Nautilus, Inc.
Q4 2016 Earnings Call Transcript

Published: 22 Feb 2017

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Nautilus, Inc. Fourth Quarter and Full-Year 2016 Earnings Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we’ll conduct a question-and-answer session. As a reminder, this conference is being recorded. Now, I’d like to turn the conference over to Mr. John Mills of ICR. Please go ahead, sir.

[John Mills:]

Thank you. Good afternoon, everyone. Welcome to Nautilus’ fourth quarter and full-year 2016 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 and with the most directly comparable GAAP measure. The 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 new product introductions, anticipated capital expenditures, planned and anticipated results of new product and business development initiatives, and anticipated benefits of the acquisition of Octane Fitness. 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:]

Thanks, John. Good afternoon, everyone, and thank you for joining our call today. I’d like to start by providing a general overview of our fourth quarter and full-year results, 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 end today’s call with some closing remarks before we open up the call for more questions. In the fourth quarter, we generated strong increases in all key financial metrics of our business. Total revenue increased 15%, operating income increased 56%, and EBITDA increased by approximately 62% over the same period prior year. The operating performance improvement was driven by several factors, including higher sales in our Retail business from the addition of Octane Fitness, gross margin improvement in all businesses, and achieving greater leverage of operating expenses. Operating income in our Direct business increased by 21% over the same quarter prior year, even though top line revenue in this business continued to be impacted by weak consumer response to our media investments during the pre-election period. The strategic decision to defer advertising media spending during the pre-election period even though it adversely affected sales was the right one. Bill will provide additional color on this channel, as well as others in a few moments. The fourth quarter rounded out another year of solid revenue growth with increased profitability and achieving greater operating leverage. Operating margins for the full-year improved by 110 basis points to 13.1%, and was a direct result of our team’s disciplined cost management practices and ability to adapt quickly to changing conditions in both the retail and direct-to-consumer markets. In addition, during 2016, we made major strides in advancing our primary strategic initiatives in the area of building the innovation pipeline and capabilities, diversifying product lines and channels of distribution, and expanding access points in international markets. The first full-year of having added Octane Fitness to our portfolio was an important contributor to all these initiatives. Looking into 2017, we do expect to achieve another year of revenue and profit growth compared to 2016, with increases coming from all three channels of our business; direct, retail and commercial and specialty. I will provide more specifics in terms of our plans for 2017 at the conclusion of our prepared remarks. Additionally, in response to a number of investors and analysts who in the past have requested that we provide more definition concerning the near-term outlook, we will be providing some guidance towards the end of the call. Now, I’d like to turn the call over to Sid to review our financials in more detail. Sid?

[Sidharth Nayar:]

Thank you, Bruce. Net sales for the fourth quarter of 2016 totaled $125.8 million, an increase of 15.2% as compared to the same period in the prior year. Net sales for the year ended December 31, 2016 totaled $406 million versus $335.8 million for the same prior period, an increase of 20.9%. Fourth quarter gross margins increased to 66.8% in the Direct segment, up approximately 630 basis points, an increase to 33.3% in the Retail segment, up approximately 570 basis points when compared to the same quarter last year. On an overall basis, total company gross margins for the fourth quarter 2016 increased 290 basis points to 51% versus the same period prior year. On an annual basis, gross margins for the year-ended December 31, 2016 improved 50 basis points to 52.1%. Total operating expenses for the fourth quarter of 2016, as a percentage of net sales decreased to 35.6% from 36.8% in the same period last year. As a percentage of net sales, lower selling and marketing costs were partially offset by higher planned research and development expenses and incremental expenses from the addition of Octane. Operating expenses for the year ended December 31, 2016, as a percentage of sales improved to 38.9%, as compared to 39.6% for the same prior period. Sales and marketing expense for the fourth quarter of 2016 totaled $34.2 million versus $31.4 million in the same period last year, reflecting higher media spending, partially offset by lower variable selling expenses, and lower bad debt expense as the prior year quarter included the write-off of the TSA receivable. As a percent of net sales, sales and marketing expense decreased to 27.2% of net sales, as compared to 28.8% of net sales in the same period last year. The percentage decrease was primarily due to the acquisition of Octane, which is reported within the Retail segment and has a lower selling and marketing expense percentage than the company average. For the year ended December 31, 2016, sales and marketing expenses were 28.4% of net sales, compared to 30.3% of net sales in the same period in the prior year. The decrease as a percent of net sales was due to including the Octane acquisition, as well as faster growth in the organic Retail business, which also has a lower marketing expense percentage than the company average. General and administrative expenses were $7.2 million, or 5.7% of net sales for the fourth quarter of 2016, which compares to $6.1 million, or 5.6% of net sales in the same period last year. The increased dollar spending in G&A was primarily due to higher amortization expense and the inclusion of Octane expenses, partially offset by lower incentive expense and legal fees. General and administrative expenses for the year 2016, as a percentage of net sales totaled 7.1%, as compared to 6.4% for the same prior period primarily driven by the same factors. Research and development costs in the fourth quarter of 2016 were $3.5 million, or 2.8% of net sales, compared to $2.6 million, or 2.4% of net sales in the same period last year. The dollar increase was driven by additional resources added to supplement our new product development capability along with inclusion of the Octane acquisition. Research and development costs for the full-year 2016 as a percentage of sales totaled 3.4% as compared to 2.9% for the prior year. Operating income for the fourth quarter of 2016 increased 56.4% to $19.3 million, as compared to operating income of $12.3 million in the same quarter of last year. The increase reflects higher gross margins in both segments, combined with improved operating leverage of sales and marketing expenses. Operating margin for the fourth quarter of 2016 increased to 15.4% compared to 11.3% for the same period last year. For the full-year 2016, operating income totaled $53.4 million, or 13.1% of net sales, up 32.6% compared to the same period last year. Income from continuing operations for the fourth quarter 2016 was $12 million, or $0.38 per diluted share, as compared to $9.9 million, or $0.32 per diluted share for the same period last year. The effective tax rate for the fourth quarter of 2016 was 36.4% compared to 20.3% in the same period last year. The prior year quarter included the tax benefit of $2 million related to release of foreign tax credit valuation allowances. Income from continuing operations for the year 2016 totaled $35.1 million, or a $1.12 per diluted share as compared to $26.8 million, or $0.85 per diluted share for the full-year 2015. Prior year financial metrics including gross margins, operating income and earnings per share were negatively impacted by unusual one-time items booked here in Q4 2016. and will be highlighted in the segment results that follow. Turning now to our segment results, net sales in the Direct business totaled $65.2 million for the fourth quarter of 2016, a 2.7% decrease over the same quarter last year. The decrease in net sales in the Direct business was due to declines in the TreadClimber product line, which outweighed continued growth of the Bowflex Max Trainer product line. Gross margin for the Direct business improved by 630 basis points to 66.8% for the fourth quarter of 2016, compared to 60.5% in the same quarter of last year. Prior year gross margins and operating income results were negatively impacted by a $2.5 million arbitration settlement expense and a $1.4 million inventory reserve of our discontinued nutrition products. Operating income for the fourth quarter of 2016 in our Direct business was $12 million compared to $9.9 million in the same quarter prior year. Turning to our Retail segment. Net sales for the fourth quarter of 2016 increased 43.6% to $60 million compared to $41.8 million in the fourth quarter of last year. The improvement reflects the inclusion of Octane Fitness in this year’s numbers, partially offset by a decline in our organic Retail business. Gross margins for the Retail business improved by 570 basis points to 33.3% in the fourth quarter of 2016, as compared to 27.6% for the prior period, driven by favorable channel and product mix and improved supply chain costs. In the fourth quarter of 2016, operating income for the Retail business totaled $12.2 million, as compared to $7 million in the same period of last year, due to the higher revenue and improved gross margins. Now, turning to the consolidated balance sheet, cash totaled $79.6 million as of December 31, 2016 with $64 million of debt. This compares to $60.8 million in cash and $80 million of debt at December 31, 2015. Working capital totaled $85 million as of the year end 2016 compared to $69.4 million at the end of 2015. The increase in working capital was primarily due to an $18.8 million increase in cash and marketable securities. Inventories were $47 million as of December 31, 2016, compared to $42.7 million at December 31, 2015. The increase in inventory versus year end 2015 is primarily due to increased stocking with specific product lines to support the higher velocity SKUs. Trade payables were $66 million as of December 31, 2016 compared to $61.7 million at the end of 2015. Capital expenditures totaled $4.7 million for the year ended December 31, 2016, with spending primarily on product tooling, IT assets, and facility infrastructure. We anticipate full-year CapEx for 2017 to be in the range of $7 million to $8 million, primarily focused on product tooling and IT integration costs. The company also repurchased $5.4 million of stock during Q4 2016 as part of the previously disclosed buyback program. 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. Good afternoon, everyone. I’d like to provide additional background on our recent results and the overall position of our business and discuss some of our new product activity. Starting with the Direct segment, our slight decrease in sales during the fourth quarter reflected the continuation of soft consumer response conditions that impacted our Q3 performance for about one-half of the quarter. Encouragingly, following the election and more specifically from Black Friday onward, we saw a return to positive year-over-year growth in our Max Trainer category. However, that growth was offset somewhat as TreadClimber sales continued lower, reflecting its aging life cycle. Overall, for the quarter, we saw a return to more favorable media conditions in the post-election environment. Given those conditions, we increased our media investment by 14% and closed the revenue GAAP versus prior year, especially as compared to the large GAAP created in Q3. While we’re pleased to return to a growth trajectory in Max Trainer following the market disruption last year, we have two near-term challenges. First, the media ROI for Max Trainer in Q1 2016 was historically high as the product was still in its early growth trajectory mode. One year later, Max continues to grow for us, but at a more modest level due to the much higher baseline revenue number. As such, the media ROI while still good is not as high as it was in prior years. This will put some pressure on direct channel profit, as we normalize to the new level of performance and invest in further growth. Secondly, our TreadClimber product line is now entering its 12th year of television advertising, and we continue to see ongoing television performance decline in this category due primarily to the natural product lifecycle. TreadClimber will level out at a new lower revenue point, but we’ve not yet reached that level and thus TreadClimber declines will be a near-term challenge to the overall direct channel growth path. Though, the introduction of our newest direct product, the Bowflex Hybrid Velocity Trainer is intended to offset this decline. As a result, in the first-half of 2017, especially Q1, we likely will not see the same expansion we posted in Q1 of 2016. However, we will continue to invest in growth for Max Trainer and we anticipate growth in our Direct business for the full-year 2017. As mentioned before, Direct’s newest product, the Hybrid Velocity Trainer or HVT is on track in terms of quality, cost and time to market. Bowflex HVT combined strength in cardio training into one product bringing the benefits of both to the consumer along with workout programming and mobile app support. We demonstrated a prototype of Bowflex HVT in our New York product showcase last fall and we’re excited to bring into market. We plan to launch before mid-year and we’ll have more information on that launch in our next earnings call. Turning now to our Retail segment. Our Q4 revenue results did not meet our expectations. While our sales grew more than 43% year-over-year, that growth was primarily due to the acquisition of Octane Fitness. Our organic retail sales declined 7% in the quarter, though we were encouraged by the 570 basis point improvement in gross profit, which consisted of further gains in our organic retail margins, as well as the contribution of commercial and specialty sales via Octane Fitness. It’s important to note that internally we evaluate mass retail over the last six months of the year versus Q3 and Q4 as standalone quarters. Our reasoning is that the selling process is heaviest in late September and early October, and variance in shipment timing during that period can swing results in either quarter. Using that as an evaluation method, our mass retail sales did increase in the second-half of the year. Nonetheless, there were near-term challenges in Q4. First, we noted a pattern of very deep promotions and daily deal buying by our competitors in the e-commerce space during December and early January. We chose not to erode our margins by matching those deals, which we felt were not sustainable and potentially involved aged inventory. Second, and also related to the question of inventory, during our last earnings call, we highlighted some concern with certain retailers being cautious in their inventory positions, and the fact – that fact could influence their rebind patterns in Q4. That concern manifested itself during the quarter as certain of our largest accounts reduced their inventory positions in terms of weeks of inventory on hand, as compared to projected sales by significant amounts for our products. These reductions occurred despite sell-through of Nautilus product continuing to be favorable. We suspect this is a new focus by certain retailers on optimizing their return on working capital and profitability. We anticipate that this behavior will level out in the long run at a new level of on hand product. And if our sell-through continues to be strong, then our comparable sales will return to normal. But this is a near-term challenge for our Online Retail segment, which will put pressure on our ability to match comparable sales from Q1 2016. We are pleased with several elements of our Retail business. For example, in 2016, our sales in the international market, which we define as outside the U.S. and Canada grew 56%, excluding the addition of Octane sales. That growth occurred in both established and emerging markets. Further, in our Commercial segment, we continue to grow sales of the Zero Runner, or ZR8000, which is now being introduced in the international market. And lastly, our Schwinn, Airdyne AD 8 and AD Pro products also gained market share on a global basis, and as such, we have decided to further expand this line of product. International now represents 6% of our revenue, which has improved, but this remains an area ripe for future growth. During our Q3 earning call, we announced our plans to partner with DICK’S Sporting Goods to place the Max Trainer M3 within DICK’S stores nationwide for in-store purchase. Additionally, we also conducted a smaller test involving a Bowflex branded store within a store concept also with DICK. These efforts are ongoing and we’ll compare results with the DICK’S Sporting Goods team at the end of this fitness season. I can say now that we’re very impressed with the partnership and teamwork shown by DICK’S Sporting Goods during this initiative. If successful, we feel that this approach could further optimize the reach of our direct media advertising to include those who prefer to buy in-store through a trusted major retailer. One last note on retail. Sales of Octane branded products were down versus prior year in the quarter by $1.6 million. This decline was anticipated, however, and it’s attributable to the inclusion in the prior year Q4 of the launch and pipeline fill of both a new Zero Runner product and the Octane XT1 elliptical. Commercial and specialty sales improved overall during the second-half of 2016 by 4%, and we anticipate growth in this segment for the full-year of 2017. We have several new product launches planned for our retail channel in 2017 expanding consumer and commercial markets across a variety of modality. We’ll provide more detail on those launches in our next earnings call. In terms of inventory, we’re well balanced and positioned to meet our needs in 2017. And additionally, our transition process with Octane to achieve full integration is well on track and it’s already delivering benefits. So in summary, despite the recent challenges based on our current knowledge of consumer response rates, very strong credit availability and accrual rates, retailer plans and our product launch roadmap, we do anticipate all of our business segments to grow in both revenue and profit in 2017. And Bruce will provide more color on this outlook in his comments. With that, I’d like to turn it 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. Even in the face of softer consumer – customer response and fewer retail doors due to this sporting goods retailer closings both Bill and Sid’s comments illustrate how we’re able to increase profitability even in a more challenging market. As we entered 2017, I’d like to reiterate the key initiatives we intend to focus on over the next few years to drive long-term growth and continue to build shareholder value. First, innovation continues to be our lead driver. In recently introduced products reaffirm our commitment to further broaden our portfolio and build the business for long-term profitable growth via industry leading design and innovation. Our product development roadmap over the next few years is rich for all parts of our business and we expect to ratchet up R&D spend and capital to support this enhanced launch cadence. Second, in addition to newly internally generated products, we’re pleased with the acquisition of Octane Fitness in the long-term opportunities this brings to our company. Whereas 2016 was focused mostly on the immediate integration activities such as, merging strategic plans, coordinating sales efforts and back office activities. Our plan for moving forward in 2017 and 2018 shifts into capturing cost and growth integration synergies in the more strategic areas. These include securing longer range operational and added innovation capabilities. Recapturing market share in the specialty retail channel and growing our presence in the commercial arena through incremental investments in sales, people and marketing programs is an investment we intend to make in 2017 to support our long-term strategy. Third, we remain committed to driving increased sales within international markets. While we were pleased with the 56% organic growth in international sales, this part of our business even including Octane still represents only 6% of our total sales. Over the past few years, we have learned a lot as to how to position ourselves to achieve more significant growth in these markets during 2017 and beyond. To achieve our near-term goal of doubling this business in the next few years, we believe we need to invest incrementally in the sales force; develop a more robust logistics platform, including potential warehousing capability in multiple markets; and a – to become a more market-centric in terms of product offering. Finally, as we have said for many years, our focus on gross margins and improving operating margins has ingrained in all areas of our business. Our team has institutionalized the process of challenging how we do things and trying new things that will improve our business processes, services, and costs. I’m really proud of our team for taking the initiative to make this happen and the positive results this work has generated. Bottom line is, we’re excited about 2017. While we expect that our growth trajectory will again be above industry average, we will – it will be more moderate when compared to the recent high double-digit pace we’ve delivered in recent years. There are four primary reasons for this near-term change in trajectory. One, we’ve identified and expanded breadth of promising new platforms to expand beyond the current portfolio of leading cardio and strength products, and we will need to invest incrementally in research and development and marketing to drive the innovation needed. Two, we intend to step up our efforts in marketing and sales within the Retail business to support new product launches and further explore additional avenues to drive future growth. Despite good momentum in many areas within both the organic retail and commercially and specialty channels, we realized that we are not getting access to all the consumers we should be. Furthermore, there are still challenging times ahead for some of the bricks-and-mortar retailers, who will likely retract, be acquired, or maybe even cease doing business in 2017. Given our company’s strengths and core competencies, we feel we are in a good position to navigate through and continue to grow this channel if we can execute near-term plans well. Three, we intend to invest more heavily in our Direct business to support continued growth of the Max Trainer product line, as well as launch the Hybrid Velocity Trainer product in the second quarter. Our research indicates that the more innovative nature of HVT will require added initial support in the early stages to build awareness. This support will include both television and expanded digital marketing efforts. The long range potential of this product will make the added initial investment worthwhile. And finally, four, as outlined, further expansion into international markets will require additional operational and sales resources. We intend to be strategic and careful about expanding overhead structure overseas. But are confident we now know where the prudent investments in capabilities need to be in order to break through to a higher scale of business. While all of these initiatives are critical to help us strive towards long-term growth targets that we have previously outlined and which remain intact, including delivering double-digit annual revenue and operating income growth, the investments required short-term will likely mute profit growth during the first-half of 2017. As I mentioned at the outset of the call, we are initiating guidance for the full-year of 2017 in terms of revenue and operating income growth. I want to make it clear that although we are providing some color as to the range of expectations for the first quarter as well today, we do not intend to provide guidance to quarterly operating results for subsequent quarters during 2017. We will, however, provide updates to our full range guidance as appropriate during the future quarterly earnings calls. On a full-year basis for 2017, we are projecting revenue and operating income growth to be in the range of 5% to 7% over 2016. This reflects starting out the first-half of the year slower when compared to the same period while layering in the incremental investments, I just mentioned, which we have already begun to execute on. Importantly, the annual guidance anticipates a return to double-digit growth run rate by the back-half of the year in line with previously communicated long-term revenue and profit growth targets fueled mostly by new product launches. The first quarter of 2017 is anticipated to be our most challenging quarter of the year, given an extremely difficult comps from the first quarter of last year. We anticipate sales in the first quarter to be in the range of $110 million to $112 million. Similarly, operating income from continuing operations in Q1 of 2017 is expected to be in the range of $12.5 million to $14 million and reflecting the added investments and increased expenses related to securing and protecting our intellectual property globally. As mentioned, the back-half of the year is expected to be strong, which will offset the slower start and generated – and generate expected full-year positive growth of 5% to 7% in terms of revenues and operating income. Finally, I’d like to take this opportunity to thank our dedicated team of employees around the world for all their hard work in helping to deliver the desired results and create a positive momentum we have in every corner of our company. That concludes our prepared remarks. Now, I’d like to open up the call for questions. Operator?

[Operator:]

Thank you, sir. [Operator Instructions] We’ll take our first question from Mike Swartz with SunTrust.

[Michael Swartz:]

Hey, good afternoon, guys.

[Bruce Cazenave:]

Hey, Mike.

[Sidharth Nayar:]

Hey, Mike.

[William McMahon:]

Hey, Mike.

[Michael Swartz:]

Bruce, just – maybe a little more color you can expand on the investment programs that you’ve just gone through. I mean, is this something that that we think of as maybe in 2017 a step back one year and we can see the double-digit growth in the second-half of the year and then going into 2018, we’d get a full-year double-digit growth, or will there be incremental investments required as we go down the path that may mute that kind of double-digit run rate longer-term?

[Bruce Cazenave:]

Thanks, Mike. The – I would say that the things that we’ve outlined in terms of added investments some of will be more, I’d say, ongoing in the years to come. I don’t anticipate that the additional R&D spend that we are layering in for – to take advantage of some of the breadth of platforms that we now view – that we have opportunities with. So that will continue. I would say, some of the shorter-term investments might be things that involve getting international going. And that – those things might be more between now and into 2018 before they might slowdown, okay, and of course, then benefiting from the increases that we expect in those markets. So those are things. So innovation I think it will be one that we continue to step up. We realized the marketplace and the feature set that people are looking for in the technologies that are becoming available to us, which suggests that we need to continue to feed the R&D area. Does that help you?

[Michael Swartz:]

Is there any – yes, that was helpful. Is there anyway just to look at what’s that kind of incremental step-up in spend is in 2017 versus maybe what we would expect in kind of a base growth scenario? In other words, what this incremental spend that you’re looking at this year that may not replicate itself in 2018 and beyond?

[Sidharth Nayar:]

Yes. I think you’re going to have some of it in 2018 as well, Mike. I mean I think that’s sort of the way we look at it. The other point I’d probably make is some of the incremental spend is also really around our media and our marketing. So I think that’s, Bill referenced the fact that, as we move forward even with Max Trainer, you’re going to see increased media spending both TV advertising, as well as digital marketing to support Max as we go forward.

[Bruce Cazenave:]

HVT launch will require some investments.

[Sidharth Nayar:]

Yes.

[Michael Swartz:]

Okay. And just one final question, it sounds like some of the trends that you saw coming out of the election improved, particularly with Max Trainer. So maybe talk about what you’ve seen in the last month or so, or maybe even year-to-date that gives you a little more comfort in the Max Trainer, I guess growing for the year is what you said?

[Bruce Cazenave:]

Yes, we’re pretty comfortable, Mike, with what’s going on with Max ever since really the election cleared out the media conditions, we feel like a return to a more normal environment. So Max is very healthy albeit it’s comping against incredible media efficiency from the prior year. I would say, at this point, it’s just quite good media efficiency on Max, but that does influence the profitability. The hard part in direct near-term is TreadClimber is showing its signs of age, and a lot of that spend is going to be replaced by the HVT launch coming up very shortly.

[Michael Swartz:]

Okay. Thank you.

[Bruce Cazenave:]

Thanks, Mike.

[Operator:]

We’ll take our next question from Frank Camma with Sidoti.

[Frank Camma:]

Hey, guys, how are you doing?

[Bruce Cazenave:]

Good., Frank.

[Frank Camma:]

My question is specifically on the direct side, because you’ve been noticing this. Do you think part of this weakness granted, I mean, understand the media spend this year. But it seems like your competitor – your main – one of your main competitors has been really ramping up their messaging. So I was just wondering, do you feel like at all that maybe the messaging might have even relative to the spend level maybe off or maybe that they’re just being more aggressive, wonder if you can give any color there?

[Bruce Cazenave:]

In terms of – well, overall, we don’t feel like there’s any competitor to Max Trainer around the market today and we don’t see any competitive influence. There are certainly other products is related to TreadClimber, where competitor has in many ways co-opted our message that was successful with TreadClimber. On the other hand, we’re not convinced that there’s a great deal of success with that product as well, though obviously, we don’t know. I would say, TreadClimber itself, we feel like there’s a lot of things we can do with that product, including its already partly cascaded into retail as we speak. We think it’s incredible platform. It will probably have some more targeted marketing going forward versus general advertising that that it’s seen for about a decade now.

[Frank Camma:]

Okay. And my question is on the HVT, it sounds like the large schedule slipped the low on that, is that a fair statement? I thought it was going to launch sort of April-ish, but now you’re saying kind of midyear, or am I wrong about the…?

[Bruce Cazenave:]

Sorry, Frank, we will launch it before midyear and we don’t believe that HVT has slipped, we’ll launch it as planned by midyear is what we’ve said.

[Frank Camma:]

Okay, great. And just on the retail environment itself, I mean, are you seeing – is there any difference at all, because you did really call out the category difference sort of aerobic versus strength. Just wondering if you’re seeing any difference over there, as you’ve seen over the last couple of years, it seems like strength for a while was making a bit of a comeback?

[Bruce Cazenave:]

Yes, we still see some positive trends in strength cardio is still the larger category by quite a bit. But strength is making a comeback, as you say, Frank, and specifically, we enjoy the benefits of that in our SelectTech category. So we like seen that happen. We feel like that still creates a great landscape leading up to the launch of HVT.

[Frank Camma:]

Sure. Okay, thanks, guys.

[Bruce Cazenave:]

Thanks, Frank.

[Operator:]

We’ll take our next question from Rommel Dionisio with Wunderlich.

[Rommel Dionisio:]

Yes, thanks. Good afternoon. Bruce, I think in your comments you talked about investments in overseas markets. So I wonder if you could just provide a little more granularity in terms of, which particular regions in the UK, New Zealand, Australia. I believe and maybe can also just comment on the strength that you’re seeing there sort of sequential as the year progressed, given that you entered some of those markets early in the year in 2016. Thanks.

[Bruce Cazenave:]

Yes. Thanks, Rommel. There’s definitely different things going on in different parts of the international markets. I think what we’re seeing is that the, if we were to prioritize where we will be investing, I would say that it would be in the European markets – Western European markets would be our primary area that we see the greatest stock near-term opportunity. Certainly, we know and we’re having great successes in parts of Asia as well both for organic retail as well as Octane. So those, I would say, if I had to prioritize, those would be the highest ones. We do intend to make an added investment in Latin America, which is underway, because we’re very much underpenetrated in that market. But I would say that’s not nearly on the same scale of opportunity as we have in Europe or Asia. Does that help you?

[Rommel Dionisio:]

Yes very much. Thanks very much.

[Operator:]

We’ll take our next question from Andrew Burns with D.A. Davidson.

[Andrew Burns:]

Good afternoon. Thanks for taking my question.

[Bruce Cazenave:]

Hi, Andrew.

[William McMahon:]

Hey, Andrew.

[Andrew Burns:]

Hi, Bruce, in your areas of investment, you mentioned the step up in marketing and sales and the retail business. I was hoping if you could elaborate a little bit more on that comment as it relates to not getting access to all the consumers that you want to get to now. What does that mean and where do you need to get your retail distribution to get all access to all those consumers. Thanks.

[Bruce Cazenave:]

Yes. Let me start with some comments and maybe Bill might want to add too. I think that you have to keep in mind that we know – we dissect the market in retail by price point, by product category, and certainly by retailers within the channel. And we’re still at a very low market share almost anyway you measure it on any one of those dimensions. So with the exception maybe of e-commerce, I would say, we’re – that that’s everybody knows we’ve been strong in that area and continue to grow there. So what we’re looking at is, it’s a combination of making our product more accessible and to be honest with you, we still have product that we need to develop with some of which is coming this year. You’re familiar that we’re launching Bowflex cardio this year and that will be at higher price points than we’ve participated in retail both for ellipticals and treadmills. And so it’s a combination of providing more products that we can sell and get more access to consumers, as well as getting more space at retail or through the digital world with our retail partners. So that and then you have – you layer in on top of that modern movement, which we also showed in New York and things like that, which opens up another whole new capability and interest level with a new target consumers. So that’s kind of it’s a multi-pronged approach to what we need to do to really take advantage of all the great product that we have coming, or already have and just making it more accessible. Bill do you want to add anything to that?

[William McMahon:]

Yes I’d only add, Andrew, it’s a great question. As you know, since you followed us for quite a while, we like to talk about the term we call skew doors. And we still do measure our advancements in retail against the concept of gaining more skews or more doors. As e-commerce grows to a greater extent in our business and as the bricks-and-mortar environment is somewhat challenged, as Bruce called out in his comments, we’re looking to expand that definition to really consumer categories, consumer needs. What aren’t we hitting, and it turns out there’s several and as Bruce called out some good example. So incremental price points, incremental modalities and even incremental categories such as modern movement shelf fitness. We think those are tremendous growth areas for us. And we have the capability of creating a much wider product portfolio for our sales teams to go out and sell. And we’re doing that at a time where we’re trying to enhance our sales teams on a global basis to take advantage of those products.

[Andrew Burns:]

Great. Thanks for the color there. And Bill during your prepared remarks, you mentioned the promotions in daily deal buying from competitors in the e-commerce space in that December, January timeframe. Do you think this is the new norm, or were there unusual events that maybe led to that, I’m just trying to gauge your outlook for the upcoming key sales seasons ahead?

[William McMahon:]

My guess is more of one-time events, given that so many people were depressed in that period up to the election. It felt like there were two types of folks either those who were sitting on their powder like we did in terms of media up to that point and others who are trying to find a way to move that inventory one way or the other. And we just saw a lot of deeper than normal promotional activity in buying of those placements in the dot com world. Ultimately, review still went out in the dot com world. =‘‘ So we’ve chose to stay the course and not match, as we just felt like it wasn’t really a sustainable business model to keep that up. So my anticipation would be, there will always be pressure for people who want to try these targeted promotions. And in fact, we do some of that too where it makes sense. But I don’t believe it will continue on at the pace we saw in that period between Black Friday and early January.

[Andrew Burns:]

Thanks and best of luck.

[William McMahon:]

Thank you.

[Bruce Cazenave:]

Thanks, Andrew.

[Operator:]

[Operator Instructions] We’ll go next to George Kelly with Imperial Capital.

[George Kelly:]

Hi, guys, a couple of questions for you. First, what were credit approvals in the quarter?

[Bruce Cazenave:]

Yes. Hi, George, credit approvals in the quarter were quite good at 55.9% versus 49.3% last year.

[George Kelly:]

Wow, is that a trend that you expect to continue into 2017. Should that change for any reason?

[Bruce Cazenave:]

We can’t think of why it would change that that improvement – continued improvement is really still reflective of our media and creative strategy that is driving and incrementally strong creditworthy people through the door. On the other hand, our credit partners have also stepped up. We have what we would call vintage with our account with our Tier one provider who can now look at us as a whole and say well our account performs at X level compared to the norm. And since that achievement has been there, we definitely performed well, so hence they’ve been willing to buy deeper on the Tier one side. So we get incrementally more credit and we get it at a better cost structure.

[George Kelly:]

Okay. And then secondly on the guidance you provided for the full-year 2017, can you give any kind of granularity about how you – what your assumptions are for HVT? It’s just really hard to think through brand new product like that? How should we think about contribution and incremental investment to what kind of – will it be profitable in the first – any of that kind of stuff that you can give more detail would be helpful?

[William McMahon:]

Yes, George, unfortunately, we can’t give any details specifically around the product sales. I would say that we intended to be profitable. Although again, from a media ROI perspective and some of the creative and other investments we need to make in the product at launch time clearly it’s not coming out of the gate won’t be as profitable as a Max Trainer. But just in terms of, if you were to sort of look at it broadly in terms of certainly from a gross profit perspective, we would anticipate – anticipate it to be sort of similar to the averages that we see in the direct channel today. Where you’ll see the incremental spend is really on the sales and marketing side, so.

[Bruce Cazenave:]

And the initial creative…

[William McMahon:]

And the initial creative, which we need to hit this.

[Bruce Cazenave:]

So traditional direct product launch, George, we would spend cautiously. So direct product launch would be sort of the opposite of say, a major consumer product launch where there would be a large ad campaign. In our case, we would start smaller and test into incremental spending, and we like to see each product earn its next level of incremental spend. So the creative costs out of the gate are there and they will not be a profitable on day one. However, the media spend we will target towards trying to get to a return on investment as soon as we can. And if it isn’t generally, we don’t find that the answer is to keep pouring money on it to see if that finally breaks through. We think the opposite, which is, well, let’s tweak our message or find out what networks are working and let’s focus more on that. So it is a lot of – part of the reason why we like launching direct products in the Q2 timeframe is, you have a free period there where you can test around and learn what works and what doesn’t work. And primarily, we’d look to have a lot of things tweaked and understood by the time we get to Q4.

[George Kelly:]

Okay. Okay, that’s helpful. And then last question for me is on your expectations around Octane in 2017. I believe that sales decline there in 2016 and do you think that will reverse?

[Bruce Cazenave:]

Yes, we anticipate growth in profit and sales in Octane for 2017.

[George Kelly:]

Okay. Thanks.

[Bruce Cazenave:]

Thanks, George.

[Operator:]

We’ll take our next question from Bill Dezellem with Tieton Capital Management.

[William Dezellem:]

Great. Thank you. The Max Trainer, would you please breakout what the rate of growth was in the fourth quarter and what the rate of growth was in the third quarter?

[William McMahon:]

We don’t, Bill, sorry, we do not disclose individual product performance metrics. I can’t tell you Max Trainer did not grow in Q3 primarily due to our decision to cut media in light of the media environment that existed pre-election. Max Trainer did grow in Q4, despite challenging conditions early in Q4 for the first-half of Q4. But Max Trainer finished quite strong in Black Friday onward and grew for the quarter.

[William Dezellem:]

That’s – that actually is helpful and essentially gets at what I was trying to get at. Thank you. And as – can you then take that a step further and talk about the rate of growth that – or not that you have seen here in the first quarter in the light of how strong the year ago was?

[Bruce Cazenave:]

Now, we did give some commentary in the script on this. And Max Trainer is growing, but the prior year was incredible growth at a very high media ROI, but it was against a much smaller revenue base to start with for that growth. So we’re happy actually with the performance of Max Trainer right now as we speak. We’re just calling out that that media performance will not be the same on a higher baseline number if that makes sense.

[William Dezellem:]

I think so. I’m going to try to paraphrase what I think you just said is that the media ROI will not be as high, but because of the success that you are having, you would expect there to be absolute growth in the Max Trainer to continue?

[Bruce Cazenave:]

Right. It will just take some additional media to get it there as compared to the same period prior year.

[William Dezellem:]

That’s helpful. Thank you.

[Bruce Cazenave:]

Thanks, Bill.

[Operator:]

And ladies and gentlemen that’s the final question we have in the queue. At this time, I’d like to turn the call over to Mr. Cazenave for any closing remarks.

[Bruce Cazenave:]

Thank you and thank you all for joining our call today and your interest in Nautilus. We look forward to updating you on our first quarter results in our next call and hope everyone has a great afternoon. Thank you.

[Operator:]

And ladies and gentlemen, this does conclude today’s conference. We appreciate your participation.