Playboy Q2 2009 Earnings Call Transcript

Playboy Enterprises, Inc. (PLA)

Q2 2009 Earnings Call

August 4, 2009 11:00 am ET

Executives

Martha Lindeman - Investor Relations

Linda G. Havard - Chief Financial Officer, Executive Vice President - Finance and Operations

Alex L. Vaickus - Executive Vice President and President - Global Licensing

Scott N. Flanders - Chief Executive Officer

Analysts

David Miller - Caris & Company

Mark Boyer - Boyer Asset Management

David Bank - RBC Capital Markets

Presentation

Operator

Good day, everyone and welcome to today’s program. (Operator Instructions) It is now my pleasure to turn the conference over to Martha Lindeman. Please go ahead.

Martha Lindeman

Good morning, everyone, and welcome to the second quarter 2009 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 Brian at 312-373-2432.

During the call today, we will be making forward-looking statements 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 describes some of the things that could cause our results to differ from today’s discussion.

On the call today, we have Linda Havard, our Chief Financial Officer; Alex Vaickus, who is President of Global Licensing; and for the first time, Scott Flanders, our new CEO and board member. So let me start by turning this over to Linda.

Linda G. Havard

Thanks, Martha and good morning, everyone. Our second quarter results benefited from the significant cost reductions we’ve made since last October. While the cost reduction initiatives were undertaken across the company, initiatives focused primarily on our mature print and domestic TV media businesses and on corporate overhead. As a result of these efforts, on an $11 million revenue decline, we were able to report a nearly $4 million improvement in second quarter segment income and a swing from a segment loss in last year’s second quarter to segment profitability this quarter.

Let me go into more detail on each of our segments and then turn it over to Alex for licensing, looking first at the entertainment group, segment income rose to $2 million in this year’s second quarter compared to a small loss last year on an almost $6 million decline in revenues over the same period. The improvement in segment income was due to a number of cost savings initiatives. These include reductions in staff, marketing, programming, distribution, and a range of other expenses, as well as the sale of or exit of unprofitable businesses.

In international television, a stronger U.S. dollar combined with lower consumer spending and increased competition contributed to lower international TV revenues. Domestic TV revenues were off as well. We continue to see consumer migration from transactional linear networks to the on-demand platform where we have less shelf space and where our movie networks face considerably more competition, including from the Internet.

Although Playboy TV revenues were down compared to the prior year, Playboy TV continues to account for the lion’s share of our domestic TV revenues in its performance, particularly in monthly. And that, Playboy TV is relatively more consistent than our movie networks.

Strong programming is of course a key element to Playboy TV’s continued success. Next month our popular show Foursome will return for a third season and we will premiere a new series called King of Clubs, a reality show based on a Las Vegas strip club.

With our cable and satellite distribution partners become more engaged in providing marketing support for Playboy TV, we are hopeful that our new and returning shows will find a larger audience.

The combined print and digital group also reported a significant improvement in profitability in this year’s second quarter versus the same period last year, benefiting from the extensive cost control initiatives that I mentioned earlier. In the case of Playboy Magazine, the cost reductions included staff, editorial, and subscription acquisition expenses.

In addition, we combined our July and August issues into one double bonus issue. Circulation and advertising revenues from the double issue were recorded when the issue went on sale in the second quarter. In the third quarter, therefore, we will publish two issues compared to the usual three per quarter. As a result, we would expect to see lower magazine revenues in this year’s third quarter.

The top line decline will be partially offset by reduced paper, printing, and distribution costs, as the double issue allowed us to reduce costs overall.

On the editorial front, we are enthusiastic about our September and October lineup, which include a celebrity pictorial and the always popular college girls issue.

Moving now to digital, our pay site, advertising and e-commerce revenues were all down in the quarter versus the same period last year. The advertising performance reflected the weaker economy and the resulting decline in spending by both advertisers and consumers.

Our online pay sites have been and remain our largest and most profitable digital revenue stream.

As we discussed in last quarter’s call, our focus over the past year has been on improving the free playboy.com site and our now relaunched site provides a better experience for consumers and advertisers, as well as a stronger representation of the Playboy brand.

Changes to the site have already helped attract new advertisers. For example, entertainment, grooming, and gaming, which historically have not had a major presence in our magazine, now represent three of our top four advertising categories online.

As a result of the long free site relaunch process, our pay sites have as expected seen a fall-off in traffic and revenues similar to the experiences of other online properties that have updated their user experiences.

With our overhaul of the free site now completed, we’re turning our focus onto the pay sites and to increasing profitability and increasing conversions.

Corporate and administrative overhead was our third major area of expense reduction. As a result of the initiatives we’ve implemented, second quarter corporate expense declined 12% this year versus the prior year quarter.

We also closed our New York office during the second quarter, leaving only a small presence in the city. This has allowed us to operate more efficiently by consolidating our print and digital content teams in Chicago and eliminating support services.

As we previously announced, vacating our New York space resulted in a restructuring charge of approximately $9 million this quarter. This represents the discounted value of our remaining lease obligations net of any expected sub-lease income. We had previously anticipated a smaller charge based on estimates of sub-lease income that were provided to us by our brokers, Kushman & Wakefield, at the beginning of the year. However, Kushman recently had revised their estimates due to the significant deterioration of the New York real estate market over the last several months.

Also as previously announced, in addition to the $9 million restructuring charge we took in the second quarter, we will record on average approximately $1 million annually in New York related restructuring charges over the remaining tenures of our lease. Until we have a tenant, most likely not until late 2010, these estimates could change based on further material fluctuations in the New York real estate market.

We ended the quarter in a strong cash position with approximately $26 million in cash and cash equivalents, roughly the same amount of cash we had on the balance sheet at March 31st and again, no revolver borrowings.

And now I’d like to turn you over to Alex to discuss licensing.

Alex L. Vaickus

Thanks, Linda. The global economic downturn and its continuing effects on consumer spending led to a decline in second quarter licensing revenues and segment income compared to last year. Our apparel and accessories business in Western Europe was particularly hard hit, although we did see slight declines in the U.S. and in parts of Southeast Asia as well.

Working against this trend were sales in Latin America and China, both of which reported year-over-year growth and both of which represent territories that we have targeted as having potential for future growth.

Looking ahead, our growth plans are three-fold -- the first is to expand into new territories. Beyond Latin America and China, which still represent untapped opportunities, we recently signed an agreement that covers apparel, footwear, and accessories for India.

Beyond being one of the most populous countries in the world, India has a growing consumer economy and a large percent of its population comprises our target audience of young adults, which makes it a particularly attractive market for us.

In signing these kinds of deals, we look for partners who have experience in manufacturing, know the retail and distribution markets, and perhaps most importantly share our passion for the brand. Our partners in India are gearing up quickly and they should have the product in the market by the end of the year.

Our second focus of growth is the addition of new categories that extend our franchise beyond our traditional base of apparel and accessories. For example, we just completed our first license year of our agreement with [Codi], with whom we launched our first global fragrance. Although launched into a difficult market, the fragrances have done well, in part because the timing was right for an affordable, feel good brand.

We expect distribution, both in the U.S. and abroad, to grow and Codi has decided to add both a fifth variant of the product and a new body spray.

Last year we also launched a Playboy energy drink through a licensing agreement and are slowly but steadily building distribution in the U.S. as well as launching the product overseas.

Before year-end, we expect to add yet another new product category, nutriceuticals. We recently signed a deal for a nutriceutical product which we expect to see in the market before year-end.

Perhaps the biggest opportunity for growth though lies with our entertainment venues. The Playboy Club at the Palms continues to be one of the top performing venues in Las Vegas. We credit the success to our great relationship with George [Maloo] to new marketing initiatives introduced this year and to the overall power of the brand.

Like many projects in Macau though, development of the Playboy Mansion Macau project has slowed over the past year. Our project partners are well-positioned, still committed to the project, and we look forward to an opening now in 2011.

While the opening of Macau has been pushed back, we are seeing faster-than-expected progress, actually, on the two other deals we announced in February. One is for a boutique gaming and entertainment venue in Mexico. Night Life in Mexico is popular with both locales and tourists and the licensing agreement now in place includes electronic and sports gaming, as well as a restaurant, night club, and sports lounge.

Our partner in Mexico is an experienced operator who manages several other entertainment venues in their country and we look forward to building a successful relationship with them.

Our Playboy design team is currently working with the project developers and we expect to open this venue before year-end.

The other entertainment deal we signed is for a boutique hotel, lounge, and restaurant in South Beach, Miami, renowned for a club scene that includes both local and international trend-setting tourists. We now believe the South Beach venue could open as early as next year.

As we look on these existing projects, we continue to field calls regarding additional venues and we’ll keep you posted as these progress.

Now let me turn you over to Scott.

Scott N. Flanders

Thanks, Alex. First of all, let me say how pleased I am to be here. I believe that the Playboy brand is unique in its power and global appeal. I also believe that my experience lends itself to the challenges and opportunities this company faces. I have now been on the job for five weeks. In that time, I’ve met with 60 employees one-on-one and immersed myself in the details of all of our businesses. I would like to share with you some of my initial observations.

To begin, I would like to credit Christy for starting and Jerry Kern for continuing the difficult task of reducing this company’s cost structure. They made some smart and difficult decisions that involved outsourcing operations, shutting down marginal businesses, and reducing headcount. Their accomplishments and those of the other managers are evident in this quarter’s improved segment results. Nevertheless, I believe that much work still needs to be done. The media industry will continue to evolve and we need to have a cost structure and revenue focus that is in line with the fragmented, highly competitive marketplace. The Playboy magazine plays a critical role in supporting the brand and it is going to have to be sustained by what will likely be a smaller revenue base. And I am not convinced that the magazine must be a money loser. We can and will do a better job on that front.

While Playboy TV is not today our major brand driver, it can certainly be a profit generator. There is an audience for sexy, fun, entertainment for adults and I believe we can grow and compete successfully in that market.

Similarly, Playboy's digital assets are likely to grow in the coming years as online and mobile distribution continues to expand globally and consumers look to those distribution channels for our entertaining content.

I have not yet determined how we will operate any of these media businesses but I am confident that the model will be different and more profitable than what you’ve seen in the past. The Playboy brand is this company’s greatest asset and nowhere is that more evident than in the licensing business.

Alex and his outstanding team have done an amazing job of finding new opportunities for growth and I am particularly intrigued by the added potential that location-based entertainment venues offer. I look forward to helping the licensing business continue its long-term growth trajectory.

Throughout my career, my management focus has been to put the consumer first. That will not change at Playboy. We will drive our profitability by delivering the best possible experience for our Playboy customers worldwide, whether they are viewing our content, wearing our licensed goods, or experiencing our entertainment venues. I look forward to telling you more about my plans in the coming months and before year-end but now let’s open this to questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from David Miller with Caris & Company.

David Miller - Caris & Company

Good morning. A few questions -- first of all, I think you guys -- Linda, correct me if I’m wrong, you’ve taken charges either restructuring or impairment in nature for the last four quarters, I think six of the last eight or something like that. Other than the $1 million a year that you cited in your prepared remarks with regard to the real estate revaluation in New York, I mean, are we clean on all the charges in the next two quarters or should we expect other things to be cleaned up?

Linda G. Havard

I would expect with a new CEO that you haven’t seen everything yet and that we should possibly expect to see more, although I couldn’t tell you anything specific at this point.

David Miller - Caris & Company

Okay, and then have you guys on the Las Vegas properties, have you guys seen any sort of improvement in traffic flows there? You know, we’re hearing everything is still pretty weak. It’s pretty much of a depression over there in Vegas but have you adjusted your pricing at all with regard to the Playboy Club at the Palms or is the pattern largely the same as we saw last quarter?

Alex L. Vaickus

Actually, our trend over the last six months has declined but it’s not been to the level that a lot of the other venues have experienced. Some of that can be attributed to the strength of the brand overall and some of it can be attributed to some marketing initiatives that we’ve undertaken with George over the last year or so.

I think the potential for the future remains strong and I think that we are going to continue to hold out and do better than a lot of other places in Vegas.

David Miller - Caris & Company

Okay and then I think you saw a couple of media reports out there, particularly in the New York Post, stating that the sister property next to Hugh Hefner’s residence is set to go out at roughly $18 million. Are you guys willing to confirm that on this call?

Linda G. Havard

I think it’s public information -- whatever that is, it’s probably public information at this point, David and --

David Miller - Caris & Company

Well, it’s not public yet. It’s not public but it does affect terminal value on your real estate so I don’t think it’s public yet. It’s been speculated by various media reports but I don’t think it’s public information, so I figured I’d just put the pedal to the metal here and see if you guys were willing to confirm that on the call.

Linda G. Havard

David, it’s not our property. It has really nothing to do with Playboy at all, nor does it have anything to do with the mansion.

David Miller - Caris & Company

Okay, fair enough. And then Scott, you mentioned that you think the magazine can make money and you sort of issues a proclamation in your prepared remarks that hey, we should not get used to the magazine losing money. Would that include an initiative to perhaps fold the publishing business into licensing and then outsource all operations to a third party or are you prepared to talk about that on the call?

Scott N. Flanders

No options are off the table but any speculation on that on my part would be premature.

David Miller - Caris & Company

Okay. Thank you very much.

Operator

(Operator Instructions) We’ll take our next question from Mark Boyer with Boyer Asset Management. Please go ahead.

Mark Boyer - Boyer Asset Management

Last August we wrote a letter to the Playboy Board in which we highlighted our concern about the long-term viability of Playboy, particularly the direction that it had been taking over the last couple of years and we advocated that the company perhaps should put itself up for sale. We received no responses from any member of the Board, although we did receive a telephone call from Christy and we did meet in New York with her. It’s now a year later, the price of the stock has halved during that period of time. I don’t have to remind you that at the dot.com bubble, this was a $30 stock. Today it’s raised at about $2.40 a share. And we are still concerned again about the viability of the business.

So my question to you is -- and part of the question emanates from an article that was in the New York Post relating to a fellow by the name of Jim Griffiths who was an employee of Playboy. In the article, they kind of indicated that he had made an offer for the business so our question is one, has he made an offer for the company? And two, are there any other parties that have recently made some sort of offer for the entire business or parts of the business? And three, if in fact that is true or even if it’s not true, would the company ever entertain an open bidding process for the entire business? That’s my question.

Scott N. Flanders

It’s Playboy's company policy not to comment on any rumor or speculation related to the sale of the company.

Mark Boyer - Boyer Asset Management

My question though -- I’ll repeat it again; has Jim Griffiths or anybody else, have you retained -- has Playboy retained an investment banker to look at potential offers?

Scott N. Flanders

I just have to repeat my same comment that the company policy is not to comment on rumor.

Mark Boyer - Boyer Asset Management

If somebody came in and made an offer for the company, would you entertain an offer?

Scott N. Flanders

Well, we have a fiduciary obligation as a board to consider all viable offers that might be presented.

Mark Boyer - Boyer Asset Management

Okay. Thank you.

Operator

(Operator Instructions) Our next question will come from David Bank with RBC Capital Markets.

David Bank - RBC Capital Markets

Thanks. Good morning and welcome, Scott, by the way. I have a couple of questions. The first one is from a comp perspective, and I apologize if I may have missed this in the very opening comments but I got the general, the gist from both the press release and your comments on the third quarter impact of the combined issue but next year in terms of 2Q, you know, as well as the impact of 3Q, what is the impact on the comp going to be a year from now in terms of both costs and revenue? I’m not sure why the revenues impacting you in the second quarter. There’s a commentary on the -- in the press release about 2Q and revenue.

And then second, I guess if you think about what’s going on with the business and I think the strategic vision you guys have articulated, it really -- and the conditions of the business, it really does sound like the VOD business is the one that arguably fits in a little bit less strategically and probably presents the most difficult challenge in terms of market share gains and is, even when it’s running well, is the least kind of margin business.

So one would think that for that business in particular, you know, you either kind of need to build it for scale or maybe strategically it doesn’t make quite as much sense and -- to me, anyway, and so I am kind of wondering what your thoughts are about, you know, on a go forward basis, how you view that business a couple of years out?

And the last question, I guess, Scott, you know a lot of us are -- we’d love to be a fly in the room when you are kind of meeting with Hef and talking all these issues through. Can you give us a sense of I guess what the chemistry is like, how often you guys talk, what is your shared vision together, how are you guys working together to realize the strategic view that you both have for Playboy? Thanks for taking so many questions.

Linda G. Havard

Do you want me to go ahead and start on the financial question, get that out of the way? In terms of the magazine, what you saw in the second quarter was really kind of an additional issue with revenue because we had the double issue. In the third quarter, you won't see that because we will effectively have two issues that will be revenue generating because we combined the July and August issues.

David Bank - RBC Capital Markets

But that revenue doesn’t occur in 3Q, it occurs in 2Q?

Linda G. Havard

Yes.

David Bank - RBC Capital Markets

Okay, got it.

Linda G. Havard

Because we are always a month ahead -- remember, we record the issue when the issue goes on sale and the July/August issue went on sale, basically.

David Bank - RBC Capital Markets

Okay, so we would see both costs and revenue a year from now comp to one less issue?

Linda G. Havard

Again, it depends on what we are doing next year at the same time. We may have a double issue in the quarter next year but if you look backward, that’s definitely the case.

David Bank - RBC Capital Markets

So then why the -- okay, never mind. I get it -- July hit June and August hit July. Sorry, okay. That’s a perfect explanation. Thanks. Hello?

Operator

Please stand by. We’re having technical difficulties. I apologize. It will be just one moment while we reconnect the speaker. We have been rejoined by the speaker.

Martha Lindeman

Okay. Linda will --

Operator

Mr. Bank is still on the line.

Martha Lindeman

-- continue about the impact of magazine issue.

Linda G. Havard

David, I think I answered your magazine question.

David Bank - RBC Capital Markets

Yes, I got cut off before you heard me say that’s a perfect explanation.

Linda G. Havard

Okay. Sorry about that. We’ll pretend like that didn’t happen and we’ll start again.

Scott N. Flanders

David, let me give you my macro response to your question on VOD. You know, when I look at Playboy's business segments, I like the businesses that we are in. I feel that Christy did a good job of weeding the garden with respect to leaving businesses that could not be profitable. At the same time, Playboy is a micro cap company in a large cap media world and I think that we need increased scale across a number of our businesses, and TV would be one of them, and so we will need to pursue strategic relationships and operating agreements that expand our presence.

So I don’t have anything particular underway in terms of talks or conversations but that is a direction I intend to head.

David Bank - RBC Capital Markets

Would you -- I mean, it’s really difficult to speculate or sort of comment but is there a price at which you would sort of buy to get bigger or would you never be interested in owning more? I mean, you can never say never but generally, is there ultimately a strategic fit where you can get an asset at the right place, where you’d actually want to own more in the VOD space?

Scott N. Flanders

Well, I like TV because in a fragmented media landscape, it’s the one medium that is not losing eyeballs. So time spent watching TV continues to grow, whereas time spent in every media other than online is fragmenting and that time is shrinking and so I would like for us to be bigger in TV but I think the more likely scenario for us would be to do that in partnership rather than acquisition.

David Bank - RBC Capital Markets

Okay.

Scott N. Flanders

Going to the Hef question, that’s a fun one. The conversations I had with Hef preceding accepting the role revolved around me asking if I would have time with him for the very purpose that your question suggests, which is to ensure that we had a shared vision. And I’ve actually been pleased that he under-promised and so far has over delivered on the amount of time that he’s given me, including multiple inbound calls that he’s placed to me.

You know, but I’m in the honeymoon period and I expect to make significant changes but I am confident that Hef will support and welcome anything that’s value creating because after all, he is the largest shareholder. And so anything that -- any of my actions that I recommend to the board that the board approves, I am genuinely confident that Hef will celebrate those moves.

David Bank - RBC Capital Markets

Okay. Thank you.

Operator

(Operator Instructions) It appears that we have no further questions at this time.

Martha Lindeman

Okay, well, thank you all very much for joining us. I will be in my office if anyone thinks of something that they meant to ask and forgot, I would be happy to try and help you. Thank you all and have a nice day.

Operator

Thank you. This concludes today’s teleconference. You may now disconnect your lines and have a wonderful day.

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Comments

[Henry Buttal:]

I'm sorry, no matter what the fiscal situation, or how the chart looks like, whenever PLA comes up, I can't help myself, I am going to think:

Naked short...

Aug 04 10:50 PM