Nautilus Inc (NLS) 2006 Q3 法說會逐字稿

Welcome to the Nautilus third quarter 2006 conference call. At this time all participants are in a listen-only mode. Following today's presentation we will have a question and answer session. We will ask callers to limit their questions to one plus one follow up if necessary. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded on Wednesday, November 1st, 2006. Before the call begins, listeners should be advised of the Safe Harbor statement that applies to today's call. Prepared remarks during this call contain forward-looking statements. Additional forward-looking statements may be made in response to questions. These statements including information about fourth quarter and long-term sales and cost savings initiatives do not guarantee future performance.

Nautilus undertakes no obligation to update publicly any forward-looking statements to reflect new information, events or circumstances, after the date they were made for to reflect the occurrence of unanticipated events. Therefore undue reliance should not be placed upon them. Listeners should review the earnings release to which this conference call relates and the company's most recent periodic reports on form 10-K and 10-Q filed with the Securities and Exchange Commission for more detailed discussions of the factors that could cause actual results to differ materially from those projected in forward-looking statements. And now I'd like to turn the conference over to Mr. Greg Hammann Chairman and Chief Executive Officer of Nautilus Incorporated. Please go ahead sir.

Thanks Debbie. Good afternoon and thanks for joining us. With me today are Bill Meadowcroft our Chief Financial Officer and Tim Hawkins, President of our equipment business. In this call we'll update you on our progress through the third quarter, provide fourth quarter guidance and give you a progress report on our improving business results. Bill will explain our third quarter financials. Tim will provide a business update on the selling season. Our third quarter was solid. We delivered $0.20 in earnings, right in the middle of our guidance of 16 to $0.24. In addition, we had a tax reserve reversal of $3 million or $0.09 in the third quarter. As we continue to manage our balance sheet conservatively. In total, we ended up with $0.29 per share for the quarter.

Our gross margins have improved to 45% and are the highest they've been in six quarters. Margins are driven by continued improvement in operational and manufacturing efficiency, by taking selective price increases and refining sales relationships to ensure reasonable profitability. We also concluded manufacturing at our Tyler, Texas facility during the quarter. And eliminated about 100 product SKUs, both of which are expected to generate further margin improvement going forward. Here are some specific initiatives that are driving margin improvement. First, our domestic factories continue to operate with first time yield's in the mid 90's with excellent plan absorption and efficiency. Second, we ceased manufacturing in early September in Tyler, Texas on schedule and have transitioned manufacturing of key products to other locations. This will allow us to start realizing $3 to $4 million in annualized savings. Third, we're operating with 11 North American distribution centers now compared with 24 a year ago and will be at 10 by year-end, bringing more efficiency to our distribution process.

Fourth, we expect to ship 30 to 35% of our retail volume this Fall directly from manufacturers, less handling means lower costs. Fifth, we've launched a reverse engineering initiative driving out costs for existing products and recovering warranty costs from our suppliers. Sixth, we'll have a year-long transition of our parts shipping to a third party logistics company. This will offer significant improvements in customer service while lowering expenses on parts, shipping and handling. And finally, we continue to make excellent progress at managing the flow and quality of our inventory. The third quarter was seasonally slow in July and August and then picked up in mid September as we began shipping for the prime fitness season. Elimination of old SKUs had some impact on the volume as we transitioned inventory to our newer models which represented a temporary reduction of about $8 million in net sales. In addition, we had $5 million in business volume planned for the third quarter that moved into the fourth. The combination of eliminating less profitable customers and SKUs in the prime fitness season moving later this year, caused net sales to be slightly below our plan.

However, these changes and others will set us up for sustainable margin improvement going forward as we return to an annualized net sales growth of around 10%. Regarding our balance sheet, we bought back about $17 million of stock in the quarter, reflecting our belief that our stock is undervalued. We're looking forward to a great fourth quarter as we combine the driving forces of a diversified product line, profitable sales growth, margin improvement and tight expense control into a strong finish for 2006. This will provide momentum as we head into 2007. Let's get to the third quarter financials. Bill.

Thanks, Greg. Net sales for the third quarter were $159.6 million. Gross profit margin was 45%, which is at the high side of our 42 to 45% range we estimated for each quarter this year. It is a 90 basis point improvement from a year ago as we continue to improve the supply side of our business and manage for both profitability and growth over the long-term. Operating income in the third quarter was $11.1 million, or 7% of net sales, compared to 12.5 million or 7.7% of sales for the year ago quarter. We realized 60 basis points of improvement in selling and marketing from the year ago quarter but our G&A was about $3 million higher due primarily to information technology costs that were capitalized last year as part of our system conversion, legal expenses and FAS 123(R) expense which we did not have last year.

We believe we will begin to leverage G&A expenses going forward as sales increase and our G&A costs are expected to stay relatively flat to current levels for the foreseeable future. Other income was pressured by 40 basis points as we paid some short term interest on our revolving line of credit. Diluted earnings per share for the quarter were $0.20 plus a tax reverse reversal of $0.09. For a total of $0. 29 on 32.2 million shares. That compares to $0.22 a year ago when adjusted for FAS 123(R). Turning to our balance sheet, we bought back $16.7 million of stock during the quarter, that's 1.3 million shares at an average price of $12.42. That leaves us with $67 million remaining on our board authorization. Short term borrowings net of cash equivalents were $31.6 million as we move into the early part of the fitness season when receivables increase and after buying back stock and completing some small acquisitions. As is expected at the end of the third quarter, our receivables move into a higher range due to the beginning of the fitness season. We do expect DSO's to be in the high 50's by year-end. Inventory levels were $69.5 million, the lowest level of the year.

This reflects better planning and forecasting as well as shipping more volume direct from our manufacturers to retail customers. We are expanding our short term credit line from $65 million to $125 million to provide more flexibility for working capital, acquisitions, or additional stock buy-backs. On the litigation front with ICON Health & Fitness, our trademark infringement case in Seattle is now scheduled for February 2007. As a company committed to innovation we remain prepared to vigorously defend our intellectual property. Finally, the company announced today that our Board of Directors has declared a regular quarterly dividend of $0.10 per common share payable December 8th 2006 to shareholders of record as of November 20th. At recent trading price that's equates to a 3% annual yield. I'll turn the call over to Tim Hawkins President of the fitness equipment business for an overview of our business by channel.

Thanks Bill As we reflect back to 2005, we grew net sales by 20% over 2004. However, our margins were not keeping pace. As a result of our new information system this year, we have increased visibility to sales and margins by customer, by channel, by SKU and by brand. We're making much better decisions that drive both sales and margins and ultimately shareholder value. So for Q3, 2006, we experienced about a 2% decline in sales but margins have risen to a strong 45%. This was achieved by taking price increases, changing some customer relationships and pulling away from less profitable products. With this new focus we're expecting around 10% sales growth for the fourth quarter, while increasing gross margins from the prior year by about 400 basis points.

So let's talk about each business channel beginning first with the fitness equipment business. I'll begin with the direct channel which is Internet, catalog and direct response advertising. Third quarter sales were $67.1 million. Our Bowflex Revolution is gaining momentum and true to our focus on cost takeout we're pursuing options to make that product line more profitable. The new Bowflex Blaze is generating excellent results at the lower end of our home gym price spectrum and we'll be introduces another home gym in our extreme lineup this quarter. We're also preparing for a new revolutionary and evolutionary innovations for this channel in 2007. For full year 2006, we expect sales to be flat with 2005.

Next is the commercial channels such as clubs, hotels and living complexes. We recorded $17.9 million, sales were affected by price action, addressing less profitable volume by renegotiating dealer terms and as we prepare to introduce a new strength line in 2007. Now that these changes are complete we expect sales to be up around 10% for the year, led by the Nautilus TreadClimber, renewed interest in stepping and our new cardio lineup which now includes new upright and recumbent bikes. Next is retail which includes sporting goods, warehouse clubs and department stores. Third quarter net sales were $27.1 million, nearly lapping the load in at new retail stores such as Sears just a year ago with caused sales to be up 80%. After our profitability analysis we transitioned out of some less profitable volume including exiting a number of treadmill SKUs and refining and eliminating some customer relationships. As the new products get placed, we expect about 10% growth for 2006.

Our next channel is specialty retail where people buy club quality equipment for the home or small business. Third quarter net sales were $15.9 million. Specialty retailers reported low traffic during the summer but that began to change late in the quarter. And as a result some volume we expected late in September was delivered in early October. We are all prepared for specialty retail customers this winter with an excellent lineup of high quality products. For the year we expect about 10% growth in specialty retail. Now let's turn to our international equipment business which includes commercial along with retail and direct sales outside of the Americas. For the third quarter we delivered net sales of $14.6 million. We began shipping direct to our commercial customers in China which will move about a million dollars of sales to the fourth quarter when the product installs.

We also have adjusted our inventory and product pipeline to comply with new July 1st standards for the reduction of hazardous substances initiatives in many industrialized countries. These initiatives have caused manufacturers to comply with new efforts to reduce hazardous electronic waste. Commercial TreadClimber and Nautilus cardio installations are driving growth in western Europe and clubs like JJB in the United Kingdom and several popular clubs in Italy. Overall we expect this channel to be up around 20% for the full year.

And finally, the apparel business delivered $16.7 million in net sales for the third quarter, that's compared to approximately $15.1 million in the year ago quarter, making them up about 11%. Spring 2007 pre-bookings came in solid with retail partners excited about our new line that includes the cross alp, walk, ride, crossover footwear. The division also has received a 2006 Gear of the Year Honor from Mountain Bike Magazine for its new line of Vagabond mountain bike footwear In addition the equipment and apparel divisions have leveraged their synergies by cooperating on catalogs for the Fall and Winter seasons. We expect about 15% growth in apparel for the full year. We are looking forward to a very solid fourth quarter. Back to you, Greg.

Thanks, Tim. Okay. So quick summary. Third quarter earnings were solid. Once again, we delivered upon our guidance, coming in at $0.20 plus the $0.09 tax reserve reversal. Grade visibility into the profitability of our business allowed us to make decisions to cut out some less profitable products and customers. Margins are solid again this quarter at a 6 quarter high of 45%, despite costs of retiring one hundred SKUs and closing a facility. Inventories and the flow of goods are being managed well as we - - easy for me to say. As we transition into new product SKUs. And last but not least we continue to do a good job of expense management.

So let's get to guidance. We're continuing to approach specific guidance one quarter at a time. And as we look to the fourth quarter of 2006, the uncontrollables are relatively calm. With fuel prices and interest rates increasing in a moderating fashion. Therefore, based upon our sales visibility and current conditions, we expect net sales of around $190 to $210 million. That would translate into 39 to $0.45 including about $0.015 per share for the quarter due to FAS 123(R) and including an expected 3% or excuse me $0.03 per share pickup from reversing tax reserves. We expect to finish 2006 with sales growth of about 10%. And when factoring out option expensing and the tax reversal, earnings growth of 22 to 32%. That is a strong reflection on the operating health of the business. Now as we move into 2007, we have almost completed our annual operating plan and our three year rolling strategic business plan. We expect 2007 to be highlighted by our continued focus to achieve leverage through operating excellence.

The greater visibility provided by our new information platform is helping us uncover and capitalize upon a broad range of revenue and operational improvements and we're just getting started in capitalizing upon them. So for 2007, we expect net sales growth of around 10% and earnings growth within our three year target range of 20 to 30% growth. So how will we achieve these targets in 2007? By continuing to build upon the solid foundation we established in 2005 and 2006. First, by setting the vision in strategies. Our objective was to create sustainable long-term growth. Our focus on pure fitness as a positioning platform and on intense focus on changing the game through diversification and differentiation is taking hold after three years of hard work. We've clearly positioned the four leading brands in fitness and acquired other leading brands to fill out our stable. We diversified our channels of distribution to ensure we are reaching consumers in the places they prefer to shop and exercise and through our fit one operating principles we've established how we will do business to ensure a high standard of integrity and ethics.

Second, establishing a rhythm of innovation. We filled out our strength and cardio offering from being way behind our competition to leading the pack. Now we have these categories brands, and product offerings up to speed. We can get on a more normalized pace of innovation. This means less stress on our operations, people and processes, while driving top line growth more profitably. Third, we have dramatically improved our sourcing approach. We have successfully streamlined manufacturing by closing our Tyler facility in Texas and improved our quality throughput at our Tulsa, Oklahoma facility and Independence, Virginia factories. We have established our own team of inspectors and engineers in Asia. We have also worked to reduce the number of suppliers and sub suppliers and have placed a strong emphasis on the quality and ability for those suppliers to grow with our demand.

Fourth, we've successfully expanded into a apparel through our acquisition a year ago of Pearl IZUMi. The apparel division has done an excellent job not only of growing our Pearl IZUMi brand but introducing two new brands in just nine months. Fifth, our new information system is providing greater visibility to the drivers of our business and is allowing us to make smarter and more profitable decisions. All of these elements have had intense focus of our management team and have created a sea change for our company.

We could not have reached the place we are today without the hard work and dedication of the talented team we have here at Nautilus. Well there is still a lot of work to do, we are seeing our efforts begin to take hold and produce results. We are well positioned for an exciting future. With that, Debbie, I think we're ready for questions

Thank you ladies and gentlemen. [OPERATOR INSTRUCTIONS] One moment, please for the first question. Our first question comes from the line of Ed Aaron with RBC capital markets. Please proceed with your question.

Good afternoon, everybody.

Hey, Ed.

Double questions for you. On the guidance I wanted to make sure I had an apples-to-apples comparison with what we talked about last quarter. Is it - - because I think last quarter you were not backing out the stock option expense. Is that correct?

We've always tried to give you a comparison for stock option expense which is a little over $0.06 a year. So we got about a penny and-a-half here in the fourth quarter that we'll take on as we do each quarter. So --

And that's part of the 39 to $0.45, the penny and-a-half. Right. Okay. And then on just the kind of on the environment, just relative to what your expectations were, you know, when you last talked to us in terms of demand.

Yeah, I think not many changes, actually. I think it looks pretty good. You know, gas prices have kind of stabilized. We have seen for the most part we had a little bit of a slow July, August as we talked about here, but we've seen business - - we saw a pick-up in September and it seems to have pretty good momentum going into the fourth quarter here. So we feel pretty good about it .

Okay. A question maybe for you, Tim. Just at the retail level with the Blaze out there, there's a couple of Bowflex products now positioned within a pretty narrow price point range. The Blaze and the Extreme are fairly comparable in price. Is that - - can you talk about how that's the sell through is going there and whether that's presenting any customer confusion?

Yeah, Ed, there's two different products, one is an upright product, one is a bench. The extreme being a bit more of the premium product, is a little bit higher price at retail, upwards of $1,000 and the Blaze is more in the $800 to $900 range. So there's definitely a differentiation and clearly when you see them side-by-side there's obviously a clear differentiation for the consumer. We've seen sell through at retail be right where we want to it be. Continue to be the number one home gym in most customer's floors so we're very pleased with that.

Okay.

Ladies and gentlemen, as a reminder, please limit your question to one, plus one follow-up if necessary. Our next question comes from the line of Paul Swinand, please proceed with your question.

Good afternoon and congratulations, guys.

Thanks, Paul.

My question is on the advertising rates and the direct channel, it seems like from our contacts in the industry that rates are actually down and inventory is actually up. I notice your - - your marketing cost was down a little. Are you getting a little relief compared to last year? I know rates were up about 6, 7% last year and as you go into the important fourth quarter, do you feel like they'll be ample inventory of the type that you like to use in the time slot you'd like to have compared to last year?

Yeah, Paul, the rates year-over-year are up slightly. You know how this goes. It's month to month and sometimes week to week as you're making these buys relative to inventory. Looking at Q4, there's other things out there. One is it's the busy season so we're not the only folks looking to buy media. Two is you've got an election time in November which always squeezes up a little bit of inventory. But I think where we're sitting right now, we're fairly pleased with what where we want to be for both clearance levels and CPIs. We'd love to have more availability and less CPI.

Do you think year-over-year last year it will be a net savings in your advertising spend?

Yeah, I don't think we're planning any savings.

Okay. Thank you.

Our next question comes from the line of Laura Richardson with BB&T. Please proceed with your question.

Thanks I have a couple questions about what I've been seeing in some of your retailer's ads for fitness equipment recently and by the way, good job on the margins this quarter, guys.

Hey, thanks.

Did Sears have a couple SKUs this week they say are new and was that - - sell into them that happened in Q3, what I'm seeing in their ads this week?

Yes, ma'am.

Okay. And I might try to fit three questions in here since these are seeming to be kind of easy ones. One of those SKUs is Bowflex Extreme and why is it $999 at Sears and $1099 at Dick's.

Sears has a slightly different unit. Sears does not include the leg attach. Dick's is advertising a different product that includes a leg attachment. So they are a little bit different product.

Okay and you know - - I saw somebody wrote earlier that in the summer about a new Bowflex competitor out there and I noticed also a new SelectTech competitor. Any comments on you know, the competitive environment and can Icon still be any kind of threat to you, even with the litigation you have going on?

Well, we take every competitor very seriously and icon is a tough competitor. So I think everybody that we compete against in the category could be a potential threat. So we don't take anybody lightly. But I would say this, you know, as far as the new competitive product out there competing with the Bowflex, because of the diversity of that brand right now and the multiple channels of distribution that we operate in, we've been able to, i think, hold our own competitively pretty well and continued to gain ground with some of the new products we're releasing on the Bowflex [inaudible] including the Revolution that is out there right now . It's just doing extremely well for us on the direct side of the business.

So I think we've managed that fairly well at this point. Regarding the SelectTech piece, our SelectTech dumbbells continue to be by far the number one selling dumbbell in the volume on those was very robust this quarter. So I don't think we have any issues there. We'll continue to monitor and manage it the best we can.

Our next question comes from the line of Kathryn Thompson with Avondale Partners. Please proceed with your question.

Most of my questions are really kind of broader focussed looking in terms of your guidance. First, what gives you confidence you'll be able to grow sales in Q4 at the levels you describe and more specifically how were shipments in October and how much of Q4 guidance bakes into a - - bakes a conservative consumer?

Okay. So we got a few of them in there, Katherine. So confidence in Q4. All we can say is what we're seeing right now with our direct business looks like we're tracking well against that question I think the other channels of distribution we're getting some pretty good orders on, I'll let Tim touch on those in a minute. Our apparel business, international business, that been working with our other division presidents on looks very solid. So from that standpoint we feel pretty good. Tim you want to touch a little more on the - -

I can break down the channel. Commercial business, we've got a lot of traction there. The commercial track market continues to drive the way as I mentioned in the script We've got new upright recumbent bikes. There's a lot of innovation there. Same thing in specialty and in retail. some I mentioned actually Laura just called them out, we got new products, new bikes, new home gyms. We continue to drive the business through innovation in all the channels and that's what continues to give us good confidence there. We're going to hit and exceed all of our innovation products that we promised you guys in the beginning of the year. So we are feeling very confident there.

The great thing on the new products, as you contrast that to last year's fourth quarter for a moment, to go back and revisit that, all these products are being shipped today. So we aren't concerned at this point in having a supply chain issue. So I think we're relatively good shape there.

I guess pulling that string a little more, how much visibility do you have for your sales right now for your Q4?

Well, retail side you get a little bit more, right? Because you're getting some of the prebookings in and some of the orders in. But on the direct side of the business, it's based on what we have for business plan and there can be some softness that that as you know. On the other side, it could go a little stronger for us too. So it's a matter of the direct thing is you know, somewhat dependent on what the availability is and how business looks. What we're telling you right now is based on what we think will come in that earnings range of 39 to 45. So we feel pretty good.

[OPERATOR INSTRUCTIONS] Our next question comes from the line of Mark Rupe with Ryan Beck. Please proceed with your question.

A couple quick questioning, as you look into '07 is there one particular channel you expect to drive the majority of the growth?

Go ahead, Tim.

Mark, there's two channels we're going to continue to put high focus on obviously, one is direct, it's the channel that brought us to the table and it's the channel that continues to drive. It's if foundation of our business. The other channel we have high importance is the commercial channel. It is the channel that has the obviously where consumers find out and learn about fitness trends.

We're going to continue to invest in that channel. And we feel strong about both those channels in terms of growth. For retail and specialty fitness, you know, those channels continue to be I think where we would like them to be which is in a growth mode. Continuing to cascade innovations off the commercial channel. But focusing our focus mainly next year on commercial and on direct and obviously international continues to be a place of great growth for us aswell.

And then on the cost takeout initiatives for this year I think at the end of the second quarter you guys were tracking above I forget what it was 10- 12 million or something like that for this year. Are you still on plan for that and then secondly, as you look into '07, is there still any low hanging fruit?

In fact, that sounds like you're sitting in one of our meetings because we just gone through and that's part of what we said continuing on in '07 with the operating excellence components from '06. You know, one, we're tracking ahead this year on the cost savings which is part of what you saw in Q3 and I think you see in Q4. But two, we think, one, some of the things that we put in place first haven't been annualized so we get some value of those going into Q1, Q2 next year. In addition to that, we've got a lot of new things that we're working on from additional cost savings on the operational manufacturing side of our business that I think will help to drive further efficiencies. So yeah, to say in a nutshell, Mark, there's still a lot of low hanging fruit on getting more operating leverage in this company.

Our next question comes from the line the Scott Krasik. Please proceed with - - CL King - - Please proceed with your question.

Hi, guys.

Hi, Scott.

Question, I guess first on gross margin. You guided to I think 400 basis points improvement in the fourth quarter year-over-year. Given the strong growth margin in the fourth quarter, what structurally wouldn't allow you to get to 45% in the fourth quarter. I assume bigger percentage, direct should help and selling in at now, I guess would make sense. Why couldn't you do better than 43%?

Scott, the main driver really is that retail is so strong in Q4 and so although you had mentioned it's a bigger percentage of direct it actually ends up being a built of a smaller percentage of direct into the four quarter. And that is the main downward pressure on that.

Okay. I guess on - - on a dollar base is. And then.

Exactly. Exactly.

And then just to on your guidance for next year, sort of a mundane question, but the range of 20 to 30% growth, is that off of a base including the tax benefit or are you excluding the tax benefit in the 20 to 30% growth for your base?

Well, the tax benefit is a one-time gain, right, and so the 20 to 30% will be off of the base going forward next year. So Bill, do you want to touch on that any further.

We'll expect in Q4 the $0.03 and we'll also probably see that next year in Q4 as well. But the $0.09 is a one time this year and would not go forward and be part of that base.

Our next question comes from the line of Scott Muskin with Banc of America Securities. Please proceed with your question.

This is actually Caroline Baker I'm calling in for Scott. I was wondering if you had any color on the consumer response or any expectations for the Revolution product especially going into the holiday season.

Revolution's been great, Caroline, so we continue to see that product ramp up quarter to quarter. It's doing well for us. We're excited about it. I think, you know, as we talked about earlier a little bit, right now it looks like the market from a consumer standpoint is stabilized. You know, we're not seeing people be overly robust out there in making early season purchases. But at the other side, we're not seeing a lot of conservatism either. I think we're right in the middle of the range there which is why we came out with the 39 to 45. So we feel pretty comfortable right now .

All right. Thank you.

Thank you.

Our next question comes from the line of Mark Beninger with Stanford group.

Hi guys great cost control. Greg, I wanted to ask you, if I understand this correctly, the $0.20 you did in the third quarter would really be your ongoing operating number, not the 29?

Yeah, I mean, and I don't know how you guys like to look at it but the way I tried to do it it is say you got puts and takes every where. We had more taxes this quarter than we had last quarter but we picked up some efficiency on our international business from a currency exchange that balanced out. So you got a .8% uptick in currency and .8% downtick in taxes. Taking currency as a gain wouldn't be a thing to do taking currency as a loss wouldn't be a thing to do.

We kind of stripped those things out and we got a tax reversal that we've got that we just manage our balance sheet very conservatively. So we're going to take that back off there as we've been instructed to do by our auditors. That's a $0.09 pick-up. But it's not really anything towards the operating income of the company it's a one-time pick up. So we try to look at it and said say what are those things that drive value and what is the operating side of our business that drives value and make sure that we're focused on those areas.

Exactly okay. So that would really be the $0.20.

That's right.

So now you're saying that in the third quarter -- I'm sorry, in the fourth quarter you're going to pick up another $0.03?

Yeah, we'll pick up 3 from the same thing. It's just on a tax basis as the - -

The expiration statute on some of our state taxes.

Our next question comes from the line of James Valesso with VA Davison and company. Please proceed with your question.

Good afternoon.

Hey, James.

The guidance, it seems to me like the sales guidance of 10% for '06 and '07 is toward the lower end of what I previously perceived you were espousing. And then the EPS guidance seems to now be a little different than it was before in that before we didn't know about the anything, the tax reversal, and I thought that the expensing of stock options was factored in. Now you're saying it's factored out in the 20 to 30% type of range that you're talking about. Can you comment?

No, no. A little confusion there, Jim. Sorry. One, we have to manage the tax expense. That's part of going forward, right? But the fact is on the expensing of stock options, that's still part of that 20 to 30% base. So we'll grow at 20 to 30% with the FAS 123(R) in there. So that's stabilized.

The only thing that's really changed here, at all, is that we said you know 10 to 20% growth in revenue, and we may be on the lower end of that for '07. We're coming out fairly conservatively right now and part of that is because we've dug into the business here and found some less profitable SKUs in our system and cleaned them out of here. Although it doesn't drive the bottom line, it did drive a little bit of top line revenue growth and we're just saying it's not worth it. If we can't make money doing it, why do it. So doesn't affect the bottom line one penny, literally. But can pull down the top line just slightly. So we're coming in fairly conservatively for the '07 number and staying right where we said we'd be for the earnings.

Mr. Hammond, that concludes the question and answer session I will now turn the call back to you. Please continue with your presentation or closing remarks.

Okay thank you. So we had an excellent third quarter, I think, and made a lot of progress. I'm really excited about our fourth quarter. We continue as we just talked about with the last question with Jim, we're getting more and more visibility now with our new system in place.

Into the profitability drivers of this business and being able to really analyze them and we're excited about that and we think we've got one heck of a fourth quarter in front of us and a great '07. So we're excited to get off and get going with it and in fact, just to let everybody know, we're going to be in New York and Boston this coming month with Avondale partners and also we'll be at the BB&T and [inaudible] Morgan conferences coming up this quarter so look forward to seeing all of you there and wish us good luck for the fourth quarter here, folks. We'll talk to you soon. Thanks.

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