Q1 2020 Earnings Call

[music].

Thank you for standing by the conference will begin shortly.

[music].

Good day and welcome to the Nautilus Inc.'s first quarter 2020 earnings results Conference call.

This conference is being recorded at this time all participants are in listen only mode. A question answer session will follow the formal presentation.

At this time I would like to turn the conference over to Mr., John Milton I see our please go ahead Sir.

Thank you good afternoon, everyone welcome to Nautilus, its first quarter 2020 conference call.

It depends on the call from Nautilus or Jim Barr Chief Executive Officer.

I know cone old Chief Financial Officer.

And Bill Mcmann special assistant to the CEO.

Our earnings release was issued today it went up by PM Pacific time, and maybe downloaded from our website at Nautilus Inc. dotcom.

On the Investor Relations page.

Earnings release includes a reconciliation of the non-GAAP financial measures mentioned in today's call. The most directly comparable GAAP measures.

For today's call we have a presentation accompanying the call that management will refer to during their prepared remarks and on slide two is our full safe Harbor statement I would like to remind everyone that during this conference call novels management will make certain forward looking statements. Instead, we ask that everyone read our safe.

Harbor statement in the presentation.

You can access the presentation by going to Nautilus Inc. Dot com.

Then click on the Investor tab.

And then click on the events and webcast and the presentation will be on that page.

And with that it's my pleasure to turn the call over to Nautilus, the CEO Mr. Jim bar.

Thank you John.

Afternoon, everyone and thank you for joining todays call.

Our first quarter of 2020 started out as a good quarter and turned into a much stronger quarter. Thanks to the agility of our entire organization as we captured the higher demand for home fitness products, primarily due to cold in 19 stay at home orders.

We achieved stronger than expected results, including revenue growth of 11%.

Realized our first positive comps since the third quarter of 28 team.

Lowered operating expenses.

And dramatically exceeded our EBITDA estimates.

I'm incredibly proud of how our team came together to sport support one another their families our communities and our customers.

Keeping our business vibrant and moving forward during unprecedented times is facing a series of challenges.

During the cold at 19 pandemic, our first and foremost priority was and continues to be the safety of our employees customers and partners.

For government orders were in place and the jurisdictions, where novelists operates we implemented our work from home policies for most employees worldwide.

While continuing to provide leading customer care.

Our distribution centers remain open for both receiving and shipping with strict guidelines on social distancing and worker health and safety protocols.

A top priority for our entire organization is to serve customers during their time of neat.

Thanks to our company's agility focus and persistent hard work, we've been able to meet most of our customers' needs.

As we enter the second quarter, we continue to benefit from the surging demand for at home fitness and our company's ability to respond.

Fortunately, our well recognized brands.

Brett and quality of our strong product portfolio.

Channel capabilities have enabled us to serve both existing customers and those who are just now learning about our company and our offerings for the first time.

In crisis, we saw a flight to our quality brands as consumers look to address their fitness needs.

It was a time, where we were reminded of the pay off of our long term investment in brand reputation and brand building.

Our our product portfolio, featuring both cardio and strength offerings, a variety of types of equipment and most multiple price points.

Gave customers outstanding choices.

And the individual strengths of both of our primary sales channels direct and retail were evident during the first quarter.

The direct channel permits rapid response to changes in the market, we could read new trends in response near real time.

And the retail channel allows us to offer greater fulfillment options, so that consumers can buy when where and how they prefer.

Looking forward for the remainder of 2020.

We believe we're well positioned with the right team products and brands to bring our company back to a leadership position in home fitness.

As an example were excited to be introducing a strong lineup of new product offerings in the fall for both retail and direct channels and we'll provide more information on these and our second quarter call.

Turning to our very strong first quarter result by channel.

Our direct net sales increased for the first time.

Year over year since 2017.

Increase sales were driven primarily by strength products, including Bowflex, Selecttech and Bowflex home gyms.

Cardio products sales decline at strong demand for our connected fitness bikes, the bowflex see six and the schwinn IC for we're not enough to fully offset continued declines in our Max trainer.

In addition to achieving its first positive comps since 2017 I wanted to share. Some other direct statistics to give you a flavor of the spike a spike in demand in the last few weeks of the quarter.

On Bowflex Dot com, our highest volume website March visits revenue and conversion rates all exceeded December 2019, typically our holiday season peak demand.

The spike in visits on Bowflex Dot Com was driven primarily by organic traffic, which was up nearly 300% versus March 2019.

In the full month of March Bowflex Dot Com revenue grew 140% versus March 2019.

And for the second half of March Bowflex Dot com revenue increase over 250%.

Our swim fitness dotcom site saw similar dynamics in the first in the full month in March our revenue was up nine times compared to March 2019, and in fact has already exceeded all of the rep revenue at produce for all of 2019.

We wanted to give back to our customers during a trying times by giving way 30 of our top of the line backs totaled in April This gave us an opportunity to highlight this terrific product when our website traffic was so high to date, we've collected over 150000 entries.

Paul Center sales were also strong operating at or above typical holiday peak levels.

Revenue per day for the last half of March with 80% higher than December 1920, Nineteens holiday volume.

We pulled back on television advertising as we generated sufficiently strong demand without it.

Focusing on digital and social channels, reducing our overall spend and increasing our ROI on ad spend.

[noise] also able to reduce the level of promotional pricing as we monitored competitors and our own strong demand.

We worked our way through selling our most popular products and then generated demand on some that we've not sold that strongly recently.

Our retail segment was up 24% with strong growth coming from both strengthen cardio products sales.

Frank sales were driven primarily by strong demand for Bowflex Selecttech 552 adjustable weights.

Cardio sales were driven by the schwinn IC for connected fitness bikes, and partially offset by declines in octane fitness equipment as Jim closures have begun to affect sales of commercial grade equipment.

Although numerous retailers have temporarily closed store locations due to covert 19, bowflex in schwinn experienced strong year over year sales increases through retail partners E commerce and curb side pickup platforms.

Our bowflex Selecttech five five to west 'cause it was a consistent hot seller on Amazon, including one day, when we sold 6000 units or 17 can cargo containers in a single day.

Dick's sporting goods and other retailers had a strong focus on fitness products fueled by their dotcom and contact with store pickup.

We also use the increased demand for our products to establish stronger partnerships with retailers with whom we've not had a significant historical presence.

Overall, we had winters on both the cardio and strength sizes. The business like demand has remained strong since the launch of the C. Six in the I C and its continued throughout the quarter bucking the lower seasonal trends, we typically see after January.

Once covert stay at home orders were issued the demand for our bikes further accelerated.

Demand for strength products was unprecedented for this time of year as an alternative to go into the Jim for these activities.

With our digital personalized connected fitness investments such as journey, we're able to see how our members are using our equipment and how their habits change overtime.

For example, using the 30 days after stay at home orders were issued and comparing that to the preceding 30 day period. We have seen that people are working out significantly more often longer and harder.

Workouts per user or up 9%.

Members are spending 14% more time on their machines.

And we've seen a 16% we've seen 16% more calories burned per user.

On top of these per user metrics, we saw nearly a 50% spike in journey downloads just in the first 30 days of stay at home.

These statistics are not only interesting to underscore the at home fitness trend, but also energized us by showing that we are progressing in our noble mission of helping people live healthier lives through fitness.

[noise] previously I mentioned, some key benefits our omni channel approach has for customers, but there are significant benefits to our business model that were particularly highlighted during the events of the quarter.

Our direct business offers very quick conversion to cash permits very quick decision, making in many aspects, including pricing promotion product mix and media spend an allocation.

Finally, we can more quickly established a direct relationship to better personalize, our fitness experiences grow our customer base and then in and enhance lifetime value.

Our retail channel enables us to expand our reaching footprint.

Getting products to consumers the way they choose in normal times consumers can experience our products in store.

This quarter retailers enhance their store pickup capabilities and pivoted to online sales.

We believe this is going to accelerate digital transformation that many retail partners.

As a former retailer who drove digital transformations I believe this will not only be good for them, but it could have a lasting benefits to our company as growth in the long run will be less restricted by floor space a typical in store price points.

As we mentioned in the fourth quarter earnings call early in the first quarter of 2020 over 19 disrupted our manufacturing and supply chain in China, where many of our products are manufactured.

Our manufacturing at most logistics in China are now nearly fully recovered and our near full capacity.

The next challenge has been responding to the unforeseen and unprecedented demand we've seen since mid March.

We have continued to work very hard to improve our manufacturing supply chain efficiencies.

We expanded production from many of our leading products, which is reducing our backlog.

However, we believe the continued strong demand we're seeing for certain products could prevent us from getting fully caught up on our full backlog until the beginning of the third quarter.

We are also expediting as many products as possible a balancing the cost impact to maintain proper margins I know will address this more when talking about margins.

Overall I'm very pleased at how our company performed during the first quarter. We are seeing what we're capable of achieving in the short and long run.

This year, while doing our best to deliver on short term results. We remain focused on the longer term transformation of our company.

We will continue to address the areas that need improvement.

We will continue to address the issues underlying the multi channel decline of our direct business that we articulated in our last earnings call. We will not get ourselves. The current surge in demand does not mean these issues have disappeared somewhere in beer merely hidden and we were relentlessly attack them.

And most importantly, we will not allow the short term sales surged to distract us from addressing the long term future of our company.

Our strategic planning process is moving ahead as expected we are garnering insights through multiple sources, a vigorous diagnostics, which will drive our focus and help us select the most attractive growth opportunities.

As we have indicated previously this will lead to any insights driven long term vision and multiyear strategic plan that we anticipate sharing late in the third quarter.

I expect that our transformative vision and plan built on existing strength and those that will develop over time, we'll be exciting to employees and to investors.

For those investors, who are new to our company welcome <unk>.

We're glad to have you.

It's important to understand the seasonal nature of our business and our industry.

In a typical year the second quarter is normally the weakest and the fourth quarter is seasonally the strongest.

The first and third quarters will fluctuate as the next strongest quarter, depending on new product introductions.

With that I'd like to now turned over the call to our CFO I know I know.

Thank you Jim good afternoon, everyone.

I'll begin by speaking to total company P. in our results for Q1 2020, but comparisons to Q1 29 team.

Net sales for 94 million.

Better than prior year by 11%.

Quarterly sales came from both the direct and retail segments were driven by the strength of our brands.

Strategic and operational changes implemented in the last several months and the near term trend towards home fitness, primarily due to the cobot 19 pandemic.

Gross margin.

Great decreased to 38% versus 42% last year, resulting in gross profit that's essentially flat year over year.

I shift in segment sales and favorable product mix and higher land at product cost for the primary drivers for the decline.

The retail segment sales were 49% of total sales this year versus 44% last year.

And as noted by Jim earlier, Max trainer sales continued to decline and the loss at these higher margin sales negatively affected our margins.

With regards to higher landed product cost as a reminder products. The import from China are now subject to a 7.5% tariff first there's no tariffs in Q1 last year.

And the also expedited shipping for products had been on back order due to supply chain disruptions caused like how cold it 19.

Certainly we're not satisfied with the decline in our gross margin rate and are working cross functionally to create a path to margin expansion in the future.

Operating expenses for a better than prior year by 21% declining to 36 million or 39% of net sales compared to 46 million or 55% of net sales last year.

Two areas drove the reduction in costs.

Selling and marketing expenses were down 27% to 25 million.

Or 26% of net sales.

Compared to 34 million or 40% of net sales last year.

The decrease in expenses, primarily in advertising spend.

We spent 13 million on me debt this year versus 20 million last year.

As we've mentioned in our P. This quarterly calls we're focused on improving our media ROI and are pleased that in Q1, we were able to grow sales on lower spend.

Research and development costs were down 12% to 3.8 million or 4% of net sales compared to 4.3 million or 5% of net sales last year.

Primarily driven by lower maintenance expenses related to our digital platforms.

General and administrative expenses were basically flat at 8 million or 8% of net sales this year compared to 9% last year.

Operating loss was zero point Sixmillion.

Better than prior years lots of 10 million a 94% improvement.

Driven primarily by expense reductions as gross profit was flat.

Well, we are pleased to have meaningfully reduce or operating loss, we recognize that the path to sustainable profitable growth requires more than expense discipline.

Income from continuing operations increased 2 million or eight cents per diluted share.

Compared to last year's loss of 8.5 million or minus 29 cents.

The improvement was primarily driven by the Opex reductions I mentioned earlier and a 3 million dollar tax benefit related to the cures Act that was recognized in the first quarter.

Net income was 2 million or seven cents per diluted share compared to a loss of 9 million or minus 29 cents per diluted share.

EBITDA from continuing operations was 2 million compared to an EBITDA loss of 8 million last year.

Turning now to Q1 2020 performance by segment.

I'll be comparing this years Q1 results with Q1 29 team.

Net sales in a direct segment were 47.1 million up 1% from 46.7 million.

Dismissed darex first quarter of year over year sales increase since Q4 27 team.

As mentioned earlier by Jim higher sales were driven primarily by strength, which grew by 59%.

Cardio declined by nine a strong demand for our connected fitness bikes were not enough to fully offset declines in Max trainer.

As of March 31, 2020, future sales related to our customer backlog indirect is estimated to be approximately 8 million.

Gross margin rate declined to 52% versus 57% last year, driven by unfavorable product mix and higher landed product costs.

Segment contribution was 2 million up 140% compared to a loss of 5 million.

The improvement in this primarily driven by 7 million dollar reduction media spend as gross profit was below last year.

Turning now to the retail segment.

Net sales were 46 million up 24% from 37 million last year.

Strength products sales were up 55% and cardio sales were up 18.

Driven by this when I see for connected fitness bike, partially offset by declines in octane fitness products.

Jim closures have begun to negatively affect sales of commercial grade equipment.

As of March 31, 2020 estimated future sales for the retail segment totaled approximately 6 million.

We disclose retail customers, whose sales are greater than 10% of total company net sales.

In Q1, 2020, Amazon Dot com accounted for 13% of total company net sales.

Gross margin rate for the retail segment was 22.6 down from 23.3 last year, driven primarily by on favorable sales mix and higher landed product costs.

Segment contribution was 2 million compared to a loss of 1 million last year. The improvement was primarily driven by higher net sales and reductions in operating expenses, partially offset by lower gross margin rates.

Turning now to the consolidated balance sheet as of March 31, 2020.

We ended Q1 2020 with cash at 26 million and debt at 28 million <unk>.

Compared to cash of 11 million and debt a 14 million at yearend 2019.

Okay.

We had $18 million available for borrowing on our credit facility.

Inventory was 35 million compared to 55 million as of yearend 2019.

Seasonally inventory levels at the end of Q1 are typically lower than at yearend, but the unplanned search in late March related to covert 19 did further decrease inventory levels.

As Jim mentioned, we are working hard to get back in stock for our best selling products and are continuing to expedite shipments to reduce our backlog, but we don't expect to be fully back in stock until the beginning of Q3.

Working capital totaled 61 million versus 40 million at yearend 2019, the result of reductions and trade payables and receivables.

Trade payables were 34 million compared to 74 million at yearend 2019, driven primarily by typical seasonality.

And lastly capital expenditures totaled 2 million as of March 31, 2020.

We are reiterating our full year capital guidance range of 8 million to 10 million for the full year 2020.

We are pleased with the sales momentum in the business and how we have responded to the surge in demand for at home fitness.

That said, we do have meaningful margin pressures as customers have moved away from the higher margin Max trainer products to lower margin modalities like the I see bikes and strength products.

We're also managing through the lingering effects of covert 19 on our supply chain, requiring us to expedite shipments SBC to meet the surge in demand.

Lastly, the tariffs that were mpos into latter half of 2019 create margin pressure that cannot always be mitigated by price increases.

We know that the path to sustainable profitable growth requires us to expand margins, while continuing to manage expenses tightly and we look forward to sharing our progress every quarter.

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

Thank you I know.

Well, we turned in strong results and are off to a good start the remainder of 2020 carries a lot of uncertainty because of cobot 19, and the global economy.

As I've said many times in our call since I've arrive.

Our long term transformation may at times, not show quarter to quarter linear progress.

We have now entered the seasonally softest quarter of the year.

The duration of the current consumer tailwind as anyone's guess.

Driven in part by the level of comfort with gyms, and the rate at which people return to them.

So not the majority of our business. We also have exposure to the commercial business space through our octane brand and perhaps most importantly, the duration of the impending recession and subsequent shape of the recovery factors that are very difficult to predict well clearly impact our company.

Despite the challenges we face I'm incredibly proud of our first quarter results and the people who are responsible for delivering them.

This has been an unprecedented time for the world and for our business.

I want to sincerely, thank our employees and partners, who while dealing with their own personal challenges showed us their best work in crisis.

And supported our customers during a very trying period in their lives.

Nautilus stands ready to continue to do our part to help people stay fit and healthy as possible through all of this and beyond.

Finally, I also want to take our analysts and investors for their patients and loyalty to Nautilus I want to assure you. We haven't lost track of the destination of returning to long term growth and sustained profitability.

We're all working very hard every day to enhance shareholder value for our company.

And now I'd like to open the call up to your questions operator.

Thank you.

We'll now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation drilling will indicate your line is in the question Q you May press Star too if you would like to remove your question from the Q.

For participants using speaker equipment, and maybe necessary to pick up your handset before pressing the star keys.

One moment, please while they pull for questions.

First question is from Mike Swartz with Suntrust. Please go ahead.

Hey, good evening everyone.

Hi, Mike.

Hey, I'm, Jim maybe for you I think you know in your prepared remarks, you would imagine some backlogs in both of the businesses.

It's the first I can remember because many talking about backlog at quarter end for quite some time and I think you'd have to go back to 2016 with one of the Max trainer iterations, where we actually saw.

A a month multi month backlog occurs you maybe just provide a little frame of reference around the numbers that you gave tonight I think you're around $15 million, you're starting backlog, how does that well historically in periods, where you've seen stronger demand and maybe just on a year to.

A year basis, what that typically looks like.

Oh I have to admit I'm, a that's a great question and I appreciate it Mike opt to admit I don't have I haven't looked at the long term backlogs overtime and so I may have to have a bill refer to that I do know that.

That's a it's a good problem to have you know the especially as we get to the end of March. We just had this amazing serves the last few weeks of March we were.

For already in kind of delayed promised periods on our bikes because that has not slowed down since we launched all the way back in October.

And of course, we lost a couple of we lost some weeks in production in China due to the cold and so we <unk> we were catching up.

But we were still you know are continuing to see just as this huge.

Just demand there and then we got to the end of a a the last few weeks and then just the bikes just took off and then also the though.

The weights, especially the five five twos and anything strength related because you know I our theory was people.

Could or could go outside to get some cardio in most parts of the country a they weren't restricted from doing that but to actually do resistance training became a lot more difficult. So we saw that so maybe oh.

After those comments Bill do you want to comments on kind of the historical.

Significant sabic, yeah, but I don't have.

The exact numbers in front of me I would tell you.

Mike <unk>, it's normal to have a little bit of backlog that happens in crossover.

Good day transportation timing and other things that impact shipments, but youre many times higher they know what normal backlog would be for us.

Okay.

Just in terms of you know that you increase capacity.

After the you talked about maybe just talk you know to give us a little color on what that means or you know as we look at you know.

If I have two is there a little bit longer promise periods and at some point. It. We just don't want to disappoint people. So we've we've substituted I'm taking orders on a product like that to notify me when button.

Which is another example of agility, we didn't even have that feature I'm on the website, but we just said we're going to get so many of the of these and so we've captured.

That demand, but we haven't taken the order for those in as we as we see those coming back into stock will reach out to those people who expressed an interest. The other thing that happened is is we sort of worked our way down the most popular product.

And then began selling.

Our our CMO said everything but the floorboards, we we were able to sell lock the equipment that we hadn't sold and in several years and that we had end of life.

Yeah, Michael overseas, obviously, there was pretty significant disruption in Q1 in our supply chain as Jim noted in his comment and I did as well you know we.

Feel like we're getting back to normal and with our factories and they are at capacity, but.

[laughter] Burton product why inflect reflect that Jim mentioned in bikes were actually increasing capacity and it happening in the process of increasing capacity for a while on the bike said, we still don't know what.

You know total potential is for that product line.

We do feel like we'll be able to catch up here in the first half over the years, we're saying maybe early.

Q3 will be bought up there there is a lot of not just getting back to normal going on but also okay. Now that you have your he back and you're getting back you know we need you to up your capacity pretty quickly to help us so all those things winguard dresses.

We speak.

I'll just I'll just add to that our partners have been are extremely great to work with ice its times like this that the relationship building you've done over multiple years with our with our manufacturing partners really pays off because when you asked them to go to the extra mile and when you ask him to add up out of production line for bikes and things like that.

The answer is yes, because the partnership has been contributed to buy both sides along the way it and really seems to pay off in times like this so I could we fully address your questions.

Yes, you did thank you so much from the color sure. Thank you.

The next question is from Steve Dyer of Craig Hallum. Please go ahead.

Oh, Thanks, good afternoon, everyone.

I see.

[noise], Jim you you talked a little bit about books second quarter work coming up on halfway through it here and you talked a couple different times about seasonality in the second quarter and I guess I'm trying to square that they'll come more I said, you'll have you know sort of more capacity quarter on quarter.

Well, you know hopefully fewer if any supply chain disruptions, you've got a backlog that takes you out into the third quarter. So I guess.

Why would there be any seasonality really at all in the second quarter piece of your what we just went through.

Well see a great question and the context of of when I mentioned, it was sort of a a list of things to roadmap.

Number or win.

Forecasting out the rest of the year.

And definitely I did mentioned the second quarter I think primarily for people Evan covered us as long as you so they're aware of that seasonality as well, but you're right and we've continued just.

But.

No. We don't know you know basically for this quarter I'd say, we are more supply constrained than demand constraint and it's really just turned into a sport of trying to fulfill as much as demand as we <unk>.

Possibly can as creativity as we can get products here as quickly as we can but you're you're not long to say that that.

You know the second quarter and you don't continues the momentum we saw in the first quarter at least most of it.

Sorry.

But is it fair to say I mean, I know your inventories down roughly $20 million quarter on quarter, maybe that served to.

To satisfy some of the demand in the first quarter and you don't necessarily have that luxury with some of your skews a into the second here.

Yeah, I mean, I think that's part of the story, where you know we sold the most popular stuff and then got into some things that hadn't sold in a while in sold them down.

And then and now were replenishing as quickly as possible. There's there's plenty of product on the water right now it will be here soon.

But you know we add to replenish that so we went through the fast the fast movers and we went into some of the more are the things we hadn't sold in a while we sold a lot of those which is actually great way to clear out.

Inventory.

And now we're right, where you're a weve replenishing as quickly as we can.

Got it and as it relates to that I guess I know, you're you're sometimes you don't want to talk too much about specific.

Products, but Max trainer, there's obviously.

Ben quite weak year over year for quite some time.

Yeah, I think the last week.

We check there was actually up a bit of a bit of a backlog maybe a little over a week now on that does that feel like it's it's reached though.

A level of demand that you know where we might not see these yeah. These big declines any further I mean does that seem like its from the level.

Yeah, I mean, it's it's pure speculation to know.

Whether it's sort of found the bottom there I think that's what you're you're alluding to but it is we are I'm actually quite optimistic about.

Oh, how it's been selling lately a part of it is when people come due our web sites naturally as we talked about through organic traffic and they're looking for fitness products. One of the reasons. We did that that give away is to really shine a light on the on the Max trainer because we actually think it's still a very very good products.

I think and I've said this on calls before that you know, it's it absolutely great workout I use it myself it it just becomes better with technology and I think some of our models fell behind on technology, and so for our current and future products, where injecting more technology and.

The coaching.

Replacements, where we end up replacing these high price high margin products with lower price slightly lower margin products in in a lot of the bikes and things like that and it's a it's not a trade off you want to make forever, but we're very optimistic about that line. We invented it we sold I think 600.

Sales and some odd units over over its life. So there must have been something good about it and.

I am I personally like it a lot and I think it can be rejuvenated.

That's great and then my last one for me and I'll pass it along so Amazon, obviously, a meaningful customer to you did there you know sort of preference for me central items for different pieces of the quarter or the last several weeks to me that impacted anything for you.

Entity that more difficult for you at all.

For me. Thanks, Yeah, no Steve we did not notice anything or any change. There are we continue to sell and of course, the big stable as we mentioned in my remarks was the Selecttech 552 and.

I'm not sure where they are the inventory now.

I would suspect there out of it twos, though but we have not seen any any decline in their ability to deliver for customers. We've not heard anything about that as the demand has remained strong.

Great. Thank you next the associate it.

The next question is from Mark Smith of Lake Street Capital. Please go ahead.

Hi, guys.

First off kind of Big picture can you talk a little bit about what you expect to happen in the mix of direct versus retail in that shift going forward.

You know strong backlog right now in direct but will you attempt to fulfill more orders and maybe shift more people and E commerce and direct rather than working much retail partners.

You know what one of the things I'm Mark that we're very proud of is being an omnichannel a company and I think there was a time that the company was a direct first but we've had such great growth with our retail partners and you know just my personal history is that you know.

You just get the products out there as many ways as possible so that that consumers can choose the way that they buy and that's really our philosophy. There are differences in and channel economics, obviously, the the I cut into the economics are actually pretty close to one another.

When you have a normal media spend requirement.

With you look at the net economics, so right now we've got a situation, where we're not having to spend much media and we're getting the orders anyway and so direct is.

You know, it's definitely a a preferred channel, but our retail partners are so important to us into our growth and we want to grow with them.

So you know we're going to you to as as as I did when I was an omnichannel Reid.

Sale. Your you know you make good decisions for the overall company a you're not optimizing you know one particular channel or the other but we definitely look at the economics, we definitely look at inventory allocation based on that but also we think about the strategic initiatives.

Or building with a retail.

Well, there's we want to grow their business, we want to give them the product they want and especially in this quarter, we rebel that to make some real hot.

Headway with some retailers, we and had a relationship with before because they suddenly had a need for fitness products and we were able to sort of been and help that Ah. So we're we're balancing those things. That's it that's really the only way I can answer that question and we don't really have a plan going forward about you know a the mix.

Most of those two we were going to we're going to let.

The let the customer choose and and we're happy with both our channels.

Perfect and then.

We're going to the strength, especially in the Schwinn numbers can you just confirmed they the already exceeded the revenue from for your 2019 is that through today or was that during the first core.

Sure and then secondly on on Schwinn.

Just to be even talking about how much that was kind of led by new products and perhaps what you're seeing with pricing and price sensitivity for consumers out there today sure.

So I can't remember the exact dates that we passed on it because I have what kind of weekly meetings with our with our web site folks and they give me great stats every week I believe it was late late March early April that we are we pass for the whole year, but I may be off a week or two on that but it was.

You know.

It was late third quarter late first quarters or early second quarter timeframe and then it just continued to accelerate since that and that's where we kinda quoted that you know nine acts.

Number for for the March timeframe.

So so it's it's gotten tremendous a tremendous a traffic conversion and it really is a lot driven by bikes I mean, that's what that's where schwinn does have other modalities, but it's really about bikes there and there were several models but.

You know the star that we mentioned a few times was the IC for that you know basically is a oh the value proposition of a buying a bike. We believe is a comparable to two or two others selling at 2300 2400 dollar for selling a bike for 799.

And then we haven't open platform, a where you can use our stuff or you could use pellets honors website or any number of of other pieces of software to give you real choice and so that value proposition for that bike and also the bowflex version of it or to see six has just been a tremendous institute.

Time, we launched it's a it's a great. These are great products. They have a great value proposition and we seem to have I've done a good job and in our marketing messaging. So nothing's getting lost in that there's a clear reason to buy those things and that's driven driven a lot of growth.

Okay, and maybe this is dig into deep on specific products, but as we look at the the Bowflex music.

[noise] versus.

Horse, we saw no you know no decrease in the to in the take rate in fact in fact its increase so at least for price sensitivity. You've got you know fairly comparable bikes that 799, and 849 with with no no major differences in a in kind of a volume.

And so you know we've we believe at least over that range. A we've got you know we've we've got real winters.

Excellent. Thank you Jerry Thank you.

The next question is from George Kelly of Roth Capital Partners. Please go ahead.

Hey, everyone. Thanks for taking my questions Hi, George.

So just a few for you first of all.

Hi, I believe I heard that media advertising was down pretty significantly in the quarter.

Oh, just wondering how do you think about that going forward do you need to step back more meaningfully anytime soon or does it just you know you're getting such a bombardment of orders. The you know can you sort of pulled back so the time being and keep it that way.

Yeah, George Great question, I mean, as I mentioned, one of the great aspects of the direct business in the direct business models, the ability to responds very fairly quickly and so when you're seeing.

Classic thing, where you're getting so much organic traffic without paying for it you're you you are getting a ton more traffic from.

Investments in.

In social media and other digital like search and you're getting great traffic that way.

I don't really need a need to spend as much on the media I mean media usually provides volume.

And those things I mentioned further down the funnel provide conversion, but when the volume seems to be natural you. You know we pulled back we've seen some of our competition pull back and not everybody, but most people have pulled back from that same phenomenon. We're all seeing the same things.

And so we've we've definitely oh pulled back on that and that's it that's a great thing to ER to be able to do it certainly isn't probably sustained well I know it isn't sustainable for four over the long run because you still have to stimulate volume.

At some point and so we will be back in but we're going to watch it and you know a day by day. The other thing that's a factor of course is when you have stopped out on some things you don't want to pay for even more traffic to come in and tell them that you know your stocked out on these things. So you watch your your inventory ended.

Workers inventory I know for example, you know we go to Pelletized side, all the time and we see there or you know more than seven weeks out themselves and so we're all seeing those same same type of things and you know, we all pull back a bit on our media because we're still getting all the demand we can fulfill.

Okay, Great. That's helpful and then second question.

Is just about journey.

And I was wondering <unk>. So you know you mentioned some new products coming out. This fall <unk> I was wondering how journey kind of fits into that and if I remember correctly I thought it was gonna be take into more products across your portfolio and there were going to be enhancements made and.

So you know Jimmy and are now for.

Maybe I.

I guess listen to your but what's your view on journey, where are we with it and is there anything you can talk about you know or other still new new things come in sometime this year sure.

Yes journey I think journey, the best way I think about it as an operating system for for our machines. That's the that's the main scenario will also cover scenarios or helping you work out off the machine.

When you're when you're at home and over time, we'll find ways to log your outdoor workouts to journey.

So those are kind of the three scenarios, but the one scenario. That's most important right now is as an operating system to all of our all of our products and so when we launched products in the fall you will see virtually everything runs journey.

And journey is I've said on these calls on the in the past that I had some negative surprises when I came here.

But one of the very positive surprises for me was how far long journey was a lot of the transformations I've done it had to.

Yes, the company to believe in digital and then invest in it in a couple of years. Later, we had products will this has already been there. It's really it's in really good shape that said the piece of software right. So you know what can never be done you're never done with it you keep on doing tons of research and seeing what the next things you should add to it are and will continue to do that but.

I think you we've talked about on a couple of these calls it's got it's got probably the leading AI driven one to one personal coaching that you could have an an algorithmic way and no. One else does that like we do and then we have a number of featured in journey that I would call are things that keep you out at longer like being.

Able to watch Netflix another streaming services like being able to use explore the world and biker run anywhere in the world and afford the immersive experience music that goes along with a with your workout all sorts of things that will will keep us keep you add at longer keep you interested in work.

And now he's keeping keeping you staying at it so.

Okay. That's all we're all about with journey is is helping you get fits stay fit stay with it by giving you a whole bunch of different choices in how to workout, but led with our with our industry, leading AI driven a personal coaching and personal workouts. So we're proud of it but we're gonna have to revenue you know everybody recompeted.

It is not going to stand still and you know right now that the a framework for the industry is great equip it plus a great software plus great content equals a great experience and that's where we are will continue to to rather that experience and make it better.

Okay. Thank you.

Thank you Sir.

[laughter], there's time and one more question, which is from Aaron Martin and a partners investment partners. Please go ahead.

Hi, given what's going on from Yeah G.H.

[laughter] is there any more quantifiable data you can give us a journey you talked about a 50% increases downloads.

Are you ready to give us anything else there in terms of Oh.

You know is it isn't a seven figure or.

Line item yet from the revenue perspective, what can you tell us there on journey.

Yeah on we're still sticking with.

As a with what we've been doing there it's still early not so much in the software development, because I like where the software is right, where we need to drive it I know where its strong I really like it overall, it's just not on enough pieces of equipment. It if you think about it like installed base.

Tilting installed base rose significantly you're not going to have the full growth you really have with with the journey now that said you know I've said before one of our big priorities. It is.

His injecting connected fitness throughout our product portfolio and having it run journey and that's that's what you'll see with our product Oh, well, we roll out. This fall. That's what you saw with a with many of our connected products. We did last fall.

I think I think that number was in 28, and we had maybe 3% of our products were quote unquote connectable in connected fitness scenarios, we took that number a significantly higher with our launches in 2019, and we'll take that number still higher you know or do a vast would.

We already have all of our products available you know this year. So that will continue to really grow that installed base and is that installed base becomes more meaningful then the subscription business does as well and they begin to report on numbers at that point.

Okay, and then one more if I may you mentioned a in opportunity with the new retail.

Partner that you haven't had before anything more you can expand upon that.

Yeah, I mean, we're not going to name the names on the call, but but you know these are retailers that you know you would know as I mentioned them. There are people we've been trying to fix for a long time, you know the limitations of we love retail, but one of limits.

There aren't enough sporting goods retailers, there aren't enough retailers that that sell fitness products, we would like more of them and we would likely existing ones that haven't series products to carried worth business. So I think what really happened in this in this last quarter is or you know these retailers there.

Smart people, they listen to what their customers say and when will come to their websites and and ER and say look I really wish read more fitness products, they turn around who come to us and said how about you get us somewhere I'm fitness products and what that allows us to do is get you know our foot in the door get on the floor and some of these places where there [noise].

I live dot com and in the meantime, but sometimes these relationships.

To get to that point and [noise].

The one of the one of the things that has happened is we've accelerated.

These retailers figured out that fitness was going to be a great category for them. You know next year are figuring it out this year.

Okay, great. Thank you congratulations great quarter, there and I'm appreciate their efforts to this a extraordinary times. Thank you Evan kids.

This concludes the question and answer session I would like to turn the floor back over to Jim Barr for closing comments.

Thank you for joining our call today and your continued support and for your continued support of Nautilus, We look forward to providing you with another update on the business in a few months on our second quarter earnings call.

Please stay safe and healthy I have a great rest of your day.

Onwards, and upwards. Thanks.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

[music].

Oh.

[noise].

[noise] [noise].

[music].

[music].

[music].

Good day and welcome to the not unless Inc.'s first quarter 2020 earnings results Conference call. Today's conference is being recorded at this time all participants are in listen only mode. A question answer session will follow the formal presentation.

At this time I would like to turn the conference over to Mr., John Nelson I see our please go ahead Sir.

Thank you good afternoon, everyone welcome to not only since first quarter 2020 conference call.

Participants on the call from Nautilus or Jim Barr, Chief Executive Officer.

I know cone old Chief Financial Officer.

Bill Mcmann special assistant to the CEO.

Our earnings release was issued today at one of five PM Pacific time, and maybe downloaded from our website at Nautilus being dot com.

On the Investor Relations page.

The earnings release includes a reconciliation of the non-GAAP financial measures mentioned in today's call most directly comparable GAAP measures.

For today's call we have a presentation accompanying the call that management will refer to during their prepared remarks and on slide two is or full safe Harbor statement I'd like to remind everyone that during this conference call Nautilus management will make certain forward looking statements and so we ask that everyone read our safe.

Harbor statement in the presentation.

You can access the presentation by going to Nautilus Inc. Dot com.

Then click on the Investor tab.

And then click on the events and webcast and the presentation will be on that page.

And with that it's my pleasure to turn the call over to Nautilus's CEO Mr. Jim Bar.

Thank you John.

Good afternoon, everyone and thank you for joining todays call.

Our first quarter of 2020 started out as a good quarter and turned into a much stronger quarter. Thanks to the agility of our entire organization as we captured the higher demand for home fitness products, primarily due to covert 19 stay at home orders.

We achieved stronger than expected results, including revenue growth of 11%.

Realized our first positive comps since the third quarter of 2018.

Lowered operating expenses.

And dramatically exceeded our EBITDA estimates.

I'm incredibly proud of how our team came together to sport support one another their families our communities and our customers.

Keeping our business vibrant and moving forward during unprecedented times is facing a series of challenges.

During the covert 19 pandemic, our first and foremost priority was and continues to be the safety of our employees customers and partners.

For government orders were in place and the jurisdictions, where Nautilus operates we implemented our work from home policies for most employees worldwide, while continuing to provide leading customer care.

Our distribution centers remain open for both receding and shipping with strict guidelines on social distancing and worker health and safety protocols.

A top priority for our entire organization is to serve customers during their time of need.

And thanks to our company's agility focus and persistent hard work, we've been able to meet most of our customers' needs.

As we entered the second quarter, we continue to benefit from the surging demand for at home fitness and our company's ability to respond.

Fortunately, our well recognized brands.

Rep and quality of our strong product portfolio.

And omnichannel capabilities have enabled us to serve both existing customers and those who are just now learning about our company and our offerings for the first time.

In crisis, we saw a flight to our quality brands as consumers look to address their fitness needs.

It was a time, where we were reminded of the pay off of our long term investment in brand reputation and brand building.

Our our product portfolio, featuring both cardio and strength offerings, a variety of types of equipment and most multiple price points.

Gave customers outstanding choices.

And the individual strengths of both of our primary sales channels direct and retail were evident during the first quarter.

The direct channel permits rapid response to changes in the market, we could read new trends in response near real time.

And the retail channel allows us to offer greater fulfillment options, so that consumers can buy when where and how they prefer.

Looking forward for the remainder of 2020.

We believe we are well positioned with the right team products and brands to bring our company back to a leadership position in home fitness.

As an example were excited to be introducing a strong lineup of new product offerings in the fall for both retail and direct channels and we'll provide more information on these and our second quarter call.

Turning to our very strong first quarter results by channel.

Our direct net sales increase for the first time.

Year over year since 2017.

Increase sales were driven primarily by strength products, including Bowflex, Selecttech and Bowflex home gyms.

Cardio product sales decline as strong demand for our connected fitness bikes, the bowflex see six and the schwinn I see for we're not enough to fully offset continued decline in our Max trainer.

In addition to achieving its first positive comps since 2017 I wanted to share. Some other direct statistics to give you a flavor of the spike a spike in demand in the last few weeks of the quarter.

On Bowflex Dot com, our highest volume website March visits revenue and conversion rates all exceeded December 2019, typically our holiday season peak demand.

The spiking visits on Bowflex Dot com was driven primarily by organic traffic, which was up nearly 300% versus March 2019.

In the full month of March Bowflex Dot Com revenue grew 140% versus March 2019.

And for the second half of March Bowflex Dot com revenue increase over 250%.

Our schwinn fitness dotcom site saw similar dynamics in the first in the full month of March our revenue was up nine times compared to March 2019, and in fact has already exceeded all of the rep revenue it produce for all of 2019.

We wanted to get back to our customers during a trying times by giving way 30 of our top of the line backs totals in April this gave us an opportunity to highlight this terrific product when our website traffic was so high to date, we've collected over 150000 entries.

Paul Center sales were also strong operating at or above typical holiday peak levels.

Revenue per day for the last half of March with 80% higher than December 19, and 29 teens holiday volume.

We pulled back on television advertising as we generated sufficiently strong demand without it focusing on digital and social channels, reducing our overall spend and increasing our ROI on AD spent.

[noise] also able to reduce the level of promotional pricing as we monitor competitors and our own strong demand.

We worked our way through selling our most popular products and then generated demand on some that we've not sold that strongly recently.

Our retail segment was up 24% with strong growth coming from both strength in cardio products sales.

Direct sales were driven primarily by strong demand for Bowflex Selecttech 552 adjustable weights.

Cardio sales were driven by the schwinn IC for connected fitness bikes, and partially offset by declines in octane fitness equipment as Jim closures have begun to affect sales of commercial grade equipment.

Although numerous retailers have temporarily closed store locations due to covert 19, both lesson schwinn experienced strong year over year sales increases through retail partners E commerce and curb side pickup platforms.

Our bowflex Selecttech five five to west 'cause it was a consistent hot seller on Amazon, including one day, when we sold 6000 units or 17 cargo containers in a single day.

Dick's sporting goods and other retailers had a strong focus on fitness products fueled by their dotcom and contact with store pickup.

We also use the increased demand for our products to establish a stronger partnerships with retailers with whom we've not had a significant historical presence.

Overall, we had winners on both the cardio and strength sides of the business like demand has remained strong since the launch of the C. Six in the I C and its continued throughout the quarter bucking the lower seasonal trends, we typically see after January.

Once covance stay at home orders were issued the demand for our bikes further accelerated.

Demand for strength products was unprecedented for this time of year as an alternative to go into the Jim for these activities.

With our digital personalized connected fitness investments such as journey, we're able to see how our members are using our equipment and how their habits change over time.

For example, using the 30 days after stay at home orders were issued and comparing that to the preceding 30 day period. We have seen that people are working out significantly more often longer and harder.

Workouts per user up 9%.

Members are spending 14% more time on their machines.

And we've seen a 16% we've seen 16% more calories burned per user.

On top of these per user metrics, we saw nearly a 50% spike in journey downloads just in the first 30 days of stay at home.

These statistics are not only interesting to underscore the at home fitness trend, but also energized us by showing that we are progressing in our noble mission of helping people live healthier lives through fitness.

[noise], obviously I mentioned, some key benefits our omni channel approach has for customers, but there are significant benefits to our business model that were particularly highlighted during the events at the quarter.

Our direct business offers very quick conversions to cash from that's very quick decision, making in many aspects, including pricing promotion product mix and media spend an allocation.

Finally, we can work quickly established a direct relationship to better personalize, our fitness experiences role, our customer base and and and enhance lifetime value.

Our retail channel enables us to expand our reaches footprint.

Getting products to consumers the way they choose in normal times consumers can experience our product in store.

This quarter retailers enhance their store pickup capabilities and pivoted to online sales.

We believe this is going to accelerate digital transformation that many retail partners.

As a former retailer who drove digital transformations I believe this will not only be good for them, but it could have a lasting benefit to our company as growth in the long run will be less restricted by floor space a typical in store price points.

As we mentioned in the fourth quarter earnings call early in the first quarter of 2020 over 19 disrupted our manufacturing and supply chain in China, where many of our products are manufactured.

Our manufacturing and most logistics in China are now nearly fully recovered and our near full capacity.

The next challenge has been responding to the unforeseen and unprecedented demand we've seen since mid March.

We have continued to work very hard to improve our manufacturing supply chain efficiencies.

We expanded production from many of our leading products, which is reducing our backlog.

However, we believe the continued strong demand we're seeing for certain products could prevent us from getting fully caught up on our full backlog until the beginning of the third quarter.

We are also expediting as many products as possible a balancing the cost impact to maintain proper margins I know it will address this more when talking about margins.

Overall I'm very pleased at how our company performed during the first quarter. We are seeing what we're capable of achieving in the short and long run.

This year, while doing our best to deliver on short term results. We remain focused on the longer term transformation of our company.

We will continue to address the areas that need improvement.

We will continue to address the issue is underlying multichannel decline of our direct business that we articulated in our last earnings call. We will not get ourselves. The current surge in demand does not mean these issues have disappeared somewhere in beer merely hidden and we were relentlessly attack them.

And most importantly, we will not allow the short term sales surged to distract us from addressing the long term future of our company.

Our strategic planning process is moving ahead as expected we are garnering insights through multiple sources of vigorous diagnostics, which will drive our focus and help us select the most attractive growth opportunities.

As we've indicated previously this will lead to any insights driven long term vision and multiyear strategic plan that we anticipate sharing late in the third quarter.

I expect that our transformative vision and plan built on existing strength and those that will develop over time, we'll be exciting to employees and to investors.

For those investors, who are new to our company welcome.

We're glad to have you.

It's important to understand the seasonal nature of our business and our industry.

The typical year the second quarter is normally the weakest and the fourth quarter seasonally the strongest.

The first and third quarters will fluctuate as the next strongest quarter, depending on new product introductions.

With that I'd like to now turned over the call to our CFO I know I know.

Thank you Jim good afternoon, everyone.

I'll begin by speaking to total company PNM results for Q1 2020 with comparisons to Q1 29 team.

Net sales for 94 million.

Better than prior year by 11%.

Quarterly sales came from both the direct and retail segments were driven by the strength of our brands.

Strategic and operational changes implemented in the last several months and the near term trend towards home fitness, primarily due to the cobot 19 pandemic.

Gross margin rate decreased to 38% versus 42% last year, resulting in gross profit that's essentially flat year over year.

A shift in segment sales unfavorable product mix and higher land at product cost for the primary drivers for the decline.

The retail segment sales were 49% of total sales this year versus 44% last year.

And as noted by Jim earlier, Max trainer sales continued to decline and the loss at these higher margin sales negatively affected our margins.

With regards to higher landed product cost as a reminder products. The import from China are not subject to 7.5% tariff for says no tariffs in Q1 last year.

And the also expedited shipping for products had been on backwater due to supply chain disruptions caused by color coded 19.

Certainly we're not satisfied with the decline in our gross margin rate and are working cross functionally to create a path to margin expansion in the future.

Operating expenses for better than prior year by 21% declining to 36 million or 39% of net sales compared to 46 million or 55% of net sales last year.

Two areas relative reduction in costs.

Selling and marketing expenses were down 27% to 25 million.

Or 26% of net sales.

Compared to 34 million or 40% of net sales last year.

The decrease in expenses, primarily in advertising spend.

We spent 13 million on me debt this year versus 20 million last year.

As we've mentioned in our previous quarterly calls we're focused on improving our media ROI and are pleased that in Q1, we were able to grow sales on the west spend.

Research and development costs were down 12% to 3.8 million or 4% of net sales compared to 4.3 million or 5% of net sales last year.

Primarily driven by lower maintenance expenses related to our digital platforms.

General and administrative expenses were basically flat at 8 million or 8% of net sales this year compared to 9% last year.

Operating loss was zero point Sixmillion.

Better than prior years lots of 10 million and 94% improvement.

Driven primarily by expense reductions as gross profit was flat.

Well, we are pleased to have meaningfully, but give us or operating loss, we recognize that the path to sustainable profitable growth requires more than expense discipline.

Income from continuing operations increased 2 million or eight cents per diluted share.

Compared to last year's loss of 8.5 million, a minus 29 cents.

The improvement must primarily driven by the Opex reductions I mentioned earlier and a 3 million dollar tax benefit related to the cares Act that was recognized in the first quarter.

Net income was 2 million or seven cents per diluted share compared to a loss at 9 million or minus 29 cents per diluted share.

EBITDA from continuing operations, plus 2 million compared to an EBITDA loss of 8 million last year.

Turning now to Q1 2020 performance by segment.

I'll be comparing this years Q1 results with Q1 2019.

Net sales in a direct segment were 47.1 million up 1% from 46.7 million.

Dismissed darex first quarter of year over year sales increase since Q4 2017.

As mentioned earlier by Jim higher sales were driven primarily by strength, which grew by 59%.

Cardio declined by nine a strong demand for our connected fitness bikes were not enough to fully offset declines in Max trainer.

As of March 31, 2020, future sales related to our customer backlog indirect is estimated to be approximately 8 million.

Gross margin rate declined to 52% versus 57% last year, driven by unfavorable product mix and higher land at product costs.

Segment contribution was 2 million up 140% compared to a loss of 5 million.

The improvement and that's primarily driven by 7 million dollar reduction media spend that's gross profit was below last year.

Turning now to the retail segment.

Net sales were 46 million up 24% from 37 million last year.

Strengths product sales were up 55% and cardio sales were up 18.

Driven by dish when I see for connected fitness bike, partially offset by declines in octane fitness products.

Jim closures had begun to negatively affect sales commercial grade equipment.

As of March 31, 2020 estimated future sales for the retail segment totaled approximately 6 million.

We disclose retail customers, whose sales are greater than 10% of total company net sales in Q1, 2020, Amazon Dot com accounted for 13% of total company net sales.

Gross margin rate for the retail segment was 22.6 down from 23.3 last year, driven primarily by unfavorable sales mix and higher landed product costs.

Segment contribution was 2 million compared to a loss of 1 million last year, the improvement must primarily driven by higher net sales and reductions in operating expenses, partially offset by lower gross margin rates.

Turning now to the consolidated balance sheet as of March 31, 2020.

We ended Q1 2020 with cash at 26 million and debt at 28 million.

Compared to cash of 11 million and get a 14 million at year end 2019.

We had $18 million available for borrowing on our credit facility.

Inventory was 35 million compared to 55 million that's at year end 2019.

Seasonally inventory levels at the end of Q1 are typically low working at year end that the unplanned search in late March related to covert 19 get further decrease inventory levels.

As Jim mentioned, we are working hard to get back in stock for our best selling products and are continuing to expedite shipment to reduce our backlog.

But we don't expect to be fully back in stock until the beginning of Q3.

Working capital totaled 61 million versus 40 million at yearend 2019, the result of reductions and trade payables and receivables.

Trade payables were 34 million compared to 74 million at yearend 2019, driven primarily by typical seasonality.

And lastly capital expenditures totaled 2 million as of March 31, 2020.

We are reiterating our full year capital guidance range of 8 million to 10 million for the full year 2020.

We are pleased with the sales momentum in the business and how we have responded to the surge in demand for at home fitness.

That said, we do have meaningful margin pressures as customers had moved away from the higher margin Max trainer products to lower margin modalities like the I see bikes and strength products.

We are also managing through the lingering effects of covert 19, and our supply chain, requiring us to expedite shipment SBC to meet the surge in demand.

Lastly, the tariffs that were in person the latter half a 2019 create margin pressure that cannot always be mitigated by price increases.

We know that the path to sustainable profitable growth requires us to expand margins, but continuing to manage expenses tightly and we look forward to sharing our progress every quarter.

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

Thank you I know.

Well, we turned in strong results and are off to a good start the remainder of 2020 carries a lot of uncertainty because of covert 19 and the global economy.

As I've said many times in our call since I have arrived.

Our long term transformation may at times, not show quarter to quarter linear progress.

We have now entered the seasonally softest quarter of the year.

The duration of the current consumer tailwind as anyone's guess.

And driven in part by the level of comfort with gyms, and the rate at which people return to them.

So not the majority of our business. We also have exposure to the commercial fitness space through our octane brand and perhaps most importantly, the duration of the impending recession and subsequent shape of the recovery factors that are very difficult to predict will clearly impact our company.

Despite the challenges we face I'm incredibly proud of our first quarter results and the people who are responsible for delivering them.

This has been an unprecedented time for the world and for our business.

I want to sincerely, thank our employees and partners, who while dealing with their own personal challenges showed us their best work in crisis.

And supported our customers during a very trying period in their lives.

Nautilus stands ready to continue to do our part to help people stay fit and healthy as possible through all of this and beyond.

Finally, I also want to take our analysts and investors for their patients and loyalty to Nautilus.

I want to assure you we haven't lost track of the destination of returning to long term growth and sustained profitability.

We're all working very hard every day to enhance shareholder value for our company.

And now I'd like to open the call up 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 10 will indicate your line is in the question can you maybe press star to she would like to remove your question from the Q.

As for participants using speaker equipment and may be necessary to pick up your handset for pressing the star keys.

One moment, please while they pull for questions.

The first question is from Mike Swartz with Suntrust. Please go ahead.

Hey, good evening everyone.

Hi, Mike.

Hey, Jim maybe for you I think you know in your prepared remarks, you would imagine some backlogs in both of the businesses.

It's the first I can remember because many talking about backlog at quarter end for quite some time and I think we'd have to go back to 2016 with one of the Max trainer iterations, where we actually saw.

A a month multi month backlog occurring maybe just provide a little frame of reference around the numbers that you gave tonight I think are around $15 million, you're starting backlog how does that look historically in periods, where you've seen stronger demand and maybe just on a year to.

Your basis, what that typically looks like.

Oh I have to admit I'm, a that's great question and I appreciate it Mike opt to admit I don't have I haven't looked at the long term backlogs overtime and so I'd have to have a bill refer to that I do know that a it's a good problem to have you know the.

As we get to the end of March we just had this amazing serves the last few weeks of March we were already in kind of delayed promise periods on our bikes because that is not slowed down since we launched all the way back in October and of course, we lost a couple who we lost some weeks in production in a in China do the Covance. So we.

<unk>, we were catching up but we were still you know are continuing to see just this this huge demand there and then we got to the end of or the last few weeks and then the bikes just took off and then also the though the weights, especially the five five twos and anything strength related but.

As you know I, our theory, what people could or could go outside to get some cardio in most parts of the country a they weren't restricted from doing that but to actually do resistance training became a lot more difficult. So we saw that so maybe a after those comments bill do you want to comments on kind of the historical because.

See I pick you up I don't have the exact numbers in front of you I would tell you like that it's normal to have a little bit of backlog that happens in crossover Judah transportation timing and other things that impact [laughter] Youre, many times higher than what normal backlog would be for us.

Okay.

It it just in terms of you know that you increase capacity you talked about maybe just talk you know the give us a little color on what that means are you you know as we look at you know Sims some product on Bowflex dot com. It seems like you, peaking somebody that off the web sites. So in like you know when I look at that is it.

Sure you're trying to free up capacity for maybe the slower turning lines or is that kind of just the normal end of life processing, taking things off the website well I'll start with the website and then I'll ask bill to talk about what we're doing with our supply chain.

So on the website. We provide for example, we continue to take orders I think I'd just I just check today and we're at kind of a 45 day promised period on that but it doesn't seem to be slowing down the demand, even though that people have to wait a while for worked for these for these bikes on things like the five five.

Two stuff Bowflex Selecttech five five twos, there are a little bit longer promise periods and at some point. It. We just don't want to disappoint people. So we've we substituted I'm taking orders on a product like that to notify me when button, which is another example of agility, we didn't even have that feature I'm on the web site, but we.

Just said, we're going to get so many of the of these and so we've captured that demand, but we haven't taken the order for those and as we as we see those coming back into stock will reach out to those people who expressed an interest. The other thing that happened is is we sort of worked our way down the most popular products and then began cell.

Thanks.

Our our CMO said everything but the floorboards, we we were able to sell lock the equipment that we hadn't sold and in several years and that we had at end of life officially ended it ended life, but we hadn't actually sold out of all the inventory because we just didn't have a way to sell them. This way and we took advantage of this period, a where people really.

We want to almost any kind of equipment at some point, where we were able to take advantage of that particular trend Bill maybe you could attack on with what you're doing supply chain wise that give us greater capacity.

Yeah. Thanks, Michael overseas, obviously, there was pretty significant disruption in Q1 in our supply chain as Jim noted in his comments and ideas as well you know we feel like we're getting back to normal in with our factories and they are at capacity, but certain product wide flexes luck as Jim mentioned in.

Well actually increasing capacity and it happening in the process of increasing capacity for a while on the bike says you still don't know what you know total potential is for that product line or we do feel like we'll be able to catch up here in the first half of the years, we're saying maybe early Q3 will be caught up there there is a lot of.

Just getting back to normal going on but also okay. Now that you have your t. back and you're getting back you know we need you to up your capacity pretty quickly to help us. So all those things when progress as we speak.

And I'll just I'll just add to that our partners have been extremely great to work with ice its times like this that the relationship building you've done over multiple years with our with our manufacturing partners really pays off because when you ask them to go the extra mile movie asking data out of production line for bikes and things like that.

The answer is yes, because the partnership has been contributed to buy both sides along the way it.

Really seems to pay off in times like this so what did we fully address your questions.

Yes, you did thank you so much of the color sure. Thank you.

The next question is from Steve Dyer from Craig Hallum. Please go ahead.

Oh, Thanks, good afternoon, everyone.

Hi, Steve.

[noise] [noise], Jim you talked a little bit about books second quarter, we're coming up on halfway through it here.

You talked a couple different times about seasonality and the second quarter and I guess I'm trying to square that they'll come more I said, you'll have you know sort of more capacity quarter on quarter, you'll have your hopefully fewer if any supply chain disruptions you've got.

Backlog that the takes you out into the third quarter, So I guess.

Why would there be any seasonality really at all in that second quarter be sort of you. What we just went through.

Well see a great question and the context of of when I mentioned, it was sort of a a list of things to remember when.

Forecasting out the rest of the year.

And definitely I did mentioned the second quarter I think primarily for people love it covered us as long as you so they're aware of that seasonality as well, but you're right. I mean, we've continued to see strong demand for our products I think maybe the difference between the last few weeks of the first quarter and the second quarter is we were.

Not out of very much inventory for the first few weeks and then we became a little bit more supply constrained after that now we're still taking orders I know most everything we're still finding a way to clear that in the timeframe that we mentioned, but you know we don't know you know basically for this quarter I'd say, we are more supply can.

Strain that demand constraint and it's really just turned into a sport of trying to fulfill as much as demand as we possibly can as creativity as we can get products here as quickly as we can but you're not long to say that that you know the second quarter and you don't continues the momentum we saw in the first quarter at least most.

It.

So as it is it fair to say I mean, I know your inventories down roughly $20 million quarter on quarter, maybe that served to.

You have to satisfy some of the demand in the first quarter and you don't necessarily have that luxury with some of your skews a into the second here.

Yeah, I mean, I think that's part of the story, where you know we sold the most popular stuff and then got into some things that hadn't sold in a while in sold them down.

And then and now were replenishing as quickly as possible. There's there's plenty of product on the water right now it will be here soon.

But you know we had to replenish that so we went through the fat. The fast movers. Then we went into some of the more Ah things, we hadn't sold in a while we sold a lot of those which is actually great way to clear out inventory ER and now, we'll reap where you're a wee replenishing as quickly as we can.

Got it and as it relates a lot I guess I know, you're you're sometimes you don't want to talk too much about specific.

Products, but Max trainer, there's obviously.

But I'm quite weak year over year for quite some time.

Yeah, I think the last we check there was actually up a bit about sort of a backlog maybe a little over a week no on that does that feel like it's it's reached a level of demand that you know where we might not see these you know these big declines any further I mean does that seem like its from the level.

Yeah, I mean, it's it's pure speculation to know.

Whether it's sort of found the bottom there I think that's what you're you're alluding to bought it is we are I'm actually quite optimistic about how it's been selling lately part of it is when people come due our web sites naturally as we talked about through organic traffic.

And they're looking for fitness products one of the reasons, we did that that give away as to really shine a light on the on the Max trainer because we actually think it's still a very very good product I think and I've said this on calls before that you know it's it absolutely great workout I use it myself it it.

Just becomes better with technology and I think some of our models fell behind on technology.

And so for our current and future products, where injecting more technology and the coaching on a high intensity workout machine like that is a super important thing and so journey really plays and even greater role. There. So we're not giving up on Max yet and I hope you're absolutely right that we're we're close to the bottom and we could actually I'm seeing.

See an uptick there that will change a lot of things a lot of it'll help a lot of things that our company, obviously I talked a little bit about the margin replacements, where we end up replacing these high priced high margin products with lower price slightly lower margin products in in a lot of the bikes and things like that and its a.

It's not the trade off you want to make forever, but we're very optimistic about that line. We invented it we sold I think 600000, some odd units over over its life. So there must have been something good about it and I I personally like it a lot and I think it can be rejuvenated.

That's great and then my last one for me and I'll pass it along so Amazon, obviously got a beautiful customer to you did there sort of preference for central items for different pieces of a quarter or the last several weeks I mean has that impacted anything for you.

Got it any more difficult for you at all that's it for me. Thanks, Yeah, No Steve we didn't notice anything or any change there we continue to sell and of course, the the big staple as we mentioned in my remarks was the Selecttech 552 and.

I'm not sure where they are the inventory now I would suspect there out of it too so, but we have not seen any any decline in their ability to deliver for customers. We've not heard anything about that as the demand has remained strong.

Great. Thank you next you appreciate it.

Next question is from Mark Smith Lake Street Capital. Please go ahead.

Hi, guys I first off kind of Big picture can you talk a little bit about what you expect to happen in the mix of direct versus retail in that shift going forward.

Strong backlog right now in direct but will you attempt to fulfill more orders and maybe shift more people and E commerce and direct rather than working with the retail partners.

You know what one of the things a mark that we're very proud of is being an omnichannel a company and I think there was a time that the company was a direct first but we've had such great growth with our retail partners and you know just my personal history is that you know you just.

Get the products out there as many ways as possible so that that consumers can choose the way that they buy and that's really our philosophy. There are differences in in a channel economics, obviously, the the back into the economics are actually pretty close to one another when you.

Have a normal media spend requirement.

With you look at the net economics, so right now we've got a situation, where we're not having to spend much media and we're getting the orders anyway and so direct is you know it's definitely a a preferred channel, but our retail partners are so important to us into our growth and we want to grow with them.

So you know we're going to can you too as as as I did when I was an omnichannel retail. Your you know you make good decisions for the overall company a you're not optimizing you know one particular channel or the other but we definitely look at the economics, we definitely look at inventory allocation based on that.

But also we think about the strategic initiatives, we're building with a retailers we want to grow their business, we want to give them the product they want and especially in this quarter, we were able to to make some real headway with some retailers, we and had a relationship with before because they suddenly had a need for fitness products and we were able to slipping.

And help that Ah. So we're we're balancing those things that's it that's really the only way I can answer that question and we don't really have a plan going forward about you know the mix of those two we were going to we're going to let the let the customer choose and ER and we're happy with both our channels.

Perfect and then we're going to the strength, especially in the Schwinn numbers can you just confirmed they already exceeded the revenue from for your 2019 is that through today or was that during the first quarter and then secondly on on Schwinn you would just talking about how much that was kind of led by new pro.

Products, and perhaps what you're seeing with pricing and price sensitivity for consumers out there today sure Ah. So I can't remember the exact date that we passed on it because I have kind of weekly meetings with our with our web site folks and they give me great stats every week I believe.

It was late late March early April that we are we pass for the whole year, but I may be off a week or two on that but it was you know.

It was late third quarter late first quarters or early second quarter timeframe and then it just continue to accelerate since that and that's where we kinda quoted that you know nine x. number for for the March timeframe.

So so it's it's got tremendous a tremendous a traffic conversion and it really is a lot driven by bikes I mean, that's what that's where it schwinn does have other modalities, but it's really about bikes there and there were several models, but you know the star that we've mentioned a few times was the I see for that.

So basically is a the value proposition of buying a bike. We believe is a comparable to two other selling at 2300 $2400 from selling a bike for 799.

And then we have an open platform, a where you can use our stuff or you could use pellets honors lift or any number of other pieces of software to give you real choice and so that value proposition for that bike and also the bowflex version of it or to see six has just been a tremendous since the two.

Time, we launched it's a it's a great. These are great products. They have a great value proposition and we seem to have I've done a good job and in our marketing messaging. So nothing is getting lost in that there's a clear visas into by those things and that's driven driven a lot of growth.

Okay and maybe this is dig into deep on on specific products, but as we look at the the Bowflex. These six versus the swim product.

It sounds like you know strong backlog on both of those strong orders throughout the quarter, you're safe to say, there's not much price sensitivity between you know that 799 and that 950 ish kind of price point.

Yeah, I mean, we started to see six at 899, and we took a $50 price increase I believe around the last time, we had our call and of course, we saw no.

No decrease in the to end the take rate in fact in fact its increase so at least for price sensitivity. You've got you know fairly comparable bikes that 799 at 849 with with no no major differences in Ah you can kind of volume and so you know we've we believe at least over that range.

We've got you know, we've we've got real winters.

Excellent. Thank you.

Sure. Thank you.

The next question is from George Kelly of Roth Capital Partners. Please go ahead.

Hey, everyone. Thanks for taking my questions George.

So just a few for Ya first of all.

I believe I heard that media advertising was down pretty significantly in the quarter.

Just wondering how do you think about that going forward do you need to step back more meaningfully anytime soon or does it just you know you're getting such a bombardment of orders you know can you sort of pull back so the time being and keep it that way.

Yeah, George Great question, I mean, as I'd mentioned, one of the great aspects of the direct business in the direct business models the ability to respond very fairly quickly and so when you're seeing a classic thing where you're getting so much organic traffic without paying for it you're you you are getting.

Ton more traffic from investments in social media and other digital like search and you're getting great traffic that way.

You don't really need or need to spend as much on the media I mean media usually provides volume.

And those things I mentioned further down the funnel provide conversion, but when the volume seems to be natural.

You you know we pulled back we've seen some of our competition pull back and not everybody, but most people are pulled back from that same phenomenon. We're all seeing the same things and so we've we've definitely oh pull back on that and that's it that's a great thing to to be able to do it certainly is it probably some.

Stayed well I know it isn't sustainable for four over the long run because you still have to stimulate volume.

At some point and so we will be back in but we're going to watch it and you know a day by day. The other thing that's a factor of course is when you have stopped out on some things you don't want to pay for even more traffic to come in and tell them that you know your stocked out on these things. So you watch your your inventory and your competitor.

As inventory I know for example, you know we go to pellets on site all the time and we see there or you know more than seven weeks out themselves and so we're all seeing those same same type of things and you know, we all pull back a bit on our media because we're still getting all the demand we can fulfill.

Okay, Great. That's helpful and then second question.

Is just about journey.

And I was wondering <unk>. So you know you mentioned some new products coming out. This fall <unk> I was wondering how journey kind of fits into that and if I remember correctly I thought it was gonna be take into more products across your portfolio and there were going to be enhancements made and and so.

Jimmy in there now for.

Maybe.

Yes listen to your but what's your view on journey, where are we with it and is there anything you can talk about you know are there still new new things come in sometime this year sure Ah, Yes journey I think journey, the best way I think about it as an operating system for for our machines.

That's the that's the main scenario will also cover scenarios for helping you worked out off the machine.

When you're when you're at home and overtime will find ways to log your outdoor workouts to journey.

So those are kind of the three scenarios, but the one scenario. That's most important right now is as an operating system to all of our all of our products and so when we launched products in the fall you will see virtually everything runs journey and journey is I've said on these calls in the in the path.

Yes that I had some negative surprises when I came here, but one of the very positive surprises for me was how far long journey was a lot of the transformations I've done it had to.

Get the company to believe in digital and then invest in it in a couple of years later, we have products will this has already been there. It's it really isn't really good shape that said, it's a piece of software right. So you know what can never be done you're never done with it you keep I'm doing tons of research and seeing what the next things you should add to it are and will continue to do that.

But I think you we've talked about on a couple of these calls it's got it's got probably the leading AI driven one to one personal coaching that you could have an algorithmic way and no. One else does that like we do and then we have a number of featured in journey that I would call are things that keep you out at longer like.

Being able to watch Netflix another streaming services like being able to use explore the world and biker run anywhere in the world and afford the immersive experience music that goes along with a with your workout all sorts of things that will will keep us keep you add at longer keep you interested in.

Working out its and keeping keeping you staying at it. So that's all we're all about with journeys is helping you get fit stay fit stay with it by giving you a whole bunch of different choices in how to work out, but led with our with our industry, leading AI driven a personal coaching and personal workouts. So we're proud of it but we're going to.

After rabbit, you know everybody or competition is not going to stand still and you know right now that the a framework for the industry is great equipment, plus a great software plus great content equals a great experience and that's where we are will continue to to read that experience to make it better.

Okay. Thank you sure fixture.

[laughter], there's time for one more question, which is from Aaron Martin of eight partners investment partners. Please go ahead.

Hi, can really experiments are not yet GHX.

[laughter] is there any more quantifiable data you can give us a journey you talked about the 50% increase since downloads are you ready to give us anything else there in terms of.

You know if it isn't a sudden figure or one I don't get from the revenue perspective, what can you tell us there on journey.

Yeah, and we're still sticking with with ER with what we've been doing there. It's still early not so much in the software development because as I said I like where the software his eye wherever we need to rabbit and over its strong I really like it overall, it's just not on enough pieces of equipment. It.

If you think about it like install base till the installed base rose significantly you're not going to have the full growth you really have with with the journey now that said you know I've said before one of our big priorities. It is.

His injecting connected fitness throughout our product portfolio and having it run journey and that's that's what you'll see with our product or what we roll out. This fall. That's what you saw with a with many of our connected products. We did last fall, but you know I think I think the number was 28.

We had maybe 3% of our products were quote unquote connectable in connected fitness scenarios, we took that number a significantly higher with our launches in 2019, and we'll take that number still higher you know or do a vast majority of all of our products available.

You know this year, so that will continue to really grow that installed base and those that installed base becomes more meaningful then the subscription business does as well and they begin to report on numbers at that point.

Okay, and then one more if I may you mentioned a in opportunity with the new retails.

Partner that you haven't had before anything more you can expand upon that.

Yeah, I mean, we're not gonna named the names on the call, but but you know these are retailers that you know you would know what I mentioned them. There are people, we've been trying to fish for a long time, though limitations of we love retail, but one of limits.

There aren't enough sporting goods retailers, there aren't enough retailers that are that sell fitness products, we would like more of them and we would like the existing ones that haven't Kerry products to carry more fitness products. So I think what really happened in this in this last quarter is or you know these retailers.

Smart people, they listen to what their customers say and when will come to their websites and and ER and say look I really wish you had more fitness products, they turn around who come to us and said how about you get us some more fitness products and what that allows us to do is get you know our foot in the door get on the floor in some of these places here [laughter] Hello.

Common in the meantime, but sometimes these relationships [laughter] to get to that point and [noise].

It's a one of the one of the things that has happened is we've accelerated.

These retailers figured out that fitness was going to be a great category for them. You know next year are figuring it out this year.

Okay, great. Thank you congratulations great quarter, there and I'm pushing your efforts to this a extraordinary times. Thank you Keith.

This concludes the question and answer session I would like to turn the floor back over to Jim Barr for closing comments.

Thank you for joining our call today and your continued support and for your continued support of Nautilus, We look forward to providing you with another update on the business in a few months on our second quarter earnings call.

Please stay safe and healthy have a great rest of your day.

Onwards, and upwards. Thanks.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.