Nautilus, Inc.
Q2 2018 Earnings Call Transcript

Published: 31 Jul 2018

[Operator:]

Good day, and welcome to the Nautilus Second Quarter 2018 Earnings Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to John Mills with ICR. Please go ahead, sir.

[John Mills:]

Thank you. Good afternoon, everyone. Welcome to Nautilus’ Second Quarter 2018 Conference Call. Participants on the call from Nautilus are Bruce Cazenave, our 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 to the most directly comparable GAAP measures. Remarks on today’s conference call will include forward-looking statements within the meaning of the securities laws. These include statements concerning financial projections, operating trends, anticipated growth and profitability, anticipated timing and market acceptance of new product introductions, planned capital expenditures, projected effective tax rates, 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 risk factors described in today’s earnings announcement and in our most recent annual our annual report on Form 10-K as supplemented by our quarterly report on Form 10-Q. Nautilus undertakes no obligation 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 unless otherwise noted. And with that, it is my pleasure to turn the call over to our CEO, Mr. Bruce Cazenave. Please 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 second quarter and then we’ll turn it over to Sid Nayar to review our financials in more detail. Bill McMahon will then provide updates on the business segments as well as product activity, and expected introductions for the remainder of this year. Finally, I’d like to provide some closing remarks, including an update on our outlook for 2018 and then we’ll open up the call for questions. As many of you know, the second quarter is the seasonally slowest part of the year for us, and we use this time to finalize preparations for product launches coming up in the back half of the year in both our Direct and Retail segments. Even in the slow period, we achieved top line results and operational improvements that position us well for the back half and gives us added confidence in our ability to achieve and even raise our full year 2018 revenue guidance. For the quarter, the Retail segment continued its momentum and was up 5.7%, driven by double-digit expansion in our mass retail channel, offsetting weakness in the commercial and specialty channels. On the Direct side of our business, we continue to face the expected phasing down of the mature TreadClimber category and experience softer-than-expected results from Max Trainer within this channel. A number of significant growth drivers are on the way in the back half of 2018, including new product launches and introduction of the new digital platform, which will be incorporated on to an upgraded and refreshed Max Trainer product line. New products are also being launched in both the mass retail and commercial specialty channels of distribution and all are tracking on schedule as Bill will describe shortly. Initial product placements for these new SKUs are strong, which validates that the early positive feedback we received from both industry shows as well as from end users and field test is indeed very real. Now I’d like to turn the call over to Sid. Sid?

[Sid Nayar:]

Thanks, Bruce. I’d like to review the details of our financial results for the second quarter of 2018. Net sales for the second quarter totaled $75.5 million, a decrease of 2% as compared to the same period in the prior year, reflecting a 11% decline in Direct segment sales, partially offset by a 5.7% increase in the Retail segment. Royalty revenue increased by $0.7 million in the second quarter versus prior year, reflecting payments related to the execution of a new patent licensing agreement with ongoing royalty payments that are not expected to be material. For the for first six months of 2018, net sales were $190.3 million, flat to the same period last year. Second quarter gross margins in the Direct segment decreased by 370 basis points to 59.6% and were down 540 basis points in the Retail segment to 29.1% when compared to the same quarter last year. Margins in both segments were negatively impacted by higher product cost due to unfavorable changes in foreign currency exchange rates and commodity price increases. Additionally, Direct margins were negatively impacted by product mix due to an increase of Results Series treadmill sales. On an overall basis, total company gross margins for the second quarter of 2018 decreased by 520 basis points to 44.6% versus the same period prior year, reflecting the lower rate in both segments and a shift in channel mix to an increased percentage of Retail segment revenues. Year- to-date, 2018 gross margins of 48.6% are 400 basis points lower than 2017 year-to-date gross margins, reflecting similar factors. Total operating expenses for the quarter – second quarter of 2018 as a percentage of net sales decreased to 43% from 44.8% in the same period last year, primarily reflecting decreased sales and marketing expense. Total operating expenses for the first six months of 2018 as a percentage of sales were 42.4% as compared to 43.9% for the same prior period. Sales and marketing expense for the second quarter of 2018 was $22.1 million or 29.3% of net sales as compared to $23.6 million or 30.7% of net sales in the same period last year. A decreased dollar spending reflected $0.9 million reduction in marketing creative costs and a $0.8 million decrease in financing fees. The decrease in sales and marketing as a percentage of sales reflects the same factors. For the first six months of 2018, sales and marketing expenses totaled $58.8 million or 30.9% of net sales compared to $61.3 million or 32.2% of net sales for the same period in the prior year, with lower financing fees and creative production costs being offset by increases to media spending. General and administrative expenses were $6.3 million or 8.4% of net sales for the second quarter of 2018, which compares to $7.3 million or 9.5% of net sales in the same period last year. The decreased dollar spending in G&A primarily reflects lower incentive compensation along with lower litigation and trademark costs. General and administrative expenses for the first six months of 2018 as a percentage of net sales totaled 7% as compared to 7.8% for the same prior period. Research and development costs in the second quarter of 2018 were $4 million or 5.3% of net sales compared to $3.6 million or 4.7% 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. Research and development expenses for the first six months of 2018 as a percentage of net sales totaled 4.5% as compared to 3.9% for the same prior period. Operating income for the second quarter of 2018 decreased $1.2 million as compared to operating income of $3.8 million in the same quarter of last year. The decrease reflects a decline in sales and gross margin rates, partially offset by the decrease in operating expenses. Operating margin for the second quarter of 2018 was 1.6% compared to 5% for the same period last year. EBITDA from continuing operations in the second quarter of 2018 was $3.3 million versus $6.2 million for the same quarter of the prior year. For the first six months of 2018, operating income was $11.9 million or 6.3% of net sales versus $16.5 million or 8.7% of net sales in the same period last year. Year-to-date EBITDA from continuing operations totaled $16.4 million versus $21.1 million in the same period last year. Income from continuing operations for the second of 2018 was $1 million or $0.03 per diluted share as compared to $2.6 million or $0.08 per diluted share for the same period last year. For the first six months of 2018 income from continuing operations was $9.1 million or $0.30 per diluted share compared to $10.8 million or $0.35 per diluted share for the same period in the prior year. The effective tax rate for the second quarter of 2018 was 20% compared to 31.1% in the same period last year. We anticipate the full year effective tax rate to be in the range of 24% to 25%. Total net income, including discontinued operations, for the second quarter of 2018 was $0.9 million or $0.03 per diluted share, which includes a $0.1 million net loss from discontinued operations. This compares to the second quarter last year where we reported total net income, including discontinued operations of $2.5 million or $0.08 per diluted, which included a net loss from discontinued operations of $0.1 million. Year-to-date, net income for 2018 totaled $9 million or $0.29 per diluted share versus $9.6 million or $0.31 per diluted share for the same prior period. Net income in the prior year-to-date period included a $1.2 million charge recorded in discontinued operations related to the final settlement of long-standing lawsuit with Biosig Instruments. Turning now to our segment results. Net sales in the Direct business totaled $34.8 million for the second quarter of 2018, a 11% decrease of the same quarter last year. Direct segment sales were impacted by the projected decline in TreadClimber sales coupled with lower-than-anticipated Max Trainer sales. However, sales increases in the Bowflex Results Series helped to partially offset those declines. Year-to-date sales of $106 million are down 6.8% year-over-over due to similar drivers. Gross margin for the Direct business declined to 59.6% for the second quarter of 2018 compared to 63.3% in the same quarter of last year due to higher product costs reflecting commodity, input price increases and the unfavorable impact of foreign exchange rates coupled with an unfavorable product mix. Operating income for the second quarter of 2018 in our Direct business was $0.7 million compared to $2.5 million in the same quarter prior year. Operating income was negatively impacted by the lower net sales and gross margins in the second quarter of 2018, partially offset by reduced marketing expenses. Year-to- date, 2018 operating income for the Direct segment totaled $12 million or 11.3% of net sales compared to $17.9 million or 15.7% of net sales in the same prior period. Net sales in our Retail segment for the second quarter of 2018 were $39.2 million, an increase of 5.7% compared to $37.1 million in the second quarter of last year. The increase in Retail net sales reflects strong growth across a variety of product lines, primarily in the mass retail channel. Gross margins for the Retail business decreased by 540 basis points to 29.1% in the second quarter of 2018 as compared to 34.5% for the prior period, mostly due to higher product costs related to commodity input pricing and unfavorable foreign exchange rates. Year-to-date 2018 gross margins for Retail totaled 30.2%, down 300 basis points versus the same period in the prior year, primarily driven by the same factors. In the second quarter of 2018, operating income for the Retail business totaled $3.6 million, as compared to $6.1 million in the same period of last year. The decrease is attributable to the lower gross margin rate coupled with higher sales and marketing costs and product development expenses incurred. Prior year sales and marketing expenses also included a $1.12 million recovery related to the settlement of an escrow dispute. Year-to-date 2018 operating income for the Retail business totaled $7.5 million versus $8.3 million for the same period in the prior year. Now turning to the consolidated balance sheet. Cash and investments totaled $85.9 million as of June 30, 2018, with $40 million of debt. This compares to $85.2 million in cash and investments and debt of $48 million at December 31, 2017. During the second quarter, the Company purchased $0.4 million of stock in the open market as part of its previously announced stock repurchase program. Inventories were $42.3 million as of June 30, 2018 compared to $53.4 million at December 31, 2017 and $42.3 million at June 30, 2017. The decrease in inventory versus year-end 2017 relates to the seasonality of the business. Trade payables were $46.6 million as of June 30, 2018, compared to $66.9 million at the end of 2017, again, reflecting seasonality of purchases. Capital expenditures totaled $4.2 million for the six months ended June 30, 2018, with spending primarily on implementation of new software systems and production tooling and equipment. We anticipate full year CapEx to be in the range of $8.5 million to $10.5 million. 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?

[Bill McMahon:]

Thank you, Sid. Good afternoon, everyone. I’d like to provide a brief background on our second quarter results and then discuss our new product introductions in the back half the year. Starting with our Retail segment. We are pleased with our 5.7% sales growth in the second quarter. The Q2 sales increase versus prior year was driven by performance in the mass retail space. We experienced solid growth in many of our cardio product lines, including our Upright, Recumbent and wind bikes. Our Bowflex Results, treadmill lineup continue to perform extremely well, and we anticipate this traction will allow Nautilus to continue to gain share in the single largest category of fitness equipment. We have completed our selling and planning period for the fall 2018 mass retail fitness season, and we’re excited about the back half of 2018. One driver of expected growth in the commercial and vertical space will be the new Octane Max Trainer, MTX. This product was designed through a collaboration of the Nautilus and Octane product development teams and has received very positive reviews at both domestic and international trade shows. Commercial Max features all the time savings and performance benefits of the consumer Max built into a commercial-grade machine. The MTX model of commercial Max is specifically designed to perform well in the rapidly growing functional training area of the commercial club space. We’re taking orders for the launch of this product with multiple national accounts. We’ll begin shipping within the next few weeks. The product will appear on commercial club floor shortly thereafter. Based on the early feedback from previews of our new Retail product launches as well as our current visibility into the fall season order plans for our partners, we anticipate continued strong growth in our Retail segment for the back half of 2018. This growth is expected to be driven by the ongoing performance of our existing product lines and enhance further by expanded product offerings across Octane, Nautilus and Bowflex brands. Turning to our Direct segment. Our sales declined during Q2, but are still in range to help achieve our full year updated revenue guidance. As expected, one of the main drivers to this decline was the year-over-year results in TreadClimber sales. In the prior year, TreadClimber was still in the television advertising rotation, whereas in this quarter, the product was not on air. Based on current trend, we continue to believe that Q2 of this year will be the last quarter in which TreadClimber declines will materially impact Direct channel results on a comparative basis. While Max Trainer as a category continues to perform well overall for the company, we did see a decline in Max Trainer performance in Direct that was greater than our expectation during Q2. Max Trainer in the past two years has demonstrated a more pronounced seasonal pattern of performance in Direct, meaning, its seasonality has higher highs in the peak season, but also more off-season lows than other Direct products have on a historical basis. As such, we’re adapting our media investments in Max to better match that pattern. This contributed to Max Trainer revenue declining for Direct in Q2 and will have some impact in the first half of Q3. However, we will ramp up spend following the back to school and fall season per our normal pattern. Offsetting a portion of these declines was growth in the strength category, including our home gyms and SelectTech as well as the performance of the Bowflex Results Series of cardio products. Finally, the prior launch of the new Nautilus and Schwinn e-commerce websites as well as continuing sales of the Bowflex HVT also contributed to Direct revenue. We previously projected a return to consistent growth in our Direct segment, and our product launches scheduled for the second half of this year are anticipated to be a key driver in delivering that growth. First, I’m pleased to announce that today we launched the new Bowflex LateralX trainer on television and in digital and social media advertising. LateralX combines exclusive and patented cardio technology from one of the Octane brands leading commercial brand products, but now designed for use at home. Lateral training better matches exercise activity with real-world movements and no consumer elliptical or treadmill currently on the market matches this product’s range of motion. The Bowflex LateralX is launching with two models and three potential options, which range in price from $1,999 to $2,999. We began our advertising campaign today and advance product shipments, which are expected to begin in two weeks. The launch of Octane Max Trainer MTX and Bowflex LateralX demonstrate continued advancement of the synergies we anticipated during the acquisition of Octane Fitness. Our product development teams are working closely together on still more innovation as part of our three-year product road map. Meanwhile, the second key product launch for Direct is our new digital platform that will create a differentiated customer experience, unique to the home consumer market. We are progressing as planned and anticipate launching this capability, which will also include a subscription model during the fourth quarter of this year. We’re excited about this new platform, which is undergoing extensive testing this summer. While for competitive reasons we’ll continue to keep specific features and capabilities of the platform confidential until launch, I can disclose today that the platform will initially be hosted on a new and updated models of the Bowflex Max Trainer, which will be launched simultaneously. We feel that combining our new digital capabilities with a proven and highly successful product platform like Max Trainer will be a catalyst for growth in the Direct business. Due to product launch timing, we would anticipate that growth to begin manifesting in Q4. Before returning the call to Bruce, I’d like to take a moment to address our gross margins. As Sid noted, gross margins in both Retail and Direct were down in Q2 as well as year-to-date on a comparison to prior year basis. Our individual channel gross margins are primarily impacted by product costs pressures due to rising commodity prices and the impact of currency exchange rates. Freight costs and product mix has also contributed to a lesser extent. Our intention is to reverse these trends, and we’ve taken steps to address these challenges via pricing and supply chain optimization. It’s the nature of such changes that they take effect over multiple quarters. However, we do anticipate that our corrective actions will begin to favorably impact results as compared to the current trend in the second half of this year. Additionally, we are monitoring closely the direction of ongoing trade disputes and potential resulting tariffs. To date, our business has not been materially impacted by the imposition of tariffs, but we recognize this as a potential risk. A risk which would represent still more product cost pressure, and we’ll react to mitigate the problem should it arise. As we enter the second half of 2018, our planned product launches are on track and our inventory and supply chain positions are prepared to support the growth trajectory anticipated in our provided guidance. We are grateful for the hard work of both our Nautilus team members and our business partners from around the world whose efforts will enable that growth. And now I’d like to turn the call back over to Bruce for his final comments. Bruce?

[Bruce Cazenave:]

Thank you, Bill. I’d like to make a few final comments before we open up the call for questions. We are pleased with how our year is shaping up and remain confident that we will achieve full year top line growth. Equally important is the progress to date we’ve made on several of the key strategic initiatives we outlined earlier in the year. This includes ramped-up investments in the international channel and completing key logistics and systems integration initiatives on schedule. While there is still much that needs to be done to accomplish the acceleration in the future top line and bottom line growth, we are on track to deliver on our stated objectives for 2018. To that end, we have raised our full year revenue guidance by $3 million to a range of $431 million to $439 million, reflecting a more robust outlook for our Retail segment coupled with the added visibility into key product launches scheduled in the back half. We have maintained our operating income guidance range of $42 million to $45 million, which is inclusive of the estimated expenses and investments related to the business model improvements we previously mentioned and factoring increased margin pressure from higher commodity pricing and an unfavorable product mix. We look forward to updating you on our exciting product introductions on our next call and providing additional detail on our fourth quarter launches. In closing, I’d like to thank all of our dedicated employees, who are instrumental in our successes and help the company become stronger every quarter as a result of their efforts and initiatives. That concludes our prepared remarks. Now I’d like to open up the call for questions. Operator?

[Operator:]

Thank you. [Operator Instructions] And we’ll go now to Michael Kawamoto with D.A. Davidson.

[Michael Kawamoto:]

Hey, guys. Thanks for taking my question. So it seems like the specialty channel got a little better in 1Q, but then may be a step back this quarter. Can you just provide any updates there and may be your expectation for the rest of the year?

[Bruce Cazenave:]

Yes, we have – we did run into some issues in the channel that were frankly unanticipated or didn’t think they would be as significant as they were in the second channel. Some of it was timing related, Michael. But we are expecting growth in the back half and for the full year for commercial specialty. And a lot of that is driven by placements that we’ve already secured as well as part of that being the new launch of the Octane MTX Max Trainer as well, which is happening later this quarter.

[Michael Kawamoto:]

Got it. Thanks. And then may be just on HVT. I think you noted you’re seeing some improved sales there and the people that do buy it, really love it. Can you just talk about what your expectations are for that to be a contributor in 2018 as well?

[Bill McMahon:]

Sure, we’re continuing to – thanks for the question, Michael. This is Bill. We’re continuing to market HVT in the digital side for now. We’ll certainly revisit it as part of our marketing campaigns when we get back into the fall season. But it is a product we’re watching closely. There is extremely high customer satisfaction with the product, so we do believe that it has legs for us. And while it may not end up being the size of Max Trainer, it certainly a profit contributor to the Direct channel going forward. And you’ll start to see it in Retail as well.

[Michael Kawamoto:]

Awesome. Thanks guys, and good luck for the rest of the year.

[Bill McMahon:]

Thank you, Michael.

[Operator:]

Our next question will come from Eric Wold with B. Riley.

[Eric Wold:]

Thank you and good afternoon, guys. Couple of questions. I guess, one, it sounds like the ramp in the sales guidance for the year. I’ve to assume it’s – even though you’ve got a lot of products launching in the back half of the year, I have to assume that it’d be too early to get a read on LateralX or Max Trainer with the revamped launch of that. So I had to assume that – is it fair to say that all the increase is due to the Retail channel? And then I guess, within that, can you give us a sense of just how strong the bookings are initially for the Octane Max Trainer product?

[Bruce Cazenave:]

Yes, Eric, you’re right. It is with the added visibility that we have into the Retail side of the business and it’s primarily, I would say, the mass retail channel that we’re seeing good initial orders. The Max Trainer as well, we’ve seen some really solid order activity out of the gate on that, which – but again, I think we had anticipated some of that in our prior guidance. So it’s really – the increase you’re seeing is coming from extremely strong Retail upside and that’s inclusive of actually may be taking Direct down a little bit, so.

[Eric Wold:]

On the – for the Max Trainer, I know it’s little early, but are you seeing the order flow for Max Trainer in the commercial channel as kind of incremental in general? Or is it an offset – is there any kind of offset or reduced order flow for other products to make up for that?

[Bill McMahon:]

Yes, Eric, no, we’re not seeing Max Trainer, in essence, cannibalize other sales. So, it’s definitely addressing a part of the club that in the functional training area, that the traditional Octane product wasn’t necessarily reaching. So it’s incremental, and we’re pretty pleased with the early response to the product.

[Eric Wold:]

Okay, then final question from me. Obviously, you took up sales guidance and left your income tax unchanged. Obviously, you’re seeing some headwinds from FX and cost pressures. Can you give us a sense of between the guidance given on the Q1 call and the guidance given now, how much incremental dollar pressure you’re baking into that OpEx guidance? In other words, kind of where would it have gone with the sales guidance hike had those two pressures not been there?

[Sid Nayar:]

Well, it’s not that significant. What I would probably say is, again, we had hoped to mitigate most of the cost increase and FX action by the end of the year. Maybe, I think we had initially talked about it, probably a 200 basis point decline in overall gross margins year-over-year and that’s probably crept up to about 300 basis points at this point.

[Bill McMahon:]

Some of it is also is – if we’re talking gross margins, it’s the mix.

[Sid Nayar:]

Some if it is. It’s the higher shift to more Retail revenues relative to Direct revenues based on upping the guidance on Retail.

[Bill McMahon:]

Yes.

[Eric Wold:]

Perfect. Thanks, guys.

[Sid Nayar:]

Thank you, Eric.

[Bruce Cazenave:]

Thanks, Eric.

[Operator:]

We’ll go next to Steve Dyer with Craig-Hallum.

[Steve Dyer:]

Thanks. good afternoon, guys.

[Bill McMahon:]

Hi, Steve.

[Sid Nayar:]

Hi, Steve.

[Steve Dyer:]

Just a question on the digital subscription platform in Q4. As we kind of think about that in the next year and following. You’re sort of setting that up and should we think about that as sort of a kind of an interesting high-margin lucrative revenue stream or is your – sort of your attempt and purpose on that going forward just to be sort of an enhancement for existing and new equipment?

[Bruce Cazenave:]

Steve, that’s a great question. I think it’s a little bit of both. Primarily in the beginning, we hopped it certainly will allow us to be more competitive in the emerging digital space, where that sort of experiences will become at some point table stakes for competing in the fitness equipment world. So we would expect product sales lift to help from the digital platform to help us. On the other hand, having an ongoing relationship with the customer, be a subscription model, it may not be quite as lucrative on the margin side as you think, because it will be incumbent on us to continue to generate content where the – of the subscription. But it will be profitable. And I’d say in the long run that’s just creating lifetime value around that relationship or brand relationship with a customer, who is in our Direct business acquisition costs are the primary expense of the business. So if we can generate a better experience for our customers, better results for our customers, and frankly, a better relationship with us over time, I think, that’s a win for everyone involved.

[Steve Dyer:]

Great. Yes. That’s very helpful. As it relates to the LateralX, it looks it hit the website today and sort of my impression of the initial discount was maybe a little bit bigger than previous products coming out of the gate. I’m just wondering if that’s sort of by design, if you’re meeting kind of making a big initial flash and get some reviews and things like that? Or what you can share with us just about the discounting service strategy or the promotional strategy going forward?

[Bill McMahon:]

No, Steve, I’d say it’s normal for us to come out. We have our price and then there’s almost some form of promotional discount that’s available in a normal rotation for us and that’s pretty standard in the industry. So I would say, in our view, the launch was not out of line with a normal launch discount.

[Steve Dyer:]

Okay. And then I guess lastly, balance sheet continues to be strong and getting stronger. Any update or color on the M&A environment out there?

[Sid Nayar:]

Steve, probably nothing more than saying we’ve been sort of actively engaged in sort of pursuing that sort of through the quarter and on an ongoing basis. Nothing further that I can sort of provide in terms of further insights at this point.

[Bruce Cazenave:]

Yes.

[Sid Nayar:]

It is a high – it used to be a high priority.

[Bruce Cazenave:]

It’s a high priority. We spent just as we’ve done for going back even before the Octane acquisition, we studied the market pretty hard and looked at a number of targets and had some set criteria. So, we know kind of what we’re after. I will remind you, Steve that we’re not just looking at physical assets; we’re also looking at intellectual property that could help us accelerate one of our strategic initiatives. So, just keep that in mind as well as we go forward.

[Steve Dyer:]

Yes, got it. That was my question. Okay, thanks guys.

[Bruce Cazenave:]

Okay. Thank you, Steve.

[Operator:]

We’ll take our next question from George Kelly with Imperial Capital.

[George Kelly:]

Hi, guys. Thanks for taking my questions.

[Bruce Cazenave:]

Hi, George.

[Sid Nayar:]

Hi, George.

[George Kelly:]

Just a couple on the Direct business. Wondering if you could – excuse me, start with approvals in the quarter and what were they last year credit approvals?

[Bruce Cazenave:]

Yes. So approvals in the quarter, George, improved to 55.5%, and that’s up from 52.2% last year. So, a little over 300 basis points, 330. I would also notice I always do that our mix of payments is still heavier on credit card than finance. So it was 54% roughly of sales in Q2 were credit card for Direct.

[George Kelly:]

Okay, got you. And then second question just on the quarter, you mentioned that the Max results were surprising a bit in the Direct segment. So, anything you can point to that is it – was it media effectiveness or a more competitive kind of pricing environment or is there anything you can pin down that led to that surprise?

[Bill McMahon:]

Yes. I think we’re realizing that we saw some pronounced seasonality last year in Max Trainer during the off-season, and then it bounced back in the peak. We’re seeing some of that same behavior this year in the off-season. And not sure, why, but it just seems to be something that’s an element of Max that we need to adapt to that. Certainly, there’s competitive pressures out there and a lot of messages around digital. So we have help on the way on that front as well. So – and lastly, I think it’s not a bad idea that we refresh Max Trainer this fall as well along with our digital launch. So, we’re kind of taking a look at our messaging and the seasonality and looking for ways that we can give Max Trainer a little more kick in the platform in the back half.

[George Kelly:]

Okay, okay. And then…

[Bill McMahon:]

Max continued to be healthy, George. Excuse me, Max continued to be healthy in the Retail channel.

[George Kelly:]

Okay. And then you mentioned relaunching Max Trainer with the digital incorporated. Will all three models then be refreshed and do you – will you change the price point at all of the models?

[Bill McMahon:]

I think it’s – that’s a great question. It’s a little too soon for us to disclose some of that. I will say the majority of models will be refreshed and – to include the new capabilities. And in terms of price point, that’ll be right around the same range, but we may look to see if we can get some of our discounted price back on the new platform. And that’s part of our desire to get some of our margin back.

[George Kelly:]

Okay, okay, got you. And then the last question from me just about your guidance. Do you expect – I guess, two questions to it; do you expect the Direct business to grow in the second half of the year? And then second question – second part is, last year, third and fourth quarters were really kind of up and down in the Retail. There was a big sort of selling, I think; it was in the third quarter. Should we have the same kind of seasonality this year?

[Bill McMahon:]

Thanks. Yes. I think as we sit right now, we would anticipate that the Direct business will grow well in Q4 due to some of our media adjustments. Q3, it may not. It sort of depends on a few factors. But I’d expect by Q4, Direct should be back on a good track. You make a great call out on Retail. Q3 last year, I think, was – we were up against a 30% up comp year-over-year. We believe strongly in growth in Retail in the back half despite that comp, but indeed one of the risks that would enter into play here is that while point-of-sale was strong in Q4 for Retail, some of the retailers waited to Q1 to make their rebuys, because of such a big Q3 selling. So, it’s something we’ll watch and probably have some updated commentary on, I would say, in the next call. But as of now, based on our visibility and most importantly, how point of sale is going to Retail, we have a strong outlook. Is that fair to say?

[Sid Nayar:]

Yes. For both Q3 and Q4 for Retail.

[Bill McMahon:]

Yes.

[George Kelly:]

Thank you.

[Sid Nayar:]

Thanks, George.

[Operator:]

Our next question will come from Michael Swartz with SunTrust.

[Michael Swartz:]

Hey guys, good evening.

[Sid Nayar:]

Hi, Michael.

[Bruce Cazenave:]

Hi, Mike.

[Michael Swartz:]

Just wanted to touch around Max Trainer. From the standpoint, it sounds like you pulled back on media investment during – or media spend during the quarter, I guess, as you talked about this more pronounced seasonality. So can you maybe help us think about how that’s going to ramp back up, maybe how much media investment was down in the quarter? And then have you changed your full-year outlook on how much you’re going to spend?

[Bruce Cazenave:]

Good question on the full-year outlook. In theory, it would be down a little bit, because I don’t know that will add at all back into Q4 or what we pulled out. It’s not, let’s say significant amounts of money, but it’s – do we disclose that, Sid?

[Sid Nayar:]

We do. Yes. It’s on the Q.

[Bruce Cazenave:]

So, the media is in the Q. So, the media is down just over $1 million to $2 million on Max in the quarter. I’d anticipate in the beginning of Q3, we would be down a little bit to start with and then begin to ramp up right around September timeframe – would be our own normal performance.

[Michael Swartz:]

Okay. That’s helpful. Thank you. And then just second question on the – sorry, I’m trying to remind – on some of the investments that you’ve been making around the logistics and some of the IT upgrades. Can you just talk about maybe how that’s going? And when we should expect to see more of the benefits from some of those investments?

[Bruce Cazenave:]

So, just in terms of incremental expenses, I think we’ve gone through about $1.5 million of the $3 million to $4 million that we’ve outlined from an expense standpoint through Q2. And on the CapEx side, we’ve spent about $3 million out of the $5 million to $6 million to date. And broadly speaking, that’s been focused on the – getting the ERP upgrades in place. It is some of the logistics getting some of the international warehousing and some of the initial consolidations in our internal warehousing as well in place. But obviously, we still have a fair amount to go. I think as we outlined previously, we anticipate seeing the core benefits of this come through in 2019 really related around the digital platform spending, but also the consolidation of the warehouses, so…

[Michael Swartz:]

Okay, great.

[Bill McMahon:]

The system is in and working.

[Bruce Cazenave:]

Yes.

[Bill McMahon:]

The primary is just some changes that we made.

[Michael Swartz:]

Okay, great. Thanks guys.

[Bruce Cazenave:]

Thanks, Michael.

[Operator:]

[Operator Instructions]. We’ll now take a question from Brennan Matthews with Berenberg.

[Brennan Matthews:]

Hi, thank you for taking my question. I wanted to ask about the Max Trainer that’s being relaunched. I wanted to make sure I’m thinking about that correctly. Is that going to be a Direct channel exclusive?

[Bruce Cazenave:]

It’ll be Direct exclusive in the beginning, primarily related to the timing of the launch, which would be past the time that Retail floor sets are made. And we’ll certainly evaluate looking at how we deploy that unit across our omnichannel strategy going into next year.

[Brennan Matthews:]

Okay. So, there could be like a point in time, where it’s slightly different than if I walk into a deck, it won’t necessarily have the digital platform connected to it. Is that right?

[Bruce Cazenave:]

There could be and we’ve anticipated what to do about that situation. We’ll have more to say about it as we get closer to launch.

[Brennan Matthews:]

Okay. Thank you very much. That’s final question.

[Bruce Cazenave:]

Great. Thanks.

[Sid Nayar:]

Thank you, Brennan.

[Operator:]

And it appears there are no further questions at this time. I’d like to turn the conference back to our speakers for any additional or closing remarks.

[Bruce Cazenave:]

Thank you, operator. Thank you all for your interest in Nautilus and joining our call today. We look forward to providing another update on the business on our third quarter earnings call in a few months. Hope everyone has a great day. Thank you.

[Operator:]

This concludes today’s call. Thank you for your participation. You may now disconnect.