Nautilus, Inc.

Good day and welcome to the Nautilus Fiscal First Quarter 2024 Earnings Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. 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 this event is being recorded. I would now like to turn the conference over to John Mills with ICR. Please go ahead, sir. Thank you. Good afternoon, everyone. Welcome to Nautilus' fiscal 2024 first quarter ended 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 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 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. For today's call, we have a presentation that management will refer to during their prepared remarks. And on slide two is our full safe harbor statement, which we ask everyone to read. If you can access the presentation by going to the investors page on our website and clicking on events and webcasts. 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 any reliance on them. Our actual results may 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 Nautilus' CEO, Mr. Jim Barr.

Thank you, John, and thank you all for joining us. To start, I'd like to emphasize four key topics that will be the focal points of today's call. First, our Q1 results show substantial progress on our path back to profitability, driven by strong gross margin improvement and operating expense reduction, resulting in a significant improvement in year-over-year adjusted EBITDA. Second, consumer sentiment around home exercise is encouraging, with solid demand in direct despite our seasonally low Q1 and some visible sell-through in retail. Third, through a series of proactive efforts, we've strengthened our balance sheet, improved liquidity, and created greater financial flexibility to better navigate an uncertain retail and macroeconomic landscape. Finally, with consumer demand indirect, a stronger financial position, and our confidence in the long-term industry opportunity, we are proud to begin introducing a new generation of Bowflex products carrying our refreshed visual branding. Turning to the first quarter, we are pleased with the results we achieved. which demonstrate our ability to navigate the challenges posed by the macro environment. For Q1, net sales were $42 million, including direct sales of $22 million. Notably, direct achieved a flat comp to last year in strength products. This bright spot can be attributed to enhancements we've made in our strength portfolio, a topic we'll cover later when we discuss our exciting new product launches. Results in our retail segment were in line with our expectations as retailers maintained a conservative approach to inventory. As I mentioned earlier, we are encouraged by the movement of some inventory in retail and we believe we are well positioned in this segment as we approach our peak retail sales quarters of Q3 and Q4. While the path back to profitability is our number one priority, scaling journey also remains a focus. and our efforts have been fruitful, with over 535,000 Journey members at the end of Q1, representing 48% year-over-year growth. Among these members, 150,000 are subscribers, showcasing 17% year-over-year growth. Our operational excellence efforts continue to gain traction. We delivered our seventh consecutive quarter of sequential improvements in our inventory position. We have now right-sized our inventory and reduced our lead times, enabling us to further optimize our working capital investments. Going forward, we will focus on aligning inventory with sales trends. We have also continued to deliver improvement on gross margin, reflecting an expansion of 800 basis points year over year in Q1-24, a testament to the progress achieved through our supply chain initiatives. As a direct result of the deliberate cost-cutting actions announced in February, adjusted operating expenses were reduced by approximately $12 million, or 40% year over year. The notable gross margin expansion and lower adjusted operating expenses translated into a $14 million improvement in adjusted EBITDA as we make headway on our efforts to return to profitability. We've also taken decisive steps to further fortify our financial position enhance liquidity, and strengthen our balance sheet. Throughout the quarter, we diligently pursued this core focus. Notably, we completed the sale of certain non-core assets, made amendments to our credit agreements, paid down debt, and significantly improved our inventory position. Additionally, in June, we made a public offering of common stock to raise additional cash for the balance sheets, as well as provide additional flexibility to opportunistically invest in marketing and drive sales growth. This places us in a better position as we prepare for our product launches in the upcoming fitness season. At quarter end, net cash position was a positive $2 million, a significant sequential improvement to our net cash position of negative $10 million in Q4 of fiscal 23. These proactive actions add fuel to maintain and grow our strong leadership in connected home fitness while effectively managing the complexities of the challenging and dynamic operating environment. At the same time, our comprehensive review of strategic alternatives is ongoing. Our board remains focused on identifying opportunities that will accelerate our company's transformation and deliver enhanced value to our shareholders. Our expertise in crafting top of the line equipment is evident through our powerful brands such as Bowflex and Schwinn. Guided by our consumer first mindset under our North Star strategy, we are constantly evaluating opportunities to innovate and align our products with consumers continually evolving preferences. First, we've refreshed our number one brand. The fitness industry is a sea of sameness and the new Bowflex brand is designed to stand apart. Our new brand identity is inclusive, empowering, and inspiring, reflected outwardly in our visual system, like our imagery, emotive color selections, and yes, a new logo. The brand is also a mindset embodied with the following statement. At Bowflex, our job is to help you find, strengthen, and follow the one inside you. That's why everything we make, every treadmill or set of weights, is a way for you to move and move closer to the you you already are. Our new branding and identity empower consumers to move towards what matters most to them. Next, our recent launch of our lower-priced digital-only Journey SKU featuring rep counting and form coaching in strength training has been extremely well-received, and it is just the beginning of Journey in Strength. This fall, we are also thrilled to be announcing a robust first wave of updated connected fitness equipment featuring our brand new Bowflex visual branding. Ahead of the holiday fitness season, we are enhancing our cardio offerings with two new products under the new Bowflex branding. The Bowflex C6SE, an update of our wildly popular C6 bike. and the new Max SE, a quieter version of our top-selling Max Trainer high-intensity interval training machine, which takes up about half the space of a treadmill at an excellent value. We are also launching a new elliptical under the Schwinn brand. The Schwinn Elliptical 490 delivers a very strong value, features a compact footprint, terrain control, and thousands of structured workouts and hundreds of virtual routes via Journey and third-party apps. We plan to follow up this wave of exciting new Bowflex products and journey features in calendar 2024 in both strength and cardio portfolios. Stay tuned. To complement these launches, we have enhanced the shopping experience by introducing a new navigation, website design, and product imagery, all under the new brand new identity system. The goal is to elevate an engaging experience for our customers as they explore our offerings. In addition to these exciting developments, the recent sale of the Nautilus brand has further strengthened our strategic direction. As a result, we are currently in the process of executing a total company rebrand by the end of the calendar year. This corporate rebranding initiative will reinforce our identity as a leader in the connected home fitness industry. Our dedication to quality and innovation remains at the core of our identity and we are enthusiastic about the future. I would also like to touch on our fiscal 24 outlook, where we have reiterated our full year guidance for revenue, adjusted EBITDA, and journey member count. Our diligence in testing and learning with journey is driving steady member growth. Conversion rate from trial to paid subscriptions has also improved over 30% in July as we enhanced and our welcome communications and move towards a greater mix of two-month trials. In tandem, our unwavering focus on driving operational excellence stands as a crucial pillar in our path back to profitability. With efficient and streamlined operations, we are paving a clear and viable framework to regain profitability. As a result, we anticipate a significant year-over-year improvement in adjusted EBITDA for the full year of 2024. Our dedication to innovation, operational efficiency, and consumer-centric equipment and services positions us to deliver long-term value for our shareholders. I will now turn it over to Ina who will give us more detail on the first quarter results and our fiscal 2024 guidance. Ina?

Thank you, Jim, and good afternoon, everyone. Today I'll be speaking to results of the first quarter of fiscal 24 and will provide guidance for the full year. Please go to our website to view our press release and the slides accompanying this call for more information. Turning to slide nine, total company P&L results with comparisons to last year. Net sales for the first quarter were 42 million, down 24% versus last year. Direct segment declined by about 17%, driven by cardio. We're pleased with the continued momentum and strength where sales were flat to L.Y. Retail segment declined by 29% as retailers continue to take a conservative approach to inventory purchases. Gross profit was $9 million, up 24% to last year, and gross margins were 21%, up 800 basis points from last year. I'll now go through the drivers of the significant gross margin expansion from last year. About 1,100 basis points of improvement were due to lower landed product costs. In the U.S., we've now cleared through older inventory that was burdened by pandemic-related detention and demurrage and higher inbound freight. New imports are benefiting from our efforts to optimize our distribution network, resulting in lower inbound freight. Additionally, we've negotiated lower factory costs for our top SKUs. 200 basis points of the improvement are due to decreased discounting, primarily in retail, demonstrating our disciplined approach to promotions. 100 basis points of the improvement is due to favorable logistics overhead, driven by the cost-cutting actions we took in February 23. Partially offsetting these margin gains are 100 basis points of decline related to outbound freight, driven primarily by mix, as this year the direct segment is a higher portion of sales versus last year. 500 basis points of deleverage related to journey cogs. Journey cogs are increasing year-over-year primarily due to depreciation. If we exclude depreciation during the COG-C leverage, it's about 300 basis points. Turning now to adjusted operating expenses on slide 10. The next few lines of the PML have been adjusted to exclude the impact of non-cash impairment charges and restructuring costs. Please see our press release for our reconciliation to GAAP. Adjusted operating expenses were 19 million, down 12 million or 40% versus last year. The key drivers of the decrease were 4 million less in advertising as we reallocated marketing dollars to later quarters to support our seasonally stronger back half. 4 million decrease in personnel expenses and 2 million decrease in contracted services, reflecting actions we took in February 23. 1 million decrease in variable selling and marketing expenses and the rest of the decrease coming from all other expenses. Excluded from adjusted operating expenses are restructuring and exit charges of about $400,000. Adjusted operating loss was $10 million, an improvement of $14 million versus last year. And adjusted EBITDA loss was $6 million, an improvement of $14 million versus last year's $20 million loss. Turning now to the balance sheet as of June 30th. Cash was $18 million. in line with our cash position at fiscal year end 23. Debt was 16 million, and our liquidity at the end of June was 28 million. We used the proceeds from our non-core asset sales to pay down a portion of our term loan. As of June 30th, we had a minimal balance on our ABL, and our net cash position was positive 2 million, an improvement to our net cash position of negative 10 million last quarter, negative 43 million at the end of third quarter fiscal 23, and negative $28 million at the end of the same quarter last year. For Q1 fiscal 24, we improved our free cash flow by $6 million. Free cash flow was negative $4 million this year versus negative $10 million for the same quarter last year. Other key call-outs in the balance sheet. For our plan, we right-sized our inventory in the quarter, ending Q1 with inventory of $40 million, down 15% versus year and fiscal 23, and down 62% versus the same quarter last year. Looking ahead, we will continue to be disciplined with inventory purchases and will work to align inventory with sales. AR was $13 million and trade payables were $21 million, both down from year-end. Turning now to guidance. We are reaffirming guidance for full-year revenue, full-year adjusted EBITDA, and year-end fiscal 24 journey members. We're guiding to full-year net revenue of between $270 million and $300 million. We expect retailers to continue being conservative with reorders, and based on the seasonality of our business, expect the second half to represent between 60% and 65% of revenue. Given the sale of the Nautilus brand, we expect full-year royalty revenue to be about $1.8 million. We're focused on returning to profitability and are targeting rates even adjusted EBITDA for fiscal 24. However, given the uncertain macro in our net revenue guidance range, we are guiding to a range of adjusted EBITDA loss of negative 15 million to break even. To achieve break even adjusted EBITDA, we need to deliver 47 million of year-over-year improvement. About 30 million of the improvement will come from lower costs, resulting primarily from the restructuring that we implemented in February 23. As we demonstrated in Q1, these cost reductions will result in lower operating expenses in gross margin expansion, as some of these costs are part of COGS. The rest of the EBITDA improvement will come from lower landed product costs, which will drive further gross margin expansion, as we demonstrated in Q1. Partially offsetting these gross margin gains will be some deleverage in Journey COGS, as fiscal $24 spent is planned to be higher year over year, primarily due to depreciation. While we saw reduced discounting in our retail segment in Q1, We continue to expect no improvement in the discounting environment for the full year, which is reflected in our guidance. While we have right size our inventory and exit Q1 in a position of strength, our competitors and the retailers continue to be pressured on the inventory front. So we have planned discounts to be flattish year over year. And lastly, we expect journey members to be about 625,000 at year end, approximately 23% growth versus last year. Like many other companies, we are preparing for a continuation of a difficult operating environment. We have secured the financial flexibility necessary to navigate the current landscape and will remain focused on operational excellence while continuing to execute on our North Star strategy. I'll now turn it back over to Jim.