Nautilus Inc (NLS) 2009 Q1 法說會逐字稿

Welcome to the Nautilus, Inc. first quarter 2009 results 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. As a reminder, this conference is being recorded today, May 11th, 2009.

Before the call begins, listeners should be advised of the Safe Harbor Act 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 do not guarantee future performance.

Nautilus undertakes no obligation to update publicly any forward-looking statement to reflect new information, events or circumstances after the date 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 forms on Forms 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.

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 now like to turn the conference over to Mr. Ed Bramson. Please go ahead sir.

Thank you, and thank you everyone for joining us today. As you can see from the earnings release, the first quarter was a tough one for us and sales in each of our three businesses were down between 40% and 50% year-over-year. So, Ken is going to go through the details of the release with you. But, before he does that, I would like to highlight a couple of points.

I think the first one is that the restructuring we have been doing has enabled us to keep our gross margins up and in fact to increase them slightly even though the sales are down and I think we feel that this will put us in a good position as and when we start to see some sales growth when the economy recovers.

And, secondly, with respect to the earnings themselves, we've provided quite a bit of additional supplemental data in the earnings release and if you have a chance to look through it, what it shows is that if you look at our pretax loss of $12 million, there were two key items that accounted for most of it. One of them was a restructuring charge of about $3.8 million which we've talked to you about in the past. And the other is that our commercial business lost $7.1 million in the quarter. So those two items account for most the loss.

And, if you look at our consumer businesses on which we have been doing a fair amount of focus lately, their loss would have been a little over $1 million, which with the sales declines that we've experienced actually shows, I believe, that the restructuring is working quite well. It also represents positive EBITDA for our consumer businesses for the first quarter.

So, with respect to commercial, obviously we are working hard on it because this amount of loss puts a real burden on the Company. At the moment we do believe that we have a path to eliminate these losses later in the year, and until then, it is going to be somewhat of a drain on earnings.

We will be happy to answer questions on each of the businesses or anything else you would like to discuss. But for now I'd like to turn it over to Ken to take you through the details of the earnings release.

Thanks, Ed. If you have the earnings press release, you will see it includes a supplemental disclosure to reconcile GAAP to adjusted pre-tax loss from continuing operations on the last page. As Ed said, we also have provided other segment information. The Company also filed Form 10-Q with the Securities and Exchange Commission today for the first quarter.

Net sales from continuing operations were $72.1 million for the first quarter compared to $129.6 million for the corresponding period last year. A 44.4% decrease from Q1 2008 primarily due to the weak consumer environment and a tight credit market. Our direct business sales in Q1 2009 were $40.7 million, down 41.5% from $69.6 million in the corresponding period of 2008.

However, it should be noted that the economic downturn in our business did not start until Q2, 2008 and in such, the percentage decline from the last year intensified due to the current challenging economy. We expect the comparables in the back half of 2009 to be better comparables.

Offsetting a portion of the sales decline in the direct business was an increase in sales of TreadClimbers compared to the same period last year. We are also experiencing positive results from our new pricing and marketing programs that rely less on special promotions and more on stable pricing on the direct side of our business.

Our cost per customer lead has improved across all product lines, due to favorable media conditions, strong creative and a more efficient mix between strength and cardio advertising.

The direct business contributed to operating income of $2.7 million for the first quarter of 2009 compared to $7.6 million in the corresponding period of 2008.

Retail sales in Q1 of 2009 were $12.5 million down 50.3% versus last year. The overall decline in sales was driven by lower sales volumes of rod-based home gyms due in part to management's decision to reduce the number of rod-based products offered in our retail business in order to realize higher profit margins for the sales of the products in our direct business.

The decline also reflects lower net sales for the cardio products due to steps taken by our retail partners to better manage their overall inventory levels, despite relatively strong sales of our Schwinn Cardio products.

Our retail business was also profitable for the quarter, contributing operating income of $1.4 million compared to $2.6 million in the corresponding period of 2008.

Commercial business sales were down 46.5% to $18.0 million in the first quarter of 2009 from $33.7 million for the first quarter of 2008. The commercial business sales decline reflects the impact of the global economic recession, which has reduced the availability of credit to businesses, as well as the decision by the Company to implement more stringent credit policies for many of our distributors and customers.

In addition approximately 44% of commercial sales are generated from international customers which have been negatively affected due to the strengthening of the US dollar compared to the Euro.

Our commercial business had an operating loss of $7.1 million for the quarter compared to an operating loss of $3.0 million in the corresponding period of 2008.

Our overall gross profit margin for the first quarter 2009 improved to 43.4% compared to 43.2% in the year ago quarter. Our gross margin in Q1, 2009 was the highest achieved in over a year and this improvement is due primarily to improvements in our cost structure, including lower operations and manufacturing costs from headcount reductions.

Offsetting a portion of the gross profit margin gain were sales of closeout product at lower than average margins and higher manufacturing costs due to lower production volumes.

Our total operating expenses declined by $21.3 million or 33.1% in the first quarter 2009 compared to the same period last year. The overall reduction in operating expenses compared to the prior year period reflects the impact of our efforts to better align spending with current and anticipated revenue levels through significant reductions in media and other marketing expenses, personnel costs and other discretionary expenses.

To provide better visibility into our operating expenses we now show one time restructuring expenses on a separate line under the corporate operating expenses. Our operating expenses for the first quarter of 2009 included $3.8 million in related restructuring charges and the first quarter of 2008 included $10.7 million in restructuring charges.

Operating expenses other than those related to restructuring were down 26.9% for the first quarter year-over-year.

For the first quarter of 2009, $1.7 million of the restructuring charges reflects the Company's remaining obligations for the Tulsa manufacturing and warehouse facilities that were closed during the fourth quarter of 2008. We do not expect to incur any further significant costs associated with the Tulsa facility.

The other large part of our 2009 restructuring charges related to the abandonment of an add-on information technology application that was purchased in 2007 and never implemented.

Looking at the components of operating expenses, our selling and marketing declined 34% from $41.7 million in Q1 2008 to $27.7 million in Q1 of 2009. The Company reduced direct media advertising expenses by $7.9 million to balance the favorable cost per lead media environment with the unfavorable change in percentage of leads that actually converted to ultimate sales. The decline also reflects a $2.7 million reduction in third party financing fees.

Corporate G&A was about $9.6 million for the first quarter of both 2009 and 2008. We do expect the additional improvements to our cost structure will result in a better year over year comparison of G&A as a percentage of sales throughout the balance of 2009.

Due to our improved liquidity position, our interest expense decreased to $147,000 in Q1 of 2009 from $1.2 million in Q1 of the prior year.

For the quarter ended March 31st, 2009, we reported a loss from continuing operations of $13.8 million or $0.45 per diluted share. Included in the loss from continuing operations are pre-tax restructuring charges of $3.8 million. As I previously mentioned, the restructuring charges are principally related to the closure of our manufacturing facility in Tulsa and a write-off related to abandoned information technology software.

In the first quarter of 2008 we reported a loss from continuing operations of $6.9 million or a loss of $0.22 per diluted share. Included in the loss from continuing operations are pre-tax restructuring charges of $10.7 million primarily related to the cancellation of the agreement to purchase Land America Health and Fitness Company and also employee termination costs.

We included in the earnings release a supplemental table that provides you with results both including and excluding restructuring charges. Excluding restructuring charges, our adjusted loss from continuing operations before income taxes was $8.3 million for the quarter ended March 31st, 2009. For the corresponding period in 2008, excluding restructuring charges mentioned, income from continuing operations before income taxes was $1.2 million.

On an operating basis, we generated $12.8 million of net cash provided by operating activities. This cash generation was primarily due to working capital improvements and the implementation of cost reductions.

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 continued to right-size our cost structure in the first quarter by implementing an additional $17 million in cost reductions.

These actions will begin to benefit our operating results in the second quarter and we expect to realize the full benefit from these improvements in the fourth quarter of 2009.

Turning to our balance sheet, inventories were $39.6 million at March 31st, 2009 compared to $43.8 million at December 31st, 2008. This is due to lower volumes and focused inventory management. Trade receivables were $30.1 million at March 31st, 2009 compared to $53.8 million at the end of 2008.

Our day sales outstanding of 28.8 days at March 31st, 2009 reflect improvements compared to prior year in all three business segments. This compares to 48.5 days sales outstanding at March 31st, 2008.

As of March 31st, 2009, we had only $120,000 in debt net of cash, compared to a net debt position of $12.4 million as of December 31st, 2008 and a net debt of $52.9 million at March 31st, 2008.

In April 2009, we received a $10.6 million US federal income tax refund that is not reflected in our cash balance as of the end of March. As of today, we have no outstanding borrowings.

Now, I will turn the call back to Ed for closing comments before we take questions.

Thank you, Ken. I don't really have anything to add but we would certainly be happy to take any questions that anybody has. So I would like to open it up.

Thank you. (Operator Instructions) Your first question is from the line of Reed Anderson from D.A. Davidson.

Hi, Reed.

Couple of questions. On sales, Ed, I am wondering, have you seen anything in recent weeks or in the last month or close to the quarter that would suggest you are seeing things at least in the top line start to stabilize a little? Because when I look at your inventories down as much as they are it suggests you hadn't seen that at the end of March. And, I'm just wondering, have you seen anything that suggested stabilizing?

It is a little hard to generalize Reed. If you look at the thing by business -- the direct business in the first quarter of last year, actually had a very good quarter if you hadn't seen the downturn whereas this year, you certainly did. So the sense we get is that the -- whereas it hasn't bottomed yet, the rate of change there is getting smaller in direct.

In retail, as far as sell through goes, it doesn't look like it is all that bad. Part of the issue is, we have a few large accounts that account for a lot of business. They have really been taking a pretty tight line on inventory overall. So, it isn't that they are not buying from us particularly, they are just cutting back.

So I think what you had in the second half of last year was that resale was looking better than it really was because you had the pipeline working for you. Now, it is looking worse because it is working against you.

Second quarter typically isn't a very good one for health and fitness equipment. But I think by the third quarter, you'll get a sense of what is happening.

That was my other piece too. If you look at that first quarter, seasonally, it tends to be one of your better ones. So, it would suggest that the next couple of quarters or certainly the second quarter could still be pretty tough.

I think the second quarter will be tough. The retailers don't really have to start bringing in product that much in Q2. They may order it, but you won't see it getting shipped. And direct -- even though we will do a good job in direct -- it's not a particularly good quarter for it. And commercial has got its own set of issues too. I would say I agree with your basic observation there.

Switching gears a little bit. Gross margin, that was a nice surprise relative to my expectation. Looks like -- obviously it seems like it's stabilized certainly in direct versus a year ago. Actually up a little.

But the big uptick seems to be in retail and I am just curious how on that big of a down tick in sales you can actually see gross margins up as much as they were in retail?

Well, firstly, retail is a very variable business model if you think about it. We're not manufacturing there, we don't have a lot of media expense so you have some protection there. I think this may have to do with some anomalies back in Q1 of last year. I'm going to ask Ken to respond to that.

Reed, part of what you are seeing, is that we do have some cost takeouts that we have implemented on the consumer side that has helped the retail margins and also, we -- while the sales were low in the quarter, they were very clean. We didn't have any special discounting or products that we were trying to move out that were end of life. So definitely is a strong improvement year-over-year.

It's getting to the point with looking at -- I think it was 33% and change in the quarter in just retail. That's getting up -- that's a big margin for a product price point where you guys are at for hardgood. Is that sustainable or would that maybe come in little bit as the year goes on?

I think if sales got better it would come in a little bit Reed, but it's not going to go back to where it was before.

Okay, good and then one other one. Just looking at SG&A particularly in the direct business. If I just do some math -- really even though sales were off a lot, the percent, if you will, of revenue -- it only ticked up a little bit. Is that -- are we seeing -- is that mainly a reflection of just the takeouts or is it really that variable of an SG&A piece just to run that direct? Can you comment on that a little bit please?

You have got two things Reed. There have been some takeouts in direct. It is fairly variable business if you think about it, other than the call center. With the exception of media.

And so what we did is we cut media expense quite a bit but with what has been happening to the cost of television, we are actually buying about the same number of impressions as we were before for less money. That's the other variable factor that helped out.

That reminds me, you made a comment in the prepared remarks about conversion rates were down though in direct. Can you give us an order of magnitude what that's come back in a little bit?

Ken, you can give the actual numbers. The reasons for it essentially have to do with the availability of credit. That's the biggest factor. Ken, do you have some numbers [to handle]?

Yes, Reed, as Ed said, the credit -- the approval rate compared to what it would have been prior year is down by about a third, so about two-thirds of the people that would have been approved a year ago were approved during the first quarter of this year. And so that is one of the large drivers that we have.

And the good news is that we track in our forecast the trending and the seasonality in that, in the first quarter and so far in the second quarter, the conversion rate that we would have planned internally, we've been doing a little bit better. So at least we feel like we've seen the bottom of it. Maybe not on the credit approval side, but at least as far as us understanding the quality of the leads we are getting and our capability to close the sale.

(multiple speakers) And, we haven't lost that, we've had a slight increase in the number of people just buying it on their own credit cards. I think that's somewhat encouraging too.

Helps a little bit. Good. Good luck. Thanks.

Thanks, Reed.

(Operator Instructions) Your next question comes from the line of Rick Fetterman from Fetterman Investments.

Good afternoon. I wonder if you could comment a little on any changes or developments, if any, in the third party financing availability that when people do not use their own credit card for the direct market.

The changes are -- we have the same provider we've had all along. If you go back a year, we did have a second tier credit provider, who took on some of the lower grade credits. Which we don't have any more. And, I forget when that happened, Ken.

It was during third quarter of 2008.

Yes, so that has gone away. Our main provider is continuing as normal. What they are doing though is they are adjusting the number of people they approve. They will tell us ahead of time we are expecting our credit approvals to come down by 100 basis points. And then they do. So, I would say that is the major change there.

I can't remember. But you may have mentioned this a couple of calls ago. Do you have an estimate for what you think the revenue necessary to break even would be? When you are finished with the restructuring process in another couple of quarters.

I think Ken did give a number the last quarter -- the last call, Ken, didn't you?

Yes. That's right, Rick. We mentioned during the question and answer on the last call is that after we finish the restructuring cost takeouts on a full impact that it would bring our breakeven point down to about $330 million -- and that would be at the operating income level.

Okay, and that would be -- assuming nothing changes -- that would be towards the end of this year -- calendar year?

Yes, the latest cost reductions that we put in place in the first quarter, most of those start taking impact in Q2 and Q3, so substantially all of that would be in place by the fourth quarter of 2009.

And let me also clarify Rick, I said that the breakeven in operating income level -- I mean, taking into account that we have very little interest, if any, and almost no taxes because of our tax loss carry forwards. You can pretty much translate that down into net income as well. There's not going to be much difference between the two.

Right, I got it. Thank you very much. Best of luck. I think you are doing a great job given the circumstances.

Thank you. That's very nice.

There are no further questions at this time. I would now like to turn the conference back over to Mr. Ed Bramson.

Thank you everyone for attending. Obviously if you have more questions, please feel free to contact us. And we will look forward to talking to you on the next quarter's call. Thanks again.

Thank you, ladies and gentlemen for your participation. This concludes today's conference call. You may now disconnect.