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Edited Transcript of NLS earnings conference call or presentation 31-Jul-19 8:30pm GMT

Q2 2019 Nautilus Inc Earnings Call

Vancouver Aug 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Nautilus Inc earnings conference call or presentation Wednesday, July 31, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dave Wachsmuth

Nautilus, Inc. - Senior Director of Finance

* James Barr

Nautilus, Inc. - CEO & Director

* M. Carl Johnson

Nautilus, Inc. - Non-Executive Chairman

* William B. McMahon

Nautilus, Inc. - Special Assistant to the CEO

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Conference Call Participants

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* George Arthur Kelly

Imperial Capital, LLC, Research Division - VP

* Michael Milton Yuji Kawamoto

D.A. Davidson & Co., Research Division - Research Associate

* Ryan Ronald Sigdahl

Craig-Hallum Capital Group LLC, Research Division - Research Analyst

* John Mills

ICR, LLC - Partner

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Presentation

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Operator [1]

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Good day, and welcome to the Nautilus, Inc. Second Quarter 2019 Earnings Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. John Mills of ICR, Chief -- sorry, ICR. 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' Second Quarter 2019 Conference Call. Participants on the call from Nautilus are Carl Johnson, Chairman of the Board; Jim Barr, Chief Executive Officer; Bill McMahon, Special Assistant to the CEO; and Dave Wachsmuth, Senior Director of Finance.

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 to the most directly comparable GAAP measures.

Remarks on today's conference call will include forward-looking statements within the meaning of the securities laws. These include statements concerning financial projections, operating trends, anticipated growth and profitability, anticipated timing and market acceptance of new product introductions, planned investments and strategic and operational initiatives and the anticipated or targeted results of such initiatives, expected growth of our user base, consumer and retail demand for our products and the impact of new product introductions on our future financial results, planned capital expenditures and anticipated results of new product, business development initiatives and strategic partnerships.

Forward-looking statements are subject to a number of risks and uncertainties, and actual results may differ materially from these statements. Additional factors that could cause Nautilus' actual results to differ materially from these forward-looking statements include weaker-than-anticipated demand for new and existing products, our ability to timely acquire inventory that meets our quality control standard from sole-sourced foreign manufacturers at anticipated costs, experiencing delays and/or greater-than-anticipated cost in connection with launches of new products, entry into new markets, our strategic initiatives, including recurring revenue offerings, our ability to hire and retain key management personnel, changes in consumer fitness trends and our ability to anticipate and satisfy consumer preferences in a timely manner, changes in the media consumption habits of our target consumers or the effectiveness of our media advertising, a decline in consumer spending due to unfavorable economic conditions and softness in the retail marketplace.

For more information about these risks and uncertainties, please refer to today's earnings announcement and our most recent annual report on Form 10-K as supplemented by our quarterly report on Form 10-Q. 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 unless otherwise noted.

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

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James Barr, Nautilus, Inc. - CEO & Director [3]

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Thank you, John. Good afternoon, everyone, and thank you for joining our call today. It's been an exciting few days for me. I joined the company as CEO on Monday, but have been following the company closely for a while.

Before I turn the call over to Carl to discuss the quarterly results, I'd like to take a few moments to tell you more about my background and why I'm eager to be joining a company with such iconic, storied brands and a strong operating platform.

My background in digital and e-commerce has extended across several industries, with a focus on helping companies transform and grow large-scale digital and multichannel businesses. Most recently as Group President of Ritchie Bros., the 60-year-old global leader in heavy equipment auctions, I helped lead a transformation to expand the company's offerings from its core on-site auctions to a full array of on-site and online formats. This vastly enhanced its value proposition and delivered an unprecedented choice of ways to transact when, where and how customers want. We built on top of the company's core 60-year-old on-site auction business, strengthening it through technology and then launched complementary digital channels. My role there encompassed leading the company's global marketing, technology and online product teams. I'm proud that we leveraged the company's historical strength and culture, added new capabilities and built a fantastic team to lead it from transformation to execution stages.

Prior to Ritchie Bros., I worked for 2 of the largest online retailers, OfficeMax and Sears. As EVP and Chief Digital Officer at OfficeMax, the company's online business went from declining revenue to double-digit growth every quarter for 2 years before we merged it with Office Depot. As President of the Online Business Unit at Sears, I helped implement an omnichannel and online strategy that expanded the product assortment and produced double-digit online growth.

The foundation of my digital experience came from 12 years as an executive in Microsoft's online businesses, as GM, MSN Business Development, and GM, Commerce Services, where I ran online shopping, classified advertising and the auction businesses as well as the platforms and technologies that later powered the e-commerce experience in Microsoft's Bing search engine.

There's a fascinating evolution going on in fitness, and I joined because I'm excited about what Nautilus, with our brand's product portfolio, market presence, know-how, people and strategic partners, can do for customers and consumers as we leverage our strengths and build out our digital capabilities. The ability to connect with consumers is like never before and coupled with the right equipment, content and technology, provides a tremendous opportunity for us to deliver an enhanced, personalized, in-home experience and to better assist our consumers' pursuit of a healthy life.

I'm delighted and privileged to be part of this team. And now I'll turn the call over to Carl.

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M. Carl Johnson, Nautilus, Inc. - Non-Executive Chairman [4]

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Thank you, Jim. I speak on behalf of the entire management team and Board when I say we are very fortunate and excited to have you at the helm. We believe your background, experience and skills will enhance our organization, our product and service offerings, our brands and the overall strength of Nautilus.

I will now provide a general overview of our second quarter 2019 results, discuss our business segments as well as new product activity and then turn the call over to Dave Wachsmuth to review our financials in more detail. I will close with a few final remarks before opening the call up to your questions.

As we have noted for the past few quarters, the year-over-year decline in the Direct segment stems primarily from the slow ramp-up of the refreshed Max Trainer product. The advertising that rolled out in the fourth quarter of 2018 for Max Trainer did not resonate with consumers nor did it properly communicate the differentiated capabilities of our digital platform. Accordingly, over the first half of 2019, we have undertaken a comprehensive effort to address this trend, with the goal to put the Direct business back on a path to profitable growth.

The primary actions taken include extensive in-depth consumer insights research, leading to a major repositioning of the Bowflex brand and a new advertising and communications campaign created by the FIG advertising agency, with whom we have been working for several months and officially announced as agency partner in July of this year. We anticipate that this campaign will begin airing in the third quarter of 2019 across television, social media and other digital platforms. The new campaign will also be incorporated in our Bowflex website, which will include enhanced navigation and motivation-to-buy features.

In order to understand and confirm the impact of our new advertising on both the Direct and Retail businesses as early as possible as well as to guide our future spending in commercial rotations, we will be initiating affordable heavy-up media spend in select markets during the last half of August. Learnings from these markets will allow us to further refine our media tactics for our traditionally strong Q4 seasonal efforts.

Additionally, we expect to launch many targeted new products across all our channels in the second half of 2019: Direct; Retail; commercial; specialty; and international. In parallel, we will continue our digital transformation with updated digital experience platforms on key new products, working toward our goal of having all of our products be compatible with subscription-based digital experience offerings.

In Retail, net sales decreased by 4.4% and 9.6% for the 3- and 6-month periods ended June 30, 2019, respectively, compared to the same periods in 2018. The decreases were primarily due to a decline in sales of the Max Trainer line, partially offset by increases in sales of other modalities. We believe that causative factors include lower order rates from certain customers anticipating new products to be launched and shipped in the second half as well as some customers reducing inventory stocking levels. We expect second half of 2019 sales to include new product introductions and in-store merchandising in key customers in North America, international and the commercial and specialty channels.

Included in our second quarter results was a $72 million noncash impairment of goodwill and intangible assets that was related to the decline in our stock price and market capitalization. Dave will cover in more detail the circumstances of this impairment. We do not expect these charges to impact the strategies we are pursuing to improve the business.

I also want to address our gross margins in the second quarter of 2019. Margins declined materially from the prior year period primarily due to a few factors. First, the weakness in revenue, especially in our slowest seasonal quarter, resulted in unfavorable absorption of our fixed distribution and fulfillment expenses. Additionally, lower Max Trainer product sales in both segments negatively impacted margins as this higher-margin product became a smaller component of the mix. Finally, to a lesser extent, margins were negatively impacted due to discounted sales of older products as part of our initiative to reduce our inventory levels.

Also during the quarter, consistent with our previously announced 2019 cost savings, we implemented a workforce reduction in July 2019 and other shared support cost reductions. The expected cost savings for the company from these initiatives, which are now fully in place, is $5 million to $6 million on an annual basis.

As for our digital platform, we continue to invest in its development. Encouragingly, we have seen an increase in adoption and subscription attachment rates since our launch late last year. Our digital offering, the Bowflex Max Intelligence Platform, has over a 4.6-star average rating on the iOS App Store, and over half of our app users are using the premium version. Our internal research and data show that the digital platform is helping users achieve success.

We have expanded the capabilities of our digital offering with RunSocial, Bowflex Radio, more advanced coaching and other highly requested features received directly from our users, a key source of feedback for enhancing the overall customer experience. Direct communication feedback received from the platform will be an ongoing tool for us as we work to continuously improve our digital offering to achieve our goal of providing the most engaged individualized user experience in the home fitness industry. Working with our strategic partners, Samsung, Vi and Feed.fm, we anticipate introducing additional features throughout the back half of this year, to include tracking enhancements, custom workout upgrades, new video content and more. Obviously, with Jim now on board, we are very excited about our expected continued improvement of our digital offerings and online expansion and look forward to his contributions in this very important area.

Starting in late August, we also expect to begin our new product rollout with the MaxTotal. This new product will feature a built-in digital screen to complement the upgraded digital platform, providing users with both a cardio and an upper-body workout with a personalized customized approach driven by built-in machine learning capabilities. We will be moving our enhanced digital platform to new modalities, starting with the Bowflex treadmills, in Q3 of 2019, which we anticipate will bring next-generation coaching and motivation to both walkers and runners.

We expect to launch the next generation of our award-winning IC spin bikes with the Schwinn IC4 to feature digital connectivity so that users can connect with their favorite apps, such as Zwift, Peloton and RideSocial. Additionally, we anticipate expanding our popular selectable strength solution, SelectTech, to the fast-growing kettlebell market with the Bowflex SelectTech Kettlebell STK-840.

As for our commercial channel, the Octane Commercial Max Trainer and the Octane XR6000S, an upgraded seated elliptical with a swivel chair, are already in the market and receiving overall great reviews, with additional product launches planned later this year. Innovation is at the forefront of our company, and it is our goal to continue to introduce differentiated products into the market on a regular basis.

And now, Dave will provide an overview of the financials for the quarter. Dave?

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Dave Wachsmuth, Nautilus, Inc. - Senior Director of Finance [5]

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Thank you, Carl. I would like to review the details of our financial results for the second quarter of 2019. Net sales for the second quarter totaled $59 million, a decrease of 21.8% as compared to the same quarter of last year, reflecting a 40.2% decline in Direct segment sales and a 4.4% decrease in the Retail segment. For the first 6 months of 2019, net sales were $143.4 million, down 24.6% compared to the same period last year.

Second quarter gross margins in the Direct segment decreased to 43.3% compared to 59.6% in the same quarter of last year, and Retail margins decreased to 20.8% compared to 29.1% in the same quarter of last year. Margins in both segments were negatively impacted by unfavorable product mix, coupled with unfavorable overhead absorption related to the decline in sales. On an overall basis, total company gross margins for the second quarter of 2019 were 29.7% versus 44.6% for the same quarter of last year, reflecting a lower gross margin rate in both segments and a shift in channel mix to an increased percentage of Retail segment revenues. For the first 6 months of 2019, gross margins were 37.2%, a decline of 11.4% from 48.6% in the first 6 months of the same period last year.

Total operating expenses for the second quarter of 2019 increased to $102.9 million compared to $32.4 million in the same quarter of last year. Operating expenses during the quarter included pretax, goodwill and intangible asset impairments of $72 million. These noncash charges were primarily driven by the decline in our stock price and overall market capitalization, which triggered a midyear review of the carrying value of our goodwill and intangible assets.

As part of our review, we determined that the asset is needed to be impaired due to the material difference between our book value of equity and our stock price and market capitalization. We do not expect these charges to impact the strategies we are pursuing to turn around the business.

In addition to these impairments, during the second quarter of 2019, we incurred charges of $2 million related to a litigation settlement and $0.3 million of severance related to workforce reductions that occurred early in the third quarter of 2019.

Sales and marketing expense for the second quarter of 2019 was $17.6 million or 29.9% of net sales as compared to $22.1 million or 29.3% net sales in the same quarter of last year. The decreased dollar spending reflected a reduction in media spend. The increase in sales and marketing as a percentage of sales reflects a decrease in sales. For the first 6 months of 2019, sales and marketing expenses totaled $51.7 million or 36% of net sales compared to $58.8 million or 30.9% of net sales for the same period last year, with lower media spend and financing fees being partially offset by higher consultant expenses related to improving our media and creative strategy.

General and administrative expenses were $9.4 million or 16% of net sales for the second quarter of 2019 compared to $6.3 million or 8.4% of net sales in the same quarter of last year. The increased dollar spending and G&A primarily reflects a $2 million litigation settlement and $0.4 million in increased legal expense and $0.3 million in accelerated patent amortization. General and administrative expenses for the first 6 months of 2019 as a percentage of net sales totaled 11.9% as compared to 7% for the same period last year.

Research and development costs in the second quarter of 2019 were $3.8 million or 6.5% of net sales compared to $4 million or 5.3% net sales in the same quarter of last year. The dollar decrease primarily reflects a reduction in third-party app development spending. Research and development expenses for the first 6 months of 2019 as a percentage of net sales totaled 5.7% as compared to 4.5% for the same period last year.

Operating loss for the second quarter of 2019 was $85.4 million as compared to operating income of $1.2 million in the same quarter of last year. The decrease reflects the previously mentioned goodwill and intangible impairment, along with the decline in sales and gross margin rates. Excluding the goodwill and intangible impairment, adjusted operating loss in the second quarter of 2019 was $13.4 million compared to operating income of $1.2 million in the same period of last year. For the first 6 months of 2019, operating loss, including impairments, was $95.6 million compared to income of $11.9 million for the same period of last year.

Loss from continuing operations for the second quarter of 2019 was $78.7 million or minus $2.65 per diluted share as compared to income of $1 million or $0.03 per diluted share for the same quarter last year. Adjusted to exclude the goodwill intangible impairments, loss from continuing operations for the second quarter of 2019 was $9.8 million or $0.33 per diluted share. For the first 6 months of 2019, loss from continuing operations was $87.2 million or minus $2.94 per diluted share compared to income of $9.1 million or $0.30 per diluted share for the same period last year.

EBITDA loss from continuing operations in the second quarter of 2019 was $82.5 million versus income of $3.3 million for the same quarter of last year. Adjusted EBITDA loss, excluding the goodwill and intangible impairment, was $10.5 million for the second quarter of 2019 compared to income of $3.3 million for the same quarter of last year.

The effective tax rate for the second quarter of 2019 was 7.9% compared to 20% in the same quarter of last year. The lower tax rate in the second quarter of 2019 was driven by the goodwill impairment, of which only a portion had an associated tax benefit. Total net loss, including discontinued operations for the second quarter of 2019, was $78.9 million or minus $2.56 per diluted share, which includes a $0.10 million loss net of taxes from discontinued operations. This compares to the second quarter of last year, for which we reported a total net income, including discontinued operations, of $0.9 million or $0.03 per diluted share, which included a net loss from discontinued operations of $0.1 million. Year-to-date net loss for 2019 totaled $87.4 million or minus $2.95 per share versus income of $9 million or $0.29 per diluted share for the same period last year.

Turning now to our segment results. Net sales in the Direct business totaled $20.8 million for the second quarter of 2019, a 40.2% decrease compared to the same quarter last year. Direct segment sales were primarily impacted by a decline in Max Trainer sales. Year-to-date sales of $67.5 million were down 36.3% year-over-year. Gross margin for the Direct business declined to 43.3% for the second quarter of 2019 compared to 59.6% in the same quarter of last year due to unfavorable overhead absorption related to the lower sales, coupled with unfavorable product mix due to the lower Max Trainer sales.

Operating loss for the second quarter of 2019 in our Direct business was $6.3 million compared to income of $0.7 million in the same quarter of last year. Operating income was negatively impacted by the lower net sales and gross margins in the second quarter of 2019, partially offset by reduced marketing expenses. Year-to-date, 2019 operating loss for the Direct segment totaled $10.9 million compared to income of $12 million in the same period last year.

Net sales in our Retail segment for the second quarter of 2019 was $37.5 million, a decrease of 4.4% compared to $39.2 million in the second quarter of last year. The decrease was primarily due to lower order rates, reflecting, we believe, the transition to new products being introduced and shipped on the third and fourth quarters of this year. Gross margins for the Retail business decreased by 830 basis points to 20.8% in the second quarter of 2019 as compared to 29.1% for the prior year period, mostly from unfavorable product mix and unfavorable overhead absorption related to the lower sales. Year-to-date, 2019 gross margins for Retail totaled 22%, down 820 basis points versus the same period last year, which was primarily driven by the same factors.

In the second quarter of 2019, operating loss for the Retail business totaled $0.2 million as compared to income of $3.6 million in the same period last year. The decrease is attributable to lower sales and gross margin rates. Year-to-date, 2019 operating loss for the retail business totaled $1 million versus income of $7.5 million in the same period last year.

Now turning to the consolidated balance sheet. Cash and cash equivalents totaled $7.9 million as of June 30, 2019, with $20.6 million of debt. This compares to $63.5 million in cash and investments and debt of $32 million at December 31, 2018. Inventories were $52 million as of June 30, 2019 compared to $68.5 million at December 31, 2018 and $42.3 million at June 30, 2018. The decrease in inventory reflects progress against our initiatives to reduce inventory from the higher levels we had at the end of 2018.

Trade payables were $31.5 million as of June 30, 2019 compared to $87.3 million at the end of 2018, reflecting seasonality of purchases as well as a reduction in new inventory shipments during the first half. Capital expenditures totaled $3.9 million for the 6 months ended June 30, 2019, was spending primarily on new software systems, production tooling and equipment. We anticipate full year capital expenditures to be in the range of $8 million to $10 million.

At this time, I'd like to turn the call back over to Carl for his final comments. Carl?

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M. Carl Johnson, Nautilus, Inc. - Non-Executive Chairman [6]

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Thank you, Dave. To sum up, we are continuing to work through this fiscal year's challenges, with the goal of returning to a path of profitable growth. We have what we believe to be a comprehensive plan to achieve this goal: a major new advertising campaign for Bowflex; a strong lineup of new product introductions planned; a continually enhanced digital experience platform; and now, new leadership in place that gives us confidence in the long-term potential of this company. Our brands, including Bowflex, Nautilus, Octane Fitness and Schwinn, are among the most recognized fitness brands in the world, and we believe that our equipment is known for its tremendous results.

In closing, I want to thank the Board for the opportunity to serve as Nautilus' Interim CEO during these last 5 months. I thank the Nautilus employees for their support and excellent work during these challenging times. And again, welcome, Jim, to the Nautilus family.

And now, I'd like to open the call up to your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Michael Kawamoto from D.A. Davidson.

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Michael Milton Yuji Kawamoto, D.A. Davidson & Co., Research Division - Research Associate [2]

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And welcome, Jim. Just first off, you mentioned you're repositioning the Bowflex brand. What does that look like? Or can you give any insight into how you're thinking about those efforts and where to position the brand?

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M. Carl Johnson, Nautilus, Inc. - Non-Executive Chairman [3]

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This is Carl, Michael. We are not going to do that for competitive reasons, but I will say that it will be unlike anything you've ever seen from Bowflex before. And we've tested the copy campaign very thoroughly, and we're looking forward to sharing it with you and the rest of the world.

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Michael Milton Yuji Kawamoto, D.A. Davidson & Co., Research Division - Research Associate [4]

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Sounds good. I'm excited to see. And then just secondly, in the Retail channel, what has the sell-through been like in the mass channel for you guys? Can you just talk about inventory levels in that channel? Are they still a little over-inventoried? Or are you pretty comfortable with them?

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William B. McMahon, Nautilus, Inc. - Special Assistant to the CEO [5]

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Yes, Michael, this is Bill. We feel good about point-of-sale performance in Retail, in areas other than Max Trainer. We saw growth in many product categories for Retail. So we feel good about that. As you're well aware, we are working through some inventory positions with some of our Retail partners. I feel like we're making good progress there to set us up well for the fall. So I'd say we expect to see good performance out of Retail.

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Michael Milton Yuji Kawamoto, D.A. Davidson & Co., Research Division - Research Associate [6]

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Got it. M5, it looks like there's a little discounting in the last couple of months. Is that a reflection of what you just talked about?

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William B. McMahon, Nautilus, Inc. - Special Assistant to the CEO [7]

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Yes, that's where we're hoping to work through that challenge there and make preparation for the fall sets.

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Operator [8]

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(Operator Instructions) We'll take our next question from George Kelly from Imperial Capital.

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George Arthur Kelly, Imperial Capital, LLC, Research Division - VP [9]

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So maybe just to follow up on the previous questions about the Retail business, I may have missed this in your prepared remarks, but could you talk about your expectations just about revenue growth and gross margins in the back half of the year?

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Dave Wachsmuth, Nautilus, Inc. - Senior Director of Finance [10]

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Yes. Hi, George. At this point, we're not providing any forward-looking guidance in regard to that.

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George Arthur Kelly, Imperial Capital, LLC, Research Division - VP [11]

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Okay. Is there any way you could more generally talk about -- I mean it's such a -- especially on the gross margin line, it's really -- it's been volatile this year. Would you expect -- I don't know if there's anything you can provide, if it should sort of normalize in the third -- it sounds like there was some discounting in the quarter. Just any additional information would be helpful, if you could.

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M. Carl Johnson, Nautilus, Inc. - Non-Executive Chairman [12]

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Well, I would say that our overall goal here is obviously to improve the margins. And we are, certainly, in terms of new product introductions, wanting to skew to the higher-margin opportunities. And we do have a range of new products coming out, as I mentioned in the formal remarks, across all 4 channels. So one would -- and these sales are obviously expected to occur during the next quarter. So we, as Bill said, we remain hopeful that they will take hold and improve the situation.

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George Arthur Kelly, Imperial Capital, LLC, Research Division - VP [13]

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Okay. Okay. And then actually, I'll jump over to the Direct side. So new Max Trainer, it sounds like coming out later this month, I think you said. What are the -- I understand that the screen is now built into the machine. Are there any other major enhancements as part of that machine?

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William B. McMahon, Nautilus, Inc. - Special Assistant to the CEO [14]

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Yes, George. So MaxTotal, actually, you hit it on the head, it has a built-in touchscreen. So everything is integrated with our digital platform with the product. But we've also -- we're also introducing some other enhancements to the Max line that involve better measurement around upper body to really emphasize the full body aspects of it and give the user feedback to help them across the board on full body. But the biggest piece is that we've had a competitive disadvantage in that not having that level of screen and entertainment built into our product. We believe this addresses that. And I think it's a major step forward in our product lines.

And it's also -- as we mentioned, we're also bringing the digital platform to treadmill. So you're going to see a further enhancement of our investments in digital begin to be much more visible in our product rollouts.

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M. Carl Johnson, Nautilus, Inc. - Non-Executive Chairman [15]

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Yes. I'll just add 2 things to what Bill said. This MaxTotal machine actually has an enhanced upper-body workout capability. So we can legitimately talk about it as a total body workout as we've never had before. So that's quite exciting. And then in terms of the digital capability, we have built-in machine learning capability, so that as a new customer steps on the machine, he or she can put in goals and the machine then assesses their current capabilities in a 10- to 14-minute time period, so then gets a customized workout that they can begin their fitness journey with and then over time, adjust it as they go along. And that's really very, very exciting, along with the other capabilities we have.

So we have, if you will, enhanced automated coaching, virtual coaching. We have music capability. We have the explore-the-world video, anywhere you want to run in the world. And it's really a very exciting experience, all told.

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George Arthur Kelly, Imperial Capital, LLC, Research Division - VP [16]

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Very cool. Very cool. And then last question for me, just about your own inventory position. How -- do you still have more work to do in sort of clearing that out? Is -- do you feel comfortable with where your inventory stands right now?

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William B. McMahon, Nautilus, Inc. - Special Assistant to the CEO [17]

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This is Bill, George. We -- I'm proud of the progress we've made on this. It's been a challenge in an off-season environment to make the progress we've made. On the other hand, I would say we will make the purchases we need for the fall season. And so the seasonality means that Q3, we will actually be increasing our inventory. But in the long run, I think we'd like to go slightly lighter from where we're at now. But then a lot of that's driven by the performance. So if we drive the expected turnaround, we're certainly in position to make the purchase as needed. If not, we'll continue to do the work we're doing to bring it down to a more reasonable level, I'd say.

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Operator [18]

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We'll take our next question from Steve Dyer from Craig-Hallum Capital Group.

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [19]

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Ryan Sigdahl on for Steve. First off, welcome, Jim, and thanks for the added background on yourself to begin. First question as it relates to the MaxTotal, it sounds like it's more of a hybrid-strength cardio piece of equipment, which tends to sound more like the HVT, which had troubles resonating with consumers. So what gives you confidence that expanding the strength capabilities is the right direction?

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William B. McMahon, Nautilus, Inc. - Special Assistant to the CEO [20]

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Yes. I think that's an awesome question, but to alleviate that fear, certainly, when you see our positioning and our new advertising campaigns, you will see that, that is not the positioning we're going out with in terms of the way we talk about our products. We're really going to emphasize the unique personalized, individualized workout elements that our AI brings to the table. And we know that will resonate or believe it that it will. It is not going to be positioned to HVT, like which is you get to do strength and cardio. It's a nice element as a value-adder, but as a headline, we've learned that, that isn't necessarily as compelling as, say, is talking about what is Bowflex and what's the experience of using the product in a digital environment.

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M. Carl Johnson, Nautilus, Inc. - Non-Executive Chairman [21]

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Yes, it's a full body workout. And the consumer will recognize it as in the family of the Max Trainer line. So we would have no worries that people will misconstrue it and misunderstand it. As Bill said, it will be positioned very appropriately.

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [22]

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Got it. Then as it relates to gross margin, just broadly speaking, on the gross margin degradation, how much was from mix versus unfavorable overhead absorption?

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Dave Wachsmuth, Nautilus, Inc. - Senior Director of Finance [23]

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Yes. I think in general, I think it depends on the channel. I mean I think, in total, you'd say mix was a bigger factor than on -- than the overhead. And then to a lesser extent, as Carl mentioned, the...

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M. Carl Johnson, Nautilus, Inc. - Non-Executive Chairman [24]

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Anything else, Ryan?

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [25]

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Sorry, you cut out at the end there, so I might have missed it. But I can follow up off-line. Just one more for me, what was cash flow from operations in the quarter?

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Dave Wachsmuth, Nautilus, Inc. - Senior Director of Finance [26]

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12 -- it was a minus $12.8 million.

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Ryan Ronald Sigdahl, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [27]

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And then as a one follow-up to that, how much capacity is available on the revolver right now?

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Dave Wachsmuth, Nautilus, Inc. - Senior Director of Finance [28]

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$14.1 million as of the quarter end.

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Operator [29]

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There are no further questions at this time. Mr. Carl Johnson, I'd like to turn the conference back to you for any additional or closing remarks.

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M. Carl Johnson, Nautilus, Inc. - Non-Executive Chairman [30]

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Well, very good. Thank you all for joining our call today and for your continued interest in Nautilus. We look forward to providing you with another update in the business in a few months on our third quarter earnings call. Have a great rest of the day.

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Operator [31]

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This concludes today's call. Thank you for your participation. You may now disconnect.