Gaia Inc (GAIA) 2009 Q2 法說會逐字稿

Welcome to the Gaiam second 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'd like to go ahead and turn today's call over to John Mills. Sir, you may begin.

Thank you. Good afternoon, everyone, and welcome to Gaiam's second 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. I'd like to welcome you to the quarterly call and for the first time since last August, I'm happy to say we are pleased with our results. We began the year with the objective to grow revenue and focus on our free cash flow. The results of the quarter are slightly ahead of the goals we set for ourselves for 2009.

Revenue for the second quarter, which ended June 30, increased 5.7% to $60.5 million from $57.2 million, which we reported in the same quarter of 2008. For this quarter, which is always seasonally our weakest, we reported a loss of $1 million or $0.04 but had positive EBITDA contribution. During the quarter we generated free cash flow of $8.2 million, which is a $13.8 million improvement from cash use of $5.6 million which we had during the same quarter of last year. Year-to-date our free cash flow is now $15.3 million, which is $24.2 million improvement from the same six months which we had during last year.

Savings from our cost reduction measures which were approximately $10 million annualized are being realized. Our operating expenses declined $3.2 million from the same quarter a year ago. We continue to focus our business sights on our control space at retailers and we expanded our store-in-store presentation again and we have right now 11,000 locations, which is up from 10,500 last quarter and 7,500 a year ago.

We also increased our DVD US market share by our fitness and wellness, our controlled distribution which includes to run what we manage, right now to 56% from 53%. And we also now are really starting to increase our focus on overall non-theatrical DVD market share, which since kind of the beginning of the year is another new focus for us. Over the last five years we have increased our market share of non-theatrical to over 6% from about 0.3% which we had five years ago. And recently we have climbed to number 5 ranking from number 6 in the beginning of the year and number 30 five years ago.

To further improve our market position as well as Gaiam brand, we signed an exclusive three-year home video license agreement with Discovery Communications. This means we will release programming including the Discovery Channel, TLC, Animal Planet, Science Channel and the rest of Discovery Communications properties.

During the quarter we also repurchased 932,000 shares of our common stock, which brings the total of shares we bought since our repurchase initiative began, to about 4.8 million, which is over 20% of the currently 23 million shares outstanding. We still have 2.7 million shares remaining in our authorized repurchase program.

Our cash position end of the quarter grew to $42.8 million, which is $4.6 million up from last quarter, even after $3 million we spent on stock repurchase. We still have $13.5 million that will benefit on our current tax line and no debt. Our current ratio over the last six months improved to 4.2.

Now I will turn the call to Vilia, to give you a little more detail on numbers and then Lynn for business.

Thank you Jirka. I am pleased to report that our second quarter 2009 results reflect quarter-over-quarter revenue growth and strong generation of cash from operations. To better understand our operating results, it is important to note that the second quarter of 2008 included two items; a gain on the initial public offering to Real Good Solar stock, partially offset by non-cash impairments of Gaiam's media library and related assets. For a more meaningful comparison of quarter-over-quarter results, my comments will exclude these items.

For the second quarter of 2009 revenue was $60.5 million, a 5.7% increase from $57.2 million for the second quarter of 2008. Revenue from our solar segment increased from $8.8 million to $12.7 million. For more information concerning results of Real Good Solar, a separate earnings call will be held tomorrow, August 6th, at 8:30 a.m. Pacific Daylight Time.

For the second quarter in 2009, revenue from our business segment increased 6.8% to $20.7 million from $19.4 million last year, a significant improvement from the first quarter, where revenue declined 29.2%. The increase in revenue in our business segment reflects our success in our store-within-store placements and media category management.

Revenue generated by direct-to-consumer segment for the second quarter of 2009 decreased 6.7% to $27 million from $28.9 million for the second quarter of 2008, after a strategic 40% reduction in catalog circulation. Lynn will elaborate further on our segment results in just a moment.

Overall gross margin was 52% of revenue compared to 63.2% of revenue in 2008. Factors contributing to the margin decline include increased revenues from our lower margin solar business, a shift in our retail product mix, which includes lower margin fitness media associated with our category management initiative, increased deductions and allowances from retailers, and reduced prices to accelerate sales and drive down inventory levels.

Our selling and operating expenses decreased 9% to $30.7 million from $33.7 million in the second quarter of 2008, reflecting cost control initiatives including reduced catalog circulation of 40% and reductions in force initiated in the first quarter.

Our corporate, general and administration expenses decreased 5.1% to $2.9 million from $3.1 million in the second quarter of 2008. The operating loss for second quarter 2009 was approximately $2.2 million compared to operating loss of approximately $650,000 for second quarter 2008.

Our interest income for the second quarter 2009 decreased to $61,000 from $269,000 for the same period last year, mainly due to the decrease in prevailing short-term interest rates.

We recorded a net loss of $1 million in the quarter or $0.04 per share compared to net income of $2.6 million or $0.10 per share in the second quarter of 2008. Excluding the impact of a stock gain and impairment losses, the 2008 net income would have been a net loss of $100,000.

As of June 30, 2009 our balance sheet remained healthy. We ended the quarter with $42.8 million in cash and we continue to carry no debt. Additionally, the cumulative effect of our asset management strategies improved our free cash flow to $8.2 million for the quarter, a $13.8 million improvement over last year's second quarter. Our cash generated from operations was $9.1 million for the second quarter of 2009.

Inventory turns improved modestly to 3.6 times from 3.5 times in last year's second quarter. Our days sales outstanding for the second quarter of 2009 improved to 33 days from 43 days in the second quarter of 2008. Approximately 82% of our receivables in the trade division are comprised of our top-10 customers; household names as Target, Wal-Mart, Dick's, 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 $2.4 million for the quarter. Capital expenditures, including video production costs, in the quarter were $900,000. We also made final payments of $700,000 for our Corporate Headquarters. We had 23.1 million shares of outstanding common stock as of June 30, 2009.

We have and we continue to focus on leveraging our infrastructure and diversifying our consumer offerings. Our ability to grow revenue and generate cash from operations attests to the strength of our balance sheet, our brand loyalty with our customers, the depth of our distribution channels and our capacity to continue to grow market share.

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

Than you Vilia. As Jirka mentioned, we're pleased with our results this quarter and believe we are now seeing the benefits of our business strategies, even during these challenging times. For the past year we've remained focused on strategies that leverage our sound financial position, capture additional market share, increase sales potential, expand our role as media category manager and enhance existing distribution through store-within-store concepts. In addition to these growth strategies, we have been mindful of the revenue impact of the current macroeconomic shift and have implemented cost saving measures that align our overhead structure.

Our core growth strategies, balanced with our focus on free cash flow and cost saving measures resulted in tangible improvements on our income statement and balance sheet in the second quarter.

I would now like to provide you with more detail on the results by business segment. In the second quarter of 2009, domestic net sales for the business segment increased over 9% versus 2008. After a difficult period, which for us began in the third quarter of 2008, we're seeing a nice improvement in our sales to retailers. As we mentioned in our last two conference calls, many of our largest retail partners cut their buying significantly, resulting in low stock positions.

In the first quarter we reported some pockets of strength, especially in the mass channel. In the second quarter the retail environment improved more broadly. For example, we recorded double-digit sales growth for our top-25 accounts in Q2 versus a modest sales decline in the first quarter. In addition, the book channel, which was weak in the first quarter, improved markedly in the second quarter. We're also noting higher sell-through at retail with strong double-digit increases in a couple of our largest accounts.

Store-within-store and category management initiatives are key strategy in maintaining our status as the clear leader in fitness media. Despite some store closures, our retail distribution remained strong at over 71,000 doors, compared to 72,000 at the end of the second quarter in 2008. More importantly, our store-within-store initiative continues to enhance the quality of our distribution, with over 11,000 doors as of the end of the quarter, up from 10,500 in the first quarter of 2009 and 7,500 at the end of second quarter of last year.

After successfully implementing media category management with Target, we secured future expansion of this strategy in sporting goods and our racked accounts. For example, Dick's now has yoga place sections in over half of the doors in which Gaiam provides category management for media and store-within-store fixtures. As a result, sales to Dick's increased over 30%.

With these recent rollouts of category management, we have now implemented the strategy in over 4,000 doors, up from 3,500 in the first quarter of 2009 and very few in the second 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.

According to Nielsen VideoScan our controlled distribution market share, which includes both ours and distributed titles, was approximately 56% year-to-date versus 53% last year. We've also announced DVD and digital deals to produce fitness DVDs with Trudie Styler featuring music by her husband Sting, Valerie Bertinelli and Bob Greene, Oprah's trainer. All titles will launch in fourth quarter this year under the Gaiam brand.

Since our call last quarter we announced an exciting new exclusive licensing agreement with Discovery Communications, which will add to an already diverse portfolio of Gaiam media offerings. Our partnership will cover DVD releases and digital downloads from Discovery Channel, TLC, Animal Planet, Science Channel, HD Theater, and other Discovery networks. It's important to note that this is the first time Discovery Communications has ever consolidated its home entertainment licenses to one company.

Together we look forward to leveraging our retail branding expertise and depth of retail distribution to grow Discovery's presence in the home entertainment market. This relationship is a key step in continuing to expand our market share within the non-theatrical category. We've grown our share in non-theatrical from 0.3% to over 6% with a number 5 ranking in this category, in five years.

For the second quarter, revenue comps for the direct segment declined 7% on a planned reduction in catalog circulation of 40%. Much of this decrease was self-initiated, as we reduced prospecting and optimized our business on the web.

In the direct segment we've implemented a number of strategies to help reduce costs and improve profitability. 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.

In summary, we believe we have a sound strategy to balance growth prospects with cash conservation. We will continue to focus on the following strategies; increase our media management footprint by adding specialty, sporting goods and racked stores to our mix. With increased pressure on retailers to cut their overheads, this management strategy works well in the current environment.

Focus on additional space for store-within-store exposure, both with our 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. Leverage our new partnerships with Discovery and Reebok, with our expanding footprint of store-within-store.

As I just mentioned, we're focused on growing our market share in non-theatrical conscious media. With our Discovery licensing agreement, we expect our share to grow with this likeminded brand. We intend to launch our first titles in October of this year, but will not have access to existing libraries until early 2010. As we highlighted in our fourth quarter call, Reebok will add a new brand to our fitness portfolio to expand our demographic reach to include men and younger women. We intend to launch Reebok fitness accessories and DVDs for certain retail channels, including specialty, department store and sporting goods, in the first quarter 2010, but the main revenue impact from Reebok will begin in June of 2010.

On the cost side, we've already taken action and we are seeing the results. On our last call we highlighted that the total reduction in cost for all our cost saving initiatives is approximately $10 million on an annual basis. We are beginning to fully appreciate the tangible benefit from these efforts.

In conclusion, we believe we are seeing the benefit of our business strategies and remain focused on cash conservation and cost reduction. Our distribution footprint at retail and our strong balance sheet will afford us the opportunity to grow revenues through our new partnerships and titles. Our leaner cost structure will allow us to leverage our business model as we look ahead to 2010 and once again focus on profitable growth.

Thank you and I'd now like to open the call up for questions. Julie?

(Operator instructions) Our first question is from Mark Argento.

First question, focusing on retail sell-in versus sell-through, I know retailers burned down their inventory levels pretty low in Q4 and Q1. Can you talk a little bit about how much of the sales you saw in the quarter just kind of bringing inventory levels up versus actually selling through at retail?

Mark, as I mentioned in my prepared comments, our sell-through at two of our top accounts were also seeing double-digit increases, so I think the consumer is out there buying now. I think part of that is because they are now back in inventory. But we're seeing very strong increase in sell-through as well as sell-in.

Any particular product doing better than others? Do you see any type of buying patterns that you can capitalize on?

Media and water bottles.

Good combo. On the media side, in regards to some of these new deals you're doing, in particular with the Discovery, have you guys got any buy-in from any large retailers in terms of doing some store-in-a-stores, figure out ways to more efficiently leverage that and grow that business?

We're certainly close on a couple of them and hopefully I'll have some good announcements on those soon. But you know how strong the Discovery store brand is. It fits very well with the Gaiam brand and leveraging that through our current infrastructure and distribution channels will be a win-win for both of us.

Sure. And the Reebok, can you explain to me in terms of the media component, are you guys going to be doing some incremental media you said with Reebok and how big do you think that could be?

We absolutely are. We shot two last week and so we'll have placement in fourth quarter in a couple of Reebok titles as well.

All right. And in terms of incremental store-in-a-stores in the quarter, where were you guys able to pick up additional real estate; what channel sector? Is it drug store, is it mass market, mass merchant?

Sporting goods primarily.

Okay. And then in terms of the overall gross margins, it looks like gross margins are down a little bit. I'm assuming most of that is in regards to Real Solar, although I do know that it's been a little tougher over the last couple of quarters in terms of margin on the direct business, but also on the retail business. Any opportunity do you think to pick back up some margin points here as the consumer shows back up at retail?

I think we'll still see some margin pressure in third and fourth quarter with the growth in Solar and particularly with some of the new contracts that they have, as well as the aggressive deductions and allowances from the retailers. And you know, we're going to continue to expand both the store-within-store initiatives that we have and our distributed media. Both put some pressure on margin, but will really enhance our growth and then leverage our infrastructure.

Great. It looks like a good quarter in a kind of mediocre environment, so congrats on the decent quarter.

Your next question is from Holly Guthrie.

Thank you and let me add my congratulations. Just a quick question on the market share gain that you saw; you said you're now number 5 versus number 6 in non-theatrical. Could you talk about the other competitors, any color you might have? Did a couple of them just get bumped out or is it just some of the new deals you've done that's bumped you up?

Well, the new deals are not at all in those numbers. I think that's more of our media category management strategy that's bumped it this time. However, we will start launching Discovery in October, so we expect to really grow it during that time as well. So this is not anything to do with the new deals.

The competitors there right now, the people that we passed most recently was like Fox, MGM, Sony. The next in front of us are now Paramount and Warner and Disney.

Great, thank you. And then a question on gross margin; where do you think and if you can give us any kind of timeframe, it might level out at and when?

Can you repeat the question?

Sure. Looking at gross margin, it has been down now two to three quarters and I was just wondering where it might level out at and over what time period we could look to that to level out?

I think you'll see some improvements or leveling in Q4, but Q3 is a very strong quarter for our Solar business, so we'll continue to see margin pressure during third quarter.

It's in the product mix. If you take Solar out it's a little different story. It's really a question of mostly the product mix, because when you look at Solar and the rest of the business and even in our business, if you sell more media, which right now we have a lot of new deals from media, that gross margin is about 75% compared to no media which we might have 15-20% lower margin. So it's a question of the product mix.

Okay great. And it sounds like the current sales environment for your product has definitely improved. Could you talk about the progress of that sales improvement over the quarter? Did it improve during the entire quarter or was it just over the last couple of weeks or so? Could you give us some color on that and then any color on the current environment?

We continued to see improvement as the quarter went on. It didn't happen in just the last two weeks. We saw it during May. It started really in May and we're seeing currently pretty strong sales in July as well.

Okay great. And then great job on the cost savings. I'm very pleased with the sales increase you're seeing, but do you think there's any opportunity to maybe even enhance some of the sales gains a little bit more by plowing, you know, do you think there was some missed opportunities because there was so much cost saving?

I think right now you'll see that we stuck with our business strategy, we cut the costs and now we can leverage our current infrastructure to grow the sales and based on the new deals coming in in October, we'll start seeing a better leverage to the operating margin.

I understand that now. You mentioned your video production cost and I don't know if it was a dollar or percentage, but my question really has to do with where that video production cost might be going, given your investment in your new studio there at the headquarters? I guess if you could go back and maybe either review in dollar or percentage the video production cost and then your thoughts of where that cost might be going relative to historical numbers, given the investment?

I don't think we said anything about cost reduction but it's not our overall CapEx right now was a little less than $1 million, not including -- we had last payment for headquarters about $700,000. The rest of it is about $1 million. And we don't expect dramatic changes on that thing so obviously do some bigger titles like we do Trudie Styler and Sting that obviously is a little more costly, but it's still for us at least a very modest cost per title. So I don't think the fundamental unit changes in the video production cost.

(Operator instructions) Your next question is from Jim Duffy.

Lynn, can you speak to the current level of catalog distribution? What is the number and is that a number which you're comfortable with on a go-forward basis or should we expect further reductions in catalog distribution in 2010?

Well Jim, as we said, we reduced our catalog circulation by about 40%. I think right now we're somewhere planning for between 10 and 12 million catalogs distributed this year, but we are constantly evaluating that, based on the results that we're seeing. So that can change on a quarter by quarter basis. When things start to pick up then we would perhaps start prospecting again. Right now we're just focusing on our house file.

If the post office keeps bumping the rates every year 10%, there really is no cost saving to offset that so it's getting (general) in the country. Even our royalty is probably better than other people, it's getting difficult business so you should look more like in our business with catalog marketing then the catalog business on its own.

How much of the catalog savings have you brought back into online marketing investment?

I don't know how to say in dollars, but catalog marketing compared -- in average, internet marketing is probably a third cheaper than catalog.

25% to 30%.

So it's definitely getting better results. There is a limit how much you can do with that thing, so obviously we can put more dollars, it's a question do we get incremental results. So right now it's kind of the road we went about third less marketing cost on internet. And obviously we try to spend as much money as we can in that target as a percentage of revenue. When it goes above it, we try not to go there. And there is a question of how much we prospect with catalog, because our house file obviously that's what is driving the business. And I don't believe that getting new clients, new customers through catalog as we did in the last eight years, it's going to be wave in the future. I think you're going to get more from different sources (inaudible) actually calling the names to do business.

Okay. And the representation in the Dick's stores that I've seen looks great. Can you speak to further opportunities in the sporting goods channel? Do you expect to get the remainder of the Dick's stores with store-in-store presence and any traction that you have with maybe the Sports Authority or Academy?

Obviously, everybody watches what Dick's does. They are the leader in the sporting goods arena and they've had very good results with what they're doing with their yoga place shops. So yes, they look great. Obviously, based on what I said, our sales increased nicely there. We have been talking to Sports Authority about media management and we're certainly looking at store-within-store expansion in most of the other large sporting goods retailers. I can't announce any of them right now, but I think we've made really good progress on that.

I've noticed multiple store-within-store at Dick's it seems and they've stated an agenda to maybe deemphasize some of the higher price point fitness equipment. Do you think that you're well positioned to continue to benefit from that?

Absolutely. If somebody can buy a DVD for $15.00 and get a great workout and a piece of equipment, which our price points are somewhere between $19.95 and $39.95, but the real sweet spot is $29.95 for us, obviously that plays well into our place that we market best.

We definitely not in high equipment business, so any kind of shift from that will benefit us directly.

Great. And then if you mentioned this, I missed it. CapEx intentions for the year, I think it's like $4.5 to $5 million?

No, the CapEx for this quarter was about $900,000, ex paying for the building and I forget what it was over first quarter, but I would say it should be less than $4 million, right?

Yes.

Is that a sustainable rate on a go-forward basis?

You know, it's maintenance CapEx, yes. The question is we obviously aren't planning to buy another headquarters. It depends how the DVD market share is. If the DVD starts increasing, can we do higher production titles, that might change. Because we typically amortize about as much a year what we put on balance sheet, so it's kind of neutral cash, so if our capital production increases, our depreciation will increase as well, so it will be still kind of neutral to the cash.

Your next question is from Mark Argento.

Just a quick follow-up. I know you guys generated about $15 million the first half of this year in free cash flow. You had originally talked to $20-plus million in free cash flow for the full year. I think that was the number you threw out a couple of quarters ago. Any thoughts on what that cash flow number could look like now that we're halfway through the year?

We're definitely doing better, as I mentioned, than we kind of set our goals. We have a lot of the free cash flow first half was influenced by (inaudible) than second parties more from operating. But we definitely are on a good way to beat that number and we still believe that it will be our best revenue ever, as we said as well.

And use of that cash, would you guys still be looking to buyback stock? I assume you have some availability yet on your authorization there.

We have still 2.7 million currently authorized, 2.7 million shares and we definite have enough cash to use them. So the question is availability with the price (inaudible). It's like we don't have any policy; we're kind of opportunistic on that.

Your next question is from Holly Guthrie.

Quick question on your category management. I think you said that you ended the quarter with 4,000 doors, up from 3,500. Those 500 additional doors, could you talk about the additional products, like did you double the number of products that you were selling into those doors and then what was the cost associated with that?

First of all, if you have a store on category management and you increase the size, you don't increase your number of doors. So we increased the doors from mostly sporting goods, again, where we did category management for places like Dick's. Was there another question in there?

Oh yes, I guess I was wondering when you go in and you set up the displays, I was just trying to get an understanding of what percent increase in sell-in do you see when you capture those new doors? And I might be misunderstanding it and I can get with you afterwards.

Holly, it depends on what's already in there. If you're starting with a door where media doesn't exist and you're bringing in category management, then obviously 100% of what you ship in is new. It all depends on the retailer.

I think what Lynn's trying to say is, as we look at there are like two different things where we look at one is the number of doors, which we're pretty high right now, close 71,000-72,000 and our main goal is to increase number of store-in-stores. Obviously it's very lucrative for us to expand the store-in-store footage or is the category management footage, so that drives the revenue. But if you would double the store-in-store footage or category management footage as you're asking, we would not count it as an increase, because it's still same door.

I show that that was the last question and I'd like to go ahead and turn the call back to Jirka Rysavy for any closing comments.

Thank you very much. Thank you for being with us on our call and hopefully you'll be with us next quarter and we're glad that we're back to our usual tough what used to be for us years before we started in September's economy and thank you very much to be with us. See you next time.

Thank you so much for participating in today's conference call. You may disconnect your lines at this time and have a great day.