Q2 2020 Nautilus Inc Earnings Call

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Greetings and welcome to the Nobilis incorporated second quarter 2020 earnings results Conference call.

At this time, all participants are listen only mode.

Question answer session will follow the formal presentation, if anyone should require operator assistance during the conference. Please press star zero Arnie telephone keypad.

As a reminder, this conference is being recorded.

There's now my pleasure to introduce your host Ms. Deirdre Thompson, Oh I see our please go ahead Mr. Johnson.

Thank you good afternoon, everyone welcome to the Nautilus second quarter 2020 conference call participants on the call from Nautilus, Our Jim Barr Chief Executive Officer, I know couldn't old Chief Financial Officer, Chris Cuattro cheap senior Vice President of product development.

And Bill Mcmann special assistance the CEO.

Please note this call is being webcast and will be available for replay through the next 14 days well be happy to take your questions at the conclusion of our prepared remark.

Our earnings release issued today at one of five PM Pacific time, and they'd be downloaded from our website at Nautilus inked dot com on the Investor Relations page. The earnings release includes a reconciliation of non-GAAP financial measures mentioned in today's call to the most directly comparable GAAP measures.

For today's call we have a presentation accompanying the call. It management will refer to during their prepared remark and on fly to its our full safe Harbor statement, which we ask everyone to read you can access the presentation by going to not only think dot com then clicking on the investors tab and then click on the inbound and whats cap and the presentation.

Be there.

I would like to remind everyone that during this conference call knowledge management will make certain forward looking statements.

These forward looking statements are based on the current beliefs of management and information currently available to us <unk>.

Such forward looking statements are not guarantees of future performance and therefore, one should not place undue reliance on that our actual results will be affected by known and unknown breadth try and uncertainties and doctors that are beyond our control and ability to predict.

For additional information concerning these factors please refer to the safe Harbor statement and sure FCC filing, which it can be found in the Investor Relations section of our website.

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

Thank you Deirdre good afternoon, everyone and thank you for joining todays call.

I'm incredibly proud of our second quarter results and the truly amazing efforts from our team to achieve them.

Operational improvements that we implemented in late 2019 are beginning to bear fruit.

We built on our Q4 2019 change in trajectory by delivering in Q1, our first positive comp and over two years and now in Q2, producing these extremely strong financial results.

Despite being supply constrained for the entire quarter, our net sales nearly doubled up 94% year over year.

This makes it our best year over year growth since becoming a public company.

Our best second quarter and over a decade, and one of our top quarters period in our long history.

Gross margin rate expanded almost 1200 basis points to 42%.

Most importantly, adjusted EBITDA swung to a positive 25 million from negative 10 million in a year ago quarter markedly improving our liquidity to fuel our short and long term growth opportunities.

We did not experience the second quarter seasonal decline that we typically see with demand strongly accelerating from Q1 levels.

Our performance was driven by accelerated demand of at home fitness due to covert 19, Jim closures.

Broad growth across both segments.

In our consumer focus brands and products and excellent execution in response to what proved to be a full sustained quarter of enhanced demand.

In addition, despite incredible efforts in our supply chain and and a dramatic increase in our manufacturing capacity.

We ended Q2 with $34 million in back orders.

While we wish we could have satisfied even more customers. This gives us a nice start to Q3.

Next I'd like to remind everyone of our company's priorities that we as we navigate the extended cobot 19 pandemic.

Our first priority remains the health and safety of our employees and partners.

I'm happy to report that to our knowledge none of our approximately 500 employees has tested positive today.

Second our mission and culture drives us to deliver for our customers, especially in their time of greatest need.

In response, we massively expanded production capacity in supply chain throughput.

Our distribution centers customer care and the rest of our operations remain open end at elevated levels of activity throughout the quarter.

Third we are leveraging all our capabilities and our of our assets, including strength of our brands.

Our quality products and our Omnichannel model to make the most of the at home fitness tailwind.

We want to maximize this opportunity and have responded well in the short term and.

And while doing so we have built confidence new skills capabilities and attracted new customers to the company that I will believe that I believe will serve us well in the long term.

I'll cover some of these with specific examples in a moment.

Finally, while we are while we were delivering.

Strong short term results.

Also remain focused on the importance of the long term transformation of our company.

We're continuing to fix the underlying issues that led to our multiyear decline.

Topics that we've highlighted previously.

And we've made significant progress on our insights driven long term vision and multiyear strategic plan that I've mentioned in the quarterly call since I arrived a year ago.

We have already delivered several elements of this plan and some of the growth from them and believe that our long term opportunity has been enhanced by the events at the quarter and the anticipated continuation of the at home fitness Trent.

While our results were undeniably aided by the tailwind from Jim closures. The main character of our Q2 and first half performance story is our team.

They're resilience agility and incredible response to unexpected challenges and opportunities.

I would like to share some examples of the remarkable response. This left this past quarter. They include.

Expansion of production and supply chain throughput.

Agile and decisive actions to drive profitability.

Investing in our omni channel approach and retailer relationships.

Accelerating progress on our own web sites and keeping our 2020, new product launches a major step in our transformation on track despite logistical challenges.

Our supply chain from manufacturing to logistics did some incredible work to respond to accelerated demand any rapidly evolving outlook of the likely duration of cobot related impacts.

As the quarter unfolded and we saw sustained elevated demand we moved to massively increased production capacity and supply chain throughput.

For example in the quarter, we saw an incredible 500% increase in IC bike production capacity.

To do this on our asset light manufacturing model requires having built long term partnerships and goodwill, which can then be leveraged at a time like this we are grateful to our production partners and suppliers, who themselves responded admirably and with agility to profound and unanticipated levels of demand.

On top of enhanced production capacity, we increased the flow through of inventory through outstanding execution, and planning purchasing and inbound logistics.

Our team worked quickly to find solutions to get our goods from manufacturers to the ports. Despite covert 19 restrictions and then secured the quickest vessels to get the product to our Dcs, we fast voted over half of our containers. This past quarter to help close Q1 back orders once the product was that the port.

The team used a variety of strategies to reduce the lead time from port to customer, including cross docking at the port and extra shifts in the Dcs to.

To illustrate the overall improved throughput, though the second quarter is typically our lowest volume quarter. We shipped about the same volume in Q2 as we did in Q4 of 19.

Our management team also made key agile decisions to drive profitability. For example, we took reasonable price increases on key high demand products, we sharply decreased the proportion of unit sales on promotion.

Leveraged our current and anticipated volume to gain cost improvements from suppliers and cut back on media spending.

We continue to invest in the long run health of our Omnichannel approach Udall utilizing an allocation decision framework intended to balance inventory between direct and retail segments.

We leverage retail partners to provide our customers with greater ability to engage with and by our products, when where and how they prefer.

This quarter, our retail partners also experienced elevated demand for our products as well as acceleration of their own digital transformations from changes in consumer behavior that I believe we'll have lasting benefits for us both.

Our retail partners drove growth through curbside pickup capabilities that did not exist before the pandemic hit.

And the accelerated the growth of their fitness categories on their dotcoms.

We believe trends accelerated in the pandemic will have long term benefit for non list by reducing traditional barrier such as floor space constraints on price point ceilings, a brick and mortar retail.

We also use the moment to build relationships and gain greater scale with new retail partners.

A new retail customer best buy quickly rose to become a top retailer in sales volume in the first full quarter of offering our products on their website.

Our own websites saw a 300% increase in visits driven by an amazing 700% increase in organic traffic as consumers sought out our brands and our products.

To capture this demand our websites added improvements in FCO content ability to take orders with longer extended promise periods lead capture for out of stocks.

And in stock notifications and ways to promote slower moving products.

While we pulled back on television advertising, we continued investing in digital channels, such as search and social media.

We also saw disproportionate growth in new customers introduced to our brands and products.

Finally, we overcame restrictions and travel and working face to face to keep our 2020, new product roadmap builds associated advertising production and overall launch plans largely on schedule.

I'm excited to tell you more about our 2020 new products shortly.

Before I turn the call over to high now I thought it would cover one other topic.

In such an unusual time, where people's lives have been altered so significantly in industries, including our own have been changed so profoundly.

What will the impact the.

Given how rapidly the situation is evolving and the typical seasonal trends a proven less relevant in predicting the future no. One can answer such questions with any degree of certainty.

But I thought I might I thought it might be helpful to share how we're thinking about our business for the rest of the year and into 2021.

Based on what we've seen so far.

And the assumptions underlying the decisions to this point.

We believe that a component of the covert effect on our business is undeniably temporary.

As Jim's open and their capacity increases over the next 12 to 18 months demand for our products were light likely decline from the current elevated levels. However, we believe there is another portion of the coveted impact that is longer term and perhaps even permanent.

And our own research, 12% to 25% of Jim goers are saying that they will never go back to the gym, they will focus on other solutions, including home fitness permanently.

We also believe that a portion of those who say they will eventually turn to return to Jim's either because they think it's safer sometime or when there's a vaccine.

We'll rely of 100 will not rely 100% on the availability of there Jim.

They were caught without options when the gym closure orders began and felt a loss of control and an important aspect of their life.

In their new normal we believe they will invest in home fitness solutions as a hedge against another outbreak and we'll balance their workouts between the gym at home differently than they did before the pandemic.

Digital solutions will help by bringing aspects of the gym experience home.

Further the supply of available gym membership options will will likely be at least temporarily disrupted because unfortunately some of the Jim's will not survive.

Due to these factors, we think the at home fitness market will experience important growth.

The size of the gym membership market is roughly 10 times that of the at home fitness equipment market.

We have already seen evidence of movement from the former to the ladder and envision a less defined boundary between the two.

Thus companies like Nautilus, who are well established in the at home market and have strong brands in a portfolio of leading products should have an enhanced opportunity.

There are clearly barriers to capturing the incremental demand such a short term supply availability.

Readiness of respective solutions to meet the needs of Jim goers, and fierce competition, including some upstart competitors.

Longer term important factors, such as reliable products, well known brands and strong established go to market solutions will play an important role.

The situation is highly uncertain and rapidly evolving but has already impacted our inventory and supply planning. Our go forward strategy, our product development roadmap, both physical and digital and our investment posture.

We will keep reading the market and and we will evolve as the situation develops.

With that I'd like to turn it over to our CFO Heineken, though will go over financial results in more detail.

Jim and good afternoon, everyone.

As Jim mentioned in Q2, we saw significant surge in consumer demand for high quality home fitness equipment.

Record setting traffic to our web sites and continued strong orders from our retail partners respect power of our brands.

We're also quite pleased about the expansion on a gross margin rate.

Key metric, we focus on as you make progress on our path to sustainable profitable growth.

I'll begin today by speaking to total company PNM results for Q2 2020 with comparisons to Q2 2019.

As a reminder, we've had William Blair to help us with the sale of octane fitness.

Commercial focus business.

As a result this quarter, we recognize a loss of 29 million on the disposal.

In Q2 last year, we booked a 72 million dollar impairment of goodwill and other intangible assets.

Both of these non cash charges are included in operating expenses.

The Pan out the obvious speaking to now adjusted to remove the impact of both of these onetime significant charges.

Please see our press release on our website for a reconciliation of these non-GAAP numbers to our GAAP reported results.

Net sales almost doubled to 114 million compared to last year's 59 million.

As Jim noted earlier this is the best Q2 sales results in the past decade.

The meaningful uptick in our sales trajectory is the result of our team's ability to rapidly pivot.

And take advantage of the surge in demand that began in March let's say at home waters first went into effect.

Our team quickly rebooted, our supply chain once Chinese corporate 19 restrictions and then to accelerated it increasing output on some of our best selling products by about 500%.

Although we significantly increased production capacity and we invested an expedited shipping costs.

Hi, Bristow insufficient to meet demand in the quarter.

Most popular products had been on extended promise periods on our web sites and out of stock in our retail partners.

We entered Q3 with over 34 million it back orders in our pulling all levers to get products to our customers as quickly as possible.

Gross margin rate increased by almost 1200 basis points to 42% growth.

Gross profit was 47 million 30 million higher than last year.

Strong execution across both segments with a key driver the increase.

Favorable mix was also a factor.

Direct was 44% of sales this year versus 35% last year.

And so the first time since Q4 17, we had year over year growth in sales of our higher margin Max trainer line.

In Cogs, we saw leverage on fixed costs offset by continued pressure on product landed costs.

Products the import from China are subject to a seven and a half terra versus no tariff last year.

We continue to incur extra fees to expedite shipments.

And lastly, overall shipping costs are rising driven by lower supply is ocean carriers have reduced the number of sailing.

Adjusted operating expenses were 18% lower declining to 25 million or 22% of net sales.

Selling and marketing expenses were down 29% of 12 million or 11% of net sales.

Fair to $18 million or 30% of net sales.

The decrease in expense was primarily in advertising as this year, we spent 2 million versus 7 million last year.

Customer acquisition cost were meaningfully lower as the company pull back on paid advertising given strong organic demand and inventory scarcity.

R&D costs were down 3% to 4 million or 3% of net sales compared to 4 million or 7% of net sales last year, driven by lower maintenance expenses related to our journey digital platform.

Gn expenses for basically flat at 9 million, 8% of net sales this year versus 16% last year.

Adjusted operating income was 22 million 35 million better than last year, driven primarily by increased gross profit and expense leverage.

Adjusted income from continuing ops increased to 17 million or 56 cents per diluted share.

Compared to last year's loss of 10 million or minus 33 cents per diluted share.

Adjusted EBITDA from continuing ops improved by 35.

We delivered 24.7 million of adjusted EBITDA This year compared to a loss of 10.5 million last year.

Turning now to Q2 2020 performance by segment.

I'll be comparing this years Q2 results with last year's Q2 results.

Net sales in the direct segment were 15 million up 142%.

After years of you sales decline. This is the second consecutive quarter of sales growth for direct.

Higher sales were driven primarily by Cartier, which grew 183% driven by the both legacy six inch when I see for bikes and our Max trainer.

Direct entered Q3 with 21 million in backlog compared to 8 million at the end of Q1 2020.

Gross margin rate rose to 55% versus 43% last year, driven by favorable product mix offset by higher landed protocol.

Gross profit was 28 million 19 million higher than last year.

Segment contribution was 17 million compared to a loss of 6 million last year.

The improvement was driven by increased gross profit in a 4 million reduction in media spend.

Turning now to retail segment results.

Net sales for our historic 63 million up 68%.

Q2, 20 is this segment's second highest quarterly sales in history.

Second need to Q4 19.

Cardio sales were up 88% driven by this trend I see for by and Max trainers.

Strengths product sales were up only 22% limited by inventory scarcity of selecttech rates and benches.

Importantly.

If we exclude sales related to our commercial focus octane brand.

Due to 2020 net sales for the retail segment grew 95% versus Q2 2019.

Retails backlog at the end of Q2 was 14 million compared to 6 million at the end of Q1.

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

This quarter Amazon accounted for 18% of total company net sales.

Gross margin rate was 30% up from 21% last year, driven by favorable sales mix offset by higher landed product costs.

Gross profit was 19 million 11 million higher.

And segment contribution was 12 million compared to breakeven last year.

The improvement driven by higher gross profit.

Turning now to other two to highlight.

Weve group, the assets and liabilities associated with octane into current assets held for sale and current liabilities held for sale on the face of our balance sheet.

Please see our press release on our website for more detailed regarding this new presentation.

Strong sales growth in grade flow through to earnings resulted in a much stronger balance sheet at the end of the quarter.

Cash was 48 million and debt was 15 million compared to cash of 11 million and data 14, asking at year end.

We had $29 million available for borrowing on our wells Fargo credit facility.

Hey, our was 34 million, 30% lower than 55 million at your end.

The decrease was due to the timing of customer payments and certain receivables included in the held for sale disposal group.

Trade payables were 45 million, 39% lower than 74 million at yearend.

Primarily due to timing of inventory payments and reduced advertising related payment.

Capital expenditures were 5 million year to date.

Inventory was 21 million compared to 55 million at your end.

The decrease is due in part to 12 million of inventory being reclassified into the held for sale disposal group.

And the surge in demand that began in mid March.

Our Q1, ending inventory would have been more in line with the seasonally normal Q2.

Our team's ability to wrap up our supply chain is what allowed us to meet the increased demand in the quarter.

We accelerated factory output and decrease lead times from port to be seen by fast voting containers cross docking I see bites at the port and adding extra shifts at the DC to process volumes more in line with two for.

Versus Q2.

To secure factory capacity, we routinely issue non cancelable pls for expected inventory purchases and the next 12 months.

These obligations are disclosed in our 10-Q.

At the end of Q2, we had about 128 million of non Cancelable purchase obligations compared to 20 million last year and 35 million at the end of Q1 2020.

Turning now to our expectations for the rest of the year.

We are operating in a highly volatile environment. Unlike other companies in our industry. We are trying to determine the magnitude and duration of the current at home fitness trend.

Our perspective on the duration of this elevated consumer demand depends in part on how launches will be close and our capacity constrained.

And when customers was more comfortable returning to their Jim.

Given this uncertainty we're not providing specific guidance for the back half of the year.

But we do want to give some color on trans overseen and how they affect our plans for the back half.

First we believe the in the near term consumer demand will continue to be elevated relative to pre corbett levels.

That the new journey connected products that we are watching in the fall will be met favorably.

Our confidence is reflected in the significant increase in our inventory commitments.

That said constraints in our supply chain could limit our ability to fulfill all of the demand in the back half.

And until a vaccine becomes widely available we remain concerned about unforeseen disruptions to our supply chain.

In Q2, Cobot 19 restrictions affected ceiling schedules and port working hours.

Creating uncertainty in our delivery schedules that making more difficult to predict from customer orders could ship.

We anticipate this difficulty to continue since the rest of 2020.

Second given the imbalance in demand and supply we expect continued cost pressure in logistics versus last year, which puts pressure on our gross margins.

Ocean shipping providers continue to constrain supply and rates have been rising.

And our logistics partners in the U.S. of total shipping capacity will be severely constrained in the upcoming holiday season.

We expect to incur increased cost to secure delivery slots for our goods.

Third with regard to operating expenses.

We plan on spending more and marketing in the back half in support of our new product launches.

So are not expecting the same level of year over year expense leverage that we saw in Q2.

Finally, we are reiterating our full year capital guidance range of 8 million to 10 million.

In summary, we are pleased with the sales momentum in the business and how our team has responded to the surgeon demand for our topic.

We're proud to have delivered another quarter results, but as Jim has mentioned we are still in the early stages of our transformation and anticipate that the way forward will not always be smooth.

We continue to balance delivering improved short term results with making the structural changes required to return not a list of sustainable profitable growth.

I look forward to sharing our progress with you next quarter.

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

Thank you Ita.

We're certainly pleased with the superior results in the quarter and the improvements we are making in our business.

However, we must remind ourselves that some of the underlying challenges in our business remain and the operating landscape is highly uncertain.

Due to the cobot 19.

While we were delivering historical Q2 financial results. Our management team was also dedicating significant time and energy on our transformative long term strategy work.

As you can see from our recent announcement announcement to explore the sale of the octane fitness.

We are making important strategic changes to our business. However, it's important to remember that transforming a company doesn't happen overnight.

Even though we're making strong strong recent progress.

But this will be a long process.

There may not always be quarter to quarter linear progress.

As a proof point to our continued focus and our long term priorities, we are poised to launch and innovative and exciting lineup of 2020, new personalized connected fitness products and services.

You will see more details on all of these in the coming weeks as we roll them out, but I'm delighted to give you a quick overview. So that you get a sense of where we're going.

We've seen a search and surge in demand for strength products and we have already added to our strength category with the launch of the Bowflex Selecttech 2080, barbell and crowbar set.

And new benches.

Our customers cannot get enough of many of our strength products, including Selecttech.

The twentyeighty sold out in less than 24 hours on Bowflex dotcom and.

And we're working hard to get them back in stock.

Nautilus's is on a quest to become a more digital company, where physical equipment content and software come together to deliver an experience that could not have been imagine several years ago.

As such we will launch and improved experience on journey, our personalized connected fitness digital platform.

Journey will feature an updated user interface, new content, including a more robust lot library of on demand streaming workouts.

An integral integration of explore the world and Apple health.

Most importantly, we have integrated into more products. So that the journey experience is available on more modalities and to more customers.

Off in the first piece of equipment bought for the home fitness is a treadmill, it's mostly easily understood modality.

Thus, we're super excited to launch three new connected fitness treads with different sized screens and loaded with Germany journey.

Wait theres more.

The Max trainer is a modality we invented.

A unique and patented combination of elliptical and stepper that gives you an exciting and excellent workout and as little as 14 minutes, a day and takes up half the space in your home that tread does.

It is one of our all time best sellers, having sold hundreds of thousands of units.

Sales declines the company suffered in the last few years were in part driven by the transition of the Max from high volume hero product to low volume later in its lifecycle.

We believe this product we believe in this product and we're betting that an immersive digital experience delivered via journey will modernize and make the Max even better. So we are launching two rejuvenated Max trainers with screens and journey embedded.

Finally, we've seen tremendous demand for our bikes, we launched the first bowflex bike the C. Six and the first schwinn connected bike the IC for late last year, both bikes were instant residing hits pre and post coated.

Therefore, we are launching three new bikes with imbedded screens and journey, including some that will deliver a very special differentiating surprised that I wish I could show you now, but I don't want to steal the thunder of our launch activities.

These new products will be added to our already robust product portfolio, we relate to connected fitness, but have taken another important step in 2020 with these launches in just two years, we will have increased the mix of units, which offer connected fitness from single digits to a strong majority of our portfolio. This.

Gives our customers the best possible modern at home fitness experience gives us greater ability to deliver on our mission to help people live healthier lives through fitness.

And fuels are growing membership business model.

Im tremendously excited to see these products hit the market, especially in the midst of the at home fitness trend.

Just a few more comments before in my prepared remarks.

Last week, Mark My one year anniversary grid, Nautilus and I found myself, taking stock at what's been a truly remarkable year for our company.

When I joined the company was in the middle of a difficult year.

We had missed some important market trends are suffering from incompletely, an undiagnosed problems and unconstrained and constrained resources.

And we were delivering poor financial results.

I knew we were in for a multi year turnaround, but I was excited and energized that the company had most of the important ingredients and needed to return to its leadership position in the fitness industry.

One year later I believe this more than ever.

2019 was a year to forget with the company continuing a multi year sales decline, losing over 20% of its revenue base that resulted in an operating loss of $100 million, we had cut 13% of our workforce to survive and we had lost our confidence, but our people were resilient gaining experience at manager.

Through crisis and remained passionate about our normal mission.

Q4, 2019 ended with a moderate change and trajectory and some reason for optimism, we relaunched journey and added connected fitness bikes treads and the Max totaled to our portfolio. The bikes gained immediate traction due to their quality and value proposition, we diagnose the root causes of the biggest problems and put or.

Early actions against them, which continue today.

We secured new financing and hired new leaders in marketing and finance.

We also made some bolt revisions to our 2020 product lineup.

Although we limped out of 2019, we enter 2020 with renewed optimism.

Q1, 20 produced our first topline growth quarter since 2018, the connected fitness bikes continued to sell without the typical seasonal drop off we felt covert nineteens effect first as a supply chain disruptor in China, losing several weeks of production on our new bikes.

Then when coven 19 began to affect the rest of world.

End demand at at home fitness skyrocketed demand for our quality products turns in already good quarter into a great one.

We saw rush to our quality products and well known brands.

We sold through almost everything in our DCF in the last two weeks of March and our supply chain team went to work to accelerate our pipeline.

In Q2 2020, we produced historic financial results fueled by the at home fitness tailwind for a full quarter broad growth across both segments and in our consumer focus brands and products and witness the teams excellent response and execution.

We changed our whole working model shifting to working from home the team face many challenges in its new normal.

While we were managing a sales volume nearly double last year's we also worked on our long term transformational growth plan, including important focusing decisions like the difficult one to sell octane.

We are optimistic about our 2020, new products and our improved cash and liquidity position, which gives us greater capabilities and expanded options.

I'm proud of our progress, but I'm constantly reminded that we have more work to do on our path to sustainable profitable growth.

As I said at the top of the call a portion of our results in the quarter were driven by covert 19, Tailwinds. However, the team's execution allowed us to meaningfully increase supply chain output capture new customers expand product margins, although well maintaining our cost discipline.

And for that I'm incredibly proud to be part of this company and to be teammates have such dedicated individuals.

I want to again, thank our employees and partners, who stand committed to our mission even during these difficult times and I'm excited to begin my year too.

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.

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One moment, please while we pull for questions.

The first questions from Steve Dyer Craig Hallum. Please go ahead Sir.

Good afternoon, congratulations and.

Thanks.

Terrific results thank Steve.

No just I guess as you look at sort of revenue or capacity in the near term.

I didn't give guidance, but I mean is it reasonable to think kind of Q2 is best case scenario. I mean, you started with a backlog ended with a backlog didnt start with much inventory demand with much inventory I mean, you. We're clearly going sort of fallout is is it reasonable to think thats kind of.

Best case scenario right now our other puts and takes there we should consider.

Yeah, I'll start and then ill ask guided to jump in so.

Great question, Steve and of course, we're trying to figure this out.

As we talked about last quarter, you've got two things going on at the same time, you've got no demand that that that continues to be extremely high.

And then you have a response in supply.

Our to our demand our view of demand as it will continue as I said in my comments on supply of supply side. It has a lot to do with how well we match supply and demand how well we anticipate these these types of things.

Where I will also say on supply, we're learning and growing I would have never thought that we could increase our our by capacity by 500% within one quarter I just did in though that was a capability and so I'm learning what we're capable of and we're still looking at that as we continue moving forward I will tell you that.

One thing you can look at is.

It is our is our our commitment.

And.

Our our balance sheet commitment of $128 million because that give some view to where we think things are going but you know everyday. This this this changes both the supply and the demand side and our ability to match those things and.

It's pretty tricky as you might imagine to get it absolutely right. We've definitely already kind of made our bets for Q3 and were pretty locked and loaded on what we're ability to our ability to to deliver in that particular, one but Q4.

By the end of Q3, what will we have done in terms of increasing our capacity even further in a will bring on some second suppliers and things like that during this quarter and we'll we'll continue due to increased capacity. Obviously first thing you do as with your existing suppliers you add new lines and you get you get that to happen and they have to invest.

With you to get those new lines and then if that's not even even enough. Then you have to go to second suppliers to actually.

Implement and add to that so augment that so theres. So many.

It's hard it's hard to tell but but we're we're pretty optimistic.

Only thing I'd add to that is.

You said it correctly when you first look at if you're coming in mid low inventory and may seem difficult to ramp up we showed in Q2 that we have the capability to do that we're very focused on expanding our supply chain and doing what we.

Through.

Noncancelable pls preserving spot on those existing lines and then continuing to expand them.

Hopefully that's helpful.

Very helpful. Thanks.

And you raised the price on some of your products during the quarter, particularly the Blake some.

You are really kind of a couple couple questions around that one is did you see any elasticities around that or any sort of noticeable difference. After you do that.

What was the demand crush just just so much in them.

Secondly, not just the bugs, but overall I mean do you have a sense as to what kind of cancellation rates you're seeing.

You know that you're leaving on the table as you as you ramp.

Sure I'll start again, I'll I'll ask I know the to augment anything she has go in but but no. We didn't see any noticeable difference and we didnt think we would.

We had tried a cost.

A price increase on the C. Six in the first quarter, if you'll recall and that was pre pandemic and we didn't see any drop eve seasonal or otherwise in that particular demand.

That gave us.

Even before covert hit we had a pretty good idea that we might look at can we raise us a little bit more it's still such a fantastic value proposition relative to many of the competitors out there.

And it's you know with an open platform and all that sort of thing that it really it really worked well. So we we felt that that would work and we also felt the same thing about.

The Selecttech five five twos I mean, those things were kind of the new toilet paper and and people we couldn't keep them keep them in stock so raising that a little bit we weren't price gouging in any way. We just we just thought hey. These these things are in high demand and.

And we've got a little room there. So we raised both of those and we saw no.

No decrease in.

In demand.

In terms of cancellations I think it's kind of a function of how long you make people wait.

Yes, I think given other alternatives in the market they are willing to wait quite awhile.

Some of our competitors are up 10, 12, 15 weeks things like that so.

They are willing to wait they are actually.

Quite quite happy to be at a spot Weston and have you have you committed to fulfilling that need you occasionally you'll get a cancellation.

For example, if we had.

Some IC force that we had gotten orders from a from our.

Our direct division from Schwinn fitness Dotcom and then also an Amazon goes back in stock on those items people will buy them immediately from from Amazon and they'll cancel cancel our so you do see some cancellations and we will likely fulfill the 34 million of back orders dollar for dollar but.

But a lot of it sticks around because because our products are good our brands are there and people are willing to wait for them anything you'd like that no no I think you covered it Tim.

Great and then last one for me and then I'll pass it along you talked about you talked about all the great new products, there's a ton coming in you talked about sort of throwing some some marketing dollars behind that which which I guess.

Any any willingness to sort of quantify that at all and there may be how we should think about the split between Q3 Q4.

I'll just tell you I think about it and then I can answer the numeric question as far as she feels comfortable doing it.

As we weren't as we didn't need to spend.

As much on marketing, even in first quarter and definitely in second quarter I think if you asked our CMO.

Are you argue permanently saving it are you putting it in piggy bag for product launches you would say the ladder and it's probably some combination of of the too I mean, we think we've got some great products to get out there in the marketplace. We've we fought through.

Producing some what I think are some really good commercials that wasn't easy by the way to do casting remotely and to go to go to California in film. Some commercials, just just before California closes again, and then shift to the New York area as well on top of that as one of those logistic things we fought we fought against but.

The way the the way I think about it we definitely want to keep that money in the piggy back because we.

It'll it'll be just as it has been if we don't need to spend a ton of it to sell everything we have well then we won't spend it but if we can if we can really go big especially on some new products and get them out there and by the way Theres also brand building too I mean, that's something in our long term strategy that we.

We really believe we haven't done enough of we've done we've only been able to afford for the last couple of years enough.

If advertising to basically drive transactions and not get our brands to the very best place. It can be so we want to spend a little bit of money on that too I know, it's kind of a non answer because you were looking for a dollar but that's just really the framework, we have which is probably the best way. We can answer any questions. In these types of situations on a do you have anything to the one thing I'd add that I remain.

And everybody that.

Our focus on being really more efficient and effective in the marketing spend started happening Q4 last year. So when you're looking at year over year compares.

Just to be mindful that the improvement in our efficiency already beginning to 19. So just something to think about on top of the product launches that we're going to plan to put marketing behind.

That's helpful. Thank you both.

Okay. Thanks.

The next question is from Mike Swartz tourist Securities. Please go ahead Sir.

Yes, Hey, good afternoon guys.

Just first question, maybe provide a little contacts to push that gave us equal more on the last call you.

Synergies your backlog.

Go into early to mid third quarter. So I just wanted to get back into the backlog where it is today is that something you can satisfy during the calendar year.

And then related the bad just on the purchase obligations maybe Brian.

Yes.

What percentage of your sales in the back half cash.

Typically have that kind of line of sight into at this point year.

So I'll start with the backlog.

Question, and and then we'll outline to go to the purchase obligations. So for the backlog look we.

Last time, we spoke co bid was still kind of on you know unwinding like we were just starting to develop I think first we thought hey, this might be a couple of weeks and I mean, we in the collective sense of the world thought it would be a couple of weeks and then we thought maybe it'd be a month and then maybe we ought to be a couple of months. So when we made those statements in early.

May that we would.

Perhaps catch up in the third quarter.

We just did see this continue elevation of demand and so if you have demand kind of running away from you and your supply side you haven't pushed all the levers yet to increase the supply in the output of the supply chain yet because you were quite sure how long it was going to less than you suddenly realize.

Hey, it's going to be longer and that was after our last call. So while we tried to do on these calls that give you. The best information we have how we're making decisions at the at the time, but I'd say within a few weeks of that call. We knew this is going to be a longer term catch up catch up mode on on on inventory and then on or do you want.

To cover that are sub divisions.

I want to add to the backlog question I wanted just make sure that.

It's not the same population the backlogs that would there.

Earlier in the year. This we are fulfilling then but as demand continues to be high end promise periods are longer. It's almost just if you think of like something that slides along Esa time progress if I want to make sure I called that out and then second when you think about the appeals that we've issued but we wanted to has.

Although we're not certain how long that high level of demands will continue we are seeing that they're going to continue for the near term. So we want to reserve as much capacity as we can so I don't want you to think that all of this hundred plus million Appeals are necessarily for just only Q3. So we're just reserving as far as we can see in the factories that we work with.

Just to make sure we don't run into a constraint so that hopefully will be helpful to you when you're thinking about inventory Pos.

No no. That's that's great. Thank you and then Jim maybe a question on marketing I know this is kind of an extraordinary.

Environment. We're in today, and then you havent had to spend as much as maybe you would have in a typical year to stimulate demand, but can you talk about maybe some of the underlying.

It was you're putting in place as far as customer attribution and maybe pack the purchase and any early learnings from that.

Sure.

It's a great question because at some point.

Gravity comes back right I mean, its weve. This this moment, where our cost of customer acquisition has dropped so pretty precipitously, that's not going to persist for years and years and years. So we know are going back. So your questions are really in there and the right spot and that's really probably the main thing I've I talk about when I say.

Say, we still have these underlying issues that were working on I know it was it was great to point out that.

Kind of beginning the fourth quarter of last year, we really focused on ROI and we just look at our product portfolio in the hand that we have and we're smart about how we're how we're going to how much money, we're going to spend the second thing is how what vehicles do you spend the money on we were two thirds TV one third did.

Little for five years in a row and every year got worse than the other I think I've called that the definition of media buying and sanity.

So we kept we kept doing that in doing that.

Of course, you say just do something different there. So we started to do something different in the fourth quarter in the first quarter then beginning.

In the in the second quarter, we have a new media buying agency they are quite a bit more digital than the last one.

They come what comes with it is attribution tools you are right on it there even when things went wrong, we didnt know what part of our spending went wrong.

It's the old advertising adage that half of your advertising is wasted you just don't know which half.

We started to get a better idea of that and so working with this new agency.

With their own tools proprietary tools that help us attribute to TV into the various digital marketing things, we at least know where what's working and what isn't and we do more of what's working and less of a less of of what isn't.

Then as we moved into the strategic planning process, we did some great new.

Consumer research, we have and we will share with you when we when we talk about the strategy.

We have new market segments, we kind of just did a demographic in it and an age group.

Segmentation now we've done behavioral segmentation and Thats Super important to our industry. So we're getting a much we're getting to know our customers are different types of customers a lot better than we had before and then we've done this past the purchase that you mentioned as well and we're learning things like most of the time people choose a modality before that.

Choose anything else. So you have to take them on your website and other places from that to the exact right thing.

That's right for them, we definitely learned that.

Purchasing products in our we knew this already but it's a very complex decision for people to purchase fitness equipment and spend the money that they do so weve, where we on our website are getting better at making that decision a little bit easier, making the decision a clearer to them doing the right kinds of comparisons and things like that and Thats. It.

Really just the tip of the iceberg, that's really what I collectively say look we haven't sold everything yet right now we have an amazing.

Media efficiency, ROI, and a low cost of customer acquisition, but but eventually that's going to be more normalized and in the meantime, we have to learn all the things we can to make sure that we're prepared for that moment. So it's a great question I appreciate.

Thanks, a lot going to color Jim.

Sure.

Next question is some George Kelly off capital Partners. Please go ahead Sir.

Everyone. Thanks for taking my question.

Hi words.

So just a couple of questions for you first.

Just to sort of the demand momentum.

However, you measure what that looks like.

And what is if you could kind of break it down sort of what you size the summer progressing maybe subsequent to quarter end.

I guess, what I'm trying to give guidance just have you seen any kind of slowdown or is it re accelerated your what does that momentum what does it look like.

You want to start I'm sorry.

I'll limit, our our comments too, but we saw in the quarter.

We didn't really see we had expected to see a slowdown because this as Jim said, we we thought it looked a little bit more shorter term situation and maybe most of it had happened already in the first news last two weeks of March early few weeks of April, but we did not see really any sort of drop off.

In Q2, we were looking for the normal seasonal drop off we were looking for some drop off when.

Some of the restriction began began to be Eastman. Some people started returning to Jim, but we did not see any drop off in Q2.

And I'll, just add that it's tough to completely.

Take supply and demand in kind of pull them apart.

Because what ends up happening, let's say, if you're out of stock of an out of an item for a few weeks people that people stop checking back on that on that.

And so you don't know if that means theres a drop in in natural demand or that that someone just got got tired of checking your web site right. So we see short term periods of that but overall, we haven't seen that drop off.

You know in in any in any seeking significant way and of course, you have to think about Q3 as well as most of our Q3 activity is in the in the September timeframe as well. So you can't really draw a lot of conclusions.

On the early parts, but but overall, we're just doing our best to get back in stock and as many things as possible and fulfill our our backlog the Fivefive twos, we started originally taking a.

Notify me when approach when we ran out because we just didn't want to show him a great out button on our website and people were just die and for these things.

So we put that in there and right now we have 300000 leads to workout. So work off so thats one of the main reasons why we're not back in stock on that is because we kind of feel like we made somewhat of an out of a have a commitment to to those people and we've got to send them notifications as we get each back.

Option and that sort of thing so we're still in that in that you know.

Demands very much outstripping supply.

And we Havent seen a a significant drop off in any way.

Okay, Okay and then.

A question for me on this just about the retail business and I remember on the prior call.

You had mentioned two new big retailers for the fall I'm guessing one was best buy.

Yes, I guess the broader question is just.

No that your supply constraints.

Are there a lot is kind of unexpected retailers coming to you trying to.

Developer relationship.

What does that all look like.

The short answer is yes, absolutely.

No. Some retailers that you wouldn't have expected would carry fitness equipment are now deciding hey, this is so important in.

In our customers' lives in their reading there their customers.

Behavior, and they're saying, Hey, look I need to start selling this whole category. So there they are well known names and there's some well known names you wouldn't have expected necessarily to carry fitness equipment and yes. One of the one of the ones. We mentioned last time was was best buy and we've we've gotten some terrific.

Traction traction with them they are great. They're a great team to work with and then of course.

No Dick's sporting goods and Amazon as our as our Premier partners.

I've seen.

Fantastic.

Surge in demand and of growth we've grown together and.

Like I said in my in my comments, you know we need to feed these retailers at the appropriate level. We first made commitments to them that we had to fulfill in this particular business, especially when you're not paying for.

For media in a big way.

The as the margin suggest you should sell everything direct but thats not a long term view, we know we know number one for our customers to have choices to buy things and number two we have invested for years and years of in this retailer network, we grow together with our retailers and we even if.

When we don't don't have enough equipment to feed every mouth, we add to the extent everybody wants to we make sure. We we feed the miles and make sure we keep.

Our partnership intact for the long run.

Okay, Great and then last question for me is just about journey.

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That.

Sounds like Theres, a lot of a lot of new features and.

It's a real kind of step up from from the prior version.

So just curious what what you're most excited about what do you think the prior version with lacking that this one really nails.

Well I was excited before but it's a piece of software right and it's and it's it's a part of our experience with with with content in software and our equipment. They all go together and so I was super excited about it the thing I was probably least excited about it was it was only on the Max total in the way that we wanted it.

Actually come alive. So I would say the most excited I am is just that it's going to be available through the portfolio and people are going to get a chance to use that without buying the top of the line $2800 model as being the only option. So unlike super excited.

About about that I would say I continue to be excited about the.

The AI driven coaching that makes it feel like it's a one to one experience even though its algorithmic and that we think is still it's a differentiator for us.

The Andy customize workouts, a differentiated differentiator for us we love those things and I think the things that I would have said.

Where is our weakness.

The one I would have pointed to especially when cove. It hit is.

It's trader led videos I.

I would have said hey, you know people want to use those more often maybe even when they're not using our equipment and we had some but not enough and thats one of the things that I'm I'm really excited we're bringing home now we're not betting.

On on live the way some others have we were looking at.

Everything and journey is is is based on.

Big time consumer insight and we don't have a lot of people, saying I really want to have a live experience they want variety.

And they want.

They want something that that like our like our coaching unlike our customize workouts that change everyday keep it interesting they like to use our.

Our net flicks capabilities, who Lou where even adding some more this particular time, so still a bunch of caught a combination of these things explore the world I'm also quite excited about two because that was a separate skew and now that is coming that will be usable within the journey members.

Platform and thats going to be exciting too so bunch more options on a bunch more equipment, and then still leading with our algorithmic approach and I would say.

Overtime, and taking a big step any perceived weakness we have we we feel like where we're backfilling and like I said its software. So we're going to keep on that on that particular journey. Chris is there anything you would you would add to that.

Covered everything.

Okay.

Jim talked long enough is good.

Well, that's great. Thank you and and again congrats on a great quarter.

Thanks.

We have a question for Mark Smith Lake Street Capital markets. Please go ahead Sir.

Hi, guys first one for me can you guys quantify it all the shipping cost increase.

Increases during the quarter, and maybe where that is today.

Okay.

We're not going to disclose that publicly right. Because we think we have some pretty good deals that we we've come up with that I think.

I just wanted to point out and make sure that you.

The analysts were aware of the different pressures on margin, we're going to do a lot of things on the.

Promotional pricing in some of the cost concessions were getting from our suppliers, but not all of that can flow down to the bottom line. Because we do have these things that are new this year versus last year related to logistics.

And obviously if they were.

Way too expensive and would really kill our margins, we wouldn't do and but we just you know we're trying to deliver for our customers a match supply and demand in if if theres slight differences in cost. We are we're going to go ahead and do that because we think thats what builds our business overtime Bill is there anything you'd like to add to that no I agree.

Well, Jim I mean is a cost pressures are both on the inbound daily outbound side and just be aware of that as we navigate through those challenges I agree upon I think we've negotiated.

From comparatively favorable deal for even at elevated rate so we'd like to keep that under our yeah. We're just trying to when it got you see don't take the Q2 margin rate and apply it to infinity.

Hello.

That's fair so helpful call out is there anything else as we kind of look out there and raw materials or labor and anything else along the line in the supply chain that maybe as a potential headwind to call up.

I'd say, we're pretty favorable conditions regarding commodities and things and labor costs are certainly under control. It really is the challenges of getting product movement in the kogan environment.

Okay.

And then just as we look at it shipping and getting the product into customers hand can you talk about expected delivery times today kind of where you're at versus where you were during the quarter. And then also talk about where you are versus maybe versus your peers.

Yes, I mean, it's a constantly evolving thing and it's almost product by product you know the thing I actually do is I put the major products in a basket on our website and I check back every day to see what our promise period is and whether you can buy them. That's a pretty good indicator that helps me.

Not even have to read management reports, but but let's see what our customers are are seeing if you do that you will see promise periods that are pretty click quick you know a matter of days two things that are out.

30, 60 days and then and then you eventually see some products like the five five twos, where you've got a great out button in a notify me win because we're working out that long term.

Back backlog there.

Relative to competitors I think.

So I I don't know how quickly you know as one of the few products public companies in the space and I think one of the first to report.

We don't know what other people are experiencing other than taking that same approach that I mentioned with our basket and we see many of our competitors, who only have a few products actually out of stock for 810 12 weeks at a time. So we know we're not the only ones.

And we do think a lot of the the secrets to our success will be how we continue to.

To push ourselves on the ability to.

To add to our supply base and match that well with our demand.

Okay, and then last one from me just and this might be hard to call out or quantify but but as you look at any changes in consumer behavior during the quarter, even post quarter.

In price points, maybe that Theyre looking more at.

Anything that you've seen really changing consumer behavior here over the last even if we look at the last 60 days.

I don't I can't think of anything that jumps out at me other than we've been able to sell some products that we haven't sold well for a while meaning I think people look for the most popular products and when they can't find it here or maybe at a competitor they'll try something that they wouldn't they.

I wouldn't have have tried before and we've seen.

We've seen that on a few of our products. It's always been it's also been great to see the Max total that's another one that sort of jumps out of course that was so much of our declined as a company wrapped up in that one and we said for several quarters, hey, the quarter that we get to when we actually positively comp.

Next total is going to be a super nice margin quarter, while we did that now I don't know if that sustain its sustainable or not or whether that was just part of this I am optimistic about our our new offerings in the Max line as I mentioned, so I hope hopefully it's that they're there, but those are the only things that really come to mind is anyone else of.

No.

No I think this spring trends.

It's something we're watching closely theirs.

Certainly with the gym closures that impacts stream people.

He is significantly and we obviously have some excellent straight products. So we're really.

Watching those trends both yes, that's probably the one that if we could go back and rewrite history.

Other than warn people that this was coming we probably would have ordered lot more strength.

Because people could go as we mentioned on last call people could go out and.

And get some cardio, especially as the weather got better, but they didnt really have an alternative to their Jim in terms of strength training that.

That's that's the one that.

We wish we could it possibly had a crystal ball on.

Okay. That's great. Thank you guys.

Thank you.

There are no further questions at this time I'd like to turn the floor I work to Jim Barr for closing comments. Please go ahead Sir.

Thank you Jerry I'd like to thank everyone for joining our call today and for your continued support of Nautilus look forward to providing you with another update on the business in a few months on our third quarter earnings call. Please stay safe and healthy have a good rest of the day onwards and upwards. Thanks.

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

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