Executives
Jerry Kern – Interim Chairman and CEO
Linda G. Havard – Chief Financial Officer, Executive Vice President – Finance and Operations
Alex L. Vaickus – Executive Vice President and President – Global Licensing
Robert Meyers – Executive Vice President and President – Media
Martha O. Lindeman – Senior Vice President – Corporate Communications and Investor Relations
Analysts
David Bank – RBC Capital Markets
Jonathan Boyar – Boyar Asset Management
Playboy Enterprises Inc. (PLA) Q4 2008 Earnings Call February 18, 2009 11:00 AM ET
Martha O. Lindeman
Welcome to the fourth quarter 2008 conference call. If you need a copy of our press release and earnings supplement, you can look on our website at www.peiinvestor.com or you can call Jen Johnson at 312-373-2432.
During the call today, we will be making forward-looking statement pursuant to the Safe Harbor provisions of the Securities Litigation Reform Act. These statements reflect our current beliefs and plans. They are not guaranteed and involve risks and uncertainties that could cause our actual results to differ materially from those discussed today. We are under no obligation to update these statements. I refer you to the Safe Harbor language in today’s release as well as the risk factors in our Securities filings, which describe some of the factors that could cause our results to differ materially from today’s discussion.
We will start today with our Chief Financial Officer, Linda Havard. She will be followed by Bob Meyers who is the President of Media, and then Alex Vaickus who is the President of Licensing. And finally, we will turn it over to Jerry Kern, our interim Chairman and CEO. Linda?
Linda G. Havard
While the global weakness in advertising and consumer spending affected our fourth queerer results, we did see some bright spots resulting from the strategies that we’ve been implementing. As a result, segment income was up year-over-year, despite the revenue pressure felt across all of our business, and weaker licensing group results resulting from the broader economic downturns, which Alex will talk about in a moment.
Turning first to our operations, and the entertainment group in particular, fourth quarter 2008 domestic TV revenues were essentially flat at $16.7 million. Excluding $1.9 million of Andrita Studio related revenues in the 2007 fourth quarter, domestic TV revenues rose 12%.
This was the first year-over-year increase in more than three years with growth in Playboy TV both monthly and pay-per-view and on-demand purchases of our movie products driving the improvement. Domestic TV profit margins increased validating our decision to sell our studio operations and narrow our focus to our core competencies.
The decline in international TV revenues primarily reflected unfavorable foreign exchange rates combined with the hyper competitive nature of the U.K. TV market where we retain a leading presence among approximately 50 adult channels.
In online and mobile, nearly $6 million of the $7.4 million decline in fourth quarter revenues was due to our decision to outsource our e-commerce business. This led to a modest improvement in online margins, despite declines in advertising and pay site revenues. Licensing fees for The Girls Next Door and the Fox Searchlight movie Ms. March premiering next month more than offset lower DVD revenues in the other entertainment category.
In the publishing group, cost control measures that you’ve heard us discuss for the past several quarters allowed us to more than offset the $2.7 million decline in fourth quarter 2008 revenues. The downturn was primarily due to an 8% decline in circulation revenues and a 16% downturn in advertising revenues at Playboy magazine, as both consumers and advertisers reacted to worsening economic conditions.
After seven years of recording year-over-year quarterly growth in our consumer products business, the licensing group finally succumbed to the pressure of the global recession in the 2008 fourth quarter with declines in both revenues and segment income. The negative comparison was exacerbated by a positive royalty adjustment in the 2007 fourth quarter of approximately $1 million.
Corporate expense declined by 12% in the 2008 fourth quarter to $7 million due to lower compensation related and other benefits expense coupled with our cost reduction initiative. In the 2008 fourth quarter, we also recorded non-cash impairment charges on goodwill and other intangible assets of $146.5 million, which were primarily related to acquisition of television assets that we had made in the late 1990s. These charges were also responsible for the $13.4 million tax benefit in the quarter.
The quarter’s results also included a $4.8 million non-cash write-down of deferred subscription costs and a $4 million restructuring charge, which follows a third quarter restructuring charge of $2.2 million. A few weeks ago we announced that we will close our New York office at the end of April, consolidate operations and further reduce our headcount and overhead expenses.
As a result, we expect to take an estimated additional $9 million in charges related to the New York office in the first and second quarters of 2009. Roughly half of the $9 million is related to writing off New York leasehold and fixed assets and will, therefore, be non-cash. In addition, we expect to record another approximately $2 million in non-New York related restructuring costs in the first two quarters of 2009.
Given the size of the impairment charge, we worked with our lender to amend our credit agreement effective at year end. As a result of current credit and industry market conditions and the fact that we’ve never drawn on this facility, we agreed to a smaller line of $30 million. This line, plus the $31 million in cash and marketable securities we had at December 31, is expected to provide us with the liquidity we need.
Effective with the first quarter of 2009, we will begin reporting our online results together with publishing rather than with the entertainment business as we have been. This change reflects our decision to consolidate and manage our online and print operations as one business.
We will reclassify our result into a new format, which we will provide to you prior to our next earnings release in May. This change in reporting units will result in additional non-cash goodwill impairment charges of approximately $5 million, which we will record in the first quarter.
In addition, in 2009 a new accounting pronouncement related to cash settlement converts will result in our booking interest expense above the 3% coupon. This is expected to add about $4 million in additional non-cash annual interest expense.
And now, I will turn you over to Bob who will talk about our media businesses.
Robert Meyers
During our recent conversations with you on these calls, we emphasize the work we were doing to streamline the cost structure of our mature television and publishing businesses to grow Playboy TV and playboy.com and to develop a more sustainable model for our publishing business.
You can see some of the results of those efforts in the fourth quarter numbers and in our recently announced plan to consolidate print and online operations. Our overall media strategy is to profitably monetize our content by finding the most effective distribution avenues. I’m pleased with the progress we’ve made along these lines in our domestic TV business.
As fourth quarter results demonstrated, our focus on increasing distribution of Playboy as a monthly service paid off in year-over-year and quarter-over-quarter revenue growth. Playboy monthly is still only available in 65% of digital cable households and we expect to increase household access in 2009. New product launches led to improved fourth quarter video-on-demand buy rates and we have additional VOD programming launches planned for 2009 as well.
This issue of how to restructure our magazine business in the face of increased costs, declining circulation and may face pressure is perhaps our biggest challenge, and we are not alone. Last week the auto dealer circulations announced that second half 2008 newsstand sales of all magazines fell 11%, the fastest decline in decades. Advertising pages for the industry fell 17% in fourth quarter compared to the prior year.
We have discussed with you some of the actions we have made to take costs out of the magazine, including reducing editorial, marketing and sales expense eliminating headcount and outsourcing some functions. While many cuts have been made, these efforts will continue.
Given industry trends, we need to continue to be aggressive in cutting costs to offset anticipated declines in both advertising and circulation revenues. As a result, we are now looking at ways to more radically change our business model, for example, the complete integration of our online and print editorial operations.
While the print and digital editorial teams have been increasingly collaborative, going forward we will have one editorial director based in Chicago leading a combined magazine and digital staff. Rather than focus on developing work for one platform, the team will create synergistic print and digital content options for consumers. This means developing unique brand consistent experiences and adapting iconic elements for the magazine, as well as for the multimedia interactive world of online and mobile.
We stand to benefit in a number of ways. Increased collaboration in creativity, a focus on what will work for the rapidly change in publishing landscape for tomorrow and of course the cost reductions that are a natural part of any consolidation. These benefits extend beyond content to our advertising partners. These changes will provide greater flexibility for reaching our target audience of young men through a wide array of advertising friendly inventory.
Our content remains enormously popular. Some pieces, such as Long Form Journalism, are better suited to print distribution. Others, such as City Guides, work best in an easy to update easy to access online or mobile format. But much of what we offer, humor, tutorials, columns works best in combination of print and digital. We expect to succeed by being distribution agnostic and providing a mix of content that suits the audience wherever they may be.
Now, let me give you to Alex.
Alex L. Vaickus
The global pullback in consumer spending creates some significant challenges for us going into 2009. However, I want to be clear. We’re not giving up on the possibility that we can show both top and bottom line growth in the licensing business for the full year this year. Excluding art sale and events, our 2008 licensing revenues were essentially flat versus 2007.
This compares to an industry-wide decline in retail sales of all licensed merchandise in the U.S. and Canada of roughly 14% last year. We really didn’t feel the effects of the downturn until he fourth quarter, well after most licensers and retailers were reporting lower sales.
It is clear that the Playboy brand is as resilient as it is popular and interestingly the staying power has opened new doors to us as retailers look for brands that can continue to deliver sales in this very tough environment. So looking ahead we have a number of opportunities for growth.
We’ve talked in the past about distribution primarily our plans to expand in new regions like Latin America and to expand our product lines in territories such as China, where we already have a significant presence. While continuing with those efforts, this year we’re also focused on expanding mass market and direct to retail merchandising, two areas, by the way, which are growing.
For example, we recently completed an agreement with the specialty retailer, which as roughly 500 U.S. stores and a very active e-commerce site. We’ve created for them an exclusive collection of t-shirts and accessories featuring slogans and quotes inspired by Playboy’s long commitment to social causes.
This retailer is going to offer that range of product, as well as an array of items across multiple categories, including handbags, jewelry, and lingerie. By dealing directly with the retailer, we can eliminate one layer of expense, create collections that retailers can offer exclusively, and through this closer connection develop a better understanding of our consumer.
Separately, we will be launching our Coty fragrance collection in a major U.S. mass merchant. Entry into major mass market retailers with a fragrance line, and hopefully with some other basic apparel and casual product offerings, gives us the opportunity to significantly increase sales volume. And recall, up until now we’ve really not had product offerings suitable for mass distribution channel and we’re now pleased that this first step that deals with Coty allowing us to take this measure.
The fragrances continue to perform well where we already launched in Europe and North America. Recently, Coty began distribution in 11 Latin American countries as well and will continue its global rollout plans this year. By year end, the line will be available in almost every major international market. Coty also will launch a fifth variance of the fragrance called Playboy Ibitha this summer.
Now let me touch briefly on our location based entertainment or LBE business and the two deals mentioned in the earnings release. As we previously have said, it is our goal to create a pipeline that brings a new venue on stream annually starting with Macao, a new venue each year.
With the recent signing of these two addition deals, we believe that we will be able to deliver on that promise through 2012. The first of the transactions announced today is for a restaurant, lounge and gaming venue in a major Latin American resort, which could open as early as the end of this year, actually.
The likely opening for Macao is now expected to be some time next year, meaning this new Latin America resort property could open ahead of Macao. While we like the stability of gaming revenues, we’ve also been open to non-gaming concepts in the right location with the right partner.
To that end, we have recently completed an agreement for a high end restaurant, club and boutique hotel in South Beach, Florida. Both of these new projects are pure licensing deals in which we will have no direct operating role or equity participation requirement.
Our involvement will include approval rights of design and construction to ensure that the venues are in line with the quality expected for the Playboy brand. We will disclose anticipating licensing revenues as we get closer to opening, but let me just say that each project is expected to be smaller than the Palms in terms of annual revenue contribution.
Now, let me turn it over to Jerry.
Jerry Kern
It’s probably unusual for you to hear a deep male voice as the CEO of Playboy, if you’ve been following the company at all for any period of time. Initially, I’d like to thank Christie for all her years of service and all of the leadership and direction she gave this company over those many years. From the long perspective of two months in a management role, I would also like to thank the senior management of the company who I find to be a dedicated and talented group of individuals.
I’ll repeat a bit of what I said or what we said in the release. Since assuming the role that I’m in, we’ve taken a very hard look at both our current plan and our future vision and goals. We’re operating in an extremely difficult environment and we’re not particularly pleased with the performance in that environment. Like everyone else, we’ve cut back significantly on expenses.
I think since the end of the third quarter, our reduction in force exceeds 22% of what the workforce was at that point in time. So we go ahead with streamlining the organization. We’re trying to identify the most profitable revenue streams, but we need to move much more rapidly than we’ve ever moved in the past.
We’re the guardians of a great brand and yet we’re not satisfied with our past performance in monetizing that brand. So we’re spending a fair amount of time thinking about what our models of the future ought to look like, as well as focusing on 2009. As Linda said earlier, we renegotiated our arrangement with the bank. We do not have a liquidity issue. We will not be going to the U.S. government for a bailout. We believe we can rely on the assets that we have and the tools that we have to return the company to profitability.
So thank you very much and with that, we’ll answer your questions.
Question-and-Answer Session
Operator
(Operator Instructions) Our first question comes from David Bank – RBC Capital Markets.
David Bank – RBC Capital Markets
I have about five questions so if you can bear with me I’d appreciate it. The first one relates to the FX side. I think that the hit in the fourth quarter was meaningful, but I have to imagine as the quarter progressed the hit got more and more significant, particularly in the U.K. Can you review for us now in the international business if foreign currency weren’t to move from where it is today, what kind of headwind on a percent of revenue would it contribute to 2009 earnings?
The second question is on the convertible issue that’s due in some time 20 some odd years from now, can you review the provision in the convert, and what is your thinking in terms of refinancing the convert ultimately ahead of that event?
The third question is on the LBEs I think historically Alex the answer to the question of why aren’t you doing more standalone clubs or hotels has been look we traditionally don’t want to attach our name to something that can go in and out of style like a club so we like the anchor of gaming, and why the departure here? Are there going to be a lot more of these? If there are, I would think you’re looking at a lot more operating income near-term.
Fourth, Linda, on a year-over-year cost reduction you guys have announced a number of restructurings reductions in force, can you give us a sense of what is the overall year-over-year cost reduction in 2009 versus 2008?
And, I guess, last with the seeming stabilization of the TV business, the publishing business to a certain extent and licensing really just being a function of cyclical weakness. What can you give us in terms of guidance for 2009 because the business seems to be stabilizing somewhat. Thank you for so many questions. I’m so sorry to bombard you with them.
Jerry Kern
Thank you, David, for being this interested. Let me address out of order two of the questions. With respect to the LBE business, our approach is that we look at every opportunity as a unique opportunity and evaluate it on that basis. So I think Alex and his people have shown a lot of flexibility and yet we do not want to get into something that’s just a flash in the pen. And that’s a question of evaluating, not just the industry or area in which it is, but who our partners are and it’s location as well. So that’s the answer to the LBE question.
We’re not really in a position to give you any guidance. I’m not sure Linda, who I’m going to turn the other three questions over to, can tell you much about the actual reduction in costs because we’re not finished and it makes it difficult to make predictions at this time. But, Linda, do you want to take the exchange and the converts?
Linda G. Havard
Let me take your balance sheet question, David, on the foreign exchange side. In licensing, it’s pretty easy for us to do forward contracts to hedge exposure if we know what that exposure is because Alex and his folks have negotiated deals and we have royalties that we expect.
On the U.K. side, there’s an actual operation there and the currency is local currency. So if we started to hedge we would have basically transaction sort of foreign exchange exposure. So we typically have not done that, the accounting rules are different for that. It’s not cash. It has nothing to do with what cash we bring back to the U.S. It is truly translation exposure.
David Bank – RBC Capital Markets
But in the press release you noted that you were looking at results that were down in international TV primarily due to unfavorable foreign exchange rates.
Linda G. Havard
Right. And some of those don’t relate to the U.K.; they relate to third party sales in other countries. We’re going to have that as well and we don’t know where we’re going to sell product, for example. So where we can hedge we do but we don’t want to create exposure where there isn’t exposure. So we’re not going to be able to hedge away a lot of the risk.
David Bank – RBC Capital Markets
Can you give an order of magnitude?
Linda G. Havard
No. You see the size of the international television revenues. Most of that is U.K. so that’s probably the best I can do there for you, David.
David Bank – RBC Capital Markets
Okay. So the pound and the euro are probably down something like 40% versus the dollar so is that a reasonable assumption?
Linda G. Havard
It’s reasonable, but I don’t think I want to go into any more detail than I have already because, again, some of that is we’re a U.K. operation and we’re actually receiving currency in the local currency. So it’s not an exposure per se. It's translation when we translate our balance sheet back to the U.S.
The second question that you had was on the convert and the put provisions that the first put that the shareholders have is March of 2012 and, of course, we would look to try to do something in advance of that. We certainly have the time to think about it and I’m not sure that we’re going to announce anything beforehand, but clearly it’s on our radar screen.
And then, as Jerry said, on the year-over-year cost reduction side, we have taken a lot of costs out of the business. We’ve taken a lot of people out of the business. It is hard to say year-over-year what that looks like because in some cases, as we’ve said, we’ve chased the advertising and newsstand costs down to the extent that if we can give you some sense we will but I don’t think we can really point to it anywhere for you.
David Bank – RBC Capital Markets
How meaningful is fourth quarter run rate?
Linda G. Havard
Fourth quarter we had taken only a little bit of the cost out so it’s a start because we did have a restructuring in October of last year. So you will have a full year in 2009 of those cost reductions, but a lot of the cost reductions that we’re making in this year relate to the closing of the New York office and those won’t occur until the second quarter.
Operator
Our next question comes from Jonathan Boyer – Boyar Asset Management
Jonathan Boyer – Boyar Asset Management
I just have two questions for you, the first one is could you just take me through the board’s decision on how it evaluated it’s fiduciary duty to shareholders regarding the severance package of the CEO, which I believe was a $2 million severance package on a company with a market cap, as of yesterday, of roughly $50 million especially in this, I know you said that there was no immediate liquidity problem with the company, but in light of the credit crisis we are facing.
Jerry Kern
Well, the board obviously evaluated the many years of Christie’s performance. Christie had been with the company 33 years had been a CEO for 20 years. She was entitled under the company’s severance plan to in excess of $1.6 million. And the board thought about what was appropriate and decided that it wasn’t in any way a violation of our fiduciary obligations to give her a severance package of $2 million.
Jonathan Boyer – Boyar Asset Management
So she was entitled to $1.6 she got an extra 400 and is this payable immediately or is this over time.
Jerry Kern
It’s been paid.
Jonathan Boyer – Boyar Asset Management
It’s already been paid. And the second question is now that there’s obviously a new CEO and Chairman, is Playboy more open to exploring…
Jerry Kern
Let me address that issue, Mr. Boyar. I should have said something earlier. We retained a search firm, I guess, early this month or late January, I don’t remember exactly when, who are actively engaged in a search for a permanent CEO. After a couple of months I’ve gotten pretty fond of interim in front of my name, as long as my wife doesn’t use it, and they are actively engaged in a search.
Two of my colleagues on the board, [Saul Rosenthal] and [David Chemero], are a small committee that are dealing directly with the search committee.
Jonathan Boyer – Boyar Asset Management
I guess my question is, now that Christie is no longer CEO and there’s not a Heffner in charge, is the company more open to an outright sale of the company or change in the strategic direction of the print magazine?
Jerry Kern
Yes. We’re willing to listen.
Operator
At this time I am showing that there are no further questions.
Martha O. Lindeman
This is Martha and I will be in my office all day if there is anything that you need clarification on that we covered today please feel free to give me a call, and thank you all for joining us this morning. Good-bye.
Operator
Once again we’d like to thank you for joining us today. This does conclude your call and you may disconnect at any time.
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