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Edited Transcript of NLS earnings conference call or presentation 1-May-17 8:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Nautilus Inc Earnings Call

Vancouver May 3, 2017 (Thomson StreetEvents) -- Edited Transcript of Nautilus Inc earnings conference call or presentation Monday, May 1, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bruce M. Cazenave

Nautilus, Inc. - CEO and Director

* John Mills

ICR, LLC - Partner

* Sidharth Nayar

Nautilus, Inc. - CFO

* William B. McMahon

Nautilus, Inc. - COO

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Conference Call Participants

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* Andrew Shuler Burns

D.A. Davidson & Co., Research Division - VP and Senior Research Analyst

* Christopher Walter Krueger

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

* Frank Anthony Camma

Sidoti & Company, LLC - Analyst

* George Arthur Kelly

Imperial Capital, LLC, Research Division - Analyst

* Michael Arlington Swartz

SunTrust Robinson Humphrey, Inc., Research Division - Senior Analyst

* Rommel T. Dionisio

Wunderlich Securities Inc., Research Division - SVP

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Presentation

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Operator [1]

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Good day, and welcome to the Nautilus Inc. First Quarter 2017 Earnings Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to John Mills. Please go ahead, sir.

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John Mills, ICR, LLC - Partner [2]

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Thank you. Good afternoon, everyone. Welcome to Nautilus' first quarter 2017 conference call. Participants on the call from Nautilus are Bruce Cazenave, Chief Executive Officer; Sid Nayar, Chief Financial Officer; and Bill McMahon, Chief Operating Officer.

Our earnings release was issued earlier today and may be downloaded from our website at nautilusinc.com, on the Investor Relations page. The earnings release includes a reconciliation of the non-GAAP financial measures mentioned in today's call with the most directly comparable GAAP measures. Remarks on today's conference call will include forward-looking statements within the meanings of the securities laws. These include statements concerning financial projections, operating trends, anticipated growth and profitability, anticipated new product introductions, anticipated capital expenditures, planned and anticipated results of new product and business development initiatives.

Forward-looking statements are subject to a number of risks and uncertainties, and actual results may differ materially from these statements. For more information about these risks, please refer to our most recent annual report on Form 10-K. Nautilus undertakes no obligation to update or otherwise publicly release any revision to forward-looking statements to reflect new information, events or circumstances after they were made or to reflect the occurrence of unanticipated events. All information and comments regarding our operating results pertain to our continuing operations.

And with that, it's my pleasure to turn the call over to our CEO, Mr. Bruce Cazenave. Please go ahead, Bruce.

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Bruce M. Cazenave, Nautilus, Inc. - CEO and Director [3]

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Thank you, John. Good afternoon, everyone, and thank you for joining our call today. I'd like to start by providing a general overview of our first quarter, and then we'll turn it over to Sid Nayar to review our financial results in more detail. Bill McMahon will follow, providing details on each business segment as well as updates on product activity. Finally, I will provide some closing remarks before we open up the call for questions.

The first quarter operating performance was right in line with our expectations and guidance. As anticipated, it was a very difficult comparison to prior year, but we are pleased that underlying factors such as the Direct segment response rates, which continued to improve in the first quarter as compared to the back half of last year, and a wide breadth of new product launches scheduled for the second quarter and the rest of the year are tracking as planned.

In addition, we are seeing an improvement in retail buying patterns as overall inventory levels at certain customers have been adjusted to new targeted lower levels. Bill will discuss these factors in more detail in a few moments. All these developments together have us well positioned for strong and broad-based growth in the second half across all of our businesses and on track to achieve our full year guidance for 2017. I will provide more color on this and the investments we are making at the conclusion of our prepared remarks.

Now I'd like to turn the call over to Sid.

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Sidharth Nayar, Nautilus, Inc. - CFO [4]

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Thank you, Bruce. I would like to review the details of our financial results for the first quarter of 2017.

Net sales for the first quarter totaled $113.3 million, a decrease of 6.3% as compared to the same period in the prior year, reflecting lower sales in both the Direct and Retail segments. First quarter gross margins decreased 80 basis points in the Direct segment to 65.5% and were up 210 basis points in the Retail segment to 32% when compared to the same quarter last year. On an overall basis, total company gross margins for the first quarter 2017 decreased by 40 basis points to 54.5% versus the same period prior year, reflecting the shift in channel mix to an increased percentage of Retail segment revenues.

Total operating expenses for the first quarter of 2017 as a percentage of net sales increased to 43.3% from 38.9% in the same period last year, primarily reflecting increased sales and marketing expense. Sales and marketing expenses for the first quarter of 2017 were $37.7 million or 33.3% of net sales as compared to $35.2 million or 29.1% of net sales in the same period last year. The increased dollar spending primarily reflects higher media spending of $2.5 million and a $1.2 million reserve related to a royalty dispute, partially offset by lower finance fees. The increase in sales and marketing as a percentage of sales reflects the same factors.

General and administrative expenses were $7.5 million or 6.6% of net sales for the first quarter of 2017, which compares to $8.2 million or 6.8% of net sales in the same period last year. The decreased dollar spending in G&A primarily reflects lower incentive reserves and expenses related to the Octane integration that were incurred in the prior year.

Research and development costs in the first quarter of 2017 were $3.9 million or 3.5% of net sales compared to $3.6 million or 3% of net sales in the same period last year. The dollar increase reflects our continued investment in the engineering and design resources required to continue to innovate and broaden our product portfolio.

Operating income for the first quarter of 2017 decreased to $12.7 million as compared to operating income of $19.3 million in the same quarter of last year. The decrease reflects the decline in revenue coupled with the increase in sales and marketing spend. Operating margin for the first quarter of 2017 decreased 11.2% compared to 16% for the same period last year. EBITDA from continuing operations in the first quarter of 2017 was $14.9 million versus $21.1 million for the same quarter of the prior year. Please refer to today's earnings release for a reconciliation of EBITDA from continuing operations, a non-GAAP measure, to the most comparable GAAP measure.

Income from continuing operations for the first quarter of 2017 was $8.2 million or $0.26 per diluted share as compared to $11.6 million or $0.37 per diluted share for the same period last year. The effective tax rate for the first quarter of 2017 was 33.6% compared to 38.3% in the same period last year. Tax expense in the current quarter was partially reduced due to the company's adoption of accounting guidance in January 2017, allowing the deduction of excess tax benefits related to stock compensation expense.

Total net income, including discontinued operations, for the first quarter of 2017 was $7.1 million or $0.23 per diluted share, which includes a $1.1 million loss, net of taxes, from discontinued operations. Discontinued operations includes a $1.2 million charge related to the final settlement of a long-standing lawsuit with Biosig Instruments. This compares to the first quarter last year, where we reported total net income including discontinued operations of $11.4 million or $0.37 per diluted share, which included a net loss from discontinued operations of $0.1 million.

Turning now to our segment results. Net sales in the Direct business totaled $74.7 million for the first quarter of 2017, an 8% decrease over the same quarter last year. Direct segment sales were impacted by a decline in TreadClimber sales. Media metrics, although improved from the lows of Q3 2016 and in line with our expectations, were much lower than Q1 of the prior year. As previously communicated, the accelerated decline of TreadClimber in Q1 2017, coupled with exceptionally favorable response rates in Q1 2016 due to the Max Trainer M7 launch, was a difficult comparison to meet. Bill will provide more color on our actions and outlook for this segment later.

Gross margin for the Direct business declined to 65.5% for the first quarter of 2017 compared to 66.3% in the same quarter of last year due to higher discounting of TreadClimber products.

Operating income for the first quarter of 2017 in our Direct business was $15.3 million compared to $21.1 million in the same quarter prior year. Operating income was negatively impacted by the lower net sales and gross margins in the first quarter of 2017.

Net sales in our Retail segment for the first quarter of 2017 were $37.8 million, a decrease of 2.6% compared to $38.8 million in the first quarter of last year. The decline in Retail net sales reflects some softness in the retail market coupled with certain customers rebalancing their inventory levels. Gross margins for the Retail business improved by 210 basis points to 32% in the first quarter of 2017 as compared to 29.9% for the prior period mostly due to improved product mix and certain onetime purchase accounting-related items in the prior year. In the first quarter of 2017, operating income for the Retail business totaled $2.2 million as compared to $3.9 million in the same period of last year. The decrease is attributable to the previously mentioned $1.2 million reserve related to a royalty dispute coupled with lower gross margin dollars related to the revenue shortfall.

Now turning to the consolidated balance sheet. Cash and investments totaled $88.8 million as of March 31, 2017, with $60 million of debt. This compares to $79.6 million in cash and debt of $64 million at December 31, 2016. Inventories were $34.3 million as of March 31, 2017, compared to $47 million at December 31, 2016, and $36.8 million at March 31, 2016. The decrease in inventory versus year-end 2016 relates to the seasonality of the business. Trade payables were $39.4 million as of March 31, 2017, compared to $66 million at the end of 2016, again, reflecting seasonality of purchases. Capital expenditures, including those incurred but not yet paid, totaled $0.6 million for the 3 months ended March 31, 2017, with spending primarily on product tooling and IT assets. We anticipate full year CapEx to be in the range of $7 million to $8 million.

Finally, the company also announced today that its board had authorized an additional $15 million expansion to the share buyback program. The company had previously fully utilized a $15 million buyback authorization and has used $5.4 million out of the $10 million expansion program approved on May 4, 2016. Additional details about this program can be found in the press release issued earlier today.

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

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William B. McMahon, Nautilus, Inc. - COO [5]

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Thank you, Sid. Good afternoon, everyone. I'd like to provide further background on our results and provide detail on our product roadmap in 2017.

Starting with the Direct segment. Our Q1 sales decline versus prior year was in line with our expectation and was primarily driven by the continued drop in Bowflex TreadClimber sales. In 2017, we'll continue to invest in television for the TreadClimber category, but these efforts will begin to transition to the digital and social media environment, where targeting strong TreadClimber response segments is more achievable. Further, we've begun to cascade TreadClimber sales across multiple opportunities in our retail and specialty channels. One of the strengths of our business is that we can capitalize on the significant television awareness created in over 13 years of advertising for this product platform in the retail space. This capability further leverages our media investments and is normal behavior for long-running direct products. We do anticipate TreadClimber will remain a large and profitable category for Nautilus overall in the future.

Meanwhile, Bowflex Max Trainer sales continued to deliver the majority of sales in our Direct segment in Q1, but those sales were roughly flat year-over-year due to a difficult media ROI comparable in Q1 2016. We had previously discussed, during our last earnings call, that the media ROIs of Q1 2016 for Max Trainer would not be possible to match given the much higher base of sales in 2017. We consider this a near-term challenge. Overall, media conditions are improved over the second half of last year. Consumer credit conditions remain strong, and media response continues to be favorable when compared to the historical performance of product categories that have reached this size in Direct. We have new and expanded creative campaigns planned for Max Trainer to reach still more consumer segments, and we anticipate increasing our media investment in Max Trainer this year to drive growth.

Regarding Direct margins, the 80 basis point decline in Direct margins is mainly attributable to price promotions and testing related to the TreadClimber category in Q1. However, Direct margins above 65% overall remain in a very healthy range. One tailwind for our Direct segment in Q1 was the performance of strength products. Both selectorized weights and home gym sales grew during the quarter. Our newest addition to the selectorized weight line, the Bowflex SelectTech 560, was a key driver of that growth. However, our legacy rod gyms grew year-over-year as well. We feel that this growth in the strength category also represents a continuing participation trend, wherein consumers are seeking strength training solutions to add to their existing cardio regimen.

Against that consumer behavior backdrop, we're excited to launch our newest Direct channel product, the Bowflex Hybrid Velocity Trainer machine or HVT. Bowflex HVT combines strength and cardio training into one product, bringing the benefits of both to the consumer, along with workout programming and mobile app support. HVT saves space in a household by combining 2 machines into 1, and it saves time by delivering the benefits of strength training's increased muscle activation along with the metabolic advantages of cardio work. The key to unlocking the benefits of HVT lies in the variety of unique workouts that our team of fitness experts have developed. The average consumer following our custom workout will burn calories equivalent to 1.5 miles of running while experiencing more than 5x the muscle activation as compared to traditional strength training. And they will be able to accomplish this in as little as 18 minutes. We demonstrated a prototype of Bowflex HVT in our New York product showcase last fall, and we're excited to bring it to market. Bowflex HVT will soon launch on television and in the digital and social media realms. The product will be priced at $1,799.

Through Q1, our Direct channel -- though Q1, Direct channel results are in line with our expectations, we continue to expect the Direct business to return to growth in the second half of 2017, fueled by new products and more favorable conditions, consistent with the full year overall Nautilus performance guidance that we previously provided. Additionally, our product pipeline for new products in Direct is healthy for 2018 and beyond.

Turning now to our Retail segment. Our Q1 revenues were down slightly year-over-year but in line with our expectations. During our Q4 earnings call, we outlined several near-term factors impacting our Retail business such as the heavier promotional environment and the desire of certain large retail partners to normalize their inventory on-hand levels at a new lower position. While certain competitors continue to utilize heavier-than-normal promotions, we maintained our normal pricing strategy and are pleased with our point-of-sale performance overall. Further, we feel that the inventory balance adjusting by certain retail partners is now largely complete, and purchasing should return to a pattern more in line with point-of-sale performance.

Sales were helped by continued strong performance in our selectorized weight category during Q1 as both our new and legacy products delivered growth. We were also pleased to see some stability in the specialty retail area of our business after a full year of decline in 2016. And lastly, our Retail sales of Max Trainer, both domestically and in international markets, were strong during the quarter.

On the topic of Max Trainer and Retail, we have previously announced our plans to partner with DICK'S Sporting Goods to place the Bowflex Max Trainer M3 within DICK'S stores nationwide for in-store-only purchase. Our intention was to determine if we could further optimize the reach of our Direct media advertising to include those who prefer to buy in-store through a trusted major retailer. We've completed our first fitness season and are very pleased with the results of our efforts. Max Trainer performed well in-store, and our analysis of the sales completed with DICK'S shows that we did achieve our desired level of incrementality. Therefore, we will continue forward, and we're very pleased to be expanding our relationship with DICK'S Sporting Goods in the coming fall season.

Retail margins improved 210 basis points in Q1, driven primarily by favorable product mix, our resistance to those deep discounting strategies and the continued benefits of the addition of higher-margin Octane sales overall. Based on our current understanding of retailer plans and ongoing point-of-sale performance, we do anticipate solid Retail growth in the back half of 2017, as is reflected in our guidance. Our emphasis on product development launch cadence is equally important to our Retail segment. We have several new product launches planned for 2017, and those key product launches include the Bowflex Results Series cardio line, including treadmills and ellipticals at $1,499 and $1,799. The Bowflex Results Series represents our first entry into higher price point retail on ellipticals and treadmills. Additionally, we will build on the success of our recent Airdyne product launches by introducing the Schwinn AD7, a consumer upscale Airdyne model, as well as the Octane Airdyne X, which combines the latest in Airdyne technology in a full commercial club warranty package and is backed by the industry-leading Octane service team.

Further, we plan to launch the new Octane ZR7000, which is the second machine in our full commercial club-rated Zero Runner line. We'll also enter new categories with the launch of a mass retail-targeted rowing machine, the Schwinn [Pro Master], and also a new incremental price point addition to our consumer indoor cycling line, the Schwinn IC3 bike. Lastly, we also plan to launch updated versions of our very successful Schwinn 70 Series and Nautilus 6 Series bikes, ellipticals and treadmills, reflecting our commitment to supporting successful existing product platforms while further expanding our market share into new categories.

On that topic of new and incremental categories. We had previously acquired the intellectual property and the rights to the Modern Movement line of fitness products. These products are primarily balance- and core-focused and would be considered shelf fitness products in-store. In the past year, we have worked to integrate digital applications into the balance regimen that these products provide, leading to a more engaging experience overall while, at the same time, also updating their design. This fall, we plan to launch 3 new products into this line, including the new Modern Movement M-Board with digital app, a new M-Pad and M-Straps, which delivers suspension training. These products will be available in national retailers, online via our e-commerce partners and the Nautilus websites as well as internationally with our valued distributors. We feel that our new product launches for 2017, combined with our existing successful platforms, will deliver the growth we have outlined in our guidance. In terms of inventory and supply chain, we are well balanced and positioned to meet our needs.

Before turning the call over to Bruce, I'd like to add that I'm very proud of the efforts of our global Nautilus team of employees. We truly do have an incredible team. Given that team and our multiyear product roadmap, I'm very excited about our opportunities in 2017 and beyond. Bruce will provide more color on our long-term focus, and I'd like to turn the call back over to him. Bruce?

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Bruce M. Cazenave, Nautilus, Inc. - CEO and Director [6]

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Thank you, Bill. I'd like to make a few final comments before we open up the call for questions. As Bill and Sid mentioned, there were a number of external factors such as retail consolidation activity and adjustments to retailers' desired inventories which caused additional pressure on an already challenging comp to the prior year. The good news is these factors were anticipated as we entered the year, and our plans are on track to achieve another full year of revenue and profitability growth as compared to 2016. Therefore, we are in a position to reiterate our full year guidance for 2017.

We are projecting revenue growth to be in the range of 5% to 7% over 2016 and with similar growth rate in operating income. As a reminder, this reflects starting out the first half of the year slower when compared to the same period last year, followed by returning to double-digit growth run rates in the back half of the year. The trajectory is fueled mostly by the new product launches Bill described and which will put us back in line with previously communicated long-term annual growth rate targets.

Our full year guidance also reflects continued stepped-up investments in sales, marketing, innovation and international and are already began -- that already began in the first quarter. As we have mentioned in previous calls and conferences, our mode of ongoing operation is to focus simultaneously on both the near-term execution of our plans while also building and investing on -- for long-term strategic growth. The priorities and strategic initiatives that will enable us to achieve long-term growth remain the same.

First is driving innovation and commercializing the robust pipeline of new offerings we have planned for the next 3 years and beyond. This includes increasing the breadth of our product lines and accelerating the pace of introductions. Second is continuing to optimize the opportunities that the acquisition of Octane Fitness affords us. We are still in the early phases of realizing these synergies that include product innovation, increased sales channel access and added operational leverage. Third is accelerating the growth pace and scale of business we have in international markets. We intend to build on the current momentum and expect and deserve to provide consumers with much better access to our brands overseas. International represented only 6% of our sales last year. And finally, fourth, maintaining focus on gross margins and improving operating margins. While incremental improvements will be a challenge in 2017 because of the strategic investments we have outlined, finding ways to keep margins moving in the right direction and tightly managing expenses remains a company-wide focus area.

All in all, we feel we are working on the right things, and it is comforting that most all of these initiatives and operating principles are just building upon the same themes that helped us achieve the performance improvements delivered over the last 5 years. Of course, they've been adapted to reflect the greater scale, process maturity and added capabilities we now have.

Finally, I'd like to echo Bill's comment and thank our dedicated team of employees around the world for all their hard work and helping us deliver the desired results and creating the positive momentum we have throughout the company.

That concludes our prepared remarks. Now I'd like to open up the call for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll go ahead and take our first question from Mike Swartz with SunTrust.

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Michael Arlington Swartz, SunTrust Robinson Humphrey, Inc., Research Division - Senior Analyst [2]

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Maybe starting off, Sid, could you help us with, I guess, understanding this $1.2 million reserve you talked about during the quarter for a royalty dispute? Here's the 2 questions: one, are you now fully reserved on that front? And then, two, when you gave guidance for the first quarter, was that already embedded in your operating income outlook?

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Sidharth Nayar, Nautilus, Inc. - CFO [3]

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Yes. So responding to your first question, yes. So we essentially booked to the maximum that we thought that liability was potentially likely to be, so that's reflected. And the -- and yes, the guidance that we provided already included this number.

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Michael Arlington Swartz, SunTrust Robinson Humphrey, Inc., Research Division - Senior Analyst [4]

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Okay, that's helpful. And then just second question, just in terms of the full year outlook, you've reiterated the 5% to 7% top line growth for the year. Could you maybe help us frame, just in terms of the HVT, maybe what you're expecting from that product in 2017? I don't know if there's a way you can just kind of give us some view maybe relative to maybe how Max Trainer did in its first 6 months. Is that how you're thinking about this?

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William B. McMahon, Nautilus, Inc. - COO [5]

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Mike, it's Bill. Generally, we don't expect any product to launch as well as Max Trainer did. We'd anticipate a more normal launch. We'll certainly take it if it does better than that, but a normal launch would look something like launching shortly, spending the summer working on our messages and networks and testing. So initially, a smaller spend, the objective of that being to have a pretty robust idea of what to do with media when we get into the next fitness season. So you'd see most of the benefit from HVT later in the year.

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Operator [6]

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And we'll take our next question from Frank Camma with Sidoti.

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Frank Anthony Camma, Sidoti & Company, LLC - Analyst [7]

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I know you're not going to break out a lot of detail on Octane specifically, but you've made some comments there. And the question I have is: Any way you could talk about just sort of the top line and how it's coming through towards your -- like your initial expectations when you bought the company over a year ago?

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Sidharth Nayar, Nautilus, Inc. - CFO [8]

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Yes. So Frank, I think we were pretty clear last year that coming out of the gate, given the challenges in specialty retail, it was below expectations we had when we went through the acquisition. However, what we've also stated is in 2017, we expect the channel, the Octane channel, to grow and grow at about the same rate that we've basically outlined for the full year guidance, at 5% to 7%. So clearly -- and clearly, everything we see at this point would be supportive of that growth.

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Frank Anthony Camma, Sidoti & Company, LLC - Analyst [9]

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Okay, good. My second question's with the selling and marketing. With respect to Bill, you've made some comments about we knew this is going to happen as far as the media metrics, obviously, not as strong as last year. But obviously, you -- it's pretty good spending there. What kind of lift do you get that in the future? I mean, some of your products, specifically the more expensive ones, have pretty long lead time, right, from hitting consumers. So can you talk about that a little bit, what you expect as far as conversions?

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William B. McMahon, Nautilus, Inc. - COO [10]

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Yes, we expect, Frank, overall the -- I would treat it more as last year's Q1 was everything working incredibly well plus launching M7. This year's performance in the Max category was pretty much where it should be for a product of that size. So we can -- we know how to operate from here and how to drive it upward, and you'll start to see that normalize as the year goes on, certainly, against some different comps in the back half of the year. TreadClimber, though, was -- our decision to reduce some media on that is primarily due to -- it is pretty well saturated at this point. So we have a tale of 2 products here. We're about to introduce a third, which should be an investment in growth. So we'll have 2 products that are worthy of investing in growth and the other 1 that we need to manage appropriately to the right size.

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Frank Anthony Camma, Sidoti & Company, LLC - Analyst [11]

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Okay. And my last question, if I can. I think Bruce made the comment about, or maybe it was Bill, about later this year, expanding the relationship with DICK'S. What do you mean by expand? Would you go beyond the M3?

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William B. McMahon, Nautilus, Inc. - COO [12]

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Potentially. And also, we believe with DICK'S Sporting Goods, we have the opportunity to expand our relationship in a variety of product areas.

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Frank Anthony Camma, Sidoti & Company, LLC - Analyst [13]

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Okay. So do they not cover some -- they already have a lot of your other products, though, correct, as far as -- like Nautilus brand products?

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William B. McMahon, Nautilus, Inc. - COO [14]

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They have some.

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Frank Anthony Camma, Sidoti & Company, LLC - Analyst [15]

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Some but not all, okay.

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Bruce M. Cazenave, Nautilus, Inc. - CEO and Director [16]

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Schwinn, as well.

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William B. McMahon, Nautilus, Inc. - COO [17]

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Yes, they have some Schwinn as well. But can't -- I need to let DICK'S comment on what they wish to comment on regarding that, Frank, and I know you get that. But we're very pleased with the ability to work closely with DICK'S right now.

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Operator [18]

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And we'll take our next question from Andrew Burns with D.A. Davidson.

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Andrew Shuler Burns, D.A. Davidson & Co., Research Division - VP and Senior Research Analyst [19]

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I was hoping you could spend a little more time on the TreadClimber and how we should think about that in 2 ways. First, as you shift away from TV and focus on digital and social media, is there an acceleration in the decline? Or should we think of that as sort of a very linear, gradual shift in terms of revenue? And then secondly, as you expanded into Retail, what percentage of your existing doors could you place the TreadClimber at? How quickly can you make it available to all retailers? Just thinking about the ramp on the Retail side.

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William B. McMahon, Nautilus, Inc. - COO [20]

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Thanks, Andrew. Those are great questions. In terms of TreadClimber media investment, we've been progressively stepping it downward for a bit now, really, the greater part of a year. And I'd anticipate us continuing to do controlled steps versus completely dropping off, and there's a couple reasons for that. One is you do want to find an equilibrium. There are levels where the products will level out and perform still. It's still a great platform, and you'd love to continue to provide some advertising to support your Retail placements as well. In terms of availability on Retail, it is -- it will be available for all retailers beginning this fall. The types of retailers that would do well at are those that have the ability to do a little bit of coaching or a little bit of help, therefore, we think, actually, our relationships with specialty that have been forged via our partnership with Octane and other retailers who've had success with it already in the U.S. But the commonality amongst them is, is they do have staff on the floor who's willing to take the time to help somebody get to know the product a little bit.

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Andrew Shuler Burns, D.A. Davidson & Co., Research Division - VP and Senior Research Analyst [21]

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Great. And in the press release and the prepared remarks, you called out softness in the overall retail environment impacting Retail, and clearly, that's impacting everyone. Just wondering if you have a view as to whether the exercise equipment category is, perhaps, faring better or worse at the brick-and-mortar environment as traffic declines.

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William B. McMahon, Nautilus, Inc. - COO [22]

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I think we continue to see a shift to online in fitness as we do in a lot of categories. In all scenarios this fall season, we just saw a lot more deeper discounting and [burst] activity of discounting than is normal. I think a lot of people were chasing what traffic there was.

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Andrew Shuler Burns, D.A. Davidson & Co., Research Division - VP and Senior Research Analyst [23]

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Last, just a quick one on credit approvals, if you could give that for the quarter.

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William B. McMahon, Nautilus, Inc. - COO [24]

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Sure. The credit approvals were excellent at 52.6%. That was compared to 49.9% last year. So we continue to see still more increase in that. It's primarily driven by our Tier 1 partner, continuing to approve at a more favorable pace. And I'd always note with that, Andrew, that our payment mix, though, also remains very healthy, where, actually, credit card sales were quite a few percentage points higher than finance sales in the quarter. So we like to see that healthy balance of payment as well as the strong credit approval.

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Operator [25]

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(Operator Instructions) And we'll go ahead and take our next question from Rommel Dionisio with Wunderlich.

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Rommel T. Dionisio, Wunderlich Securities Inc., Research Division - SVP [26]

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I think the weakness in the mass retail categories has been pretty well documented. But I wonder if you could just give a little more granularity on the strength that you're seeing in specialty retail. What are some of the factors that are driving that? Obviously, very encouraging after a somewhat soft 2016.

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William B. McMahon, Nautilus, Inc. - COO [27]

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Yes. I think that you would characterize it the way we would, Rommel, in that, we were pleased to see that begin to steady out. I think our view on it is, it's essentially -- a lot of the disruptive activity that was going on is a little more steadied out a year later than most of that activity occurring. So they're starting to be the new pattern of this is what the floors are going to look like going forward in specialty. So we're encouraged by that.

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Rommel T. Dionisio, Wunderlich Securities Inc., Research Division - SVP [28]

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Just as a general -- I think, too, Bill -- obviously, online retails have taken some share away from bricks-and-mortar retails in the mass channel. Is that occurring in specialty to the extent? Or you're not really seeing that?

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William B. McMahon, Nautilus, Inc. - COO [29]

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It is occurring but to a lesser extent now, and that is, I think, related to a lot of the strengths of specialty retail is that personalized experience, that coaching, in that sort of end-to-end, from store-to-home setup environment that online hasn't yet replicated as well. Though I would say the ability to provide a lot of

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Operator [30]

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(Operator Instructions)

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William B. McMahon, Nautilus, Inc. - COO [31]

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Hello. Okay. We apologize for that. Not sure what happened, but we're back. Rommel, you were asking a question regarding specialty and online direction. And we think at the moment, specialty stores still have an advantage over online in that the folks shopping at those stores are seeking that personalized attention and that end-to-end help from store-to-home for setup. However, the online environment is enticing because of the variety, so we would -- we are thinking ahead in that in the long run, that certainly, we'll have to mitigate those challenges there as well or take advantage of them.

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Operator [32]

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And we'll take our next question from George Kelly with Imperial Capital.

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George Arthur Kelly, Imperial Capital, LLC, Research Division - Analyst [33]

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A couple of questions for you. First, Bruce, you mentioned Octane synergies. You went through a couple different places that you expect to achieve synergies in the next 2 years, I believe. Could you go through that again and maybe give timing?

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Bruce M. Cazenave, Nautilus, Inc. - CEO and Director [34]

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Yes, it's -- I talked about product innovation. I talked about increased sales channels and additional operating leverage. And I would say, when we look back at -- we're now in our fifth quarter of having bought Octane, and we anticipate that it's going to be between systems and between operational leverage and even sourcing opportunities, that it's going to take us well into '18 before we can realize all these things. '17 will be a big year primarily because of some of the new products that you will see, starting with the Airdyne X bikes under the Octane brand for commercial gyms that Bill alluded to. You're going to see some of that. And then right behind it, there's more new products coming out of the combined product development roadmaps that hit in 2018. We're working right now on systems integration, some of the back office thing that [sets] leading for us, and that will be accomplished, we expect, here in this year. And that sets the platform for being able to do additional things in terms of synergies and so forth, warehousing and things like that. So it's going to be a 3-year process. And what I like to share with people is that the premise of why Octane was appealing to us all remain very intact. It's going to deliver meaningful acceleration on some of our key initiatives that we've identified for growth. It's also going to bring a lot of new innovative products that we can bring to market across the 2 businesses. We're getting enhanced financials, accretive financials, from the business and good margins. And the fit culturally has been as we had hoped it would be, a nice fit on that regard. So it's hitting on all the key things that were kind of the building blocks of why we were attracted to the business. But it will take time, as I mentioned, well into '18, which will be basically 3 years, all in, before we can realize all the opportunities that are available to us.

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George Arthur Kelly, Imperial Capital, LLC, Research Division - Analyst [35]

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Great. And then second question on the HVT launch. Do you expect that your Max customers, a lot of them will go for the HVT as well? And does that help the first couple of years of sales because you have customer lists and people you can hit that maybe you didn't have when you launched Max?

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Bruce M. Cazenave, Nautilus, Inc. - CEO and Director [36]

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It's a great question, George. We do know part of the success driver of Max's launch was early adopters were actually TreadClimber owners, who were ready for their next product from Bowflex. We are hopeful, and certainly, we will attempt to market to current owners of Max, and we're hopeful that will give a good leg up to start with.

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Operator [37]

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And we'll take our next question from Chris Krueger with Lake Street Capital Market.

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Christopher Walter Krueger, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [38]

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Just one question. I believe you stated that international sales were 6% of your total in 2016. Can you talk a little bit about how you hope to grow that? I know it's a big opportunity. I don't know if you're focused on certain countries or regions or if you need to invest in facilities and people. Just talk about the whole international outlook.

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Bruce M. Cazenave, Nautilus, Inc. - CEO and Director [39]

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Sure, Chris. The key to us is -- first of all, it's pretty small percentage of our overall sales as compared to even our competitors in a lot of key markets. We are focused on, I'd say, the appropriate markets, which would be Europe and certain emerging markets in the Far East and Latin America. The way we grow is we continue to use a distributor model primarily, though we do sell directly, in some cases. We just need to find the right partners in the right regions, and then the next phase is how do we best support those sales, which means our ability to distribute product and expand those product lines on an international level. So we've been pretty -- while we've been progressively growing internationally, I would say we have been using this earn-while-we-learn approach here of finding distributors and minimizing risk overall. But we do need to take the next step, I think, which is increase our ability to distribute product on a wider basis globally. And we're in process of looking at our supply chain right now for the best approaches on how to do that.

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Sidharth Nayar, Nautilus, Inc. - CFO [40]

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I would just add that we're -- Chris, we're also spending in terms of some sales and marketing support just in terms of added sales people in certain countries to help drive that growth, too.

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Operator [41]

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And we have no further questions in the queue at this time. I'd like to go ahead and turn the conference back over to Bruce for closing remarks.

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Bruce M. Cazenave, Nautilus, Inc. - CEO and Director [42]

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Thank you. I'd like to thank all of you for your interest in Nautilus and joining our call today. We look forward to sharing further progress updates during our second quarter call in the early August time frame. I hope you all have a great rest of the day. Thank you.

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Operator [43]

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Ladies and gentlemen, that does conclude today's conference. We'd like to thank you all for your participation. You may now disconnect.