Nautilus : FQ4 2023 Earnings Call Transcript

Corrected Transcript

23-May-2023

Nautilus, Inc. (NLS)

Q4 2023 Earnings Call

	Total Pages: 14
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Nautilus, Inc. (NLS)	Corrected Transcript
Q4 2023 Earnings Call	23-May-2023

CORPORATE PARTICIPANTS

John F. Mills	Aina E. Konold
Managing Partner, ICR LLC	Chief Financial Officer, Nautilus, Inc.

James Barr

Chief Executive Officer & Board Member, Nautilus, Inc.

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OTHER PARTICIPANTS

Michael Swartz

Analyst, Truist Securities, Inc.

John-Paul Wollam

Analyst, ROTH Capital Partners LLC

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MANAGEMENT DISCUSSION SECTION

Operator: Good day and welcome to the Nautilus, Inc. Fourth Quarter 2023 Earnings Results Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, today's event is being recorded.

I would now like to turn the conference over to Mr. John Mills with ICR. Please go ahead, sir.

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John F. Mills

Managing Partner, ICR LLC

Thank you. Good afternoon, everyone. Welcome to Nautilus' fourth quarter and year-end fiscal 2023 conference call. Participants on the call today from Nautilus are Jim Barr, Chief Executive Officer; and Aina Konold, Chief Financial Officer. Please note, this call is being webcast and will be available for a replay for the next 14 days. We will be happy to take your questions at the conclusion of our prepared remarks.

Our earnings press release was issued today at 01:05 PM Pacific Time and may be downloaded from our website at nautilusinc.com on the Investor Relations page. The earnings release includes a reconciliation of the non- GAAP financial measures mentioned in today's call to the most directly comparable GAAP measures. Please note, unless otherwise stated all comparisons in this call will be against our results for the comparable period of 2020.

For today's call, we have a presentation that management will refer to during their prepared remarks. On slide 2 is our full Safe Harbor statement, which we ask everyone to read. You can access the presentation now by going to nautilusinc.com, then click on the Investors tab and then click on the Events & Webcasts, and the presentation will be there for your viewing.

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Nautilus, Inc. (NLS)	Corrected Transcript
Q4 2023 Earnings Call	23-May-2023

I'd like to remind everyone that during this conference call, Nautilus management will make certain forward- looking statements. These forward-looking statements are based on the beliefs of management and information currently available to us as of today. Such forward-looking statements are not guarantees of future performance, and therefore, one should not place undue reliance on them.

Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control and ability to predict. For additional information concerning these factors, please refer to the Safe Harbor statement and to our SEC filings, which can be found in the Investor Relations section of our website.

And with that, it is my pleasure to turn the call over to Nautilus' CEO, Mr. Jim Barr.

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James Barr

Chief Executive Officer & Board Member, Nautilus, Inc.

Thank you, John, and thank you all for joining us. I would like to begin by highlighting four key topics we'll be focusing on during today's call. First, by leveraging our Direct business and through strong cost control, we delivered Q4 and fiscal 2023 results significantly better than our guidance provided in February.

Second, we have taken deliberate actions to strengthen our balance sheet and sharpen our focus, which better positions us to navigate the current environment.

Third, we expect our efforts to drive free cash flow and return the company to profitability, resulting in significant year-over-year improvement in Adjusted EBITDA for the full year fiscal 2024.

Finally, we remain confident in the long-term industry opportunity and our own position due to our leading brands, comprehensive equipment portfolio and omni-channel approach as we continue on our path to becoming a leader in connected fitness.

Our fourth quarter and full year results demonstrated our ability to navigate industry and broader macro challenges. For fiscal year 2023, we delivered net sales of $287 million, including Direct net sales of $139 million, 16% growth versus fiscal year 2020. Strength in Direct was driven by demand for our broad portfolio of strength and cardio offerings.

In the fourth quarter, we delivered net sales of $68 million, including Direct net sales of $42 million as we continue to see a return to pre-pandemic seasonal trends. Within Direct, we saw momentum in strength, which was up

22% in the quarter versus Q4 fiscal 2020, reflecting the enhancements we made to our offerings in this category.

On the bottom line, our operational excellence efforts enabled us to deliver Q4 and fiscal year 2023 Adjusted EBITDA above expectations. The core focus of our operational excellence is centered around inventory management and per our plan, we continued to significantly improve our inventory position in the fourth quarter. We feel very well positioned as we enter our seasonally softer months to provide our customers the products they want, when they want them and where they want to buy them.

I'm proud of our continued momentum on scaling our differentiated digital offering as we exceeded our growth targets for JRNY Members. We added more than 61,000 JRNY Members in Q4 and ended the fiscal year with approximately 508,000 JRNY Members, growth of 56% year-over-year. Of these members, 156,000 were subscribers, representing 41% growth year-over-year.

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Nautilus, Inc. (NLS)	Corrected Transcript
Q4 2023 Earnings Call	23-May-2023

We are encouraged to see that sell-through to consumers [ph] are progressing (00:05:39). However, retailers continue to take a conservative approach across the home fitness category in light of the macroeconomic environment. We expect this to continue through the first half of fiscal 2024.

As a result, we took proactive measures to reset the cost structure of our business during the fourth quarter, which are expected to yield $30 million in cost savings on an annualized basis. We remain committed to our omni- channel approach. We have been successful in doubling our Direct segment market share since 2020 and we believe Retail will remain an important long-term component of our business model when market conditions improve.

To further enhance our ability to navigate near-term industry challenges, earlier this month, we announced several actions to enhance our balance sheet. This included the sale of non-core assets, including the Nautilus brand trademark assets and related licenses for about $13 million. This enables us to continue to streamline our focus on our top brands and improve our debt position as we leverage the net proceeds to pay down part of our term loan. The sale of the Nautilus brand reflects a deliberate strategic branding approach we announced two years ago and will have minimal ongoing impact.

Our Bowflex, Schwinn and JRNY brands generate over 95% of our revenue. We are in the process of reevaluating our corporate brand identity and look forward to updating you on our plans in the future.

Additionally, as Aina will discuss later, subsequent to the quarter end, we further improved our liquidity by amending our credit agreements. The sale of non-core assets, amendments to our credit agreements and substantially improved inventory position provide us with enhanced liquidity and a stronger balance sheet. At the same time, our comprehensive review of strategic alternatives is ongoing.

Our board remains focused on identifying partner opportunities to accelerate the company's strategic transformation and enhance shareholder value. We have no additional information to share regarding this process at this time.

Looking ahead, we remain confident in the long-term industry opportunity. Our research continues to show the steadiness of the shift to home exercise as a result of changes in long-term workout habits favoring home fitness and the strong opportunity with connected fitness. We have made significant progress over the last two years on our long-term strategic transformation under our North Star strategy, which we believe will make the company stronger as our industry normalizes post pandemic.

Today, I want to highlight our progress on three key areas. Under our consumer-first mindset, we have implemented better consumer segment targeting and optimized our media mix, which is driving enhanced return on advertising investment. We are seeing the benefits of this in our demand for our equipment, particularly our fast-moving top sellers. This is highlighted by the strength of our Direct business, where we have the strongest visibility into end-user demand and we are excited to have an exciting pipeline of new product offerings and refresh Bowflex branding to be introduced in fiscal 2024.

We are achieving our transformative goal to turn supply chain into a competitive advantage. In addition to tangible gross margin improvement via lower landed product costs, we have significantly enhanced our delivery times to retailers, permitting them to order closer to when they need the product, and we are rolling out a better last-mile delivery process for our Direct consumers.

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Nautilus, Inc. (NLS)	Corrected Transcript
Q4 2023 Earnings Call	23-May-2023

We are also making significant progress in scaling a differentiated digital offering. Tangible results include transitioning our cardio portfolio to connected fitness as an installed base for JRNY, introducing vision and motion tracking technologies to our strength portfolio, enabling members to receive personalized, real-time form coaching and rep counting using their mobile devices.

This quarter, we introduced a lower-priced digital offering for members who only wish to use JRNY on their mobile devices. We've built JRNY connected fitness experiences to be consumed across our equipment portfolio and off equipment so that anyone can experience the benefits of connected fitness. This has resulted in achievement of our 500,000 member goal.

We have laid strong foundation for JRNY, delivering continued total member growth. Because we have already built so much of what I just mentioned, we've been able to reduce near-term spend on JRNY and keep connected fitness experiences much more affordable than our key competitors, especially important in a volatile economy.

Moving forward, we'll continue to focus on making advancements in quality and adaptive personal training, which we believe will drive engagement and support for conversion to paid Subscribers over time.

I would now like to touch on our fiscal 2024 outlook. At the same time that we're seeing a reversion to pre- pandemic seasonality of demand, the macroeconomic environment has continued to be difficult causing our retail partners to maintain their conservative inventory positions. We are navigating these industry challenges by taking steps to operate more efficiently and enhance our balance sheet.

While significant uncertainty remains in top line for fiscal 2024, especially in Retail, we believe that a continued focus on our equipment business, our Direct business and operational excellence efforts, including cost control and margin enhancement create a clear path back to profitability. As such, we are guiding to a significant year- over-year improvement in Adjusted EBITDA for the full year of 2024.

I will now turn it over to Aina, who will give us more detail on the fourth quarter and full year results and our fiscal 2024 guidance. Aina?

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Aina E. Konold

Chief Financial Officer, Nautilus, Inc.

Thank you, Jim, and good afternoon, everyone. Today, I'll be speaking to total company results for Q4 fiscal year 2023 and will provide guidance for full year fiscal year 2024. Please go to our website to view our press release and slides for additional information on Q4 and full year results.

Turning now to slide 9, total company P&L results for the quarter. In addition to comparing this year's revenue to last year, we'll also be comparing to more normalized pre-pandemic results in fiscal year 2020.

Additionally, as we disclosed on May 2, we've made progress this past quarter on our previously stated strategy of rationalizing our brand portfolio by selling the Nautilus brand. We took advantage of fitness season demand and sold through a significant portion of our Nautilus branded inventory.

Net sales for the fourth quarter were $68 million, down 43% versus last year and down 19% versus the same quarter in fiscal year 2020, excluding Octane. Versus fiscal year 2020, Direct declined by about 12%, driven by cardio as strength was up 22%. Retail was down 29% as retailers continue to be more conservative with their inventory purchases given the macro environment. Gross profit was $11 million and gross margins were 16%, down about 2 points from LY.

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