Nautilus, Inc. Q4 2008 Earnings Call Transcript

| About: Nautilus, Inc. (NLS)
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Nautilus, Inc. (NYSE:NLS) Q4 2008 Earnings Call March 10, 2009 4:30 PM ET


Edward J. Bramson - Chairman of the Board & Chief Executive Officer

Kenneth Fish - Chief Financial Officer


Eric Wold – Merriman Curhan Ford & Co.

Reed Anderson – D. A. Davidson & Co.


Welcome to the Nautilus, Inc. fourth quarter 2008 results conference call. At this time all participants are in a listen only mode. Following today’s presentation we will have a question-and-answer session. As a reminder this conference is being recorded today, Tuesday, march 10th, 2009. Before the call begins listeners should be advised of the Safe Harbor statement that applies to today’s call.

Prepared remarks during this call contain forward-looking statements. Additional forward-looking statements may be made in response to questions. These statements do not guarantee future performance. Nautilus undertakes no obligations to update publically any forward-looking statements to reflect new information, events or circumstances after the dates they were made or to reflect the occurrence of unanticipated events.

Therefore undue reliance should not be placed upon them. Listeners should review the earnings release to which this conference call relates and the company’s most recent periodic reports on Form 10-K and Form 10-Q filed with the Securities and Exchange Commission for a more detailed discussion of the factors that could cause actual results to differ materially from those projected in forward-looking statements.

Also I’d like to remind you that the company has provided a presentation today to accompany the conference call. The presentation will review the recent projected operational improvements and strategic focus initiatives. This presentation is available on the company’s website at Please take a few moments to locate this presentation now.

On the call today from the company are Mr. Ed Bramson, Chairman and Chief Executive Officer and Mr. Kenneth Fish, Chief Financial Officer. I would now like to turn the conference all over to Mr. Ed Bramson.

Edward J. Bramson

We’ve got quite a lot of ground to cover today and I know some of the listeners are on the East Coast so I do plan to take you through our strategic review of the direct business and our operating performance but in the interest of time I’m going to turn over now to Ken Fish, our CFO, to review our 2008 earnings performance and our turnaround efforts to date.

Kenneth Fish

If you have the press release in front of you you will see that it includes a supplemental disclosure to reconcile GAAP to adjusted pre-tax loss from continuing operations on the last age and also comparative net sales by business segment within the text. While the press release includes both Q4 and full year 2008 information I will only be covering fourth quarter results in my prepared statements.

Net sales from the continuing operations were $92.2 million for the fourth quarter compared to $146.7 million for the corresponding period last year a 37% decrease from Q4 2007 primarily to the weak consumer and tight credit environment. Our direct business sales in Q4 2008 were at $36.0 million down 42% from $61.9 million in the corresponding period of 2007.

The decline is due to overall consumer environment and credit market disruptions as well as an internal decision to reduce the level of discounting versus the prior year. Ed will update you on product strategies for the direct business after I cover the results. Retail sales in Q4 2008 up $28.5 million were down 31% versus last year.

Given the state of the economy we experienced acceptable results with our largest nationwide retail partners but our smaller regional partners did not perform as we expected in the quarter. Commercial business sales were down 37% from $41.9 million to $26.4 million.

This decline is primarily due to the late investment by health clubs to modernize existing equipment, reduced Tread Climber sales, tighter inventory controls by dealers that sale mainly into light commercial applications and delays in opening up new gyms. Excluding Tread Climber sales commercial business revenue was down 29% in Q4 of 2008 versus Q4 of 2007.

As many of you may recall we made a decision to reduce Tread Climber sales in order to improve the design to better match the high hourly usage these machines are receiving in the gyms. We remain dedicated to the Tread Climber Modality and still plan on the future introduction of a new version of this highly desired product for the commercial market but are not yet ready to announce that timing.

Royalty income was down to $1.2 million compared to $1.5 million last year. Our overall gross profit margin for the fourth quarter 2008 improved to 33.7% compared to 24.1% in the year ago quarter. We recorded $3.2 million of restructuring charges in the fourth quarter of 2008 primarily associated with the closing of our Tulsa facility and a China inventory reserve. Excluding the charges our adjusted gross profit margin was 37.2% for Q4 2008.

For the fourth quarter of 2007 we recorded $16.1 million of unusual charges mainly inventory and warranty reserves. Excluding the charges our adjusted gross profit margin was 35.1% for Q4 2007. The improvement in adjusted gross margin is due primarily to improvements in our cost structure.

Even though we expect continued pressure on our gross margin percentage until the sales mix shifts back towards the direct channel our continued improvements in the cost structure will offset some of these pressures. Our reported operating expenses declined by approximately $4.6 million in the fourth quarter 2008 compared to the same period last year.

The company incurred $36.9 million of restructuring and other unusual costs during the 2008 period and $27.2 million during the 2007 period. Adjusted for lower sales volumes operating expense reductions were $13.6 million in the fourth quarter compared with reductions of $8.4 million that were projected by the company during the earnings release conference call that you may have joined us on for the second quarter of 2008.

Looking at the components of operating expenses excluding unusual charges our selling and marketing declined from $41.5 million in Q4 ’07 to $29.8 million in Q4 ’08 while G&A was reduced from $12.2 million to $8.9 million. On an adjusted basis operating expenses were 44.0% of revenue compared to 38.2% in Q4 2007 even though they declined in real terms due to the drop in sales.

We expect the additional improvements to our cost structure will result in a better year-over-year comparison as a percentage of sales in 2009. Due to our improved liquidity position our interest expense decreased to $0.2 million from $1.7 million in Q4 of the prior year. For the quarter ended December 31st, 2008 we recorded a loss from continuing operations of $41.9 million or $1.37 per diluted share.

Included in the net loss from continuing operations are a non-cash goodwill and other intangible assets impairment charge of $30.9 million pre-tax or $0.81 per share after tax, charges against certain assets of a subsidiary in China of $3.8 million pre-tax or $0.10 per share after tax and restructuring related charges of $6.3 million pre-tax or $0.17 per share after tax.

The restructuring charges are principally related to the previously announced closure of the manufacturing facility in Tulsa, Oklahoma and also some severance and legal costs. During the fourth quarter of 2008 we conducted impairment testing required by SFAS Number 142, Goodwill and Other Intangible Assets and recognized an impairment loss to write down certain assets to implied fair value.

Specifically our goodwill impairment of $29.8 million was related to our retail business and the $1.1 million impairment loss related to our StairMaster trade name. In the fourth quarter of 2007 the company reported a loss from continuing operations of $31.8 million or $1.01 per diluted share including charges of $43.1 million pre-tax or $0.92 per share after tax related to the terminated acquisition of the Land America manufacturing facility in China and inventory and warranty reserves related to certain commercial cardiovascular products.

Excluding non-cash goodwill and intangible impairments and restructuring charges our adjusted loss from continuing operations before income taxes was $10.2 million for the fourth quarter of 2008 compared with adjusted loss from continuing operations of $6.0 million before tax in the corresponding period of 2007.

The major cause of the increased loss is the decline in the direct business which is the first segment to be impacted by an economic decline. Now I would like to spend a moment discussing cost takeouts in our business. Nautilus tracks cost takeouts by project to ensure the savings become permanent to lower the company’s level of sales necessary to break even.

We capture the cost reductions as part of the savings run rate once actual savings begin to be realized for a project. Since most project savings do not begin on January 1st there are carryover savings that represent the difference between the fully annualized cost reduction and that actually saved during the previous year.

We’ve achieved annualized run rate cost reductions of $60.4 million including cost of sales of $6.0 million and operating expense reductions of $54.4 million. This compares favorably to the previous projection of $58.2 million of reductions that we provided to the investment community. We have now identified approximately $90 million of annualized cost reductions compared to previous estimates of achieving $64 million.

In addition to the full annual benefits of actions taken in 2008 we are in the process of identifying initiatives to be actioned in 2009 that could achieve additional annualized cost reductions of $17 million. The majority of our cost takeouts in 2009 are from two areas, the first part of the cost takeout is focused on the commercial business.

We are continuing to downsize and reposition this business unit to focus on the profitable product lines, the markets where we have a strong presence and the customers with ability to pay understanded terms. We will stop selling selected products where volumes are low or competitive pressures do not allow reasonable margins.

We will continue to develop relationships with distributors that are financially strong and focus on our brands and relationships with those that do not fit that profile. The cost reductions will come from reduced sales and marketing costs allowed by the more focused business plan and also savings in operations.

The second major part of our 2009 cost takeout is in general and administrative. We are reducing our workforce and related costs across the board to resize our infrastructure with the lower sales volumes.

While we expect our revenue will continue to be impacted by the challenging economic environment throughout 2009 we believe these additional cost improvements in 2009 will enable us to be cash flow positive in 2009 as we continue to right size the company and lower our breakeven point.

Turning to our balance sheet inventories were $43.8 million at December 31st, 2008 compared to $58.7 million at the end of 2007 due to lower volumes and focused inventory management. Trade receivables were $53.8 million at December 31st, 2008 compared to $88.3 million at the end of 2007. Our days sales outstanding of 46 days at December 31st, 2008 reflect improvements compared to prior year in all three business segments.

As of December 31st, 2008 we had $12.4 million in net debt compared to a net debt position of $71 million as of December 31st, 2007. During calendar year 2008 we had repurchased approximately $5.3 million of common stock. With our focus on cash and liquidity due to the uncertain economy we are facing we do not expect to repurchase additional shares at this time.

In order to better position our line of credit with our business going forward we have worked with Bank of America to reduce the committed facility from $40 million to $30 million. This enables us to align our financial covenant with the results currently expected for 2009. Now I will turn the call back to Ed for a preview of our operating improvements and a presentation on the company’s direct business strategy.


Ken and I will be happy to answer your questions on the 2008 results but before doing that there are two other topics that I’d like to cover today. On our website there are two presentations that we’ve made available which are referred to in the earnings press release. I’d like to start with the first one which is titled Operating Review Update.

Before beginning I’d like to direct your attention to the Safe Harbor language on Page 2 and then turn to Page 3 to begin the presentation. This is really an update of what we went over with shareholders back in July just to bring you up to date and to remind you of what we said back then we had set a cost reduction target on an annual basis of about $58 million.

At the end of the year in Q4 we were actually running at a rate of over $60 million so I think we’ve achieved that fairly handily. However since July sales outlook has dropped again so we thought it was wise to make some additional reductions and we’ve gone into a number of new cost reduction initiatives in the first quarter of this year.

The upshot of it all is that our revised run rate for savings will go up from the original $58 million to about $90 million at an annual rate most of which will have been achieved by the third quarter of this year. As you can see in the table we’re moving fairly aggressively on this and we expect to see a large improvement in Q2 from the first quarter actions that we’ve taken.

If you go to Table 4 this is also an update of a previous schedule it has to do with the timing of the costs of the restructuring and if you look at the comparisons versus previous you’ll see that we’ve increased our non-cash restructuring charges in essence because of the further cost reductions that we’ve undertaken but I think the key change would be in the first half of 2009 where we’ve increased our cash restructuring charge estimate from about $500,000 to about $4.5 million.

This again is in connection with some of the actions we’re taking in the first half and also includes a reserve for reducing some of the onerous lease expense that we have here at our world headquarters. Most of these actions should be taken as I said in the first quarter and the money will probably be spent by the middle of the year.

On Page 5 there’s really nothing else to say but that 2008 was a bad year by any measure. However if we hadn’t done the restructuring that we talked about it would have been quite a bit worse. In 2008 of the $60 million that were running out of the year at the rate we were running at we actually saved $53 million during the year because of actions that we took in 2008 if you annualize them for a full year was about another $19 million of savings to be generated in 2009.

If you take the cost reductions we’ve done in Q1 that’s about another $17 million at an annual rate because they won’t be in place for a full year. The impact in 2009 is probably in the region of $10 million maybe a little bit higher. If you put that in context our adjusted operating loss if you take out the unusual items and the non-cash write offs was about $16.5 million in 2008.

If the 2008 cost reductions had been in effect for the whole year that would have got us more or less to break even and the additional savings in 2009 of $17 million give us a bit more cushion in case sales go down a bit more this year and possibly even could make us profitable depending on how things go.

If you go to Page 6 as we all know capital markets are very bad at the moment and if capital is available it’s very expensive so we’re paying extra attention to the balance sheet and this is just a quick update on the balance sheet position. Our net debt at the end of December as Ken said was about $12.5 million and we’ve put a couple of ratios on here. The first one is net debt to working capital.

Our debt is approximately 20% of working capital and our debt to tangible equity is also about 20%. Normal times, these would be very strong balance sheet ratios but of course these aren’t normal times in the credit markets so we’re paying extra attention to liquidity this year and in the table on the second part of Page 6 we lay out for you some one time items that are going on.

We will be getting a tax refund this year of about $11.5 million, $11.4 million. We also have an escrow that was established in connection with the sale of [Perla Zumi] which will be released to us this year for about $4.4 million. We have refunds coming back to us of almost $16 million this year. In addition our working capital management is getting better so we’re expecting to bring in almost $17 million of net working capital.

That’s also affected by the fact that our sales are down. We have that play in 2009 as well. Offsetting that we’ve got capital expenditures, we’ve put in $2.2 million it might be a little bit higher than that but not very much. Our cash restructuring costs that I mentioned earlier. On a net basis our non-operating cash in flows would be about $26 million this year and of course we still have availability under our line of credit and whatever earnings we might generate.

Given the environment we’re in I think our liquidity position is satisfactory at least for this year. To summarize we’re not making light of the current difficulties we’re experiencing but we are taking serious steps to work our way through them. We’re also staying focused on opportunities that will present themselves as we start to come out of the economic situation we’re in. With that I’d like to ask you to go the other presentation titled Direct Business Review.

If you go to that presentation again I’d like to direct your attention to the Safe Harbor language on Page 2 and then turn to Page 3 to begin the presentation. A little bit of background here we have three businesses, retail products that are sold in stores, commercial products that are sold into health clubs and then direct to consumer which is sold through TV, print and web marketing directly to consumers.

To subsize it for you last year the sales were in the region of $200 million and it was slightly profitable. A couple of other things to point out the gross margins in this business are quite high. The average gross margin is about 60%. The incremental gross margin is actually quite a bit higher than that. The other thing I’d like to point out is the net working capital at the bottom of the table.

The brackets on there are not a mistake. We actually had negative working capital in the direct business principally because our customers pay us before we have to pay our vendor. A little more background, essentially all of our direct products are marketed under the Bow Flex brand at the moment.

We’ve historically been focused on strength principally home gyms but we introduced a new segment, cardio, in 2005 which is a product we call the Tread Climber that I’ll talk about a bit more as we go through the presentation. A point I’d like to reinforce that Ken did in his presentation is that the direct business is immediately responsive to changes in consumer spending.

When it goes down the sales drop very quickly, when it goes up they tend to rise more quickly than retail or commercial and they have a longer pipeline and therefore a lag. The other thing is that the high gross margins and the low working capital requirements make it a very interesting business model as and when things go well. We’re very interested in growing this business as much as we can.

If you turn to Page 4 our current market position is as follows, in strength which is the larger part of the direct business, the home gyms, our target demographic skew is heavily male, it’s about 70% of sales and it tends to be younger. The bulk of the consumers are actually below 40 years old. They’re buying the product principally for appearance, they want to bulk up and they generally have somewhat lower credit scores because they’re younger.

Depending on how you segment the market we’re estimating that the number of consumers that are in the demographic target for these products is in the range of $3 million to $5 million. Obviously we’ve been selling home gyms for a long time so our market penetration is relatively high in the strength area.

If you go to the cardio business, the Tread Climber product, the demographics are quite different. As you’ll see it skews female and it also skews quite a bit older. The average customer for Tread Climber is 10 to 15 years older than in our strength area and these people are generally looking for weight loss or wellness rather than building up muscle or shaping it. Because they’re older they tend to have higher credit scores or to use credit less and we’ll go through this in a bit more detail but again, depending on how you segment the market, it’s quite a bigger demographic, maybe 25 million people versus 5 million strength. Our TreadClimber market penetration to date is relatively low since it’s somewhat a newer product than the strength product.

If you go to page five and you look at the chart at the top of the page, this again makes the point that the direct business responds to consumer changes much faster than retail or commercial, it’s almost instantaneous. So, if you look at the first quarter of 2008 you’ll see that sales were down about 6% but for these purposes essentially similar to the prior year. However, when you get in to Q2, 3 and 4 you’ll see as the economy got worse sales dropped in proportion so that by the fourth quarter you were seeing a very large impact from the change in consumer spending.

What drives this is a couple of things, economic factors obviously but in addition in our direct business generally around 60% of sales are financed for our customers by a third party bank program that we offer and credit availability became tighter as well. So, what we’ve done to illustrate this is the second chart and we’ve used the first quarter of 2008 as the baseline, the index because it was more or less the same as the year before and what you can see is as the economy started to turn down customer leads which is basically responses to TV advertising or web solicitation dropped quite significantly.

At the same time, credit applications stayed at the same level relative to leads that they were before which indicates that the people who are interested are still quite interested because they went through the trouble of completing a credit application. But, sales actually dropped faster than leads and the principal reason for that is because the rate of credit approval dropped off and that comes back to the target demographic that strength serves which tends to be younger men. So, when the economy is bad they tend to do proportionately worse and when it’s good they tend to do proportionately better.

So, that’s a thumbnail on the strength business. If you go to page six, the TreadClimber was also affected by the downturn and by the credit conditions but there’s some interesting differences in the pattern that you see in cardio versus strength. What we’ve done again in the chart at the top of the page is to take the first quarter of 2008 as the base quarter, so it’s 100 and you’ll see in the middle of the year customer leads for the TreadClimber started to drop off. But, in the fourth quarter they actually increased and so for the year as a whole they were higher in Q4 than they were in Q1.

Credit applications were recovering too and unit sales were down about 20% for the year in the TreadClimber in Q4 and that compares with strength where they were down by 58% so quite a bit better performance in cardio at that level than you see in strength. The why this happened is partly where the product was positioned and the market it was addressing but also as you may recall from the operating discussion we had back in July we did some price point testing in the third quarter which turned out to be quite successful and we also changed the advertising message a little bit in Q3 to appeal to a slightly different demographic than where we had been going before.

So actually, those two factors made quite a difference and accounted I think for a large part of the success we’ve been having here. Again, the sales have held up better because credit approvals are less of an issue for this group than they would be for strength. Interestingly, the trend that we saw in Q4 is actually extended in to the first quarter of this year. So, if you look at the bottom of the page, January and February are now booked you’ll see that customer leads for the TreadClimber are actually up even more than they were in the fourth quarter. They’re up 23% year-over-year.

Credit applications were also up strongly and orders are actually 2% higher than they were a year ago. When you think about the difference in the overall economy between 2008 first quarter and 2009 first quarter I think that’s quite a difficult comparison so I think it shows that the product is doing quite well. As a result of all this the cardio business is now up to about 36% of our direct sales versus 17% back in 2005 so all-in-all we’re beginning to feel the strategy we have in TreadClimber is starting to looking promising.

If you go to page seven, it tells what our product strategy is. Strength is still a very attractive business. We are the leader in it and we plan to stay that way. We’ve got a number of new ideas that we’re evaluating for new fitness products but we don’t want to introduce one before 2010 principally because we want to make sure that we have enough marketing money to spend on TreadClimber this year so we’ll continue to work on strength but more so next year than this.

In cardio we’re going to put more emphasis and marketing on the health and wellness aspects of what we’re doing to get an improved demographic which is a relatively untapped market for us and it’s much bigger probably than strength is. The marketing message, the proposition for the TreadClimber is as follows, you get a workout that is at least as good for you in cardio vascular terms or weight loss as a treadmill but you can get those benefits at a walking pace rather than running.

So, what you end up with is a more comfortable natural walking motion which is easier than running on a treadmill or frankly also more intuitive than the elliptical but it happens at lower speeds. So, what you have in the TreadClimber is sort of a differentiated low impact cardio product and that’s what should be attractive to this health and wellness demographic that we’ve indentified.

One other side point is the Bowflex home gym has patents that extended through 2004 so it expired a few years ago. TreadClimber has a lot of patent coverage on it, it has almost 70 US and foreign patents which extend for a fairly long time. So, this one also has quite a bit of intellectual property protection which could be attractive if the product really takes off.

If you go to page eight, this again starts to size the market that we’re talking about. These statistics are retail market statistics, they’re not gym, they’re not direct they’re only those sold in stores but they’re indicative. What they show is that retail sales of cardio products, almost 90% of the total, and of that treadmills and elliptical are about 72% and where the TreadClimber competes would be against treadmills and also elliptical so it’s aimed at about 70% of the market.

The home gym business is a little less than $300 million a year so it’s a sizeable business but it’s only about 12% of the market and therefore quite a bit smaller. We talked earlier about the potential size of the demographic and like all these things it depends on the definition. But, rather than go for all of it we’re targeting a couple of key segments of the demographic. The first one is female 35 to 54 years old with what I call health factors. That’s a Center for Disease Control definition and what it principally means people who are overweight or have cholesterol problems. So, as you can see that’s a pretty large group, it’s about 17 million people.

Then, we also looked at males and females who are somewhat older because as men get older they tend to have similar concerns and that’s about 20 million. Now obviously, there’s overlap between those two categories but even allowing for that we don’t think an estimate of 25 million potentially consumers in the demographic is really stretching very far.

If you go to page nine, we’re going to be changing our branding approach a little bit in direct. Typically in direct marketing the product is most of the story and the brand is subsidiary. Even given that we think there’s an opportunity to use our branding as part of the strategy. The Bowflex brand has 85% awareness which is very high, it’s a very well known brand. If you look at the attributes that consumers attach to it it’s confident, good looking and inspirational so we plan to keep using that for our current customer who tends to be younger and appearance focused.

We also think there’s an opportunity to start to use the Nautilus brand where we don’t use it today. Nautilus has 70% brand awareness which is still quite high but the attributes are very different, they are authentic, sensible, safe, all the sorts of attributes that it would seem would apply better to a more mature and health focused demographic so we think there’s a real opportunity to use the Nautilus brand in a good way here.

The product strategy for the TreadClimber we talked about it a little bit earlier and a little last year, we’re introducing a lower cost product which should be deliverable in the fourth quarter of this year. It’s not a lower priced product because we’ve already lowered the price as a result of our price testing back in Q3 of last year. So, what this will do initially is actually to restore some margins. We could do a lower cost product and we still intend to but in order to hit the time schedule which was to get it in the market this year we took a fairly conservative design approach so we’re going to do another redesign in 2010 which should bring the cost down again further.

As I said, we’re continuing to market it at the price points that have tested very successfully as you can see. And, we’re refining the advertising messaging for Bowflex and developing new messaging for Nautilus so as to differentiate the products for the markets they’re intended to grasp.

If you go to page 11, you can see the existing Bowflex TreadClimber which is a product we plan to continue for the Bowflex market. It’s got somewhat of a gym look to it and it uses very strong colors like black and red, the sort of thing that tend to appeal to young men everywhere. If you go to page 12, this is the Nautilus version of the TreadClimber which is mechanically very similar to the Bowflex but as you’ll see it’s in neutral colors and it clearly isn’t designed to look like a gym product. Again, we think it’s more appropriate to the market that we’re going to be going after.

So in summary we’re going to maintain our position and strength. We think there’s quite an opportunity in front of us in cardio with a product that is differentiated and has intellectual property protection. We’re also because we’re going to be advertising Nautilus on TV now getting we think some side benefits for our future retail strategy which we’ll be talking about later in the year and again I’d point out that TreadClimber is successful very attractive business model as is our strength business because you have such high egress margins and low working capital requirements.

Our plan is we’ll update you on the progress in TreadClimber later in the year and we also are in the process of finalizing a strength strategy for the direct business which we’ll also discuss later in the year. So, I’m afraid we’ve covered quite a lot of ground today so at this point I’d like to finish the presentation and open it up for questions which Ken and I will be happy to cover on any topic.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Eric Wold – Merriman Curhan Ford & Co.

Eric Wold – Merriman Curhan Ford & Co.

One, you mentioned kind of obviously lowering the operating coast and getting to the point of breakeven, can you give an idea of once you complete all of the cost reductions in Q1 what the annualized run rate of sales you need to get to breakeven?

Kenneth Fish

Eric, breakeven point that we would have during 2009 would be falling down with those cost takeouts to $350 million or less and then on a full annualized basis more to the $330 range.

Eric Wold – Merriman Curhan Ford & Co.

Now, just to make sure we’re apples-to-apples, is that breakeven cash flow or breakeven GAAP profitability?

Kenneth Fish

GAAP profitability.

Eric Wold – Merriman Curhan Ford & Co.

Secondly, with the plan reduction of the availability under the credit line and then the initiatives bringing in greater cash flow what do you project to be your peak debt level in 2009 before it starts coming down?

Kenneth Fish

Levels of debt that we’re carrying presently are around the level that we started the year and we would anticipate to have the debt coming down over the next few weeks and so we’ve really hit the peak already.

Eric Wold – Merriman Curhan Ford & Co.

Lastly, on the commercial side as you’re getting down to reducing the products that you sell that you’re now getting the more profitable ones and reducing or downsizing that division, is there a point where even being in that channel at all doesn’t make sense?

Edward J. Bramson

We’re looking at a strategy for all three of the businesses Eric and I think the first thing to do is see how profitable it looks like commercial would be and then depending on that we’d have to decide what to do.


Your next question comes from Reed Anderson – D. A. Davidson & Co.

Reed Anderson – D. A. Davidson & Co.

A couple of questions and I joined the call late so you might have covered some of this, getting to the stuff you covered in kind of the last presentation Ed looking at the TreadClimber product and the opportunities to kind of grow that I’m just curious how big a business is that product today? Whether the install based both commercially and the direct business but where are we today in that product as we stand here today I guess?

Edward J. Bramson

We haven’t been selling it in commercial for a while so I don’t really remember what the sales were there, we’re going to reintroduce it. In the direct business now it’s running coming on to 40% for our direct sales in any given period, that’s roughly what it would be.

Reed Anderson – D. A. Davidson & Co.

So 40% of sales and what did you say it had been last year as a percent of sales? You gave a number.

Edward J. Bramson

I don’t remember last year but the first year of sales was 2005 and it was about 15% then so I want to say last year was maybe 25%, 26% of sales.

Reed Anderson – D. A. Davidson & Co.

What is the average price point of that item?

Edward J. Bramson

It’s right around $1,700. With shipping it’s a little higher but the ASP is around that.

Reed Anderson – D. A. Davidson & Co.

Is your thought as you sit here and look at your business and the ability to grow that product that from an ASP standpoint you kind of are where you want to be or would you like to see that – is there going to be a concerted effort to actually move that a little higher through add ons or features, who knows?

Edward J. Bramson

I would say that the outlook here is probably to keep to the product as standardized as possible because you’ll get better cost that way and keep the ASP around where it is. If we do the next redesign, I don’t know if you were on the call at the time but we’ve already lowered the price to where we think it needs to be in advance of bringing our cost down so as we’re bringing in the new product, our margins will tend to get better. If the sales support it we might even want to bring the pricing down a little bit more but I think for right now we’re in about the right zone.

Reed Anderson – D. A. Davidson & Co.

Ken, just looking at just the fourth quarter numbers I want to get a sense, I know there were some one-timers in there but if you were to just look at the income statement in the fourth quarter, for example selling and marketing, what’s one-time or unusual in the fourth quarter of ’08 to that $32.5 million?

Kenneth Fish

I covered in some of my commentary some of the one-time items more collectively in the operating expense category and so if you go back and just review that part. We had a total of $36.9 million of restructuring and other unusual costs for operating expenses for 2008 and then in 2007 for the fourth quarter it was $27.2 million. We’re not breaking those out by individual line items but that’s the impact on the total operating expenses.

Reed Anderson – D. A. Davidson & Co.

I guess finally obviously, the big issue is top line because you’ve done a great job bringing cost in but the top line is really difficult but it sounds like the presentation ad you’ve laid out where you’re taking the cost down, etc. that’s more than less assuming a business it sounds like from the last question of about a $350 million business. Is that fair?

Edward J. Bramson

I think it would be consistent. At the beginning, I don’t know if you heard this part, one of the points we’re making was if you take a certain level of consumer spending and the rate of change, you’ll see it in direct the next day. When a consumer stops spending it hits direct immediately. When they start to spend it ticks up again. So, what appears to be happening is the rate of decline in direct is stabilizing.

In retail and commercial you have a little bit of a pipeline so they probably have still some room to go down but at the sales level that we’re talking about you’d expect a breakeven or make a little bit of money. But, one extra sale in direct is very profitable, it’s more than 60% profit margin so that’s really the swinger in it.

Reed Anderson – D. A. Davidson & Co.

Then I guess just lastly I heard you make a comment about retail that you’re doing okay it sounds like with the national accounts, the large chains, but it’s the independents or the smaller chains were the issue. Should we infer from that that the larger accounts were still down just not as much or were they more or less just breakeven levels or similar levels to what you saw maybe a year ago?

Edward J. Bramson

In Q4?

Reed Anderson – D. A. Davidson & Co.


Edward J. Bramson

I would guess they were down a little bit. They weren’t down as much as the regionals were.


At this time there are no further questions.

Edward J. Bramson

Thank you very much everyone for coming on the call. I know we spent a lot of time today but we’ll look forward to reporting to you again in about another six weeks. Thank you again and good night.

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