Nautilus Inc (NLS) 2009 Q4 法說會逐字稿

Welcome to the Nautilus, Inc. fourth quarter 2009 results conference call. At this time all participants are in 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, March 1, 2010.

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 10-K and Form 10-Q filed with the Securities and Exchange Commission for more detailed discussions of the factors that can cause actual results to differ materially from those projected in forward-looking statements.

During this call management expects to refer to certain non-GAAP measures. Information about non-GAAP measures is included in the Form 8-K we filed in connection with this earnings release. On the call today from the Company are Mr. Ed Bramson, Chief Executive Officer, and Mr. Kenneth Fish, Chief Financial Officer. I would now like to turn the call over to Mr. Bramson, Chief Executive Officer. Please go ahead, sir.

Thank you, and thank you everyone for joining us today. Ken is going to go over our financial results in a moment, but before I turn the call over to him, I'd just like to review a few highlights.

During 2009, it was mostly about restructuring, as you know. We made significant progress in getting Nautilus to where it's a more focused business that's really concentrating on the consumer areas where we think we can do better, and with a more competitive cost structure. As part of this, as many of you are aware, we completed the sale and licensing of the StairMaster and Schwinn Fitness product lines in December, and in February we completed a sale of the large part of the remaining assets of the commercial business. So, as a result of this in 2010 we will be able to present -- start to present a clearer picture of our performance than we've been able to do while we've been so involved in restructuring. We'll also be able to focus on areas where we think we can start to grow the Company again, which is obviously an objective that we're going to start to have.

So, as a result of the hard work in '09, our financial position is much stronger than it was a year ago, and that also provides us the wherewithal to start investing new products and in marketing to get growing in the consumer markets, as we had mentioned. A large part of our success in 2010 is going to be based on the performance of the new product that we're bringing out. In particular, the Nautilus Mobia, and also the Bowflex Treadclimber, both of which are cardio products in the direct channel. We're also planning to introduce some new products later in the year to strengthen our position in cardio and retail, principally in the stationary bike area. And as I said, now that the restructuring phase is behind us, or largely behind us, we plan to give you more information quarter by quarter to let you know how these new products and initiatives are going. We look forward to talking about that on future calls.

So we'll mostly today be talking about 2009, which is sort of a transition for us. But with that I would like to hand it over to Ken to take you through the details.

Thanks, Ed. My comments today are going to primarily address our fourth quarter results for continuing operations, which consist of the direct and retail businesses, and exclude our discontinued operations. Net sales from continuing operations were $53.7 million for the quarter, compared to $63.9 million for the corresponding period last year. A 16% decrease from Q4 '08, reflecting the challenging economic environment.

Our direct business sales in Q4 2009 were $28.9 million, down 19.9%, from $36.0 million in the corresponding period of 2008. Net sales decline in the direct business was primarily due to a decrease in the credit approvals through our finance partner, as well as reduction in advertising in response to the weaker economic environment. In addition, we have focused more on profit and efficiency instead of sales at lower volumes, and lower margins.

We've improved media messaging and advertising placement to obtain cost effective leads and also implemented more efficient follow-up sales process to convert leads to sales. Our exclusive Treadclimber product line increased year-over-year and continues to outperform our home gym strength products. We believe that sales of our Treadclimber are benefiting from adjustments in product pricing, improved model mix, and a shift in our overall advertising expenditures toward the Treadclimber.

Retail sales in Q4 2009 were $24.0 million, down 9.4% versus last year. This decline was primarily due to reduced consumer spending and reluctance of retailers to replenish inventory levels in this uncertain economic environment. These factors were partially offset by sales increase from new product introductions and gaining new retail partners.

Towards the end of our earnings release we provided a sales table that breaks out sales by the retail and direct channel, and you can see the table indicates that the rate of decline in year-over-year sales is diminishing. The stabilization in our sales over recent quarters was an important factor in our decision to begin investing more resources and capital towards growth initiatives, such as new product development and the recent launch of the Mobia.

Turning to gross margins, for continuing operations, our consolidated gross profit margin for the fourth quarter 2009 increased 380 basis points to 48.7% compared to 44.9% in the year-ago quarter. Reflecting improved gross margins in both our direct and retail segments. This is the result of a number of factors including our ability to right-size our business over the past two years.

For the direct business, gross profit margin increased 270 basis points to 60.7% for the fourth quarter of 2009, compared to 58.0% for the same period in the previous year. This improvement is primarily due to better management of freight distribution and warranty costs. As part of our restructuring efforts over the past year, we improved our systems and implemented more stringent claim verification procedures which we believe will continue to help control our warranty expenses in the coming quarters.

The retail business gross profit margin increased 630 basis points to 32.6% in the fourth quarter of 2009, compared to 26.3% in the same period in the prior year. The increase in gross profit margin is attributable to a favorable mix of products, lower return rates, and various cost saving initiatives, including the consolidation of our distribution centers. After taking out the effect of the favorable product mix, we would anticipate our gross retail profit margin to be closer to 30.0% for 2010.

Looking at the components of our operating expenses, our selling and marketing declined 6.4% to $22.6 million in Q4 2009, from $24.2 million in Q4 2008. Our selling and marking expenses reflect our improved advertising efficiencies, including better alignment of ad spend with anticipated revenue, optimized ad placement, and improved creative content of our ads themselves. However, in the fourth quarter of 2009, these improvements were partially offset by our strategic decision to invest in the launch of the Nautilus Mobia.

Included in the fourth quarter 2009 marketing costs is $5.2 million of expenses principally for advertising and marketing costs including the development of creative content for television, print, and on-line advertisements associated with Mobia. We expect to incur high levels of marketing expenses for Mobia as we continue the implementation of our marketing plan. While we do expect the gross profit from Mobia sales will begin to become more significant as the year goes on, we currently do not expect that gross profits for Mobia will exceed marketing expenses until later in 2010. We believe that a substantial initial investment for new products is important for increasing awareness of our new machines and maximizing their long-term potential in the market.

Total G&A was $6.0 million in Q4 2009, compared to $8.2 million in Q4 2008. This 26.8% reduction is due to improvements we made with our cost saving initiatives such as reduction in legal and professional fees and decreased occupancy costs. Total operating expenses in Q4 2009 were at $33.9 million, compared to $64.2 million in Q4 2008. It is important to note that in the fourth quarter 2009, we incurred $3.9 million of non-cash impairment charges, and in the fourth quarter, 2008, we incurred $30.3 million in non-cash goodwill impairment and restructuring charges. Our reported operating loss from continuing operations was $7.7 million in Q4 2009, compared to $35.5 million in the prior period. Because our operating results for both Q4 2009 and Q4 2008 include the various aforementioned one-time expenses, we believe it is helpful to also consider our performance based on our adjusted operating income which excludes these expenses. In our release we provided a table that outlines these adjustments, and makes it easier to understand our performance excluding these items.

In Q4 2009, our adjustments include $4.9 million related to the Mobia launch, and $3.9 million for the non-cash impairment charge amounting to total adjustments of $8.8 million. In Q4 2008, total adjustments equaled $30.3 million, related to a goodwill write-off and restructuring charges. On this basis, adjusted operating income in the fourth quarter of 2009 was $1.1 million, compared to an adjusted operating loss of $5.2 million in the prior year period.

Looking at operating results by segment, operating loss for our direct business was $5.8 million. Excluding the aforementioned $4.9 million loss associated with the launch of Mobia, our operating loss was $0.8 million, and this is despite the fact that credit approvals from our financing partner are less than half what they were in 2008. In the fourth quarter 2008, operating loss for our direct business was $3.1 million. For our retail business, we achieved operating income of $6.0 million, a 46% increase in operating income of $4.1 million in the fourth quarter of last year. Our strong improvement in retail operating income was mainly due to reduced costs associated with our distribution centers and associated freight as well as lower bad debt expense.

For the quarter ended December 31, 2009, we reported earnings from continuing operations of $3.0 million, or $0.10 per diluted share. Included in income from continuing operations is an income tax benefit of $11.4 million, which was attributed to the reversal of a portion of our previous reserve against our tax provision. In the fourth quarter of 2008, loss from continuing operations was $19.1 million, or $0.62 loss per diluted share which included income tax benefit of $16.0 million.

Now turning to our adjusted EBITDA in the fourth quarter of 2009, we reported adjusted EBITDA from continuing operations was a positive $2.5 million. The continuing businesses had depreciation and amortization of approximately $2.1 million in the fourth quarter of 2009. Our adjusted EBITDA in the fourth quarter of 2008 was a negative $1.5 million.

Shifting briefly to our discontinued operations, in the fourth quarter 2009, we reported income from discontinued operations of $2.7 million, or $0.09 gain per diluted share. This income is primarily due to the impact of an $8.9 million accounting adjustment to reduce the loss previously estimated in connection with the planned sale of the assets of our commercial business. We were required to value all assets based on the current market value, which approximated the liquidation value of our commercial assets. This compared to a net loss from discontinued operations of $22.1 million, or $0.72 loss per diluted share in the fourth quarter of 2008. Net income from continuing and discontinued operations was $5.7 million, or $0.19 per diluted share compared to net loss from continuing and discontinued operations of $41.2 million, or $1.35 loss per diluted shared in the prior year period.

For the full-year 2009, we generated net cash from operating activities of $14.8 million compared to $4.4 million in 2008. The improvement is primarily the result of receiving an income tax refund, increased collections and accounts receivable, and inventory reductions.

Now we would like to spend a moment discussing cost take-outs 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. At the beginning of 2009 we announced the initiation of an expanded cost savings plan aimed at further reducing operating costs and improving overall alignment of spending with anticipated revenue. We continued to execute on the 2009 plan in the fourth quarter. We are realizing benefits from our efforts, particularly in the terms and reducing operating expenses.

While on the direct side our improvements were temporarily offset by the investment in Mobia, we were pleased to achieve operating profitability for our retail business for the third consecutive quarter and look forward to overall improvements in both segments going forward.

Turning to our balance sheet, inventories for the retail and direct segments were $13.1 million at December 31, 2009, compared to $14.4 million at the end of 2008. Trade receivables were $27.8 million at December 31, 2009, and $18.2 million of this amount is from continuing operations. This compares to $53.8 million at the end of 2008.

Our sales outstanding of 29.0 days at December 31, 2009, compares to 42.8 days at December 31, 2008. This reflects improvements compared to the prior year in all three business segments, including commercial.

As of December 31, 2009, we had no borrowings and total cash of $12.2 million, comprised of unrestricted cash and cash equivalents of $7.3 million and $4.9 million of restricted cash which served as collateral for outstanding letters of credit. Subsequent to year end we received $12.9 million of cash in income tax refunds that were receivables at year end. In addition, we had $10.8 million of assets held for sale associated with the divestiture of our commercial assets at year end, a portion of which were subsequently sold in February of this year. At December 31, 2008, we were in a net borrowing position of $12.4 million, which consisted of cash of [$5.5 million] (corrected by company after the call), offset by short-term borrowings of $17.9 million.

We are very pleased with our improved balance sheet and believe we are in a good position as we emphasize profitable growth in 2010.

Now we would like to open the call for questions. Operator?

Thank you. (Operator Instructions) And one moment for the first question. (Operator Instructions) And gentlemen there appear to be no questions at this time. I will now turn the call back to you.

Well, Ken, you must have done an absolute superb job of answering everybody's questions in advance, so congratulations. I'd like to thank everybody for joining in the call. Obviously, if you do have further questions, please feel free to contact us at any point. And thank you again for joining us. Bye.

And ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day.