Nautilus, Inc.
Q1 2017 Earnings Call Transcript

Published: 1 May 2017

[Operator:]

Good day and welcome to the Nautilus, Inc. First Quarter 2017 Earnings Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to John Mills. Please go ahead, sir.

[John Mills:]

Thank you. Good afternoon, everyone. Welcome to Nautilus’ first quarter 2017 conference call. Participants on the call from Nautilus are Bruce Cazenave, Chief Executive Officer; Sid Nayar, Chief Financial Officer; and Bill McMahon, Chief Operating Officer. 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 with the most directly comparable GAAP measures. Remarks on today’s conference call will include forward-looking statements within the meanings of the Securities Laws. These include statements concerning financial projections, operating trends, anticipated growth and profitability, anticipated new product introductions, anticipated capital expenditures, planned and anticipated results of new product and business development initiatives. Forward-looking statements are subject to a number of risks and uncertainties and actual results may differ materially from these statements. For more information about these risks, please refer to our most recent Annual Report on Form 10-K. Nautilus undertakes no objection 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. And with that, it is my pleasure to turn the call over to our CEO, Mr. Bruce Cazenave. Go ahead, Bruce.

[Bruce Cazenave:]

Thank you, John. Good afternoon, everyone, and thank you for joining our call today. I’d like to start by providing a general overview of our first quarter and then we’ll turn it over to Sid Nayar to review our financial results in more detail. Bill McMahon will follow providing details on each business segment as well as updates on product activity. Finally, I will provide some closing remarks before we open up the call for questions. The first quarter operating performance was right in line with our expectations and guidance. As anticipated it was a very difficult comparison to prior year, but we are pleased that underlying factors such as the Direct segment response rates which continued to improve in the first quarter as compared to the back half of last year and a wide breadth of new product launches scheduled for the second quarter and the rest of the year are tracking as planned. In addition, we are seeing an improvement in retail buying patterns as overall inventory levels at certain customers have been adjusted to new targeted lower levels. Bill will discuss these factors in more detail in a few moments. All of these developments together have us well positioned for strong and broad-based growth in the second half across all of our businesses and on track to achieve our full-year guidance for 2017. I will provide more color on this and the investments we are making at the conclusion of our prepared remarks. Now I'd like to turn the call over to Sid.

[Sidharth Nayar:]

Thank you, Bruce. I would like to review the details of our financial results for the first quarter of 2017. Net sales for the first quarter totaled $113.3 million a decrease of 6.3% as compared to the same period in the prior year reflecting lower sales in both the Direct and Retail segments. First quarter gross margins decreased 80 basis points in the Direct segment to 65.5% and were up 210 basis points in the Retail segment to 32% when compared to the same quarter last year. On an overall basis total company gross margins for the first quarter 2017 decreased by 40 basis points to 54.5% versus the same period prior year reflecting the shift in channel mix to an increased percentage of Retail segment revenues. Total operating expenses for the first quarter of 2017 as a percentage of net sales increased to 43.3% from 38.9% in the same period last year primarily reflecting increased sales and marketing expense. Sales and marketing expenses for the first quarter of 2017 were $37.7 million or 33.3% of net sales as compared to $35.2 million or 29.1% of net sales in the same period last year. The increased dollar spending primarily reflects higher media spending of $2.5 million and $1.2 million reserve related to our royalty dispute partially offset by lower finance fees. The increase in sales and marketing as a percentage of sales reflects the same factors. General and administrative expenses were $7.5 million or 6.6% of net sales for the first quarter of 2017 which compares to $8.2 million or 6.8% of net sales in the same period last year. The decreased dollar spending in G&A primarily reflects lower incentive reserves and expenses related to the Octane integration that were incurred in the prior year. Research and development costs in the first quarter of 2017 were $3.9 million or 3.5% of net sales compared to $3.6 million or 3% of net sales in the same period last year. The dollar increase reflects our continued investment in the engineering and design resources required to continue to innovate and broaden our product portfolio. Operating income for the first quarter of 2017 decreased to $12.7 million as compared to operating income of $19.3 million the same quarter of last year. The decrease reflects the decline in revenue coupled with the increase in sales and marketing spend. Operating margin for the first quarter of 2017 decreased to 11.2% compared to 16% for the same period last year. EBITDA from continuing operations in the first quarter of 2017 was $14.9 million versus $21.1 million for the same quarter of the prior year. Please refer to today's earnings release for a reconciliation of EBITDA from continuing operations a non-GAAP measure to the most comparable GAAP measure. Income from continuing operations for the first quarter of 2017 was $8.2 million or $0.26 per diluted share as compared to $11.6 million or $0.37 per diluted share for the same period last year. The effective tax rate for the first quarter of 2017 was 33.6% compared to 38.3% in the same period last year. Tax expense in the current quarter was partially reduced due to the company's adoption of accounting guidance in January 2017 allowing the deduction of excess tax benefits related to stock compensation expense. Total net income including discontinued operations for the first quarter of 2017 were $7.1 million or $0.23 per diluted share which includes a $1.1 million loss net of taxes from discontinued operations. Discontinued operations includes a $1.2 million charge related to the final settlement of a long-standing lawsuit with Biosig Instruments. This compares to the first quarter last year where we reported total net income including discontinued operations of $11.4 million or $0.37 per diluted share which included a net loss from discontinued operations of $0.1 million. Turning now to our segment results, net sales in the Direct business totaled $74.7 million for the first quarter of 2017 an 8% decrease over the same quarter last year. Direct segment sales were impacted by a decline in TreadClimber sales. Media metrics although improved from the lows of Q3 2016 and in line with our expectations were much lower than Q1 of the prior year. As previously communicated, the accelerated decline of TreadClimber in Q1 2017 coupled with exceptionally favorable response rates in Q1 2016 due to the Max Trainer M7 launch was a difficult comparison to make. Bill will provide more color on our actions and outlook for this segment later. Gross margin for the Direct business declined to 65.5% for the first quarter of 2017 compared to 66.3% in the same quarter last year due to higher discounting of TreadClimber products. Operating income for the first quarter of 2017 in our Direct business was $15.3 million compared to $21.1 million in the same quarter prior year. Operating income was negatively impacted by the lower net sales and gross margins in the first quarter of 2017. Net sales in our Retail segment for the first quarter of 2017 were $37.8 million a decrease of 2.6% compared to $38.8 million in the first quarter of last year. The decline in Retail net sales reflects some softness in the Retail market coupled with certain customers rebalancing their inventory levels. Gross margins for the Retail business improved by 210 basis points to 32% in the first quarter of 2017 as compared to 29.9% for the prior period, mostly due to improved product mix and certain one-time purchase accounting related items in the prior year. In the first quarter of 2017 operating income for the Retail business totaled $2.2 million as compared to $3.9 million in the same period of last year. The decrease is attributable to the previously mentioned $1.2 million reserve related to a royalty dispute coupled with lower gross margin dollars related to the revenue shortfall. Now turning to the consolidated balance sheet, cash and investments totaled $88.8 million as of March 31, 2017 with $60 million of debt. This compares to $79.6 million in cash and debt of $64 million at December 31, 2016. Inventories were $34.3 million as of March 31, 2017 compared to $47 million at December 31, 2016 and $36.8 million at March 31, 2016. The decrease in inventory versus year end 2016 relates to the seasonality of the business. Trade payables were $39.4 million as of March 31, 2017 compared to $66 million at the end of 2016 again reflecting seasonality of purchases. Capital expenditures including those incurred but not yet paid totaled $0.6 million for the three months ended March 31, 2017 with spending primarily on product tooling and IT assets. We anticipate full-year CapEx to be in the range of $7 million to $8 million. Finally, the company also announced today that its Board had authorized an additional $15 million expansion to the share buyback program. The company had previously fully utilized a $15 million buyback authorization and has used $5.4 million out of the $10 million expansion program approved on May 4, 2016. Additional details about this program can be found in the press release issues earlier today. At this time, I'd like to turn it over to Bill McMahon, our Chief Operating Officer, who will provide additional insights into our business and key products. Bill?

[William McMahon:]

Thank you, Sid and good afternoon everyone. I'd like to provide further background on our results and provide detail on our product roadmap in 2017. Starting with the Direct segment our Q1 sales decline versus prior year was in line with our expectation and was primarily driven by the continued drop in Bowflex TreadClimber sales. In 2017 we will continue to invest in television for the TreadClimber category, but these efforts will begin to transition to the digital and social media environment where targeting strong TreadClimber response segments is more achievable. Further, we've begun to cascade TreadClimber sales across multiple opportunities in our retail and specialty channels. One of the strengths of our business is that we can capitalize on the significant television awareness created in over 13 years of advertising for this product platform in the Retail space. This capability further leverages our media investments and is normal behavior for long running Direct products. We do anticipate TreadClimber will remain a large and profitable category for Nautilus overall in the future. Meanwhile Bowflex Max Trainer sales continued to deliver the majority of sales in our Direct segment in Q1 but those sales were roughly flat year-over-year due to a difficult media ROI comparable in Q1 2016. We had previously discussed during our last earnings call that the media ROIs of Q1 2016 for Max Trainer would not be possible to match given the much higher base of sales in 2017. We consider this a near-term challenge. Overall media conditions are improved over the second half of last year. Consumer credit conditions remained strong and media response continues to be favorable when compared to the historical performance of product categories that have reached this size in Direct. We have new and expanded creative campaigns planned for Max Trainer to reach still more consumer segments and we anticipate increasing our media investment in Max Trainer this year to drive growth. Regarding direct margins the 80 basis point decline in Direct margins is mainly attributable to price promotions and testing related to the TreadClimber category in Q1. However, Direct margins above 65% overall remain in a very healthy range. One tailwind for our Direct segment in Q1 was the performance of strength products. Both selectorized weights and Home Gym sales grew during the quarter. Our newest addition to the selectorized weight line, the Bowflex SelectTech 560 was the key driver of that growth. However, our legacy Rod Gyms grew year-over-year as well. We feel that this growth in the strength category also represents a continuing participation trend wherein consumers are seeking strength training solutions to add to their existing cardio regimen. Against that consumer behavior backdrop we are excited to launch our newest Direct channel product, the Bowflex Hybrid Velocity Trainer Machine or HVT. Bowflex HVT combined strength and cardio training into one product bringing the benefits of both to the consumer along with workout programming and mobile app support. HVT saves space in a household by combining two machines into one and it saves time by delivering the benefits of strength training to increased muscle activation along with the metabolic advantages of cardio work. The key to unlocking the benefits of HVT lies in the variety of unique workouts that our team of fitness experts have developed. The average consumer following our custom workout will burn calories equivalent to one and a half miles of running while experiencing more than five times the muscle activation as compared to traditional strength training and they'll be able to accomplish this in as little as 18 minutes. We demonstrated a prototype of Bowflex HVT in our New York product showcase last fall and we're excited to bring it to market. Bowflex HVT will launch on television and in the digital and social media realms. The product will be priced at 1799. Though Q1 Direct channel results are in line with our expectations we continue to expect the Direct business to return to growth in the second half of 2017 fueled by new products and more favorable conditions consistent with the full-year overall Nautilus performance guidance that we previously provided. Additionally, our product pipeline for new products in Direct is healthy for 2018 and beyond. Turning now to our Retail segment, our Q1 revenues were down slightly year-over-year but in line with our expectations. During our Q4 earnings call we outlined several near-term factors impacting our Retail business such as the heavier promotional environment and the desire of certain large retail partners to normalize their inventory on hand levels at a new lower position. While certain competitors continue to utilize heavier than normal promotions we maintained our normal pricing strategy and are pleased with our point-of-sale performance overall. Further, we feel that the inventory balance adjusting by certainly retail partners is now largely complete and purchasing should return to a pattern more in line with point-of-sale performance. Sales were helped by continued strong performance in our selectorized weight category during Q1 as both our new and legacy products delivered growth. We were also pleased to see some stability in the specialty retail area of our business after a full year of decline in 2016. And lastly our retail sales of Max Trainer, both domestically and in the international markets were stronger in the quarter. On the topic of Max Trainer and Retail we had previously announced our plans to partner with Dick's Sporting Goods to place the Bowflex Max Trainer M3 within Dick's stores nationwide for in-store only purchase. Our intention was to determine if we could further optimized the reach of our direct media advertising to include those who prefer to buy in-store through a trusted major retailer. We have completed our first fitness season and are very pleased with the results of our efforts. Max Trainer performed well in-store and our analysis of the sales completed with Dick's shows that we did achieve our desired level of incrementality, therefore we will continue forward and we're very pleased to be expanding our relationship with Dick's Sporting Goods in the coming fall season. Retail margins improved 210 basis points in Q1 driven primarily by favorable product mix, our resistance to those deep discounting strategies and the continued benefits of the addition of higher margin Octane sales overall. Based on our current understanding of retailers plans and ongoing point-of-sale performance, we do anticipate solid retail growth in the back half of 2017 as is reflected in our guidance. Our emphasis on product development launch cadence is equally important to our Retail segment. We have several new product launches planned for 2017 and those key product launches include the Bowflex results series cardio line including treadmills and ellipticals at 1499 and 1799. The Bowflex results series represents our first entry into the higher price point retail ellipticals and treadmills. Additionally, we will build on the success of our recent Airdyne product launches by introducing the Schwinn 87 a consumer upscale Airdyne model as well as the Octane Airdyne X which combines the latest in Airdyne technology and a full commercial club warranty package and is backed by the industry-leading Octane service team. Further, we plan to launch the new Octane ZR7000 which is the second machine in our full commercial club rated Zero Runner line. We will also enter new categories with the launch of a mass retail targeted rowing machine, the Schwinn Crewmaster and also a new incremental price point addition to our consumer indoor cycling line the Schwinn IC3 bike. Lastly, we also plan to launch updated versions of our very successful Schwinn 70 series and Nautilus 6 series bikes, ellipticals and treadmills reflecting our commitment to supporting successful existing product platforms while further expanding our market share into new categories/ On that topic of new and incremental categories, we have previously acquired the intellectual property and the rights to the Modern Movement line of fitness products. These products are primarily balancing core focused and would be considered shelf fitness products in-store. In the past year we have worked to integrate digital applications into the balance regimen that these products provide leading to a more engaging experience overall while at the same time also updating their design. This fall we plan to launch three new products into this line including the new Modern Movement M-Board with digital app, a new M-Pad and M-Straps which deliver suspension training. These products will be available in national retailers, online via our e-commerce partners and the Nautilus websites as well as internationally with our valued distributors. We feel that our new product launches for 2017 combined with our existing successful platforms will deliver the growth we have outlined in our guidance. In terms of inventory and supply chain, we are well balanced in position to meet our needs. Before turning the call over to Bruce, I'd like to add that I'm very proud of the efforts of our global Nautilus team of employees. We truly do have an incredible team. Given that team and our multi-year product roadmap, I'm very excited about our opportunities in 2017 and beyond. Bruce will provide more color on our long term focus and I'd like to turn the call back over to him. Bruce?

[Bruce Cazenave:]

Thank you, Bill. I'd like to make a few final comments before we open up the call for questions. As Bill and Sid mentioned, there were a number of external factors such as retail consolidation activity and adjustments to retailer's desired inventories which caused additional pressure on an already challenging comp to the prior year. The good news is, these factors were anticipated as we entered the year and our plans are on track to achieve another full year of revenue and profitability growth as compared to 2016. Therefore we are in a position to reiterate our full year guidance for 2017. We are projecting revenue growth to be in the range of 5% to 7% over 2016 and with similar growth rate and operating income. As a reminder, this reflects starting out the first half of the year slower when compared to the same period last year, followed by returning to double-digit growth run rates in the back half of the year. The trajectory is fuelled mostly by the new product launches Bill described and which will put us back in line with previously communicated long term annual growth rate targets. Our full year guidance also reflects continued stepped up investments in sales, marketing innovation and international and already that began in the first quarter. As we have mentioned in previous calls and conferences, our mode of ongoing operation is to focus simultaneously on both the near term execution of our plans while also building and investing on for long term continued growth. The priorities and strategic initiatives that will enable us to achieve long term growth remain the same. First, is driving innovation and commercializing the robust pipeline of new offerings we have planned for the next three years and beyond. This includes increasing the breadth of our product lines and accelerating the pace of introductions. Second is continuing to optimize the opportunities that the acquisition of octane fitness affords us. We are still in the early phases of realizing the synergies that include product innovation, increased sales channel access and added operational leverage. Third, is accelerating the growth pace and scale of business we have in international markets. We intend to build on the current momentum and expect and deserve to provide consumers with much better access to our brands overseas. International represented only 6% of our sales last year. And finally fourth, maintaining focus on gross margins and improving operating margins. While incremental improvements will be a challenge in 2017 because of the strategic investments we have outlined, finding ways to keep margins moving in the right direction and tightly managing expenses remains a companywide focus area. All-in-all, we feel we are working on the right things and it is comforting that most all of these initiatives and operating principles are just building upon the same themes that helped us achieve the performance improvements delivered over the last five years. Of course they have been adapted to reflect the greater scale, process maturity and added capabilities we now have. Finally I'd like to echo Bill's comment and thank our dedicated team of employees around the world for all their hard work in helping us deliver the desired results and creating the positive momentum we have throughout the company. That concludes our prepared remarks. Now I'd like to open up the call for questions. Operator?

[Operator:]

Thank you. [Operator Instructions] And we will go ahead and take our first question from Mike Swartz with SunTrust.

[Michael Swartz:]

Hi, good evening guys.

[Bruce Cazenave:]

Hi Mike.

[Sidharth Nayar:]

Hi Mike.

[Michael Swartz:]

Hey maybe just starting off Sid, could you help us with the, I guess understanding this $1.2 million reserve you talked about during the quarter for a royalty dispute, there's two questions, one, are you now fully reserved on that front and then two, when you gave guidance for the first quarter, was that already embedded in your operating income outlook?

[Sidharth Nayar:]

Yes, so responding to your first question, yes, so we essentially booked to the maximum that we thought that liability was potentially likely to be, so that's reflected, and yes, the guidance that we've provided already included this number.

[Michael Swartz:]

Okay, that is helpful, thank you. And then just second question, just in terms of the four-year outlook, you reiterated the 5% to 7% top line growth for the year, could you maybe help us frame just in terms of the HVT maybe what you're expecting from that product in 2017, I don't know if there's a way you can just kind of give us some view of maybe relative to maybe how Max Trainer did in its first six months, is that how you're thinking about this?

[William McMahon:]

Hi Mike, it’s Bill. Generally we don't expect any product to launch as well as Max Trainer did. We would anticipate a more normal launch. We will certainly take it if it does better than that, but a normal launch would look something like launching shortly, spending the summer working on our messages and networks and testing, so initially a smaller spend, the objective of that being to have a pretty robust idea of what to do with media when we get into the next fitness season. So you'll see most of the benefits from HVT later in the year.

[Michael Swartz:]

Okay, great. That is helpful. Thank you.

[William McMahon:]

Thanks Mike.

[Operator:]

And we will take our next question from Frank Camma with Sidoti.

[Frank Camma:]

Good afternoon guys.

[Bruce Cazenave:]

Hi Frank.

[Sidharth Nayar:]

Hi Frank.

[Frank Camma:]

Hey, I know you’re not going to break out a lot of detail on Octane specifically, but you've made some comments there and question I have is, anyway you could talk about just sort of top line in how it's coming through towards your, like your initial expectations when you bought the company over a year ago?

[Sidharth Nayar:]

Yes, so Frank I think we were pretty clear last year that coming out of the gate given the challenges in specialty retail it was below expectations we had when we went through the acquisition. However, what we've also stated is in 2017, we expect the channel, the Octane channel to grow and grow at about the same rate that we’ve basically outlined for the full year guidance at 5% to 7%. So clearly and clearly everything we see at this point would be supportive of that growth.

[Frank Camma:]

Okay, good. My second question is with the selling and marketing. Bill you made some comments about and we knew this is going to happen as far as the media metrics obviously not as strong as last year, but obviously you did some pretty good spending there, what kind of lift do you get in the future, I mean some of your products, especially the more expensive ones have pretty long lead time right from hitting consumers. So can you talk about that a little bit, what you expect as far as conversions?

[William McMahon:]

Yes, we expect Frank overall that I would treat it more as last year's Q1 was everything working incredibly well plus launching M7. This year's performance in the Max category was pretty much where it should be for a product of that size. So we can - we know how to operate from here and how to drive it upward and you'll start to see that normalize as the year goes on as certainly against some different comps in the back half of the year. TreadClimber though, was our decision to reduce some media on that is primarily due to it is pretty well saturated at this point. So we have a tale of two products here. We're about to introduce a third which should be an investment in growth. So we'll have two products that are worthy of investing in growth and the other one that we need to manage appropriately to the right size.

[Frank Camma:]

Okay. And my last question, I think Bruce made the comment about or maybe it was Bill, about later this year expanding the relationship with Dick's, what do you mean by expand, would you go beyond the M3?

[William McMahon:]

Potentially and also we believe with Dick's Sporting Goods, we have the opportunity to expand our relationship in a variety of product areas.

[Frank Camma:]

Okay, do they not cover some - they already have a lot of your other products, correct as far as like Nautilus brand products?

[William McMahon:]

They have some.

[Frank Camma:]

Some, but not all, okay that is fine.

[William McMahon:]

Yes, they have some Schwinn as well, but I can’t - I need to let Dick's comment on what they wish to comment on regarding that, Frank and I know you get that, but we’re very pleased with the ability to work closely with Dick's right now.

[Frank Camma:]

Got it, got it. Thank you.

[William McMahon:]

Thanks Frank.

[Operator:]

And we will take our next question from Andrew Burns with D.A. Davidson.

[Andrew Burns:]

Hey good afternoon, thanks for taking my question.

[Sidharth Nayar:]

Hi Andrew.

[Bruce Cazenave:]

Hi Andrew.

[Andrew Burns:]

I was hoping you could spend a little more time on the TreadClimber and how we should think about that in two ways. First, as you shift away from TV and focus on digital and social media is there an acceleration in the decline or should we think of that as sort of a very linear gradual shift in terms of revenue? And then secondly, as you expanded into Retail, what percentage of your existing doors did you place the TreadClimber at, how quickly did you make it available to all retailers, just thinking about the ramp on the retail side? Thanks.

[Bruce Cazenave:]

Thanks Andrew. Those are great questions. In terms of TreadClimber Media investment, we've been progressively stepping it downward for a bit now, really the greater part of the year, and I would anticipate it’s continuing to do control steps versus completely dropping off and there's a couple reasons for that. One is, you do want to find equilibrium. There are levels where the products will level out and perform still, it’s still a great platform and you'd love to continue to provide some advertising to support your retail placements as well. In terms of availability on Retail, it is it will be available for all retailers beginning this fall. The types of retailers that it would do well at are those that have the ability to do a little bit of coaching a little bit to help. Therefore, we think actually our relationships with specialty that have been forged via our partnership with Octane and other retailers have had success with it already in the U.S., but the commonality amongst them is they do have staff on the floor, who's willing to take the time to help somebody get to know the product a little bit.

[Andrew Burns:]

Great, thanks, and in the press release and the prepared remarks you called out softness in the overall retail environment impacting retailers and clearly that's impacting everyone. I was just wondering if you have a view as to whether the exercise equipment category is perhaps faring better or worse as the brick and mortar environment as traffic declines?

[Bruce Cazenave:]

I think we continue to see a shift online in fitness as we do in a lot of categories. In all scenarios, this fall season we just saw a lot more deeper discounting and first activity of discounting than is normal. I think a lot of people were chasing what traffic there was.

[Andrew Burns:]

Thanks and last just a quick one on credit approvals, if you could give that for the quarter?

[Bruce Cazenave:]

Sure, the credit approvals were excellent at 52.6%. That was compared to 49.9% last year. So we continued to see still more increase in that. It's primarily driven by our Tier 1 partner continuing to approve at a more favourable pace and I'd always note with that Andrew that our payment mix though also remains very healthy, where actually credit card sales were quite a few percentage points higher than finance sales in the quarter. So we'd like to see that healthy balance of payment as well as the strong credit approval.

[Andrew Burns:]

Thanks and good luck.

[Bruce Cazenave:]

Thanks Andrew.

[Operator:]

[Operator Instructions] And we will go ahead and take our next question from Rommel Dionisio with Wunderlich.

[Rommel Dionisio:]

Thanks, good afternoon everyone.

[Bruce Cazenave:]

Hi Rommel.

[Sidharth Nayar:]

Hi Rommel.

[Rommel Dionisio:]

I think the weakness in the mass retail categories were pretty well documented, but I wonder if you could just give a little more granularity on the strength that you're seeing in specialty retail, what are some of the factors that are driving that, obviously were encouraging after a somewhat soft 2016? Thanks.

[Bruce Cazenave:]

Yes, I think you would characterize it the way we would Rommel in that, we were pleased to see that begin to steady out. I think our view on it is essentially a lot of the disruptive activity that was going on is a little more steadied out a year later than most of that activity occurring. So, there's starting to be the new pattern of this is what it is, what the floors are going to look like going forward in specialty, so we're encouraged by that.

[Rommel Dionisio:]

Just a general thing to Bill, obviously online retailers have taken some share away from bricks and mortar retailers than the mass channel, is that occurring in specialty to the extent or you are not really seeing that? Thanks.

[Bruce Cazenave:]

It is occurring but to a lesser extent now and that is I think related to a lot of the strengths of specialty retail is that personalized experience that coaching in that sort of end-to-end from store to home set up. Environment that online hasn't yet replicated as well, though I would say you know there the ability to provide a lot of [Audio Gap]

[Operator:]

Ladies and gentlemen, this is the operating speaking, please standby. And again ladies and gentlemen this is the operating speaking, please continue to standby we will be live momentarily. Ladies and gentlemen our speakers' lines disconnected temporarily, they will be dialing in momentarily.

[Bruce Cazenave:]

Okay, we apologize for that, not sure what happened but we're back. Rommel, you were asking a question regarding specialty and online direction and we think at the moment specialty stores still have an advantage over online and that the folks shopping at those stores are seeking that personalized attention and that end-to-end help from store to home for set up. However, the online environment is enticing because of the variety. So, we would, we are thinking ahead in that in the long run they'll certainly will have to mitigate those challenges there as well or take advantage of them.

[Rommel Dionisio:]

Okay, thanks very much.

[Bruce Cazenave:]

Thanks Rommel.

[Operator:]

And we'll take our next question from George Kelly with Imperial Capital.

[George Kelly:]

Hi guys, couple of questions for you. First Bruce you mentioned Octane synergies, you went through a couple different places that you, you expect to achieve synergies in the next two years I believe, could you go through that again and maybe give timing?

[Bruce Cazenave:]

Yes, its I talked about product innovation, I talked about increased sales channels and additional operating leverage and I would say, when we look back at, we're now in our fifth quarter of having bought Octane and we anticipate that it's going to be between systems and between operational leverage and even sourcing opportunities that is going to take us well into 2018 before we can realize all of these things. 2017 will be a big year primarily because of some of the new products that you will see starting with the Airdyne X bikes under the Octane brand for commercial gyms that Bill alluded to, you're going to see some of that and then right behind it there's more new products coming out of the combined product development roadmaps that hit in 2018. We're working right now on systems integration, some of the back office things that Sid's leading for us and that will be accomplished we expect here in this year and that sets the platform for being able to do additional things in terms of synergies and so forth, warehousing and things like that. So it's going to be a three-year process and what I like to share with people is that the premise of why Octane was appealing to us all remain very intact, it's is going to deliver meaningful acceleration on some of our key initiatives that we've identified for growth. It's also going to bring a lot of new innovative products that we can bring to market across the two businesses. We're getting enhanced financials, accretive financials from the business and good margins and the fit culturally has been as we had hoped it would be a nice fit on that regard. So, it's hitting on all the key things that were kind of the building blocks of why we were attracted to the business, but it will take time as I mentioned well into 2018 which will be basically three-years all in before we can realize all of the opportunities that are available to us.

[George Kelly:]

Great and then second question on the HVT launch, do you expect that your Max customers, a lot of them will go for the HVT as well and does that help the first couple years of sales because you have customer lists and people you can hit that maybe you didn't have when you launched Max?

[Bruce Cazenave:]

It’s a great question George. We do know part of the success driver of Max's launch was early adopters were actually TreadClimber owners who were ready for their next product from Bowflex. We are hopeful and certainly we will attempt to market to current owners of Max and we're hopeful that will give a good leg up to start with.

[George Kelly:]

Okay. That's it. Thank you.

[Bruce Cazenave:]

Thank you, George.

[Operator:]

And we'll take our next question from Chris Krueger with Lake Street Capital Markets.

[Chris Krueger:]

Good afternoon.

[Bruce Cazenave:]

Hi, Chris.

[Chris Krueger:]

Hi, just one question and I believe you stated that international sales were 6% of your total in 2016. Could you talk a little bit about how you hope to grow that, I know it's a big opportunity, now if you’re focused on certain countries or regions or if you need to invest in facilities and people, can you just talk about the whole international outlook?

[Bruce Cazenave:]

Sure Chris. The key to us is first of all it's pretty small percentage of our overall sales as compared to even our competitors in a lot of key markets. We are focused on I'd say the appropriate markets which would be Europe and certain emerging markets in the Far East and Latin America. The way we grow is we continue to use a distributor model primarily, though we do sell directly in some cases. We just need to find the right partners in the right regions and then the next phase is how do we best support those sales, which means our ability to distribute product and expand those product lines on an international level. So we’ve been pretty - while we've been progressively growing internationally, I would say we have been using this earn while we learn approach here of finding distributors and minimizing risk overall. But we do need to take the next step I think which is increase our ability to distribute products on a wider basis globally and we’re in process of looking at our supply chain right now for the best approaches on how to do that.

[Sidharth Nayar:]

I would just add, Chris we are also spending in terms of some sales and marketing support just in terms of added sales people in certain countries to help drive that growth too.

[Chris Krueger:]

All right. That is all I got. Thanks.

[Sidharth Nayar:]

Thank you, Chris.

[Operator:]

And we have no further questions in the queue at this time. I would like to go ahead and turn the conference back over to Bruce for closing remarks.

[Bruce Cazenave:]

Thank you. I would like to thank all of you for your interest in Nautilus and joining our call today. We look forward to sharing further progress updates during our second quarter call in the early August timeframe. I hope you all have a great rest of the day. Thank you.

[Operator:]

Ladies and gentlemen, that does conclude today’s conference. We would like to thank you all for your participation. You may now disconnect.