Nautilus Inc (NLS) 2008 Q4 法說會逐字稿

Welcome to the Nautilus, Inc. fourth quarter 2008 results conference call. At this time, participants are in a listen-only mode. Following today's presentation we will have a question and answer session. As a reminder, this conference is being recorded today, Tuesday March 10th, 2009. 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 could not guarantee future performance. Nautilus undertakes no obligation to update publicly any forward-looking statements to reflect new information, events or circumstances after the dates that they were made or 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 Form 10-Q filed with the Securities and Exchange Commission for a more detailed discussion of the factors that could cause actual results to differ materially from those projected in forward-looking statements.

Also I'd like to remind you that the Company has provided a presentation today to accompany the conference call. The presentation will review the recent projected operational improvements and strategic focus initiatives. This presentation is available on the Company's web site at www.nautilusinc.com/earnings. Please take a few moments to locate this presentation now. On the call today from the Company are Mr. Ed Bramson, Chairman and Chief Executive Officer and Mr. Kenneth Fish, Chief Financial Officer. I would like to turn the call over to Mr. Ed Bramson, please go ahead sir.

Thank you. Good afternoon everyone. Thank you for joining us. We have got quite a lot of ground to cover today. But I know some of the listeners are on the east coast, so I do plan to take you through our strategic review of the direct business and our operating performance, but in the interest of time I'm going to turn over now to Ken Fish to review -- our CFO -- to review our 2008 earnings performance and our turnaround efforts to date.

Thanks Ed. If you have the press release in front of you you will see it includes a supplemental disclosure to reconcile GAAP to adjusted pre-tax loss from continuing operation on the last page. And also comparative net sales by business segment within the text. While the press release includes both Q4 and full year 2008 information I will only be covering fourth quarter results in my prepared statements.

Net sales from the continuing operation were $92.2 million for the fourth quarter compared to $146.7 million for the corresponding period last year, a 37% decrease from Q4 2007 primarily to the weak consumer and tight credit environment. Our direct business sales in Q4 2008 were $36.0 million down 42% from $61.9 million in the corresponding period of 2007. The decline is due to overall consumer environment and credit market disruptions as well as internal decision to reduce the level of discounting versus the prior year. Ed will update product strategies for the direct business after I cover the results.

Retail sales in Q4 2008 of $28.5 million were down 31% versus last year. Given the state of the economy we experienced acceptable results with our largest nationwide retail partners, but our smaller regional partners did not perform as we expected in the quarter. Commercial business sales were down 37% from $41.9 million to $26.4 million. This decline is primarily due to the late investment by health clubs to modernize existing equipment, reduced TreadClimber sales, tighter inventory controls by dealers that sell mainly into light commercial applications and delays in opening new gyms. Excluding TreadClimber sales, commercial business revenue was down 29% in Q4 2008 versus Q4 2007. As many of you may recall we made a decision to reduce TreadClimber sales in order to improve the design to better match the high hourly usage these machines are receiving in the gyms. We remain dedicated to the TreadClimber modality and still plan on the future introduction of the new version of this highly desired product for the commercial market but are not yet ready to announce that timing.

Royalty income was down to $1.2 million compared to $1.5 million last year. Our overall gross profit margin for the fourth quarter 2008 improved to 33.7% compared to 24.1% in the year ago quarter. We recorded $3.2 million of restructuring charges in the fourth quarter of 2008 primarily associate with the closing of our Tulsa facility and our China inventory reserve. Excluding the charges our adjusted gross profit margin was 37.2 % for Q4 2008. For the fourth quarter 2007, we recorded $16.1 million of unusual charges, mainly inventory and warranty reserves. Excluding the charges, our adjusted gross profit margin was 35.1% for Q4 2007.

The improvement in adjusted gross margin is due primarily to improvements in our cost structure. Even though we expect continued pressure on our gross margin percentage until the sales mix shifts back towards the direct channel, our continued improvements in the cost structure will offset some of these pressures. Our reported operating expenses declined by approximately $4.6 million in the fourth quarter 2008 compared to the same period last year. The Company incurred $36.9 million of restructuring and other unusual costs during the 2008 period and $27.2 million during the 2007 period. Adjusted for lower sales volumes, operating expenses -- expense reduction were $13.6 million in the fourth quarter compared with reductions of $8.4 million that were projected by the Company during the earnings release conference call that you may have joined us on for the second quarter of 2008. Looking at the components of operating expenses excluding unusual charges our selling and marketing declined from $41.5 million in Q4 '07 to $29.8 million in Q4 '08, while G&A was reduced from $12.2 million to $8.9 million. On an adjusted basis, operating expenses were 44.0% of revenue compared to 38.2% in Q4, 2007, even though they declined in real terms due to the drop in sales. We expect the additional improvements to our cost structure will result in a better year over year comparison as a percentage of sales in 2009.

Due to our improved liquidity position our interest expense decreased to $0.2 million from $1.7 million in Q4 of the prior year. For the quarter ended December 31st, 2008 we reported a loss from continuing operations of [$41.2 million or $1.35] (corrected by company after the call) per diluted share. Included in the net loss from continuing operations are noncash goodwill and other intangible assets impairment charge of $30.9 million pre-tax or $0.81 per share after tax. Charges against certain assets of a subsidiary in China of $3.8 million pre-tax or $0.10 per share after tax and restructuring related charges of $6.3 million pre-tax or $0.17 per share after tax. The restructuring charges are principally related to the previously announced closure of the manufacturing facility in Tulsa, Oklahoma, and also some severance and legal costs.

During the fourth quarter of 2008, we conducted impairment testing required by SFAS number 142 goodwill and other intangible assets and recognized an impairment loss to write down certain assets to implied fair value. Specifically, our goodwill impairment of $29.8 million was related to our retail business and the $1.1 million impairment loss related to our StairMaster trade name. In the fourth quarter of 2007, the Company reported a loss from continuing operations of [$32.0 million] (corrected by company after the call) or $1.01 per diluted share. Including charges of $43.1 million pre-tax or $0.92 per share after tax related to the termination -- terminated acquisition of the Land America manufacturing facility in China and inventory and warranty reserves related to certain commercial cardiovascular products. Excluding noncash goodwill and intangible impairments and restructuring charges, our adjusted loss from continuing operations before income taxes was $10.2 million for the fourth quarter of 2008 compared with adjusted loss from continuing operations of $6.0 million before tax in the corresponding period of 2007. The major cause of the increased loss is the decline in the direct business, which is the first segment to be impacted by an economic decline.

Now, I would like to spend a moment discussing cost takeouts in our business. Nautilus tracks cost takeouts by projects to ensure the savings become permanent to lower the Company's level of sales necessary to break even. We capture the cost reductions as part of the savings run rate once actual savings begin to be realized for a project. Since most project savings do not begin on January 1st, there are carryover savings that represent the difference between the fully annualized cost reduction and that actually saved during the previous year. We have achieved annualized run rate cost reductions of $60.4 million including cost of sales of $6.0 million and operating expense reductions of $54.4 million. This compares favorably to the previous projection of $58.2 million of reductions that we provided to the investment community. We have now identified approximately $90 million of annualized cost reductions compared to previous estimates of achieving $64 million. In addition to the full annual benefits of actions taken in 2008, we are in the process of identifying initiatives to be actioned in 2009 that could achieve additional annualized cost reductions of $17 million.

The majority of our cost takeouts in 2009 are from two areas. The first part of the cost takeout is focused on the commercial business. We are continuing to downsize and reposition this business unit to focus on the profitable product lines, the markets where we have a strong presence and the customers with ability to pay under standard terms. We will stop selling selected products where volumes are low or competitive pressures do not allow reasonable margins. We will continue to develop relationships with distributors that are financially strong and focus on our brands and will end relationships with those that do not fit that profile. The cost reductions will come from reduced sales and marketing costs allowed by the more focused business plan and also savings in operations. The second major part of our 2009 cost takeout is in general and administrative. We are reducing our work force and related costs across the board to resize our infrastructure with the lower sales volumes. While we expect our revenue will continue to be impacted by the challenging economic environment throughout 2009, we believe these additional cost improvements in 2009 will enable us to be cash flow positive in 2009 as we continue to right size the company and lower our breakeven point.

Turning to our balance sheet, inventories were $43.8 million at December 31st, 2008, compared to [$58.9 million] (corrected by company after the call) at the end of 2007 due to lower volumes in focused inventory management. Trade receivables were $53.8 million at December 31st, 2008, compared to $88.3 million at the end of 2007. Our day sales outstanding of 46 days at December 31st, 2008, reflect improvements compared to prior year in all three business segments. As of the December 31st, 2008 we had $12.4 million in net debt compared to a net debt position of $71 million as of December 31st, 2007. During calendar year 2008, we have repurchased approximately $5.3 million of common stock with our focus on cash and liquidity due to the uncertain economy we are facing, we do not expect to repurchase additional shares at this time. In order to better position our line of credit with our business going forward we have worked with Bank of America to reduce the committed facility from $40 million to $30 million. This enables us to align our financial covenant with the results currently expected for 2009.

Now I will turn the call back to Ed for a preview of our operating improvements and a presentation on the Company's direct business strategy.

Thanks Ken. Ken and I will be happy to answer your questions on the 2008 results, but before doing that there are two other topics I would like to cover today. On our website there are two presentations that we have made available which are referred to in the earnings press release, so I would like to start with the first one which is titled Operating Review Update. Before beginning I'd like to direct your attention to the Safe Harbor language on page two and then turn to page three to begin the presentation.

This is really an update of what we went over with shareholders back in July. Just to bring you up to date and to remind you of what we said back then -- we had set cost reduction target on an annual basis of about $58 million. At the end of the year in Q4 we were actually running at a rate of over $60 million, so I think we have achieved that fairly handily. However, since July sales outlook has dropped again, so we thought it was wise to make some additional reductions. And we have gone into a number of new cost reduction initiatives in the first quarter of this year and the upshot of it all is that our revised run rate for savings will go up from the original $58 million to about $90 million at an annual rate most of which will have been achieved by the third quarter of this year. So as you can see in the table, we're moving fairly aggressively on this and we expect to see a large improvement in Q2 from the first quarter actions we have taken.

If you go to page four, this is also an update of a previous schedule, has to do with the timing of the cost of the restructuring. If you look at the comparisons versus previous you will see that we have increased our noncash restructuring charges in essence because of the further cost reductions we have undertaken. But I think the key change would be in the first half of 2009 where we have increased our cash restructuring charge estimate from about $0.5 million to about $4.5 million. This again is in connection with some of the actions we're taking in the first half and also includes a reserve for reducing some of the lease expense we have here at our world headquarters. So most of these actions should be taken as I said in the first quarter and the money will probably be spent by the middle of the year.

Page five, there's really nothing else to say, but 2008 was a bad year by any measure. However, if we hadn't done the restructuring we talked about it would have been quite a bit worse. In 2008, of the $60 million that we were running out of the year at the rate we were running at we actually saved $53 million during the year. Because of actions that we took in 2008 if you annualize them for a full year there is about another $19 million of savings to be generated in 2009. And if you take the cost reductions we have done in Q1, that's about another $17 million at an annual rate, because they won't be in place for full year, the impact in 2009 is probably in the region of $10 million, maybe a little bit higher. So if you put that in context, our adjusted operating loss if you take out the unusual items and noncash writeoffs was about $16.5 million in 2008. If the 2008 cost reductions had been in effect for the whole year that would have got us more or less to break even. And the additional savings in 2009 of $17 million give us a bit more cushion in case sales go down a bit more this year and possibly even make us profitable depending on how things go.

If you go to page six, as we all know capital markets are very bad at the moment and if capital is available it's very expensive so we're paying extra attention to the balance sheet. This is just a quick update on the balance sheet position. Our net debt at the end of December as Ken said was about $12.5 million. We put a couple of ratios on here, the first one is net debt to working capital -- our debt is approximately 20% of working capital and our debt to tangible equity is also about 20%. So normal times these would be very strong balance ratios, but of course these aren't normal times in the credit market so we're paying extra attention to liquidity this year. And in the table on the second part of page six we layout for you some one time items that are going on.

We will be getting a tax refund this year about $11.5 million, $11.4 million. We also have an escrow that was established in connection with the sale of Pearl iZUMi which will be released to us this year for about $4.4 million, so we have refunds coming back to us of almost $16 million this year. In addition, our working capital management's getting better, so we're expecting to bring in almost $17 million of net working capital. That's also affected by the fact our sales are down. So we have that inflow in 2009 as well. Offsetting that we have capital expenditures, we have put in $2.2 million, might be a little bit higher than that, but not very much. And our cash restructuring costs that I mentioned earlier. On a net basis our nonoperating cash inflows would be about $26 million this year and of course we still have availability under our line of credit and whatever earnings we might generate. So given the environment we're in I think our liquidity position is satisfactory at least for this year.

To summarize we're not making light of the current difficulties we're experiencing, but we are taking serious steps to work our way through them. And we're also staying focused on opportunities that will present themselves as we start to come out of the economic situation we're in. So with that I'd like to ask you to go to the other presentation which is entitled Direct Business Review. So if you go to that presentation again I'd like to direct your attention to the Safe Harbor language on page two and then turn to page three to begin the presentation.

A little bit of background here. We have three businesses, retail products that are sold in stores, commercial products that are sold into health clubs, then direct consumer which is sold through TV, print and web marketing directly to consumers. And to size it for you, last year the sales were in the region of $200 million and it was slightly profitable. A couple other things to point out -- the gross margins in this business are quite high. The average gross margin is about 60%, the incremental gross margin is actually quite a bit higher than that. The other thing I'd like to point out is the net working capital at the bottom of the table. The brackets on there are not a mistake. We actually had negative working capital in the direct business principally because our customers pay us before we have to pay our vendors. A little more background, essentially all of our direct products are marketed under Bowflex brand at the moment. We have historically been focused on strength, principally home gyms. But, we introduced a new segment cardio in 2005 which is a product we call the TreadClimber which I'll talk about a bit more as we go through the presentation.

A point I'd like to reinforce that Ken made in his presentation is that the direct business is very -- is immediately responsive to changes in consumer spending. When it goes down sales drop very quickly. When it goes up they tend to rise more quickly than retail or commercial where you tend to have a longer pipeline and therefore lag. The other thing is that the high gross margins and low working capital requirements make it a very interesting business model as when things go well. So we're very interested in growing this business as much as we can.

If you turn to page four, our current market position is as follows. In strength which is the larger part of the direct business, the home gyms, our target demographic skews heavily male, it's about 70% of males and it tends to be younger. The bulk of the consumers are actually below 40 years old. They're buying the product principle apply for appearance, they want to bulk up. And they generally have somewhat lower credit scores because they're younger. Depending on how you segment the market we're estimating that the number of consumers that are in the demographic target for these products is in the range of 3 million to 5 million. Obviously we have been selling home gyms for a long time, so market penetration is relatively high in the strength area.

If you go to the cardio business, the TreadClimber product, the demographics are quite different. As you will see it skews female and also skews quite a bit older. The average customer for a TreadClimber is 10 years to 15 years older than in our strength area. And these people are generally looking for weight loss or wellness rather than building up muscle or shaping it. Because they're older they tend to have higher credit scores or use credit less, we will go through this in a bit more detail. But, again depending how you segment, it's quite a bit bigger demographic -- maybe 25 million people versus 5 million for strength. Our TreadClimber market penetration to date is relatively low since it's a somewhat newer product than the strength product.

If you go to page five, and you look at the chart at the top of the page, this again makes the point that the direct business responds to consumer changes much faster than retail or commercial, it's almost instantaneous. If you look at the first quarter of 2008 you will see sales were down about 6%, but for these purposes they're essentially similar to the prior year. However, when you get into Q2, Q3 an Q4, you will see that as the economy got worse the sales dropped in proportion. So by the fourth quarter you were seeing a very large impact from the change in consumer spending. What drives this is a couple of things -- economic factors obviously -- but in addition in our direct business, generally around 60% of sales are financed for our customers by a third party bank that we -- program that we offer. And credit availability became tighter as well.

So what we have done to illustrate this is the second chart. And we have used the first quarter of 2008 as the baseline -- the index -- because it was more or less the same as the year before. And what you can see is as the economy started to turn down customer leads which is basically responses to TV advertising, or web solicitation dropped quite significantly. At the same time credit applications stayed at the same level relative to leads that they were before, which indicates that the people who are interested are still quite interested because they want to go to the trouble of completing the credit application. But sales actually dropped faster than leads and the principle reason for that is is because the rate of credit approval dropped off. And that comes back to the target demographic that strength serves, which tends to be younger men. So when the economy is bad they tend to do proportionately worse and when it's good they tend to do proportionately better. That's a thumbnail on the strength business.

If you go to page six, the TreadClimber was also affected by the downturn and by the credit conditions. But there's some interesting differences in the pattern that you see in cardio versus strength. What we have done again in the chart at the top of the page is to take the first quarter of 2008 as the base quarter so it's 100. You will see in the middle of the year customer leads for the TreadClimber started to drop off. But in the fourth quarter they actually increased and so for the year as a whole they were higher in Q4 than they were in Q1. Credit applications are recovering too and unit sales were down about 20% for the year in the TreadClimber in Q4 and that compares with strength the way they were down by 58%. So quite a bit better performance in cardio at that level than you see in strength.

Why this happened is partly is where the product is positioned in the market it's addressing. But also as you may recall from the operating discussion we had back in July, we did some price point testing in the third quarter which turned out to be quite successful and we also changed the advertising messaging a little bit in Q3 to appeal to a slightly different demographic than where we have been going before. So actually those two factors made quite a difference and account I think for the large part of the success we have been having here. Again, the sales held up better because credit approvals are less of an issue for this group than they would be for strength. Interestingly the trend that we saw in Q4 has actually extended into the first quarter of this year.

If you look at the bottom of the page -- January and February are now booked - you will see that customer leads for the TreadClimber actually up even more than they were in the fourth quarter. They were up by 23% year over year. And credit applications are also up strongly. Orders are actually 2% higher than they were a year ago. When you think about the difference in the overall economy between 2008 first quarter and 2009 first quarter, I think that's quite a difficult comparison, so I think it shows that the product is doing quite well. As a result of all this, the cardio business is now up to about 36% of our direct sales versus 17% back in 2005. So all in all we're beginning to feel that the strategy we have in TreadClimber is starting to look promising.

If you go to page seven, it tells what our product strategy is. Strength is still a very attractive business. We are the leader in it. We plan to stay that way. We have a number of new ideas we're evaluating for new fitness products, but we don't want to introduce them before 2010, principally because we want to make sure we have enough marketing money to spend on TreadClimber this year. So, we will continue to work on strength, but more so next year than this.

In cardio, we're going to put more emphasis in marketing on the health and wellness aspects of what we're doing to get an improved demographic which is a relatively untapped market for us and much bigger probably than strength is. The marketing message -- the proposition for the TreadClimber is as follows -- you get a workout that's at least as good for you in cardiovascular terms or weight loss as a treadmill -- but you can get those benefits at a walking speed rather than running. What you end up with is a more comfortable natural walking motion which is easier than running on a treadmill or frankly also more intuitive than an elliptical, but it happens at lower speeds. So what you have on the TreadClimber is really a differentiated low impact cardio product and that's what should be attractive to this health and wellness demographic we have identified.

One other side point is that the Bowflex home gym had patents that extended through 2004, so they expired a few years ago. TreadClimber has a lot of patent coverage on it -- it has almost 70 US and foreign patents which extend for a fairly long time, so this one also has quite a bit of intellectual property protection which could be attractive if the product really takes off.

If you go to page eight, this again starts to size the market that we're talking about. These statistics are retail market statistics, they're not gyms, they're not direct, they're only those sold in stores, but they're indicative. And what they show is that retail sales of cardio products almost 90% of the total, and of that treadmills and ellipticals are about 72%. And where the TreadClimber competes would be against treadmills and also ellipticals, so it's aimed at about 70% of the market. The home gym business is a little less than $300 million a year, so it's a sizable business, but it's only about 12% of the market and therefore quite a bit smaller.

We talked earlier about the potential size of the demographic and like all these things it depends on definition. But rather than go for all of it, we're targeting a couple of key segments of the demographic. The first one is females 35 years to 54 years old with what are called health factors -- that's Center For Disease Control definition -- what it principally means is people who are overweight or have cholesterol problems. As you can see that's a pretty large group, it's about 17 million people. And then we also looked at males and females who are somewhat older, because as men get older they tend to have similar concerns and that's about 20 million. Obviously there's overlap between those two categories, but even allowing for that we don't think an estimate of 25 million potential consumers in the demographic is really stretching very far.

If you go to page nine, we're going to be changing our branding approach a little bit in direct. Typically in direct marketing the product is most of the story and the brand is subsidiary. And, in getting that we think there's an opportunity to use our branding as part of the strategy. The Bowflex brand has 85% aided awareness which is very high -- it's a very well known brand. If you look at the attributes that consumers attach to it, it's confident, good looking, inspirational. So we plan to keep using that for our current customer who tends to be younger and appearance focused.

We also think there's an opportunity to start to use the Nautilus brand in direct where we don't use it today. Nautilus has 70% aided awareness which is still quite high but the attributes are different. They're authentic, sensible, safe -- all the sorts of attributes it would seem would apply better to a more mature and health focused demographic, so we think there's a real opportunity to use the Nautilus branding in a good way here. The product strategy for the TreadClimber -- we talked a little bit about in the middle of last year -- we're introducing a lower cost product which should be deliverable in the fourth quarter of this year. It's not a lower priced product because we have already lowered the price as a result of our price testing back in Q3 of last year, so what this will do initially is actually to restore some margins. We could do a lower cost product and we still intend to. But in order to hit the time schedule which is to get it into the market this year, we took a fairly conservative design approach. We're going to do another redesign in 2010 which should bring the cost down again further. As I said we're marketing it -- continuing to market at the price points that have tested very successfully as you can see -- and we're refining the advertising messaging for Bowflex and developing new messaging for Nautilus so as to differentiate product market for the markets they're intending to grasp.

If you go to page 11, you can see the existing Bowflex TreadClimber which is a product that we plan to continue for the Bowflex market. It's got somewhat of a gym look to it and it uses very strong colors like black and red, the sort of things that tend to appeal to young men everywhere. If you go to page 12, this is the Nautilus version of the TreadClimber which is mechanically very similar to the Bowflex, but as you will see it's a neutral colors and it clearly isn't designed to look like a gym product. Again we think it's more appropriate to the market that we're going to be going after.

So in summary, we're going to maintain our position and strength. We think there's quite an opportunity in front of us in cardio with a product that's differentiated and has intellectual property protection. We're also -- because we're going to be advertising Nautilus on TV now -- getting we think some side benefits for our future retail strategy which we will be talking about later in the year. Again I point out that if TreadClimber is successful -- very attractive business model as is our strength business -- because you have such high gross margins and low working capital requirements. So our plan is, we will update you on the progress in TreadClimber later in the year and we also are in the process of finalizing a strength strategy for the direct business which we will also discuss later in the year. So I'm afraid we have covered quite a lot of ground today. At this point I'd like to finish the presentation and open it up for questions which Ken and I will be happy to cover on any topic.

So that's it, I'd like to turn it back to the operator.

(Operator Instructions). Your first question comes from the line of Eric Wold with Merriman Curhan.

Hi Eric.

During the presentation I guess one -- you mentioned obviously lowering the operating cost and getting to a point of break even. Can you give an idea of once you complete all the cost reductions in Q1, what the analyzed run rate of sales of each product to get to break even?

Ken?

Eric, the break even point that we would have during 2009 would be falling down with those cost takeouts to $350 million or less and then on a full analyzed basis more to the $330 million range.

Now apples to apples -- is that break even cash flow or break even GAAP profitability?

GAAP possibility.

GAAP possibility.

Okay. And then secondly, with the reduction in the -- with the plan reduction in the availability under the credit line and then the initiatives bringing in greater cash flow, what do you project to be your peak debt level in 2009 before it starts coming down?

Levels of debt that we're carrying presently are around the level that we started the year and we would anticipate to have the debt coming down over the next few weeks. So we really hit the peak already.

Okay , perfect. And then lastly, on the commercial side as you're getting down to reducing the products that you sell, channeling in the more profitable ones, downsize in that division -- is there a point where even being in that channel at all doesn't make

Well we're looking at a strategy for all three of the businesses Eric. I think the first thing to do is to see how profitable it looks like commercial would be. And then depending on that we would have to decide what to do.

Okay. Thank you guys very much.

You're welcome.

Your next question comes from Reed Anderson with D.A. Davidson.

Hi Reed.

Hi. Thanks, that's a lot of information and what's going through.

Couple questions, and I joined the call late, so you might have covered some of this. Getting to the stuff you covered in the last presentation Ed -- looking at the TreadClimber product and the opportunities to grow that -- I'm just curious, what is -- how big a business is that product today, whether the install base both commercially in the direct business, but where are we today with that product just as we stand here today I guess?

Well, the -- we haven't been selling it in commercial for awhile, so I don't really remember what the sales were. We're going to reintroduce it. But in the direct business now it's running coming on for 40% of our direct sales. So in any given period that's roughly what it would be.

Okay. So 40% of sales. And what did you say it had been last year as a percent of sales, you gave a number.

I don't remember last year, but the first year of sales was 2005, it was about 15% then. So I think, I want to say last year was maybe 25%, 26% of sales.

Okay, got it. And what is the average price point of that item?

It's right around $1,700, with shipping it's a little higher, but the ASP is around that

So is your thought as you sit here and look at your business and the ability to grow that product that from an ASP standpoint you are where you want to be or is there going to be a concerted effort to actually move that a little higher through add-ons, features, who knows.

I would say that the outlook here is probably to keep the product as standardized as possible, because you will get better costs that way. And keep the ASP around where it is. If we do the next redesign -- I don't know if you were on the call at the time, but we have already lowered the price to where we think it needs to be in advance of bringing our cost down. So as we bring in the new product our margins will tend to get better. If the sales support it, we might even want to bring the pricing down a little bit more. But I think for right now we're in about the right zone

Got it. Then Ken just looking at just the fourth quarter numbers -- I just want to get a sense -- I know there were some one-timers in there -- if you were to look at the income statement in the fourth quarter -- for example, in selling and marketing what's one time or unusual in the fourth quarter of '08 to that $32.5 million?

Yes, I covered in my commentary some of the one time items more collectively in the operating expense category. And so if you go back and just review that part.

Pardon me?

We had a total of $36.9 million of restructuring other unusual costs in operating expenses for 2008. And then in 2007 for the fourth quarter it was $27.2 million. So we're not breaking those out by individual line items, but that's the impact on the total operating expenses.

I guess I'll just have to go back and listen to the transcript then, we're apparently not on the same page.

Okay, then I guess finally, obviously the big issue is top line, because you've done a great job bringing costs in. But the top line is really difficult. But it sounds like -- the presentation Ed you've laid out where you're taking the costs down etc. That's more or less assuming a business of about $350 million business, is that fair?

I think it will be consistent with -- at the beginning I don't know if you heard this part -- one of the points we're making was is if you take a certain level of consumer spending and the rate of change you will see it in direct the next day. When consumers stop spending it hits direct immediately. When they start to spend it picks up again. What appears to be happening is that the rate of decline in direct is stabilizing. You've got -- in retail and commercial you have a little bit of a pipeline, so they probably have still some room to go down.

But at the sales level that we're talking about you expect to break even or make a little bit of money. But one extra sale in direct is very profitable, it's more than 60% profit margin so that's really the swinger in it.

Then I guess lastly I heard you make a comment about retail that you were doing okay with it -- it sounds like the national accounts, larger chains -- but the independents or smaller chains were the issue. Should we infer from that that the larger accounts were -- they weren't -- they were still down just not as much or were they more or less break even levels or similar levels to what you saw maybe a year ago.

In Q4?

Yes.

I would guess they were down a little bit. They weren't down as much as the regionals were.

Okay. All right. I guess that will do it for me now thanks.

Okay, give us a call if you have something else.

(Operator Instructions). At this time, there are no further questions.

Well, thank you, very much, everyone, for coming on the call. And I know we spent a lot of time today, but we will look forward to reporting to you again in about another six weeks, so thank you again, and good night.

This concludes today's conference call. You may now disconnect.