Nautilus Inc (NLS) 2010 Q4 法說會逐字稿

Welcome to the Nautilus, Incorporated fourth-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, Tuesday, March 8, 2011.

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 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.

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. As usual, I'm going to ask Ken to take us through the details of the quarter in a minute but I'd like to cover a few high points first. To start with, retail sales have been roughly where they have been trending lately, which is to say more or less flat with a year ago, having recovered from the slump they had early in 2009. In direct, the sales were down somewhat for the quarter slightly, but this is the best year-over-year performance we've had in quite a while in direct. And the underlying situation there, is that they're now at a point where the Bowflex TreadClimber, which is our cardio product line, is now significantly the largest part of direct sales. And TreadClimber grew by 17% in the fourth quarter, while the Bowflex home gyms dropped about 32%.

But because we're now at a point where home gyms are a smaller category, whereas they used to be dominant a couple years ago, the two changes are more or less offsetting. And that's important, because we're looking to continued growth in TreadClimber to get us to a situation where, perhaps in the second half of the year, we would expect growth in TreadClimber to be larger in dollar terms than declines in rod gyms. And, we could see overall direct sales growing. On TreadClimber, part of the reason why it grew as it did year over year relates to improving credit availability. Our credit-approval rates are getting back to roughly where they were a year ago. And also, consumer sentiment is better, but we don't think this is the whole reason behind it.

It looks to us like TreadClimber is beginning to gain traction with consumers, because we've got increasing awareness now after another year of advertising. And the advertising itself has become very effective and productive. So, speaking to the TreadClimber trend, it's continued to be very strong in Q1. And we're looking for, therefore, to continuation through the year and getting direct into an overall growth situation again. So, with those as high points, I 'd like to turn over to Ken to review the details of the quarter, and we'll be happy to answer any questions you have at the end. So Ken, over to you.

Thanks, Ed. My comments today primarily will focus on the results for the continuing operations, which consist of the direct and retail fitness businesses, and exclude our discontinued operations. I'll begin by discussing the results of our overall Company, and then I'll move on to provide additional detail on the two segments. Our net sales were $53.7 million in the fourth quarter of 2010, essentially unchanged compared to the fourth quarter of 2009. While our sales were relatively flat between such periods, this marks the end of a trend of negative quarterly sales comparisons that had persisted for the past 11 quarters.

Consolidated gross profit margin in the fourth quarter of 2010 was 44.1% of net sales, compared to 48.7% in the fourth quarter of 2009. Lower gross profit margin this year resulted from lower margins from the direct business, primarily due to the decision to offer deep discounts on one specific end-of-life home gym. The use of promotional programs for home gyms is expected to be more limited throughout 2011.

Looking at the operating expense components, selling and marketing expenses were $16.1 million in Q4 2010, a decrease of $6.5 million compared to Q4 2009. The decline in selling and marketing expenses was largely due to our decision to reduce television media advertising for our home gyms, based on the declining sales that have occurred over recent quarters. During the fourth quarter, we began reallocating a greater portion of the television advertising budget toward the Bowflex TreadClimber product line.And we expect to continue to direct the vast majority of our marketing expenditures to this product line during 2011.

As Ed mentioned, we expect to rely on a lower cost internet-based advertising strategy for our home gyms in 2011, since we are able to capitalize on the extensive product awareness that currently exists for Bowflex rod-based home gyms. Also, for modeling purposes, it is important to recall that Q4 2009 sales and marketing expenses included $5.2 million associated with the rollout of the Nautilus Mobia cardio product. Total G&A was $4.6 million in Q4 2010, compared to $6 million in Q4 2009. This 23.4% reduction is driven by the realization of the cost-saving initiatives that we started a couple of years prior. The savings are primarily attributed to lower personnel, occupancy, and outside service-related costs.

Total operating expenses in Q4 2010 declined by 37%, to $21.3 million, compared to $33.9 million in Q4 2009. Keep in mind that Q4 2009 operating expenses included non-cash impairment and restructuring charges of $3.9 million, as well as the aforementioned $5.2 million associated with the Nautilus Mobia. Operating income was $2.4 million in the fourth quarter of 2010, compared to an operating loss of $7.7 million in the fourth quarter of 2009. Our fourth quarter 2010 operating income reflects the Company's diligent expense management, improvement in the direct business, and continued profitability of the retail business. Turning briefly to our full-year 2010 results, net sales were $168.5 million, compared to $189.3 million in full-year 2009.

Loss from continuing operations net of tax for 2010 was $9.8 million, or $0.32 loss per share, compared to a loss of $18.6 million, or $0.61 loss per share, for 2009. The loss from continuing operations in 2009 included $20.1 million non-cash pre tax charges related to goodwill, other intangible asset impairments, and restructuring, which were partially offset by an income tax benefit of $10.9 million. Now, I'd like to provide additional detail on our segment results. Fourth quarter net sales of the retail business were essentially unchanged, with $23.9 million for the fourth quarter of 2010, compared to $24 million last year. Our fourth quarter 2010 sales were impacted by inventory levels that were not sufficient to meet the demand of our retail partners, especially for elliptical products.

We do plan to modestly increase inventory levels to support expected continued strong retail sales demand in coming quarters. In the Cardio Product category, which is primarily made up of Schwinn exercise bikes and ellipticals, fourth quarter 2010 net sales increased by 9.8%, compared to the fourth quarter 2009. In contrast, the Strength Product category declined by 11.3% in the fourth quarter of 2010, compared to the fourth quarter of 2009. The decline in the Strength Product category was related to the continued decline in sale of home gyms. Net sales of our direct business in Q4 2010 were $28.2 million, compared to net sales of $28.9 million in Q4 2009. In the Cardio Product category, which is primarily made up of Bowflex TreadClimbers, fourth quarter 2010 net sales were up 17% compared to fourth quarter 2009.

These strong sales were largely offset by continued sales declines of our legacy strength-oriented products, including the Bowflex rod-based home gyms, which fell 32.3% in the fourth quarter of 2010, compared to 2009. During most of 2010, we experienced a significant decline of credit approvals from our previous consumer financing source from the levels typically attained in prior years. During September 2010, we transitioned to a new third-party financing source, which has designed financing options that better fit our customer needs. Credit approvals from the Company's primary and secondary financing sources increased each month in the fourth quarter of 2010, and averaged 20% of applications processed, compared to 18% in the fourth quarter of 2009.

As Ed mentioned, we expect the credit approval rates in 2011 will remain at these levels experienced in the fourth quarter, or improve modestly, as we continue to optimize our consumer financing programs. Gross profit margin of the retail business was 31.2% in the fourth quarter of 2010, compared to 32.6% in the fourth quarter of 2009. Gross profit margin of the direct business declined to 52.1% in the fourth quarter of 2010, compared to 60.7% in the fourth quarter of 2009. As I mentioned earlier, this margin decline reflects our decision to offer deep discounts on one end-of-life home gym. Use of promotional programs is expected to be limited throughout 2011.

Our retail business achieved operating income of $5.8 million in the fourth quarter of 2010, compared to $6 million in the fourth quarter of 2009. We continue to be pleased with the strong contribution to our business from our retail segment. Operating loss for our direct business improved significantly. Q4 2010 operating loss was $1.6 million, compared to an operating loss of $5.8 million in Q4 2009.

Our reduced operating loss for the direct business reflects our successful management of operating expenses in the quarter, including reduced advertising. We are optimistic about the outlook for our direct business. Our sales have stabilized in the fourth quarter, and we see continued strong sales of TreadClimber products in Q1 2011.

The results from our consumer credit program with GE Money Bank are very positive. In addition, we implemented a new Tier 2 finance program in the middle of January, and initial results from this program are very encouraging as approval rates have improved compared to those we experienced with our other Tier 2 providers. As we mentioned in our last call, as we see improved availability of consumer credit, we will increase advertising spend in the coming quarters to drive awareness of our offerings and capitalize on the demand of our products.

Turning to our consolidated balance sheet, inventories were $10.3 million at December 31, 2010, compared to $13.1 million at the end of 2009. We expect to increase inventory levels modestly -- year-end levels, in order to meet customer demand for cardio-related products. Trade receivables were $19.6 million at December 31, 2010, of which $19.3 million was from continuing operations. This compares to trade receivables of $27.8 million at the end of 2009, of which $18.2 million was from continuing operations.

At year end 2010, we had cash and cash equivalents of $14.3 million, as well as $0.4 million of restricted cash. Our cash position is adequate to support growth in our business going forward. We also had $0.3 million of assets held for sale, associated with our discontinued commercial business as of the end of the fourth quarter 2010. I would also like to point out that we have $77 million in federal net operating loss carry-forwards that are available to offset future taxable income.

In summary, I share Ed's encouraging views about our business as we head into 2011. With that, we would like to open up the call for questions. Susan?

(Operator Instructions). The first question is from the line of Reed Anderson with DA Davidson. Please proceed with your question.

Hi.

Hi, Reed.

Hi, Reed.

Nice turn on the quarter there. That's great. Couple things. You talked about credit approvals and kind of back to where they were, Ed. A little bit better than they were last year at this time. It sounds like you're being conservative when you think that it's probably not going to get a whole lot better this year. So, I'm curious about the color on that. But then also, I think you had said before that even though approvals maybe are back where they were, the amounts people are being approved for is growing. Can you provide some color or some numbers there to give us a sense of that piece of it as well?

On approvals in total, Reed, actually our Tier 1, which is what we normally focus on -- the GE Money Bank and HSBC in the past, are still not back to where they were a year ago.

Okay.

We think that there's a bit more optimization to go on there. The reason that we got back to where we were a year ago, is that the Tier 2 market at the end of '09 had basically disappeared. Now it's coming back a bit. So now, we have 2 Tier 2 providers, and that's going to be part of the reason why we think we'll do maybe a little better on overall credit approvals this year, because we've got more vendors. What I think we were saying about the nature of the thing, though, is that in the past all we really had was these revolving credit programs. And what GE does for us is 2 things. They'll offer actual term loans, 1-year, 2-year, that sort of thing, at much more favorable interest rates. And, even though they're not approving some of the lower-quality credits that used to get approved in the past, the ones that they do approve, they're giving much more credit to. So, some of our products, as you know, run up to like $3,000. And, we didn't used to get that many credit lines that would support a $3,000 purchase. Now we do. So, it's going to, over time, have an effect on improving our average selling price because we'll be able to [enrich] from the product mix a bit.

Another question was on advertising. You had commented that you're getting a lot more productivity out of the ad spend. And, I'm sure a lot of that's mix-related and shifting. Can you just provide a little more detail there and give us a sense of how that will continue to shift, whether it's shifting from just TV to Internet, or whatever, in '11?

We finally are at the point where the opportunity in rod gyms doesn't justify a full-on TV advertising campaign. So, we'll probably campaign our rod gyms periodically. But the most productive advertising for them is online, online search principally. And you've got such high consumer awareness of rod gyms, that most people who want one already know what it is. So, that's going to improve our productivity, and that started during the fourth quarter. The other thing is that the overall cost, or response rate, to our TreadClimber ads has doubled. So, for the same amount of money you get almost twice the number of leads that we got a year ago.

So, you have a couple of options. You can harvest that, which is sort of what we did in Q4. You spend a bit less to get the same sales. As you get above break-even and have you more financial resources -- and if the receptivity to the advertising stays the same -- then you can start to add to it. And so, money that's coming out of rod gyms can be reallocated to TreadClimber. And if TreadClimber justifies it as the year goes on, you might even up it. Because the response rate is still at the higher spending levels in the first quarter, it's still very good.

And so do you think -- maybe you can't look at it this way -- but I'm just curious, if you think of this year from a dollar standpoint, what you spend on marketing or promotion, how would that compare to 2010? Would it be up? Would it actually be down? What's your thought process there?

I'm thinking, and this early in the year, so I don't want to be held to it, Reed. But I think it will probably be similar to this year, but more productive.

Okay, good. That's great. From a gross-margin standpoint, Ken, given the commentary and kind of what played out in the fourth quarter, particularly in Direct, does the fourth-quarter gross margin as reported, does that end up being hopefully our low watermark as we go forward, and should be better in every quarter? Or, is there something else out there that will be [anniversaried]?

The fourth quarter was definitely lower than what we would expect going forward. I think if you look more for the Direct segment at the margin that we had for the full-year 2010, for the Direct business, it was about 56%. That's going to be more of what we would see going forward, maybe a bit better because, again, we have some improvements that have been put in place. So, yes, I think the quarter was lower, and that we're going to be more towards what the full-year 2010 would be, or a bit better on Direct.

That's very helpful. And then last one, just given the inventory position and your comments on it, it would seem to me like at least in the first quarter, your Retail business would have a hard time growing as you catch up. And also anniversaried a pretty big jump last year. Is that the right way to think about that? Or, do you actually think you could grow Retail in the first quarter?

It's hard to call. I think the way we're looking at it at the moment, the objective in Retail for the first half of the year at least, is to optimize it. As we start to get some new product,, you might do something differently during the year. And the comps are not as easy, but we seem to be doing sort of flattish at the moment, which isn't too bad.

Okay, great. Thanks very much. Good luck.

Thank you, Reed.

Our next question is from the line of Steven Martin with Slater Capital Management. Please go ahead, sir.

Great improvements.

Well, thank you.

Ed, would you care to give us some guidance as to what you expect the first quarter to look like, recognizing that as you discussed just before, you're still a little short of inventory?

I think we're still a bit short of where I'd feel comfortable giving guidance, Steve. I think, though, that we're very comfortable in the statement that the TreadClimber trend is continuing to be very strong in Q1. So, if you don't mind, I'd rather comment on that when we have some Q1 numbers to talk to you about.

Do you expect at least to be positive- EBITDA in the first quarter?

Ken, what would your take on that be?

To this point in time, Steve, we haven't been giving guidance on it, so --

I'm not looking for a specific number, Ken. We're almost halfway through March, which puts us --

As one of my mentors used to say, the quarter is 10% over.

But you're a good 75% through the quarter.

I'd say we're optimistic, but I don't want to give you a number.

Okay. And, you said you were light on inventory and it cost you some sales. Would you venture a guess as to what it cost you in sales in the fourth quarter? And what it maybe cost you in the first?

I could just point out the backlog that we had at December 31, 2010 was $3.2 million, and so we would certainly end Q1 with that backlog level down. We're chasing inventory a bit, but we're getting very good cooperation with our partners that supply us the product. And, we think we'll be able to catch up most of that backlog during the first quarter. And that will certainly make a difference on getting our sales.

But that does depend on certain things happening between now and the end of the quarter, and that's why we're hedging a bit, Steve -- (multiple speakers)

Yes, and G&A level, when you look out to the 2011, would it be fair to take your G&A for the fourth quarter and annualize that? Or, is there more reduction to come?

Well, the big [swinger] is how much you want to spend on marketing. So, for the time being, I think you can't annualize it because the fourth quarter and the first quarter are bigger than the rest of the year.

No, Ed, I specifically asked about G&A.

Yes, on G&A, I think that's fair. You could take it and annualize it. We still are very good at spending money wisely. And so, we might find some small savings compared to that. But on the other hand, we're turning around and investing a little bit more towards the growth. So, I think we'll save a bit here and there, and then we'll invest that in helping to regrow the business, and it will tend to be around the similar level.

Yes, if you look at fixed G&A, I would agree with Ken, you can probably annualize it.

And R&D levels for the year?

Maybe the same, up a little bit.

Okay, thanks a lot.

You're welcome.

(Operator Instructions). Gentlemen, we don't have any other questions at this time. I will now turn the call back to you.

Thank you very much. And thanks, everybody, for being on the call. I think when we have the Q1 numbers, they'll be a little cleaner than Q4 was. And, we look forward to talking to you then and taking you through where we are. Thanks again for joining us.

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.