Nautilus Inc (NLS) 2010 Q1 法說會逐字稿

Welcome to the Nautilus, Inc. first-quarter 2010 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, Wednesday, May 12, 20 10. 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 period 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.

In addition, please note that certain numbers presented on today's call will be made on a non-GAAP basis. Further information regarding these non-GAAP figures, including a presentation and reconciliation, are included in today's earnings release, which is available on the investor relations page at www.nautilusinc.com. 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. The purpose today obviously is to update you on first quarter and Ken's going to go through details of our results in a few -- in a moment. I'd just like to make a few opening remarks to provide some perspective. If you look at where we are now I think it's fair to say that our restructuring is basically done, which has been a relatively long process. So the first quarter with respect to continuing operations is our first clean quarter, meaning no significant nonrecurring items for a long time. And what it shows is that we're almost at break-even EBITDA, which is a fair-sized improvement over the same time a year ago. Within that our retail business is doing quite well. The sales are up 27% year over year, which is actually a positive surprise to us. It's better than we'd expected. Retail business is profitable and currently the outlook in retail continues to be positive.

On the other hand, in direct our sales continue to be down. They were down 30% year over year, which is worse than we expected. The causes of that don't really have to do with product or/and demand as best we can tell. Our cardio products are holding up well. The new Mobia product is actually doing better than we'd expected and better than other similar product launches that we've had in the past. Customer interest levels for all the products in direct are quite good, and our cost of lead acquisition is also okay. The key issue that remains for us in direct is the availability of credit to our customers, which is provided through our consumer financing partner. This is an issue that's been going on for quite awhile and we've highlighted it since the end of 2008, so it's not totally new. But we had expected that credit conditions in the first quarter would at least level off compared to where they were in the fourth quarter of 2009. In fact, our credit approval rate dropped by 26% from the fourth quarter of 2009 to this current quarter, which is the largest quarterly drop, quarter-over-quarter drop that I can remember seeing.

This happened despite the fact that it looks like the credit market's generally getting better, and the FICO scores on our credit applications were approximately the same as they were in Q4, so this had an unanticipated impact on the first-quarter direct business in all categories, and it affected home gyms in particular. To put this in context, our rate of credit approvals as a percent of applications is now down nearly 40% year over year, and it's down 70% plus from two-years ago. So as a result, we've started looking at alternative partners for our consumer financing program, and fortunately, Nautilus' on balance sheet's improved somewhat and it looks like financial institutions generally are becoming more interested in consumer lending again. As of today we're in discussions with several potential new credit providers who've indicated interest in offering a program. We don't have any firm offers from any of them as of yet, but we're hopeful that we'll conclude something reasonably soon. Our objective would be to have a new financing program in place for the direct business in time to support our most important selling season in the later part of the year.

So in summary where we are at the moment, retail's doing well, our overall costs are well controlled, and if we can improve the financing situation, even partially in direct, the impact on Nautilus could be very positive. Obviously we'll be announcing anything that develops with respect to the financing programs when it happens. And with that as background, I'd like to now turn it over to Ken to take you through the details of the first-quarter results.

Thanks, Ed. My comments today are going to primarily address our first-quarter results for continuing operations, which consist of the direct and retail businesses and exclude our discontinued operations. I will begin by discussing the results of our overall Company, and then I'll move on to provide additional detail on the segments. Our net sales were $45.6 million in the first quarter of 2010 compared to net sales of $54.1 million in the first quarter of 2009. The 16% year-over-year decrease reflects lower sales from our direct business, which were partially offset by higher retail sales. Gross profit margin in the first-quarter 2010 was 50.3% of net sales compared to 56.1% for the same period in 2009, reflecting the decline in the portion of sales represented by the direct business, which has a higher gross profit margin than the retail business.

Looking at the components of our operating expenses, selling and marketing declined 16.4% to $18.9 million in Q1 2010 from $22.7 million in Q1 2009. Our selling and marketing expenses reflect our continuing efforts to align ad spend with anticipated revenue, to optimize ad placement, to improve creative content of the ads themselves, and this allows us to connect with more potential customers each time we advertise. Total G&A was $5.2 million in Q1 2010 compared to $7.9 million in Q1 2009. This 34.6% reduction is due to efficiencies resulting from 2009 cost saving initiatives. Total operating expenses in Q1 2010 were $24.9 million compared to $34 million in Q1 2009. The decline in operating expenses was driven by previously-implemented restructuring efforts and the aforementioned reduced selling and marketing costs. first-quarter 2009 operating expenses include a $2 million restructuring charge.

Operating loss was $1.9 million for the first-quarter 2010 compared to $3.7 million in the prior-year period. The improved operating results were driven by an increase in operating income from our retail segment and Company-wide cost reduction initiatives. For modeling purposes, it is important to note that the first quarter of 2009 included $2 million of one-time restructuring charges. These improvements were partially offset by operating income declining for the direct segment in the first-quarter 2010 when compared to the same period in the prior year. In the first-quarter 2010 our EBITDA from continuing operations was a negative $192,000. This compares to negative $1.3 million in the first quarter of 2009. Loss from continuing operations was $2.4 million, or $0.08 per share. This compares to a loss from continuing operations of $5.4 million, or $0.18 loss per share in the first-quarter 2009.

Briefly, on our discontinued operations, loss from discontinued operations in the first quarter of 2010 was $5.4 million, or $0.17 per share. compared to loss from discontinued operations of $8.4 million, or $0.27 per share in the first quarter last year. During first quarter of 2010 we disposed of substantially all of the assets of the Nautilus-branded commercial product line and the factory in Virginia. A significant portion of the remaining commercial assets were also sold effective April 30, 2010. As such, the commercial operations disposed of to date accounted for the majority of the loss from discontinued operations. We generated net cash from operating activities of $0.9 million for the first-quarter 2010 compared to $12.8 million for the comparable period in 2009. It is important to keep in mind that the cash generated in 2009 was particularly high as a result of our efforts to reduce working capital invested, primarily in our commercial business, in anticipation of discontinuing that segment.

Now I would like to provide some additional detail on the segment operating results. Our first-quarter 2010 net sales in our retail business increased 27%, driven by strong sell-through of our newly-designed bikes and our existing elliptical offerings. Our direct business sales in Q1 2010 were $28.5 million, down 30% from $40.7 million in the corresponding period of 2009. This year-over-year decline was primarily due to a 37% year-over-year decrease in the rate of credit approvals through our consumer credit finance partner, as Ed has mentioned. As Ed mentioned, we are evaluating different programs to improve our credit approval rates in order to offer our customers' better financing options and we do believe that once credit approval rates improve we will see corresponding improvements in our direct sales.

Turning briefly to discuss our products in direct, our cardio product line continues to perform well. Sales for our newest product, the Nautilus Mobia, were very promising, and as Ed mentioned, they exceeded our first-quarter expectations, and we do expect that this will become one of our best performing cardio products over the course of the next couple years. The stability of our cardio products was offset by slower sales of Bowflex home gyms, which are more impacted by reductions in credit approval than the cardio products. The gross profit margin of our retail business was 26.5% in the first quarter of 2010, a decrease of seven percentage points as compared to the first quarter of 2009. It is important to note that the higher gross profit margin in the first quarter of 2009 was due primarily to adjustments to certain previously-estimated cost reserves to reflect lower expected costs as a result of our 2008 restructuring efforts; and this included warranty, freight, and also reduced customer product returns. Gross profit margin in the direct business declined slightly to 61.5% for the first-quarter 2010 compared to 63% for the same period in 2009 due to lower sales volumes for the direct segment.

For our retail business we achieved operating income of $2.3 million, a 64.3% increase in operating income from $1.4 million in the first quarter of last year. Our strong improvement in retail operating income reflects the segment's strong year-over-year sales growth, as well as our successful cost control efforts, including costs associated with the distribution center, general and administrative costs, and research and development expenses. Operating loss for the direct business was $1.5 million compared to operating income of $2.7 million in Q1 2009. The decline is primarily due to lower sales volume.

Now briefly turning to the cost take-outs in our business, as you may recall, at the beginning of last year we initiated an expanded cost savings plan that we successfully implemented. While we believe that we are now a lean and efficient organization, our 2010 results will benefit from these take-outs on a year-over-year basis. While our lower sales in the direct business had a negative impact on our operating results, we are very pleased that we achieved operating profitability in the retail business. We expect to continue this positive trend, as well as improve our direct business going forward.

Turning to the balance sheet, inventories for the retail and direct segments were $14.8 million at March 31, 2010 compared to $13.1 million at the end of 2009. Trade receivables were $18.9 million at March 31, 2010, and $11.5 million of this amount is from continuing operations. This compares to $27.7 million at the end of 2009, of which $18.2 million was from continuing operations. As of March 31, 20 10 we have no borrowings and cash of $16.3 million, of which $4.4 million was restricted cash to support outstanding letters of credit. We also had $4.2 million of assets held for sale associated with the discontinued commercial business at the end of the first quarter. At December 31, 2009, we had no borrowings and cash of $12.2 million, of which $4.9 million was restricted cash. We now have a strong balance sheet and we believe we are in a good position as we emphasize profitable growth throughout 2010.

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

Thank you. (Operator Instructions). Our first question comes from the line of Reed Anderson of D.A. Davidson. Please proceed with your question.

Hi, guys.

Hi, Reed.

Hi, a couple questions. On the retail business, which looked like it had a nice rebound, I'm just curious. A year ago at this time a lot of the retail customers were -- really had taken down their inventories or just clearing out as quickly as possible, so I'm just curious. What portion of this retail business this quarter do you think might have been channel refill and -- or what might be new customers, renewed demand? If there's any color you can give on that, that would be great?

Well, it's hard to know exactly, Reed, but we do look at sell-through and the consumer uptake's increasing, but it's not increasing at 27%, so the larger part of the thing has got to be restocking. But there is a significant amount, at least this quarter, of increased consumer up tick.

And did you add any significant new customers in the quarter, or is this largely driven by your existing retail customers?

It's pretty much the same. We've got some new customers coming on, but I don't think they would have affected Q1.

Okay. Okay, good. And then in terms of the direct side, you talked a little bit about that, both of you, did and I'm just curious, could you give a little more detail on Mobia? You don't have to give the exact numbers but it was pretty toes figure out in the prior quarter. Were you up significantly from what 4Q was? I'm just trying to get a sense of the trend there because it sounds like the product is building, but it's maybe not -- it's still pretty early. Just trying to get sense of it.

Yes, it's not a very big part of the business yet. The larger part of the cardio by far is still TreadClimber, but it's on track to be by the end of the year, maybe 20% of (inaudible) cardio, maybe a bit better, depending on how it goes.

Okay, and then last question for me. I'm just curious what your thinking is on product costs, particularly as we get later in the year, sensing might be seeing some up tick in costs sort of thing. Is that something you believe will happen? Should we think about -- how should we think about that in terms of margins later this year and into next year?

Well, Ken should comment on it, too. To date I don't know that we've seen any strong indications of increasing pricing, but Ken, do you have any different view on that?

We continue to talk to our key suppliers and they're alerting us to the possibilities of fuel price increases, et cetera, so we're working with them to try to lock in prices as far as we can through the heavy selling season in the back half of the year. So we're watching it, but so far we don't have specific price increases.

Okay. Okay, good, that's helpful. Thanks, that's it for me. Good luck.

thanks, guy.

(Operator Instructions). Our next question comes from the line of John Rooney of MCT. Please proceed with your question.

Hi, it's John Rooney, and I have two questions, if I could, Mr. Bramson. The first question has to do with liquidity and your consumer finance provider, and I guess my question is, you've got -- you had approximately $27 million of liquidity available, including your unused line of credit and non-restricted cash during the quarter and I'm curious as to why you would have not used some of that liquidity to offset the decline in sales that you're claiming resulted from the tightening of credit from your consumer finance provider?

We have talked about it periodically and we have had a small pilot program to do it. The reason that we didn't is because we thought the discussions with another provider were going okay. If you think about the amounts that you might need, could you run through our liquidity pretty quickly if you did, so we're trying to be conservative at this point.

Okay, thanks. And then we talked about a year ago and you had stated that you felt that once you had completed the -- your operating restructuring that it would it make sense to look for a growth-oriented CEO who had experience in this space and I say, one, congratulations on completing the operating restructuring. My question is, is that still something that you're planning on pursuing?

Yes, we're -- the subject of succession's front and center for the board and I think it's fair to say that the restructuring part is essential done.

Do you have any timeframe as it relates to trying to recruit a growth-oriented CEO?

I don't want to be specific, but they don't pay me a lot to do the job so I'm not pushing too hard.

But it's something you're actively seeking?

Yes, I think that's fair to say, we are.

Okay, thank you very much.

You're welcome.

Mr. Bramson, that is all the questions we have for today. Please proceed with your closing remarks.

Well, thank you, everyone, for joining us and obviously if you have any other questions later you're free to call Ken or me, and look forward to bringing you some better results in the future. Thank you.

Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation and ask that you please disconnect your line.