Nautilus Inc (NLS) 2009 Q3 法說會逐字稿

Welcome to the Nautilus Incorporated third 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, Monday, November 9, 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 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 are made or to reflect an 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 10K and form 10Q filed with the Security and Exchange Commission for more detail discussions of the factors that can cause actual results to differ materially from those projected in forward looking statements.

On the call today from the company are Mr. Ed Bramson, Chief Executive Officer and Mr. Kenneth Fish, Chief Financial Officer. I would like to turn the call over to Mr. Bramson, Chief Executive Officer. Please go ahead, sir.

Thank you. Thanks, everyone, for joining us today. As you will see, we are talking principally by continuing operations today since in September announced to you that we were going to be exiting our commercial gym equipment business. With respect to that, we are in active discussion to sell various products of new commercial business. It's early days at the moment, but we have some very strong indications of interest. And we hope to have one of more of these pieces sold in the reasonably near future. Our continuing operations are now all consumer orientate through both the direct and retail channels and all of our key brands Nautilus, BowFlex and Schwinn have been impacted and emphasized Both consumer channels were profitable in Q3 as sales were still down significantly from a year ago in both of them, but a couple of points I would like to make.

First, in that, in the retail area, retailer inventory appear to be stabilizing. That's to say they are not ordering aggressively, but our customers are not coming back for their stocks anymore, as best we can see. And in the direct business, (indiscernible) activity has been very good. Although the tight availability of consumer credit is still holding us back and converting some of those deeds into revenue. Total continuing operations for the quarter lost about $1.5 million, but this includes two one-time items that Ken will discuss a bit later. Adjusting for these items, the third quarter would have shown $800,000 loss. And if we add back depreciation and amortization, we would have reported positive (indiscernible) of about $1.2 million through Q3 on this (indiscernible). That compares with about $3.3 million of negative EBITDA in Q3 at last year. So we are starting to see some indications that the consumer business is starting to look a bit healthier. Ken will take you through the details of the quarter in a few moments but before he does I want to mention one other thing.

As you know Nautilus is, for a long time, been under represented for our size in the cardio market and some what over represented in strength training. A few days ago, we launched the initial marketing for the Mobia, which is a new low-impact cardio product that's been marketed through our direct channel, under the Nautilus brand. As you know, in the past, all our direct products have been marketed as Bowflex but we plan to use Nautilus more aggressively in the consumer market and maybe as the first step in this strategy. If you like to learn more about the Mobia product, I'd like to suggest that you go to the web to our new website MOBIA.com to see the product. We will spend a lot of marketing money this quarter and we're hopeful that the product will start to generate significant revenues for us early in the new year. With that as background, I would like to turn it over to Ken to discuss the details of the quarter. Ken?

Thanks, Ed. My comments today are going to primarily address the results for continuing operations, which consist of direct and retail businesses but exclude our discontinued operations. Additional information regarding the results for our commercial business can be found in the form 10 Q that we filed today with the SEC.

Net sale from continuing operations were $41.4 million for the quarter compared to $62.7 million for the corresponding period last year, a 33.9% decrease from Q3 2008 primarily due to a challenging consumer spending environment in a tight consumer credit market. Our direct business sale in Q3 2009 were $25.3 million, down 34.8% from $38.7 million in the corresponding period of 2008. Net sales decline in the direct business due to restricted availability of our consumer credit programs as well as our strategic decision to reduce advertising spend commensurate with sales trends.

Our exclusive Treadclimber product line continues to outperform our home gym products. We believe that sales of our Treadclimber is benefiting from adjustments in product pricing, improved model mix, and a shift in an overall advertising expenditures toward the Treadclimber as well as an older and more affluent demographic that is less impacted by economic conditions. We were able to offset our expected lower sales with improved operating efficiencies through better media management as well as other cost-saving initiatives. As a result, our direct business contributed operating income of $1.7 million for the third quarter, compared to an operating loss of $0.9 million in the corresponding period of 2008.

Retail sales in Q3, 2009, were $15.7 million, down 34% versus last year. This decline was due to reductions in customer inventory levels and reluctance by retailers to replenish inventory in this challenging economic environment as well as reduced product placement at certain customers, partially offset by new business gains. Even with the tough economic environment and associated decline in sales, our prudent cost-saving measures enabled our retail business to achieve profitability, contributing operating income of $2.2 million compared to operating income of $4.4 million in the corresponding period of 2008.

For continuing operations, our consolidated gross profit margin for the third quarter 2009 increased 320 basis points to 49.0% compared to 46.5% in the year ago quarter. The improvement in gross margin is due primarily to a $1.4 million benefit relating to our warranty expense following an analysis of recent warranty claim experience performed in the third quarter 2009. While this expense is a one-time benefit, we anticipate our warranty costs will also be lower as a percentage of revenue in future quarters based on the current trends. Part of our restructuring efforts over the past year was a thorough review of all expense items including warranty expense. We have implemented certain procedures that we believe will enable us to improve on this expense item going forward. Additionally, gross margin benefited from a shift in sales mix towards higher margin Treadclimber products in our direct business and also decreased shipping costs.

For the direct business, gross profit margin was 62.8% for the third quarter of 2009 compared to 59.3% for the same period in the previous year. This improvement reflects the afore mentioned decrease in warranty expense partially offset by unusually high charges of approximately $400,000 related to the write off of certain parts in inventory in connection with the relocation of our service parts warehouse facility. The retail business gross profit margin was 26.6% in the third quarter of 2009, compared to 30.0% in the same period in the prior year. This decrease in gross profit margin for the retail business was primarily due to changes in product sales mix in connection with our decision to reduce the number of broad based home gym products offered in our retail business.

Our operating expenses declined by approximately $11.7 million or 33.6% in the third quarter of 2009. Compared to the same period last year. The decrease in operating expenses reflects our commitment to better align spending with the current and anticipated revenue levels partially offset by a $2.1 million non cash impairment charge related to intellectual property of our retail business.

Looking at the components of operating expenses, our selling and marketing declined 40.6% from $23.8 million in Q3, 2008 to $14.3 million in Q3, 2009. The decline is primarily related to lower advertising costs within the direct business. We focused on achieving greater efficiencies by taking advantage of the soft advertising market and also by optimizing advertising placement and improving the creative content of the ads themselves. Total G&A was down 41.5% to $5.2 million in Q3, 2009, from $9.0 million in Q3, 2008. The decline in corporate and other G&A reflects reduced expenses associate with our cost savings initiatives include reductions in legal and professional fees and decrease in occupancy costs in addition to net decrease in other various cost areas. G&A expenses in 2008 include a charge of $1.2 million, legal settlement and $0.6 million in reimbursement to a third party for costs related to share holder action. We continue to expect additional operating improvements and believe they will result in a better year-over-year comparison as a percentage of sales for the fourth quarter of 2009.

For the quarter ended September 30, 2009, we reported a loss from continuing operations of $1.5 million or $0.05 per diluted share. This loss include non cash impairment charge of $2.1 million and a benefit from warranty expense adjustment of $1.4 million. So on an adjust basis loss from continuing operations would have been $1.0 million or $0.03 per diluted share. In the third quarter of 2008, we reported a loss from continuing operations of $22.2 million or $0.72 per diluted share.

Now, turning to our EBITDA for the quarter, we are pleased to report that we generated positive EBITDA in the quarter of $0.5 million. For modeling purposes, continuing businesses had depreciation and amortization of approximately $2.5 million in the third quarter. After adjusting for the impairment charge, and warranty benefit previously mentioned, our EBITDA would have been $1.2 million. In the third quarter of 2008, EBITDA was a -$3.0 million.

Shifting briefly to our discontinued operations, we reported loss from discontinued operations net of tax of $22.9 million or $0.75 per diluted share. This reported loss from discontinued operations was primarily the result of our commercial business qualifying for held for sale accounting treatment, which resulted in a recorded non cash after-tax disposal loss of $17.9 million based on our estimated proceeds. This compared to a net loss from continuing operations net of tax of $11.9 million or $0.39 per diluted share in the third quarter of 2008. Net loss from continuing and discontinued operations was $24.4 million or $0.80 per diluted share compare with $34.1 million or $1.11 per diluted share in the prior year period.

For the first nine months of 2009, we generated net cash from operating activities of $21.1 million compared to $13.4 million in the previous year period. The improvement is primarily the result of the collection of accounts receivables and reduction of inventory within the commercial business. For the nine months ended September 30, 2009, total depreciation and amortization was $8.6 million with $1.0 million attributed to discontinued operations.

Now we would like to spend a moment discussing cost takeout in our business. Nautilus tracks cost take outs by project to ensure the savings become permanent to lower our level of sales necessary to break even. Earlier in 2009, we announced the initiation of expanded cross savings plan aimed at further reducing operating costs and improving overall alignment of spending in anticipated revenue. We continue to execute on the 2009 plan in the third quarter. We are realizing benefits from our efforts, particularly in the terms of reduced operating expenses which helped us to achieve profitable results in our ongoing business segments directing retail for the third quarter of 2009.

On an annual basis, we expect to save approximately $3.3 million from the new headquarters lease arrangement. We will continue to focus on reducing operating expenses in the coming months as we move forward with these initiatives and we remain on track to realize the majority of these benefits in the fourth quarter of 2009. Some of the benefit from these initiatives will be offset by advertising costs associated with the Mobia launch. We anticipate ad cost for this new product to be approximately $3.5 million to $4.0 million in the fourth quarter.

As Ed mentioned, we believe the Mobia cardio machine will resonate well with consumers and as such we believe this investment to be prudent. Sales will be modest, though, in Q4, certainly not enough to offset the marketing investment. Hopefully Q1 will begin to reflect higher Mobia revenue. Turning to our balance sheet, inventories for our continuing operations were $12.5 million as September 30, 2009. We are pleased with our inventory levels as we enter our anticipated strong selling season.

Trade receivables were $27.6 million at September 30, 2009, and $12.6 million of this amount is from continuing operations. Compared to $53.8 million at the end of 2008. Our sales outstanding of 29.7 days at September 30, 2009, reflect improvements compared to prior year in all three business segments including commercial. This compares to 45.2 days as September 30, 2008. As of September 30, 2009, we had a net cash position of $7.0 million compared to net debt of $12.4 million as December 31, 2008. In addition, we expect to receive approximately $11.9 million as a result of a bill that President Obama signed into law last week that allows businesses with net operating losses for 2008 or 2009 to carry back those losses for up to five years. We are very please with our improved balance sheet and believe we are in good very position as we prepare for increased selling season, which began at the end of the third quarter and will continue through the remainder of 2009. Now we would like to open the call for questions. Operator?

(Operator Instructions) Our first question comes from the line of Reed Anderson with DA Davidson. Please proceed.

Hi, guys.

Hi, Reed

Hi, Reed.

Hi. A couple questions.

On the Mobia, was curious on that. So timing on that, the ad spend is just kicking off now but product, really no product expected to ship in meaningful quality until next quarter?

That's pretty much right. We're taking a bit of a different approach here where we typically had gone direct. Some doing some awareness advertising actually starting last week, which doesn't really have a lot of direct response activity in it. And we are starting with direct response advertising in December. So if you take the typical lead times we expect to sell a few this quarter but not proportionate to the amount of investment we're making.

That makes sense. Thinking of your direct business where historically has been positioned where it is today. Is that, from a margin standpoint, is that kind of a margin we should expect that type of product would have or is there reason to think kind of the traditional margin you typically get on direct would be different with this product?

It's on the range with our typical margins.

All right. And then another question on ad spend, you said it was down. And you did give kind of a little color but I was looking far little bit more. I guess I was wondering if that was just a shift, if you maybe kicked some stuff out of the quarter and didn't felt it mattered or if it was a planned change? And also, just a little more color, I guess, on what areas you did reduce and what might have gone up?

Well, we always modulate the advertising link depending on how response and conversion is going. And we had pretty good ad rates this year. So the number impressions that we've been buying has been pretty good. But as you know, because of the tight credit, our conversion hasn't been so good so the efficiency of the leads is down a bit. So we really just have nipped and tucked a bit as we see the quarter go on. And as I think Ken might have said, we have seen better response in the Treadclimber area in the last quarter. We have been shifting some spend there. Actually the number in (inaudible) we're buying in down that much but the cost for impressions are down a bit because (indiscernible). And but so from a channel standpoint you're still kind of allocating in similar areas. It's just that it's more based on what product is working better. It is. The efficiency of the cardio media has been better so it's getting more of the dollars.

Good. Lastly, you made a comment, I think it was you, Ed, in the prepared remarks about retail. And you talked about you've seen some new retail business or customers. I'm curious, is that independents or chains you're seeing but you hadn't been ? I want a little more detail behind that,

It's pretty much the same customers, really. You get some wins in one skew.

So it's more skewed dependent as opposed to --

Yes

Okay. That's it for me. Thanks.

Thank you.

(Operators Instructions) Our next question comes from the line of Peter Culver from Cannacord Capital. Please proceed.

Good afternoon. I was wondering if you would venture a guess as to what kind of proceeds you might expect to see from the sale of the non discontinued operations?

We've got an estimated number you can share.

Yes. Peter, we went through the valuation and took an account of information we had and did reflect the write down according to GAAP for discontinued operation. And what we have left on the books for the discontinued assets for sale is about $10.5 million. Keep in mind that we're not looking to transfer some of the areas related to business such as accounts receivable. So we will continue to collect the accounts receivable up to a point in time where we sell off one of the business segments of commercial.

Okay, thank you. That's all I have.

Thank you, Peter.

And there would appear to be no further questions at this time.

Thank you, very much, for joining us, everyone, and we look forward to talking to you next quarter.

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