76.7 million for the same period last year.

The reduction in operating margin was primarily due to the decrease in Bowflex sales which resulted in a higher percentage of commercial and retail products combined with higher direct marketing expenses due to increased advertising costs, competition and overall unfavorable economic conditions.

As we mentioned in our first call, in order to give a better insight into our business, our financial statements will now reflect a third statement comprised of corporate holding company which includes structure costs, legal and accounting fees and salaries of personnel as well as other costs not specifically attributable to the energy segment. In addition, treasuries of corporate functions, so interest income is included in the corporate segment.

For financial reporting purposes, we have reclassified prior year balances to conform to the three segment presentation. For the second quarter, net sales from our direct segment were 57 million compared to 103.1 million for the second quarter of last year. Direct segment earnings per share for the second quarter were 10 cents per diluted share compared to 73 cents per diluted share for the same period last year. For six months, direct segment net sales were 135.9 million, and earnings were 47 cents per diluted share compared to net sales of 194.2 million and $1.37 per diluted share for the same period last year.

Second quarter presented a challenging business environment for the direct segment due to increased competition primarily from Icon (ph), unfavorable economic conditions and higher advertising expenses. For our commercial and retail segment, net sales were 43.6 million for the second quarter compared to 37.3 million for the same quarter last year, a 17 percent increase. Commercial retail segment earnings per diluted share for the second quarter was 7 cents compared to 1 cent per diluted share for the same period last year.

For the first six months, net sales were 94.2 million, and earnings per share were 15 cents compared to sales of 82.2 million and earnings per share of 6 cents for the corresponding period last year. Please note, we acquired StairMaster during the first quarter of 2002. Also, sales from our Bowflex retail equated to 6.7 million or 15 percent of overall commercial retail sales in the second quarter. The operating expense for the holding company in the second quarter were 1.4 million compared to 1.7 million in the second quarter of 2002. For the six months, operating expenses for the holding company were 2.9 million compared to 3.3 million for the same period in 2002. Our cash and short-term investment position was 59.7 million at the end of the second quarter compared to 49.3 million at year-end. This was achieved even after paying 6.5 million in dividend and spending approximately 4.6 million on capital expenditures during the first six months of 2003. Our Accounts Receivable at the end of the second quarter decreased to 37 million from 50.1 million at year-end. Inventories decreased to 62.3 million, down from 63.8 million at year-end.

Moving to guidance. As we had mentioned earlier this month, based on the current business environment, we expect revenues for the full year to be in the range of 450 to 470 million. Furthermore, we believe earnings per share for the full year will likely be in the range of $1.00 to $1.10 with operating cash flow per 2003 in the range of 35 to 40 million. We are projecting our gross profit margin for the year to be in the range of 50 to 52 percent, and we're projecting our operating margin for the year to be in the range of 10 to 12 percent.

In terms of quarterly breakdown for the remainder of 2003, we believe the third quarter will represent approximately 18 to 20 percent of earnings for 2003. We project the fourth quarter will represent approximately 27 to 29 percent of 2003 earnings. In addition, we expect our commercial retail segment will account for 44 to 48 percent of total sales in 2003.

As we work through this adverse business climate, our cash flow continues to be positive. The Company remains in a very strong financial position. During the first quarter, our Board of Directors initiated the Company's first-ever annual dividend because of the belief in our company's long-term financial strength as well as to enhance shareholder value. The annual dividend is 40 cents per share, payable 10 cents per quarter. As of today, that equates to a yield of approximately 3.5 percent. The next dividend payment will be payable on September 10, 2003 to shareholders of record at close of business on August 20, 2003. Nautilus will continue to evaluate all uses of cash to increase shareholder value.

Now I would like to turn the call over to Kevin to discuss our commercial retail business.

Year-over-year revenue growth for the commercial retail segment was 17 percent for the second quarter compared to this period last year. This growth was due primarily to the introduction of the Bowflex Power Rod technology products to our retail channel. Without the Bowflex products, our second quarter sales were approximately the same as this period last year. We continue to leverage our superior brands by developing opportunities to cross-sell multiple products into the same customer, and we're now offering products with Bowflex Power Rod technologies through our retail channels, which we believe over the long-term will create more cross-selling opportunities.

In or commercial business, we continue to become more competitive because of our ability to offer a combination of Nautilus, Schwinn and StairMaster products. By combining cardiovascular and strength products together, we have the ability to sell our products as a packaged offering to more customers. To date, the weakest component of our offering has been the commercial cardiovascular equipment. As a point of reference, we believe that in the commercial industry treadmills and elliptical sales represent about 70 percent of the dollars spent on cardiovascular equipment. This has been an underrepresented area of our product offering. However, in June, we began production of the new StairMaster 2100 treadmills and expect to introduce new StairMaster ellipticals during the fourth quarter of this year. The addition of the new treadmills and ellipticals will greatly strengthen our cardiovascular offering.

Moving to retail, excluding Bowflex we saw softness in retail throughout the first two months of the second quarter, but this was partially offset by strong sales during June. We believe the softness at the beginning of the quarter was due to the war in Iraq and the worry about the economy. However, we believe this business will improve when the economy recovers.

We will be introducing several new retail products and product line extensions next week at the Health and Fitness Expo in Denver. We anticipate that these new products combined with the success we are experiencing with the Bowflex Power Rod resistance technology products will broaden distribution of our premier branded fitness equipment by offering a more complete line of products to sporting goods and specialty retailers.

We believe our research and development teams are going to bring new products to market faster and look to gain new floor space and new distribution opportunities. We also believe our R&D team is second to none in developing new quality health and fitness products and enhancing existing products. Proof of this is seen in our new StairMaster 2100 treadmills. This product development cycle was faster than any commercial treadmill product we brought to market before.

We continue to streamline the business and position ourselves as the global leader in 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 will continue to be the differentiating factor for this company for years to come.

Now I like to turn the call back to Brian.

Thank you. As I mentioned earlier, the second quarter proved to be challenging for both our business segments. Having said that, we are certainly encouraged by recent initiatives concerning competition, new products and new sales channels opportunities. Our direct business saw a drop in sales and earnings during this second quarter that we believe was due to increased competition, higher marketing costs and lackluster consumer spending.

As many of you know, in late 2002 Icon (ph) Health and Fitness introduced a product called the Crossbow. In December, we filed a lawsuit against Icon Health and Fitness because we believe the product infringes both patents and trademarks relating to the Bowflex.

Let me give you an update on this litigation. On July 14th, the court ruled in favor of the Nautilus Group and granted a preliminary injunction barring Icon Health and Fitness from using the trademark Crossbow on any exercise equipment. In its ruling, the court concluded that Nautilus had shown a probability of success at trial on its trademark infringement claim. Then later the same week, Icon (ph) filed motions for reconsideration.

As of today, all of Icon's (ph) motions for reconsiderations were denied. The bond was (inaudible) by the court, and the injunction will be effective as soon as Icon (ph) receives a copy of the order and bond which is currently being served on them. This effectively prohibits Icon (ph) and anyone in consort with Icon (ph) from using, selling, marketing or distributing its exercise product under the Crossbow mark.

In addition, the court has scheduled a trial date for September 4th to hear our appeal to its earlier ruling on May 20th concerning our preliminary injunction on the grounds of literal patent infringement. Lastly, the court has scheduled a trial date for December 1st to determine the majority of issues we have brought against Icon (ph) including claims for patent infringement based on doctrine of equivalents, trademark infringements and unfair competition. We will continue to vigorously protect and defend our intellectual property and will seek monetary damages and all other remedies provided by law.

Since competition has impacted our sales, you must ask what are we doing about it? First, the Company began to test selected Bowflex products through certain retailers during the first quarter of 2003. We expanded this initiative in the second quarter and have aligned ourselves with some of the top retailers to sell Bowflex Power Rod resistance technology under both the Bowflex and Schwinn brands. We are offering differentiated products to address different markets and different price points at multiple retail locations. We believe that we will do well in the retail channel but remain conservative with our estimates at this time and will keep you updated quarter to quarter.

Within the direct business, we introduced the new Bowflex Extreme late in the second quarter. This product is a transformation from the original Bowflex due to its upright seating position. This new product is receiving positive initial response. Additionally, we have recently introduced three new models and price points of our popular Bowflex Ultimate product.

Also in the direct line is the Nautilus Fleet system. We believe the airbed market is going to be a very lucrative market for years to come. We are committed to this market and believe we have a competitive product line over the long-term. However, at this time, we are reassessing our marketing plan and have reduced the advertising budget. We no longer are projecting growth for this product line in 2003. We will update you more during the next quarter regarding our plans for the product line.

With regard to the TreadClimber, we are continuing to see very positive results from our marketing. We introduced the TreadClimber in March of this year, and the product is exceeding our early expectations. The TreadClimber is a revolutionary patented cardiovascular fitness product that we believe will be complementary to our Bowflex strength training products. The TreadClimber has three models, and prices range from 14.99 to 21.99.

In closing, we are excited to have Greg Hammann onboard as President and Chief Executive Officer and look forward to his leadership. As Chairman, I look forward to working closely with Greg as we continue to continue to remain focused on offering our customers the best health and fitness products. We will continue to be prudent with our cash flow, work to improve internal efficiencies, and grow our revenue with a long term focus of increasing shareholder value. We are excited about the opportunities to expand our business and expect to deliver both sales and earnings growth over the long-term. We own the strongest brands in the industry and believe we have tremendous platform to build upon, and we are very excited as we look to the future.

At this time, I would like to open up the call to your questions and answers.

(CALLER INSTRUCTIONS). Eric Wold, (inaudible) and Company.

Good afternoon. First question, can you talk in broad strokes on how the advertising efficiency changed from Q1 to Q2 as compared to how it changed from Q4 to Q1 maybe in terms of the decline in inquiry rates or sell-through rates?

What we are seeing is the advertisement environment. We have seen rates go the third quarter of last year, and we see that environment staying with us and believe this is new environment that we are in. What we have seen is due to competition from Icon (ph) and also the general economy. It is really hard to read it because we just came out of a war here in second quarter here and a few other effects, so I think we need another quarter or two to really read the efficiency of what our advertising is going to be. We have a lot of exciting things going on right now.

Okay. And then a follow-up question on the retail side of Bowflex, can you comment on how many storefronts you are in now, what your year-end goal is and if there has been any larger channel partners that have the Bowflex (inaudible) recently?

Kevin, I think you might be qualified there.

We identified the potential to be somewhere around 1000 in sporting goods opportunities with our Schwinn brand of product, and we are in over 500 of those locations now and have a little under 350 specialty locations selling the product. Notably everybody from sports authority, (inaudible) sports and (inaudible) sporting goods on the sporting goods side are selling our product and then down to strong specialty dealerships such Hest (ph) Fitness in Texas and American Home Fitness in Chicago and Detroit.

Let me make sure I understand you. You are in 350 specialty, and then (multiple speakers).

A little under 350 specialty dealers.

Then 500 sporting goods (inaudible).

Over 500 sporting goods locations with a bigger opportunity to grow that as we go forward.

Laura Richardson.

Just wondering if you could address what you think is going on with the Sleep System, which sounded like it was selling and growing quite well until what we just heard on this conference call?

As I mentioned, we believe that the air sleep system market has very lucrative, will be a very lucrative market for years to come. We are committed to this market, and we think we have a great product line. However, we are reassessing our marketing efforts at this time and have decided to reduce the budget and, therefore, do not expect to have growth this year for the product line. We will update you more during the upcoming quarter on how we proceed to move forward.

Brian Smith, Red Chip Companies.

What were your TreadClimber revenues during the quarter? Also, can you quantify how much your ad rates have risen year-over-year up?

The TreadClimber at this time we are very excited about that product. We're not for competitive reasons here going to be breaking out those numbers. We might in the future, but we have made that decision right now. When you look at ad rates, what we have seen is not only have rates gone up, but it is harder to clear your advertisements. So it is very difficult to come up with an apples-to-apples comparison, but in general in general we are spending about 30 percent on advertising as a percentage of revenue, where a year ago we were spending about 20 percent.

I have a follow-up. What was your ASP on the Bowflex during the quarter?

The ASP on the Bowflex is trending very well. It is actually trending up. It was over $1560 for the quarter, which is a nice flip up from the previous quarter.

Andrew Hudson, RBC Capital Markets.

How aggressive do you plan on being with Bowflex as you move into the seasonally strong part of the year?

I think we continue to be aggressive with Bowflex both on a direct basis, and we will continue to expand the retail distribution. You do understand on the retail distribution that their season really begins in about September and gets stronger through January and February.

Okay. Thanks.

Eric Wold, (inaudible).

Just a follow-up. Do you mind giving the typical individual numbers of the number of Bowflex units and then the gross margin operating margins by two divisions?

Sure. Bowflex, the numbers we are breaking out for everybody is (inaudible) on the direct side of the overall numbers. We sold, in the second quarter, we sold 31,000 in units of the Bowflex on the direct side of the business.

And to go through fairly quickly, I will start with the direct division and just give you some percentages here. Of course, profit margin came in really well as a matter-of-fact. It came in at 72.2 percent, and that compares to the previous year of 72.3 percent. What we talked about is we have seen selling and marketing increase in the second quarter, which is seasonally our weakest quarter on an advertising perspective because it is springtime, people go outside and watch more TV and it is not fitness. But selling and marketing (inaudible) went up to 52.2 percent. G&A was running about 8.7 percent. Really it is a function of the sales, and we have a normal royalty. Income from operations was 9 percent. And just moving on down the line, net income was 5.7 percent.

Now I am going to move over to the commercial and retail part of our business. In the second quarter 2003, gross profit margin was 25.9 percent; Bowflex helped increase that margin there. Selling and marketing was 13.7 percent, G&A was 5.5 percent, income from operations was 5.5 percent, and we did have some other based on currency fluctuations of 2.1 percent. Net income was 5 percent of revenue.

Thank you. One follow-up. Was there anything unusual in G&A that brought that line item a little bit higher than trend?

When you look at it it is really a function of sales on the direct side of the business at this time. Our depreciation is running higher, G&A because we were very successful at launching our new computer system. But you can see some non-cash flow expense and depreciation going forward. We expect G&A will probably be about $12 million a year going forward.

Tim Gray, Potomac Capital.

Just a quick question. Doing some math from your guidance here and correct me if I am wrong, I am getting a guidance variance from 18 to 22 cents for the third quarter and roughly 22 to 36 cents for the fourth quarter, which is obviously an uptick from Q2. From describing retail growth at 17 percent, cardio is small at this point, and beds somewhat flat it seems, it seems like to get to those numbers we are going to need some initial stabilization and then some growth in the Bowflex be it retail or direct. Can you give us an idea or some kind of confidence that we have hit the bottom on the Bowflex? Is there anything you can lead us in that direction with?

Yes, we believe we have conservative numbers out there based on what we have seen in the first half of the year. We did have a war in the second quarter that did affect the consumer economy from there. But really where our projections are, we are projecting an uptick in Bowflex retail. I mean it makes sense. In retail for fitness equipment second quarter, you typically need around 15 percent of your overall business.

As Brian mentioned before, it is really going to start September, October and go through about the end of the first quarter. So we felt pretty good about the retail of Bowflex, and also this commercial retail generally should have a stronger second half of the year and the first half of the year as Kevin talked about in launching new products.

Along those lines as a follow-up, can you describe any regional effects of cannibalization with retail?

Yes. We have not been in Bowflex retail for that long, so we are assessing what effect that has on direct. We will be talking about it later.

Laura Richardson, Adams, Harkness & Hill.

I did not get a chance to ask a follow-up before and I still I am understand exactly what is dragging down the Sleep System business. Is it like some competitive issues? Are you seeing the same kind of ad rate pressures there that you started to see in Bowflex? I guess I am wondering where do you think you stand long-term in direct marketing versus wanting to be more of a retail distributor?

First of all, I think long-term direct marketing is going to be very strong portion of our company. We believe in direct marketing; we also believe in the commercial and retail side of our business. We think we will do well in both. We think the Sleep System will continue to be an important part of our business.

But as you grow product lines, from time to time you assess it, stand back and assess what you are doing. That is what we are doing at this time with the Sleep Systems and putting together the new marketing plan for taking the product forward. And as we do that, we will be talking to you more about it next quarter.

Okay. (inaudible) as to why you're doing that reassessment because usually if things are going on plan, you keep going on that plan rather than reassess?

We have seen with the (inaudible) just like Bowflex, we have seen increased advertising rates. We have seen lower consumer confidence right now, so we want to make sure that we can be most efficient with that product as we can. What we are trying to do here is maximize profitability, and to do that, at some time you might have to take a step back to go forward, and that is what we are doing right now. We will update the market in the next conference call.

Thanks.

Karen LeMarc (ph), Merrill Lynch.

Can you talk about your major other product lines in commercial retail? Give us some unit numbers year-over-year? And then also give us a sense of the number of doors you are in now and what your plans are compared to what you talked about when you talked about Bowflex?

First, with regard to unit sales, we just do give out unit sales product by product. It would take a long time, and from a competitive standpoint, it would not be very good. Kevin, I might let you address the number of doors that we are in from a retail standpoint and from a club standpoint.

From a club standpoint, we sell to a universe of about 12,000 health clubs. It is going to be tough for me to give you a total universe of every door we are in because we are in a large number of those doors with one or more of the products that we have -- Nautilus, Schwinn or StairMaster.

From a retail prospective, we sell to a network of over 500 specialty fitness retailers. When I say retailers, those are storefronts, and we have a network -- we also have a very high marketshare in selling to a much smaller network of specialty retailers called Independent Bike and Fitness retailers that sell the Schwinn product during the off-season when their bike sales are down. And then we believe the opportunity, as I said before in the sporting goods business, is over 1000 new stores, and with the introduction of the Schwinn comp product featuring Bowflex Power Rod technology, that product is doing very well in there. We look to expand the number of stores that will be offering that product as we go forward. And we have product in different categories -- (inaudible), treadmills -- that are doing well in that channel of distribution.

As in our categories, I can tell you are pedal power products continue to perform very well. Our R&D team is well entrenched in understanding how to build those types of treadmills. Our retail treadmills as the economy has been tougher of late, but it is also very seasonal business. During second quarter, treadmills sales are not as strong as they are third and fourth, so we are getting into season again with treadmills. Ellipticals are obviously very strong, and as I mentioned before, we will have a new commercial elliptical fourth quarter.

One follow-up. I understand if you don't want to give unit sales, but can you give us an idea of sales trends year-over-year in general, or are you seeing an increase or flat to increased sales of most of your products in that channel?

I think as Kevin stated earlier the commercial business is slightly up, and overall in the commercial retail channels without regard to the new Bowflex technology, it is pretty flat for the first six months of this year.

Mike (inaudible).

Actually my question has been answered. Thank you.

On that, I would thank everyone for joining us, and we look forward to talking with you again next quarter. Thank you.

Ladies and gentlemen, this concludes the Nautilus Group second-quarter earnings conference call. If you would like to listen to a replay of today's conference, you may dial 1-800-405-2236 or 303-590-3000 with pass code 544963.

Thank you again for your participation on today's conference, and you may now disconnect.

(CONFERENCE CALL CONCLUDED)