iMedia Brands Inc (IMBI) 2003 Q1 法說會逐字稿

Good morning and welcome to ValueVision Media's first quarter 2003 earnings conference call. All lines have been placed on a listen-only mode until the question and answer session. Today's conference is also being recorded. Before we begin, Anthony Giambetti, Director of Corporate Communications, will read a brief statement.

Today's conference call may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Listeners are cautioned that such forward-looking statements may involve risks and uncertainties that could significantly affect actual results from those expressed in any such forward-looking statement. More detailed information about these risks and uncertainties is contained in ValueVision Media's filings with the SEC.

I would now like to turn the call over to ValueVision Media's Chairman and CEO, Gene McCaffery. Thank you, sir, you may begin.

Good morning, thanks for your interest. I have with me Dick Barnes and Nathan Fagre. We have quite a bit to cover this morning so I'll attempt to be brief with what you already know.

We had a pretty good quarter. I think it bodes well for the year. Our top line sales exceeded our expectations during the quarter, mostly attributable to playing that was initiated, anticipating that we were going to have some difficult economics, and the anticipation of what was obvious with the Iraqi war. Our sales performance was very positive even relative to our competitors. And if you look at this past quarter of this last year, we did have, we had a pretty good quarter in 2002. And if you notice our Internet sales have been running in the really high double digits. And if you look at the Internet sales for this quarter where it says they are up 8%, I think it might be important to note that last year we did the infamous Olympic berets and in quarter one alone last year we did $3.1 million on the Internet in Olympic berets which obviously was not cycled this year. So for us to do $25 million on the Internet against last year's 22.6 or 22.7, if you took those berets out and if you talk about doing 25 million against 18 or 19 million. So the Internet business remains very strong. It was able to cycle a unique experience in 2003.

On the EBITDA side our guidance was zero to 2 million. And without one-times it was approximately 900,000. We mentioned in there we had a 4.4 million gain on the sale of some low power TV stations and we had two approximately half million dollars one time charges for issues that were outlined in the guidance. So we came in about mid on our EBITDA projections of the zero to two. And I think that if you look at our margins they remain under some pressure but our merchandise margins are very good, well over 39%. Our promotional activity that we anticipated to get through the quarter was a little expensive but margins come in at 37, a little bit better than last quarter.

I had some calls this morning about the numbers and comparabilities and that's two different questions about comps. I think that, I am just going to take a second and talk about comps. It's very difficult to do comps. Comps are just not easy. If you look at half the new homes that we've added in the last few years, half of them are analog and half of them are satellite. Our competitors are adding homes at somewhere between 3 to 5% a quarter and they count satellite as half a home. We are adding homes at 12 to 20% a quarter and we count everything as a whole unit. And as many people would tell you here as well as in our competitors is that the satellite homes are approximately half as productive as our analog homes on average. So we just had an amazing amount of growth here in the last couple of years. And I have a tough time doing comps when everybody is using everything very differently. Our growth, it sounds a bit dramatic and while it's challenging to continue to absorb all these significant costs, I just don't believe that a few years ago that anybody believed that we'd be at the 52, 53 million full time equivalent marks that we are today.

So on comps, at some point we are going to catch up with each other and we are going to catch up with ourselves, and these significant additions of these 12 to 20% increases a quarter, while they cause comparable discussions and difficulties to talk through, they certainly, as I mentioned in the press release, bode well for the future. We had just in the last quarter or two, we've had 5 million new homes come on board and, of course, yeah, that's 10 million plus dollars in expense. So it's a juggling act but it certainly bodes well for the future. Our sales trends remain positive. We’ve elected to remain at our current guidance just based on everybody being very concerned about the economy. Based on this quarter's performance we anticipate that we are going to have a very good year.

Secondly, with regard to my or the company's announcement with regard to my transition as CEO and Chairman, it's pretty much as it's been stated. Approximately one year ago we initiated some succession planning discussions at one of our board meetings. This is the eventual result of those discussions. The decision was, again, as we mentioned an amicable one that resulted out of discussions on both our parts over the last few months. My plans are to assist in the search and provide any analysis that the board and I feel appropriate going forward and for the foreseeable future I am providing 100% of my time to insuring that we have the kind of year that we expect and that obviously we have set the expectations for.

I think that most of the other information that we've talked about has already been released in print. So with that because we have a dual release today I think I will open it up for questions.

Thank you. At this time if you would like to ask a question please press star followed by one on your touch-tone phone. Your name will be announced prior asking your question. To withdraw your question press star followed by two. Again, it is star followed by one if you do have a question.

Your first question is coming from Robert Rouse. Sir, please state your company name.

Hi, actually it's David Brenner calling from Natexis Bleichroeder. I just have a few quick questions this morning. I know last quarter, I think it was last quarter, you said that the home business was gaining popularity in your company and gaining sales numbers and maybe it was 14% in Q4. I'm wondering if you can tell us how much it was in the first quarter. And the second was with respect to Comcast, I know that you've been pursuing sort of a large scale carriage transaction. I'm wondering if you can update us on the progress of those discussions.

The home business remains pretty good. It's about the same percentage as it was last quarter. We, as we did mention last quarter we've brought on a number of folks and even during this quarter we've brought on some additional folks to expand our home business. So our home business continues to good. We've also brought on some people to start to work on the -- by the way, 15% is about right. I mean, it's gone from about zero to 15% in the last 2.5 years and it's gone up from about 8% last year to 14, 15% this year so far. It needs to be broadened. Today it's limited in its assortment. And while we are happy with the number we need to broaden the assortment and we've brought on some officers and buyers to develop the home business even greater going forward.

We've also brought on people to develop cosmetics, apparel, exercise. Rebecca Cole has joined us for the whole home area garden, but expanded into the home area. Rebecca Cole, who is from a syndicated television show, is going to be taking an expanded role on the air. Probably the difference between what I've said in the past about just the pat answer of we are going to expand our categories and we have to stop being such a jewelry company, is we've taken the approach this year that we are going to develop buying offices, develop staff and that we are not going to rush to get it on the air, that we are going to spend the appropriate amount of time building a vendor structure. Liz Haesler has been instrumental in the last five months with her contacts from a vendor standpoint in developing lots of new vendor opportunities that, like I said, we are not going to try and rush on the air. We are going to spend a great deal of time developing these folks and we will start, while we'll test them on the air even as we speak and we hope that some of these categories will come on strong in the fourth quarter of this year. So it's an investment in long-term strategy to get us out of the tendency that we have on jewelry while attempting to build our jewelry business and productivity into less hours so we that free up the hours for these other categories and still make the jewelry business a lot more productive and less hours so that we have a little bit of a cushion to pay for all the testing we are going to have going forward.

Second question? Oh, Comcast, yeah, I just always hesitate to comment on -- I mean, the problem with anything that goes on with cable companies is that there is just never anything going on with the cable company until you come to some kind of an agreement. So I don't want to mislead anybody. I usually try and do this kind of a qualification at all times. You probably will not hear, I mean, where do we get our 5 million homes in the last two quarters from? We get them from lots of people. We get them from expanded satellite distribution. We get them from existing contracts that we have today with Charter and Cox and Adelphia and all these companies and sometimes we even get them from Comcast and AT&T. I guess I will not, I can't comment on anything with regard to a large cable deal, until such time that we have that cable deal. It's just, you just never know until you sign. I know that's not a satisfactory answer but that's the best one I can give you

Okay. Great. One follow-up question. With respect to one of your brethren, QVC, currently in an appraisal process, I'm curious do you have any thoughts on how that appraisal process may translate through to your business and what that may mean for home shopping evaluations?

I think that if you read all these different analyst reports in the newspapers with regard to this process and as recently as yesterday or the day before, I read some information that John Law had put forward about how much he would like to own QVC. I don't know, you know, it just opens up a lot of opportunities. I mean, what would Comcast look like if Liberty owned QVC? What would, if Liberty doesn't own QVC, what does that do from a negotiation standpoint with us moving forward with Comcast? I've spoken to people that would seem to be in a position to know more than I would and I don't think that there's any point of view other than what's been published and that is you have to go through the process and if there's a high valuation, it's going to drive some decision-making that very few of us can speculate on. I think that the opportunities for electronic retailing, if you look at the -- I think there's big opportunities going forward other than the traditional, meaning that we are going to probably do, we did $25 million in the first quarter. If we do -- if you figure that a few years ago our Internet business was $3 million and today it's going to be $125 million with margins that are pretty darn good. And, by the way, you wouldn't have a $125 million Internet business unless had you television, to make sure, cross marketing. It just seems to me that electronic marketing is probably on the verge of lots of stuff going on other than the traditional QVC, HSN, ValueVision model. That's just hard to predict but I would say it's very positive.

Great. Thanks very much.

Can I add one thing here?

Yes, Dick Barnes.

David, Dick Barnes here. The other interesting aspect of this in terms of my perspective is obviously the establishment of some sort of valuation here which is kind of an independent benchmark but obviously is of interest to us. We are the only home shopping company, pure home shopping company that's publicly held so we are very interested in that little process and eventually comes to a financial valuation of the company.

Thanks.

Our next question is coming from Mr. Bob Evans. Please state your company name.

Craig Hallum Capital. Good morning.

Good morning.

Can you comment, Gene, on the transition process, how long do you expect it to take and give us any color in terms of candidates, what qualifications you are looking for?

It would be hard for me to speculate on how long it will take. I think that it's a relatively, it's not an easy search because if you were to take most industries you would say, well, this industry only has three or four competitors, two or three competitors, actually for us, and how much do you look at those competitors for who you'd want to recruit. So you have this mixture of electronic retailing and then you have this retailing issue. I think a candidate, that he or she would optimally you would say that you would like a mixture of electronic retailing, and I think what I mean by that is it could be somebody that's in electronic retailing today or it could be somebody that worked at some of our competitors during that period of time when they were going through the growth process that we are going through and maybe, might not necessarily be there today but might have a very senior position at a retail company with the background of electronic retailing. I think that if I was, and I did, when we met with Bill Simon and Cort Barry that is the conversation we had. We'd like it all. Who do we end up with from a consideration standpoint? Obviously the board is going to pick the best candidate but we would certainly like someone to be reasonably well-rounded in management, retail and electronic retailing. So with regard to how long it will take, we are effective today, although Cort Barry has done some work since we first met, but effective today we are public on the process and we are going to move as prudently as possible. Aside from the search committee that is made up of a few of the board members, obviously the Board of Directors are each going to get down to the final candidates and interview them. So it going to take what it takes, Bob.

But the process is at the beginning stages?

The process is at the beginning stages.

And separately on the business, Dick, can you comment on the cash flow from operations? What was cash flow from ops and free cash flow?

Our net cash position at the end of the quarter was 138 million, which is down about 30 million from the end of January but we had a major impact during the end of the quarter, we look at fall, we laid out 33 million as we stated for the acquisition of the Boston television station that closed during the quarter. We laid out $11 million for the purchase of our headquarters facilities here in Eden Prairie and we talked about that on the last call. Incoming, there's $11 million from the ROM settlement that we received in the last quarter and we talked about that on the last call, 5 million incoming from the low power television station sale and then 6 million outgoing for the share buy-back during the quarter. If you add all that up that's actually about $35 million use of cash so from the business itself we generated about $5 million of a positive cash flow which probably comes from inventory being lower in the quarter than it was in the third quarter and also receivables being lower. So net contribution of $5 million from a pure operating basis is the way to think about it.

Okay. That's what I was trying to get at. And Gene, could you comment on the growth? You had really good growth in homes this quarter. Would you say it was about a 50/50 split between digital and satellite and is it coming from any one carrier?

No, it's 50/50 split between satellite and analog; a small percentage of it being digital. That's for the trend, for the last two years. And is it coming from any one carrier on the analog side? It's from a number of carriers. What happens every quarter and I would be happy to give you the actual numbers off-line but what happens every quarter is you lose a couple hundred thousand dollars here and you pick up -- I'll be happy to give you the make up of it. Yeah, the growth in carriers has far exceeded our expectations.

Okay. And the trend seems to --

Well, the trend seems to continue. Because obviously I was a little surprised that we picked up I think it was 2.4 million last quarter and I think it's over 2 million this quarter and if that were to continue we'd be in pretty good shape in 24 months. We'd be in pretty good shape if we could pay for them. Eventually we are going to pay for them. It's amazing to have 53 million homes.

Obviously the value of the firm is based on the distribution.

And the other thing is I guess I neglected to mention before is as you look at all this growth and all this comparable sales discussions, there are not a lot of people growing at 20% or 15% a quarter. And taking on that in many cases taking on the whole issue of satellite being not that productive and QVC takes every satellite home and divides it by two, multiplies it by two and HSN just went to a different accounting of satellite homes accounting two satellites home for one cable. We count all of our homes at one unit as opposed to breaking them down in halves. And I actually think that, I actually think that the ability to have, to be paying frankly from cash flow for what turns out to be certainly a terrific, a terrific growth in these homes is pretty damn good.

Okay. And the promotional costs, you said you had spent a little bit more on promotional costs. Did you expect that going into Q2?

Did I expect as much of it? No. We actually for the first part, we are in high single digit sales increases through the first half of the month and we have not incurred any promotional costs. Now, that's 15 days into 90 so I don't know the answer to that but my sense is that we looked at March as a problematic month in anticipation of what was going to happen and we responded according. I don't expect that to continue into the second quarter.

Okay. Thank you and thanks for your contribution to the company.

As a reminder, if you would like to ask a question please press star followed by one on your touch-tone telephone. To withdraw your question, press star followed by two. Again, it is star followed by one to ask a question.

Our next question comes from Lenny [Breckan]. Please state your company name.

[Breckan] Capital. I just wanted to clarify, the jewelry segment, do you expect to as a result of the hours dedicated in the fall to the category, do you expect it to drop appreciably as a percent of the overall mix of business?

No.

Or you are just making that more efficient?

We expected to, in this year if we were able to drop it 5 to 7 to 8% just because most what have we are working on now, we have a very different approach this year. In the previous years we threw some folks at different categories and we attempted to get those categories to build and we probably didn't invest in developing good management teams to develop those businesses. I mean today what we are saying is let's put money up front, let's develop the teams, let's not try to get them on the air too quick and have fits and starts and let's make sure that we have a vendor structure and a testing program and what's going to happen is that it's not going to be very dramatic this year because we are not going to do it until, I don't see significant category changes until fourth quarter where I think you'll see a cosmetic and a gift-giving business for Christmas that will be a much greater percentage of our total than in the past. But in tandem with that, as we find the hours to put that merchandise on, we are spending as much if not more time saying that we need to build the jewelry business in less hours. I mean, one of the things that when you have 65% of your business in jewelry, I mean one of the numbers you don't see is that, there's a similar amount of hours, in other words if we were to take 100% of our hours, there's a similar amount of our hours, 65% of our hours that get dedicated to jewelry. I mean that, causes us in many cases to put jewelry on and vendors on too often within a four to six weeks period when in fact if you are able to put those people on once every seven or eight weeks instead of once every four weeks what you find is that you get a much better response from not being on all the time. So our position is to expand the vendor structure in jewelry as well, take the hours down in jewelry that will allow hours for the additional categories but to actually build the jewelry business productivity.

Gotcha. That's exactly the way I took it. Thank you.

Okay.

Thank you. The next question comes from Ken Heller. Please state your company name.

Yes, Kennel Capital. I was wondering if you thought you might be doing additional acquisitions such as the Boston stations that you acquired or is that something that's on the back burner?

There was a unique situation in Boston with the purchase of a station that we were on and because Boston is such a terrific market for us and because with thought that based on, I mean all the, everything kind of came together on Boston and normally it is not a strategy for us for a use of cash. I will tell you that we periodically take a look at markets that look like our best markets which are usually relatively large cities and we take a look at what's available in those markets from a station standpoint and we have discussions about it and we match that up against who the major carriage holder is in that city against a possible ability to purchase a station but I would say to you that it is not our strategy and a use of cash for us to purchase TV stations going forward.

Thank you.

Thank you. At this time I am showing no further questions.

What I would like you to is thank everybody for their interest and we will certainly be available to answer any questions you might have individually. Thank you very much.