Nautilus Inc (NLS) 2007 Q1 法說會逐字稿

Welcome to the Nautilus Incorporated first quarter 2007 earnings 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 two. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded on Wednesday, April 25, 2007.

Before the call begins, listeners should be advised of the Safe Harbor statement that applies to today's call. Prepared remarks during the call contain forward-looking statements. Additional forward-looking statements may be made in response to questions. These statements, including statements concerning product introductions and anticipated revenues, earnings and gross margins 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 or to reflect that occurrence of anticipated events. Therefore, undue reliance should not be placed upon them.

Listeners should review the Earnings Release to which the conference 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 discussion of the factors that could cause actual results to differ materially from the 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.

Thank you, Shawna, good afternoon and thanks for joining us. With me today is Bill Meadowcroft, our Chief Financial Officer. Tim Hawkins is out today with our customers. In this call, we will update you on our progress for the first quarter, provide second quarter guidance, and discuss preliminary plans for the next fitness season that begins in the third quarter of our fiscal year.

Our net sales came in around $159 million and earnings were $0.08 a share for the quarter. Meanwhile, gross margins were up for than 300 basis points from the year ago quarter. While three of our four business units performed well, consisting of international, apparel and our commercial businesses, our domestic home business consisting of of retail and direct performed below expectations. We experienced sluggish trends in the North American market for home fitness equipment in the first quarter. We believe that the heavily promoted electronic items pull discretionary spending away from fitness equipment. We also believe the slowdown in housing completions and remodeling softened the buildout of fitness centers in North American homes. This resulted in a substantial shortfall in March for the retail replenishment orders and softness in our direct business.

Areas that point in a more positive direction are one, we've already observed that electronic retailers have backed away from some of the aggressive financing they were offering this winter. Some terms were aggressive as 36 months same as cash but most already have cut those terms to 12 to 24 months. Two, we believe retailers will reposition their fitness floor sets and inventory around innovative products with high sell-through velocity, and those that bear strong brands that attract foot traffic. Three, our consumer research indicates that more consumers are expressing intentions to intensify their exercise as people face the consequences of an activity.

While these indicators are positive, we're not waiting for them to happen. We are taking proactive steps to move the fitness environment to the forefront of consumer decision-making, and counter any prolonged softness in fitness sell-through. Our plans include the following: Accelerating new promotion programs. We're introducing new retail and direct promotions that will help us attract consumer interest in fitness and capture a greater share of the fitness floor space. Two, introducing a range of new products throughout the year. This includes new cardio category for our direct business and three new cardio and strength items for our retail business. And finally, we're making necessary organizational changes. The effect of these changes is to flatten our retail and direct organization to make sure key Management is close to the customer, helping us act and react quickly.

We are confident that these steps will help us make up ground later in the year, along with managing operating expenses wisely and actions that will continue to improve gross margins. We'll get into some additional discussion later but first, let's get to the financials. Bill?

Thanks, Greg. Net sales for the first quarter were $158.8 million, a decrease of 14% from the year ago quarter. The international business recorded $16.6 million in net sales or 23% growth. Our international business is benefiting from a broader line of commercial cardiovascular products along with growing retail penetration. Our Nautilus Treadclimber just received a Global Innovation Award from FIBO, the world's largest fitness equipment show.

The Apparel Business recorded $21.9 million in net sales or 13% growth. Demand continues to grow for high performance running and cycling apparel in North America And Western Europe. The commercial business recorded $18.2 million in net sales or 1% growth. The large Ursa commercial show was held the last three days of the quarter so orders from that show will flow into Q2 and throughout the year. We received strong support for our new Nautilus One strength line that we will begin shipping this summer and for Nautilus Treadclimber and our new recumbent bikes.

Direct recorded $73.9 million, off 12% from a year ago. We attribute the softness to competition for discretionary dollars. Our direct financing program has remained consistent as we are in the third year of a three year agreement with a private card provider who retains portfolio risk. Preliminary negotiations suggest we will have equal or more favorable terms as financing companies for our significant volume of business. Retail recorded $27.6 million, off 45% from a year ago as retail replenishment orders failed to materialize later in the quarter as Greg described earlier.

Finally we picked up $0.7 million from licensing revenue paid to us. For the year we expect another solid year of international business growth of 15 to 30% and apparel and commercial business to over perform with growth of 11 to 20%. Meanwhile, we expect direct and retail sales to equal last year's sales as we continue to clean up lower performing volume.

Looking to the income statement. Gross profit was 46.1%, an improvement of 320 basis points from the year ago quarter. Of the 320 basis point improvement, about 100 basis points are attributed to mix and the other 220 basis points to operational improvements. Gross margin was on the high side of the 43 to 46% range we estimate for each quarter this year. Gross margins were the highest in seven quarters, reflecting our ongoing improvements to manufacturing and operations. This is despite taking some added steps to assure sell-through of inventory at retail selling us up for the next fitness season.

Operating expenses as a percentage of sales were about 490 basis points higher, primarily due to the revenue shortfall. In actual dollars, operating expenses were $2 million lower than the year ago quarter. This is after absorbing nearly $2 million creative for new advertising within the quarter. Operating income in the first quarter was $4.6 million or 2.9% compared to $8.7 million or 4.7% for the year ago quarter. We continue to expect operating cash flow of approximately $60 million in 2007.

Turning to our balance sheet. Inventory for $89.9 million, primarily reflecting loss of retail replenishment orders, the quality of inventory remains very high with around 85% of the value accounted for in the top 20% of our SKUs. DSOs were 56 days, the lowest level in four quarters, short-term borrowings net of cash was about $32.4 million. We expect that number to be less than $15 million by the close of the second quarter. We did not repurchase stock in the first quarter. We have $68 million remaining on our authorization.

We are continuing our diligence on the acquisition of our contract supplier Land America. Our purchase option expires June 30th so we will be finishing our diligence and making that decision during the second quarter. This remains our top priority regarding uses of cash for our short-term credit revolver. On the litigation front with Icon Health & Fitness, we are continuing settlement discussions involving a possible resolution of all cases. Should those discussions not result in a agreement, we'll ask the Federal Court in Seattle for a new trial date to hear a trademark infringement case. Finally, our Board of Directors will meet in about a week and we expect approval of our regular quarterly dividend of $0.10 per share payable June Eighth, 2007 for shareholders of record as of May 20, 2007. Greg?

Thanks, Bill. So a quick summary. International, apparel and commercial channels are performing well. Direct is a little soft, but the big driver was that we didn't get the turns we expected at retail as the prime fitness season concluded. Our gross margins are solid and getting better. Operating expenses are in check. The balance sheet is solid. Receivables are improving. Inventories are high, but composed of first rate goods.

We consider softness in fitness as temporary, due to unusual competitive pressures for discretionary income and softness due to housing. We expect that those conditions will be countered as retailers reset their floors for the fall, and as Nautilus intensifies innovation and marketing activities. On the expense side, we continue to work on improving the efficiency of our supply chain, which we expect to contribute about 15 to $20 million of savings to our business this year. About half of that amount is likely to be offset due to additional fuel and transportation costs and rising costs of media.

We are better positioned than any other fitness company with our strong and diversified brands, channels, and supply chain. We believe that over time, an easiness in the economy favors companies with strong brands, strong innovation, and strong balance sheets. We have the five strongest brands in the industry, a pipeline of innovation that is unmatched by any fitness competitor, and a conservative balance sheet with low leverage. Today, we have just a 6 to 7% market share in global fitness. So we are confident that the foundation we have built will produce market share gains over time.

Furthermore, we continue to refine the positioning of our brands and product lines to achieve less than 20% overlap of brands, products, and price points between channels. This allows us to compete in multiple segments of the business while avoiding channel conflict. We think our progress in growing market share will become more evident in the back half of the year.

Let's get to guidance. As we look to the second quarter 2007, we expect net sales approximately flat with last year at $135 to $140 million. And earnings of $0.03 to $0.06. We view the second quarter as the pre-season preparation time for the important back half of the year where we expect to realize most of the year's earnings. We trimmed our sales estimates to 5 to 10% growth for the year due to the first quarter shortfall. We do remain confident in delivering 20 to 30% earnings improvement from last year's $0.81 base. This comes through innovation and marketing we have planned for the balance of the year. Along with our persistent work in streamlining our supply chain and containing costs. With that, Shawna, I believe we're ready for questions.

Thank you. (OPERATOR INSTRUCTIONS) One moment, please, for the first question. Our first question comes from the line of Laura Richardson with BB & T Capital Markets. Please go ahead.

Thanks, hi, everybody. Just launch into questions then. I missed, Bill, you said something in your commentary about the gross margin and what I wanted to get at was how much of that 300-something basis points should we expect to see in the next couple quarters?

Yes, good question, Laura. Do you want to handle that one, Bill?

We would expect to continue to be in the upper end of 45 to 46% margin.

Okay.

That's for the margin.

And how was mix contributing because I thought Direct was the highest margin stuff.

Yes, and it is and certainly as we said about 100 basis points of that improvement was mix related and the Direct being a higher percentage in this quarter.

Oh, okay. That makes sense. And then same kind of question about the Sales and Marketing line. I know that there was some unusual stuff in the first quarter, except I don't think you expect to have that kind of increase the rest of the year but I was wondering if you could expand on thoughts of what you're going to do with the Marketing budget this year.

Yes, so let me first answer, in the first quarter we had about $2 million we spent on two new infomercials and the old days of being able to accrue those over time and spend them as you spend the media, you have to take the hit for the production charges right up front, so we launched two new ads at the beginning of January on the long form infomercial side of our business, that cost about $2 million to produce so that was about $0.04 in earnings in itself that was in that first quarter S& M line that you won't see show up and outgoing quarters we got that produced. So that was part of the first quarter hit. As we look at the back half of the year, if things continue to look soft in the retail environment and in the direct environment from a consumer standpoint, you'll see us tighten up those Sales and Marketing line a little bit further than we had in our original plan, from a cost savings standpoint, but if the market recovers and gets back to a more normalized course of business, then we'll plan according to the growth plans we have so you'll see it on an equal basis to sales on an increased standpoint as a percent to total.

Okay. I think I got that. And when you talk about plans in the beginning, your commentary, Greg, accelerating retail and direct, I thought I wrote down the word " Promotions". Are you talking price or are you talking, then you said floor space and consumer interest. So what did you have in mind for those promotions I guess.

Yes, well, some of it is, we've got, and that's a great question to ask because I do think that whenever you say promotion, people think you're cutting price and that's certainly not our intention. That's always part of the program is price related promotions, but we're talking about here some really new unique things that we're going to be doing with cross- promotions with other customers or other manufacturers that may have a similar type of consumer base that we would, that we can do cross-programs with. We've also got some unique things we're launching in the second half of the year to really go after the whole obesity campaign and I can't talk too much about that right now, but certainly on the second quarter call we're going to talk about it, just from a competitive standpoint, but we think there's really neat things we're going to be able to do in the back half of the year here from a promotional standpoint that will not only help us from a sales and revenue standpoint but also from, and I hate to say philanthropic standpoint, but also help us from the standpoint of going after and trying to really start putting a dent in this whole obesity issue.

Last question I have to ask, and then I'll let someone else go, earlier in the month, you said something, Greg, about maybe because the commercial demand is so strong, seeing if you could shift some commercial production to Tulsa? And what's the status of that?

Yes. We're actually working on that. We've got a couple of different options we're looking at with the Land America acquisition, we may have some opportunity there to shift some of our production to that facility. We're looking at whether we can ramp Tulsa up on some of the new Nautilus One product at least from maybe potential of steel bending, if you want to call it that, just the initial assembly process, and then shift that from Tulsa to our Independence facility to give Independence a little relief. They're working awful hard there, so there may be some capacity there, but we're still working through the details of of that right now.

Okay, so there's no definite plan in place but it's definitely being studied at the moment?

Well it's more than being studied. What we're looking at right now is we're actually running various scenarios on it. Treadclimber is also produced out of our Tulsa facility and that product from a commercial standpoint has really taken off, so we got to make sure that as we plan this and we don't end up as we fix one issue and leave ourselves with a shortfall on another and since both of those product lines are doing extremely well on the commercial side we want to make sure we balance it out and really think through the back half of the year and have our production ducks in a row here, so Mark Meussner, and Dustin Groves and the team are working diligently and I think we'll have an answer in the next week or so. It's pretty darn close to being decided. We have to make sure of a few of the things and the long pole in the tent frankly is plastics from sub suppliers and what the easiest way to get it to them is, so that's part of the decision matrix that's left to be done here which is why I can't give you a formal answer yet.

Okay. Thanks and good luck.

Thanks, Laura.

Our next question comes from the line of Ed Aaron with RBC Capital Markets. Please go ahead, sir.

Thanks, good afternoon, everybody.

Hi, Ed.

A couple questions. First of all, I wanted to ask about the three new retail products that you have rolling out. Obviously I'm sure for competitive reasons you don't want to talk about what they are but in terms of how broadly you can get them distributed for this selling season, could you maybe talk about where those products are going to fit in terms of your key accounts and how many of them are going to have them?

Yes. So we have actually presented to all three of those products to our retail partners, both on the specialty and the sporting goods side of the business and all three have been accepted so we will have as broad a distribution as we had planned for those products.

Okay. And then on the inventory on the balance sheet, you mentioned that it's high but fairly current. Considering that you're planning on bringing a lot of new products home later in the year I would assume that there's going to be some need to take on inventory of those products , but you have this operating cash flow goal for the year that I think would probably requires a well managed inventory level by year-end. Can you talk about how you are going to get that inventory level where it needs to be if inventories are on the high side right now and you have new products coming on the pipe that you weren't really planning on taking on until next year, until

Yes. So great question, Ed. The actual, the inventory product that we have that we shipped for those turn orders we thought we were going to get in March for retail are actually products that they are going to carry ongoing. So they aren't, it's not like we're going to take markdowns or anything like that. Those products are going to go on to the floor. The three new retail products we talked about are incremental, and so incremental addition, not a substitute out for. And then for the fourth quarter some of the promotional programs that we're moving up and some of the things we're doing with the new product lines are like I said, they are all of those are incremental to the business, not a trade out of other SKUs.

Okay. Great. And then lastly, can you just give us a directional sense if you look at your retail inventories in the channel, where do you think they are now versus last year? Can you kind of give us a ballpark estimate on a percentage basis in comparison?

Yes. Overall I'd say we're a little bit higher on an inventory basis from last year but not significantly, so when I say a little bit, I'm talking 5 to 10%, which we should burn off over the next several weeks, so it's not an issue that I think will affect us for the back half of the year. As we look at how we're going to approach the retail inventory piece, we've been working with our retail partners now for several weeks. Part of the reason we didn't get those turn orders and do what we could have done which is put some pressure on people because a lot of the product that we ordered was specifically for them and trying to be good to our retail partners and really do this in the right way, we backed off those orders, so that did help us from not being over inventoried at retail and in fact, if you look at it, there's good, bad, and there's ugly and to be very specific, let me just walk you through that.

Our recumbent bikes and the upright bikes under the Schwinn brand lines, we were out of stock with a lot of our customers and the Bowflex brand, on the high and low price Bowflex products we sold very very well and above actually last year. In our Selectech dumbbell line, we actually ended up with Selectech being out of stock at a lot of our retailers so that we sold through there. The one kind of ugly place for us was that middle price point range for home gyms, for Bowflex home gym specifically, and the mid price point range and that was the place we were a little bit long on inventory and we therefore didn't get the turn orders on any of those items and we had to burn some of that inventory off. On the other hand there were some things out of our control from an inventory standpoint as well, and what I mean by that is buyers have a certain amount of money they can spend to do replenishment orders and some of the treadmill inventory out there that wasn't our company's treadmills but rather other people's treadmills was extremely high, and tied up a lot of those open to buy dollars so treadmill sales as probably most of you have seen on the SGMA reports were really pretty awful for the first quarter and even through the fourth quarter. So not a surprise I'm sure to anybody listening here, but did affect us for some of those turn orders.

Great. Just a quick clarify, that 5 to 10% versus last year, is that on a same-store basis or total number do you think?

No. It would be same-store, Ed. And as you know, Dick's Sporting Goods and some of those guys have opened up more stores so I'm looking at it as what people would have had out there for total inventory in our products, it would be slightly higher but again, we're talking that 2 to 3 week inventory difference. We're not talking about a 12 to 20 week difference. We're talking 2 to 3 weeks on average.

Understood. Thank you.

Thanks, Ed.

Our next question comes from the line of Kathryn Thompson with Avondale Partners. Please go ahead.

Hi, how are you doing?

Hi, Kathryn.

I'd like to focus a little bit on your guidance. First, talking on the top line, how can -- you, previously said that retail orders and for the month of April were ahead of plan. Could you give some clarification on that and how can we be assured that retailers in the direct side will pick up in the back half of the year if it's more product-driven or just kind of optimism that the consumer will return and just really give a little bit more confidence in how we can get to that 20 to 30% earnings growth number.

Well, the last part of your question, I can help you with. The first part I'm not sure I can, so I could never assure you unless I have a crystal ball that I could say retail is going to come back or any of the other things. I think what we're talking about, Kathryn, is with the programs we're putting in place right now, as you look at them from a market share standpoint, we're going to capture more SKU's, have more SKU's on the floor because of the way we're working in partnership with some of our retail partners than we had in prior years, and so the opportunity for the back half of this year is really about trying to help get these retail floors in a place that if the consumer does come back, we'll be well positioned to take advantage of that. If the consumer doesn't come back, it will help us a little bit from the standpoint of we're going to have more products there than we had last year so from a sell-through standpoint, we will have more volume flowing than we would have had with the limited number of SKUs we had the prior year.

So there's a little bit of cushioning effect at least for our Company that helps us in the back half of the year and makes us a little bit more confident and the fact that we can offset any of that slowdown in retail by just having great innovative product out in the marketplace, and having more SKUs and a greater share of the floor space than we had in the prior year. So, there's part of it. Now, that's just a segment of it though. The other things we're working on are new things in our direct business that we think will help pick that up a little bit.

But the commercial business is on fire. I mean, we are really in a great position there and we're really excited about that. Our international business has done extremely well and our Apparel Business has done extremely well so we got three of the four hitting pretty well. We had some softness as you know, a lot of softness on the retail side, some softness on the direct side and we're working to offset those with the programs I just described. So I can't assure you that the economy is going to come back because that's not what I do, but what I can tell you is we're taking all of the proactive steps we possibly can to make sure that we bring in the year as strong as possible.

Does your 20 to 30% EPS growth assume recovery with the consumer and are April retail orders ahead of plan?

Somebody is chit chatting back there, Katherine. We'll have to talk to them about that. What it assumes is that we will have more of a normalized back half of the year, but it doesn't assume that there's a rubber band effect, and by that it doesn't say that the people we lost in the first quarter we'll get back in the back half. All it assumes is you go into a more normalized fashion. If that doesn't play out, then we have contingency plans in place for our Sales and Marketing side of our business, to be able to cut some expenses there that would help us bring in the earnings into still able to achieve that range.

Okay. And finally, could you give any more details on your organizational changes you referred to in the call?

Yes. It's really pretty simple. I mean, of of the 1,600 employees that we have today, it was 25 people for the most part, and some of that was jobs that we just didn't backfill, and we moved people to other assignments, so it was actually a fairly small percentage of our organization. The main reason we did it was not for operating expense reduction standpoint, it was just to make sure we're getting closer to the customer.

So there was an entire layer of folks in the retail side of our business that we took out primarily, and that allows Tim Hawkins and Management team on his side of the business to be much much closer in a lot of cases, two steps closer to the customer than he was before, and make sure that we're really staying close to some of these things. I mean, just as an example of that, the feedback that we got in mid March going into the second week of March was that they were seeing some softness in retail but certainly didn't expect us to be cutting orders at that point, and then in late second week of March to the early third week of March, all of a sudden orders start getting cut, and that was a little bit shocking I think for some of the Senior Management Team here, including me, and so we are making adjustments there to make sure that we get that information firsthand and we're in front of it because we if we knew there was softness in retail we would like to have known about it back in February. Not at the end of March, right?

Yes. Okay. That's helpful. Thank you very much.

Thanks, Kathryn.

Our next question comes from the line of Scott Krasik with C.L. King. Please go ahead.

Hi, thanks. Just again, when did you know that the reorders were going to be cancelled at retail in Q1?

Yes. We had a couple of orders in February, late February, early March that moved out a week, but the big ones were scheduled for that third week of March, third and fourth week of March as they did retail replenishment and we just didn't get those, what we feared when they first informed us of it back in the third week of March there was we were going to have them moved out into April and then what it turned out is they actually got cancelled. So the retail side of the business for sporting goods was just for the retail side of the business for fitness equipment I should say, not sporting goods in general, but fitness equipment was pretty tough, so for us, caught us a little bit off guard too.

So if the orders weren't cancelled until the end of March , how do you control the selling if this occurs again to not have

Yes. I think that's a great question, Scott. So the thing we're working on right now is for the back half of the year, if we assume more of a normalized approach, we've got plans on the inventory and the problem we run into is you can't run your business quarter to quarter, unfortunately, so although Wall Street runs quarter to quarter, we have to run our business the way our retailers would like us to run our business, and so all we can do is work with them on smaller shipments, more frequent shipments, trying to keep the inventory managed at retail and we've also got a couple of programs we put in place now where we're going to have access to a couple of our customers inventory sell-through at retail so that we can can actually get an earlier read on the business than we have been able to get.

Up until this point it's been primarily buyer feedback or store checks which one or two store checks doesn't really tell the story for you. You've got to know what's going on in a chain and when you're dealing with these people that have 5 or 600 stores to go out and talk to one person in a store doesn't really give you a lot of fact based information. So we're now trying to get data and we're getting the set up of these customers where we can actually get that data.

Do Dick's and Sports Authority, do they have category captains within the vendor community or do you try to become that? Is that possibility?

Well, yes, good question. That's something that they don't formally have today, but it's something that we would like to strive to achieve, they don't really assign a category captain like they do in some of the health and personal care products and other categories as well, so but we're sure working on that as something that would be an objective for us to get to.

Right. And then just on commercial, you signed probably three or four exclusive arrangements with clubs and hotels here and one in India. When will we start to see that fill and you said the commercial was in good shape, it was up 1%. Pre-quarter U.S. business they just announced was up 13% so it seems like the commercial channel is humming and you're of doing okay, not blazing. Do you have any thoughts there?

Yes. Ours is, the 1% is not the number that would lead me to say it's doing well. The thing that I look at is how are we coming out of Ursa, which was the last week of March which was the big opportunity from a club standpoint, and we came out of Ursa about as hot as any Company possibly could and as we were discussing earlier on the call, our issue right now is not do we think we're going to be able to hit that double digit growth from a sales standpoint, our issue right now is making sure that we can do that in a quality fashion and that we can actually get enough time in the plants and factories to produce everything we need to.

Yes, and then the exclusive arrangements. Are we going to start to see the fill there?

Yes. I think right now, and this is another one of those where you kind of get into the quarter issues here, but we think toward the end of June we're going to be able to start shipping Nautilus One product provided we get some of the plastics we're getting from a subsupplier in on a timely basis, so hopefully we'll be getting that product out at the end of June. We're already seeing orders for Treadclimber so that's flowing now as we speak, so the commercial Treadclimber product is actually being shipped and we'll see more and more of that product start to show up in the marketplace in these clubs.

Okay and just lastly, you have the shift between Q3 and Q4 last year retail where some orders got pushed back into Q4. In early discussions, do you expect the same sort of seasonality where they're ordering later in season?

I'm not sure I understand the question on that. Can you ask that again, Scott?

Just pulling, your sales pulled out of Q3 into Q4 because Sports Authority delayed their orders and made you hold the inventory longer last year. Do you expect that same sort of phenomenon?

Yes, although since we lapped it last year, it will be more of a normalized approach for us this year, but I wouldn't expect them to change their approach. That was more of a shift in the customer and I think a smart one on their part frankly, bringing inventory closer to the season and they are doing a much better job, Sports Authority I think is doing a great job now of sort of the just in time inventory approach and really flowing goods to the stores and not holding as much in their DC's and warehouses, so they've gotten a lot better which moves that timing tighter so although it did cause a shift for us last year, we've now absorbed that in our base and it should be more normalized for us this year.

Perfect, thanks.

Scott?

Yes.

Before you jump off, I've got a question for you because I thought net sales for pre-quarter were only up 1% versus Q1 prior year. How did you get 13?

Sales and local currencies were up 13% in the Americas.

I got 73.8 versus 72.9.

Right in Euros so I guess what they were doing in dollars before they converted back.

Is that what they're claiming, huh?

Okay.

Our next question comes from the line of Scott Mushkin with Banc of America Securities. Please go ahead.

Hi, this is [Asha Bakely] filling in for Scott here. I was just wondering, obviously you guys do a lot on the direct side through credit in house and also credit cards. Everyone is talking about subprime and all that kind of stuff. Have you seen any delta there or any change on the quality of the applications coming in?

No.

Okay.

No, it's been fine.

Okay. I think I got all my other questions were answered before so that was what I had left.

Thanks.

Thanks.

Our next question comes from the line of Mark Bettinger with Stanford Group. Please go ahead.

Hi, guys. Can you tell me what the percent of the direct channel sales have been on the private Nautilus card?

It's in the high 60s and that's been pretty consistent.

Okay. Also, does the international channel, I think it's got about a 26% gross margin, does that generate an operating profit?

Yes. And this quarter they are actually higher than that. They were close to 30%.

On the gross margin?

Right.

Okay what about on an annual basis?

It will be in the high 20s.

But they will generate a profit for the year?

Yes. This year, we're certainly as volume picks up there, that certainly helps absorb some of the fixed costs as well as operational improvements that we're putting into place there Mark.

So for the year in 2006, you did have an operating profit then?

A small one, a lot less than we would have cared to have.

And for 06, now we're talking '07 here though and with the growth that we've got in the international business to Bill's point is we're scaling that business and it actually did very well for us. The first quarter I think it produced the same amount of profit it did the entire last year, so we're in a position now where we're actually starting to grow that business on an appropriate level and feel pretty good about international.

Okay, great. And Land America, the increase in gross margin in '08 should be about what?

It's almost 200 basis points.

150 to 200 basis points we expect. It all depends on volume.

Thanks, guys, good luck.

Thanks, Mark.

There are no further questions at this time.

Okay. With that, let me say this. We had a tough first quarter, and as I look at our business, there's a few things that I look at, and the most important for me is where are we on the fundamentals of our business and I look at what we've done from the supply chain standpoint and from a manufacturing standpoint, I feel very good about that. I Think the way that we're managing our channels of distribution is getting better every day, and I think we've done a very good job of creating firewalls there so we don't have a lot of cannibalization or overlap between the channels, and that we're continuing to work with our retail partners specifically on those opportunities, and then I look at the innovation and what we're doing to really drive consumer behavior in the marketplace and I think all three of those are lines up very well for our Company and we're putting the pieces together in the right way for the long term value of this business. I feel very positive about what we've done.

I think we had a pretty tough situation here in the first quarter with the consumer environment from a domestic standpoint. I think we've weathered that storm pretty well, and I think without losing importantly without losing focus on the back half of the year and what really needs to get done to drive this business over the long term. So, I'm proud of our organization. I'm proud of the people here that continue to work their tails off to make sure that they're focused on the right things, and I am very confident that we're going to be able to make all of the shareholders happy by the end of the year here.

So we're going to keep focused, non-controllable things we can't deal with. Controllable things we have to stay focused on and that's exactly what we're going to do as an organization. So hopefully all of you will see the same confidence in us that we believe we have and the ability that we believe that we have to execute. So with that, I'm going to get my butt back to work. So, thank you very much.

Ladies and gentlemen, that does conclude the conference call for today. We thank you very much for your participation, and we ask that you please disconnect your lines. Have a great afternoon, everyone.