Nautilus, Inc.

Good afternoon and welcome to the Nautilus, Inc. first quarter 2023 earnings results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note that this event is being recorded. I would now like to turn the conference over to John Mills, ICR. Please go ahead.

Great. Thank you. Good afternoon, everyone. Welcome to Nautilus' fiscal 2023 first quarter into June 30th 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 the prepared remarks. Our earnings press release was issued today at 1.05 p.m. Pacific time and may be downloaded from our website at nautilusinc.com on the investors 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. Please note we will be comparing results versus last year, fiscal 2015, 2022 and also versus fiscal 2020, as we believe comparing to the last pre-pandemic period is helpful in demonstrating our growth and progress. 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 will ask everyone to read. If you can access the presentation now by going to the investors page on our website and clicking on the events and webcast. I'd like to remind everyone that during this conference call, Nautilus Management will make certain forward-looking statements. These forward-looking statements are based on the 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 under-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 on our website. And with that, it is my pleasure to turn the call over to Nautilus' CEO, Mr. Jim Barr.

Thank you, John, and thank you all for joining us. I am proud of our team's perseverance and grit in the face of challenging macroeconomic conditions. and I'm pleased with our results for the first quarter and our progress on our long-term transformative strategy. Starting with the financial results, we achieved the high end of our revenue guidance, and EBITDA was better than expected even during our seasonally soft fiscal first quarter. Given the strength of our operating capabilities, our increasing understanding of consumer post-pandemic demand, and our balance sheet, we continue to expect positive adjusted EBITDA in the back half of fiscal 2023, and are reiterating our full-year revenue, EBITDA, and journey member growth guidance. INA will provide additional color on our financial results and guidance shortly. Our well-known brands, omnichannel go-to-market model, wide choice of price points in both strength and cardio offerings, and tight cost control were important drivers of our first quarter results. Our direct segment was up 27% compared to the same pre-pandemic period in fiscal 2020. Despite consumer macro wariness, and even in the sector's low season, we were encouraged that the consumer responded well to our holiday offers for Mother's Day, Memorial Day, and Father's Day. As expected, retail segment growth, excluding octane, was slightly down compared to the same pre-pandemic quarter in fiscal 2020. This decline was driven by retailers' higher inventory positions after their heavy ordering last year. We closely partnered with retailers and supported promotional actions to work down inventory levels in Q1, generating some early reorders, beginning to build some backlog, all with the goal of generating more reorders as we enter fitness season. While delivering expected Q1 results, we also advanced our long-term strategy. Two strong examples I'll cover on this call are advancements in Journey and optimizing supply chain. Journey membership growth was a bright spot during the first quarter. Total members were 360,000 at 630, 133% higher than the same period last year. We have worked hard to design our business for long-term growth, but maintain a culture of agility and a cost structure that permits us to adjust to and navigate through short-term challenges. As such, we believe we are relatively well positioned in the current macro conditions. Our first quarter results show that consumers will buy fitness equipment even in off-peak times of the year if they believe they are getting a good value. Having a diversified product portfolio versus having only one or two modalities is an advantage in this current environment. Our wide range of modalities and price points will give our consumers more affordable choices this fitness season. Similarly, Unlike some competitors who charge $500 per year or more, we feature an attractively priced digital platform at $149 per year. Together, our equipment and digital platform deliver an outstanding comparative total cost of ownership. We highlight this value proposition both in advertising and on our website. Additionally, as we've mentioned on prior earnings calls, we have an asset-light operating model. We work with contract suppliers in Asia and partner with contractors for elements of our talent needs. Our strong focus on cost control and our decision to invest in supply chain capability give us more flexibility to navigate the current economic situation. Pillar four of our North Star is about optimizing supply chain for competitive advantage. Our investments in supply chain are beginning to pay off, and we believe will become even more evident later in the year. We've made several moves to give us line of sight to improve gross margins in the second half of fiscal 23. We negotiated lower inbound freight costs, which, while still higher than calendar 2019, are much lower than peak market rates last year. We actively managed our inventory down and won't be incurring the detention and demurrage fees that hit us last year. We also won't be renewing leases for storage locations that we took on to house elevated levels of inventory last year. As part of our supply chain planning, we are exiting the Portland DC in late fall. And we renegotiated the cost for our top SKUs, which will positively benefit the P&L once we sell through the inventory already on hand. Finally, we have instituted tight cost control, including, for now, pausing incremental brand marketing. As much as possible, we will remain vigilant in continuing to match variable SG&A costs with sales. For these reasons, we believe we are better positioned than some key competitors to weather short-term challenges. As a leader in home fitness, we are buoyed by the strong long-term market opportunity. Through our first quarter, we continue to see evidence that post-pandemic exercise habits favoring home fitness are here to stay. Pre-pandemic, about 40% of people for whom fitness is important worked out at home. Even as more people headed back to the gym, that number is close to 70% and is now held steady for over 15 months. Consumers have adopted a hybrid model for fitness, similar to what they've done for work locations. In our new target consumer segment, which we call enthusiastic cross trainers, the importance of home workouts is even more pronounced with nearly 90% of them working out at home. They are building home gyms with multiple modalities and are becoming more brand loyal. Despite some possible pull forward sales over the last two years, we believe that 27% growth in our direct channel compared to pre-pandemic levels further supports this data. Let me now give you some more color on Journey. A core tenant of our transformation is being consumer-led, listening to what fitness consumers are asking for and providing them with leading cardio and strength equipment combined with digital connectivity to help them achieve their goals. Journey, our digital membership platform, is being fueled by our successful equipment business, which bears much of the cost of customer acquisition and provides the funds to improve and scale Journey which we believe will elevate the long-term operating margins of the company. While we just completed year one of our transformation, and though we are still learning and have work to do, I am pleased with our progress and believe we are well positioned to continue our growth. I would like to highlight a few of our key journey accomplishments. We've completed the launch of a full line of embedded screen cardio machines, treads, bikes, and max trainers, all running our differentiated digital platform journey. Journey must be connected to and be optimized for each modality, and in Cardio, this work is behind us. Last year, we launched the Select Tech Journey experience, making it available to millions who own these wildly popular products. As a result, we've increased our install base from only one Journey-enabled product a little over two years ago to over 80% of our total units in fiscal 2023. We also offer Journey BYOD, Bring Your Own Device, an attractive option for those who want to spend a little less on their equipment or want to use Journey without any equipment at all, such as body weight workouts. We continue to advance the rich and differentiated feature set of Journey. We offer a variety of different ways to work out so the consumer's fitness routine does not become boring and they stay at it longer. including personalized connected fitness that suggests workouts just for you, a content library that continues to grow, the ability to stream your favorite entertainment services while being coached at the same time, and much, much more. We have also made important improvements with the recent over-air updates to Journey to enhance quality for better instrumentation, playback capabilities, and UX improvements. Finally, we are in the process of adding automatic rep counting and form coaching to the Journey Select Tech offering, which will incorporate the vision and motion technologies from Way. We are in alpha testing now and expect to get this enhanced and highly differentiated experience more broadly to consumers in the third quarter. We continue to grow our Journey user base with marketing and promotion. We now include Journey in most Bowflex advertising under the tagline Bowflex with Journey. Bowflex brings users to Journey, and Journey helps to modernize the Bowflex brand. We began offering 12-month trials in late September last year to scale up our member count and get feedback from a larger number of users. As those 12-month trials begin converting to paid, we will be able to share more meaningful information about churn. For now, churn will be a factor embedded in the subscriber numbers. The advancements of Journey are paying off, enabling us to grow Journey members to over 360,000 as of 6-30-22. This represents 133% growth versus the same period last year. About 35% or 127,000 of our current members are subscribers, which represents 290% growth year over year. We are proud of our first quarter results in the face of a challenging environment and moving forward on key aspects of North Star as we continue transforming Nautilus. We believe we have also taken responsible actions as good operators that position us well to achieve our full year guidance. This approach will move our long-term strategy forward while also keeping us on path to deliver positive adjusted EBITDA in the back half of fiscal 2023. I'll now turn it over to Ina, who will give us more detail on our first quarter results and guidance for the year. Ina?