Nautilus, Inc.

Good day and welcome to the Nautilus Inc. Fourth Quarter 2023 Earnings Results Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, today's event is being recorded. I would now like to turn the conference over to Mr. John Mills with ICR. Please go ahead, sir.

Thank you. Good afternoon, everyone. Welcome to Nautilus' fourth quarter and year-end fiscal 2023 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 will 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 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. 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 now by going to Nautilusinc.com, then click on the Investors tab, and then click on the Events and Webcasts, and the presentation will be there for your viewing. 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 risk, 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 Nautilus' CEO, Jim Barr.

Thank you, John, and thank you all for joining us. I would like to begin by highlighting four key topics we'll be focusing on during today's call. First, by leveraging our direct business and through strong cost control, we delivered Q4 and fiscal 23 results significantly better than our guidance provided in February. Second, we have taken deliberate actions to strengthen our balance sheet and sharpen our focus, which better positions us to navigate the current environment. Third, we expect our efforts to drive free cash flow and return the company to profitability, resulting in significant year-over-year improvement in adjusted EBITDA for the full year fiscal 2024. Finally, we remain confident in the long-term industry opportunity and our own position due to our leading brand, comprehensive equipment portfolio, and omnichannel approach as we continue on our path to becoming a leader in connected fitness. Our fourth quarter and full year results demonstrated our ability to navigate industry and broader macro challenges. For fiscal year 23, we delivered net sales of $287 million, including direct net sales of $139 million, 16% growth versus fiscal year 20. Strength and direct was driven by demand for our broad portfolio of strength and cardio offerings. In the fourth quarter, we delivered net sales of $68 million, including direct net sales of $42 million, as we continue to see a return to pre-pandemic seasonal trends. Within direct, we saw momentum and strength, which was up 22% in the quarter versus Q4 fiscal 20, reflecting the enhancements we've made to our offerings in this category. On the bottom line, our operational excellence efforts enabled us to deliver Q4 and fiscal year 23 adjusted EBITDA above expectations. The core focus of our operational excellence is centered around inventory management and Per our plan, we continue to significantly improve our inventory position in the fourth quarter. We feel very well positioned as we enter our seasonally softer months to provide our customers the products they want, when they want them, and where they want to buy them. I'm proud of our continued momentum on scaling our differentiated digital offering as we exceeded our growth targets for journey members. We added more than 61,000 journey members in Q4 and ended the fiscal year with approximately 508,000 journey members, growth of 56% year-over-year. Of these members, 156,000 were subscribers, representing 41% growth year-over-year. We are encouraged to see that sell-through to consumers are progressing. However, retailers continue to take a conservative approach across the home fitness category in light of the macroeconomic environment. We expect this to continue through the first half of fiscal 2024. As a result, we took proactive measures to reset the cost structure of our business during the fourth quarter, which are expected to yield $30 million in cost savings on an annualized basis. we remain committed to our omnichannel approach. We have been successful in doubling our direct segment market share since 2020, and we believe retail will remain an important long-term component of our business model when market conditions improve. To further enhance our ability to navigate near-term industry challenges, earlier this month, we announced several actions to enhance our balance sheet. This included the sale of non-core assets including the Nautilus brand trademark assets and related licenses for about $13 million. This enables us to continue to streamline our focus on our top brands and improve our debt position as we leverage the net proceeds to pay down part of our term loan. The sale of the Nautilus brand reflects a deliberate strategic branding approach we announced two years ago and will have minimal ongoing impact. Our Bowflex, Schwinn, and Journey brands generate over 95% of our revenue. We are in the process of reevaluating our corporate brand identity and look forward to updating you on our plans in the future. Additionally, as Ina will discuss later, subsequent to the quarter end, we further improved our liquidity by amending our credit agreements. The sale of non-core assets, amendments to our credit agreements, and substantially improved position provide us with enhanced liquidity and a stronger balance sheet. At the same time, our comprehensive review of strategic alternatives is ongoing. Our board remains focused on identifying partner opportunities to accelerate the company's strategic transformation and enhance shareholder value. We have no additional information to share regarding this process at this time. Looking ahead, we remain confident in the long-term industry opportunity. Our research continues to show the steadiness of the shift to home exercise as a result of changes in long-term workout habits favoring home fitness and the strong opportunity with connected fitness. We have made significant progress over the last two years on our long-term strategic transformation under our North Star strategy. which we believe will make the company stronger as our industry normalizes post-pandemic. Today, I want to highlight our progress on three key areas. Under our consumer-first mindset, we have implemented better consumer segment targeting and optimized our media mix, which is driving enhanced return on advertising investment. We are seeing the benefits of this in our demand for our equipment, particularly our fast-moving top sellers. This is highlighted by the strength of our direct business where we have the strongest visibility into end-user demand, and we are excited to have an exciting pipeline of new product offerings and refreshed Bowflex branding to be introduced in fiscal 2024. We are achieving our transformative goal to turn supply chain into a competitive advantage. In addition to tangible gross margin improvement via lower landed product costs, we have significantly enhanced our delivery times to retailers, permitting them to order closer to when they need the product, and we are rolling out a better last-mile delivery process for our direct consumers. We are also making significant progress in scaling a differentiated digital offering. Tangible results include transitioning our cardio portfolio to Connect Fitness as an install base for Journey, Introducing vision and motion tracking technologies to our strength portfolio, enabling members to receive personalized real-time form coaching and rep counting using their mobile devices. This quarter, we introduced a lower price digital offering for members who only wish to use Journey on their mobile devices. We built Journey connected fitness experiences to be consumed across our equipment portfolio and off equipment so that anyone can experience the benefits of connected fitness. This has resulted in achievement of our 500,000 member goal. We have laid strong foundation for Journey, delivering continued total member growth. Because we have already built so much of what I just mentioned, we've been able to reduce near-term spend on Journey and keep connected fitness experiences much more affordable than our key competitors, especially important in a volatile economy. Moving forward, we'll continue to focus on making advancements in quality and adaptive personal training, which we believe will drive engagement and support the conversion to paid subscribers over time. I would now like to touch on our fiscal 2024 outlook. At the same time that we're seeing a reversion to pre-pandemic seasonality of demand, the macroeconomic environment has continued to be difficult, causing our retail partners to maintain their conservative inventory positions. We are navigating these industry challenges by taking steps to operate more efficiently and enhance our balance sheet. While significant uncertainty remains in top line for fiscal 24, especially in retail, we believe that a continued focus on our equipment business, our direct business, and operational excellence efforts, including cost control and margin enhancement, create a clear path back to profitability. As such, we are guiding to a significant year over year improvement and adjusted EBITDA for the full year of 2024. I will now turn it over to Ina who will give us more detail on the fourth quarter and full year results and our fiscal 2024 guidance. Ina?