Nautilus Inc (NLS) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Nautilus Q2 fiscal 2013 conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference call is being recorded, Monday, August 5, 2013.

I would now like to turn the conference call over to John Mills, Senior Managing Director of ICR. Please go ahead, sir.

Great, thank you. Good afternoon and welcome to Nautilus' second-quarter 2013 conference call. Participants on the call today from Nautilus are Bruce Cazenave, Chief Executive Officer, and Bill McMahon, Chief Operating Officer.

Remarks during today's conference call may include forward-looking statements concerning the Company's prospects, current and future financial and operating trends or new product introductions. These statements, along with other information presented that are not historical facts, are subject to a number of risk and uncertainties. Actual results may differ materially from these forward-looking statements. Nautilus undertakes no obligation to publicly update any forward-looking statements to reflect new information, events or circumstances after they are made or to reflect the occurrence of unanticipated events. Please refer to our quarterly and annual reports filed with the SEC for more information about the risks and uncertainties that could cause actual results to differ.

Unless otherwise indicated, all information and comments regarding our operating results pertain to our continuing operations. With that, it's my pleasure to turn the call over to Bruce. Go ahead, Bruce.

Thank you, John. Good afternoon, everyone, and thank you for joining our call today.

I'd like to begin today's call with a general overview of the quarter and an update on our Business, and then I will move on to review our financial results in more detail. During the second quarter, we continued to achieve growth in our Direct business, primarily driven by the steady growth of our core cardio products, as well as increased sales versus last year on both the CoreBody Reformer and the new Bowflex UpperCut.

The second quarter is our seasonally slowest quarter of the year and is a time when our focus is directed towards positioning ourselves for the back half, when the fitness season gathers momentum and the scale of opportunity is greater. To that end, we made a strategic decision to increase our media spend in the quarter versus last year in order to continue to build awareness of our new products and create a sales lead foundation for the back half of the year. In addition, we invested in launch activities associated with our licensing initiative, which will leverage our strong brands and help drive high margin revenue for our licensing business in the years to come.

While these investments put pressure on our short-term operating results, particularly as mentioned in the seasonally slowest quarter of the year, we believe they are important to the exposure -- to further improve the longer term foundation of Nautilus, including increasing exposure of our brands and providing key complimentary sources of revenue and profitability for our overall Business. As a point of reference, despite the slower growth of revenues in the second quarter, the Direct business year to date is running 16% ahead of last year in revenue and 79% ahead in terms of profit contribution.

Moving to Retail, as we previously discussed, we expect that the second quarter for Retail to be challenging from a year-over-year point of view because of very strong, tough comparison to second quarter of 2012. In the second quarter of last year, our revenue -- our Retail revenue increased 23%, as some customers accelerated their normal buying pattern from the back half of the year into the second quarter, in anticipation of the price increase implemented mid-year last year. This year, we expect our Retail sales to follow the usual seasonality pattern and be weighted more toward the back half of the year.

One of our key focus areas has been improving the foundation of our Retail segment, particularly in terms of product innovation and margin improvement. It is for this purpose we developed a whole new line up of cardio equipment for this fall season, and we have been very encouraged by our Retail partners' responses to these products, new products. We are optimistic based on the product placements and initial customer orders, which will begin shipping in the third quarter and accelerate in the fourth quarter, that we will experience increased revenues in the back half, enough to return to positive growth on a full-year basis in 2013 as compared to 2012.

While for the reasons I mentioned our second-quarter results are not representative of our target long-term profitability trajectory, the underlying trends are positive and we are pleased with the position of our Business going into the back half and with the long-term improvements we are making in our operating platform. Importantly, we continue to make progress improving gross margins, as evidenced by our overall margin improvement in the quarter, as well as individual improvements in both of our Retail and Direct businesses. Our focus continues to be on expanding our product portfolio with innovative fitness products that capitalize on our deep brand heritage, improving our product margins, and leveraging our operating structure.

Before I move on to discuss our financial results in more detail, I'd like to comment on our Chief Financial Officer search. We are still early in the process, but have already received significant interest from very experienced and talented CFOs from across the country. We will update you on our progress as appropriate.

Now turning to our financial results, net sales for the second quarter totaled $36.2 million, a decrease of 8.4% as compared to the same period prior year. Year to date through two quarters, net sales are $95.5 million, a 5.1% increase over the same period last year. As mentioned, the second quarter overall, gross margin improved 440 basis points to 47.8% versus 43.4% last year. This increase is primarily due to higher gross margins in both Retail and Direct businesses. Secondly, to a greater percentage of sales coming from the Company's higher margin Direct segment. And thirdly, to greater overhead efficiency. On a year-to-date basis, gross margin is 50.3%, a 510 basis point improvement over the same period last year.

Operating loss for the second quarter of 2013 was $1.7 million compared to $0.6 million in the same quarter of 2012. The increase in operating loss reflects expected lower net sales in the Retail segment, as well as our strategic decision to increase media spend to drive awareness of new Direct products and increase its sales lead foundation for the back half of the year. Year-to-date operating income increased to $4.3 million, up from $2.2 million last year.

Income from continuing operations was $32.7 million for the second quarter of 2013, which includes a $34.3 million income tax benefit due to partial reversal of the valuation allowance following a review of the objective evidence which indicated a -- that a portion of the valuation allowance is no longer appropriate, given recent profitability improvements. Excluding this tax benefit, our loss from continuing operations before income taxes was $1.6 million. This compares to a loss from continuing operations before income taxes of $0.7 million for the same period last year. On a year-to-date basis, income from continuing operations excluding the net income tax benefit increased to $4.3 million as compared to $2.2 million last year.

Income per diluted share for continuing operations for the second quarter of 2013 was $1.04, which includes $1.09 related to income, the income tax benefit. Excluding this tax benefit, loss per diluted share was $0.05 in the second quarter of 2013. This compares to loss per diluted share from continuing operations of $0.02 the same quarter a year ago. On a year-to-date basis, income per diluted share excluding the net income tax benefit is $0.13, up from $0.07 last year.

We reported total net income, including discontinued operations of 32.9 million, or $1.05 per diluted share, which includes the aforementioned income tax benefit. Excluding the net income tax benefit, the net loss was $1.4 million, or a loss of $0.04 per diluted share. In the second quarter of 2012, our net loss including discontinued operations was $0.2 million, or a loss of $0.01 per diluted share.

Net income for the second quarter of 2013 included income of $0.2 million, or $0.01 per diluted share from discontinued operations, and net income in the second quarter last year including income of $0.3 million, or $0.01 per diluted share from discontinued operations. Total operating expenses for the second quarter as a percentage of sales increased to 52.6% from 44.9% for the second quarter last year.

The increase in operating expenses as a percentage of sales was primarily due to increased selling and marketing expenses, which totaled $13.8 million, or 38% of sales for the second quarter, compared to $12.6 million, or 31.7% of sales for the second quarter last year. As I previously stated, this reflects our decision to invest in media spend and support the launch of our licensing initiative. We were pleased with our creative messaging surrounding our new products, as well as our existing products and believe that it is prudent to make an investment to build leads in order to help drive sales in the coming quarters.

General and administrative expenses decreased to $4 million, or 11% of sales for the second quarter of 2013, which compares to $4.3 million, or 10.8% of sales in the same period last year. Research and development costs in the second quarter of 2013 were $1.3 million compared to $0.9 million the same period last year. We continue to invest in new products at a greater pace than last year, in line with our commitment to roll out new products with a regular cadence.

Turning now to our segment results, net sales in the Direct business totaled $25.3 million for the second quarter, a 2.5% increase over the same quarter last year. Direct segment sales benefited from increased sales of our new products, CoreBody Reformer and Bowflex UpperCut, as well as strong demand for our cardio products, especially our Bowflex TreadClimber product line. This growth was partially offset by a decline in strength products.

US credit approval rates rose to 33.8% in the second quarter of 2013, up from 30% for the same period last year. Operating income for the second quarter in our Direct segment was $0.5 million compared to $1 million in the same quarter prior year. Higher sales and higher gross margins were offset by the previously mentioned sales and marketing investments we made.

Gross margin for the Direct business was 57.6% for the second quarter 2013 compared to 55.1% in the second quarter of last year. Direct business gross margins benefited from higher overall overhead operating efficiency and cost improvements.

Net sales in our Retail segment for the second quarter were $10.2 million, a decrease of 27.5% compared to $14 million in the second quarter last year. As mentioned, the Retail segment sales in the second quarter of 2012 benefited from some Retail customers accelerating a portion of their purchases into the second quarter from the back half compared to their typical buying pattern.

In addition, the overall Retail environment for fitness equipment remains soft in the second quarter of fiscal 2013. Operating income for the Retail segment was $0.1 million compared to $1.1 million for the second quarter last year. Retail gross margin was 19.5% in the second quarter of 2013 compared to 19.2% in the same quarter last year, a 30-basis point improvement, which is directionally encouraging, considering the lower volume base to absorb overhead costs this year versus last year. I would like to reiterate that we are optimistic about the back half and do expect our Retail segment to show growth and improved operating results on a full-year basis in 2013 compared to 2012.

As it relates to our consolidated balance sheet, we continue to be in a strong financial position. Cash and cash equivalents increased to $28.4 million as of June 30, 2013, with no debt financing, as compares to $23.2 million and no debt at the end of 2012. Inventories were $13.3 million as of June 30, 2013 compared to $18.8 million at the end of last year, and $12.6 million at the end of the second quarter 2012.

We tightly manage inventory and believe that inventory is at a proper level to support our sales in the back half of the year. Trade payables were $16.6 million as of June 30, 2013 compared to $32.8 million as of December 31, 2012, and $16.9 million at the end of the second quarter 2012.

At this time, I'd like to turn the call over to Bill McMahon, our Chief Operating Officer, who will provide some additional insights into our business and key products. Bill?

Thank you, Bruce.

I'd like to add a few comments regarding our operations and provide additional background on our second quarter results in positioning for the back half of 2013. Starting with our Direct business, we continue to make progress in this segment. In our seasonally slowest quarter, our cardio product lines, including the TreadClimber, continue to grow. While we routinely discuss our investments in new product advertising, it is very important for us to maintain a regular cadence of new marketing assets for our mature product platforms, as well. As such, we continue to invest in refreshed advertising in support of TreadClimber. In early July, we launched a new television ad for TreadClimber, and while it is early in this ad's lifecycle, we are pleased with the gains it has provided to date.

Our results also benefited from the performance of the Bowflex UpperCut, which was launched early in the first quarter of this year. This product leverages the strength of our Bowflex brand, combined with an innovative, yet affordable strength training package. UpperCut media response and conversion continues to exceed our expectations. As Bruce said, we have strategically accelerated our media spend in support of this product to help drive awareness and build sales leads.

While the Direct business has experienced rapid growth over the past 18 months, we continue to expect improved Direct segment in the back half of 2013 compared to 2012 due to our strategic investments. As Bruce mentioned, consumer financing approval rates improved on a year-over-year basis in Q2.

Credit approval rates do historically exhibit a seasonal trend, but on a comparison basis, they have continued to improve over the past several quarters. We remain in close communication with our credit provider partners, and based on what we know today, we do not forecast or anticipate a degradation in approval rates. We are hopeful that continued improvement in the housing market, which is highly correlated to fitness equipment sales, will drive still more improvement in the second half of 2013.

We continue to focus on developing new products to further diversify our Direct portfolio. Later in Q3, we will launch our long-anticipated fitness activity monitor, the Bowflex Boost Band. Boost is a low cost digital tracking device, integrated with a Smartphone application that allows users to set their goals across a variety of choices, and track their progress throughout the day. The digital tracking market is large and growing. With Boost, we sought to differentiate the product from existing offerings by finding segments and features not being served in the current market.

Boost features extended battery life and the ability to synchronize and track results via low energy Bluetooth versus requiring a physical connection to a computer. In short, it's an activity tracking appliance that fits the life-style of consumers, looking to measure their progress that doesn't require them to be a technical expert in doing so. The product will retail for $49.95, which is competitive in this space. We will market Boost initially via online, social media and public relations, as well as using Boost as a complement to sales of our other Direct products. More information on the product is available at our pre launch website, www.bowflexboost.com.

Lastly, in terms of our Direct business, we intend to maintain a regular cadence of product launches. The majority of our recent Direct launches have been in the lower price point product space. This is not coincidence, as we've been underrepresented in our offerings at those lower price points and felt it was strategically important to enter that space. However, our pipeline of product ideas is not limited to items below $500.

Our next launch in the Direct business will involve a midrange price point product, beginning at $999. Just as the TreadClimber changed the treadmill category, we feel this product will be an advancement within the very large elliptical machine space. We will provide more detail on this product in our Q3 earnings call in early November, and the product is scheduled to launch late this year or early Q1 2014.

Turning now to our Retail business, as Bruce described during his remarks, we face difficult comparisons for this segment in the second quarter. In addition, the overall Retail environment for fitness products has been challenging, as our Retail partners continue to be cautious with their spending throughout the first half of this year. In response to these challenges, we have been focused for the past year on developing an updated line of cardio products, including bikes and elliptical machines built from the ground up with our consumer insights and research findings incorporated into a highly competitive design. These products will first reach our partner's stores in the September/October timeframe.

We know that retailers have generally been disappointed with our overall fitness department sales over the past several quarters, and they are looking for improved traditional products, as well as new and innovative products that capitalize on evolving fitness trends. We kept this front of mind throughout the product design and development process, and we are optimistic about our new Retail portfolio and its potential in the marketplace. We have long felt that the combination of our well-recognized brands, along with high-quality products that are designed based on extensive consumer research and insight would enable us to begin gaining Retail market share and lead to long-term growth and profitability in this segment.

Based on our current order book for Q3, as well as on the very positive feedback we have received from our customers regarding the new product offerings, we feel we have succeed in our initial goal. We expect, based on our current understanding of customer buying forecast, to compare favorably to prior year in the second half and to grow on a full-year basis in Retail in 2013. I am proud of the Nautilus team's efforts to drive improvement in our Retail segment and we will see positive effect from those efforts in the second half. However, as with our Direct business, we feel this is only a first step and we intend to continue to utilize product innovation to gain market share in this space going forward.

For both of our business units, much of our strategic direction is driven by our product development road map. We are endeavoring to create greater awareness of our products via public relations and outreach efforts, often times in advance of a product launch, such that we can be reviewed in appropriate fitness and gift guides. One key new component of these efforts will be an annual product preview event, where we will showcase the new fall launches, as well as new products near launch in our pipeline. We will hold our first event on September 10 in New York City. At this event, we plan to display the new fall 2013 Retail product line and the Bowflex Boost Band. It is also a chance to potentially preview the next direct product plan to launch later this year. Information on time and location will be released closer to the event date.

Now turning to our third revenue source, which is the strategic licensing of our intellectual property and our brands. Nautilus has several known brands and we believe that there is an opportunity to better leverage these brands and potentially increase our royalty revenue. Earlier this year, we announced our partnership with the Seltzer Licensing Group to explore possible options. In June, we invested in a launch event at the 2013 Licensing Expo show in Las Vegas.

Over 15,000 product and brand licensing professionals attended this show, which allowed us to accelerate the introduction of our brands to those looking for partners. We exited the show with many new connections. We are pleased with our progress and believe that over the long term, this will be a key contributor to our top and bottom line growth. But as we stated previously, we do not expect this to be reflected in our financial results in the current fiscal year.

Regarding the licensing agreement in place for commercial TreadClimber, our partner, Star Trac, began to ship and install units in July. The product is impressive and has passed a detailed series of pre launch and field tests before being introduced to the commercial club. We are pleased with the work that's been done with this technology and look forward to seeing TreadClimber grow in the commercial market for years to come. Nautilus will derive royalty revenue based on net sales on a quarterly basis moving forward.

In summary, we're in a strong position as we begin the second half of 2013 and remain on track to deliver a solid year. We continue to launch products as planned per our strategic road map, which is designed to drive the business towards the long-range objectives that Bruce has outlined for Nautilus. Additionally, we feel we have a strong ability to support current and future products with a full portfolio of highly recognized brands and diverse marketing capability. With the launch of our new fall 2013 products, we will have improved the foundation of our Retail business and believe that we are on a path returning to growth in this segment over the next several quarters. We are confident about our new product pipeline and look forward to discussing our plans further later this year.

Now I'd like to turn the call back over to Bruce for his final comments. Bruce?

Thank you, Bill.

Before opening up the call for questions, I would like to take a few moments to comment on the business in general. Over the past few years, we have made tremendous progress and built a much stronger foundation for Nautilus, including an expanded product portfolio and improved gross margins, while continuing to operate in a lean and efficient manner to leverage our infrastructure over increasing revenues.

Our formula for growth remains the same; to drive top and bottom line growth by increasing the demand for our existing products, while strategically launching new complementary innovative fitness solutions.

Concurrently, we are also focused on supporting our products with the proper levels of investment in marketing and media, including developing the right creative content. Our Management team remains confident that the course we are on is the right one and we will continue to advance priority initiatives with a brisk pace, while also proceeding cautiously and with patience when appropriate.

That concludes our prepared remarks, and now I would like to open up the call for questions. Operator?

(Operator Instructions)

Reed Anderson, Northland Securities.

Couple questions. First, I want to follow up on the expense timing. You talked about media spend feeling like it made sense to ramp that up. And then some of that also looks like was related to launching licensing-related stuff. Bruce, I'm wondering if you could quantify that or give us a sense of the order of magnitude? And then secondly, just from a timing standpoint, is this something you were contemplating throughout the quarter or was there an event or something that triggered it as the quarter unwound and you decided you know what, we got to do this now? Just want to get a sense of what you were thinking.

Yes, the -- I think it became apparent more during the quarter that it made sense to do it. Remember, we launched UpperCut as an example in January and the first few months, we were feeling out in terms of what -- testing different creative messages, et cetera, and media plans. As we got into the second quarter, it became apparent that this is an item that we needed to support at a higher level than what we normally would do as a product goes through its first few quarters of introduction. So I would say it was more during the quarter. In terms of order of magnitude, it's approximately the difference between last year versus this year in terms of media spend increase. And that'll be more apparent in our Q when it comes out later this week.

Okay, got you. And so -- okay, that's helpful. And would you say the same in terms of similar rationale when you talked about the incremental spend you had to get the licensing launched or was there other factors related to that?

Yes, Reed, this is Bill. Good afternoon. The licensing was not nearly as high an investment as the media was. But certainly, it was incremental spend in order to support a show.

Okay, and then back to that -- back to the media piece of that, what was the -- did the incremental dollars go towards more creative, broader distribution? Just qualitatively, what was it directed at?

Primarily media versus creative and apparently in support of new products as compared to last year, where we weren't on TV with new products as much.

Okay, that's very helpful, thank you. And then on the Retail side, the -- you talked about shipping the new products and you feel very -- obviously you've got some nice visibility there over the near term. You're going to be shipping those in 3Q. When -- from a consumer standpoint, will those show up in your core customers, your Retail stores, the bigger chains, that kind of thing? Will they be there in the third quarter or will they may not hit the floor until fourth quarter?

Most likely October timeframe.

Okay.

That's usually when the floor sets are happening. Certainly, they will buy in Q3, but floor deployment is based on several factors, not the least of which is clearing out other product to make room.

Okay, that's great. And then a follow up to the Retail piece is again, as you look at your order book and who's interested in that product, it sounds like you've got some pretty broad excitement there, is it a lot of the same customers you've had in the past, again, thinking more of the core bricks and mortar retailer, or are you seeing some other people garner some interest here as you've got now really a new line?

It's a little of both, Reed. We certainly expanded with the majority of our core customer base, but we have layered in some new customers that we can't speak to specifically yet. But you'll certainly see our product show up in some new places this fall.

Okay, good. And then last one, and then I'll let somebody else jump in. Bruce, so you had -- in the Direct side, you had huge growth in the first quarter, a little bit -- it's a little bit slower in the second, but net, net on the six-month basis, you're still up a nice teens rate. Does that cause you to think differently about the second half in terms of growing that Direct business, whether it's a double-digit rate or whatever? Is there anything that's changed there or just curious of your thoughts as we look in the second half on the Direct.

No, nothing's changed, Reed. There's still a lot to be done in Direct and the growth trajectory that we've called out in some of our presentations in the past is the pace that we expect to continue.

That's great. Thanks, guys. Best of luck.

Joseph Munda, Sidoti & Company.

Real quick, let's -- first off, I want to start with the CFO search and you guys had said that it's still early in the process. I'm wondering, any idea on the number of candidates that have been interviewed? Have any been interviewed? And when do you expect a resolution?

It's difficult to say, because we are, like I said early in the process, Joe. We have probably a handful already that we've talked to. We're in the initial, what I would call the initial screening phases. So it will take some time and we will have the help of a national search firm to send out a broad net, to make sure it's not just the referrals that we're looking at, but actually a proactive search out for people who may not even be aware of the opportunity.

Okay, that's helpful. And then I assume, Bill, the unallocated corporate expense you guys were talking about was the licensing for the show. Is that -- was that that expense, that $2.4 million in the quarter?

Unallocated corporate expense, that would include a lot of other things, including incentives and things like that, Joe. The licensing will show up in the sales and marketing area, and I don't think we allocated to Direct versus Retail, it's just unallocated. But it's -- as Bill said, it's -- there is expense of the show. There's also some expense getting it off the ground with our licensing agents and partner.

Okay. Okay and then as far as some of the other products that you had launched, the fitness DVD, any word or any news on that?

Yes. On the DVD sales, we're finding it's a pretty crowded market and I'm not sure that that product's going to justify television advertising in the near future. We take a look at a lot of opportunities there, but the DVD product is not a major element of our sales at this point. We certainly continue to evaluate the space, though, to see if we can find some messaging that would work.

Okay. And then on the Boost Band, is that something that would get allocated TV ad spend? Or is this more -- I know you mentioned you're going to launch it on the site. But I know of a number of products, and I'm not going to name competitors, that have already made headwinds in the space, much like a DVD, and I'm just wondering how you guys are going to position that product when it launches.

Yes, Joe, it will not be a TV product in the beginning. We feel like we have enough extensibility through our online and PR efforts, as well as the ability to tag it on as part of our existing Direct marketing efforts, that we can grow awareness that way in the beginning. As the product proves itself out, we'll certainly evaluate ways to expand it or perhaps share it between Retail and Direct moving forward. But for now it makes for a pretty effective way to enhance our Direct sales against our existing marketing spend. So we're going to initially launch it that way.

The other thing I would add, Joe, is the product -- is we studied the marketplace pretty carefully and it's part of the reason that we retracted the original launch we had scheduled, if you remember, last year in order to come up with something that's even more compelling. So we studied what's out there, and we have a very compelling proposition in terms of the value. And it will appeal to different people than some of the products that are out there that you might be aware of. So it's a big market and we've got a unique proposition. And we got a really good value in the form of $49.95 for what this product does.

Yes. No, that does seem like an extremely nice number to -- a nice purchase price to go off that for consumers. My other -- I have two more and then I'll hop back in. Even though Retail sales were down, gross margin actually improved in the quarter and I just want to know, is this going to be a trend that we're going to see going forward or is this more of a product of variable cost and volume in the quarter?

No actually the volume would have been a detraction from the margin improvement. That's -- when we start to see more volume in the back half, you should start to get better leverage of the overhead, warehousing costs, et cetera. So that should help with margins in the back half. So that -- that's -- it's all driven by the new product, the margins of the new product and the increased volume that we anticipate in the back half, that Bill and I commented on.

Okay, and then just one final and I'll hop back in. You guys have been making tremendous headway domestically. I was wondering if any plans internationally going forward, any new markets that you're taking a look at? I mean, you guys are sitting on $28 million in cash and no debt. Just wondering what the plans are possibly to go internationally going forward.

Joe, this is Bill again. We definitely have aggressive hopes in international sales. And this quarter, our international Retail sales were up quite a bit, which is to say we are against an extremely low base and we're seeing many multiples of improvement. I think that comes from product. We're looking for good distributors around the world, we've identified several already. Now we need to give them internationally compliant product to begin to flesh out our product lines globally. The new model year '13 product in Retail is compliant for sales in Europe and pretty much everywhere else in the world. So we're hopeful we'll be able to -- part of the Retail growth will come from continuing to accelerate our international efforts.

Okay, thank you. That's very helpful. I'll hop back in the queue.

(Operator Instructions)

Ian Corydon, B. Riley & Company.

A lot of my questions have been answered. On the Boost, do you expect that to have gross margins that are roughly similar to your Direct gross margins?

Maybe a little bit less, given the lower price point, but certainly still high margin. And without an initial TV spend to support that, Ian, it still will be quite profitable against the bottom line.

Okay. And then also in the Direct Segment, could you give us a sense for how much of a headwind strength was in Q2? And then it sounds like you're looking for a healthy increase in revenues in the back half in Direct. Do you expect that strength will be up or will strength continue to be a headwind there?

On the Direct Segment, Ian, we continue to see some decline in that segment, though it is beginning to slow. We do anticipate revenue growth in Direct every quarter, but I don't know that strength will be positive contributing going forward. We just anticipate that it'll continue to level out in the long term. UpperCut will begin to help that, but UpperCut's gains are being offset a bit by the legacy home gyms continuing to ramp down over time. There'll be a crossing point for that, but I don't think it's near term. I should note, though, that the home gym market and strength is doing better in Retail. So some of it is lower price point strength product home gyms are performing reasonably well in the retail space. And both channels are seeing reasonably good strength performance in Canada. So we think that even though home gyms may be a little bit weaker in the United States, there's certainly markets for them that we continue to explore.

Got it. Thank you very much.

(Operator Instructions)

There are no further questions at this time. I'll turn it back to Management for their concluding remarks.

Okay. Thanks, everyone, again for your participation and interest in our call today. We look forward to speaking with you next in our third-quarter 2013 conference call in November. Thank you again.

Ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation and ask that you please disconnect your lines.