Nautilus, Inc.

Greetings, ladies and gentlemen, and welcome to the Nautilus Incorporated Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Should anyone require operator assistance, please press star zero on your telephone keypad. It is now my pleasure to introduce your host, Mr. John Mills. Thank you. You may begin. Great.

Thank you, Jen. Good afternoon, everyone. Welcome to Nautilus' second quarter fiscal 2022 conference call. Participants on the call today from Nautilus are Jim Barr, Chief Executive Officer, and Ina Knoll, Chief Financial Officer. Please note, this call is being webcast and will be available for replay for the next 14 days. We'll be happy to take your questions at the conclusion of our prepared remarks. Our earnings press release was issued today at 1.05 p.m. Pacific time and may be downloaded from our website at Nautilus Inc. on the investor relations page. The earnings released, including a reconciliation of the non-GAAP financial measures mentioned in today's call, are the most directly comparable GAAP measures. Please note, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2020. For today's call, we have a presentation that management will refer to during their prepared remarks. On slide two is our full safe harbor statement which we ask everyone to read. You can access the presentation by going to NautilusInc.com, then click on the Investors tab, and then click on the Events, and the webcast and the presentation will be there. I would like to remind everyone that during the conference call, Nautilus Management will make certain forward-looking statements. These forward-looking statements are based upon beliefs of management and information currently available to us as of today. Such forward-looking statements are not guarantees of future performance, and therefore, one should not place any reliance on them. Our actual results will be affected by known and unknown risks, trends, uncertainties, and factors that are beyond our control and ability to predict. For additional information concerning these factors, please refer to the Safe Harbor Statement and to our SEC filings, which can be found in the investor relations section of our website. And with that, it is my pleasure to turn the call over to the CEO, Jim Barr.

Thank you, John, and thank you all for joining us. Today, I'll begin with some thoughts on the home fitness market dynamics over the past 18 months and the outlook going forward as context, then cover our financial performance in the quarter and the first half. Next, I'll discuss our strong progress on our North Star strategy, including Journey. I'll end with our plans to further accelerate our investments in journey and in marketing. You've heard us talk in detail over the past 18 months about the dramatic expansion in the size of our SAM, two to three X by our most recent estimates. This kind of industry growth is very rare and underscores our strong opportunity as the number three in market share. There is strong evidence that much of this market expansion may be permanent because the principal driver is profound and fundamental secular changes in workout attitudes and habits that favor home fitness. Our frequent surveys continue to indicate that 25% of former gym goers do not intend to ever go back to the gym, and that others who say they will return to the gym plan to work out more often at home than they did pre-pandemic due to remote or hybrid work models. Workout place is highly correlated with workplace. We are seeing these changes and attitudes play out in consumer behavior. For example, in a recent study we commissioned, 66% of respondents report that they work out at home versus 43% pre-pandemic. Connected fitness and our transformation are still in early innings, I'm proud that we have positioned ourselves well during the pandemic for post-pandemic success. We now have a portfolio of new connected products, a Strength and Journey digital offering with a growing member base, stronger consumer targeting, expanded omnichannel distribution, and a stronger team. It is remarkable what we have accomplished in the last two years. I'll talk more about that a bit later. Now I'll briefly speak to our second quarter and first half financial results. In the second fiscal quarter of 2022, net sales were $138 million, which represents nearly 125% growth versus two years ago. Our net sales were $155 million in the same period last year. The primary driver of our miss to guidance was due to global shipping challenges beyond our control that affected the end of quarter cutoff. Specifically, we would have met our guidance of $145 to $155 million if just a portion of the $22 million of FFO finished goods inventory we had ready and waiting on the dock for retail customers had been picked up. There are a variety of reasons for the delay in pickup, including retailers' inability to secure containers in time. In fact, $12 million of the $22 million had shipped by the end of October. For additional perspective, this was the second strongest September quarter in the past decade for Nautilus. Excluding Octane, our retail segment in the second quarter was up 19% compared to the prior year period and up 175% compared to the same period two years ago. The direct channel exceeded our internal goals and was down in the second quarter due to seasonality, which didn't occur last year. but it was up 134% compared to the second quarter two years ago. International, which is reported as part of the retail segment, continued to achieve very strong year-over-year and two-year growth in the second quarter, up 57% and 655% respectively. As expected, gross margin for the second quarter of fiscal year 2022 was lower due to abnormal shipping and logistics costs, eight points, commodities and components and foreign exchange, four points, and continued investment in journey, one point. The cost pressures related to the global supply chain disruptions are obviously affecting many industries, including ours. While the impact is significant, we believe these external margin pressures will normalize over time and, when coupled with the expansion of our addressable market, will result in improved operating margins for non-lists. Despite our sales miss, we achieved our adjusted operating margin guidance for the second quarter of low single digits, while increasing our investment in advertising and journey by nearly $8 million versus LY. Especially given the atypical retail seasonality patterns we have seen, it is important to also discuss the first half of the year in aggregate. For the first half, net sales were $323 million, a 28% comp to LY, and a 215% comp to LLY, excluding Octane. Keep in mind, 2022 is comping against the pandemic sales in 2021, so we're quite pleased with our first six months' performance. In fact, this first half ranks as the best comparable period in Nautilus history. For the first half, adjusted operating income was $22 million, or 7%. Moving on to our progress on our North Star strategy. During our investor day in March, when we laid out our long-term vision and strategic plan, North Star, one of the areas we highlighted was our supply chain. We have made great strides by working down backlog, improving our inventory position relative to last year, and opening a new DC to alleviate the widely known supply issues affecting global shipping. We are proud to have built and shipped the inventory to meet consumer demand without the disappointment of last year's long waits. We have overcome shipping issues and will not be among those sellers with empty shelves this holiday season. Even with these successful investments, we expect gross margins to continue to be under pressure as global supply chain disruptions continue to persist. We continue to address unprecedented challenges such as container availability costs of shipping and storing inventory, elevated commodity costs, availability and spot prices of electronic components, and delayed retailer FFO pickups. But we have developed a much stronger and more agile supply chain, thanks to disciplined execution on our North Star strategic plan. Next, I would like to turn to innovation. This quarter, we announced and completed the acquisition of Way, a leader in motion and vision technology. This acquisition directly supports our aim to accelerate our software development capabilities and add new and innovative features to its journey platform, moving us closer to our vision for journey as your highly personalized one-on-one fitness coach. Waze proprietary technology enables computers to understand human motion using cameras on its computer vision software, analyzes movements, and provides real-time individualized feedback and coaching on exercise. Way has a particular unique strength in using cameras found on today's mobile devices, such as smartphones and tablets. Way's existing partners include Microsoft and ETH Zurich, one of the top science and technology universities in the world. We plan to integrate Way's motion tracking capabilities into Journey to further advance and accelerate our highly personalized workout experiences, including automatic rep counting and form coaching. Our initial focus will be on strength training and off-product workouts such as body weight, yoga, and floor exercises. We are excited to have increased our software capabilities through this tuck-in acquisition and plan to incorporate the first set of features from Way into the Journey experience during our fiscal 22 fourth quarter. Over the past year, we've made tremendous advancements with Journey and are seeing very strong adoption and tremendous growth in Journey members. We are excited about the value and the experience that Journey provides. It is focused on the individual. It provides a greater variety of choices of equipment and ways to work out than competitors. We have added classes, of course, but Journey brings what we call entertainment beyond the class. And we provide all this at a great value, typically one-half to one-third the price of our competition. Just last week, we announced that Journey now includes strength video workouts for both Select Tech 552 and 1090 dumbbells. Select Tech is one of our strongest selling offerings, and this is our first entry into strength training with Journey. The new updated digital platform now includes a video library of instructor-led strength workouts for these Bowflex Select Tech dumbbells. In the near future, we will also be adding strength workouts specific for the Bowflex Select Tech 840 kettlebell and the Bowflex Select Tech 2080 barbell. We also announced that for a limited time, New Journey members are eligible to receive a 12-month complimentary trial membership. This marks the latest step to make the Journey experience available to more consumers, whether they are using cardio or strength equipment or both. Previously, consumers could not easily experience Journey without owning one of our connected cardio products. We are excited to expose the Journey experience to a much broader audience. We were also excited to announce last week our latest connected cardio product, the new connected Bowflex Max Total 16. The new Max offers a 16-inch HD touchscreen and integration with the Journey digital fitness platform, so users stay engaged and motivated during high-calorie burn interval workouts. The Bowflex Max Total 16 machine blends the low impact of an elliptical and the high intensity of a stepper to offer a short, high-intensity interval workout in a compact design. The initial reception of our Journey-powered MAX machines has been phenomenal, and we are excited about how we have improved upon this industry-leading product unique to Bowflex. We've increased Journey content, adding over 100 Explore the World immersive experiences, and have released hundreds of new trainer-led videos during the first half of the fiscal year 22. We've done so with our own first-party content and through partners such as FitOn. We also launched Journey.com, a new web-based consumer portal to better highlight Journey platform's features and benefits, as well as helping members more easily manage their Journey accounts without calling customer service. The team and I are delighted with our execution and progress in Connected Fitness via our new equipment and the Journey platform, and we're only just beginning. All of this progress in the last few months has led to very strong membership growth and lowered our churn significantly. While it is early, our growth is extremely promising. I am pleased to report that our current member count is approximately 200,000, more than three times the year ago period when we had about 65,000 members. And this incredible growth is before the holiday season, before our new product introductions, journey enhancements, and special limited time trial offers that I just discussed. As planned in our North Star plan, we have stood up and are building a highly profitable digital business on top of a successful equipment business. The consumer experience on our equipment is enhanced by our digital offering, and our digital business is fueled by the economics of the equipment business. We have been working tirelessly to make Journey a leading fitness service that matches our incredible lineup of equipment. Our digital connected subscription service is driving the future of Nautilus and the execution and results of our North Star strategy have exceeded our expectations to date. I'm delighted that we are even further along in our long-term transformation than we expected on Investor Day in March. This progress ultimately will enable us to have more predictable growth and higher profitability that will generate attractive long-term returns. There remain challenges to overcome, such as post-COVID recovery-driven margin pressure from inflation and transportation costs, which had been more severe than anyone expected. In fact, 12 points in Q2. In the first half of our fiscal year, we were proud to have overcome these challenges, stayed committed to North Star investments, and still remained profitable. It was an incredible accomplishment to do it all. As we looked at the second half, we assumed that these margin challenges, while temporary, would likely persist for the remainder of our fiscal year. This led us to an important decision point. Do we choose to remain profitable by pausing or reducing our North Star strategy investments? Or do we capitalize on our progress and continue to invest with confidence using our balance sheet? Faced with this choice, our board and management team have made the strategic decision to not only stay committed to North Star, but to accelerate our investment in the second half of the year. We are choosing progress towards our long-term goals over short-term profit maximization. Specifically, We are increasing our second half forecasted OPEX spend by $12 to $14 million in Journey versus LY, and marketing as a percentage of sales will increase by 9 to 11 points versus last year. This will permit us to more quickly grow our membership base and transition to a higher gross margin business earlier than originally laid out in our investor day. Additionally, we have improved our liquidity by increasing our line of credit to $100 million. This allowed us to deploy cash for tuck-in acquisitions like Wei, gave us working capital to invest in inventory, and importantly, gives us room to accelerate our long-term investments. We also expect that this near-term investment will enable our journey digital platform business to be accretive sooner than previously expected. Ina will be providing specific 2022 guidance during her remarks, and will include a waterfall of margins to show where we are investing. We also expect margins to climb each year from 2023 to 2026 and beyond. Simply put, we are leveraging our profitable equipment business to build digital faster due to strong results. We are unified in our confidence that this is the best approach for our company and for our shareholders. I'll now turn it over to Ina, who will give us more detail on our second quarter financials and guidance for the rest of the year. Ina?