Imation Corp. Q1 2009 Earnings Call Transcript

| About: Imation Corporation (IMN)

Imation Corp. (NYSE:IMN)

Q1 2009 Earnings Call

April 22, 2009 10:00am ET


Frank Russomanno - President and Chief Executive Officer

Paul Zeller - Vice President and Chief Financial Officer

Matt Skluzacek - Investor Relations Officer


Glenn Hanus - Needham & Company

Hamed Khorsand - BWS Financial

Chuck Murphy - Sidoti & Company


Good day ladies and gentlemen and welcome to Imation announces the Q1 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions)

I’d now like to introduce your host for today’s conference call Mr. Matt Skluzacek. You may begin sir.

Matt Skluzacek

Thank you, Kevin. Good morning everyone and welcome to our Q1 results teleconference. I’m joined today by our Vice Chairman and CEO, Frank Russomanno and our Vice President and CFO, Paul Zeller.

Before I turn the call over to them for their comments followed by your questions, I want to remind everyone that certain information discussed on this call that is not related to historical information maybe deemed to constitute forward looking statements.

Such statements are subject to risks and uncertainties that could cause actual results to differ materially from any projected results. Risk factors that could cause results to differ our outline both in the press release we issued this morning as well as in our filings with the SEC.

With that I’d like to turn the call over to Frank Russomanno.

Frank Russomanno

Thank you and good morning. I want to make a few comments on the quarter and then turn the call over to Paul. We continue to face a difficult economic environment in our major commercial and consumer markets during the first quarter. Although, we generated an operating loss on the quarter, these results were not unexpected.

In my remarks today I will discuss the factors impacting the quarter and we’ll outline actions we’ve taken and that we will continue to take to manage through the current economic challenges, while we continue to make real progress on our longer term company transformation.

In Q1, we saw continuing declines in our legacy storage media business at rate similar to those of the fourth quarter of 2008. Magnetic tape continues to experience the most significant declines, especially in the financial services sector, which has clearly been hit hard during this economic crisis. This is an important vertical for us, where we’ve seen clear evidence of significantly constrained IT spending.

We had a solid magnetic and optical margins in the quarter and we are encouraged to see growth in consumer electronics as well as our external hard drive products. As I noted earlier, we are beginning to see the benefits of restructuring actions we’ve taken. These actions have been focused on improving our financial results through aggressively reducing costs and conserving cash.

At the same time, we are continuing to execute our longer term strategy to transform into a brand and product management company and our addressing areas with greater growth potential. I’d like to share some of the positive progress we are making in these areas.

We recognized sometime ago the need to focus our R&D and manufacturing resources on high value advanced tape coating and to consolidate multiple manufacturing sites into one. Our manufacturing optimization program, began in 2007 has resulted in outsourcing of tape converting operations and the exit of two manufacturing plants, while consolidating our tape coating operations.

In response to the economic issues in 2008, we were able to successfully accelerate the closing of the second plant of full-year ahead of schedule. Our remaining facility in Weatherford, Oklahoma is now fully utilized producing the most advanced tapes on our state-of-the-art TeraAngstrom coater. Gross margins on our tape products are at their highest levels in the past year, reflecting the fuller optimization of the plant, as well as more favorable mix of magnetic tape sales.

In last month, our Weatherford site received ISO 14001 environmental certification demonstrating Imation’s ongoing commitment to the environment. We are proud that throughout this accelerated manufacturing consolidation we remain focused on high quality, high yields and environmental responsibility. Our manufacturing optimization is delivering significant results and is a testament to the skills and resilience of our R&D and manufacturing teams.

Over the past several quarters, we taking additional actions to simplify our business and align our cost structure with our strategic direction. We are aggressively implementing a linear distribution system. For example, we have simplified our distribution operations to fewer and more efficient warehouse and distribution facilities.

In 2008, we successfully transferred operations from our Anaheim facility to our South Haven Mississippi location. In fact, from 2007 to 2009, we have consolidated eight separate Americas distribution centers into two key locations. This has resulted in reductions in both costs and working capital requirements.

In February, we completed yet another cost saving measure, transferring the operations of the South Haven site to an outsourced logistics firm, which has continue to maintain high customer delivery metrics. Additionally in March, we completed the closure of our Cerritos, California office successfully transferring the Memorex sales, marketing and customer service functions to our Oakdale, Minnesota Headquarters.

While we are focused on simplifying our business and reducing cost, we are also making longer term improvements aligned with our strategic direction as a brand and product management company.

For example, while the optical market is declining overall, Imation is seeing the benefits of our optical brand consolidation strategy, where we are gaining market share. Memorex is the cleared number one optical brand in the U.S. The TDK Life on Record brand is the number one optical brand in Japan retail and the Imation brand is the number one optical brand in Asia-Pacific.

Our total optical share across all brands and regions represents one third of the total optical market, a strong number one global share position. We offer retailers the breadth of a good, better, best portfolio of optical brands with the convenience of working with one supplier.

We’ve had several recent retail consolidation wins moving competitor brands off the shelf with our Memorex, TDK Life on Record, Imation and private-label brands and after integrating our Memorex and TDK Media acquisitions, optical margins have improved and held steady.

Additionally, in consumer electronics, we are seeing the benefits of our broader retail portfolio, leveraging our strength in optical media to gain new placement for Memorex, CE products. One example is an end-cap starting in June, just in time for the Dads and Grads purchasing season.

At key Best Buy stores in the U.S. for the first time, Best Buy consumers will see a direct connection between a selection of Memorex optical medial and six different Memorex brand, iPod-compatible audio products, merchandise together in a high profile store location, a similar assortment of Memorex products will be merchandised in Best Buy’s Canadian stores, which demonstrates our consumer strategy is working both in and outside the U.S.

Memorex consumer electronics are also gaining traction in Europe, where we have just secured new Memorex brand audio product placements in major retailers, such as Media Markt and Carrefour, France.

We are also growing in new storage categories through the strength of our brands and our global distribution footprint. Imation’s Apollo line of external hard disk drives addresses the storage needs of high-end consumers and small and medium businesses and we are seeing an up tick in sales of these products, particularly outside the U.S. and in the removable hard disk drive area both our RDX in Odyssey products are showing progress.

In the first quarter, Imation was selected by two major OEMs as the exclusive supplier of RDX drives for their storage systems and I Europe a major OEM has selected Imation Odyssey removable hard drives for placement in their consumer photo disc kiosks in optical mouse, Solid State Drives representing other growth area.

In April, we began shipping both our S-class and M-class SSD drives of our own design, as well as an SSD upgrade kit that enables users to easily and economically upgrade their hard disk drive, base computers with a faster performing SSD drive.

In addition to these new storage products, we’ve launched several products in adjacent markets taking advantage of our strong channel relationships and global footprint. The wireless projection link and our newest product line, Imation Earthwise brand Remanufactured Toner Cartridges are an example of this.

The Earthwise cartridge extension is an excellent fit with our existing commercial channels where we’ve established distribution systems. This product line gives us access to a new and large aftermarket, where we believe the Imation brand recognition and reputation will be a strong asset. We’ve already taken orders from U.S. and Latin America channel partners and large end users and have expanded our offerings into Europe.

Finally, as part of our transformation, we continued the rescaling of our workforce to make sure we have the capabilities we need to succeed as we move into new areas. This has included some changes at our senior management level.

Last month Mark Lucas, former CEO of Geneva Watch Group and Altec Lansing as well as the former member of Imation’s Board of Directors, joined Imation as our new President and Chief Operating Officer.

We’re pleased to have added someone with Mark’s experience in global retail brands, multi channel sales, planning and supply chain management to our executive team. Mark’s experience combined with his knowledge of Imation through his service on our Board enabled him to immediately engage and deliver value for Imation.

In summary, Q1 was a challenging quarter. We continue to see reduced demand from our end users in both commercial and consumer markets as a result of the global economic situation. This clearly impacted our revenues for the quarter, but at the same time, we’re encouraged by the positive signs that the actions we have been taking for sometime both in cost savings and in longer terms strategic program implementation are yielding results.

Our gross margins improved from Q4 2008, some like our magnetic tape margins are the highest levels they’ve been in the past year, result of the successful implementation of our manufacturing optimization program. Optical margins are solid and stable as we continue to gain market share.

In addition, throughout our operations we have aggressively addressed cost savings opportunities and are beginning to see the results. In addition to the restructuring and as I mentioned in the last quarter, we’ve implemented a program we call Three S’s with our employees. This emphasis the Three S words of simplicity, size and speed in all of our operations worldwide.

For example, we have undertaken a significant SKU rationalization program to reduce our total SKU count, while retaining our highest performing SKU’s.

Similarly, we are reducing the number of suppliers we work with, simplifying out sourcing process. We are focused on the concept of less is more. Recognizing that Imation can get more sales and margin from its operational activities, if we focus on fewer objectives and if execute more efficiently.

Finally, our financial position remain strong. We are confident in our ability to withstand the current economic headwinds, while positioning the company for success when global economic conditions improve. We remain committed to our strategy and are intently focused on improving our financial performance and creating shareholder value.

Now, let me turn the call over to Paul, who will provide more details on the quarter.

Paul Zeller

Thanks Frank and good morning everyone. I believe our quarter one results are clearly reflective of a very difficult business environment and we are not pleased that we had an operating loss.

Having said this, these results were not unexpected. In fact, there are several positive signs, the actions we’re taking to first continue transforming the company and second to respond specifically to the difficult economic environment are taking route and delivering benefits to us.

Now, I’ll touch on a few examples of that as I provide some more color around our first quarter results. Our revenues were $426 million in the first quarter, that’s down just short of 20% from quarter one last year. This is a similar, though slightly lower rate of decline than we saw last quarter.

We continue to see relatively steep revenue declines in our legacy storage media products offset somewhat by growth in other product categories including consumer electronics and external and removable hard disk.

From a regional standpoint, our declines were broad based. U.S., Europe and Asia were all very soft. We continue to see modest growth however in Japan, despite a very difficult economy and that was driven by growth in our Blu-ray optical media.

Our revenues from optical products declined 19% to $211 million in the quarter. Though this rate of decline was better than we saw last quarter we’re clearly still feeling the effects of the soft global economy especially on the consumer side of this business. Optical products represented about 50% of revenues in the quarter.

Magnetic product revenues declined 31% to a $123 million that was a similar rate of decline to what we saw in the fourth quarter. Magnetic represented 29% of total revenues in the quarter. This part of our business has been particularly impacted by the economy given our exposure to the financial sector in our tape business. We estimate that up to 40% of our tape revenue comes from this sector.

We did see solid growth in our electronic product segment, which was up about 22% to $31.5 million dollars, primarily in audio products including iPod speaker systems. Electronic products represented 7% of total revenues in quarter. Flash product revenues totaled $20 million and declined 24% from last year representing about 5% of revenues in the quarter.

In our remaining product categories, revenues were up just slightly with growth in hard disk products offset by declines in storage related accessories. When we look at that overall 20% decline in revenues it can be roughly split into a six point impact from lower volumes, a nine point impact from price erosion and a five point impact from negative currency translation.

The rate of volume decline was improved from quarter four, which was a 10% decline and price erosion was inline with recent trends. Currency was a particularly large penalty from a historical standpoint with certain currencies devaluing significantly versus quarter one last year.

Our gross margins in the quarter improved by 2.6 points from the fourth quarter to 16.2% of revenues, however we’re still down 2.4 points from first quarter last year. Last year’s margin had the benefit of a much higher percentage of magnetic revenue and it was prior to the impact of our financial sector vertical, which really began in Q2 last year and prior to the general economic slowdown in the second half of last year.

Our gross margins benefited from a couple of important factors in the quarter. First, our magnetic tape margins were at their highest levels, since first quarter last year and we’re clearly starting to see the benefits of our manufacturing restructuring actions as Frank mentioned earlier.

Second, our optical margins were also very good in the quarter. This category has shown remarkably solid and stable margins for over a year now. The benefits of our brand consolidation strategy are clearly evident in these results.

We’re seeing retailers consolidate their business around fewer brands and with the strength of our portfolio brands after completing the TDK acquisition, which follow the Memorex acquisition, we’ve been gaining share and have seen some of our competitors brands being consolidated out.

In consumer electronics our margins improved from the fourth quarter, but we’re still not where they need to be. Our underlying margins in the quarter were actually pretty solid. We did however need to take some additional reserves for excess inventories in certain categories, which remain from the soft holiday season last quarter. We had mixed margin results in the other product categories. Accessories improved, but we struggled with hard disk and flash based products.

R&D costs were $5.3 million in the first quarter that’s inline with recent quarters. Selling, general and admin expenses totaled $65.6 million that’s down $6.3 million from quarter one last year and down $10 million from last quarter.

There were several drivers to this. First we’re beginning to see the benefits of our operating expense restructuring program we announced in the fourth quarter and though the program will not be finalized until the end of this year we are seeing some benefits already.

Second as we said last quarter, the fourth quarter was impacted by higher than typical levels of litigation costs and bad debt expense, both of which were lower in quarter one. The litigation costs were lower than last quarter they continue to be a drain on our earnings and totaled around $6 million in the quarter. The largest part of this spending was associated with the Philips litigation which is ongoing.

Finally in the current economic environment we’re being very cautious about our spending overall. We’ve pulled back in non-essential areas and have instituted a number of cost control measures on a global basis.

Our worldwide employee count ended the quarter at approximately 1,340 that’s down about 15% or 230 employees in the quarter and down nearly 40% from the beginning of last year. These declines were driven by several actions over this period including acquisition, integration efforts, our manufacturing restructuring actions and most recently our OpEx restructuring program.

Restructuring charges totaled $5.5 million in the first quarter and we’re associated with our structure realignment we announced in November. Let me remind you a little bit about that program. We set a goal of aggressively reducing total operating expenses by the year-end 2009, the overall objective of which is to align our business model with our strategic direction.

Our reductions are focused on selling, general and admin expenses and we’re targeting annualized cost eliminations of greater than $40 million once fully implemented. Theses actions will be implemented overtime with the vast majority and completed by the end of this year.

We have recorded approximately $15 million in charges thus far for this program including the $5.5 million this quarter and we anticipate absorbing up to $40 million in total charges for the program and they will mainly be cash for severance and related costs.

Including the charges for restructuring, our operating loss for the quarter was $7.4 million on a GAAP basis and excluding the $5.5 million in restructuring charges, our loss was $1.9 million for the first quarter.

Non-operating cost totaled $7.8 million in the quarter, which is up substantially compared to $1.2 million in the same quarter last year and to $2.5 million last quarter. There were two main factors driving up expense in the quarter.

First, we recorded a $4 million non-cash charge for the write-down of notes receivable and related assets with one of our commercial partners whose financial condition worsened in the quarter and second, with a significant volatility in currency exchange rates during the quarter, we recorded a higher than normal level of currency losses.

Our income tax line was a $3.6 million benefit in the quarter associated with our $15.2 million pre-tax loss, that loss obviously including restructuring in the non-operating charges I just discussed. This represented 24% tax benefit rate, this was lower than our normal tax rate due to our profitability mix by country as well as the tax treatment associated with restructuring charges.

Our loss per share on a GAAP basis in the first quarter was then $0.31 and if we exclude restructuring that loss per share was $0.21. Cash and equivalents ended the quarter at a $103 million that’s up $6.4 million from year end and we generated $15.7 million in cash from operations in the quarter and that’s despite paying nearly $11 million of restructuring costs.

We had ended the year with days of inventory supply plus days sales outstanding of receivables at a relatively higher 145 days. We brought this down nine days in the quarter primarily through working down inventory levels where we saw a seven day decrease. Additional cash outflows during the quarter included capital spending of $5.4 million.

We believe the cash generating engine here at Imation remains intact and we’ll remain very focused on cash flow and working capital management in 2009. In fact, we’ve increased the role cash generation plays in our variable compensation programs at the company for 2009.

In summary, first as I mentioned earlier, we’ll never accept the loss last quarter or something to be proud of regardless of the economic environment. Having said that, I’m proud of the resiliency of the global team as we work through these difficult times, I’m encouraged by our margin performance and the pockets of growth; we did see in the quarter and pleased with the results on the cash side.

We are taking aggressive actions to reduce cost and improve our efficiency and the results are beginning to show. Our gross margins improved sequentially and SG&A was down nicely.

I believe the actions we are taking are the right ones and are necessary to bring our business model in line and to establish the right foundation for the future as we continue to not only address the difficult economic environment, but also position the company for long term success.

At this point, we’ll be pleased to take your questions. Thank you.

Question-and-Answer Section


(Operator Instructions) Your first question comes from Glenn Hanus - Needham & Company.

Glenn Hanus - Needham & Company

I don’t know if you can give us any help directionally on or how to think about sort of seasonality this year versus other years in your second quarter, third quarter revenue outlook?

Paul Zeller

Well, I guess the comment, one of the comments we made coming out of year-end Glenn that I’d hold to is that in this economic environment we’re in and given our seasonality. We always felt it was going to be difficult to have positive operating earnings in the first half and I still believe that.

I think that you typically see and have seen, especially since we’ve added more consumer content to our overall portfolio. Our strongest quarter being fourth quarter likely followed by third and that’s not changing. I believe the open question certainly is the economic environment in the second half and year end and at this stage we’re remaining cautious.

We’re assuming that we’re going to be facing difficult economic conditions for a while and we’re approaching our business with that in mind and very focused on cash conservation, control of cost, making sure we go after good business and solid business and that’s how we’re looking at 2009.

Frank Russomanno

Glenn, I’d like to add to what Paul’s comments that I want to separate the business into commercial and consumer. On the commercial side it’s extremely difficult for us to talk about any seasonality per se because it’s highly depended as to what happens to the economy and it’s more difficult to predict from the consumer side.

We can tell you that there are still plans going forward for promotions that are back end of the year based including some Black Friday type promotions. So the seasonality on the consumer side would be somewhat typical, barring some major problems in the economy. The commercial side is definitely harder to predict and very heavily economy dependent.

Glenn Hanus - Needham & Company

So would it be reasonable to think June will be, flat-to-down a little bit overall and then tending assuming the economy status at least for it is today or a little better that you’d see a sequential growth in the second half of the year then?

Paul Zeller

That’s our typical seasonal pattern, yes.

Glenn Hanus - Needham & Company

Gross margins, coming in good this quarter at 16.2%, what do you feel about the sustainability of gross margins going forward now?

Paul Zeller

Well, let me address it kind of in two ways. It’s a kind of there is a seasonal reality to the first quarter, but then there is also some trends we’ve been seeing in the business.

Let me start on the first seasonal point, which is, if you look back over the last number of years, three, four or five years, first quarter will tend to be our highest gross margin percentage quarter, just based on the mix of our products, are coming off a very high consumer electronics fourth quarter and much less so in the first quarter that helps from a mix standpoint.

We also tend to see our best margins of the year in certain tape products especially in the entry level in first quarter and so seasonally speaking that is reality. Within the business however, I mean we were encouraged by the improvement in our magnetic margins.

The restructuring programs we’ve been working hard at, implementing for a number of quarters, really starting in 2007 as you are aware, first with kind of the Wahpeton plant closure and the converting consolidation actions and then more recently with Camarillo closure and consolidating all the coating into Weatherford.

We’ve been getting benefits, but they haven’t been as readily apparent until this quarter and we are clearly seeing our operating expenses at the plant level coming down and we think that’s a good thing and should help first and foremost to mitigate the pressures we’ve been experiencing as the overall portfolio in tape as you know moves towards open formats and then overall just gives the advantage of our overall volume and the real efficiency from running through one plant and really running at full capacity.

Glenn Hanus - Needham & Company

Though is it fair to think that, if you looked at gross margins, have you separated out kind of the mix factor and maybe said, okay, gross margins on a like-for-like basis as you went through sort of each of your business segments, that you could kind of sustain gross margins on a like-for-like basis and then the mix factor which helped you most in the first quarter and then hurts you a little bit in the second quarter and then perhaps the margins rebound in the second half is that, how to think about it?

Paul Zeller

I think the margins percentage wise will usually be the lowest in the fourth quarter actually because of the mix issue, because such a significant consumer electronics piece. I’d say lets talk a little bit business-by-business.

Consumer electronics, our margins in fourth quarter for sure were very disappointing and they were, while better still not where they need to be in first quarter and I’d say we’re very focused on improving that on a go forward basis. When you look at optical, very consistent and I believe that’s very stable and there is no reason not to assume that will continue in the optical business.

In magnetic we’ll continue to battle the mix impact within the data center and between data center and mid range that we’ve talk about it some length in previous calls and that’s really what the restructuring actions are all about is to mitigate that overtime.

So I think overall, I’m not uncomfortable with your statements. I think our objective clearly is first was to stabilize our gross margins and stop the declines year-after-year and I think, we’ve shown some abilities successfully do that.

Over the long term, we’d certainly like to make sure our margins stay nicely above 15%, I’d say and we’re always going to have the objective of improving margins, but there is a number of secular factors we’ll face in our businesses as well.

Frank Russomanno

Glenn, at the beginning of Paul’s comments, he talked about the first quarter typically being our highest gross margin quarter. I think the best indication is to look at the past couple of years and see what happens in the first quarter vis-à-vis second, third and fourth quarters, today’s marketed conditions.

Paul Zeller

Yes, with the caveat that fourth quarter has unique issues that really drove down margins further than we’re comfortable with.

Glenn Hanus - Needham & Company

Just on the OpEx side, if I think about excluding kind of one time items of things on and like non-GAAP OpEx basis, Should that trend down a few million dollars each quarter for the next quarter too or just give us some help on how to think about OpEx for the next couple of quarters?

Paul Zeller

Well, I’d first go back to what are we doing about OpEx. We’re in the middle of obviously restructuring program and that kicked off in fourth quarter, not a lot of impact in fourth quarter, fourth quarter had some unique extra charges in it as we talked about. Legal litigation costs were higher than they typically been and bad debt expense was higher.

If you adjust for that and then recognize that over the long term we’re trying to take $40 million of cost out of total OpEx a little bit of that in the factory line, but most of that in SG&A and a little bit in R&D. That’s our long term goal and first quarter, we made some progress in that regard, but we’re clearly not fully there yet. Lot of actions left internationally yet to complete on the program.


Your next question comes from Hamed Khorsand - BWS Financial.

Hamed Khorsand - BWS Financial

First question, could you breakout what the OEM represent as a percentage of revenues?

Paul Zeller

Sure. OEM is I think, we actually disclosed this in the annual report. I don’t know is it about 10% to 15% in terms of total revenues, roughly speaking, it’s an important part of our business because the business we do with OEMs isn’t just about the sales to them, but it’s a relationship with them and the development programs and the fact that we take a lot of OEM brand to market for them and it’s a very important distribution business for us. The actual number, it’s actually in our 10-K was 8% from 2008.

Hamed Khorsand - BWS Financial

Given what’s going on, what’s the decline in your magnetic tape. How are you guys just into may be not been able to recoup those loss revenues from the financial customers, maybe they go onto newer technologies, different ways of storing, how are you guys manage to adjust that loss in revenues?

Frank Russomanno

Well, we are going to do several things. Number one as Paul just mentioned is to maintain close relationship with the OEMs. We know that the OEMs are going to continue over the next couple of years to introduce new formats and in a couple of years means anywhere from five to seven years starting with the LTO-5, which we expect to be introduced in the fourth quarter of this year, with limited amount of drives being introduce, but in 2010 LTO-5 will be in full availability.

Then of course there are the 3592 systems and also the T10000 systems from Sun StorageTek. So we have maintained good relationships with the OEMs and we’ll continue to do that and we’ll continue to develop products for the future, so that’s the first thing.

The second thing is we’re very focused on margin and dollars derived from these sales. We think tape sales are going to have a very long tail and that will be in the business for a long time and we will continue to optimize, which is one of our key platform strategies continue to optimize our tape business participation and tape is much caused out through greater productivity, greater yields and looking for opportunities when and where possible to find further cost reductions.

So we see margin as to being the important element to the tape business. Clearly, new technologies are changing this business and by that I mean a virtual tape, which has been around for a long time, but deduplication is another example of a technology that has changed the storage of tape, but there is no other format that has a better costs per gigabyte than tape for archival storage and we don’t see that changing.

So, we’re going to participate to our maximum share by the way we are the number one share leader. So, we intend to maintain that global share even if that market declines.

Paul Zeller

If I could add something more on it is that we are also focused in other categories within our commercial business for growth. We think there is a very nice opportunity in the whole hard disk arena, especially around removable hard disk in the RDX platform as well as Odyssey. You may have seen some announcements on our new toner product line and we think that’s an interesting opportunity.

Some other new technologies, wireless projection link and other product category. Within the consumer side of the business, we think there are growth opportunities overtime as well in consumer electronics and in broader categories of accessories as well.

I think in the near term in the economic environment we’re in, clearly revenue is not the number one focus, it’s an important focus. We’re focused on profitability and cash generation and making sure that we’re well positioned as the economy turns around, but I think overall the growth prospects are very good and interesting here at the company.

I think some of the proof points in our strategy are the breadths of different directions and opportunities that we now have in front us with our brands, with our channel strength, with the global footprint.

Frank Russomanno

So that the key point is whereas tape might be going away, we don’t intend to lose our presence in the commercial channels and with the large commercial accounts that we have those relationships with.

Hamed Khorsand - BWS Financial

When do you think we’ll see an inflection point in Blu-ray where it’s more cost efficient to use that media?

Frank Russomanno

We see the inflection point in Japan already. Our sales in Japan this year versus last year just about double, there were up over 90%. We’ve not seen that inflection anywhere else in the world to any degree and there is a good possibility, we might not see an inflection point to the degree that we’ve been talking about for the past couple of years.

What the Japanese market has introduced is set-top players and recorders more importantly including recorders in flat-panel TVs. If we had devices like that in U.S. that perform more or like older video type systems. We could very well see that inflection point, but we might have to consider that our economy and our preference in U.S. and probably for Europe is a DVR type of economy as compared to an optical disc.

Paul Zeller

I think if you think about the pattern of movement in CD and then DVD between the players and moving to recorders, that path is moving on a similar if not even a more accelerated pace with Blu-ray, but it does take time.

Right now it’s about getting the recorder hardware to come to a price point where it becomes ubiquitous at the PC level for instance, where it becomes a standard drive with the recording capability and then we’ll see a larger share of blank media sales.

The question about when and how big that is, I think it’s still an open question, because really the hardware is into a price point where it’s going to be a generally available feature in PCs at this stage.


Your final question comes from Chuck Murphy - Sidoti & Company.

Chuck Murphy - Sidoti & Company

I’ve got a few questions for you. I guess first, could you talk a little bit in the press release and in your comment you mentioned that the gross margins for optical were pretty stable, if not a little bit better, just talk about what that was again?

Paul Zeller

Yes, I think overall at the high order of magnitude level, it’s really the success of our brand consolidation strategy with the portfolio brand we have and the strengths that they have in the various regions around the world, Memorex very strong brand in the U.S. well over 50% share we believe.

TDK, the number one in Japan; Imation brand in Asia-Pacific, outside of Japan is a number one brand and we have a number of solid brands in Europe. I just think we’re in a position now where we are the number one share leader in the industry and that allows us I think to have a very stable business in this arena. I think the maturity of the category is part of that as well.

On the very early stages when there was very fast and rapid growth, you saw a more capacity coming online, you saw more pricing distortions and cost moment and more variability and volatility in gross margins, because of that.

Now, really as we said for a number of quarters in a row, I mean our gross margin have been very stable and then frankly they are at and above corporate levels and it’s a very good product for us and we’re well positioned and the ability to be the vendor with multiple brands when some of the channels are looking at consolidating space is really a good position to be in and we think that’s helping us.

Frank Russomanno

Chuck, the other thing besides Paul mentioning that this is part of our strategy and we feel very confident this piece of our strategy is working. Industry consolidation was recognized by us three years ago.

We’re about doing that right now our experience in diskettes pointed the way of how to do this in a previous way and when it’s all set and done, we would not be surprise the major markets to just seek two brands on shelf, just like we saw with diskettes. As we intend to be one of those two brands in all of the major regions around the world.

Chuck Murphy - Sidoti & Company

So it’s just kind of factors since you are the biggest player now in the space, you can just kind of keep pricing a little bit more stable?

Frank Russomanno

I think Paul’s point was that it’s a mature product category. This is not the product you see on ad every weekend in the flyers. It’s not what’s going to draw street store traffic like it did in five or six years ago. So it’s a more stable environment without high growth, but there is opportunity for us to consolidate and grow share by being the preferred brand on shelf.

So I wouldn’t say that it’s just because of the lack of competition by no means, its part of a strategy, but it’s typical of the lot of consumer products that are mature.

Chuck Murphy - Sidoti & Company

I’m just saying like in terms of the margin, I mean if the sales are down year-over-year and somehow the margins were at the same?

Paul Zeller

Yes, well, I mean first of all it is the source product business model and so there isn’t the efficiency issues you’d face with manufacturing when revenue go down and I’d say our position of strength is forward and back with the supplier community as well as with our position in the channel.

Chuck Murphy - Sidoti & Company

What are your expectations for depreciation and amortization as well as CapEx for the year?

Paul Zeller

Well, we haven’t given specific guidance, but it should be pretty clear from our trends and things that we’ve been traveling in the kind of $15 million circle range for CapEx and D&A last year was $50 million. It’s reasonable to assume that the depreciation part of that is probably going to trend down with some of our manufacturing rationalization actions we’ve taken. Now, you should expect something lower that that.

If you look at first quarter and annualize it, you are not far off, maybe a little bit higher than that on an annual basis, but we’re still going to have in the mid 40s somewhere in terms of D&A on an annual basis.

Chuck Murphy - Sidoti & Company

I know you said that the CapEx was pretty high in the quarter, was there a reason for that?

Paul Zeller

Yes, actually there was, it’s a good question. We did leave some space here at our headquarters and finalized at least as of the beginning of the year like last year and there were some tenant improvements that we are always part of our plan for 2009, but we’re all timed in the first quarter that we’re part of bringing that tenant in. So I just think we sort of upfront a bit of that capital spending run rate into the first quarter.

Chuck Murphy - Sidoti & Company

What about working capital? Where do you see that going through out the year? I mean, you’ve already taken it down to fair amount versus the fourth quarter?

Paul Zeller

I’d say, let’s break it into the pieces, I think accounts receivable has been more stable than inventory and it’s probably in and around the right range a few days up and down from where it’s out.

Inventory I think, we still have some room for improvement there and our business is a different mix that it use to be. So, if you go back several years I don’t think you will see us approaching those kinds of days of inventory and turns, but I’d like to see as target getting back towards the range we were at coming out of ‘07 and into ’08 rather than certainly where we ended ‘08.

Chuck Murphy - Sidoti & Company

And payables?

Paul Zeller

Yes, that will trend with the activity and with the inventory levels.

Chuck Murphy - Sidoti & Company

Can you just kind of give us an update, we’ve talked about in the past that what you are doing as far as restructuring and your potential cost savings? Can you just tell us how much you’ve spend so far? How much you’ve planned to spend and how much of your total cost saving you’ve realized so far will do in the future?

Paul Zeller

On the cost side, we’ve quoted that we may spend up to $40 million on the program of which we have incurred $15 million to-date generally related to that. I’d say and then we’ve said we’ll save at least $40 million in OpEx. I think, if we are off those number we’ll save more and spend less than the other way around and so that’s good news.

I’d say, we are moving along the way, the precise number is a moving target to a degree because you have currency rates that move and other factors affecting OpEx, but we’ve made a meaningful start, but there is quite a bit left as well especially in Europe.

Chuck Murphy - Sidoti & Company

So, but is $40 million in OpEx savings, not including any kind of change in cost of goods?

Paul Zeller

Correct. It’s primarily in OpEx, there is an inconsequential part in cost of goods sold, but the majority is in OpEx and the majority of OpEx by far is in SG&A.


There are no further questions at this time.

Frank Russomanno

Okay. I’d like to just wrap this up by thanking everyone for joining us on today’s conference call. This was a challenging quarter for us, but I do want to emphasis that we’re encouraged by the actions we’ve taken and we’ll continue to take, we remain committed to this strategy and are focused on improving our financial performance and creating shareholder value. We look forward to talking to you at the end of Q2. Thank you for attending the call.


Ladies and gentlemen, this concludes today’s presentation. You may now disconnect.

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