Q3 2019 Earnings Call
At this time I would like to turn the conference over to Mr., John Mills I see our please go ahead Sir.
Thank you. Good afternoon, everyone. Welcome was always just third quarter 2019 conference call.
Participants on the call from novelist, Jim Barr, Chief Executive Officer, Bill Mcmann special system to a CEO .
<unk> Senior Vice President innovation, and engineering and they walk Smith senior director of Finance.
Earnings release was issued earlier today, maybe downloaded from our website at <unk> Dot com on the Investor Relations page. The earnings release includes a reconciliation, but non-GAAP financial measures mentioned in today's call to the most directly comparable GAAP measures also on today's call, we're gonna be referring to a slide presentation deck.
The jumble will will discuss the access this presentation. If you would please now go to our website Nautilus eat dot com and the investor presentation will be under the events and Webcasts section.
Remarks on today's conference call will include forward looking statements within the meaning of the securities laws. These include statements concerning financial projections operating trends anticipated growth and profitability anticipated timing and market acceptance of new product introductions planned investments in strategic and operational initiatives.
And the anticipated or targeted results such initiatives expected growth of our user base consumer and retail demand for products and the impact.
New product introductions and marketing campaigns on our future financial results planned capital expenditures and anticipated results of new product business development initiatives and strategic partnerships.
These statements are subject to a number of risks and uncertainties and actual results may differ materially from these statements additional factors that could cause <unk> actual results could differ materially from these forward looking statements include weaker than anticipated demand for new and existing products, our ability to timely acquired inventory that meets our quality control standards from sole source for him and.
Factors that acceptable cost experiencing delays in or greater than anticipated costs in connection with launches a new products entry into new markets, where strategic initiatives, including recurring revenue offerings, our ability to higher and retain key management personnel changes in consumer business trends and our ability to dissipate.
And satisfy consumer preference in a timely manner.
Changed in the media consumption habits of our target consumer or the effectiveness of our media advertising decline in consumer spending due to unfavorable economic conditions and softness in the retail marketplace for more information about these risks and uncertainties. Please refer to that age earnings announcement and our most recently annual report on Form 10-K .
At supplemented by our quarterly report on Form 10-Q .
Nautilus undertakes no obligation to update publicly released any revisions to forward looking statements to reflect new information events or circumstances. After they were made or to reflect the occurrence of unanticipated events.
All information.
And comments regarding our operating results pertain to our continuing operations.
Otherwise noted that it's my pleasure draw on the call over to the knowledge the CEO Jim Moore.
Thank you John Good afternoon, everyone and thank you for joining our call today.
I have now been CEO of novelist for 90 days.
Welcome to Nautilus has been energizing my on boarding going well and I'm spending time systematically learning our businesses.
Well continuing my education I am also balancing near term decisive actions and holiday season execution, well diving into a longer term strategic review.
So far I'm very encouraged about the opportunities ahead for our company and I'm convinced that we have the right raw materials for a good come back story.
We have on top of industry brand reputation over decades innovative design sourcing great products and standing behind them.
As a result these brands remain very strong in the market. In addition, we provide customers with great choice.
They can choose from multiple modalities of equipment, they can choose their price points and features.
From budget conscious to top of the line technology Laden models.
As an Omnichannel company choice, even extends to multiple ways to buy direct at leading retailers and through commercial channels.
The team at some of the best talent in the industry and the culture is strong with little resistance to change in contrast to many other growth transformation.
Even some I've witnessed firsthand.
A positive development has been our differentiated digital platform, which is now manifesting itself in exciting product offerings entering the market.
When I decided to take the position of CEO I knew we would face significant challenges.
I have confirmed the belief that my background, the digital products and marketing.
And my experience driving growth transformations that legacy brands in several industries in the face of technological disruption and changes in value proposition. It's a strong fit for the areas that need improvement not less.
Our recent results are indicative of there being a lot of work to do but I'm convinced we can reclaim our leadership position in the fitness industry.
Even though being CEO for a few months is not enough time to make a full and proper assessment of our overall business, especially in our busiest season I thought it might be helpful to share a few initial high level observation.
First our direct business has been declining for several years and thus I do not expected to recover in just a few quarters.
There are multiple causes including adjusting to evolving shopping habits and media consumption.
What's your changing at an accelerating pace.
We are actively mining insights from consumers and are making adjustments to better deliver the right marketing message to the right audience at the right time.
Recently based on extensive consumer insight work, we launched a brand positioning for Bowflex as well as a new advertising campaign stronger everyday.
The campaign better positions us for where the market is today.
We have provided links to these TV spots in our materials to give you a sense of this positioning.
We're just beginning to enter our heavier spending period and believe the campaign will resonate and the one important step to meeting this challenge.
We have worked to do to return this channel to profitable growth.
Second.
Technology is driving our industry in a great direction for both customers and fitness companies through connected fitness, we know more about where they are in their fitness journey.
We can engage frequently with them to assist them in meeting their goals.
We can help motivate users so they stick with it for a longer in short we now have more ways to deliver on our long standing mission to make fitness more attainable and motivate people to live healthier lives.
One current challenges that this is attracted competition at times, making it more difficult for our messages to be hurt when these entrant strongly outspend us to build their brands.
We need to strive for strong and sustained innovation in overall fitness, while making sure our brands get credit the credit they deserve for.
For our connected fitness experience, which now spans software content and machine.
Ultimately that experienced still centers around a wide choice of reliable and attainable equipment across multiple modalities and price points, which we intend to continue to deliver.
Third one size does not fit all which is why our <unk> product portfolio is so comprehensive spanning several brands extra diet exercise modalities and price points, providing many choices and home fitness versus one brand or one or two types of equipment.
This also helps protect us against in the inevitable up and down popularity of any particular type of equipment.
Today, our digital product offerings are strong and differentiated we're squarely in digitally connected fitness space.
However, I wish we we're further along and getting the platform on more products in our broad portfolio.
We're making progress including several recent connected fitness launches I'll discuss on this call.
But I won't be looking to accelerate connected fitness through the portfolio, giving customers even better choices sooner.
Finally, as someone has spent a lot of my career driving omnichannel growth I am pleased we also give consumers great choices to buy.
Our retail channel in particular has good growth potential has been profitable and should provide a meaningful economic base, while we correct and improve our direct channel.
These are some initial observations, but as mentioned we have initiated a full assessment of our overall business.
From this we plan to create a new insights driven long term Truenorth division and multi year strategic plan.
Which we will unveil and transition to during 2020.
A durable vision and plan takes time to get right. However, I assure you we won't wait for the plan to begin to move into right direction.
I'd now like to provide a quick overview of our third quarter 2019 result.
Discuss our business segments as well as our new product offerings, and then turn the call over today to review our financials in more detail.
I will close with a few final remarks before opening up the call to your question.
We experienced declines in both of our segments in the third quarter. The decline of our direct segment is primarily related to our 37% reduction in advertising expense compared to the prior year.
As discussed in prior calls we intend to increase this AD spend in the fourth quarter to support new offerings and improved advertising and messaging.
Retail sales were down 27.1% from the same quarter in the prior year, primarily reflecting partial shipment delays until the beginning at the fourth quarter due to recently imposed tariffs and some weakness is from Max trainer sales in the segment.
Although overall results indirect segment have been disappointing we had been pleased with the recent rollout of our new Max total product.
It has done well and we're looking forward to its performance in the fourth quarter holiday season, and the first quarter 2020 fitness season.
This new trainer features the company's first integrated digital touch screen that directly connects the user to the features of our upgraded AI powered journey digital platform.
The next total also delivers it connected fitness experience incorporating both a cardio and upper body workout in as few as 14 minutes with customized personalized coaching driven by built in machine learning capabilities.
Last week, we relaunched our digital platform under the new journey, Brent the name reflects our belief that fitness as a lifelong pursuit.
It is our goal to accompany users on this journey and help them stay with fitness for the long run.
The new brand also makes it easier to enable it connected fitness experienced across our portfolio of brands and modalities converging into one digital platform that we expect to be leverage throughout our product portfolio.
At its core journey features an AI driven troop personalization engine that suggests customized workouts and adjust to individual fitness levels, along with friendly coaching that customers tell us feels a lot like having an on demand one on one personal trainer.
Journeys adaptive coaching technology uses algorithms data from and initial assessment and tracking from previous workout to create personalized daily workouts based on the users fitness goals.
Each custom workout as adjusted automatically based on input about how the user is feeling how much they improve.
And their past performance.
In addition to the true personalization engine journey features and ray of choices to motivate and entertain during workouts.
This starts with our proprietary explore the world experience, which allows users to virtually train and locations across the globe from the Irish countryside to the beaches of Australia via high definition video.
This will launch featuring numerous locations and we expect it to be available later this year.
Journey also features an expanded library of trainer led workouts based on a user's fitness level.
Personalize running and walking coaching for treadmill users and additional rewards to celebrate achievements and motivate users to complete their workouts.
Journey also gives users a curated matching music.
The matching their music matching their workout and access their streaming entertainment subscriptions, including Netflix Amazon Prime video and who.
Journey is integrated onto the new Bowflex Max total and is available via an app for selected Bowflex results series Treadmills. It will be made available on more bowflex Nautilus and schwinn equipment overtime.
Before I leave the discussion of our digital platform I'm excited to report that subscribers to journey, our working out 70% more than non subscribers, which is a great early indicator of the exciting ways. We can achieve our novel mission through technology.
Moving to the cycling category I'm proud to say that in late October we debuted the first ever Bowflex indoor bike for the direct channel that delivers an excellent connected fitness experience.
The Bowflex CSX bike features and open platform. So users can connect with our explore the world App as well as third party cycling apps, including peloton and Swift.
We're very excited to now offer bike users a more attainable and affordable option under the Bowflex Brad.
In fact, the Bowflex CSX delivered a great connected fitness experience at less than half the price of some of our competitors.
We're also continuing to expand our digital platform across our portfolio with the new Schwinn IC for bike and the 810 treadmill both of which we also launched in October .
While we are very excited about these new offerings, we still have a lot of work to do to improve the business.
We are developing actionable insights meaningful innovation and increasing our digital focus in marketing and in our products.
Look forward to speaking more about this transformation in the coming months in the meantime, we will do all we can to shore up our short term financial performance to give us the runway to execute our transformative strategy.
And now Dave will provide an overview of the financials for the quarter Dave.
Thank you Jim.
I would like to review the details of our financial results for the third quarter of 2019.
Net sales for the third quarter totaled 61.7 million a decrease of 32.2% as compared to the same period in the prior year, reflecting a 44.1% decline in direct segment sales and a 27.1% decrease in the retail segment.
For the first nine months of 2019 net sales were 205.1 million down 27.1% compared to the same period last year.
Third quarter gross margins in the direct segment decreased to 38.3% compared to 57.3% in the same quarter of last year and retail segment margins declined to 27.1% compared to 34.7% in the same quarter of last year.
Margins in both segments were negatively impacted by unfavorable product mix, coupled with unfavorable overhead absorption related to the decline in sales.
On an overall basis total company gross margin for the third quarter 2019 were 30.9% versus 42.3% and the same period of the prior year, reflecting the lower rate in both segments.
The first nine months of 2019 gross margins were 35.3% a decline of 11.3% from 46.6% in the first nine months at the same period last year.
Total operating expenses for the third quarter of 2019 as a percentage net sales increased to 44.3% from 35.5%. The same period last year, primarily reflecting a decrease in sales.
Total operating expenses for the first nine months of 2019 as a percentage of sales were 85.9% that's compared to 40.1% in the same prior period.
Operating expenses for the first nine months of 2019 included a $72 million of goodwill and intangible impairments.
Sales and marketing expense for the third quarter, 2019 was 17.5 million or 28.3% of net sales as compared to 20.6 million or 22.7% on sales and the same period last year.
The decrease dollar spending reflected a reduction in media spend partially offset by increased advertising production costs.
The increase in sales and marketing as a percentage of sales reflects a decrease in sales.
For the first nine months of 2019 sales and marketing expenses totaled 69.1 million or 33% net sales compared to 79.5 million or 28.2% net sales for the same period in the prior year lower media spend and financing fees being partially offset by increased advertising production costs.
General and administrative expenses were 6.7 million or 10.9% net sales for the third quarter of 2019, which compares a 7.5 million or 8.2% him net sales in the same period last year.
The decrease dollar spending and Jna, primarily reflects lower litigation expense.
General and administrative expenses at the first nine months of 2019 as a percentage of net sales totaled 11.6% as compared to 7.4% for the same prior period.
The increase in DNA as percentage of sales reflects the decrease in sales as well as higher litigation expense and a legal settlement completed in the second quarter of the current year.
Research and development costs in the third quarter of 2019 were 3.1 million or 5.1% net sales compared to 4.2 million or 4.6% percentage of net sales and the same period last year.
The dollar decrease primarily reflects an increase internal capitalized labor and a reduction in third party App development spending.
Research and development expenses for the first nine months of 2019 as a percentage of net sales totaled 5.5% as compared to 4.5% for the same prior period.
Operating loss for the third quarter 2019 was 8.3 million as compared to operating income of 6.2 million the same quarter of last year.
The decrease reflects the declines in sales and gross margin rates along with increases in advertising production costs, partially offset by lower advertising expense.
EBITDA loss from continuing operations in the third quarter of 2019 was 5.5 million versus income of 8.5 million for the same quarter the prior year.
The first nine month first nine months of 2019 operating loss was 103.8 million as compared to operating income of 18.1 million and the same prior period.
Year to date operating loss includes goodwill and intangible impairments of 72 million in the second quarter.
Loss from continuing operations for the third quarter of 2019 was 10.6 million or minus 36 cents per diluted share as compared to income of 4.5 million or 15 cents per diluted share for the same period last year.
For the first night first nine months of 2019 loss from continuing operations was 97.8 million or $3.30 per diluted share as compared to income of 13.7 million or 45 cents per diluted share the same period last year.
The effective tax rate for the third quarter, 2019 was minus 21.9% compared to 29.3% and the same period last year.
Tax expense and the current year quarter included a 3.9 million evaluation allowance against the company's deferred tax assets to reduce the assets to anticipated realizable value based on our recent financial performance.
Total net loss, including discontinued operations for the third quarter of 2019 was 10.7 million or minus 36 cents per diluted share which include a 0.1 million loss net of taxes from discontinued operations.
This compares to the third quarter last year, when we reported total net income, including discontinued operations of 4.3 million or 14 cents per diluted share, which included a net loss from continuing discontinued operations of 0.2 million.
Year to date net loss for 2019 toll 98.1 million or $3.31 per share versus income of 13.3 million or 44 cents per diluted share for the first night nine months of 2018.
Turning now to our set of results net sales for the direct business totaled 16.2 million for the third quarter of 2019 44 point.
1% decrease over the same quarter last year.
The decline was primarily from lower sales a max trainer products and was related to a 37% reduction in advertising expense compared to the prior year quarter as a company prepared to increase spend on a new advertising campaign and the fourth Corp fourth quarter of 2019.
2019 year to date sales of 83.7 million in the segment were down 38% year over year.
Gross margin for the direct business declined to 38.3% for the third quarter of 2019 compare to 57.3% and the same quarter last year due to unfavorable overhead absorption related to lower sales coupled with unfavorable product mix due to lower Max trainer sales.
Operating loss for the third quarter 2019 in our direct business was 8.7 million compared to a loss of 1.4 million and the same quarter of the prior year.
The operating operating loss was negatively impacted by the by the lower net sales and gross margins in the third quarter 2019, partially offset by reduced advertising expenses.
Good day 2019 operating loss for the direct segment totaled 19.6 million compared to income of 10.7 million and the same prior year period.
Net sales in our retail segment for the third quarter of 2019 were 44.8 million a decrease of 27.1% compared to $61.5 million in the third quarter of last year.
The decrease primarily reflected the delays and product placements until the beginning of the fourth quarter 2019, resulting from recently imposed tariffs as well so decline and Max trainer product sales.
Gross margin gross margins for the retail business decreased by 760 basis points to 27.1% and the third quarter of 2019 as compared to 34.7% for the prior period, mostly from unfavorable product mix and and favorable overhead absorption unrelated to the lower sales.
You today 2019 gross margins for retail were 23.9% down and our 20 basis points versus the same period in the prior year, primarily driven by similar factors.
The third quarter of 2019 operating income for the retail business totaled 4.8 million as compared to income of 12.7 million and the same period of last year. The decrease is primarily attributable to the lower sales and gross margin rate.
To date 2019 operating income for the retail business totaled 3.8 million versus 20.2 million for the same period in the prior year.
Now turning to the consolidated balance sheet cash totaled 5.8 million as of September Thirtyth 2019 were 20.3 million of debt.
This compares to 63.5 million and cash and marketable securities and debt at 32 million at December 31 2018.
The company at 12.7 million available borrowing on this line of credit as of September Thirtyth 2019.
Inventories were 50.1 million as of September 32019, compared to 68.5 million at December 30, Onest 2018, and 35.5 million at September 32018.
The decrease is primarily reflect our efforts to reduce inventories from the higher than desired levels. We ended up in December of 2018.
Trade payables were $38.5 million as of September 32019, compared to 87.3 million at the end of 2018, primarily reflecting seasonality of purchases.
Capital expenditures totaled $6.6 million for the nine month ended September 32019, we're spending primarily on new software systems and production tooling and equipment.
We anticipate full year capex to be in the range of eight to 10 million.
At this time I'd like to turn the call back over to Jim for his final comments Jim.
Thank you Dave.
Not list as a company with multiple strong brands, including Bowflex, Nautilus octane fitness and schwinn, which are among the most recognized fitness brands in the world and our equipment is known for its tremendous results.
We now need to combine our improving product offerings with advertising and messaging that delivers the right message to our customers at the right point of contact.
We also needs to continue launching innovative products drive connected fitness across our portfolio and keep improving our digital platform.
Our efforts to rightsize the business announced in July are progressing and we expect to save approximately $6 million in workforce and shared support cost reductions in 2020.
During the fourth quarter, we expect to achieve positive cash flow from operations and positive EBITDA from offer up from continuing operations.
There's a lot of work to do this turnaround is not going to occur overnight. However, I expect we will make good progress each quarter and I look forward to telling you about it as we do.
Our entire company is aligned in our goals and the belief. So we will restore nobilis to its leadership position in the fitness industry.
And now I'd like to open up the call to your questions operator.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad confirmation John will indicate your line is another question can you May press star too if you would like to remove your question from the Q.
Participants using speaker equipment, and maybe necessary to pick up your handset for pressing the star keys.
One moment, please call me poll for questions.
Just first question is from Michael Swartz with Suntrust. Please go ahead.
Hey, good afternoon guys.
Just wanted to start off with the retail side of the business trying to just trying to understand what exactly occurred in the quarter with regard to the tariffs was this something related to cancellation of direct import orders and you were forced to import them yourself or maybe just help us understand that I guess, maybe also how much.
Revenue that shifted between the quarters.
Yes, Hi, this is bill so the impact was not really cancellation of orders so much as renegotiating in light of the new cost structure related to the tariffs that position and the biggest challenge was there was really know runway in posed to allow us time to do this.
In fact, we at product on the water that was already subject to the increase tariffs at the time. It was announced so it was a bit of scrambling I can tell you that those shipments, which I believe Dave was six roughly 6 million.
Impacted have already shipped in Q4, so it really was literally down to the hours of trying to hit the deadline to make Q3 still with all the renegotiation that had to happen.
Okay Thats great. Thank you and then I know I know we're in early days here and part of this turnaround and new product and connected fitness platform, but have you given any thought to maybe but the margin structure of this business should look like longer term I know theres. Some targets that were put out years ago, but just trying to see if you have any.
Any general thoughts on that.
No I don't think we have anything really to share at this point I mean, it would be part of our true north strategic planning to take a look at the trade off we have obviously there are impacts.
On a positive and negative too.
Connected fitness, you've got large screens that constitute a larger.
Part of the cost of goods sold but then you also have revenue streams that that weren't in the original model. We we have our own internal view of that but we've not we have not gone to the point, where we would share any of that.
Okay. Thanks, a lot.
Yes.
The next question is from George Kelly of Imperial Capital. Please go ahead.
Hi, guys. Thanks for taking my questions.
Hi, George.
So more questions on the retail side.
It's that segment has been a bit week now for a few quarters.
So just wondering if theres anything else you can talk to I don't know fits the category has seen more pressure or others.
Too much retail inventory or a loss of share.
Just wondering if you could go into more sort of deps about.
What else is has now that you've been here for several months if theres any other observations about the retail business.
Yes sure. This this is Dave so I think aside from the I mean, I think it the first half the year. There was the high level channel inventory, which we've talked about in previous calls and that has.
Fix itself.
Aside from the tariff issue the one other.
A dynamic going on is just as Max trainer within the channel.
And I think just some of our.
Since it's been selling through a little slower in the first half the year in a little bit ended last year I think customers at this being more concerned about how much inventory they want to take on that.
And and does Max trainer still representing a pretty material portion of.
Your retail business.
I mean, it's material.
Yeah Okay.
Okay and then.
So I guess just as you look forward in retail then I mean should the fourth quarter is it too soon to expect to kind of.
Returning to more.
Flattish or positive revenue growth or what's what's your forward outlook.
Until business.
Yeah, we're not providing guidance actually on the on the topline and the segment at this point, but I think.
In general I think the the normal seasonality what would apply as well as those shipments I didnt happen in Q3 are definitely rolled into Q4.
Okay, Okay and then.
Next question for me just on the balance sheet.
Can you that was helpful.
I think I heard just say positive cash flow from operations in the fourth quarter.
Anything else you can share just about.
Your inventory expected inventory at year end or her availability on your facility and anything else I just.
It would be helpful.
Sure. Thanks regards the facility.
It's the abilities based on the amount of working capital primarily accounts receivable and inventory, we have and generally seasonality wise, we end up with a higher amount of account receivable at the end of the year, so that should be positive in that regard.
On the inventory side, we know we fit as we said we finished high last year and our goal and turtles dropped by around 10 million at the end of this year.
Okay. Okay.
Dropped at $10 million versus the close to seven so inventory could come back up in the fourth quarter.
Correct, Yes, because you guys remember that we're still we saw the fitness season continues onto Q1. So we still have enough inventory position at the end December support that.
Okay alright. Thanks.
Thanks George.
There are no further questions at this time I would like to turn the floor back over to Jim Barr CEO for closing comments.
Thank you for joining our call today and your continued interest in not Atlas, we look forward to providing you with another update on the business in a few months on our fourth quarter earnings call have a great rest of the day onwards and upwards.
This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a great day.
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