Gaia Inc (GAIA) 2009 Q1 法說會逐字稿

Welcome to the Gaiam First Quarter 2009 Financial Results Conference Call. (Operator Instructions). Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Now, I will turn the call over to Mr. John Mills of ICR. Sir, you may begin.

Thank you. Good afternoon, everyone, and welcome to Gaiam's First Quarter 2009 Earnings Conference Call.

The following constitutes the Safe Harbor Statement of the Private Securities Litigation Reform Act of 1995. Except for historical information contained herein, the matters discussed in this call are forward-looking statements that involve risks and uncertainties including, but not limited to, general business conditions, integration of acquisitions, the timely development of new businesses, the impact of competition, and other risks detailed from time to time in the Company's SEC reports. The Company does not undertake any obligation to update forward-looking statements.

On the call today representing Gaiam is Mr. Jirka Rysavy, Chairman and CEO; Lynn Powers, President; Vilia Valentine, CFO and Carole Buyers, Vice President of Corporate Finance and Investor Relations.

And now, I would like to turn the call over to the Company's Chairman and CEO, Jirka Rysavy. Go ahead, Jirka.

Thank you, John. As discussed widely in the media in the first three months of the year, customers continue to sporadic buying and the retailers pretty much maintain their focus on inventory levels.

Our revenue for first quarter, which ended March 31st, decreased to $55.9 million from $65.2 million reported in the first Q of 2008. During the quarter, we generated free cash flow of $7.1 million, which is $10.5 million improvement from the cash use of $3.4 million, which we had during the first quarter of the last year.

In addition to decreasing consumer spending and [constraint] of retail buying, our sales were affected by our planned cuts in our catalog prospecting and fortunately, the last year of the impact of our change in reporting of our international revenues, which were affected by our transitioning from product sale to licensing.

For the quarter our net loss was $3.1 million or $0.13. Included in that number are number of non-recurring costs related to a large reduction in payroll, and all related severance cost payouts and associated expenses, which kind of come with process like that, and the closing on profitable business, and also consolidated higher than the expected loss from our 56% on solar subsidiary division. All these costs annualized, they represent about $10 million so that's [$1 million] cost savings.

We continue to focus on growth of our controlled space at retailers by expansion of store-in-store, and we ended the quarter with 10,500 store-in-stores which is up from 10,000 last quarter and compared to 7.1 a year ago.

Our communities of subscription clubs grew above the 250,000 we reported at the end of the last year but, as we said last quarter, because the current state of the economy and the focus of our cash flow, we're focusing on cutting the loss rather than rapid growth. We reduced the loss about 25% on the quarter and expect even better improvement in this coming quarter.

As we discussed in the last call, free cash flow is right now our mantra. In the first quarter, as I mentioned, even including all these expenses from the cost saving measure, we generated $7.1 million of the free cash flow, and we improved our cash position at the end of the quarter to $30.8 million which is $6.2 million up from the numbers what we have end of the year.

We also have $13.3 million on the current tax benefit line. We have no debt, and our current ratio improved to 4.8 from 3.9 at the end of the previous quarter. We also have untapped $15 million line of credit.

After the quarter, we are repurchased 932,000 shares of our common stock bringing total of the shares that the Company repurchased since our buyback initiative began about two years ago to about 4.8 million, which represents about 20.9% of 23 million shares currently outstanding. The Company still has 2.9 million shares in its authorized share buyback program.

And now I will turn it to Vilia to give you some numbers and Lynn for business. So Vilia?

Great. Thank you, Jirka. As Jirka mentioned, the current economic climate played a significant role in our first quarter results. As the softening in consumer spending continued from 2008 into 2009, we took actions to reduce expenditures, preserve our cash, and convert our operating assets into cash. As a result, our cash generated from operations during the quarter was $8 million compared to a use of cash of $1.4 million in the comparable quarter of last year.

For the first quarter of 2009, revenue was $55.9 million, a 14.2% decrease from $65.2 million in the first quarter of 2008. Revenue from our solar segment increased from $6.6 million to $9.5 million reflecting the acquisitions of California based solar companies in 2008. For more information concerning results of Real Good Solar, a separate earnings call will be held tomorrow, Thursday, May 7th, at eight thirty AM Pacific Daylight Time.

For the first quarter in 2009, revenue generated by our direct-to-consumer segment decreased 14% to $27.7 million from $32.2 million in the first quarter of 2008 primarily reflecting a strategic 39% reduction in catalog circulation. Revenue from our business segment decreased 29.2% to $18.7 million from $26.4 million last year, primarily due to conservative retail buying, discontinued businesses, and increased deductions and allowances to retailers.

Domestic growth revenue which is domestic growth sales to retailers and does not include deductions and allowances was down approximately 5%. Additionally, $2.5 million of the business segment revenue change quarter-over-quarter was due to the closure of our U.K. operations at the end of Q1 2008 and the change to licensing revenue from traditional product sales.

Overall growth margin was 55.4% of revenue compared to 62.9% of revenue in 2008 with our lower margin solar business growth accounting for over 30% of the decline. Other factors contributing to the margin decline include reducing prices to accelerate sales and reduce inventory levels, and a shift in our retail product mix to include lower margin category managed fitness media associated with our category management roles and store-within-store strategies.

Our selling and operating expenses decreased 2.8% to $33.9 million from $34.9 million in the first quarter of 2008 reflecting cost control initiatives including reduced catalog circulation of 39% and reductions in force. We expect the payroll deductions made at the end of March coupled with reductions the latter half of 2008 will decrease total salary costs by over 15% on an annualized basis.

Our corporate, general and administration expenses decreased slightly to $3.3 million from $3.4 million in the first quarter of 2008. The operating loss for the quarter was approximately $6.2 million compared to operating income of $2.7 million for 2008 reflecting our lower revenue and margins.

Our interest income for the quarter 2009 decreased to $74,000 from $469,000 in the same period last year, reflecting mainly the decrease in prevailing short-term interest rates.

We recorded a net loss of $3.1 million in the quarter or $0.13 per share compared to earnings of $2.2 million or $0.09 per share in the first quarter of 2008.

As of March 31st, 2009, our balance sheet remained healthy. We ended the quarter with $38.2 million in cash and no debt. Additionally, the cumulative effect of our cash generating strategies improved our free cash flow by $10.5 million quarter-over-quarter.

Our inventory decreased $8.2 million from $40.8 million at the end of the fourth quarter 2008 to $32.6 million at the end of the first quarter 2009.

Our day sales outstanding for the first quarter of 2009 increased to 46 days from 40 days in the first quarter of 2008. Approximately 78% of our receivables in the trade division are comprised of our ten customers, household names as Target, Wal-Mart, Dicks, and Amazon. We are pleased with our collection efforts and our ability to minimize the risk during these difficult economic times.

Depreciation, amortization, and stock compensation expense totaled $2.2 million for the quarter. Capital expenditures in the quarter were $300,000. We also made payments totaling approximately $900,000 on the purchase of our Corporate Headquarters.

In summary, our solid liquidity affords us the flexibility to sustain a prolonged downturn in the economy and to continue to grow market share and build brand loyalty with our customers.

Now I will turn the call over to Lynn to provide more detail on our growth initiatives by business segment.

Thanks, Vilia. In the midst of the adverse macroeconomic conditions, we remain focused on the core growth strategies that we have discussed on our past calls. These strategies will leverage our sound financial position to capture additional market share, increase sales potential, expand our role as media category manager, and enhance existing distribution through the store-within-store concept.

In addition to these growth strategies, we are mindful of the revenue impact of the current macroeconomic shift that has occurred, and we have implemented cost savings measures aligning our overhead structure going forward with the revenue base, and ultimately realizing meaningful efficiencies.

This year we're we focused on free cash flow and are running the business accordingly. We are committed to a long-term outlook of growth and profitability while we're maintaining a strong commitment to our brand and mission to provide products and services to better the lives of our customers, especially in times like these where consumers are faced with ever increasing financial pressure and stress.

I would now like to provide you with some more detail on the results by business segment. In the first quarter of '09, net sales for the domestic business segment were down 20% from 2008, where we experienced 25% comps in the first half of the year. This revenue reduction reflects the adverse effects of the economic downturn, which began in third quarter of '08 and continues into the start of this year.

In addition, given the difficult retain environment, we increased our deductions and allowances accrual along with our returns reserve, which impacted our net revenue results as well as our margin. Domestic growth revenue, which is domestic growth sales to retailers, does not include deductions and allowances, was down only 5%.

As we mentioned in our last call, many of our largest retail partners cut their buying significantly in the fourth quarter resulting in low stock positions at retail that were carried through the holiday buying season.

In the first quarter, while the overall retail environment remains cautious, we have seen some pockets of strength at retail. For example, we recorded sales growth of over 10% in the quarter in the mass market channel and total sales for our top five accounts were positive. The biggest source of weakness to note in our trade division is the book channel.

Category management and store-within-store initiatives are a key strategy in maintaining our status as the clear leader in fitness media.

Despite some store closures at retail, including Circuit City, Mervyn's and Linens 'n Things, our retail distribution remains strong at 72,000 doors compared with 71,000 at the end of first quarter '08. Our store-within-store initiative continues to enhance the quality of our distribution with over 10,500 doors up from the quarter up from 10,000 in the fourth quarter of '08 and 7,100 at the end of first quarter of last year.

After successfully implementing media category management with Target, we secured further expansion of this strategy in sporting goods and [our racked] accounts. With these recent rollouts of category management, we have now implemented the strategy in over 3,500 doors, up from 3,000 in the fourth quarter and none in first quarter of last year.

Our category management strategy has increased our mix of distribution sales and costs of securing shelf space. While this has impacted our overall gross margin, it's an essential part of our long-term retail strategy and a key step in securing shelf space for media creating a more proactive role with our retail partners and becoming the go to Company for fitness.

In addition, category management has actually fueled growth in the fitness media category at major accounts. According to Nielsen video scan, growth and fitness DVDs at retail increased 22% in the quarter. Our control distribution market share, which includes ours and distributed titles, was approximately 45% for the quarter.

For the first quarter, revenue comps for the direct segment declined 14% on a planned reduction in catalog circulation of 39% and overall slower consumer spending in the quarter. In the direct segment, we also initiated a number of cost cutting strategies that should result in improved profitability in the latter half of '09.

These strategies include renegotiating our inbound and outbound freight contracts to take advantage of lower fuel costs, renegotiating our product manufacturing costs, consolidating our mail order catalogs into one title, implementing a reduced and optimized circulation plan, reducing inventory, as well as overhead reductions associated with underperforming direct divisions. At the end of the first quarter we closed out last print publishing division and are reviewing the cash requirements on other units to maintain our focus on free cash flow.

In summary, we believe we have a sound strategy to balance growth prospects with cash conservation. We'll focus on the following strategies -- increase our media management footprint by adding specialty, sporting goods and rack stores to our mix. With increased pressure on retailers to cut their overheads, this management strategy works well in the current environment. While start up costs are high, with this model we are able to expand the media category while controlling the space. The margin improvement over time, along with the category expansion, is a key competitive advantage.

We'll focus on additional space for store-within-store exposure, both on current retail partners as well as new store growth. As our brand continues to perform well at retail, we expect to be able to expand in new categories and in a larger footprint with our current partners. We're confident in this strategy and know it's a win-win for both Gaiam and its retailers as, once again, we were awarded Vendor of the Year in 2008 by Target last week. I should also note that we have received this award four of the past six years.

We intend to add titles or new brands to our conscious media library of titles. This will help us continue to grow our market share in the non-theatrical sector. In accordance with our focus on cash, we plan to license or distribute a like minded brand.

As we highlighted in our fourth quarter call, we plan to add a new brand to our fitness portfolio to expand our demographic reach to include men and younger women. Today we are delighted to announce a license deal with Reebok to produce and distribute fitness accessories and DVDs for certain retail channels including specialty, department stores and sporting goods. We expect this licensing deal to impact revenue beginning in the forth quarter of this year.

While we remain focused on growth opportunities, at the same time, we're reviewing every expense line to look for cost savings and cash conservation. We've already taken action on the following items -- reduction in force that occurred in late '08 and at the end of March 2009, which will reduce payroll by $6.4 million on an annual basis.

We also reduced expenses through a consolidation of all of our hosting sites, the renegotiation of all of our freight contracts, along with paper and printing cost decreases associated with our strategy to produce one catalog title versus two. The total reduction in costs for all these initiatives is approximately $10 million on an annual basis. All of these cost reductions should be fully appreciated on a quarterly basis by Q2.

In conclusion, we believe we're well positioned to continue our strong brand momentum and leadership in the LOHAS industry. We're committed to expanding our high quality, socially responsible content and brands, and we continue to review and revise strategy across all of our business units to better position Gaiam for future growth and return to profitability.

The solid foundation we've built affords us flexibility in the consumer market that many highly leveraged companies do not have in this difficult climate. We continue to push aggressively to gain placement and market share in retail, creating a distinct competitive advantage for the Company today and in the years to come. We continue to focus on free cash flow and are pleased with our first quarter improvement in free cash flow of $10.5 million compared to first Q '08.

I'd now like to open the call up for questions.

(Operator Instructions). Our first question comes from Mark Argento from Craig-Hallum Capital. Your line is open.

First question, surrounding the -- or you had mentioned in prepared remarks about some of the vendor, I don't know, they are called holdbacks, but you had mentioned that ex the holdbacks or rebates that the comps are only down about 5% versus the report. I think it was roughly down 20. Can you explain a little bit about what, you know, how those work and if that's something you expect to continue or reverse or just a little color there would be helpful.

Okay. Well, normally in the first quarter of last year, our allowances and deductions accounted for somewhere between 5% to 10% of our retail sales. For first quarter this year, it accounted for over 20%. And that is not only our aggressively going after retail space, which we are having to pay for, but it's also retailers, of course, increasing their review of everything and trying for additional deductions. It can, will continue as long as we are aggressively going after the retail space, but we believe that once the consumer returns to their normalized buying patterns, which we hope will happen in third to fourth quarter this year, then we should see that also reduced as a percent.

And those are, are they termed like marketing funds?

It's everything from fixturing to marketing funds to just markdowns and displacing competitive product in space where we would like to take over that space.

Okay. And then, a little bit of color on the Reebok deal that you mentioned towards the end. So, are you going to take over -- will you guys still carry the Reebok brand or will it be Gaiam branded or a little bit of help understanding kind of how that relationship will work.

Well, we identified that the Gaiam brand is great for female fitness, but that we felt that we could expand our demographic by going after a male and a younger female demographic. And we felt like by doing so, we would like to license a well known brand in that space, so we went to Reebok and licensed the brand. We'll produce fitness media and fitness products under the Reebok brand, and then take it out through our channels, again trying to appeal to a different demographic than we have under the Gaiam brand.

And in terms of channel conflict, I mean, it will be for the most part a really different store than you would be selling the Gaiam product at versus the branded Reebok product?

It may be in complimentary stores, but it will also open up new channels of distribution, such as department stores that we aren't currently in. We will leverage off the distribution that Reebok already has in those channels with their apparel and shoe franchises.

Could you talk a little bit about inventory levels at retail? I mean, you know, I assume, I know inventory levels -- that retailers burnt them down through the holidays. From our channel check, store checks, it still appears that inventory is pretty thin, especially at like a Target. Are you starting to see replenishment orders or frequently are these guys carrying more days of inventory? Anything there that's encouraging?

Yes we're starting to actually see some encouraging signs that they are getting back in stock in second quarter, but we saw some in first quarter. As you saw, the mass channel was up about 10%, and that we are seeing encouraging signs at the beginning of second quarter as well.

Great. I think that's good for me. I'll hop back in the queue. Thanks.

(Operator Instructions).

Okay, there's no further questions.

There are no further questions, sir.

So we would want to thank everybody and hopefully, you're with us the next quarter. Thank you very much.

Thank you for participating in today's conference call. You may disconnect at this time.